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Not yet in effect, a new SEC rule has some companies bearing down on their suppliers for contractual changes and others just realizing the new requirements will apply to them.
Sarah Johnson, CFO.com | US
October 19, 2011
Irma Villarreal, chief securities counsel and assistant corporate secretary for Kraft Foods, thought she could ignore a new disclosure rule that, at first glance, seemed to apply only to companies that deal with electronics products and jewelers. "We had no idea that this legislation was going to be covering companies like us," she said during a Securities and Exchange Commission roundtable about the rule on Tuesday.
But since some of the thousands of products Kraft sells (such as coffee and biscuits) are packaged in tin, the company will need to sift through its supply chain to trace whether minerals used in its final products came from the Democratic Republic of Congo or nearby regions and whether its purchases indirectly funded the ongoing violence there. As written, the SEC rule — which the regulator has yet to finalize — will require all public companies whose products contain "conflict minerals" such as tin, tantalum, tungsten, and gold to comply, no matter how much (or how little) of these metals they use. These minerals are included in various everyday products, such as smart phones, laptops, hearing aids, and jewelry.
The prospect has public companies pressing their suppliers for details they have never previously requested, as well as making requests for contract changes. They're finding the task, which may include hundreds of thousands of suppliers and thousands of parts, difficult. At Boeing, changing supplier contracts across the board couldn't be done all at once because the agreements renew every three to five years, said Benedict Cohen, chief counsel at the company. Moreover, companies may need to switch suppliers if a disaster occurs, and they may not have time to do proper due diligence. "Any supply-chain map of conflict minerals would be out of date as soon as it's released," said Cohen.
Participants in the roundtable included corporate representatives, investors, and auditors, who debated the details of the SEC rule that was proposed one year ago. (The SEC has fallen behind the Dodd-Frank Act's mandate that it come up with a rule on conflict minerals within nine months of the law's passing.) The commission has since received more than 250 comment letters on its proposal.
While supportive of the rule's intent, business advocates have worried over to what extent the regulator will hold companies responsible for knowing with certainty the origins of these minerals. CFOs in particular have a stake in the final rule, since their personal liability will rise when they sign off on annual reports that include this data. They will have to trust the word of third parties. "After we have obtained information from our suppliers, we are dependent on them for the accuracy of that information," said David Bouffard, vice president, public relations, for Signet Jewelers.
The rule may also place an additional time crunch on employees who are already scrambling to get end-of-year reporting done. The mandate "puts issuers at risk of being unable to timely file their form 10-Ks," Kraft's Villarreal said. She asked the SEC to instead allow companies to put together a separate report at another time in the reporting cycle.
Villarreal's request was one of many suggestions made at the roundtable by corporate representatives keen on fine-tuning the rule and making it more feasible and less costly for them to comply. They also expressed concern that it could unintentionally harm the people intended to be helped under the Dodd-Frank provision. The law's passage in July 2010 has resulted in a de facto ban on trade in the minerals in the African region, noted Yedwa Zandile Simelane, senior vice president of corporate affairs at AngloGold Ashanti, a gold producer based in Africa that is listed on the New York Stock Exchange.
Business advocates also pushed the SEC for a phased-in approach based on the maturity of certification programs of smelters that process the minerals in question. Moreover, they noted, smaller companies may have a more difficult time complying with the rule and have less purchasing power to press their suppliers for information or contractual changes. They also suggested exempting gold from the rule and raising the threshold so that companies whose products contain very small amounts of the minerals in question would not be subject to it.
However, lawmakers are pressing the SEC to act quickly and move beyond such requests. "Allowing any further time to elapse will only prolong the profound human suffering and violence," 11 senators wrote in a letter to SEC chairman Mary Schapiro on Tuesday. The letter said the regulations should not include "phase-ins, exemptions, or delays."