Dodd-Frank is Coming! Should Sourcing Professionals Care?
Stan Lepeak, Director, Research, KPMG SSOA practice
Jim Low, Partner, KPMG Audit practice
The “Dodd-Frank Act” is not top of mind among many sourcing professionals. Officially labeled the “Dodd–Frank Wall Street Reform and Consumer Protection Act (H.R. 4173)”, this Act was introduced in the US Senate in 2009 and signed into law in July 2010 and is intended to introduce perceived (by some) much needed regulatory reforms into the US financial services industry following its near meltdown in 2008-09. Much of the of the focus on the Act has naturally been on how it will impact the operations and core business of financial services firms.
Like many legislative acts and bills, however, the reach of the Act is greater than it may appear on the surface, and its ultimate impact is difficult to ascertain due to its density and complexity. For example, section 1502 of the Act addresses “conflict minerals”, or “minerals that the U.S. Secretary of State determines is financing conflict in the Democratic Republic of Congo or any adjoining country (DRC countries).” This section will have great impact on publicly traded mining companies or downstream firms that use minerals that will need to address compliance and reporting requirements. Relatedly, the Act also requires the SEC to start to report on mine safety (a core competency?)
Similarly, sections of the Act directed at financial services firms will also impact organizations that work with those firms, including outsourcing service providers. Service providers, for example, could potentially be held liable for processing fraudulent or illegal transactions even though they are doing so at the request of the client that initiated the transactions and defined their terms and conditions. The Act also creates a rewards or “bounty” program for whistleblowers (potentially from service provider organizations) that bring claims of violation to the SEC.
Addressing these changes is important for the service provider as well as to those within the financial services firms tasked with managing and governing the outsourcing effort and service provider relationship. These changes will impact the costs and risk profile of an outsourcing effort as well as the overall outsourcing governance process and program.
The points may be somewhat minor from the overall perspective of a financial institution facing new restrictions of what core businesses it is allowed to conduct and how they are operated. They do illustrate, however, the importance of understanding what is in the Act, and the other myriads of legislation (like healthcare “reform”) working their way through western government bureaucracies when it comes to defining, executing, and operating a global sourcing strategy.
Update September 16, 2011: For more information on Dodd-Frank and a practical approach for conducting due diligence on conflict minerals, please read KPMG’s paper, “Conflict Minerals Provision of Dodd Frank.” For regular updates direct to your inbox, subscribe to the KPMG’s Dodd-Frank newsletter at us-cssfsregulareform@kpmg.com.
The conflict minerals provision, contained in Section 1502 of the Dodd-Frank Act, has a direct bearing on reporting requirements on about one-half (at least 6,000) of all publicly traded companies in the United States. Complying with the due diligence requirements of the provision is daunting and unclear; many corporations are waiting for the SEC to issue the final rule before the end of the year. However, several corporations and industry groups have begun to trace conflict materials in their supply chain, rather than wait for SEC’s final rules, due to the tight timeline for implementation once the ruling is finalized.
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