Wednesday, October 16, 2013

PwC Survey Indicates Varied Preparation to Comply with SEC Conflict Mineral Regulations Implementing Section 1502 of the Dodd-Frank Act

In the spring of 2013, PricewaterhouseCoopers surveyed companies to determine their level of understanding of the conflict minerals regulations adopted by the SEC, as well as their progress towards compliance. The report summarizes the responses of nearly 900 individual respondents and sheds light on some of the more significant hurdles companies are, or are expecting, to encounter, as well as which industries seem to be furthest ahead with their compliance efforts.

Section 1502 of Dodd-Frank directs the Commission to issue rules requiring companies to disclose their use of conflict minerals if those minerals are necessary to the functionality or production of a product manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten. Under the final SEC regulations, a company that uses any of the designated minerals would be required to conduct a reasonable good faith country of origin inquiry reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources.

If the inquiry determines that the company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources or the company has no reason to believe that the minerals may have originated in the covered countries and may not be from scrap or recycled sources, then the company must disclose its determination, provide a brief description of the inquiry it undertook and the results of the inquiry on new Form SD filed with the Commission.

Approximately 44 percent of companies surveyed by PwC expect to file a Form SD, meaning that they believe they are within the scope of the rule because they manufacture products containing conflict minerals. But only 8.4 percent said they would definitely expect to file a Conflict Minerals Report along with the Form SD. Early SEC estimates suggested that more than 50 percent of registrants would likely need to file a Conflict Minerals Report.
Companies filing a Form SD must designate one executive to sign the form. Ideally, said PwC, companies should determine which executive will sign the form early in the compliance process so that individuals will be involved in the many judgment calls that are necessary when complying with the rule. Of those companies anticipating the filing of a Form SD, 30 percent have already decided which corporate officer will be signing the form, with the CFO as the most popular choice followed by the General Counsel. The corporate officer signing the Form SD can be different from the signatory of other SEC filings.

About a quarter of the companies expect that they will not be able to determine the conflict status of their products in the first year and thus will be underminable and not required to obtain an audit of their Conflict Minerals Report. Another 14 percent plan to obtain an independent audit in their first year of compliance, either because they believe it will be required of them or because they want to obtain one on a voluntary basis.

Almost half of the companies in the PwC survey are still in the initial stages of their compliance efforts on the SEC conflict minerals regulations, with 16 percent not having started gathering information. Not surprisingly, the single most challenging task for most companies is obtaining accurate information from their suppliers. More than half of the companies view their conflict minerals regulation compliance efforts as a compliance exercise, while only six percent intend to use the regulations as an opportunity to make supply chain changes.

Around 42 percent of companies surveyed have agreed upon or are deliberating conflict minerals policies. With the SEC rules in effect and the first compliance deadline less than a year away, noted PwC, formulating a conflict minerals policy is a good first step to take as it helps provide the near and long-term goals for the program.

Many companies are incorporating OECD-due diligence guidance in developing their policies. But only two percent of companies have completed their reasonable country of origin inquiry and started due diligence. Conducting RCOI and due diligence on the origin of the conflict minerals used in products will be a detailed and time-consuming part of the compliance effort due to the breadth and depth of most company supply chains. More than a quarter of the companies surveyed saikd that their supply chain contains over 1,000 suppliers.

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