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The Conflict Minerals Act: Good Start Or Bad Law?

Tracking a supply chain is not an easy task. In an August Forbes article, Erika Morphy highlights the difficulty that riding a supply chain of conflict minerals presents. “Supply chains, for various reasons, can be notoriously opaque especially for items that are provided by a supplier that may be two or three tiers away from a core supplier. Products also tend to consist of many components — to give one example, an automobile line might be made up of 5,000 components.”

Consumers will drive disclosure

Daniel Persico, vice president of special products at Kemet (NYSE:KEM), one of the largest users of tantalum, agrees that contracting out manufacturing is a way for companies to circumvent the regulations.

“We may end up seeing some companies that have maintained their own manufacturing sell their manufacturing and become virtual manufacturers just so they don't have to deal with disclosing their materials. Instead, they'll let the suppliers deal with the regulations.”

However, Persico does not believe that this task will be an easy undertaking for larger electronic companies. He maintains that “there is such strength in the younger, social-media-inclined generation that large electronic companies cannot completely avoid disclosing the information of the sources of their materials.” Companies will have to enforce the ethical nature of their products because that's what consumers are pushing for, he said.

Companies filing a conflict minerals report must also determine their products' country of origin, ensuring that such enquiries are performed “in good faith and [are] reasonably designed.” The SEC's request that companies make a “reasonable effort” to do so relies heavily on the goodwill and ethical inclinations of companies that could be using conflict minerals.

Such vague wording could make it difficult for consumers to gauge the accuracy of a company's disclosure of specialized materials. Persico explained that when it comes to deciding what is a “reasonable effort,” the decision will ultimately be established by the auditors. However, he added that a certain degree of wiggle room in the guidelines is necessary as a company's ability to provide accurate disclosure depends on where it stands on the supply chain and on its ability to obtain the required information from its suppliers.

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