By Ilana R. Morady

nugget goldSeyfarth Synopsis: Companies are experiencing difficulties in complying with their disclosure responsibilities under the SEC’s conflict mineral requirements.

The Government Accountability Office (GAO) recently released a report to Congress on the effectiveness of the Securities and Exchange Commission’s (SEC’s) conflict minerals rule, finding that companies are experiencing difficulties in fulfilling their disclosure responsibilities.

The SEC adopted the conflict mineral disclosure requirement in 2012. The rule requires companies to report on the use of conflict minerals from countries in the Democratic Republic of Congo (DRC) region in Africa. The rule came about because of concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the DRC region and is contributing to a humanitarian crisis. The rule applies to any company that uses minerals including tantalum, tin, gold or tungsten if: (a) The company files reports with the SEC under the Exchange Act; and (2) the minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.

In its report, the GAO found that although some sourcing initiatives have been developed to assist companies with their reporting obligations, a majority of companies have reported to the SEC that they were unable to determine the country of origin of the conflict minerals used in their products. It appears that some companies are unable to make the determination because suppliers will not respond to their inquiries. Layered and complicated supplied chains can also create confusion and delay, especially when companies use and purchase minerals from multiple suppliers.

In addition, the report found that the Department of Commerce, which is required under the Dodd-Frank Act to assess the accuracy of the independent private sector audits that accompany the conflict minerals disclosure, has not submitted a report on its assessment of the accuracy of the independent private sector audits or other due diligence efforts by reporting companies. The GAO said that until the Department of Commerce takes action in this regard, companies subject to the reporting rule lack information about best practices for responding to the conflict minerals rule.

The GAO report underscores the difficulty companies are having with disclosing information about their use of conflict minerals. Despite this difficulty, and the lack of information about best practices, companies subject to the disclosure rule should continue to do their best to determine the source of conflict minerals used in their products.

For more information on this or any related topic please contact the author, your Seyfarth attorney, or any member of the Workplace Policies and Handbooks Team.