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Initial Round Of Conflict Minerals Filings May Be A Compliance Goldmine

Merrill Disclosure Solutions | April 21, 2015

Conflict Minerals Filings

Abstracted from: The First Annual Conflict Minerals Filings

By: Amy Goodman, Kasey Robinson, and Timothy Mullins

Gibson Dunn & Crutcher, Washington DC (AG and KR) and Irvine CA (TM)

Insights: Corporate & Securities Law Advisor, Vol. 28, No. 11, Pgs. 21-27

Unearthing what the SEC requires. Companies planning their conflict minerals disclosures can learn from the first round of filings, which occurred in 2014. Under SEC Rule 13p-1, attorneys Amy Goodman, Kasey Robinson, and Timothy Mullins explain, an issuer must determine whether any of four specified conflict minerals are essential to the functionality or manufacture of the company's products. An affirmative answer requires that the issuer undertake a good-faith, reasonable, country-of-origin inquiry (RCOI) to ascertain if there is reason to believe any conflict minerals originated in the Democratic Republic of the Congo or a neighboring country. (The issuer must also look into recycling or scrap as a possible source.) If the minerals do not originate in the designated countries, the issuer need only file a Form SD, with specified disclosure. If the minerals do come from the Congo or other countries, the issuer must perform due diligence on the minerals' source and chain of custody. Unless the conclusion is that the minerals did not originate in any of the specified countries, the issuer must also file a conflict minerals report that describes its due diligence, provides other specified disclosure, and characterizes its products in one of three ways: free of DRC conflict minerals; not found to be free of DRC conflict minerals; or - during a transition period - status-indeterminable.

Assaying the aftermath, and mining the data. In an April 2014 decision, National Association of Manufacturers v. SEC, the DC Circuit Court of Appeals held that the required three-way product characterization violates the First Amendment. The SEC responded by suspending the requirement but still requiring disclosure. The appeals court remanded the case to the district court and later denied an emergency motion to stay the rule. Meanwhile, by June 27, 2014, the SEC had received Forms SD from just over 1,300 companies, 77% of which had also filed conflict minerals reports. The authors reviewed 70 filings - half of which included a minerals report - from large- and mid-cap companies in many industries. Form SD must disclose the determination that the company needs conflict minerals and must briefly outline the RCOI process and outcome. The 35 filings with just Form SD described the issuers' diverse methods of contacting, examining responses from, and following up with suppliers during the RCOI. Almost all briefly described the RCOI outcome.

Digging diligently and giving descriptions. The conflict minerals report must disclose the issuer's due diligence concerning each mineral's source and the chain of custody. Of the 35 reports reviewed by the authors, about half gave the percentage or number of suppliers contacted, and about half gave similar data on suppliers' reply rates. Nearly all indicated the replies were examined for completeness or consistency or both, and most indicated red flags were followed up. Most disclosed either the contents of the replies or, based on the responses, the conclusions that could or could not be reached as to each mineral's origin. Other reporting requirements relate to the now-suspended characterization rule. For products not characterized as free of DRC conflict minerals, the report must describe the products, the facilities that processed the conflict minerals, the minerals' country of origin, and the attempts to ascertain the specific mine or other location of origin. The reports' descriptions varied greatly. For products characterized as status-indeterminable, the report must also disclose the measures taken or planned to lessen the risk of profiting armed groups. Even absent such a characterization, numerous reports disclosed these measures.

Refining actions and reports. Rule 13p-1 filings for calendar year 2014 are due June 1, 2015. To improve compliance and disclosure, the authors suggest, corporate executives can examine their industry peers' filings for last year and nongovernmental organizations' publications, some of which said those filings were vague. After the SEC staff studied a sampling, Keith Higgins, who directs the SEC Division of Corporation Finance, offered suggestions for this year's filings. First, the issuer should show that it understands how the RCOI and the due-diligence requirements differ, despite the overlap; it can then omit the former if it fulfills the latter or give clear, detailed reasons if it omits the latter. Second, the issuer should not imply its products are conflict-free unless it voluntarily uses that characterization and obtains the required independent private-sector audit before doing so. Finally, the issuer ought to provide whatever data it has on the facilities that process the conflict minerals in its products and on the minerals' country of origin, even if it cannot conclude that the minerals either came from the countries specified in the rule or funded armed groups. The authors also advise monitoring the National Association of Manufacturers lawsuit and any SEC responses to it.

Abstracted from Insights: Corporate & Securities Law Advisor, published by Wolters Kluwer Law & Business, 4025 W. Peterson Avenue, Chicago IL 60646. To subscribe, call (800) 638-8437.

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