Editorial · May 10, 2014
Conflict Minerals Reporting: What Suppliers Will Hear
Conflict minerals reporting is a new federal rule that makes some companies check where the tin, tantalum, tungsten and gold in their products came from. The Securities and Exchange Commission (SEC) wrote it. The first reports are due June 2, 2014. The SEC believes suppliers at all levels will spend some effort giving some of their customers that information. So if you supply parts or materials to a company that files reports with the SEC, you may get questions.
What the rule covers
Section 1502 of the 2010 Dodd-Frank Act told the SEC to write the rule. The SEC adopted it on August 22, 2012, as Rule 13p-1 and a new form, Form SD. It applies to companies that file reports under the Securities Exchange Act. A company is covered if a conflict mineral is "necessary to the functionality or production" of a product it makes or contracts to have made. A company that fails that test need do nothing under the rule.
The rule covers tin, tantalum, tungsten and gold, along with the ores that yield the first three. The SEC describes uses such as tin in solder, tantalum in electronic parts, gold in jewelry and electronics, and tungsten in wires and electrodes.
The three steps and the deadline
The rule sets a three-step process. First, a company decides whether the rule covers it. Second, it makes a reasonable inquiry into where its minerals came from. The SEC says the inquiry must be reasonably designed to learn whether any of the minerals came from the Democratic Republic of the Congo (DRC) or its nine neighbors. They are Angola, Burundi, the Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia. The inquiry must also be designed to learn whether any of the minerals are recycled or scrap. It must be done in good faith.
A company with no reason to believe the minerals may have come from those countries can stop there. So can a company that reasonably believes they are recycled or scrap. Either company still files Form SD to state what it found and briefly describe the inquiry and its results. Third comes due diligence, a deeper check of the minerals' source and chain of custody. A company must do this if it knows any of its minerals came from those countries and were not recycled or scrap. The same goes if it has reason to believe the minerals may have come from there and may not be recycled or scrap. Then the company files a Conflict Minerals Report with its Form SD. If the due diligence shows the minerals did not come from those countries or are recycled or scrap, no Conflict Minerals Report is needed. The company still files Form SD, stating what it found and briefly describing its inquiry, due diligence and their results.
The SEC set May 31, 2014 for the first reports, which cover 2013, and May 31 of each later year. May 31, 2014 is a Saturday, and Form SD moves a weekend deadline to the next business day. The SEC staff says the first reports are due June 2, 2014.
Why customers ask their suppliers
The SEC staff says a company that files reports must inquire even about conflict minerals in generic components it buys for products it makes or contracts to have made.
The SEC says a company meets the inquiry standard if it seeks and obtains reasonably reliable statements. The statements must identify the facility where its minerals were processed. They must also show the minerals did not come from those countries or did come from recycled or scrap sources. Statements can come directly from the facility or indirectly through the company's immediate suppliers. The company must have reason to believe them and consider warning signs.
The SEC adds that the law and the rule will affect many companies. These include some that do not file reports but are in the supply chain of one that does.
What suppliers will hear
Expect questions that follow the SEC's test. Do your products contain tin, tantalum, tungsten or gold? Which smelter or refiner processed the metal? Did any of it come from the DRC or its nine neighbors? Is it recycled or scrap?
The SEC says a company would have reason to believe a statement if the smelter holds a "conflict-free" designation from a recognized industry group that requires an independent audit. That SEC test names no group. The Conflict-Free Sourcing Initiative keeps a list of smelters and refiners found compliant with the assessment protocols of its Conflict-Free Smelter Program. It also offers a free Conflict Minerals Reporting Template. It says the template helps move information through the supply chain about mineral country of origin and smelters and refiners in use.
What the April court ruling changed
On April 14, 2014, a federal appeals court rejected all of the challenges to the rule based on the Administrative Procedure Act and the Securities Exchange Act. It held, though, that the law and the rule violate the First Amendment where they make companies say a product has "not been found to be 'DRC conflict free.'"
On April 29, the SEC's Division of Corporation Finance said it expects companies to file required reports on time, subject to its guidance and any further action by the Commission or a court. It added that no company is required to describe its products as "DRC conflict free," as having "not been found to be 'DRC conflict free,'" or as "DRC conflict undeterminable." On May 2, the SEC issued a partial stay. It pauses compliance with only the parts of the rule that would require statements the court held violate the First Amendment. The SEC denied a request from three business groups to stay the whole rule.
The origin inquiry and the due diligence description remain in force. For products not found to be "DRC conflict free," or whose status cannot be determined, the staff said a company should still disclose three things. They are the facilities used to produce the minerals, the minerals' country of origin and the company's efforts to find the mine or location of origin. So suppliers should still expect the questions.
What to do now
List which of your products contain tin, tantalum, tungsten or gold. Ask your suppliers what your customers ask you. Say what you know and what you do not, since customers may need reasons to believe your answers. Ask each customer which format it wants and by when.