NEWS ALERT – SEC Announces Public Roundtable on Conflict Minerals Regulations

See the press release here about SEC’s roundtable to be held in Washington DC on October 18, 2011.  More information will be provided as it becomes available.

House Committee on Financial Services Urges SEC to Adopt “Transitional Implementation” of Conflict Minerals Requirements

In a letter dated July 28, 2011, the leaders of the House Committee on Financial Services submitted additional comments to the SEC on the yet-to-be-finalized conflict minerals regulations.  The Committee Leaders, Congressmen Spencer Bachus, Gary Miller, Robert Dold and Steve Stivers, provided their recommendations on specific elements of a transitional implementation plan for Section 1502 of the Dodd-Frank Act.

Key points brought forth in the letter include:

• The State Department’s most recent map of Conflict Zone Mines is incomplete, the mine sites are inaccessible, the Congolese Ministry of Mines cannot obtain verifiable information, and the information in the map is insufficient for companies t use in effective due diligence.
• Creation of a new temporary category – “indeterminate origin.”  This would exempt companies from filing SEC reports when the origin is not possible to ascertain.  Due diligence efforts would still be required and proper filings made once the source is determined.
• Retaining the  “indeterminate origin” classification as permanent for scrap materials.
• A call to establish a de minimis standard for conflict minerals.

It is interesting to note that the letter explicitly indicates the need for a  “multi-tiered certification system, especially at the smelter and refinery level”.  Such a program is not required by the law, but may provide a key information element for companies subject to SEC reporting on conflict minerals.

At the same time, it is important to remember that use of/reliance on information from a certification system is simply one element of the program and reporting required.  Additional management processes are still needed for the internal use, management, risk assessment and reporting of that information.  That is sometimes not recognized by those entities who are emphasizing certification systems.

See the letter here:  HFSC ltr to SEC re Conflict Minerals

Elm Launches Groundbreaking Low Cost Conflict Minerals Audit Preparation Tool

The Elm Consulting Group International LLC today announces a groundbreaking cost effective tool to support companies preparing for conflict minerals traceability audits or customer inquiries.

The delay in SEC’s final rule triggered many questions from companies about planning and pre-audit preparation.  This led us to a solution that is valuable in almost any foreseeable final regulation scope/content and companies planning responses to customer inquiries – yet significantly reduces costs during this period of uncertainty.

Elm’s Self-Implemented Conflict Minerals Audit Preparation^© (SICMAP℠) is conceptually similar to a self-audit checklist.  SICMAP℠ is a spreadsheet tool that maximizes the use of internal company staff for cost reduction and implementation flexibility to develop and review conflict minerals programs in advance of third party auditing.

SICMAP℠ focuses on basic program elements equally relevant to companies responding to customer inquiries/procurement requirements and those working to comply with the upcoming SEC regulations on conflict minerals.   Successive and more complex tasks – for both program development and audit preparation – are identified based on initial SICMAP℠ findings, lessons learned from working through the SICMAP℠ process, and the final regulatory requirements once they are known.  The final rule, when published, will clarify the level of detail for some of the efforts.

Screenshots (which can be enlarged by clicking on them) show some of the features and functionality in SICMAP℠ include:

• “At a glance” color-coding indicates progress/status of both program development and audit preparation
• Live links to reference materials on the internet
• Summaries of language from the U.S. legislation (which will not be changed by SEC’s final regulations)
• Step-by-step pragmatic guidance on specific program elements
• Highlights of emerging international initiatives in comparison/contrast to SEC audit standards

Sample Page Showing Detailed Guidance

Topics covered in an intuitive and pragmatic way include:

• Initial scoping
• Reasonable assurance and representative sampling concepts reflecting SEC auditor standards
• Information management systems
• Internal controls
• Supply chain mapping
• Communications planning and content
• Scrap materials – special definitions and challenges in traceability efforts
• Considerations in selecting an auditor and preparing for the site visit

Summary Tracking Page With Color Coding. This image shows covered topic tabs along the bottom.

The tool is based on Elm’s experience as one of four firms worldwide that have completed conflict minerals traceability independent audits. Elm’s tantalum traceability audits in 2010 resulted in the first ever “Conflict-Free Smelter” designation^*, covering sites in the US and Japan.

We continue to recommend that companies move forward with planning activities, but defer third party audits until planning is substantially complete and the SEC regulations are final.  As with almost any new management program, a formal third party audit should be the last step of the implementation process – not the first.

SICMAP℠ will be commercially available beginning June 6, but feel free to contact us beforehand with questions.

* Issued by the industry association sponsoring the audits.  The Conflict Free Smelter (CFS) program is emerging as the leading conflict minerals third party certification program for smelters by the electronics industry.

SEC Provides Preview of April 15 Final Rules on Conflict Minerals Supply Chain Traceability

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FOR AN UPDATE ON SEC’S DELAY OF THE FINAL RULE, CLICK HERE.

As veterans of regulatory research, we are accustomed to spending hours poring over a plethora of governmental regulations, background documents, guidance and other reports.  Our work with conflict minerals supply chain traceability and SEC’s regulations has been no different.  In addition to having completed such audits, we have read and re-read

• the proposed SEC regulation and its preamble;
• the OECD Due Diligence Guidance for Responsible Supply Chains of Materials from Conflict-Affected and High Risk Areas, and the Supplement on Tin, Tantalum and Tungsten;
• the ISO 19011 standard;
• comments submitted to the SEC on the proposed regulation (approximately 700 total comments were submitted, of which 433 were standard form letters.  Of the remaining 270, approximately 75% provide substantive content);
• hundreds of relevant media reports, legal advisories and NGO documents;
• various auditor standards under SEC, including Government Accounting Office Government Accounting Standards GAO-07-731G, AICPA Statements on Standards for Attestation Engagements (SSAEs); and
• industry commentary and alerts on the topic.

Yesterday, we completed an analysis of the 263-page report from the Boston Consulting Group (BCG) titled US Securities and Exchange Commission Organizational Study and ReformMarch 10, 2011 to see what insight might be hidden therein on the upcoming final conflict minerals regulations.

BCG’s report establishes the ultimate context for the other documents which, in turn, essentially provides a preview of the final rule.  Our opinion is that SEC will meet the statutory deadline of April 15 with a rule that will:

• clarify procedural aspects, such as applicable audit standards (i.e., GAO-07-731G, AICPA SSAE, etc), the need for annual audits and the question of “furnishing” versus “filing” the report;
• establish a materiality threshold for conflict minerals content in products;
• specifically exclude retailers and contract manufacturing arrangements under certain conditions;
• defer most substantive compliance requirements to allow further study; and
• defer the initial reporting compliance date.

By doing this, SEC can meet competing priorities with which it is currently struggling.  Such a rule would appease the regulated community and buy SEC time, while allowing SEC to claim victory in meeting the legal deadline.  During the deferral period, we expect SEC will implement its overarching organizational restructuring and internal risk assessment processes spelled out in the BCG report, then come to a final position on Section 1502(b).

What does this mean for companies impacted by the due diligence/audit requirements?

We have written and directly counseled clients and others on business risks associated with completing the audits in advance of the final SEC rules.  As we see it, the risks are somewhat different depending on your company:

• Companies directly regulated by SEC. Audits conducted “pre-rule” risk being non-compliant with the final SEC requirements.  Early adopters may be faced with paying for audits a second time to achieve compliance.  Reputational damage is possible where companies publicize or market the results of audits that are non-conforming to the final rule.  At an extreme, companies could face lawsuits over nonconforming audits in a manner similar to lawsuits filed for non-GAAP financial reporting or certain corporate social responsibility reports.
• Privately-held companies responding to customer demands. For these companies, the risk is not compliance oriented, but centers on unnecessary costs and reputational damage.  Where customers demand this information of suppliers, the demands must be met.  The question becomes is SEC compliance driving the customer’s request?  If so, (assuming our prediction is correct) the customer’s need may not be so urgent or burdensome as originally thought; and early adopter efforts on the supplier’s part may be overkill/overly expensive in light of a rule deferral period.  Legal action from customers who rely on the “pre-rule” audit information and reputational damage are both possible where companies publicize or market the results of audits that are non-conforming to the final rule.  Suppliers would be wise to work with customers to find an acceptable balance between the drivers, timing, scope and cost.

Companies want to be proactive and responsible corporate citizens.  But we live in a command-and-control legal setting – combined with third-party lawsuits and governmental performance metrics that incentivize fines, penalties/aggressive enforcement.  Early action in a time of regulatory uncertainty carries risk.  In US corporate sustainability activities, this is perhaps most vividly demonstrated by last year’s complete collapse of the voluntary US GHG emissions trading market - specifically established in advance of US legal requirements on GHGs to create “first mover advantage”.

Elm continues to recommend that companies move forward with implementation evaluation, scoping and planning activities, but wait for SEC’s rule to be finalized before conducting audits.

Survey on Green/Ethical Procurement in Disaster/Supply Chain Disruption Recovery

As the world begins to assess the global economic impacts of the Japan disaster, it is clear that many industries are facing major supply chain disruptions.

Generally, companies have robust business continuity/disaster recovery plans that provide for employee safety and continued business operation.  At the same time, in the last 5 years have we have witnessed an explosion in the adoption of green/ethical procurement standards.   So we have posed the question:

How are corporate green/ethical procurement standards addressed in emergency recovery plans – if at all?

Elm has launched a short survey to gather general information on this question.  Click here to participate in this survey.  Please be assured that we do not track any information about the participants and no company/individual identification information is requested or gathered.

The results will be published here in 2-4 weeks.  We appreciate your participation.

Japan Tragedy Tests Ethical/Environmental Procurement Standards

As the world grapples with the immense impact of the disaster in Japan, attention is turning to the global economic impact of the country’s lost production.  Japan has long been a critical link in the supply chain of many industries – perhaps most notably in the automotive and electronics sectors.

The Financial Times ran a piece today on this which touches on contingency plans to help replace lost production stemming from unforeseen major disruptive events.

In this context, a question arises:  Will companies enforce their procurement requirements for vendor EHS performance during this period?

Elm has long discussed EHS risks in the context of supply chain disruption contingency planning.  In past years, the risks have been more focused on matters related to how production redistribution could cause violations of various environmental permit limits tied to production levels.  However, the rise of ethical purchasing standards – as voluntary and highly publicized corporate commitments – has altered the definition of EHS risks in supply chains.

It may be months or years before some of the Japanese plants are in production mode again.  In the interim, companies impacted by the disruption face a conundrum:

• Do they attempt a rapid production recovery by quickly engaging second-tier alternative suppliers that may not meet EHS procurement standards (i.e., relaxing their supplier requirements)?
• Or do they stick to the EHS standards for suppliers, thereby risking potentially extended production downtime while either (a) searching for a supplier who meets the standards, or (b) bringing a supplier up to speed?

Certainly, it is easy to say there is a third option – implementing an existing contingency plan with an existing alternate supplier that already meets the EHS procurement standards.

But few manufacturers have that third option available, as EHS concerns tend to be overlooked in supply chain disruption planning.

Elm Concludes Conflict Minerals Auditing Presentation in San Diego

This week we concluded our presentation giving an overview of Conflict Minerals Traceability auditing under US Securities and Exchange Commission (SEC) regulations on “Conflict Minerals” originating from the Democratic Republic of Congo (DRC).  Lawrence Heim, Director at ELM, presented on Elm’s experiences as part of a panel on sustainability at The Auditing Roundtable Winter Meeting January 25.

The key points made were:

• Planning is critical.  Because the legal requirements apply to the supply chain rather than a single site, a successful auditing program needs to start as close to the mine as practical then move forward toward the consumer.  Working backwards creates complexities, confusion and increases costs.

• SEC sees different audit types, but the market doesn’t. SEC’s proposed regulations establish two traceability activities: “reviews” (a less formal, internally-driven screening process) and “Conflict Minerals Reports” (requiring formal third party audits).  However, buyers of affected products/materials are already demanding third party credibility and independence for any material origin statements.  These buyers are increasingly unwilling to rely on statements or declarations of “DRC free” based on the “reviews”.

• Audits are SEC-based, not EHS. As stated in SEC’s proposal, AICPA-based attestations are a critical component of viable traceability programs.  Requirements for auditor independence, attestation engagements and “audits of the auditors” far exceed similar elements found in traditional EHS auditor standards, certifications and practices.

• Additional sources of audit information are necessary. Increased stakeholder and regulator concern over information veracity reflecting ore provenance is driving the need for new data resources and verification tools well beyond information available/provided by the audited site.

Heim concludes, “Media coverage has painted an unnecessarily pessimistic picture of the practicality and cost of these conflict minerals audits.  Our experience demonstrates that such pessimism is generally unwarranted, provided the right plan and resources are in place.”

Elm to Present on Conflict Minerals Supply Chain Auditing at San Diego Meeting of The Auditing Roundtable

Lawrence Heim, CPEA of The Elm Consulting Group International LLC will be speaking as part of a panel on sustainability at The Auditing Roundtable national meeting.  The meeting will be held from January 24 – 26, 2011 at the W Hotel in San Diego.

Mr. Heim will be discussing Elm’s experience with the first third-party audits of Conflict Minerals Supply Chain Traceability conducted under the US Conflict Minerals Act/Dodd-Frank Wall Street Reform Act.

The meeting agenda can be viewed here:     http://bit.ly/etp3sj

EHS Journal Publishes Detailed Article on Elm iPad Trials

We recently announced our trial of and results from using an iPad for EHS auditing.  These articles were intentionally short and provided summary information.

We were subsequently contacted by the Editor of EHS Journal to provide a more detailed article for their respected publication.  That article is now available.

We invite you to read it.

In Tampa, a Mining Company Shutdown Highlights Business Interruption Risk from Environmental Issues

In Tampa Bay, an all-to-real demonstration is playing out of the trickle-down economic impact of a company operation being shut down for environmental reasons.  The Tampa Bay Business Journal reported this story.

The Mosaic Co. is a publicly-traded company with over $6billion in annual revenue reported last fiscal year.  Mosaic mines phosphate ore.  The company has been mining in Polk County since 1995 and recently filed for an expansion of operations to access reserves in Hardee County.  These ore reserves represent about 10 years of active mining operations.

The Sierra Club, along with other NGOs challenged the issuance of a federal permit that would allow Mosaic to expand, alleging that the expanded operations would cause environmental damage to the headwaters of the Peace River and other streams that drain into the Charlotte Harbor estuary.

On July 30, in response to the challenge

U.S. District Judge Henry Lee Adams Jr. in Jacksonville issued a preliminary injunction against the expansion, saying the Army Corps had failed to adequately explore alternative plans that would cause less environmental damage to the area.

The article reports that, if the Mosaic expansion does not move forward, the economic impact would be dramatic.

At least 18 companies that do business with Mosaic would be out at minimum of $80 million in combined annual revenue, and about 400 of their employees would lose their jobs, in addition to the 221 Mosaic workers who would be laid off …

“If Mosaic is prohibited from further mining, it will mean that Bul-Hed Corporation would cease to exist sometime in the near future,” Ronnie Hedrick, president, said in a court filing.

Mosaic has estimated it would lose $250 million to $300 million in operating earnings in a worst-case scenario.  In its fiscal year ended May 31, Mosaic had earnings of $1.75 billion before interest, taxes, depreciation and amortization on net sales of $6.76 billion.

Business Interruption Planning

The company’s most recent 10-Q (Item 1A – Risk Factors), filed April 1, 2010, did  disclose this potential risk:

Expansion of our operations also is predicated upon securing the necessary environmental or other permits or approvals. Over the next several years, we and our subsidiaries will be continuing our efforts to obtain permits in support of our anticipated Florida mining operations at certain of our properties. In Florida, local community participation has become an important factor in the permitting process for mining companies, and various local counties and other parties in Florida have in the past and continue to file lawsuits challenging the issuance of some of the permits we require. In fiscal 2009 environmental groups for the first time filed a lawsuit in federal court against the U.S. Army Corps of Engineers with respect to its issuance of a federal wetlands permit and similar lawsuits could be brought in the future. A denial of, or delay in issuing, these permits or the issuance of permits with cost-prohibitive conditions could prevent us from mining at these properties and thereby have a material adverse effect on our business, financial condition or results of operations.

Even so, how should the company – and its business partners – respond to such a risk?  And did business partners understand, assess and plan for such a contingency?  In many discussions we have had with clients about potential shut downs, it is common for companies to plan production volume shifts across other operating locations to make up for the lost volume and continue operating.  In Mosaic’s case, however, the article states:

Although Mosaic has four other mines in Florida, their output would not offset the impact of a shutdown at South Fort Meade, the company said.

Even where a company has the physical capacity at other locations to make up for lost production at one plant, environmental restrictions may not allow timely production increases at others.  Wastewater and air permits typically contain conditions limiting production.  These limits can take various forms:

• Direct limits.  For example, plant operating hours or volume; emissions limits for production equipment or material use; wastewater flow or contaminant concentration limits.
• Indirect restrictions.  For example, fuel use or emissions limits on supporting equipment such as generators or boilers; wastewater treatment capacity/retention time for adequate treatment.

Suppliers, contractors and vendors may attempt to recover losses from Mosaic through the contractual obligations in place between the parties.  However, in this case, Mosaic has notified at least some of their business partners that this is a “force majeure” event – an extraordinary circumstance beyond their control – which releases Mosiac from contractual obligations.

Has your company evaluated/assessed the myriad business continuity risks associated with environmental matters in your supply chain?  And what contingency plans do you have in place to protect yourself?