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• If the issuer is involved in
  • Specifying or negotiating contractual terms with manufacturer
  • Affixing brand, logo, marks or label to a generic product
  • Services, maintenance or repair activity
• If the issuer is not directly or indirectly involved in manufacturing process

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We reviewed the SD form submissions of several publicly listed companies to understand the nature of research done that led to the ‘conflict mineral declaration of 2014’.

We observed, towards the end of 2013 and beginning of 2014 all companies frantically sent out and started collecting responses from their supply base. Also most of the companies gave out their CMRT forms at a company level without effectively identifying the smelters in their supply chain. Additionally the effort done on implementing the due diligence process was very limited. This resulted in responses that were similar across the supply base and comprised very limited mineral traceability information. The final outcome was, most companies provided their compliance status as ‘Unknown’.

We understand that the process is expected to evolve further in the coming years, hence in this article we are sharing a few areas of primary concern for the companies:

• The upcoming challenge in conflict mineral compliance will be to show incremental progress in the efforts on a year-on-year basis.
• Most companies will have to invest effort in identifying smelters in their supply chain.
• Identifying the product chemical composition and driving product level CMRT declarations from the suppliers will be a crucial step for companies to channelize their efforts towards high impact suppliers, who account for the major percentage of conflict minerals in their products.
• The due diligence process implementation will have to be performed in alliance with expert consulting companies.

Because of the already existing regulations in compliance (including ROHS, REACH, WEEE and Prop 65), most electronic companies will have to reach out to their supply base to collect diverse information. Due to the vast depth of efforts and the evolving nature of conflict minerals compliance, most companies might resort to end-to-end conflict mineral solution providers rather than running this as a special project within their finance or compliance department. Most software solution providers in the environmental compliance area have already extended their solution to include conflict mineral modules which will make this consolidation more easy and achievable. The ideal strategy for the industry will be to consolidate these activities with the conflict mineral RCOI.

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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.

How �ۿ۴�ý can help:

�ۿ۴�ý with a decade of experience in can offer complete solution for your Conflict Minerals compliance needs. �ۿ۴�ý Provides consulting, services and software for obligations. �ۿ۴�ý’s data collection reporting services enables companies to gather material composition information especially related to 3TG. With Proven method of data collection for other compliance laws like ROHS and REACH, �ۿ۴�ý provides material data collection, analysis and reporting services enabling companies to achieve compliance on time and

within budget. Speak to one of our consultant to know more about your obligation and how you can fulfil in a shorter time frame.

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