Cost of Compliance with SEC Conflict Minerals Rule High—Even If Not As High As Feared

According to a survey recently issued by Tulane University's Payson Center for International Development, issuers spent more than $700 million to comply with Dodd-Frank Section 1502 and the SEC's conflict minerals rule promulgated thereunder. The survey was based on responses from 112 of the 1,300 issuers that filed Form SD (the form on which conflict minerals disclosures must be made). These costs break down as follows: 

Total compliance cost for issuers

•The total aggregated and extrapolated expenses of the 1,300 issuers to comply with Dodd-Frank Section 1502 was $709.7 million by June 2014.

•Thus, on average, an issuer expended $545,962 to comply with the law.

$ value
A. Internal company time	$420,784,310
B. Non-IT related external resources	$149,950,495
C. IT gap / needs analysis	$40,866,337
D. IT project element supporting conflict minerals traceability processes and reporting	$97,500,000
E. Independent Private Sector Audit (IPSA)	$650,000
Total  $709,751,142

These numbers are interesting as it appears that despite the allegation made in the original suit challenge the SEC’s conflict minerals rule that the agency failed to conduct an appropriate cost-benefit analysis, the SEC actually came quite close—far closer than Tulane’s original estimate. At the time of original prognosticating, Tulane assessed the costs of implementation to be approximately $7.93 billion—more than one hundred times greater than the estimate prepared by the SEC of $71.2 million (the lowest estimate was $387 million). Why such a differential in the original cost estimates and the final actual costs? In part, it might be explained by the fact that many issuers simply stated their products were “DRC conflict undeterminable” or it may be that the SEC was just right. Regardless, it cannot be denied that the aggregate cost is large—and of questionable impact.

The survey also asked issuers whether they would like to see any changes made to either Section 1502 or the conflict minerals rule to which 65% said yes, 4% said no and 31% had no comment. Included in the changes issuers would like to see are: 

repeal

stipulate a de minimis exemption

clarify rule

focus on importation of 3TG

render disclosure voluntary

offer supply chain degree threshold exemption

extend indeterminable period

provide information on and certify SORs

align with the EU proposed legislation

promote standard process and systems across industry

remove audit requirements

expand scope to include diamonds

remove mandatory disclosure 

Given that the conflict minerals rule is still under challenge it is possible that some of the items on issuers’ wish lists will be met. It is not likely however that most of them will as the only portion of the rule not upheld was the requirement to label products as being “non-conflict free.”