SEC: Time to disclose the origins of conflict minerals

19 Aug 2013

“Many issuers are just beginning their compliance efforts, so their suppliers may not realise that they will be affected by the rule. Considering the depth and breadth of many companies’ supply chains, and the absence of tracing mechanisms in most, the rule poses significant challenges for many companies.” Barbara Kipp, PwC partner

In August 2012, the US Securities and Exchange Commission (SEC) issued a rule requiring US-registered companies (issuers) to assess and disclose the origin of conflict minerals – including tantalum, tin, tungsten and gold – in their products.

If those minerals originated, or may have originated, in the Democratic Republic of Congo or certain surrounding countries, issuers must also perform due diligence to determine whether their purchase of conflict minerals may have benefited armed groups. They must also have that due diligence process audited by a third party.

The SEC was mandated by the Dodd-Frank Act to issue the rule in response to concerns that the exploitation and trade of conflict minerals is funding armed groups responsible for extreme violence in that region. The rule is effective for this calendar year.

Who is affected?

The SEC estimates almost 6,000 issuers will fall within the scope of the rule. And that more than 275,000 global suppliers who sell to those issuers will also be affected, as US companies look to them to gather the necessary information to help them comply. The rule is applicable to all issuers that file periodic reports with the SEC, whether they are domiciled in the US or abroad.

“Issuers have to dig down through their supply chains to find the data they need to comply,” said PwC partner, Barbara Kipp. “Many suppliers − especially those outside the US − may not realise that they’ll be on the hook for providing that information.”

The estimated financial impact of the rule is substantial. Initial compliance costs could range between US$3 billion and $4 billion, while the ongoing costs are estimated to reach US$200 to $600 million annually. Non-public suppliers both within and outside the US are expected to spend a hefty US$1.2 billion to comply with information requests.

Reaction to the rule

Some leading companies are already planning to be conflict free in an effort to meet goals for sustainable and responsible sourcing. Others have voiced doubts over whether it will achieve the intended goal of reducing violence in the DRC region and see the compliance exercise as costly and time consuming.

Several significant business groups have filed a joint lawsuit to tr y to stop or amend the rule. But no decision is likely this year, so many issuers are starting compliance efforts as the rule is already effective. Not complying with the rule may result in being ineligible to raise new capital under SEC regulations and risks pressure to take action from human rights activists, consumer groups and others.