A new study on conflict minerals compliance from Tulane University and Assent Compliance, a compliance software and services firm, revealed that, about 90% of filers of conflict minerals reports indicated that they were unable to determine if their products were conflict free, the primary object of the conflict minerals due diligence effort. What’s more, for the second year of conflict minerals filings, affected issuers expended a total of 6 million hours on their compliance and reporting, for an aggregate internal cost of $420 million, as well as additional millions on external costs. The grand total was estimated to be $709.7 million, an average of half a million dollars per filing issuer.
The study looked at SEC compliance indicators for all filers of Form SD only and separately for all filers of Form SD together with conflict mineral reports (CMRs). (A CMR is required if, after conducting a reasonable country of origin inquiry (RCOI), the company knows or has reason to believe that its conflict minerals may have originated in the DRC or surrounding countries.) The study also analyzed good-practice indicators drawn from Mining the Disclosures: An Investor Guide to Conflict Minerals Reporting from Responsible Sourcing Network/Sustainalytics. (See this PubCo post.)
For the reporting year 2014, the study reports that there were 1,267 conflict minerals filers (a decline from last year’s 1,320 filers), of which 77% were manufacturers. Smaller reporting companies represented only 14% of filers.
Twenty percent of filers filed a Form SD only. This group was evaluated in the study based on a six SEC requirements and showed strong compliance results: 75% had 100% SEC compliance and 97% were at or above the 75% compliance mark, for an average compliance score of 94%. A non-working link to the Form SD seemed to be the biggest problem identified (19%).
The results for the remaining 80% that filed a Form SD and a CMR were definitely mixed. Of these filers, only 91 stated that their products were DRC conflict free (and DRC conflict undeterminable). The study evaluated companies filing CMRs using criteria based on 15 SEC requirements. More than half did not disclose the countries of origin of their conflict minerals (67%) or the smelters or refiners used to process them (58%). The study also notes that many companies did not describe the five steps of their due diligence under the OECD guidance (43%) or describe their RCOIs separately.
[Sidebar: Some of these criteria appear to represent good practices, if not strictly SEC requirements. For example, the SEC rules require “a description of the measures the registrant has taken to exercise due diligence” and also that the “due diligence must conform to a nationally or internationally recognized due diligence framework,” but do not expressly require that the company identify the five steps of the OECD framework. Nevertheless, it appears that most companies organized their descriptions of their due diligence efforts by specific reference to the five steps.]
Almost half of the filers reported a supplier response rate; these ranged from 13% to 100%, with the average response rate at 81%. Fifty-six percent of filers reported that their supply chains included one or more audited conflict-free smelters or refiners. The study identified 12% of filers that had 100% SEC compliance scores, and 76% were at or above the 75% compliance mark, for an average compliance score of 82%. (Note that the SEC compliance criteria of the study were not weighted for the significance of the criterion, so that the same points were attributed to having an active link to the company’s Form SD or providing the signature of an executive officer as to identification of smelters or countries of origin.)
An appendix to the study identifies the top 25 filers, based on compliance scores. Scores for all filers are expected to be released in three months.
This year, only six companies filed independent private sector audits (IPSAs), but we may well see a lot more IPSAs next year. As it now stands, no IPSA is required if products are described as “conflict undeterminable.” However, the ability to categorize products as “conflict undeterminable” was a transitional accommodation and, under the SEC rules, will not be available next year (other than for companies categorized as “smaller reporting companies”). In addition, pending the outcome of the conflict minerals case currently on appeal before the D.C. Circuit, Corp Fin has announced that companies have to obtain and file an IPSA only if they voluntarily describe their products as DRC conflict-free, but otherwise are not required to do so. (See this PubCo post.) You may recall that, in April 2014, a three-judge panel of the D.C. Circuit struck down a portion of the SEC’s conflict minerals rule on First Amendment grounds. In that case, the Court decided that the requirement to disclose whether companies’ products were “not found to be DRC conflict free” amounted to “compelled speech” in violation of companies’ First Amendment rights. In November, the D.C. Circuit granted the petitions of the SEC and Amnesty International for panel rehearing, as discussed here. If the case remains on appeal when the next round of filings approaches or if the decision striking down the requirement to disclose the conflict-free status of products is ultimately upheld, it remains to be seen how or whether the SEC will modify its current requirements.