Included in the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (Dodd-Frank Act), which became law in the United States on July 21, 2010, was the requirement that U.S. public companies disclose their use of “conflict minerals”—and compliance efforts must begin now. Specifically, companies must determine whether any of their products have been manufactured with any tin, tantalum, tungsten, or gold (3TG).
If a public company concludes that 3TG has been used in one of its products, and these minerals are “essential to the functionality of the product,” then it must make certain disclosures. The extent of disclosures depends on whether the 3TG came from countries used to finance violence in the Democratic Republic of the Congo (DRC) or adjoining countries (e.g., South Sudan, Uganda, Rwanda, Burundi, Tanzania, Malawi, Zambia, and Angola). Any 3TG that originates from these countries is considered a conflict mineral subject to the focus of this legislation.
But the Dodd-Frank Act was enacted to address the abuses (real, perceived or otherwise) by Wall Street that gave rise or at least contributed to the global financial crisis in 2008—what does violence in the DRC have to do with that? A great question, but the answer demonstrates how the legislative process “works” in the United States. There was significant support for addressing the global financial crisis but an unrelated issue of violence in the DRC was “stuck” in another piece of legislation. So, certain legislators decided to move many of the provisions in the “stuck legislation” into a bill that was moving reasonably well through the U.S. Congress. Bingo! Section 1502 (“Miscellaneous Provisions”) of the Dodd-Frank Act contains these requirements which include designation of the U.S. Securities and Exchange Commission (SEC) to write the disclosure and reporting rules and oversee ongoing compliance.
The final SEC rules were issued August 22, 2012, with a specified effective date of November 13, 2012. Affected companies must comply with these rules for the calendar year beginning January 1, 2013, and depending on their results, the first report is due May 31, 2014.
Purpose of Conflict Minerals Legislation
As stated in the Dodd-Frank Act, “[i]t is the sense of Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual and gender-based violence, and contributing to an emergency humanitarian situation therein ….” The conflict minerals disclosure requirements in the legislation remain in effect until at least August 23, 2017. Thereafter, removal of the disclosure obligations would require the U.S. President to determine and certify to Congress that “no armed groups continue to be directly involved and benefitting from commercial activity involving conflict minerals.”
Breadth and Regulatory Cost of Conflict Minerals Legislation
The SEC includes the following observations (estimates) in its final conflict minerals rule:
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The initial cost of compliance is approximately $3 to 4 billion
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The annual cost of compliance is between $207 million and $609 million
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Approximately 6,000 issuers will need to perform some level of due diligence to determine whether they are impacted
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About 4,500 issuers will need to file an audited conflict minerals report with the SEC
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About 278,000 companies will be affected by requests from companies that are evaluating whether they have conflict minerals in their supply chain at a cost of $1.2 billion.
All SEC issuers (foreign and domestic), including smaller reporting companies, that file periodic exchange act reports with the SEC are affected, except those that are “registered investment companies.”
What Companies Should Be Doing Now to Comply
Some companies are hoping that a pending legal challenge by the National Association of Manufacturers, the U.S. Chamber of Commerce, and certain other interest groups will make the conflict minerals disclosure requirement “go away.” That is probably wishful thinking. While there may be merits in the litigation against the SEC rule in one or more ways, it was the U.S. Congress that created the rule—the SEC only developed the necessary disclosure rules and regulations to implement the legislation that Congress passed. Presumably, the SEC could have written its rules to be “less-onerous” and provided more “de minimis” relief, but that is probably for the courts to decide and (or) for Congress to change the law. The U.S. Court of Appeals for the District of Columbia Circuit is scheduled to begin hearing the challenge on May 15, 2013.
Rather than joining the ranks of the “wishful thinking,” public companies should begin to process of determining whether they manufacture or contract to manufacture any products that contain 3TG. If a company concludes that it doesn’t, there is no disclosure requirement and it may go about its business. However, reaching that conclusion is not so easy. A company must consider all of its suppliers and where those suppliers got the materials.
Take for example, the highly popular Apple iPhone. While the phone itself is being sold by a U.S. public company, Apple Inc., the parts and materials to manufacture the iPhone likely came from numerous countries around the world. For Apple Inc. to determine whether it has any conflict minerals in its iPhone requires the company to make inquiries of all of its suppliers of components of the phone, and then, potentially, to instruct each supplier to contact any of its sub-suppliers, etc., before concluding whether it has any conflict minerals in its phone.
In short, the process a public company should follow to determine whether it must comply with the disclosure requirement will require assembling a team of accountants and lawyers. However, this team, unlike the team required for compliance with most SEC rules, will need significant support from numerous other parts of the business, including purchasing, product development, and the like.
Effect on Private Companies
As stated above, the new disclosure requirement only applies to public companies subject to SEC oversight. However, private companies will undoubtedly be affected, at least indirectly, because for a public company to make the necessary evaluations and assessments, it must work with its suppliers many of which are not public. Accordingly, private companies that provide product to public companies should also be assembling a team to address the inquiries and other “due diligence” questions that will undoubtedly be forthcoming in the months ahead.
Further, a public company subject to the rule may want some form of assurance from its suppliers, whether public or private, in the form of certifications or the like. Suppliers will likely be very cautious in furnishing any such representations or certifications.
About the Author
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.