Questions for the board and audit committee to consider
- Does the company manufacture or use conflict minerals? If so, in what products?
- What has management evaluated to make this determination? Has it looked at all raw materials? Has it made inquiries of subcomponent’s manufacturers?
- If the company is subject to Dodd-Frank Section 1502, has management developed a strategy for compliance? Does the strategy take into account the public relations and reputational issues involved with conflict minerals and the potential cost of totally conflict-free manufacturing? Has management communicated its strategy to the audit committee?
- Does the audit committee understand what still needs to be finalized so the company is ready to meet the reporting requirements of Section 1502?
Companies should begin now to assess the potential level of effort the rule would require, the potential reputational risks involved in the new disclosure process and the options available to ensure compliance.
Under its proposed rule, the US Securities and Exchange Commission (SEC) estimates that more than 5,500 companies would need to provide certain disclosures about their use of “conflict minerals” from the Democratic Republic of the Congo and adjoining countries (DRC countries1).
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act aims to dry up the source of money for certain mines. These mines are believed to abuse workers’ human rights, and money earned on the sale of the minerals is believed to be financing regional conflicts that have been characterized by widespread incidents of extreme violence.
The proposed rule would apply to SEC registrants that manufacture or contract to manufacture products that use conflict minerals, which are currently defined as cassiterite, columbite-tantalite, gold and wolframite.2 These minerals are commonly found in electronic circuits, wires and electronic products. Industries likely to be most affected by the proposal include electronics, communications, aerospace, automotive, jewelry and industrial products.
What are the disclosure requirements?
The SEC proposed a three-step disclosure process:
|1 || |
First, an issuer would need to determine if any of the four conflict minerals are necessary to the functionality of any of its manufactured products or to a product’s production process. If not, an issuer would not be required to take any action.
|2 || |
If, however, the minerals are determined to be necessary, the company would have to make a conflict minerals disclosure in its annual report and on its website on its use of conflict minerals and whether the conflict minerals originated in any of the DRC countries. The disclosure would have to be based on a “reasonable country of origin inquiry.”
|3 || |
If an issuer determines that its minerals are from the DRC countries or cannot determine their origin, the SEC proposal would require the company to furnish a conflict minerals report as an exhibit to its annual report and post it to its website.
The conflict minerals report
The conflict minerals report would include a description of the measures taken to exercise due diligence on the source and chain of custody of any conflict minerals. Issuers would be required to describe:
- Any products that are not “DRC conflict free”
- The facilities used to process such conflict minerals
- The country of origin of those conflict minerals
- The efforts to determine the mine or location of origin of the conflict minerals with the greatest possible specificity
The issuer also would need to certify that it obtained an independent audit of the report and furnish the audit report.
Timing and next steps
There are many questions related to the conflict minerals report and its audit requirements that still need to be clarified in the final SEC rule, which is expected to be issued between September and December 2011. Annual reports for years beginning thereafter will be subject to the disclosure requirements.
For calendar-year filers, it is currently anticipated that the disclosures will be required in annual reports for the year ended 31 December 2012.
There is still much to be determined but public companies that manufacture or contract to manufacture products (including private label retailers) should evaluate the law’s applicability and the cost of compliance, and then develop a strategy to meet the requirements of the new law. The strategy could include implementing supply chain due diligence and track and trace procedures, changing procurement sources or potentially switching to other materials.
1 The DRC countries are defined as including the DRC, the Central African Republic, Zambia, Angola, the Congo Republic, Tanzania, Burundi, Rwanda, Uganda and Sudan and (or) South Sudan.
2 Cassiterite is the metal ore commonly used to produce tin, columbite-tantalite is the metal ore from which tantalum is extracted and wolframite is the metal ore used to produce tungsten.
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