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Conflict Minerals Law

The Source for Legal Insights & Analysis on Conflict Minerals Compliance

Legal Challenge — Review of the Docket — “Not Conflict Free” Product Description Requirement Violates First Amendment

Posted in Legal Challenges

As you recall, shortly after the SEC issued the Conflict Minerals Rule, several trade groups challenged the rule in federal court. The trade groups challenged the SECs cost-benefit analysis, questioned the SECs discretionary choices, and claimed that certain requirements in the rule violate the First Amendment. 

Today, in a 2-1 decision, the D.C. Court of Appeals sided with the SEC and rejected all of the trade associations’ arguments – with one exception. After discussing the legal basis for its review of the First Amendment claim, the Court concluded that portions of Section 1502 of the Dodd-Frank Act and the SEC’s conflict minerals rule violated the First Amendment when they required that reporting companies report to the SEC and state on their websites that any of their products have “not been found to be ‘DRC conflict free.’” The Court remanded the case to the district court for further proceedings.

It was the product description requirement that was the focus of the Court’s attention. In what may be the most quoted selection from the opinion, the majority stated “The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war….By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”

Despite today’s decision, uncertainty remains. The Court did not stay the implementation of the Conflict Minerals Rule, and all provisions other than the “not found to be DRC conflict free” product description remain valid. Among the possible next steps – the petitioner trade groups could seek a stay of the Conflict Minerals Rule pending the further proceedings which would delay any required filings beyond the current June 2 deadline, the SEC could challenge the Court of Appeals’ decision, and/or the SEC might indicate that it expects reporting companies to file the required disclosure except for the “not been found to be ‘DRC conflict free’” product description.

Until the full implications of the Court of Appeals decision are known, companies should continue to press forward with their inquiries, diligence and with the drafting of their Form SDs and Conflict Minerals Reports so that they are prepared to make the conflict minerals disclosures that will be required of them 7 short weeks from now.

Conflict Minerals Rule Weekly Recap #73 – April 4, 2014

Posted in Weekly Recaps
April 4, 2014 - April 11, 2014
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Sanders (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

SEC Issues Second Set of Conflict Minerals FAQs

On April 7, 2014, the SEC issued a second set of FAQs on the conflict minerals rule which is presented as Frequently Asked Questions 13-21. Most of the new FAQs focus on the independent private sector audit requirement in the conflict minerals rule. None of the FAQs address any of the questions of interpretation that are part of the pending legal challenge – obviously, the SEC did not want to address those in advance of the Court of Appeals decision, which is expected soon.

For a brief summary of the new FAQs, see Dynda’s post from last week titled New Conflict Minerals FAQs – But Little New Guidance.

Also, you can see a description of the first set of FAQs in our blog post from last June 2013.

PwC Survey: Companies Unprepared for Conflict Minerals Filing

PriceWaterhouseCoopers recently conducted a conflict minerals survey titled Where Companies Stand on Their Compliance Efforts – This Year and Beyond and the results confirm our expectations about the progress companies have made towards their initial conflict minerals filings.

Accompanying the survey is a release which lists key findings:

  • A quarter of the respondents were still in the early stages of compliance;
  • Only 45% had sent a Reasonable Country of Origin Inquiry to more than three-quarters of their in-scope suppliers; and
  • Only 47% had received fully-completed responses from more than half of the suppliers queried.

In addition, a Reuters article titled Companies Unprepared for Conflict Minerals Rule, U.S. Court Ruling Looms summarizes PwC’s survey and its methodology. According to the Reuters article, only four percent (4%) of survey respondents have completed a draft of their conflict minerals filing.

Bobby Kipp, a partner at PwC, commented, “Time is running out and companies need to move fast.”

Source Intelligence: Suppliers Take Up to Six Months to Respond to Conflict Minerals Inquiry

According to a Source Intelligence white paper titled Overcoming Supplier Resistance: How Educating Suppliers Impacted Responses to Conflict Minerals Regulation in 2013, suppliers can take up to six months to respond to a conflict minerals inquiry.

The press release accompanying the white paper says, “Publicly-held companies (issuers) must take into account this significant lead time in the preparation for compliance with Section 1502 of the Dodd-Frank Rule.”

Kevin McArthur, Source Intelligence Manager of Risk and Compliance Solutions, states, “Some suppliers simply don’t understand the rule or are pushing back after receiving multiple requests for the same EICC survey.”

2014 AIAG Global Automotive Corporate Responsibility Survey

The Automotive Industry Action Group (AIAG) released the results of its 2014 AIAG Global Automotive Corporate  Responsibility Survey, which was “designed to measure opinions, action and opportunities on key corporate responsibility issues facing the automotive industry and related sectors.” Approximately 550 professionals, both AIAG and non-AIAG members, completed the survey.

One of the issues highlighted in the survey was the conflict minerals rule. The survey results provide that only forty-six percent (46%) of respondents have a conflict minerals policy or process in place to comply with reporting requirements or customer requests. In addition, in a surprising survey response, of those companies that are required to file a Conflict Minerals Report, only fifty percent (50%) expect to meet the deadline to file a conflict minerals report. Nine percent (9%) do not expect to meet the deadline and twenty-two percent (22%) do not know. The remaining nineteen percent (19%) indicate that the Conflict Minerals Report is not applicable to them.

For additional information about the survey, see the Mining.com article titled Carmakers Invite Action on Conflict Minerals Rule as May Deadline Looms.

New Conflict Minerals FAQs — But Little New Guidance

Posted in Conflict Mineral Compliance, News and Analysis, Resources and Tools

On April 7, 2014, the SEC issued a second set of FAQs on the conflict minerals rule which is presented as Frequently Asked Questions 13-21. Most of the new FAQs provide guidance on the Independent Private Sector Audit (IPSA), which very few companies will be required to provide for this first reporting year.  But, a couple FAQs give insights into how the “DRC conflict undeterminable” conclusion should be described and how to deal with products with multiple conflict minerals.  Not surprisingly, the FAQs do not respond to questions that are part of the still ongoing legal challenge.

Despite this additional guidance, many of the most vexing questions remain and will not be answered before the June 2, 2014 filing date.  This leaves reporting companies to exercise their best legal judgments on how to deal with the unanswered questions, some of which are fundamental to what is required and what will be reported.

A brief summary of the new FAQs is provided below, but you will want to review the guidance to understand the limitations of the answers. The numbers below correspond to the numbers of the questions/answers in the FAQs.

13.  A non-CPA auditor is permitted to perform the IPSA.

14. If any of the reporting company’s products are “DRC conflict undeterminable,” an IPSA is not required.

15.  If a reporting company describes any products as “DRC conflict undeterminable,” and, therefore, does not perform an IPSA, it cannot describe other products as “DRC conflict free.”

16.  A product cannot be described as “conflict free” if it contains any conflict mineral whose source was not determined or if it was not possible to determine that the conflict mineral did not benefit or finance an armed group.    Importantly, if a product contains a conflict mineral that did benefit or finance an armed group, it must be described as “having not been found to be ‘DRC conflict free.’”

17.  The IPSA has 2 distinct objectives:  (1)  to express whether the design of the due diligence measures conform, in all materials respects, with the criteria of the nationally or internationally recognized framework (currently, the OECD Guidelines), and (2) to express whether the description of the due diligence measures performed is consistent with the process the reporting company actually undertook.

18.  The IPSA is not required to opine on the reasonable country of origin inquiry.

19.  If a product contains some conflict minerals from recycled or scrap sources and some that are not from recycled or scrap, the disclosure about the conflict minerals from recycled or scrap sources must be reported on the Form SD.  The description of the due diligence and other required disclosure about the conflict minerals not from recycled or scrap sources must be reported in the Conflict Minerals Report.

20. Due diligence measures need not necessarily be carried out throughout the entire year covered by the report.  And, the due diligence measures for a reporting year may begin before or extend beyond the reporting year.

21.  The due diligence measures must be described in sufficient detail in the Conflict Minerals Report to allow the auditor to be able to form an opinion about whether the description is consistent with the measures that the reporting company actually performed, but the design of the due diligence need not be described in full in the Conflict Minerals Report.

You can see a description of the first set of FAQs in our blog from last June.

Conflict Minerals Rule Weekly Recap #72 – March 28, 2014

Posted in Weekly Recaps
March 28, 2014 - April 4, 2014
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Sanders (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

Canadian House of Commons Begins Debating Conflict Minerals Act

Paul Dewar, a Member of Parliament and sponsor of the Conflict Minerals Act, wrote an op-ed in the Toronto Star urging all parties to support the Act, as the House of Commons began debating the Conflict Minerals Act this past week.

In his op-ed, Mr. Dewar summarized his proposed bill stating, ”This bill requires Canadian companies using minerals from the [Great Lakes Region of Africa] to exercise due diligence to ensure that no armed groups engaged in illegal activities have benefited from the extraction, processing, or use of those minerals. Companies would have to publish their findings on their website and in documents filed with the Canadian government. The government would then share the report with the producing countries.”

We will continue to keep you apprised of any recent developments in regards to the Canadian Conflict Minerals Act.

Michael Kors – Conflict Minerals Policy

Michael Kors, a global luxury fashion brand, released its conflict minerals policy. Excerpts from the policy follow.

“Michael Kors does not directly source conflict minerals from mines, smelters or refiners, and is many levels removed from these market participants. We therefore require the cooperation of our suppliers in the implementation of this policy and in enabling Michael Kors to meet its SEC compliance obligations. Suppliers are expected to:

  • Put in place procedures for the traceability of conflict minerals;
  • Cooperate with our conflict minerals due diligence process, which includes providing us, from time to time, with written certifications and other information concerning the origin of conflict minerals included in products and/or components supplied to Michael Kors;
  • Maintain reviewable business records supporting the source of conflict minerals;
  • Adopt policies and procedures with respect to conflict minerals consistent with Michael Kors’ policy and practices set forth herein and the OECD Guidance, including the adoption of a risk mitigation strategy to respond to identified risks in the supply chain, and communicate such policies and procedures to their personnel, direct suppliers and indirect suppliers; and
  • Require their direct and indirect suppliers to adopt policies and procedures that are consistent with our Conflict Minerals Policy.”

Conflict Minerals Rule Weekly Recap #71 – March 21, 2014

Posted in Weekly Recaps
March 21, 2014 - March 28, 2014
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Sanders (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

AICPA Provides Conflict Minerals Audit Guidance

According to its press release, the AICPA recently released new nonauthoritative guidance that includes three (3) examples of the independent private sector audit report.  The guidance also addresses how a practitioner would communicate findings that are required to be communicated by Generally Accepted Government Auditing Standards and whether the practitioner may report either directly on the subject matter or on management’s assertion for each of the two audit objectives.

As the initial calendar year reporting deadline draws nearer, we expect to see similar guidance from other trade associations regarding Form SD, Conflict Minerals Reports and Independent Private Sector Audit reports.

The Washington Post Doubts That the Conflict Minerals Rule Was the Demise of the M23 Rebel Movement

At the end of last year, various news outlets reported that the M23 rebel movement in the eastern Democratic Republic of the Congo (DRC) had collapsed. Recently, John Prendergast, c0-founder of Enough Project, claimed that one of the reasons behind the downfall of the M23 rebel movement was the conflict minerals rule. Mr. Prendergast hinted that the rebel movement was in part funded by the trade of conflict minerals and since the adoption of the conflict minerals rule in August 2012, many companies reformed their supply chains to prevent the financing of armed conflict in the DRC.

Laura Seay, an Assistant Professor of Government at Colby College and contributor to the Washington Post, disagrees with Mr. Prendergast’s claim. Ms. Seay states, among other things, that the M23 rebels never controlled the mining areas in the DRC.

This debate will be worth paying attention to in the coming years. If policy makes believe that the conflict minerals rule is successful in reducing armed conflict, one could expect calls for additional regulations in the future.

Conflict Minerals Rule Weekly Recap #70 – March 14, 2014

Posted in Weekly Recaps
March 14, 2014 - March 21, 2014
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Sanders (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

Intel Director of Corporate Responsibility Interviewed About Company Culture in Regards to Conflict Minerals

Rahim Kanani, a contributor to Forbes online, in his article titled Why Intel Is Taking a Stand on Conflict Minerals, interviewed Gary Niekerk, Director of Corporate Responsibility at Intel Corporation, about Intel’s stance on conflict minerals and more.

Mr. Niekerk noted that Intel’s CEO, Brian Krzanich, wanted to be the solution, rather than the problem, in regards to the situation in the Democratic Republic of the Congo. Niekerk stated, “There was never a discussion about impacts to materials costs or schedules, it was always just what can we do to fix it.”

One of the biggest challenges facing Niekerk was that there was no “established mechanisms or systems in place to track minerals from the mine of origin throughout the supply chain.” Intel worked with industry partners to establish a smelter validation system, which took several years.

UK Poll Reveals Majority of Manufacturers Have No Reporting Mechanism for Conflict Minerals

Achilles, a UK-based supply chain solution provider, released a poll which revealed that “fifty-one percent (51%) of [UK] manufacturers  have no reporting mechanisms for issues such as…conflict minerals.”

A spokesperson for Achilles reacted to the poll, “This survey shows just how unsure large UK manufacturers actually are about the treatment of people within their supply chains.”

For more discussion surrounding the poll, see LogisticManager.com’s article titled Manufacturers in the Dark about Suppliers Ethics.

Just a Reminder: Source Intelligence to Release Conflict Minerals Benchmarking Report

Source Intelligence is promoting a presentation, which will discuss the preliminary results of its conflict minerals cross-industry benchmarking report.

The benchmarking report will include insights on:

  • 2013 conflict minerals programs
  • supplier profiles (by industry and region)
  • challenges incurred in compliance

To sign up for the complimentary presentation and receive the report when its released, see Conflict Minerals Benchmarking Report.

Conflict Minerals Rule Weekly Recap #69 – March 7, 2014

Posted in Weekly Recaps
March 7, 2014 - March 14, 2014
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Sanders (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

NAEM’s Five Tips for Preparing a Conflict Minerals Filing

The National Association for Environmental Management (NAEM) spoke with Kirsten Wallerstedt, a Senior Regulatory Analyst with 3E, regarding a company’s first conflict minerals filing. Ms. Wallerstedt provided these five (5) helpful tips when filing a Form SD and Conflict Minerals Report (if any):

  1. Understand the impact of your filing.
  2. Circulate the form early.
  3. Explain your findings, no matter what they are.
  4. Look for language that reflects the SEC requirements.
  5. Show the efforts you’ve made and how you plan to improve.

For more discussion surrounding her tips, see NAEM’s blog post titled Five Tips for Preparing Your Conflict Minerals Filing.

Intel Offers to “Open Source” Conflict Minerals Program, Hopes to Assist Other Companies in Compliance Efforts

According to the Thomson Reuters Foundation, Intel’s CEO, Brian Krzanich, recently announced that Intel will “‘open source’ its methods for verifying that none of its products contain minerals from armed groups involved in the DRC conflict.” Open source is a tool that allows any company to have access to Intel’s compliance methods as well as permission to make modifications or improvements to the methods and redistribute the modified or improved methods as it sees fit. Mr. Krzanich stated, “For us, this has always been about doing the right thing.”

North Carolina Could Become Conflict-Free In Near Future

According to an Enough Project blog post, a group of University of North Carolina students are advocating that the university, and in turn the state, amend its electronics procurement policy to favor companies who have made progress toward conflict-free sourcing.

Late last year, the university student government adopted a resolution in support of a conflict-free campus, but encountered an obstacle when it later was informed that since UNC is a public university, its procurement policy is set by the state legislature. The UNC students spearheading the process have been in contact with various state legislators and ”are optimistic about future collaborative efforts in concert with the upcoming North Carolina General Assembly session this May.”

Management Could Field Questions About Conflict Minerals at their Annual Meetings this Year

According to an Accounting Today article written by Michael Cohn, titled Annual Shareholder Meetings May Include Auditor Tenure and COSO Questions, management should prepare to field questions about conflict minerals, among other things, at their annual meetings this spring. Mr. Cohn states, “Shareholders may want to know if the company is conducting country-of-origin inquiries to ensure that their supply chains are conflict free.”

Conflict Minerals Rule Weekly Recap #68 – February 28, 2014

Posted in Weekly Recaps
February 28, 2014 - March 7, 2014
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Sanders (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

EU Releases Draft of Conflict Minerals Regulation, Proposes Voluntary Scheme

On March 5, 2014, the EU released a draft conflict minerals Regulation that will create a voluntary process in which importers of tin, tantalum, tungsten and gold into the EU can self-certify that they do not contribute to financing armed conflict.

The draft Regulation focuses on the upstream portion of the supply chain, specifically the more than 400 importers of minerals into the EU, and offers incentives to importers that undertake the due diligence steps.

For commentary about the draft Regulation, please see our blog post and client alert letter.

Op-Ed: Court Should Uphold Conflict Minerals Rule

Bennett Freeman, Senior Vice President, Sustainability Research and Policy at Calvert Investments wrote an opinion editorial in The Hill urging the Court of Appeals to uphold the conflict minerals rule. Freeman reasons, “Striking the rule would create troubling uncertainties for the future of countless SEC disclosure requirements that are essential to investor confidence.”

Freeman then discusses the benefits of such disclosures required by the conflict minerals rule. “Due diligence disclosures enhance investor confidence and decision-making by shedding light on how companies manage two material risks:  First,  brand value in a marketplace where consumers are conscious of the origins and ethical impacts of their purchases, and, second,  a company’s capacity to manage complex global supply chains.  If a company is unwilling or unable to identify material origins, then is it maximizing efficiencies?  If a company is not mitigating supply chain risks, then is it mismanaging other material risks?”

Poll: Businesses Would Suspend Relationship With Alleged Conflict Mineral Supplier

The Ethical Alliance, a member-based organization for anti-corruption and compliance professionals, recently conducted a poll questioning legal and compliance professionals as to what they would do if a member in their supply chain violated rules designed to prevent trade in certain conflict minerals areas.

According to the accompanying press release, eighty-three percent (83%) of businesses would suspend their relationship with that supplier until further due diligence could be conducted and fifteen percent (15%) of businesses would terminate their relationship with that supplier.

For more information about the poll, see The FCPA Blog.

EU Releases Draft of Conflict Minerals Regulation, Proposes Voluntary Scheme

Posted in News and Analysis

Summary of EU Conflict Minerals Regulation:

  • Focuses on upstream portion of supply chain, specifically the more than 400 importers of minerals into the EU
  • Creates new, voluntary EU system for supply chain due diligence self-certification
  • Offers incentives to companies that undertake the due diligence steps
  • Defines “Conflict Minerals” as tin, tantalum, tungsten and gold (same as US conflict minerals rule)
  • Is global in scope, and is not limited to central Africa

Earlier today, the EU released a draft conflict minerals Regulation that will create a voluntary process in which importers of tin, tantalum, tungsten and gold into the EU can self-certify that they do not contribute to financing armed conflict. If EU importers opt-in to the process, they will be required to conduct due diligence on their supply chains in accordance with the five steps of the OECD due diligence framework. By March 31st of the following year, the EU importer will have to report its findings to the EU. The EU will gather this information and publish an annual list of “responsible smelters and refiners.”

Incentives benefitting the participating companies include:

  • public procurement incentives
  • financial support of the due diligence efforts of small and medium sized enterprises
  • “visible recognition” for companies that source responsibly

Drafters of the EU conflict minerals regulation insisted that they did not want to create a de facto embargo of conflict minerals, which has been one unintended consequence of the US conflict minerals rule. In addition, drafters wanted to complement, not copy, the US conflict minerals rule. A EU official stated, “This is not a stand-alone proposal. But we don’t want to repeat what has already been done. Dodd-Frank takes care of downstream users, and the European Union is taking care of the upstream.”

Shortly after its release, several NGOs released a joint statement stating their dissatisfaction with the draft of the EU conflict minerals regulation. The statement reads, “Rather than building on the significant momentum generated by legislation passed in the US, thereby raising the bar for responsible sourcing globally, the Commission’s proposal threatens to lower international standards and start a race to the bottom.”

An FAQ accompanying the draft Regulation can be found here.

The EU conflict minerals draft Regulation can be found here.

EU Conflict Minerals Draft Said To Fall Short of NGOs Expectations

Posted in Conflict Mineral Compliance

According to a EurActiv.com news article, entitled EU Drafts Conflict Minerals Law, With Opt-In Clause, when the proposed rule is released tomorrow, March 5th, it will be limited to the same minerals identified by the U.S. conflict minerals rule (tin, tantalum, tungsten and gold) and the rule will not contain any compulsory measures, but will instead incentivize companies to conduct due diligence on their supply chains.

When asked to comment on the draft of the EU rule, a spokeswoman for the Global Witness campaign stated, “This weak proposal risks undermining states’ duty to protect human rights and could even be redundant. An opt-in scheme would be tantamount to the EU saying that it’s ok for companies to choose not to source responsibly.”

If released tomorrow as anticipated, the rule will likely be voted on in September 2014 and if approved become effective at the beginning of 2015.