SEC Delays Conflict Minerals Rule: Now What?

April 20, 2011 - PRLog -- SEC’s delay in finalizing the regulations on has raised this question in many companies:  “Now what?”

“Given our pioneering experience in conducting conflict minerals traceability audits, we have fielded a number of inquiries asking this question,” said Lawrence Heim, Director of The Elm Consulting Group International LLC.  “Our response is that this is an excellent opportunity to develop a well thought-out plan for communicating with suppliers/customers on information needs and scoping required audits/site visits.”

Although the final regulations are delayed, “the federal legislative mandate still exists,” Heim said.  “The requirements are not going away.”

Elm recommends that companies focus their planning efforts on two main areas:

Communication tools and processes.  Successful compliance with Section 1502(b) will hinge on effective communication with other links in your supply chain.  This includes tools/processes for reaching out to your company’s suppliers – and the suppliers’ suppliers if needed.  A good communications strategy will also include how best to respond to similar requests you receive from your customers.

Audit scope and execution.  This involves identifying the sites/companies that must be audited, the scope of the audit itself, and how to execute audits efficiently in a supply chain context.  Proper sequencing of audits in supply chain linkages has a dramatic impact on the effectiveness of the overall audit program.  It is also critical to remember that Section 1502(b) mandates  “an independent private sector audit … that is conducted in accordance with … rules promulgated by the Commission.”  

Heim continues: “While we strongly suggest these planning activities, we also caution against moving forward too aggressively in advance of the final regulations.  Given the unique nature of these audits/disclosures being a legal compliance requirement under SEC, there are significant risks to aggressive early action.”  He emphasized “emerging initiatives such as the OECD Due Diligence framework and similar programs do not comply with SEC audit standards.”

Elm points out a few possible risks:

Companies directly regulated by SEC. Audits conducted “pre-rule” risk being non-compliant with the final SEC requirements.  Early adopters may be faced with paying for audits a second time to achieve compliance.  Reputational damage is possible where companies publicize or market the results of audits that do not comply with the final rule.  At an extreme, companies could face lawsuits over nonconforming audits in a manner similar to lawsuits filed for non-GAAP financial reporting or certain corporate social responsibility reports.

Privately-held companies responding to customer demands. For these companies, the risk is not compliance oriented, but centers on unnecessary costs and reputational damage.  Where customers demand this information, the question becomes “is SEC compliance driving the customer’s request?”  If so, the need may not be so urgent or burdensome as originally thought; early adopter efforts may be overkill/overly expensive in light of the rule deferral period.  Possible legal action may arise from customers who rely on the “pre-rule” audit information.  Reputational damage can result from publicizing or marketing the results of audits that are non-conforming to the final rule.  


More information and analysis of the conflict minerals requirements is available on Elm's blog at http://elmconsultinggroup.wordpress.com/

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Founded in 2001, The Elm Consulting Group International LLC is a specialty health, safety, environmental and sustainability management services firm with 11 offices in the United States, Mexico, Argentina, Venezuela, New Zealand, Indonesia, China and a network of over 100 hand-selected affiliates in 22 other countries. To maintain our independence as auditors, our services are focused on audit program development, execution and related support, and we maintain various third-party HSE auditor certifications in the US and abroad.