In the first of three reports scheduled for release by the OECD over the course of next year, upstream and downstream companies impacted by the Dodd-Frank banking reform (and subsequent Conflict Minerals aspects of the legislation) have the opportunity to see the results of the OECD pilot study.
This first release includes two separate reports one for upstream companies and the other for downstream companies. We examined only the downstream report in conjunction with conflict minerals expert Lawrence Heim, who recently led a conflict minerals webinar with sponsor Aravo earlier this fall with MetalMiner. The recorded webinar provides an overview to the legislation.
OECD Framework Problematic
In our view, the OECD framework (or perhaps more accurately, SEC’s possible incorporation of it into their final rules) may create more problems than it solves. According to Heim, the OECD may not amend the language of the guidance itself, but instead is amending the substance of the guidance through less formal “clarifications” from the OECD secretariat. Heim points out three main ramifications for US companies that must comply with the US Conflict Minerals legislation:
- First, if the SEC adopts the OECD guidance by reference or implication, the SEC — and the universe of regulated companies — will, according to Heim, “be at the mercy of OECD and those few companies who are participating in the pilot and thereby driving the OECD secretariat’s clarifications.”
- Second, this creates a window for a non-US, non-regulatory body to modify (via “clarification” or other means) a substantive US regulatory provision, essentially sidestepping US rule-making processes.
- Last, the pilot is scheduled to continue until August 2012, along with additional clarifications (some of which already have been requested by the participants) through that time. Therefore, the true substance or framework of what OECD really wants won’t be known for another eight to ten months. If the SEC does promulgate its final rule next month, it would finalize a regulation that isn’t really final, making it very difficult for US companies to plan and implement their conflict minerals programs.
So why wouldn’t we want to leverage someone else’s work, the argument goes? That may work for adopting industry-wide voluntary programs/solutions, but is not appropriate for rule-making bodies working in a legislative capacity.
Heim raises one critical argument to support that assertion. “This is similar to how industry challenged the EPA in the 90s when it intended to adopt the ISO14000 standard as part of its regulatory framework, he said. Because ISO14000 represented a voluntary standard developed outside the US rule-making process and was never intended to have the force of law, EPA ultimately did not promulgate ISO14000 regulations. Heim doesn’t see any difference between this and the current situation with SEC/OECD.
The Pilot Group
The other issue with adopting the OECD approach involves who has (and who has not) participated in the pilot. A list of pilot participants (at least those that chose to disclose their names) appears on page 8 in the link entitled downstream baseline report.
The pilot group consists of predominantly mega-corporations with global operations primarily in the electronics and aerospace industries. Though these two industry groups certainly make up a substantial proportion of industries impacted by the legislation, based on attendees to our own MetalMiner Conflict Minerals webinar, we can safely say that the pilot group does not contain a range of firms also subject to the legislation.
This group of webinar attendees includes: SME firms, firms in the medical device, consumer packaged goods, appliance and oil and gas industries, among others. Those firms’ interests may materially differ from the concerns of electronics and aerospace manufacturers and distributors. In other words, the concerns of other companies not participating in the OECD pilot project may not have a voice in what may have a substantive impact on the SEC rule-making process.
Other Areas of Interest
Heim’s firm, The Elm Consulting Group International, published a four-page briefing document on the OECD report. The briefing summarizes what Heim sees as some of the more important aspects of the pilot study, including how companies have approached creating a conflict minerals strategy or policy, challenges in identifying vendors that supply products that contain tin, tungsten, and tantalum, the complexity of supplier communications and the sheer depth of most supply chains (at least eight tiers in length). Heim also comments on smelter and supplier audits and what pilot participants have found while using the EICC-GeSI Conflict Free Smelter program.
The pilot program results will likely continue to identify challenges to the OECD framework. We will endeavor to stay on top of this issue as additional reports become available.