Year three of conflict minerals reporting is fast approaching, with Form SD filings due on May 31st. The good news, and the bad news, is that not much has changed since last year.
The status of conflict minerals reporting
As you know, in April 2014, the Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. SEC held that the rule’s requirement that companies state that their products have not been found to be “DRC conflict free” violated the First Amendment. Subsequently, the SEC staff released guidance relieving issuers of the obligation to put those labels in their reports. Though the Court of Appeals for the D.C. Circuit agreed to rehear the National Association of Manufacturers case, in August 2015 it affirmed its prior ruling, and in November 2015 it rejected the petitions of the SEC and Amnesty International for another rehearing, leaving the SEC with no recourse other than an appeal to the U.S. Supreme Court (which has not yet happened).
For now, it is uncertain when this issue will be resolved (though almost certainly not before May 31st). Therefore, upcoming Form SD filings should not state the products are “DRC conflict free” since doing so, according to the SEC’s guidance, would trigger the requirement for an independent private sector audit (see below). In fact, be careful not to even imply conflict free status since that also may trigger an IPSA. Stating that products are “DRC conflict undeterminable” remains permissible, though it is unnecessary.
What should you be doing now?
Despite the uncertainty, companies still must comply with the current rules, and the SEC is still monitoring compliance. Here’s a list of the things companies should consider as we head into year three and beyond:
Review the Form SD filings of your peers. If you previously filed a Form SD, this allows you to compare your conclusions and disclosures to other companies in your industry. If you didn’t previously file a Form SD, it is a good way to collect information about your peers’ products and supply chain.
Separate the RCOI and due diligence disclosures. A Conflict Minerals Report (“CMR”) is required to be filed if the company either determines that its covered minerals came from one of the covered countries or is unable to determine that its covered minerals did not come from the covered countries. Last year, the vast majority of companies filed a CMR.
Because the SEC has provided no guidance on the layout of the CMRs, presentations varied widely. The SEC staff has, however, stressed that companies should draw clear distinctions between their reasonable country of origin inquiry and supply chain due diligence. In addition to making the CMRs easier to follow, describing due diligence measures in a separate section of the report will be helpful if audits are ultimately required upon resolution of the pending litigation or further SEC rulemaking.
The due diligence section should essentially track the five-step due diligence framework released by the Organisation for Economic Co-operation and Development (“OECD”), the only framework that has been approved so far, though it is not required to do so. Presenting due diligence information in accordance with the OECD framework will greatly simplify any subsequent IPSAs.
Improve Smelter and Refiner Disclosure. Companies are expected to make ongoing, good faith inquiries that provide increasing visibility into their supply chain and applicable smelters and refiners. Continue to pressure suppliers to provide the information necessary to obtain this information. Companies that provide no disclosure regarding smelters and refiners are likely to be scrutinized by the SEC. Also, some companies that did include smelter and refiner data last year did not clearly state the basis for including this disclosure, which left investors asking whether those processing facilities were actually in the company’s supply chain or were just a list of processing facilities that the company identified in its due diligence.
Companies should review the Department of Commerce’s list of smelters and refiners that contains a list of all the processing facilities known by the U.S. government, as well as the Conflict Free Sourcing Initiative Lists, which helps companies identify whether the facilities are conflict-free.
Independent Private Sector Audits. A few companies have conducted mock audits or pre-audit readiness assessments. Alternatively, consider conducting a “gap analysis” to identify any gaps between the company’s compliance program and the requirements of the conflict minerals rule and the OECD framework.
Pressure from Stakeholders. More and more stakeholders other than the SEC, including customers, consumer groups and research firms, employees, non-governmental organizations and socially responsible investors, are closely scrutinizing conflict minerals disclosure. For example, in April 2015, Amnesty International released a report concluding that 80% of US companies “failed to meet the minimum requirements of the U.S. conflict minerals law.” In implementing compliance procedures and crafting disclosure, companies should consider who their stakeholders are and what message they are trying to send.
Be flexible. As companies continue to integrate and improve their conflict minerals compliance programs, they should aim to design and structure the programs with enough flexibility to accommodate additional supply chain compliance initiatives outside the U.S.
Keep up with changing circumstances. Remember also that business operations are fluid—product lines, manufacturing processes, suppliers and product uses contantly change. Train employees to proactively and promptly pass along any changes in operations that could trigger the conflict minerals rules.
Although there remains a chance that the law could be modified or repealed at some point, unless and until that happens companies must remain vigilant and compliant.
All the best,