Compliance & Conflict Minerals: Lessons Learned (Session 105) 05/10/2013. Agenda. Lessons Learned

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1 Compliance & Conflict Minerals: Lessons Learned (Session 105) Amy Lehr, Foley Hoag LLP Bobby Kipp, PwC LLP Agenda Overview of rule and interpretive issues (Amy Lehr, Foley Hoag LLP) Practical steps and lessons learned (Bobby Kipp, PwC LLP) Compliance & Conflict Minerals: Lessons Learned Amy K. Lehr Foley Hoag LLP Society of Corporate Compliance and Ethics Compliance & Ethics Institute October 7, 2013 Compliance & Conflict Minerals: Lessons Learned 3 1

2 Overview of the Conflict Minerals Rule Section 1502 of the Dodd-Frank Act (July 2010) Directed the Securities and Exchange Commission ( SEC ) to issue a rule establishing disclosure requirements for issuers for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by the issuer. Intended to address the humanitarian crisis in the Democratic Republic of Congo ( DRC ), and concerns that sales of specific minerals are funding armed groups in the ongoing conflict. Final rule issued on August 22, 2012; effective date November 13, 2012; compliance required beginning January 1, First reports due on May 31, Compliance & Conflict Minerals: Lessons Learned 4 Overview of the Conflict Minerals Rule Conflict minerals include: cassiterite (tin); columbite-tantalite (tantalum); gold; and wolframite (tungsten). Conflict minerals are widely used by manufacturers of many products, including: electronic components, automotive parts, medical devices, jewelry, and industrial machinery; some uses are not obvious. DRC Conflict Free : products that do not contain conflict minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country (the Covered Countries ). Compliance & Conflict Minerals: Lessons Learned 5 Overview of the Rule: Reporting Requirements Companies that utilize conflict minerals must disclose, on an annual basis, whether those minerals originated in Covered Countries. Companies must filea Form SD(Specialized Disclosure) and, if applicable, an attached Conflict Minerals Report. A Conflict Minerals Report must: include an independent private sector audit report (unless DRC conflict undeterminable ); and be made publicly available on the company s website. Form SD is filed and subject to liability under Section 18 of the Securities Exchange Act for material misstatements or omissions; private right of action available. Compliance & Conflict Minerals: Lessons Learned 6 2

3 Overview of the Rule: Key Steps Step 1: Determine if the rule applies. Are you an issuer required to file periodic reports with the SEC? (includes foreign private issuers) Do you manufacture, or contract for the manufacture, of products? Do any of your products contain one of the listed conflict minerals? If so, is the conflict mineral necessary to the functionality or production of the product? Step 2: If yes, conduct Reasonable Country oforigin Inquiry( RCOI ) to determine whether materials originated in a Covered Country (special treatment of scrap/recycled material) and address in Form SD. Step 3: If yes, or if unable to determine origin, engage in due diligenceon sourcing of materials (including audit); produce Conflict Minerals Report for SEC. Compliance & Conflict Minerals: Lessons Learned 7 Overview of the Rule: PwC s simplified flowchart Some companies will need to file high-level summary disclosures while others will be subject to additional detailed reporting and auditing. Companies should evaluate each of their products to determine the extent of reporting requirements. Start Product contains tantalum, tungsten, tin, or gold? Yes Conduct inquiry into origin Sourced from the covered countries?* Yes/reason to believe Conduct due diligence No No Unknown Adequate chain of custody? No Yes Free of conflict minerals Conflict-free mineral Temporarily undeterminable** (no audit required) Conflict-free mineral Not conflict-free mineral No disclosure requirements Specialized Disclosure with SEC Specialized Disclosure + Conflict Minerals Report + Audit opinion with SEC * Covered countries under the rule are the Democratic Republic of the Congo, Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. ** Companies would reach this conclusion if they cannot determine whether their conflict minerals benefited armed groups. This option is only available for the first two years. Compliance & Conflict Minerals: Lessons Learned 8 Overview of the Rule: Corporate Policies This is a transparency statute. The rule does not prohibit the use of conflict minerals. Each company must decide how it wants to approach the sourcing of conflict minerals. The rule present challenges in terms of engagement with suppliers: The rule is conceptual and many key terms are not defined or clearly understood. Different companies will have different policies: Some companies will seek to ensure that their products are DRC Conflict Free. Other companies will approach compliance as an information gathering exercise. Different corporate approaches, and lack of information on the rule, has caused supplier confusion. It will take time to build capacity in terms of supplier compliance and responsiveness. Compliance & Conflict Minerals: Lessons Learned 9 3

4 Challenges in Determining Applicability of the Rule Conflict minerals must be necessary to the functionality or production of a product. Is the conflict mineral necessary to the generally accepted function, use, or purposeof that product? If the conflict mineral is for ornamentation or decoration, is ornamentation or decoration the purpose of the product? No de minimis exception. But, in a court hearing on July 1, 2013, the SEC stated that it will consider granting exemptions on a case-by-case basis. Compliance & Conflict Minerals: Lessons Learned 10 Interpretation Challenges: Contracting to Manufacture Final SEC Rule The question of whether an issuer contracts to manufacture a product will depend on the degree of influence exercised by the issuer on the manufacturing of the product based on the individual facts and circumstances surrounding an issuer s business and industry. American Apparel & Footwear Association Guidance (May 2013) Each company, regardless of whether the product in question is branded product, private label product, or product produced by a licensee, should conduct an analysis of each product to determine whether, under the facts and circumstances for each product, the company has exercised a degree of influence sufficient to be considered contracting to manufacture [.] Compliance & Conflict Minerals: Lessons Learned 11 After Due Diligence: What Can Be Determined? Companies must have reason to believe that supplier representations are true given the facts and circumstances of those representations. Companies must take into account warning signs red flags. Companies needs to consider how to assess representations from suppliers and/or processing facilities. Considerations: Plausibility Trusted and informed suppliers Availability of industry information, including Conflict Free designations by industry or civil society organizations Compliance & Conflict Minerals: Lessons Learned 12 4

5 After Due Diligence: What Constitutes Success? It is not completely clear what constitutes a reasonable due diligence process. How many responses from suppliers? Audit Objective: Audit must express an opinion or conclusion as to: whether the designof the issuer s due diligence measures conforms to the criteria in the applicable due diligence framework; and whether the issuer s descriptionof its due diligence measures in the Conflict Minerals Report is consistent with its actual efforts. Companies should consider multiple external audiences for disclosures: SEC External stakeholders (investors, civil society, consumers) Compliance & Conflict Minerals: Lessons Learned 13 Making an Action Plan: Practical Steps 1) Organize a cross-functional conflict minerals working group: Include all relevant functions (purchasing and procurement, engineering, manufacturing, sales and marketing, finance, legal, IT) Include senior-level executives: need buyin, resources and tone at the top Assign a budget 2) Identify outside advisors and resources: Due diligence consultants, IT providers, auditors, counsel Industry standard processes, materials, resources (e.g., EICC-GeSI). Compliance & Conflict Minerals: Lessons Learned 14 Making an Action Plan: Practical Steps 3) Design a process covering: Characterization of products and manufacturing processes Identification of suppliers; RCOI inquiry process, follow up Design and execution of Step 3 due diligence program, if necessary Selection of auditor and conduct of audit Preparation of Form SD and Conflict Minerals Report Communications with appropriate stakeholders 4) Carefully document your plan and process: Personnel and governance Each process step: who, what, where, when and how Rationale and criteria for key decisions (e.g., characterization of products, vendor selection, RCOI determination, etc.) Copies of all supporting documentation, sign-offs, etc. Compliance & Conflict Minerals: Lessons Learned 15 5

6 Compliance & conflict minerals: Lessons learned October 7, 2013 Bobby Kipp PwC LLP Conflict minerals program architecture Determine product and supplier scope Understand source of minerals and chain of custody Report conflict minerals status 1 Determine S1502 applicability 5 Design and administer RCOI / DD¹ questionnaire 9 Manage performance 2 Establish and communicate policy 6 Perform additional due diligence 10 Respond to customer questionnaires 3 Identify 3TG content 7 Develop and execute risk mitigation 11 Obtain independent private sector audit 4 Determine scope for supplier RCOI/DD¹ 8 Determine product conflict status 12 File Form SD and Conflict Minerals Report 13 Program management 14 Resources, organization, and change management 15 Technology and information management 1 Reasonable country of origin inquiry / due diligence Denotes process steps that may be enabled by technology tools PwC 17 Tips and hints for challenging areas of the program architecture PwC 6

7 Identify 3TG content (Step 3) Trade-off in effort between 3TG scoping and surveying Some product content information may already exist Data analytics tools can lend efficiency Don t forget subcontractors PwC 19 Determine scope for supplier RCOI / due diligence (Step 4) Prioritization of suppliers Tiered strategy Continuous improvement goals A little time up front can pay dividends later PwC 20 Design and administer RCOI / DD questionnaire (Step 5) Standard vs. custom survey templates An escalation process can drive responses Local language needs and cultural differences Ability to link responses to products PwC 21 7

8 Perform additional due diligence (Step 6) Survey evaluation: completeness, red flags, reliability of representation Planning for follow-up / due diligence Smelter evaluation Keep reporting goals in mind PwC 22 Determine product conflict status (Step 8) Mapping from suppliers to parts to products No requirement to get to conflict-free Process and progress disclosure PwC 23 Technology / information management (Step 15) Technology spans the program architecture Some areas may deliver greater returns than others No one tool supports end-to-end program requirements Some tools may already be in place Process and technology proceed hand-in-hand Consider the long term PwC 24 8

9 Reporting and the independent private sector audit (IPSA) PwC Reporting requirements Timeline for Origin of 3TG minerals File SEC Conflict Independent reporting and (at product level) Form SD? minerals audit audit report? required? 2013 & DRC or covered countries (but not undeterminable) Yes Yes Yes 2 Outside the DRC and covered countries Yes No No 3 Possibly DRC or covered countries but conflict source undeterminable (undeterminable option available only in 2013 / 2014) Yes Yes No After DRC and covered countries Yes Yes Yes 2 Outside the DRC and covered countries Yes No No PwC 26 Independent private sector audit Overview Audit required when issuer is sourcing from the DRC, regardless if conflict-free or not Audit objective is to express an opinion or conclusion as to whether: - the design of the issuer s due diligence framework as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer - the issuer s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook Form of audit report: - Attestation (must be performed by CPA); or - Performance audit (not required to be performed by CPA) Exemption for temporary Undeterminable products during transition period PwC 27 9

10 Independent private sector audit What to expect Audit objective 1 Audit objective 2 Assess whether the issuer s due diligence framework conforms to a recognized framework: - Walkthrough to understand issuer s Conflict Minerals process (policy, RCOI and Due Diligence frameworks, risk mitigation strategy) Focus is primarily on the additional due diligence (to determine source and chain of custody for DRC sourced 3TG) However some limited evaluation of prior steps (3TG scoping, RCOI process) - Understand consistency of approach across company/business units - Assess relevant documentation in comparison to audit criteria, including: Overall CM program governance, including CM policy, due diligence approach and process (including process for evaluation of supplier responses), risk mitigation Limited assessment of: 3TG scoping, RCOI process, product-level conclusions. Assess whether the description in the Conflict Minerals Report is consistent with process undertaken: - Sample testing of suppliers/products against designed process(es) PwC 28 Independent private sector audit How to prepare To prepare for the conflict minerals audit, companies should consider the following: Engage your auditor early to discuss/review your conflict minerals program design - No surprises approach - Earlier identification and remediation of potential audit issues - Effort to assess program design will not be repeated later (will just need refresh) Document as you go maintain audit trail - Key decisions and scope (such as 3TG products/suppliers) Consider trial run / readiness assessment - Scope of trial run aligned to actual audit scope - Reduced sample sizes, timeline and audit cost PwC 29 Critical success factors Take a broad view Avoid absolutes Develop a working group Leverage other efforts Market expectations will change, and stakeholders may ultimately compare companies' information. Those stakeholders will dictate the importance of these guidelines, and companies that get ahead and move quickly may enjoy competitive advantage. Companies should develop their conflict minerals philosophy with a measured and deliberate approach so as not to place themselves in a position resulting in significant unintended consequences. This is a complex project and requires structure. Especially for companies seeking to go beyond compliance. Having broad representation will facilitate a thorough understanding of what the rule requires and how best to respond. Don t operate in a vacuum leverage existing systems, policies and procedures such as certificate of origin programs for trade agreements, ethical sourcing initiatives, existing supplier management programs, other product traceability efforts such as REACH and RoHS. Focus on supplier engagement Don't over-rely on supplier reports Don't over-rely on the framework Consider engaging an auditor early While it is tempting to focus on the RCOI and DD efforts, companies should also concentrate on building supplier engagement in the near term. Supplier training is critical to the success of the survey process. Some suppliers may provide companies with an indication that their products are "conflict free" without providing further detail. While it may be tempting to take that information as-is and stop there, that does not represent reasonable due diligence. Pay attention to what you actually need to do from a legislative point of view; not only what's in the OECD framework. Can't just be a checklist need proactive program in place Ultimately, your conflict minerals report will need to be reviewed by an independent auditor. Therefore, it makes sense to engage that auditor early in the process to help ensure fewer surprises. Leverage an incremental approach to compliance Use an appropriate IT solution Document as you go Monitor the issue Develop an implementation plan that is based on a phased approach that will allow you to conduct an end-to-end program that you may then modify, improve, and replicate for the remainder of your organization. Companies will need to collect, store, process, and report on data that will be received from third-party suppliers identifying the component origin. An automated system or technology can support these needs, while also providing a mechanism to identify, assess, and manage risks with suppliers. Companies will be making decisions and judgments about a number of program aspects, scope, process, and other considerations. While there is no prescribed form of documentation, companies should track these elements, especially when it comes to decisions pertaining to rule applicability to certain products or operations. This is a dynamic area, with legal challenges, ongoing updates from the SEC, new tools and resources, and a steady flow of information from industry associations. It can be difficult to keep track of everything, but companies should keep an eye out for major developments. PwC 30 10

11 PwC resources Visit our conflict minerals website: Resources include: Thought leadership FAQs Webcasts Videos continued PwC 31 Thank you! Bobby Kipp PwC Partner Office: Mobile: High Street, Boston, MA PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See for more information. This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. 11