Friday, February 24, 2017

Minerals review comments start to flow, disagreement on costs

By Mark S. Nelson, J.D.

Early comments on the SEC’s review of its conflict minerals rule guidance are divided on the contours of and need for the disclosure regime mandated by the Dodd-Frank Act. Still, commenters appeared united on tackling the issue of compliance costs.

Gregory Kleffner, executive vice president and CFO of Stein Mart, Inc., an apparel retailer with stores across the county, said the conflict minerals rule is a diversion from the SEC’s core mission, the consideration that should be the primary driver of the agency’s review. But Kleffner also said compliance costs, especially for non-reporting vendors, may not be reflected in data on the burdens imposed by the rule on businesses. In Stein Mart’s case, Kleffner said the company currently pays about $50,000 annually for a consultant and attorneys in order to deal with the conflict minerals rule. While he said that number was lower than the company’s initial compliance cost, he urged the Commission not to ignore the fact that the overall trend of lower costs for all companies subject to the rule can mask the still quite large burden on businesses.

Also on the matter of cost, Lawrence Heim, managing director at Elm Sustainability Partners LLC, characterized the Commission’s cost estimates in the final rule as “grossly overestimated” in light of recent trends. Heim noted that some analyses of the conflict minerals rule could only be grasped via “retrospective analysis” and the Commission should instead mull the newer data as part of its review. But Heim also urged the Commission to consider adding a de minimis threshold, an item left out of the final rule, but which would reduce compliance costs and match regulatory developments in the European Union.

A comment by the CEO of Source Intelligence, Jess Kraus, suggested that technology evolutions since the adoption of the conflict minerals rule have led to improved tracing of minerals and less costly compliance. He also said his firm was unaware of its customers ending contracts with suppliers who use minerals from “legitimate mines” in areas of Africa impacted by the conflict minerals rule.

Lauren Compere, managing director, Boston Common Asset Management, and a group of additional investor signatories, expressed support for the conflict minerals rule. The letter urged the SEC to enforce the disclosure requirements contained in the conflict minerals rule. Moreover, the signatories noted that despite lingering hurdles to peace in the Democratic Republic of the Congo, the emergence of environmental, social, and governance investing and regulatory developments in Europe, and the possibility of future developments in China, had set the stage for supply chain due diligence to emerge as a “global norm” largely because of U.S. leadership.

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