In enacting Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress expressly stated its view that “the exploitation and trade of conflict minerals is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein.”  Responding to this humanitarian crisis, Congress directed the Securities and Exchange Commission to adopt new disclosure requirements related to the use of “conflict minerals” originating in certain countries. 

This alert is a reminder about the importance of the rules and Form SD that the SEC has adopted relating to companies’ uses of conflict minerals.

The requirement to comply with the rules and use the form is already in effect. Compliance has been required since the year ending December 31, 2013, and affected issuers had to submit the initial Form SD by May 31, 2014.  A key deadline for this year is approaching.

Accountability and the supply chain

Experts believe that in order to eventually ensure that products contain only minerals that are “conflict free” (the overarching goal of the Congressional mandate and the SEC rules), individual companies need to be held accountable for their actions.  This accountability extends throughout a company’s supply chain.  As a foundation for this accountability, it is essential for companies to set a vision, create a team, and fund an appropriate budget to oversee their supply chain.  The team should holistically manage supply-chain compliance and diligence.  The goal is for the supply chain to be transparent enough so that each participant in it understands the requirements and identifies the risks applicable to that participant.

Many companies have become leaders in this compliance, but that should be seen as an advantage, not a threat, to other companies in the same industry.  Given the current business environment, it makes sense to view the conflict minerals rules as part of the inevitable evolution of industry customs, and as part of the way any company needs to manage its supply chain risks in the global economy.

Preparing for the 2016 conflict minerals filing

The SEC’s conflict minerals rules require public companies to disclose information relating to conflict minerals (columbite-tantalite, also known as coltan, from which tantalum is derived; tin; gold; and tungsten; or their derivatives) contained in their products.  For the calendar year 2015, companies subject to this rule have to file a Form SD with the SEC by May 31, 2016.

In previous years, issuers were permitted to describe their products as “DRC conflict undeterminable” in the Form SD if they were unable to determine the source and chain of custody of conflict minerals in a product (including whether or not such conflict minerals came from the Democratic Republic of Congo or an adjoining country), or whether conflict minerals in the product financed or benefitted armed groups in those regions.  Issuers using the “DRC conflict undeterminable” designation were required to file a Conflict Minerals Report (CMR), but were not required to obtain an Independent Private Sector Audit (IPSA) to assess the conflict minerals due diligence process employed by the issuer.  Starting with Forms SD filed in 2016 with respect to calendar year 2015, issuers will no longer be permitted to use the “DRC conflict undeterminable” determination.

For purposes of reporting in 2016, issuers must file a CMR as an exhibit to Form SD if they (1) are not a smaller reporting company and (2) are unable to determine that the conflict minerals contained in their products (a) did not originate in the DRC or an adjoining country, or (b) originated in the DRC or an adjoining country, but did not directly or indirectly finance or benefit armed groups.  As a result of a 2014 court decision that partially vacated the conflict minerals rules, the SEC has advised that issuers are not required to describe their products as “DRC conflict free” or having “not been found to be ‘DRC conflict free’” (however, as noted above, beginning with reports filed in 2016 for calendar year 2015, the “DRC conflict undeterminable” designation may no longer be used by companies, other than smaller reporting companies). 

Further, pursuant to interpretive guidance published by the SEC’s Division of Corporation Finance on April 29, 2014, an IPSA will not be required unless an issuer voluntarily elects to describe a product as “DRC conflict free.”

Action items

For public companies subject to the rule, here are a few action items to consider with respect to their obligations for the filing due in 2016 related to conflict minerals.

  • Review current conflict minerals compliance program, including confirming that supply chain diligence is current as of December 31, 2015.
  • To the extent relevant to the company, review relevant NGO publications and emerging requirements in the EU and some US states and cities.
  • Review prior Form SD filed by the company and its peer group competitors, with an emphasis on reviewing the supply chain diligence steps.
  • Consider contacting an auditor about the cost, timing, and process of an IPSA, and consider obtaining an IPSA in 2016 for purposes of evaluating the due diligence process.