Companies prepare for the May 2014 Compliance with SEC Conflict Minerals Rule
Written by Samuel M. Witten, Mara V.J. Senn, & Khalil Gharbieh; Arnold & Porter LLP
Some companies that file with the SEC were no doubt disappointed that a Washington, DC federal court reviewing the SEC’s Dodd-Frank conflict mineral disclosure rule recently upheld the new regulation. The case, brought by the National Association of Manufacturers, the Business Roundtable, and the U.S. Chamber of Commerce, argued that several of the SEC rule’s provisions were arbitrary and that the rule and Dodd-Frank statute violated the First Amendment.
Since the SEC rule still stands, companies’ first disclosure reports are due to the SEC just eight months from now, in May 2014. Although the plaintiffs have appealed the lower court’s ruling in favor of the SEC, briefing will not be complete until mid-November 2013, with oral argument to follow. Thus, companies should assume they need to file the required disclosures with the SEC by May 31, 2014, as required by the original 2012 rule.
The Dodd Frank Act’s conflict minerals provision, Section 1502, was intended to reduce the flow of funds from the extraction and sale of four minerals that have been used to finance armed conflict in the DRC and surrounding countries by increasing accountability for parties involved in the supply chains for those minerals. The SEC’s rule will require an estimated 6,000 companies that file annual reports with the SEC to review their supply chains and publicly disclose their use of the four minerals — tantalum, tin, tungsten, and gold — if any of those minerals are “necessary to the functionality or production of a product” that they manufacture or contract to manufacture.
While many industries are affected, manufacturers of electronics, such as mobile phones, digital cameras, and computers, and companies in the automotive, construction, medical equipment, and aerospace sectors in particular utilize large quantities of the four minerals — as do companies that use electronics or otherwise include the four conflict minerals in their products. The SEC itself has estimated that the rule will impose an initial financial burden of approximately $3-$4 billion for companies to develop their compliance programs, and an additional $207-$609 million annually for ongoing compliance.
The final rule requires all SEC filers to undertake an analysis that consists of as many as three steps. Those steps — and our tips on what companies should be doing now to implement their requirements — are as follows:
Step 1: Determine if your company is covered, i.e. whether your company manufactures or contracts to manufacture a product for which “conflict minerals” are necessary to the functionality or production of that product. “Conflict minerals” include gold, tin, tantalum, and tungsten, regardless of where they mined.
Share information within your company and develop a compliance plan. The rule is complex and determining whether your company is covered and, if so, how to address steps 2 and 3, may require inputs from many sections of the company, including the compliance, legal, and supply chain functions.
Analyze your company’s products to determine if they have conflict minerals and whether those minerals are necessary for the functionality or production of the product. Even if it appears obvious that your company is covered, such an analysis may help narrow the number of product lines for which it will need to perform supply chain inquiries.
Step 2: If your company does have products with necessary conflict minerals, it must conduct a “reasonable country of origin inquiry” (RCOI) to determine whether those minerals originated in the Democratic Republic of the Congo or any another Covered Country (Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia) and did not come from recycled or scrap sources.
Review your company’s supply chain and decide how you will perform the RCOI. This will require inputs from your procurement and operations experts. It will also require you to decide whether you will rely entirely on first tier suppliers to provide information or whether you will also contact entities that your company does not have a direct relationship with, but which are closer to the minerals smelter or mine.
Begin engaging your company’s suppliers. In most cases it will be useful to inform your suppliers about the nature of the information you will need even before you make any formal requests.
Determine the supplier questionnaire your company will use. Many companies have chosen to use the Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative’s Conflict Minerals Reporting Template. In addition, there are numerous software options companies can consider to help collect and organize information.
Step 3: If, after its RCOI, a company knows or has reason to believe that its conflict minerals originated in the Covered Countries and did not come from scrap or recycled sources, it must exercise due diligence on the source and chain of custody of its conflict minerals. It must also produce a Conflict Minerals Report, to be filed alongside its SEC disclosure, describing such due diligence measures, unless its due diligence ultimately establishes that its conflict minerals did not come from the Covered Countries or did derive from scrap or recycled sources. The aim of such required measures is to trace the minerals’ path from mine to smelter or refiner in order to determine whether the minerals financed or benefitted armed groups.
- Prepare to obtain an independent private sector audit, should one become necessary. A company’s Conflict Minerals Report must be audited — unless the company qualifies for the rule’s temporary exemption currently available to companies that are unable to determine whether the relevant minerals in their products financed armed groups in the Covered Countries. Start a dialogue with an auditing firm now, so that your company is prepared should an audit be necessary prior to May 31, 2014.
Looking Ahead
Compliance with these three steps will require companies to deepen their understanding of their supply chains and sourcing practices, which means they will need to pursue inquiries and analyses not necessarily relevant to their normal business practices or needs. In this respect, the rule and the SEC’s lengthy explanation of its reasoning do not answer all questions, and companies will have to exercise their own judgment on key issues. For example, SEC has required a “reasonable” supply chain inquiry and “reasonably reliable” representations from suppliers. Similarly, the SEC expects reports from companies that “contract to manufacture” products that are covered under the rule, but has provided limited guidance on what this phrase means.
By any measure, compliance with the SEC’s conflict minerals rule will be a challenge for all but those few companies that start with a very clear picture of the complete supply chain for their relevant products. Companies will have to show a degree of seriousness of purpose and thoroughness in approaching compliance, document their work and decision points, and be prepared to answer questions from the public and the SEC about the steps they took to comply. Companies in trade associations will want to monitor any relevant guidance and many will seek to know as much as possible about what similarly-situated companies are doing. Although eight months remain before the SEC’s first compliance deadline, the unprecedented and time-intensive nature of the new reporting obligations mean, unfortunately, that the pressure is on now to begin devising a thorough and well thought-out program.
Expert Biographies
Arnold & Porter LLP counsel Samuel M. Witten advises multinational companies on issues including compliance with the SEC conflict minerals reporting requirements and the Foreign Corrupt Practices Act. He served for 22 years at the US State Department, including as Deputy Legal Adviser (equivalent to Deputy General Counsel) and Principal Deputy Assistant Secretary of State. He may be reached at [email protected] (202) 942.6115.
Arnold & Porter LLP partner Mara V.J. Senn regularly represents clients before the SEC and DOJ in FCPA cases and advises clients on FCPA Compliance Programs. She regularly leads multijurisdictional corruption internal investigations and responds to government inquiries and investigations in a wide variety of industry sectors and countries. She also advises companies on conflict minerals issues. She may be reached at [email protected] or (202) 942.6448.
Arnold & Porter LLP associate Khalil Gharbieh is a member of the firm’s litigation group, focusing on complex civil litigation. He has also closely followed the SEC’s conflict minerals rulemaking and other recent developments at the intersection of law and corporate social responsibility. He can be reached at [email protected] or (202) 942.5982.
