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Focus on Manufacturing & Distribution: Section 1502 (Conflict Minerals) of the Dodd-Frank Act

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The Dodd-Frank Act, formally named the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, focuses on financial regulatory reform. The act was signed into law in July 2010 by President Obama.
November 2, 2011

The Dodd-Frank Act, formally named the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, focuses on financial regulatory reform. The act was signed into law in July 2010 by President Obama.

The legislation includes various compliance requirements impacting organizations in various sectors. One of these overarching compliance requirements is Section 1502: Conflict Minerals.

The purpose of Section 1502 is an attempt to reduce or even eliminate significant exploitation and violence in the Democratic Republic of Congo (DRC) by identifying companies that source specific metals/minerals from this region of the world and making the public aware of its impact through financial statement disclosure.

There are currently four metals, referred to as ‘3TG’ metals, originating from DRC countries that are encompassed by the act; however, other metals/minerals determined to be conflict related could be included as determined by the Secretary of State.

The 3TG metals currently covered are:

  • Tungsten
  • Tantalum
  • Tin
  • Gold

In its proposed rule submitted for public comment in December 2010, the Securities and Exchange Commission is proposing that a Conflict Minerals Report be prepared and filed with the SEC.

The proposed report should explain the process and controls that a company has in place to perform reasonable due diligence over the use of the aforementioned metals/minerals in their supply chain and finished products. It appears that reports and information from suppliers used in a company’s supply chain will be able to be relied upon and a full audit over a company’s supply chain will not be required.

The proposed Conflict Minerals Report will likely have to be audited by a third party, which will have to assess the design and operating effectiveness of the process and controls used by the company to perform their due diligence. This has been compared to the SOX disclosure over the design and operating effectiveness of internal controls over financial reporting.

While the act or the SEC have not clearly defined the expectations and compliance standards for Section 1502, the companies impacted by the rule are clearer. As currently proposed, a company will be required to comply if it files reports with the SEC under the Exchange Act and conflict minerals are necessary to the functionality or production of its products.

Furthermore, even companies that do not file with the SEC may need to conduct due diligence on their supply chain if they are suppliers to impacted SEC filers.

The industries that will be primarily affected include:

  • Electronics and Communications
  • Aerospace
  • Automotive
  • Jewelry
  • Industrial Manufacturing

The comment period for the proposed rule ended in March 2011 and the SEC is evaluating all comments received before finalizing the rule. It is expected to be adopted by the end of December 2011, which would require affected companies to report for the first time in the fiscal year ending 12 months after the final rule is adopted.

To view the Section 1502, click here.

To view the SEC proposed rule, click here.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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For more information, please contact:

  • Mike Ramirez, CPA — St. Louis
  • Director
  • Manufacturing & Distribution Services Group
  • 314.290.3455
  • mike.ramirez@rubinbrown.com