With the first disclosures due on May 31, 2014, the Securities and Exchange Commission (SEC) has still not given industry a sense of when any guidance will be published. As such, publicly traded companies are still left to figure out how best to comply. The immediate impact, of course, is on those companies required to file disclosures, but the true impact is even more widespread as probably any company required to disclose next year has already begun the process of gathering data from its supply chain partners.
Intended to stem the flow of minerals from the Democratic Republic of the Congo, Section 1502 of Dodd-Frank put the burden on publicly traded companies to disclose the origin of their conflict minerals. The resulting disclosure is required to include steps about company due diligence; details about the chain of custody of the listed minerals; the products manufactured or contracted to be manufactured that are not DRC-conflict free; the identity of the entity which conducted the audit concluding the minerals are DRC-conflict free; the facilities used to process the conflict minerals; and the efforts made to determine the mine or location of origin of the conflict minerals;
The law itself defines conflict minerals as: “(A) columbite-tantalite (coltan), cassiterite, gold, wolframite,or their derivatives; or (B) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.”
On August 22, 2012, see http://www.sec.gov/rules/final/2012/34-67716.pdf, the SEC published its rules interpreting Section 1502. While those rules cleared up some points, others remain muddy. So, for example, if you manufacture or assemble, you are subject to the disclosure and related requirements. However, if you only add labels and the like or service the product, you are not. Frankly, who is and is not subject to the requirements has been far less controversial that which minerals are considered conflict minerals and which are not. Additional controversy comes from whether the minerals are in scrap or the company has reason to know they are from a covered country (DRC and its surrounding neighbors).
The key minerals are tantalum, tin, gold or tungsten, but the law talks in terms of derivatives and there is no di minimus rule, so one quickly appreciates just how complicated this area of compliance can become. Disclosure is to be made on the newly developed SEC Form SD. The SEC released a proposed format for the Form SD which contains links that explain the required details, see http://www.sec.gov/info/edgar/edgartaxonomies_d.shtml, and focus on the zip file for ease of reading.
Beside the failure to define what constitutes a derivative, the SEC rules also fails to define a product. If you deliver large pieces of machinery, what are you making, vs. assembling, vs. other steps? What do you do with a mixed product, for example a building? Do you make intermediate components? Are you packaging? When is assembly the equivalent to manufacturing vs synonymous with packaging? As in so many other due diligence situations, companies will first have to define their products and then seek ways to comply. Do you use questionnaires, supplier letters, certifications, have your own staff handle these efforts or have them dealt with by third parties? Do you screen in advance or review all the answers up on receipt? What is your policy with incomplete answers – do you go back for more or is the supplier disqualified? How do you handle responses which are internally inconsistent or provide conflicting information? So, far there is no universally accepted checklist or report form. Hopefully, the SEC will provide further guidance far enough in advance of next year’s deadline so as to actually be useful.