Dirty Work

By Susan Bloom

The SEC recently relaxed enforcement of the time-consuming ‘Conflict Minerals Reporting’ requirement, but will distributors still find themselves bogged down by this onerous task?

A provision of the Dodd–Frank financial reform law requires publicly-traded companies to certify whether or not their products contain “conflict minerals” – e.g., minerals sourced from mining operations in the Democratic Republic of the Congo (DRC) and neighboring countries that are believed to subject workers to serious human rights abuses and use proceeds from the sale of these minerals to finance regional conflicts.  In actuality, however, the ‘Conflict Minerals’ reporting requirement has created mountains of paperwork for many distributors and manufacturers, both of whom must work to certify the source of the minerals in their products for customers who inquire.

In a recent development, the SEC decided to relax enforcement of the Conflict Minerals reporting rule, but industry lobbyists and distributors alike have expressed frustration over being required to complete paperwork that won’t necessarily be reviewed/enforced as well as concern over what the future for the reporting requirement might hold.

A Day in the Life
While his company isn’t mandated to file an SEC ‘Form SD’ directly, Trevor Munoz, Operations Manager at Wholesale Electric in Houston, knows first-hand the extensive efforts required by his firm to comply with the reporting requirement in support of his customers.  “Our former VP of Operations spent a lot of time researching the law and what all we needed to do to comply and created a statement of our policy in support of the efforts of the international community and the U.S. to combat the use of conflict minerals and help our customers obtain accurate information about whether or not conflict minerals have entered their supply chain,” Munoz said.  “He also began compiling information reported by the manufacturers we represent for use in reporting to customers and we continue to compile information and update it to report to our customers as requested.”

Jack Henderson, Executive Vice President at Hunzicker Brothers in Oklahoma City, agreed that supporting his customers’ reporting requirements has weighed heavily on his firm in terms of time and resources.  “Initially, in 2014, our company provided a fairly simple conflict minerals statement to our customers stating that, as a distributor, we do no manufacturing and are unable to certify the country of origin relative to conflict minerals,” Henderson said. “However, many companies currently require a product-specific conflict minerals statement. In support, NAED has collected significant information from many suppliers on its website and a range of suppliers have provided information specific to their companies’ compliance.  But there’s considerable debate over whether this onerous reporting task has made any positive contribution towards achieving its intended goal.”

Like Henderson, Munoz questions the effectiveness of the process.  “I don’t believe that these reporting requests of distributors really do much to prevent the sourcing of conflict minerals,” Munoz contended.  “A lot of businesses that are asked to help support the reporting, such as distributors, don’t source any raw materials or manufacture anything.  All we can do in our reporting is say that we don’t manufacture anything and simply provide second-hand information from our manufacturers about where they source from, which doesn’t necessarily do anything to solve the issue from a legal perspective.”

NAED Vice President of Government Affairs Ed Orlet agreed and believes that, based on the vagueness of the SEC’s current approach, distributors have reason to be annoyed.  “The filing requirement is still in place, it’s just that no one is going to enforce it,” Orlet said.  “But filing companies are unlikely to risk not filing, which means that distributors are still likely to receive requests for compliance assistance.”

Unfortunately, Orlet continued, “NGOs and socially-responsible investment groups will still pressure filers to make sourcing decisions based on the limiting of conflict minerals and the EU also has its requirements.  This issue isn’t going away and in fact, we expect requirements around supply chain visibility to increase globally.  As a result,” Orlet advised, “distributors are wise to prepare to respond to more and varied customer requests for compliance assistance.”

“Whether they’re related to conflict minerals, ‘Buy American’ requirements, human trafficking policies, RoHS, WEEE, or other platforms,” Orlet continued, “distributors are going to be asked by customers, pressure groups, and regulators to supply more information about the materials they buy and the companies they buy them from.”

An Uncertain Future
It’s a tough pill to swallow for distributors like Wholesale Electric and Hunzicker Brothers, who continue to deploy resources to support their customers’ compliance with a law currently in limbo.

“Presently, the requirement is subject to interpretation by the SEC and penalties won’t be enforced at this time,” Henderson said. “The SEC’s Acting Chairman has asked staff for a recommendation on how to proceed with the rule and its enforcement, but currently all forms are still to be reported.”

“As a distributor, we have no control over where our manufacturers source their raw materials from and the information we provide to our customers is only as good as what our manufacturers share with us,” Munoz said.  “The burden of reporting and compliance needs to rest with the manufacturers who actually source raw materials; requiring more paperwork by the sales channel isn’t the most efficient way to combat the sourcing of conflict minerals.”

On an optimistic note, “I think that the spirit of the law will be positive for our company and business as a whole,” Munoz continued.  “However, until the reporting requirement is removed, it will still be a burden on us to compile and submit the information for our customers. If the SEC isn’t going to be enforcing that part of the law, the reporting requirements need to be removed.”

Palmer Schoening, Chairman of the Washington, D.C.-based Family Business Coalition and President of Schoening Strategies LLC, concurred.  “We’re obviously relieved about the relaxation in enforcement, but until the reporting requirement is repealed, business owners still have to deal with the paperwork. Since the enforcement is being scaled back, we think it helps our argument to repeal the reporting requirement altogether.” Schoening and Orlet agree that American businesses will ultimately need Dodd-Frank reform via an act of Congress to address the reporting requirement once and for all.

But will Congress change the law to eliminate the reporting requirement?  “It’s tough to say right now,” Orlet said.

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Bloom is a 25-year veteran of the lighting and electrical products industry. Reach her at susan.bloom.chester@gmail.com.