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Retailers Struggle to Comply with SEC Conflict Mineral Filing Requirements

Many apparel manufacturers have been grappling with the Securities and Exchange Commission’s (SEC) new requirements that they file disclosures regarding the use of conflict minerals by a May 2014 deadline. Complaints regarding the requirements’ lack of clarity, as well as the seemingly onerous obligations they place upon manufacturers, are increasingly widespread.

The SEC’s new policy, mandated under the Dodd-Frank Act, requires all manufacturers to disclose whether they use conflict minerals–gold, tin, tantalum and tungsten–in their products. This has proven particularly challenging for apparel retailers and producers, who typically don’t exert complete control over their supply chains.

The scope of the new filing requirement, which applies to any conflict mineral that is “necessary to the functionality or production of a product,” is expansive; according to a recent report issued by PricewaterhouseCoopers LLP, it covers “thousands of products ranging from cell phones and laptop computers to jewelry, golf clubs, drill bits and hearing aids,” ensuring that “6,000 SEC issuers will have to provide new disclosures under the rule.” The same report also estimates that 275,000 private companies that are, in one way or another, linked to these issuers’ supply chains will also be affected.

And it’s not always clear that the requirements are entirely relevant for apparel producers and retailers. Speaking to CFO magazine, David Bohan, the president and chief operating officer of Brooks, a sneaker retailer, said, “It’s not going to be in the performance fabrics, which are used in a large portion of our products. But a lot of it’s potentially going to be in the zipper material. It’s at the bottom of the zipper or in the zipper pull that maybe you’ll have some tin.”

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Bohan also said that tracking tungsten could be a challenge in the future. “Potentially, tungsten is a concern,” he said. “I don’t really see us using it, but things do change. That could happen if apparel designers see something that they really like that happens to have tungsten in it. But those would be the only two. We don’t do any diamonds or gold: Our customers are not interested in wearing gold and diamonds while they’re out running.”

Since supply chains can be so diffuse, tracking specific materials can be a frustratingly difficult enterprise. Bohan said, “It’s going to be a huge challenge for us because we work with many different suppliers and many different vendors, especially cut-and-sew vendors. We give them the specs relative to the materials that we want them to build. Then they go to the next level of supply chain to purchase the raw materials needed to provide us with the finished goods.”

And compliance for many will necessarily introduce additional costs. Many retailers have already conceded that they need to hire more personnel for their sourcing teams or pay more for compliance auditing. Bohan already resigned himself to this move, saying, “We’ll be adding another person in 2014 to the team to help with the testing, and working with our sourcing partners around the globe to make sure that we’re in compliance.”

Other companies are less worried about the regulatory costs than they are about the potential public relations fallout that might follow government induced candor about their sourcing practices. Last June, the activist group Walk-Free lambasted Nintendo publicly for using conflict minerals in its products, besieging the company with protests and petitions. The information Walk-Free obtained was the result of independent investigation, before the SEC-solicited information was even available.

There are resources available that help companies craft a preemptive strategy to meet the demands of the new SEC requirements. Responsible Sourcing Network and the Enough Project jointly issued a report that provides precisely this kind of strategy, which stresses the incorporation of conflict mineral tracking into a company’s daily practice. The report recommends regularly tracking all products that may contain conflict minerals, keeping in regular contact with all suppliers and providing educational seminars for staff on the SEC’s filing requirements. It also encourages including a company’s policy on conflict minerals in contracts with suppliers.

There’s still no substitute for scrupulously monitoring one’s supply chain. Bohan said, “In the past we’ve given specifics about the materials we need to have. But we’ve never had to actually go out and ask, ‘OK, is this coming out of China, India, Malaysia?’ We’ve never really gotten to that level of specifics before.  But now we need to understand the origin of all the materials in finished goods to make sure we’re still in compliance.”