GAO Publishes Results of Accountability Audit of SEC Conflict Minerals Rulemaking Activities

The Government Accountability Office (GAO) has published its report to Congress (mandated as part of Section 1502 of The Dodd-Frank Act) that

  • assesses the effectiveness of Section 1502(b),
  • describes issues encountered by the SEC in carrying out the provisions of the Act,
  • reviews non-covered companies that have conflict minerals necessary to the functionality or production of a product manufactured by such companies; and
  • reviews the rate of sexual-and gender-based violence in war-tom areas of the Democratic Republic of the Congo and adjoining countries.

Because the final rule has not yet been promulgated, the GAO report – as stated by SEC in their June 22, 2012 written comments to the report – “examines the steps the SEC has taken toward issuing a conflict minerals disclosure rule; stakeholder-developed initiatives that may help covered companies comply with the anticipated rule; and any additional information available on the rate of sexual violence in the eastern Democratic Republic of Congo.”

Key Points from the Report

The following are excerpts from the report on what we think are key points.

Some stakeholders’ efforts to improve their initiatives through expansion and harmonization have been hindered by the uncertainty regarding potential due diligence and disclosure requirements stemming from SEC’s delay in issuing a final rule. For example, while 12 of the approximately 25 tantalum smelting companies world-wide have been certified as conflict-free through the Conflict-Free Smelter Program to date (see figure 6),[Footnote 38] company representatives said GeSI and the EICC are facing challenges engaging tin and tungsten smelters in the absence of a final rule…

GeSI and EICC representatives are finding it difficult to convince Asian–particularly Chinese–smelters to participate in the program because the electronics industry has limited leverage over Chinese smelters in the absence of a final SEC rule. In addition, according to one EICC member company representative, Chinese smelters and the Chinese government are not concerned with improving the transparency of supply chains in the absence of any business incentives. The limited participation by Chinese smelters may affect the scalability of the Conflict-Free Smelter Program as Chinese smelters processed an estimated 43 to 48 percent of the global tin supply between 2006 and 2009, and Chinese companies mined and processed an estimated 77 to 84 percent of the global tungsten supply between 2006 and 2009…

Some stakeholders have discussed efforts to harmonize their initiatives to further improve them, but some of these efforts have been hindered by the absence of SEC’s final rule.

In the report’s conclusion, GAO stated the following:

SEC has taken some important steps in its effort to issue a rule, including issuing a proposed rule that generated a large volume of public comments. However, SEC has not yet finalized and issued a rule as stipulated in the Act, largely due to the time and effort required for the Commission to understand the complexities of the four conflict minerals’ supply chains, review the large volume of comment letters, and hold the numerous meetings requested by stakeholders…

The continued delay in issuing a final rule, however, has contributed to a lingering uncertainty among industry and other stakeholders who expect their actions to be guided by a final rule…

Without a final rule, it is unclear to what extent the initiatives currently being developed or implemented by industry and other stakeholders will achieve results consistent with those anticipated under the conflict minerals legislation. Moreover, in part because of the delay in the rule’s issuance, many companies across the tin, tantalum, tungsten, and gold supply chains are reluctant to participate in or support the global and in-region initiatives currently being developed or implemented because they are uncertain whether or not the initiatives will align with the anticipated rule.

We think it is worth noting that although GAO laid out that there are six global inititives requiring audits and 3 in-region sourcing initiatives requiring audits, there was no mention of the divergent scopes of these audit, the absence of auditor qualification standards or applicability/relevance to the audits required by Section 1502.

The full report is available as a PDF here or text file here.

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