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“This is not going away anytime soon. Even if SEC keeps losing (on appeal), a part of the rule is effective,” says Scott Kimpel, a partner with the Washington D.C. law firm Hunton & Williams. “Either way, there is going to be some future compliance in regards to conflict minerals.”
On Monday, a federal appeals court struck down an SEC rule that required public companies to disclose whether their products contain minerals from the Democratic Republic of Congo (DRC). The court said a provision of the rule that was included in the Dodd-Frank Wall Street Reform Act forcing companies to publicly report their products as not being “conflict-free” violated their First Amendment protections against compelled speech. The ruling did, however, uphold the rule's other provisions.
Kimpel says he is telling clients that since the court did not stay the rule’s implementation – and the SEC has not yet announced any delays – they should continue working toward the June 2nd compliance deadline.
“My advice is to keep working and keep up on compliance since this was not a 'pencils down' sort of ruling,” he explains. “There are avenues of appeals (for the SEC), there could be a new ruling or the SEC could tweak the rule to meet the standards of the court but keep the June deadline. This is not the last word.”
Filers Already Behind
Even prior to Monday’s court ruling, many public companies were scrambling to comply with the conflict minerals requirements.
With less than two months left, there is a small minority that did not focus on this issue, says Bobby Kipp, partner in PwC's Risk Assurance practice and PwC’s Conflict Minerals leader. “The vast majority of filers realize that this is a journey and that it will take time.”
According to PwC’s recent survey on conflict minerals reporting, a quarter of public companies surveyed were still in the “early stages” of the process and 11 percent has just begun “scoping” the project.
“[With] just over two months to the filing deadline, some respondents may have a rapidly narrowing window for action,” the PwC report says.
For CFOs that find themselves behind the eight ball on the initial conflict minerals reporting requirement, there are two significant downsides, according to Kipp:
• With little or no time to review the information from the supply chain properly, the data will not be robust enough and what they will describe in the reports “may not stack up to peers in quantity or quality.”
• If a company needs to catch up on conflict minerals reporting in a short period of time, it could take significantly more effort, and money, than it would have six months to a year ago.
“Most companies will tell a story of continuous improvement in terms of their journey toward responsible sourcing -- including conflict mineral sourcing, as well as other aspects, such as labor standards and shining a light on the sourcing process,” Kipp says. “It’s all about making the companies publicly accountable.”
Companies should also not think that the court ruling will put them in an any better position to meet the June 2nd deadline, Kimpel adds. “This type of reporting has a steep learning curve and most companies have approached it on good faith. Right now the deadline is still June 2, and if you put if off you will be right back doing the same
compliance checks later this year or a year from now."
One comforting aspect of the conflict minerals reporting deadline is that companies can use the information to improve their internal processes, says Kipp.
“This is different from other SEC filings because it’s a different skill set. Filers are taking their time in order to be confident on what they are reporting,” she explains. “But we believe there will truly be long –term benefits as they use the information remake the supply chain and create more streamlined organization. That’s the real silver lining.”