One of the lesser-known facts about the Dodd-Frank Act (also known as the “conflict minerals” rule) is that the provision has been challenged in court. The U.S. Court of Appeals for D.C. Circuit recently issued its ruling on a challenge by the National Association of Manufacturers (NAM) regarding the SEC's conflict minerals rule, according to the Electronic Components Industry Association. NAM argued that the Securities and Exchange Commission (SEC) lacked the authority to require due diligence and reporting in implementing the Dodd-Frank law's provisions regarding conflict minerals. The Appeals Court upheld the SEC's authority to require due diligence and reporting to the SEC.
The conflict minerals rule requires public companies to disclose the presence of conflict minerals (tin, tantalum, tungsten, or gold) originating from the Democratic Republic of the Congo or specific adjoining countries in their products. These materials are widely used in electronics. The deadline for compliance is May 31.
However, the ECIA said, the court also ruled that the public reporting aspects of the rule were unconstitutional "compelled speech" under the First Amendment. Specifically, the Court held that the government could not require the inclusion of the statement "not DRC conflict free" in reports to the SEC.
The decision has created a great deal of uncertainty regarding what happens next and what companies need to include in their conflict minerals reports. The electronics industry supports the intent of the rule, which is to cut off sources of revenue to rebels that occupy the DRC and nearby regions. However, tracing minerals back to their source and declaring them “conflict-free” is extremely complicated, time-consuming and for many companies costly.
According to a PriceWaterhouseCoopers survey of 700 companies across 15 industries, organizations continue to find the journey to compliance required by Dodd-Frank Section 1502 to be challenging at nearly every step: scoping, surveying suppliers, performing due diligence and drafting filings. As a result, 62 percent of survey respondents reported needing one to two full-time resources for their conflict minerals compliance efforts, and 21 percent needing three to five full-time resources, a substantial evolution over the last year. It ultimately comes down to performing reasonable due diligence, and according to PwC’s survey, companies in the technology, energy and metals industries appear to be the furthest along.
The vast majority of public organizations covered under the rule will fail to meet the requirements by the May 31 deadline anyway, according to PwC. The study found that only four percent of companies have completed a draft of their filings, and 90 percent haven’t even begun drafting or have only developed initial drafts with significant work still needed, providing a rapidly narrowing window of action before the deadline arrives.
Until recently, there was also no standard format for conflict minerals reporting for the electronics industry. The IPC recently released a recommended template for collecting data from suppliers and provides a Conflict Minerals Due Diligence Guide; the Electronics Industry Citizenship Coalition along with the Global e-Sustainability Initiative provides a reporting template, tools and resources for compliance. The organizations only recommend the usage of these materials -- there is currently no standard required by the SEC.
According to the ECIA, the recent appeals court decision could spur a number of different scenarios:
- The Appeals Court could, on its own initiative, do an en banc review of its ruling.
- Either party could request an en banc review by the Court of Appeals.
- The SEC could delay the June 2 deadline for reporting pending its resolution of the First Amendment violation.
- The SEC could start a new rule-making proceeding to correct the constitutional defect. This re-opening of the regulation could be limited to resolving the compelled speech issue or it could be a broader examination of the conflict minerals regulation.
Although compliance with the conflict minerals rule has proven to be highly resource-intensive, PwC’s survey found that 67 percent of respondents anticipate not needing an independent private sector audit (IPSA) in the first two years, either because they source their minerals from outside the covered countries or expect them to be Democratic Republic of Congo conflict undeterminable. In fact, only 12 percent expect to require an IPSA for either or both years. After 2014, PwC expects that number to increase.
Another way to look at the effort, according to Bobby Kipp, partner in PwC’s Risk Assurance practice, is as an opportunity. "Those that are just beginning to gather information and draft their filing are at risk of not only falling behind, but of missing opportunities in terms of supply chain improvements, competitive advantage and enhanced customer and stakeholder trust," Kipp said in a release. "We found that 90 percent of survey respondents see this as a compliance exercise. However, those in the technology, industrial products, manufacturing and retail and consumer industries, while focused on compliance, are uncovering the potential business opportunities that conflict minerals compliance can provide. ”