What does an issuer expect from its supplier in the conflict mineral survey?

The first criteria to complete a conflict mineral survey successfully is to have the supplier conduct a similar survey at its level in the supply base to understand the origin of conflict minerals in its products. Supplier should be able to identify the parts supplied by them to the listed company who asked for this survey and analyze and confirm whether those products contain 3TG. The supplier should have also established a decent level of due diligence within its organization to ensure that it does not fall under a risky supplier category.

The responses which are made through the should be based on the factual research the supplier has conducted. If the report is provided at product level, the supplier should be able to identify the parts/products and confirm whether the research was conducted by them. The report should also contain the smelter names which they have identified in their supply base which constitute the maximum percentage of supply of the conflict minerals.

Supplier Training and support- A tool to motivate the suppliers to provide better declarations

is a new regulation in US. Most suppliers are unaware about the details of the compliance requirements. In most cases, issuers who are affected by the SEC filing requirement have a vast supplier base spread across different parts of the world. This makes it more difficult to get responses as there is nothing legally binding the supplier to provide information. In several cases, replacing the non-responding supplier is not an easy task.

Most studies in the industry confirm that issuers who invested more resources in the front end communication, training and support have managed to reduce their overall conflict mineral compliance cost. A training delivered in a supplier conference or through a webinar will act as an effective tool for improving supplier responses and quality of responses.

A seminar/ webinar focusing on the regulation, its applicability, reporting process and tools (if any) will help suppliers to engage with the issuer more closely in this compliance process. Supplier training should be refreshed every year due to change of resources in the supply base and update them about the recent development and changes in the reporting process.

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The United States Dodd Frank Act, Section 1502 requires manufacturing companies to identify and disclose to the U.S. Securities and Exchange Commission (SEC), the source of 3TG minerals- tin, tantalum, tungsten and gold used in their products when those minerals originate from or around the the Democratic Republic of the Congo (DRC).

Obligation of Conflict Mineral manufacturers :

The SEC law transpired in to an industry compliance process as below.

1. Determine Applicability – Does the issuer fall under the regulation? Do products and parts contain 3TG minerals?
2. Perform RCOI – Identify if the country of origin of the 3TG minerals is in the DRC region.
3. Due Diligence – For 3TG minerals sourced from the DRC region, conduct due diligence over the chain of custody
4. Determine Status – Assess supplier, part and product level conflict mineral status
5. Report – Fulfill SEC and customer reporting requirements.

Challenge to the three-judge panel of the U.S. Court :

U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers — had argued that the SEC conducted a flawed rulemaking and failed to weigh the costs of new regulations.

The challenge by these association is that, the conflict minerals rule and Section 1502 of Dodd-Frank represent, government compelled speech in breach of the First amendment. The Manufacturers asserted that the conflict minerals regime is unlawful and compels companies to make an ideologically driven, rather than fact based, statement about their own products namely, that the products have not been found to be conflict-free.

They argued that, this type of speech forces companies to denounce their own products based on information that is speculative, rather than fact based. The Manufacturers also objected to the requirement that companies post conflict minerals reports and information on their corporate websites, arguing that those websites are “Our space”.

During argument the Manufacturers clarified that they do not challenge the requirement to report factual information about conflict minerals in their products to the SEC. Their First Amendment challenge does not extend to the SEC’s ability to take that factual information and make its own judgments about whether a company’s products are conflict free. Rather the objection is to the requirement that companies apply that ideological label to their own products and post conflict minerals information on their own corporate websites.

Stay by US court :

On April 14, 2014, the U.S. Court of plea for the District of Columbia Circuit ruled that the U.S. Securities and Exchange Commission (the “SEC“) rule requiring issuers to disclose whether they use “conflict minerals” in their products was unconstitutional because it would compel speech in violation of the First Amendment.The circuit court remanded the matter to the district court, from where this case was appealed, for further consideration

The circuit court found the label conflict free to be a “metaphor that conveys moral responsibility for the Congo war and that forcing a company to use that language interferes with First Amendment protections. The SEC argued that rational basis review is appropriate because the conflict free label discloses purely non- ideological information.

The circuit court disagreed, finding that rational basis review is the exception, not the rule in First Amendment cases. While the U.S. Supreme Court has stated that rational basis review applies to certain disclosures of purely factual and uncontroversial information, the circuit court relied on a previous ruling to hold that this is limited to cases in which disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers. No party in the case had suggested that the conflict minerals rule was related to preventing consumer deception, and in the district court the SEC admitted that it was not.

The circuit court found that the SEC failed to present any evidence that a less restrictive approach would not achieve the rule’s intended purpose. The circuit court considered alternatives to regulating speech for example issuers could use their own language to describe their products or the government could compile its own list of products that it believes are affiliated with the Congo war based on information issuers submit to the SEC.

Without any evidence that alternatives would be less effective, the circuit court dismissed the SEC’s claim that the restriction to speech as enforce by the disclosure requirement is to achieve the rule’s purpose. As a result, the circuit court found the SEC’s conflict minerals disclosure rule violates the First Amendment, to the extent the SEC rule and the underlying statute require issuers to report to the SEC and to state on their websites that certain of their products have not been found to be DRC conflict free.

SEC Partial Stay :

The Securities and Exchange Commission (SEC) issued a partial stay of its conflict minerals rule. The SEC’s order stayed the effectiveness of only those portions of Rule 13p-1 under the Securities Exchange Act of 1934, as amended and Form SD that would require issuers to make statements in that the U.S. Court plea’s for the District of Columbia Circuit held would violate the First Amendment. Thus, only the requirement that issuers report in a conflict minerals report to be filed with the SEC and posted on the issuer’s publicly available website that any of their products have not been found to be DRC conflict free is stayed.

The stay will remain in place pending conclusion of the litigation involving the rule. In addition, the order denied the motion for stay filed with the SEC by the appellants in the case before the DC Circuit Court of Appeals, who had petitioned the SEC to stay the effectiveness of the entire rule.

The SEC’s order is consistent with the recent statement published by the Director of the SEC’s Division of Corporation Finance (CorpFin) in response to the court’s ruling (Statement) that indicated June 2, 2014 remains the deadline for issuers to file any required Form SDs and conflict minerals reports and indicated that the CorpFin staff expects that filed Form SDs and conflict minerals reports will comply with and address those portions of the conflict minerals rule that the court upheld.

The Statement also provided some guidance on the disclosure to be provided in Form SDs and conflict minerals reports in light of the court’s ruling. In fact, the SEC’s order notes that issuers seeking more detailed guidance regarding compliance with the rule should review the Statement and any additional guidance to be provided.

Although there may be additional developments regarding the rule, for the time being issuers working to finalize their Form SDs and conflict minerals reports must continue to prepare for the filing of their reports by the June 2, 2014 deadline in accordance with the guidance provided in the Statement.

CONCLUSION :

The rule says No company is required to describe its products as DRC conflict free, having not been found to be DRC conflict free, or DRC conflict undeterminable. If a company voluntarily elects to describe any of its products as DRC conflict free in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as DRC conflict free in its Conflict Minerals Report.

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