Corner office Kelly Watson

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For New Jersey business leaders who have not yet read Section 1502 of the Dodd-Frank Act, I would suggest putting it on their priority list.

The act, which was created to protect consumers and investors, and to ensure the financial stability of U.S. markets, could have a profound effect on their businesses.

Section 1502 includes additional reporting requirements for companies’ Securities and Exchange Commission filings on the sources of certain metals used for the manufacture of products. The intent of the provision is to curb violence and exploitation in the Democratic Republic of Congo and neighboring countries by exposing companies that use minerals derived from this region.

Metals covered under the act are commonly referred to as “3TG,” or tin, tantalum, tungsten and gold. These metals are widely used in industries throughout New Jersey, including electronics and communications, aerospace, automotive, jewelry, health care devices and diversified industrial manufacturing.

While this provision was signed into law by President Barack Obama, its implementation is being decided by SEC. We anticipate the final rule will be released in the fourth quarter of 2011, and effective for a company’s first full fiscal year after the rule is final. A company will be affected by this rule if it files reports with SEC under the Exchange Act, and if conflict minerals are “necessary to the functionality or production” of its products. Even non-SEC-registered companies may be affected if they are part of the supply chain for these metals to SEC-filing companies.

Leading companies are proactively addressing the issue, including publishing the names of their primary suppliers, adding requirements to their supplier contracts and making disclosures on their company’s website.
Some things a company can do now:

• Determine if 3TG metals are necessary for manufacturing its products, and determine where they are used in products or processes.

• Develop a list of suppliers that potentially use 3TG metals and risk rate them to understand exposure to conflict minerals.

• Survey suppliers on their sources of the 3TG metals, down to smelters and mining region, and seek third-party certification or conduct spot-audits if necessary.

• Develop a supply-chain policy and risk management plan.

• Mandate usage and certification of Democratic Republic of Congo conflict-free sources of 3TG metals in supplier contracts.

In order to comply with Section 1502, companies will be asked to do the following:
• Public companies must disclose annually whether they use conflict minerals.

• Disclose whether or not any of their conflict minerals originate from the Democratic Republic of Congo and neighboring countries.

• Furnish an audited conflict minerals report as an exhibit to their annual report filed with the SEC, if they determine their conflict minerals originate from the Democratic Republic of Congo and neighboring countries or if they are unable to determine the origin of such minerals.
While the conflict minerals provision may seem to represent a small slice of the regulatory reforms that New Jersey companies will need to incorporate into their operations, it could, at a minimum, create serious reputational concerns if they don’t comply with the new law.

Kelly Watson is the New Jersey office managing partner of KPMG.