Global accountancy PwC released a new survey on companies’ compliance efforts for SEC’s conflict minerals disclosures. The survey, conducted in February 2014, offers a number of valuable insights into Dodd Frank Section 1502 compliance. We recommend reading the report in its entirety, but our view of the highlights is below. Our general takeaways are that many companies still have much work ahead for the May 31, 2014 filing, and efforts are overwhelmingly geared toward regulatory compliance rather than other goals or value creation.
- 25% of the respondents indicated they are still in early stages of compliance – mainly conducting the RCOI. However, 11% have not completed the product applicability determination/screening phase. Only 4% have created a draft disclosure as of the survey date.
- 62% of respondents have one to two full time resources working on conflict minerals programs, with 21% more having three to five full time resources. From our experience, staff originally had (and may still have) other job functions, but conflict minerals compliance has become their full time job.
- 90% of respondents view the efforts as a regulatory compliance measure, but are also trying to find ways to create value from the time and expenditures involved.
- Use of third parties for various activities is high. PwC rightly points out that companies should not over-rely on these third parties to define key terms and strategies for them. Each issuer needs to make educated, informed decisions reflecting their own unique situation and risks. We couldn’t agree more – as a matter of fact that is a centerpiece of our engagements, and our CMCheckPoint tool. Third parties should focus on helping clients be informed about the requirements and facilitate internal discussions leading to the company’s own determinations. Ultimately if the company is asked to explain or defend a particular position, the company must stand on its own – the consultant shouldn’t be the one to answer. PwC also mentions that over-reliance on technology solutions can create risks for issuers, especially where the issuer is not fully aware of how the solution screens, verifies or otherwise manipulates data.
- 32% expect to file only the Form SD, with another 33% expect to file a Form SD and CMR. This indicates that a significant percentage of respondents are taking a position that they have adequate and sufficiently reliable information from suppliers to conclude, as a result of their RCOI, that they have no reason to believe that conflict minerals may have originated in a covered country. We find this particularly interesting given the general availability and credibility of relevant information. A new article from the law firm King & Spalding offers more insight on this topic.
- 48% of the respondents use Excel spreadsheets or Access databases, while only 14% purchased a software solution to manage conflict minerals data. Although the study points out that there can be shortcomings associated with Excel and Access tools, we believe it depends on the number of suppliers who must be contacted for conflict minerals information and the available internal staff time/resources. One Fortune 200 client is exceptionally adept with Access and created a highly effective, thorough and responsive system for a company with 350,000 parts in 400 commodity codes. Potential pitfalls of commercial solutions are also discussed. Highlighted concerns were lack of clarity between the output and Form SD/CMR requirements, confusion about what role the solution provider is to play, and a rush to market ahead of clear industry consensus has required a series of rapid enhancements.
- 13% are trying to reduce the compliance burden by taking a “DRC free” position, eliminating sourcing from the region altogether. It is too early to tell if this will ultimately be a successful strategy as it contrasts with in-region initiatives supported by several major electronics companies that have significant power over their suppliers. The market may split along ore/metal lines however; while in-region conflict free programs for tantalum and tin are growing, the tungsten market is currently showing significant resistance to African sourcing.