February 19, 2014

Risk Factors for This Proxy Season? Cybersecurity & Conflict Minerals

I recently field a question in our “Q&A Forum” – #7944 – about trends in new risk factors for this proxy season. I noted that some companies are revisiting their cybersecurity risk factor is light of the Target situation and the other security breaches in recent months.

Brink Dickerson of Troutman Sanders also noted that he is a bit surprised that more companies are not including conflict minerals risk factors. While he doubts that the conflict mineral disclosure regime is material, or that the failure to comply will in the early years have significant consequences, it is a big enough issue with some socially responsible investors and special interest groups that he was expecting to see more Form 10-K disclosure. Here is an example of a risk factor that he has suggested as a starting place:

The Company is subject to recently adopted SEC disclosure obligations relating to its use of so-called “conflict minerals” – columbite-tantalite, cassiterite (tin), wolframite (tungsten) and gold. These minerals are present in a significant number of the Company products. The disclosure obligations are complex, and there is little formal guidance with respect to their application. The first reports under the disclosure obligations are due to be filed with the SEC not later than May 2014 and cover the Company’s activities during 2013.

Although the Company expects to be able to file the required report on time, in preparing to do so it is dependent upon the implementation of new systems and processes and information supplied by its xxx+ suppliers of products that contain, or potentially contain, conflict minerals. To the extent that the information that it receives from its suppliers is inaccurate or inadequate or its processes in obtaining that information do not fulfill the SEC’s requirements, the Company could face both reputational and SEC enforcement risks.

He also expected to see more references in Item 1 or elsewhere to the existence of conflict minerals policies.

And then Dave Lynn added: I think another take on the conflict minerals disclosure that I have seen is that efforts to comply with the disclosure rules and to otherwise implement conflict-free sourcing policies is the extent to which changes to the supply chain can disrupt existing supply sources or cause more uncertainty with respect to the company’s supply chain. You could also envision how this might be relevant for the description of Business and perhaps MD&A as well depending on an issuer’s particular circumstances.

Steve Quinlivan notes that an industry group has launched the first integrated conflict minerals database for suppliers called “BOMcheck,” currently used by over 560 manufacturers to gather materials declarations from over 3,500 suppliers worldwide for more than 1.6 million parts.

Cybersecurity: SEC Calendars a Roundtable

On Friday, the SEC announced that it will hold a March 26th roundtable to discuss cybersecurity and the challenges it raises for market participants and companies, and how they are addressing those concerns.

Transcript: “How to Sell a Division: Nuts & Bolts”

I have posted the transcript for our recent webcast: “How to Sell a Division: Nuts & Bolts.”

– Broc Romanek