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Footwear Retailers Confront Complex SEC Conflict Minerals Filing Requirements

Footwear retailers and manufacturers are closely scrutinizing the Securities and Exchange Commission’s (SEC) new filing requirements regarding the use of conflict minerals in retail products. 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.

A consortia of trade associations recently mounted a court challenge to the SEC requirements, claiming that some sections of the regulation violate the First Amendment. On April 14, the District of Columbia Court of Appeals for the Federal Circuit sided with the SEC and rejected all of the trade associations’ arguments, save one, in a 2-1 ruling. Ultimately, the court concluded that Section 1502 of the Dodd-Frank Act and of the SECs Conflict Minerals Rule violated the First Amendment since it compels reporting companies to to publicly announce, on their own proprietary websites, that some of their products have “not been found to be ‘DRC conflict free’.” The court ruling did not decisively settle the issue, though, because it stopped short of issuing an injunction to halt the implementation of the SEC requirements.

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Matt Priest, President of the Footwear Distributors & Retailers of America (FDRA), speaking exclusively to the Sourcing Journal, said that while the SEC ruling presents some challenges given the diffuse nature of any supply chain, the impact on footwear companies should be minimal since they tend not to use much gold, tin, tantalum or tungsten in their products. However, he did note that footwear can include these materials in some circumstances. For example, buckles and fasteners can be made of tin or gold, and tin can be used in the tanning of leather. Also, tin is sometimes used for eyelets and grommets as well as toecaps, outsoles, shanks and heels.

Many apparel producers and retailers have complained that the SEC requirements don’t always clearly apply to their specific supply chains. 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.”

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.”

Priest said that the real problem posed by the SEC requirements is the burden it places on retailers to remain vigilant over the many and often remote links of their supply chains. It’s important that companies producing in factories in places like China make sure on-site managers understand the requirements and what counts as their adequate satisfaction. To this end, the FDRA provides an assortment of educational materials, including webinars, that help retailers and manufacturers navigate these turbid waters.