Forums explore impact and responses to SEC regulations on conflict minerals
In 18 months, thousands of public companies in the United States that make or use metal in their products or packaging must disclose their use of conflict minerals with the Securities and Exchange Commission.
The new regulation intends to bring transparency to the murky supply chain of four rare earth metals – tin, tungsten, tantalum and gold – that are vital to the technology revolution. A portion of the world’s supplies comes from the Democratic Republic of Congo (DRC) and the central African frontier, where millions have died and children are forced to work in bleak conditions while armed rebels profit from the minerals trade.
Rebels escalated hostilities in late November, vying for control of Goma, a border city through which key minerals are exported into neighboring Rwanda. United Nations’ sanctions have not produced a solution.
Thousands of miles from the conflict, U.S. companies are spinning with questions and concerns about the new regulation, which was established by the 2010 Dodd-Frank Act. They know when their reports are due – May 31, 2014 – but how to report? What to report?
And how will these new disclosures affect their reputations? Their businesses?
In search of answers, dozens of companies gathered in a pair of November forums organized by the IPC, an electronics industry trade association. No one has established a model to comply with the new regulations. The IPC offers several initial resources and tools.
“IPC has taken a leadership role in advocating for its members concerns during regulatory development and now is working diligently to help its members comply with SEC regulations and customer inquiries,” said Fern Abrams, Director of Government Relations and Environmental Policy for the Arlington, Va.-based IPC.
Companies such as Dell, HP and IBM have joined cooperative working groups to address the issue of responsible sourcing. Others, including Motorola Solutions, have organized projects on the ground in the DRC. Chipmaker AMD has chaired a multi-stakeholder working group on the topic with the Enough Project, an NGO, and made policy recommendations to the SEC.
Forum participants learned that despite widespread uncertainty, it would be far riskier to adopt a “wait-and-see” strategy and not be prepared to file a report at all.
“It is better to be careful and be prepared to file a report if necessary,” said David Engvall, a Washington, D.C.. attorney with Covington & Burling LLP, who advises public companies on SEC compliance and disclosure matters. “There is much work to be done yet by the SEC, but all the same you want to keep moving. You need to aim high.”
What are conflict minerals?
The four main conflict minerals covered by the SEC regulation are cassiterite (tin ore), coltan (tantalum ore), wolframite (tungsten ore) and gold, a metal.
Tin is used as a solder in circuit boards; tantalum goes into capacitors that store and release an electrical charge in devices such as smart phones and laptop computers; tungsten is used in the vibrating function of mobile phones; gold is widely used as a highly efficient, corrosion-free conductor of tiny electric currents and data streams.
Exporters in the DRC sell the minerals to overseas smelters, which sell the refined metals to component manufacturers in China and other nations, and the components make their way into consumer products and equipment worldwide. Much of the supply chain activity occurs in countries that do not have to comply with the new regulation.
Speakers and participants in the IPC seminars said it’s important that companies try to work cooperatively in the initial years of SEC reporting. That’s because the SEC ruling often refers to “reasonable” efforts by companies to investigate their supply chains and report their results. Without strict definitions, there is opportunity to establish boundaries for future reporting.
“We must all hang together or surely we will hang separately,” quipped Tim Mohin, CSR director for AMD.
Other reporting tips from the forums:
- Companies should establish internal conflict minerals committees that may include Procurement, Supply Chain, Public Affairs, Legal, Finance and IT. Participants should read the entire 356-page response issued by the SEC to glean information that will make their initial report as effective as possible.
- Companies that manufacture or contract for products that are not “conflict free” must reveal the facilities used to process the conflict minerals, the country of origin of the minerals and the mine or location of origin within the country.
- Companies will not be held liable under the securities laws for misleading statements if they can establish that they reported in good faith and had no knowledge that their reports were false or misleading.
- For guidance, companies should refer to the due diligence process established by the Paris-based Organisation for Economic Co-operation and Development. While the OECD’s 5-step process applies to any mineral, the SEC used it as a model for reporting conflict minerals.
- Companies that cannot verify that their minerals did not originate in central Africa and cannot verify that their purchase did not benefit outlaws or rebels, may initially describe the origin of their minerals as “undeterminable.” But this is not a free pass. It’s only a grace period – two years for large companies and four years for small companies – in order to, in the SEC’s words, “obtain more data on, and control over, their supply chain through revised contracts with suppliers and smelter verification.”
- A conflict minerals report is required only if conflict minerals are sourced from the DRC region. If a reasonable country of origin inquiry determines that minerals used originate in, say, Chile or Canada, then the SEC requires only an SD form. But the company still must describe its country of origin inquiry and post the information on its website.
A company’s report must be audited by a third party and that audit statement must accompany the filing with the SEC. Companies should use an auditor that meets federal standards and understands the due diligence process. Companies that file an “undeterminable” status report do not need to have their report audited.