CONFLICT MINERAL COMPLIANCE TOOLKIT

Transcription

1 20 13 CONFLICT MINERAL COMPLIANCE TOOLKIT FOR EXECUTIVES WITH CONTRIBUTIONS FROM: REACH RoHS PROP65 CPSIA CONFLICT MINERALS CUSTOM COMPLIANCE SOLUTIONS

2 TABLE OF CONTENTS Introduction... 3 Assent Compliance Corporate Overview... 4 Conflict Minerals... 8 Conflict Minerals & Kübler Ross Dodd Frank Conflict Mineral Compliance in 5 Easy Steps How to Select an IT Vendor for Dodd Frank...12 What Divisions/Departments You Need to Involve and Why...16 Conflict Minerals and your Supply Chain Conflict Mineral Implementation Plans Partner Introduction Your Law Firm and Conflict Minerals...31 Conflict Mineral Diligence Diligence Flow Chart Conflict Minerals: Industries and Applications...56 For More Information Conflict Minerals and Your Accountant Categories That Trigger an Audit (Illustrative) Conflict Minerals Compliance Survey Results Analysis...81 Lessons Learned Resource Centre

3 INTRODUCTION With May 2014 as the first compliance deadline for Dodd Frank Conflict Mineral Compliance requirements CFO s and compliance executives across North America are tasked with signing off on the final fillings with the SEC. As a function of this it s a fundamental requirement that executives be equipped with all the tools they need to appropriately and affordably comply with this regulation. It s also important that executives don t look at compliance requirements for this particular regulation in a microcosm but rather look at a holistic approach to materials compliance which puts in place the infrastructure to comply with current and future restricted or controlled substance requirements. Through development of compliance modules that track restricted substances for a multitude of different regulations, through the implementation of compliance plans at Fortune 500 firms, through open dialogs/partnerships with Big 4 accounting firms and leading law firms Assent Compliance has put together a comprehensive guide that will give CFO s and compliance executives all the tools they need for Dodd Frank Conflict Mineral Compliance as well as a process for compliance which can be used for any restricted or controlled substances. This compilation takes the position that most compliance executives already understand the logic behind the regulations so we do not thoroughly cover the history and human rights aspects that lead to its formation and passing. Rather Assent is looking to provide readers with the salient compliance information they will need to meet the May 2014 deadline for the first reporting period. If you or your team would like background information please see the resource section. Thank you for reading the Assent Conflict Mineral Toolkit E-book. If you have any questions please feel free to contact Assent Compliance anytime. Assent Compliance Inc. The World Exchange Plaza O Connor St. Ottawa ON K1P 1A4 Canada Toll Free: Fax: info@assentcompliance.com 3

4 WHO IS ASSENT? Assent delivers SaaS Environmental Compliance Services to companies that must comply with local, national, + global environmental regulations. Our software division is fully supported by a team of highly experienced industry consultants providing our clients with turnkey compliance solutions. Assent Compliance is rated among the top environmental compliance solutions in the world. Not to mention it s one of the only global solution providers to offer a full service solution from end to end. We re here to help our clients comply with environmental regulations in the most efficient + cost effective manner possible. This is achieved through SaaS automation of processes + working with clients to build efficient internal compliance programs that meet global compliance requirements. OUR MISSION ASSENT COMPLIANCE 2013 E-BOOK 4

5 HOW THE ASSENT COMPLIANCE MANAGEMENT SYSTEM WORKS Pulls Bill of Material (BOM) into a centralized compliance data base or operates as a stand-alone system. Integrates with Major ERP/PLM Systems Communicates with Supply Chain in bidirectional fashion to procure environmental information from suppliers Modules to Comply with All Major Environmental Regulations Build IPC 1752-A FORMS. Import/Export via XML Built-in CRM for compliance tasks, due diligence reporting and audit trails Homogenize proprietary supplier DOC formats in xml Allows internal Staff to Make Engineering Override assessments Acts as a repository for any compliance related material 5

6 SERVICES WE OFFER Environmental Compliance Software for Conflict Minerals, REACH, RoHS etc. Compliance Assessment Services Internal Standard Operating Procedure Development Compliance Outsourcing Services IT System Integration Compliance Plan Development OUR CLIENTS Assent serves clients ranging from Small Business to Fortune 500. In global supply chains companies of all sizes must comply with environmental regulations. Regardless of size Assent has products and services to help any sized company meet their environmental compliance obligations. 6

7 OUR GLOBAL OFFICES CANADA (HEADQUARTERS) ASSENT COMPLIANCE 56 Sparks Street Suite 510 Toll Free: Ottawa ON K1P 5A9 Fax: Canada info@assentcompliance.com LONDON, UK MUNICH, GERMANY OTTAWA, ONTARIO CANADA (HQ) TAIPEI, TAIWAN NEW YORK, NEW YORK BANGALORE, INDIA KENYA (CONFLICT MINERALS) CANADA ASSENT COMPLIANCE The World Exchange Plaza O Connor St. Ottawa ON K1P 1A4 Toll Free: Fax: info@assentcompliance.com UNITED KINGDOM ASSENT COMPLIANCE 3 Coborn Road, Suite 210, Docklands London E3 2DA England Phone: info@assentcompliance.com UNITED STATES ASSENT COMPLIANCE 244 Fifth Avenue Suite 1717 New York NY U.S.A. Toll Free: Fax: info@assentcompliance.com 7

8 CONFLICT MINERALS

9 CONFLICT MINERALS + KÜBLER ROSS Assent Compliance global consultants have seen North American businesses react to conflict mineral compliance in a manner not unlike the Kübler-Ross grief model. The five company stages break down as follows: 1. Denial an outright denial by some companies to acknowledge that this regulation can affect them. The majority of companies are beyond this stage. 2. Anger any change from the status quo in a large organization may cause anger in those burdened with extra work. This can undoubtedly cause internal frustration with regard to means of compliance, budget decisions and plans for moving forward. During this early planning stage, companies have trouble making decisions and typically seek advice. 3. Bargaining with any legislation there can be exemptions, addendums or clauses that may absolve a party of some portion of their responsibility. This can be noted in the NAM lawsuit that was recently deliberated on where parties were in the bargaining stage. Industry watched closely as the Washington D.C. District Court passed its ruling on the Dodd Frank Conflict Mineral Rules case. The court rejected all of the plaintiffs claims and denied the plaintiffs motion for a summary judgment. The Conflict Minerals final rules therefor continue to be in effect as they were passed. This means that all industry sectors that were currently in scope continue to remain so. conflict-mineral-compliance-final-rules/ 4. Depression typically a company will tender several requests for consultants to make suggestions and to better inform internal stakeholders on instituting a compliance process or system. Although this phase does not effect the organization as a whole, the compliance team itself frequently feels incapable of undertaking the task either due to perceived understaffing or adverse impact by their supply chain. This stage is more of a micro state, which follows the organization s acceptance of REACH requirements. 5. Acceptance once organizations accept the reality that environmental regulations are real, enforceable and can affect their bottom line, the typical response is an Alright, let s do it approach. As one Assent client noted: Has our business model changed? No? If our business model includes selling our products globally then we re going to comply with these regulations. It s simple. We re not afraid of challenges at this company. 9

10 DODD FRANK CONFLICT MINERAL COMPLIANCE IN 5 EASY STEPS The typical approach to Dodd Frank Compliance can be broken down into these 5 steps: Regulatory Assessment and Scope Analysis: This involves examining your product portfolio and doing an analysis of in scope VS out of scope. It can also include: Examining corporate obligations Determination of key regulatory compliance decision points Creation of a conflict minerals technical document Creation of a Compliance Plan: This involves creating an end to end compliance plan and associated processes. All activities detailed in chronological order Creation of application of due diligence standards Responsibilities assigned to personnel Determination of compliance communication pathways Software Set Up: Industry standard to date for the majority of companies in scope of this regulation involve using a software platform to manage the large amount of data and suppliers that will be surveyed. Vendor Selection Decisions to integrate with ERP or PLM Systems Methodology of supplier communication Supplier Engagement: This portion of the process involves communication and data collection from the supply chain. Includes: Data collection methodology Reporting and analytics of the data collected Corrective action and addressing problem suppliers Reporting: Once data has been collected firms enter the reporting phase to complete the process for the first year. This process is then replicated year over year. With the infrastructure in place firms enter the maintenance phase of compliance. 10

11 Standard practise in the industry has also seen that firms are engaging 3-4 outside service providers. They are usually: 1. Legal: To determine exact requirements and legal requirements. Firms like SRZ and Baker Law have been on the front lines of Conflict Mineral Compliance. 2. Software: To provide the platform for data collection, management and analytics. Firms like Assent Compliance, PTC and ipoint are leading vendors. 3. Accounting: To audit the data collected and ensure strong data backing the program. All 4 major accounting firms provide Conflict Mineral services. 4. Consulting: To develop the processes, work with /train suppliers and help with data collection. Assent Compliance and PTC provide conflict mineral compliance services. Assisting your clients with Dodd Frank Conflict Mineral Compliance does not have to be complicated. Working through the 5 step process above and working with other 3rd party providers makes compliance at any level easy. 11

12 HOW TO SELECT AN IT VENDOR FOR DODD FRANK CONFLICT MINERALS When sourcing a software vendor for Dodd Frank Conflict Mineral Compliance there are several important factors to note. In this article we will examine the methodology surrounding the approach several software firms have taken and examine implications and processes involved with each methodology. We will also look at salient factors that should be considered when choosing a software vendor. DIFFERENT SOFTWARE MODELS: 1. Client Direct VS Supplier Direct. Client Direct: In the client direct model firms pay for a software platform either hosted or cloud based to manage their compliance processes. There can be a combination of licensing fees, set up costs and if purchasing a hosted solution, hardware costs. Typically these solutions will have multiple modules for different restricted substance lists, social regulations and compliance requirements. For supplier data procurement there are either supplier data exchanges put in place through a portal or a wizard which is free for suppliers to use. Supplier Direct: Under this model firms would purchase a software platform which may be cheaper than the client direct model but would then require that their suppliers pay the vendor to submit data on the platform. This model is typically only practical for Fortune 50 sized firms who have immense leverage and control over their suppliers. Under this data exchange, supplier direct model the platform is usually only valid for one regulation. 12

13 2. Cloud Based VS Hosted: There are currently vendors who offer solutions that are cloud hosted meaning there are no hardware installation costs. Cloud Based: Usually offers a lower cost and unlimited seat licensing for a fixed monthly cost and a onetime set up cost. Traditionally cloud based solutions are the direction most firms are moving because of the ease to deploy and lower costs. Hosted: Firms offering hosted solutions require the purchase of servers and each computer installs local software on individual machines. When upgrades to the software occur they must re-install on each computer where the solution is running. Once the decision has been made on supplier direct VS client direct and hosted VS cloud then next decision should in terms of scalability in terms of regulation. You and your client should have a discussion about their currently regulatory and future regulatory landscape. Does your client sell into Europe? In which case they will have to comply with REACH. Are they in electronics? They might have to comply with RoHS. It is very important when selecting a software platform that it is both usable and affordable to use for other regulations. Purchasing a solution that is only usable for one restricted or compliance required substance list is inefficient. Once the decisions have been made around how broad reaching the software solution should resemble its time to source conflict mineral firms. The leading solution providers in each sphere are as follows: Cloud Based/Client Direct: Assent Compliance ( Hosted/Client Direct: PTC ( ) Cloud Based/Supplier Direct: ipoint ( ) 13

14 ITEMS TO NOTE WHEN SOURCING: Does the client have experience in your vertical? Is the solution usable for other regulations in the future? How much to add modules in the future? Can you outsource data analysis or supply chain work to the vendor if warranted? Are there any law firms the vendor is currently working with? WHAT TO ASK DURING AN IT PRESENTATION? Show us a copy of an implementation plan for your solution Will you come on site for a presentation Show how your system handles conflict mineral compliance end to end Please outline your process methodology and why its best for our client Show us how you save on supplier touch time and data analysis Can your solution integrate with ERP/PLM systems CORE FEATURES THAT ARE NEEDED: Mechanism to gather data from suppliers Data analytics and reporting on collected info Detailed reports on supplier response rate / missing info Ability to attach / map tier 2-3 suppliers to tier 1 Task assignment and CRM capabilities 14

15 Once the presentation portion of the selection process has been finalized and it comes time to select the vendor there are several other best practises to consider: 1. Involve IT Early: Include the IT department from the beginning to ensure that the set up process identified by the vendor is one that can work with current IT in place at the firm. Bringing IT to the table late in the game only to find major road blocks presents a major challenge. 2. Requirements Definitions: Make sure you outline all your requirements very clearly. The last thing anyone wants is scope creep which could cause more costs for your firm and more headaches for your vendor. Be very clear when outlining requirements. 3. End User Approval: Ensure that the power users of the system who will be doing the majority of the use time give their approval. In many cases management procures a system and the actual users disagree with the choice. Make sure selection is agreed on internally by the major users of the platform. AVOIDING THE CONFLICT MINERAL MICROCOSM: At the heart of Dodd Frank Conflict Mineral Compliance is the fact that these minerals are just like any other restricted or regulated substance. These regulations are becoming more and more prevalent. One just has to look at the EU REACH Regulation, RoHS, Proposition 65, CEPA 99 and the list goes on. This means that as the regulatory landscape expands that companies will need scalable platforms to manage and track RSL (restricted or regulated substance list) substances. Looking at Conflict Minerals in a microcosm will only see your firm scramble to meet the next RSL requirement with a new solution which all tolled would be an inefficient and IT intensive process. For all intents and purposes the solution/firm selected for Dodd Frank should offer the flexibility to be used for the following at a base level: Customizable supply chain materials data collection Modules or expandability to REACH RoHS and other RSL A holistic approach to compliance Proof that the module has been expanded from previous iterations 15

16 WHAT DIVISIONS/DEPARTMENTS YOU NEED TO INVOLVE/INCLUDE AND WHY When your company falls in scope of an RSL (restricted/regulated substance list) there are multiple touch points within the company. Conflict Minerals and other RSLs can include: QUALITY AND/OR REGULATORY COMPLIANCE: With most RSL s the first stop is with the quality department or compliance department. In many larger firms there will be both a compliance and a quality department. In this case it s important to ensure no overlap in effort and keeping each division in the know is especially important from a managerial perspective. ENGINEERING: Conflict mineral compliance is unique in that the substances are not restricted. Therefor there isn t a large need to include engineering except to assist with scope identification. Engineering will be needed to determine the presence of 3TG s in your product portfolio. After the initial scope assessment it is not mission critical that engineering be involved with the conflict mineral program unless your firm combines engineering and quality/regulatory into the same division. PROCUREMENT/SUPPLY CHAIN: As the largest exercise for conflict mineral compliance is the RCOI (reasonable country of origin inquiry) from the supply chain its imperative that procurement and supply chain divisions be included in the compliance program from the beginning. As with most regulated substance compliance initiatives, compliance/quality and procurement will have to work hand in hand throughout the program. LEGAL: As conflict mineral legislation involves submissions to the SEC most firms have opted to either develop their program with their legal counsel or have them review the chosen program, The legal counsel in some cases have stewarded the entire process. In any case it s advisable to include legal either at the beginning of the program or the end to ensure that the conflict mineral compliance initiatives are in line with your firm s current legal position. 16

17 ACCOUNTING: Conflict mineral compliance does involve audit which naturally involves your accountant. Some firms have opted to use their accountant s management consulting arms to help build their programs similar to the steward ship process where firms have included their legal counsel. The best practise for the higher level professional services (namely legal and accounting) have tended to trend towards helping set up the program at the beginning and reviewing results at the end. In this sense the use of legal and accounting share some overlapping similarities. IT: As part of the RCOI (reasonable country of origin inquiry) firms must survey their supply chain. This must also be done year over year. This means sourcing a solution to procure that data in a scalable, repeatable means. Doing this task manually by is wildly inefficient and therefor sourcing an IT solution or using an incumbent one is necessary. Involving IT early in the process is an absolute best practise since the program will largely be centreed around procured data, its analysis and reporting on that data. 17

18 CONFLICT MINERALS AND YOUR SUPPLY CHAIN STEP 1 SCOPE ANALYSIS Determining which of your suppliers are in scope is the first step. Some companies have thousands of suppliers but many of which are service providers (legal, accounting), provide products or articles but they do not go into products that are sold to consumers (janitorial supplies, print suppliers, marketing products). Some suppliers might supply products that go into consumer facing goods but there is no chance of them containing 3TGs (wood and plastic suppliers for example). Doing a thorough scope analysis usually with a member of the engineering team and the procurement team will start the program with the most efficiency and eliminate contacting suppliers erroneously. SCOPE ANALYSIS CHEAT SHEET: Are they a service provide? Delete Do their products go into your end product sold to your customers? If No Delete Does what they supply contain: Tin, Tungsten, Tantalum or Gold? If Yes Include If Unsure Do they supply metals? If Yes Include a sample usually of the suppliers that represent the largest spend. STEP 2 GATHERING CONTACTS The first challenge with conflict mineral data procurement for the RCOI is obtaining the proper contacts within your supply chain. While sales contacts usually jump at the opportunity to speak with you, locating compliance officers can be more challenging. The best approach is as follows: Your procurement division will have the most up to date contacts for suppliers but they are usually a sales contact or a generic to place orders. (E.g.: sales@acme.com). Finding an actual contact is the first step. If there is no contact, starting with the contact page on the suppliers website and associated s does, in most cases, get directed to the appropriate personal it may just take longer than anticipated. If sales thinks noncompliance may affect getting a PO or as a latent function, their commission could be in jeopardy they will act quickly and escalate the matter. Sales contacts are second best, aside from the person directly heading up the CM compliance initiative. (Usually in compliance, quality or supply chain). 18

19 A central database should be established where contacts can be updated and shared among divisions for maximum efficiency Procurement Engineering / Design Compliance STEP 3 CONTACTING SUPPLIERS Once the correct contacts have been found, contacting suppliers is the next step. This step can involve massive amounts of data depending on your supply chain. This step is also the most useful to use a software application to manage the process. The ideal steps are as follows: Send a notification noting that you will be requesting CM compliance info in the near future. If you are using a third party vendor to manage this process this notification is essentially an authorization . (See example in Resources section). This ensures: You have the right contact That there are no surprises when you make your request That your compliance vendor (if you have elected to use one) has your authorization to procure this data from your supply chain»» That suppliers know what format or means of delivery you want the data submitted (through a portal, in the GESI form, COC PDF, custom survey etc.) Send your information request with delivery method and make it as easy as possible. Keeping in mind that some suppliers might be hearing about CM compliance requirements for the first time its important that this information request give the suppliers all the tools they need to quickly and easily comply in a fashion that is congruent with your program. For example: If you have elected to have suppliers submit info through a web portal or fill out a custom survey it is important that they are made aware they can t you a MS word document. This should include: Polite info request with reason Form or survey link Education link Example of a correctly filled out form or survey Clear instructions on how to complete and how not to complete (Responses delivered via X will not be accepted) Contact person for question Links to resources 19

20 STEP 4 TRACK YOUR PROGRESS AND ANALYZE YOUR DATA TRACK YOUR SUPPLIER PROGRESS When dealing with supply chains you will have waves of responses depending on the size and readiness of the suppliers. Centralized information will help you compliance team increase efficiency in contacting all suppliers When a supplier has provided the information make sure it s noted so that the same supplier isn t contacted multiple times for information they already have provided. Ensure that you measure the touch time required and look at automated solutions for supply chains larger than 100 suppliers. Ensure that your process can be replicated easily in the event that there is a new restricted or regulated substance(s) DEALING WITH RESPONSES: Typically companies follow an escalation process. (See attached Process Maps). Responses can typically be broken down into the following categories: Supplier responds appropriately: This is the ideal situation. Data should be stored and a process for replicating this data collection means should be saved. (I.e.: We deal with Dave at Acme for compliance. In the future Dave who knows about compliance program and knows how to respond appropriately). Typically noting this in your data collection platform is ideal. Supplier Responds but does not provide info: This is common at the beginning phases of any new controlled substance. Notes should be made to follow up with this supplier at a mutually agreed upon date. If this is the correct contact it should also be noted for future compliance requests. Supplier does not respond: This means that you either have the wrong contact, the did not go through (spam filter) or they are working on finding the information but didn t reply. In most escalation cases there is a finite window and then a second is sent with a new contact added as CC (carbon copy) Supplier does not respond (second request): After the window has lapsed and a second contact has been added typically these suppliers are escalated and a phone call is made. These responses should be tracked in a CRM or compliance management system that allows notes to be made on suppliers and their status. Delinquent: If 2 s have been sent to multiple contacts and a call has been made a supplier then typically becomes delinquent. This is where a business decision must be made to continue purchasing from this supplier, attempting to procure the data alternatively (checking their website, data mining) or assuming the risk of having a gap in the program. 20

21 ANALYZE YOUR DATA: It is easiest and most efficient to monitor and analyze your data as it is procured rather than at the end of the process. The best way to approach analysis is through a data aggregator that will show en mass the responses to your survey or questions. (E.g.: Show me everyone who responded X to Question 2 on the survey). Then follow up accordingly. If you do not have this mechanism in place then manual review and a tracking/analysis process must be established. 21

22 CONFLICT MINERAL IMPLEMENTATION PLANS 22

23 WHAT A CM PROGRAM IMPLEMENTATION PLAN LOOKS LIKE IMPLEMENTATION PLAN OVERVIEW PHASE 1A Regulatory Assessment and Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting 23

24 PHASE 1A Legend: CC: Conference Call C&A: Check and Adjust REGULATORY ASSESSMENT AND TECHNICAL DOCUMENT Phases PHASE 1A Regulatory Assessment & Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting Roles & Responsibilities ASSENT A. Client communication and applicable questionnaires for detailed product line evaluations B. Evaluation of responses, clarification and feedback C. Examination of scope and risk D. Corporate level requirements E. Determination of regulatory requirements F. Determination of business requirements G. Comparison to industry standards and best practices H. Recommendations for compliance I. Determination of key regulatory compliance decision points J. Creation of Conflict Minerals Technical Document C&A >3 weeks: Weekly CCs necessary for all groups? ACME Corp. A. Communication of ACME Corp. product, corporate and supply chain information to Assent Compliance B. Q&A discussions C. Participation by Regulatory Compliance and Legal in Resolution Committee Resources Assent As needed Quality Weekly CC 4-6 hours Q&A Regulatory Compliance Weekly CC hours Q&A Engineering Weekly CC 4-6 hours Q&A Procurement/ Supply Chain Weekly CC hours Q&A Legal Weekly CC hours Q&A Finance Weekly CC hours Q&A Deliverables: Conflict Minerals Technical Document Resolution Committee Issues addressed on case-by-case basis 24

25 PHASE 1B ONSITE WORKSHOP Phases PHASE 1A Regulatory Assessment & Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting Roles & Responsibilities ASSENT A. Regulatory education/training B. Review of Technical Document findings Compliance activity training Reviewing COCs Applications of OECD due diligence Test report review Supplier engagement C. Questions and answers D. Discussion and resolution of key decision points E. Begin Compliance Plan outline ACME Corp. A. Communication of ACME Corp. product, corporate and supply chain information to Assent Compliance B. Appropriate personnel at workshop to decide on key program decision points Resources Assent As needed Quality 8 hours Regulatory Compliance 8 hours Engineering 8 hours Procurement/ Supply Chain 8 hours Legal 8 hours Finance 8 hours Deliverables: Conflict Minerals Education and Planning 25

26 PHASE 1C Legend: CC: Conference Call CREATION OF COMPLIANCE PLAN Phases PHASE 1A Regulatory Assessment & Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting Roles & Responsibilities ASSENT A. Creation of end-to-end compliance process B. Documentation of all ACME Corp. compliance activities by regulation C. All activities detailed in chronological order from beginning to end D. Activities assigned to specific internal personnel E. Creation and application of due diligence standards F. Responsibilities assigned for creation of SEC compliance documentation G. Determination of compliance communication pathways H. Scheduled annual Compliance Plan review as part of due diligence and optimization for new business ACME Corp. A. Communication of ACME Corp. product, corporate and supply chain information to Assent Compliance B. Occasional Q&A on day-to-day Conflict Minerals activities C. Participation by Regulatory Compliance and Legal in Resolution Committee Resources Assent As needed Quality Weekly CC 4-6 hours Q&A Regulatory Compliance Weekly CC hours Q&A Engineering Weekly CC 4-6 hours Q&A Procurement/ Supply Chain Weekly CC hours Q&A Legal Weekly CC hours Q&A Finance Weekly CC hours Q&A Deliverables: ACME Corp. Conflict Minerals Standard Operating Procedures Resolution Committee Issues addressed on case-by-case basis 26

27 PHASE 2 Legend: CC: Conference Call SOFTWARE SET-UP Phases PHASE 1A Regulatory Assessment & Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting ASSENT Project Manager ASSENT Data Administration ACME Corp. Roles & Responsibilities A. Communication with client B. Establish/meet project objectives C. Maintain timelines and manage implementation process D. Assign and manage work flow E. Provide updates to ACME on any changes to regulatory requirements affecting ACME products A. Maintain and update database with changes to suppliers/supply chain B. Update database with pertinent regulatory changes C. Help desk support for internal and external users D. Assent Compliance will maintain and update ACME Corp. s database with changes to suppliers via AP Integration with PDMs and ICCS E. Database integration and security F. Formatting set-up G. Interface configuration A. IT permission for ERP/PLM access B. Extraction of supplier and product data for submission to Assent Compliance s database C. Feedback on configurations D. Occasional Q&A on day-to-day Conflict Minerals activities E. Participation by Regulatory Compliance and Legal in Resolution Committee Resources Assent As needed Regulatory Compliance Weekly CC hours Q&A Procurement/ Supply Chain Weekly CC hours Q&A Legal Weekly CC 2 hours Q&A IT Weekly CC hours Q&A as well as providing SAP Access Deliverables: A. Project management and database administration B. Database integration and security C. Interface configuration Resolution Committee Issues addressed on case-by-case basis 27

28 PHASE 3 Legend: CC: Conference Call RMC: Risk Mitigation Committee SUPPLIER ENGAGEMENT Phases PHASE 1A Regulatory Assessment & Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting Roles & Responsibilities ASSENT A. Supplier portal set-up B. Supplier portal maintenance C. Supplier education D. Supplier support E. Supplier training F. Reasonable country of origin inquiry ( RCOI) G. Data gathering and analysis H. Supply chain mapping I. Application of OECD Due Diligence audit trails J. Task management ACME Corp. A. Participation by appropriately assigned ACME Corp. staff members in monthly Conflict Minerals Risk Mitigation Committee B. Occasional Q&A on day-to-day Conflict Minerals activities C. Participation by Regulatory Compliance and Legal in Resolution Committee Resources Assent As needed Quality Monthly RMC CC hours Q&A Regulatory Compliance Monthly RMC CC hours Q&A Engineering Monthly RMC CC 5-10 hours Q&A Procurement/ Supply Chain Monthly RMC CC hours Q&A Legal Monthly RMC CC 5 hours Q&A Finance Monthly RMC CC 5 hours Q&A Deliverables: A. Supplier portal setup and maintenance B. Supplier education, support and training C. Reasonable Country of Origin Inquiry D. Application of OECD due diligence audit trails Resolution Committee Issues addressed on case-by-case basis 28

29 PHASE 4 REPORTING Legend: CC: Conference Call RMC: Risk Mitigation Committee Phases PHASE 1A Regulatory Assessment & Technical Document PHASE 1B Onsite Workshop PHASE 1C Creation of Compliance Plan PHASE 2 Software Set-Up PHASE 3 Supplier Engagement PHASE 4 Reporting Roles & Responsibilities ASSENT Form SD Completion A. Disclosure of Conflict Minerals determination B. Description of Reasonable Country of Origin methodology C. Description of applied OECD due diligence standards D. Description of applied corrective actions E. Description of Conflict Minerals compliance process and plan F. Disclosure of internet website address where this information can be accessed publicly G. Conflict Minerals report creation ACME Corp. A. Occasional Q&A on day-to-day Conflict Minerals activities B. Participation by Regulatory Compliance and Legal in Resolution Committee C. Sign-off on Form SD and Conflict Minerals Report by Legal and Finance ASSENT Form SD Completion A. The products manufactured or contracted to be manufactured that have been found to be not DRC Conflict Free B. The facilities used to process the conflict minerals in those products C. The country of origin of the conflict minerals in those products D. The efforts to determine the mine or location of origin with the greatest possible specificity What is Conflict Minerals Determination DRC Conflict Free DRC Conflict Undeterminable A. Its products manufactured or contracted to be manufactured that are DRC Conflict Undeterminable B. The facilities used to process the Conflict Minerals in those products, if known C. The country of origin of the Conflict Minerals in those products, if known D. The efforts to determine the mine or location of origin with the greatest possible specificity E. The steps it has taken or will take, if any, since the end of the period covered in its most recent Conflict Minerals report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve due diligence INDEPENDENT PRIVATE SECTOR AUDITOR CONFLICT MINERALS REPORT AUDIT A. Independent private sector audit of the Conflict Minerals report C. The audit report B. Certification of audit D. Identity of the auditor Resources Assent As needed Quality Monthly RMC CC 5 HRS Q&A Regulatory Compliance Monthly RMC CC 5-10 HRS Q&A Engineering Monthly RMC CC 5 HRS Q&A Procurement/ Supply Chain Monthly RMC CC 5-10 HRS Q&A Legal Monthly RMC CC HRS Q&A Form SD Sign Off Finance Monthly RMC CC HRS Q&A Form SD Sign Off Deliverables: A. Form SD Completion B. Conflict Minerals Report Creation Resolution Committee Issues addressed on case-by-case basis 29

30 PARTNER INTRODUCTION Assent Compliance has been fortunate enough to work with some of the world s leading Accounting/Audit and Law Firms. Our legal and accounting partners have each had unique perspectives on compliance and have dealt with a wide variety of clients in many different sectors. We ve asked that our partners examine Conflict Mineral Compliance from their own lens and provide executive readers with the need to know information when it comes to compliance. We d like to thank our partners for their contributions. 30

31 YOUR LAW FIRM & CONFLICT MINERALS YOUR LAWYER S ROLE IN COMPLYING WITH THE SEC S CONFLICT MINERALS REPORTING REQUIREMENTS By: Melvin Schwechter of Baker Hostetler 1 When Congress passed Section 1502 of the Dodd- Frank Wall Street Reform and Consumer Protection Act in 2010, it, no doubt, thought it was adopting an approach to address the use of conflict minerals (tin, tantalum, tungsten, and gold ( 3TG )) originating in the Democratic Republic of the Congo ( DRC ) or its adjoining countries to fund conflict there that would result, relatively quickly, in the Securities and Exchange Commission ( SEC ) adopting final implementing regulations, and in companies moving forward to comply with their requirements. Fast forward more than three years later to see that in light of the host of critical implementing issues left unresolved by the statutory language, and the vast numbers of public comments that were submitted on the proposed regulations: i. It took the SEC until August 2012, more than 15 months beyond the original April 2011 deadline, to issue final implementing regulations; ii. iii. Litigation, so far unsuccessful, was brought against the SEC to overturn the final regulations that were issued; and Most importantly, some companies subject to the new regulations have reportedly not yet begun, in any serious way, to undertake to gather the information needed for them to file the first required conflicts minerals disclosure report to the SEC by the May 31, 2014 deadline. 1 Melvin Schwechter is the National Team Leader of Baker Hostetler s International Trade Compliance Practice. 31

32 When they do begin this effort, they will quickly discover that they will need the assistance, not only of consultants who can reach out to suppliers to gather the information the companies will need to include in their reports to the SEC on the use and origin of 3TG, and assemble it, as required, but also of attorneys to advise them on the myriad of legal issues that arise in complying with the new regulations. These include: 1. Who is required to report? While the regulations apply to SEC issuers, the questions of who exactly is an issuer and to what extent do the activities of domestic and foreign related companies and affiliates have to be included in the disclosure requirements, need to be addressed. 2. What is contracting to manufacture? While the regulations require disclosure of the use/origin of 3TG in products manufactured or contracted to be manufactured by the reporting entity, there is little detailed guidance as to what constitutes contracting to manufacture. The regulations indicate that a contracting to manufacture scenario will exist if the issuer exerts some actual influence over a product s manufacture, and provide a few examples of certain activities that do not involve contracting to manufacture slim guidance indeed, particularly for companies in the business of retailing that enter into a variety of different kinds of relationships with vendors. 3. When are conflict minerals necessary to the functionality or production of a product? Reporting is required only for 3TG that are necessary to the functionality or production of a product a company manufactures or contracts to manufacture. The regulations adopt a facts and circumstances test, outlining a variety of factors that point either to the conflict minerals being necessary, or not necessary, to the functionality or production of the product. Disclosing companies need to know how to interpret those factors and properly apply them to a specific set of facts assistance their counsel can provide. 4. What constitutes a reasonable country of origin inquiry? The regulations require that where the subject minerals are necessary to the functionality or production of a product, manufactured or contracted to be manufactured by the reporting company, a reasonable country of origin inquiry be undertaken to determine whether the minerals originated in the DRC or adjoining countries, or are from recycled or scrap sources. The SEC s regulations again adopt a facts and circumstances approach, requiring companies to take into account such things as the issuer s size, products, relationships with suppliers, or other factors and the available infrastructure at any given time. What is reasonable is an issue on which experienced attorneys can provide needed advice. 32

33 5. When must due diligence be undertaken? The SEC regulations require that, if, after a reasonable country of origin inquiry is undertaken, the issuer knows or has reason to believe its 3TG minerals may have originated in the DRC/its adjoining countries and may not have come from recycled or scrap sources, the issuer must exercise due diligence on the source and claim of custody of the minerals. Here again, experienced counsel, particularly those with supply chain experience, can assist in determining when the required legal standard is met. 6. What is involved if due diligence must be undertaken? Due diligence must follow a nationally or internationally recognized due diligence framework for the 3TG in question. Counsel can help their clients identify such a framework, whether that provided by the OECD, or other, and advise the reporting entity how such diligence needs to be conducted. 7. When and how must an outside audit of due diligence findings occur? A certified independent private sector audit of the due diligence findings is required, unless such findings result in a determination that the 3TG did not originate in the DRC or an adjoining country, or are from recycled or scrap sources. Here again, attorneys can work with their issuer clients to prepare for the audit and advise regarding outside audit requirements. 8. Preparing the submission to the SEC Once all the required information flowing from the reasonable country of origin inquiry and related due diligence, as well as the results of any outside audit, if necessary, has been gathered, the issuer needs to (i) prepare a submission to the SEC by May 31, 2014 (covering 2013 activities), and annually thereafter, and (ii) include the information on its internet website. Guidance of counsel will be important in making sure the submission contains the required information and the proper justifications for the conflicts minerals determinations the issuer must make. 9. What will happen if an issuer fails to gather and report all information needed to comply fully with its disclosure obligations? The submission to the SEC of false or incomplete information can result in a variety of responses/enforcement actions. Advice as to what is likely to happen in each kind of situation is a uniquely legal function. Thus, a company subject to the conflicts minerals regulations needs to put together a proper multidisciplinary team to include not only software database consultants, but attorneys, as well, to address their requirements. In addition to helping issuers meet their compliance obligations under the SEC s regulations, there are two other critical roles counsel can play in the conflicts minerals space. 33

34 First, while not specifically prohibiting/penalizing the use of 3TG from the DRC or its adjoining countries, Congress has clearly signaled that their use is to be strongly discouraged. As a result, many companies, whether issuers or not, are reviewing, in conjunction with their lawyers, their policies in this area and establishing new ones. Second, where a contracting to manufacture scenario exists, issuers need to reach out to their suppliers to gather the information they will need for purposes of their submissions to the SEC. In many cases, these suppliers will not themselves be issuers and, particularly where they are based overseas, may be unfamiliar with, or not understand, the reasons why their customers are seeking the subject information. In these cases, US counsel can provide the necessary explanations, clarifications, and context, and advise the vendors as to the most effective and efficient ways to meet their customers requests and expectations. 34

35 CONFLICT MINERAL DILIGENCE Michael Littenberg and Farzad Damania, Schulte Roth & Zabel LLP, with Practical Law Corporate & Securities This article provides an overview of the Conflict Minerals Rule and its requirements for legal, supply chain, corporate social responsibility and other professionals involved with Conflict Minerals Rule compliance. 35

36 CONFLICT MINERALS DILIGENCE MICHAEL LITTENBERG AND FARZAD DAMANIA, SCHULTE ROTH & ZABEL LLP, WITH PRACTICAL LAW CORPORATE & SECURITIES This Note explains and offers guidance on the diligence required by the Securities and Exchange Commission s final rule (Rule 13p-1 under the Exchange Act) implementing Section 1502 of the Dodd- Frank Act, the conflict minerals provision. This is just one example of the many online resources Practical Law Company offers. To access this resource and others, visit Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a significant number of SEC reporting companies to make specialized disclosure and conduct related diligence concerning specified minerals and their derivative metals contained in the companies products. The minerals and metals covered by the rule, which are included in many common products, include: Cassiterite Columbite-tantalite (coltan) Wolframite Tin, tantalum and tungsten, which are derivatives of these minerals. These metals are often referred to as the three Ts. Gold Other minerals or derivatives the US Secretary of State may designate in the future. The sale of these minerals, which Section 1502 defines collectively as conflict minerals (regardless of their origin), is believed to be financing conflict in the Democratic Republic of the Congo (DRC). The intent of Section 1502 is to reduce a significant source of funding for armed groups that are committing human rights abuses and contributing to conflict in the DRC. Under the SEC s rule implementing Section 1502, Rule 13p-1 (the conflict minerals rule) under the Securities Exchange Act of 1934 (Exchange Act), companies that manufacture or contract to manufacture products that contain conflict minerals generally must conduct diligence on the source and chain of custody of the applicable conflict minerals. In some cases, the company will be required to publicly disclose that its products containing the minerals have not been found to be DRC conflict free. 36

37 When possible, companies are expected to preemptively make changes to their supply chains in response to the rule to avoid having to disclose that their products have not been found to be DRC conflict free. This Note discusses: Which companies are affected by the conflict minerals rule. The effective date of the rule s diligence and disclosure requirements. The three main steps of conflict minerals diligence that reporting companies may need to conduct depending on whether their products contain conflict minerals and, if so, the minerals country of origin. The independent private sector audit that the rule requires under certain circumstances. For information on resources that may assist companies in their conflict minerals rule compliance programs, see Practice Note, Conflict Minerals Rule Compliance Resources: For a checklist that suggests action items for companies preparing to comply with the conflict minerals rule, see Preparing for Conflict Minerals Compliance: Company Action Items Checklist: COVERED COMPANIES AND EFFECTIVE DATE This section discusses the broad range of companies that are affected by the conflict minerals rule and details when compliance obligations begin. WHO MUST CONDUCT CONFLICT MINERALS DILIGENCE? The conflict minerals rule applies only to reporting companies, meaning companies that file reports with the SEC under Section 13(a) or 15(d) of the Exchange Act. This includes voluntary filers, but excludes companies exempt from Exchange Act reporting requirements under Rule 12g3-2(b). Unlike some other Dodd-Frank rule-making initiatives, the conflict minerals rule does not exempt foreign private issuers (FPIs) or smaller reporting companies (SRCs). The conflict minerals rule also does not offer any special relief for emerging growth companies, although a newly public company is only required to start reporting for the first calendar year that begins no sooner than eight months after the effective date of the company s IPO registration statement (see When Must Companies Conduct Diligence and Make Disclosure?). A reporting company must conduct conflict minerals diligence and make disclosure with respect to its operations and the operations of its consolidated subsidiaries (Question 3, Dodd-Frank Wall Street Reform and Consumer Protection Act Frequently Asked Questions: Conflict Minerals (May 30, 2013) (conflict minerals FAQs)). In this Note, the term company refers to a company and its consolidated subsidiaries. 37

38 Because every reporting company must determine whether it uses conflict minerals in a way that triggers the rule (see Diligence Step 1: Ascertain the Company s Use of Conflict Minerals), all reporting companies must conduct some level of inquiry under the conflict minerals rule. By the SEC s estimate, approximately 6,000 reporting companies will need to conduct a reasonable country of origin inquiry concerning the conflict minerals they use and make some disclosure on new SEC Form SD and on their website (see Diligence Step 2: Determine Minerals Country of Origin). The SEC has further estimated that 75%, or approximately 4,500, of those companies will also need to conduct more detailed supply chain due diligence and prepare a conflict minerals report to be filed as an exhibit to Form SD, among other requirements (see Diligence Step 3: Detailed Due Diligence and Reporting on Supply Chain). In this Note, companies that are required to make any form of conflict minerals disclosure because they use the minerals in a way that triggers the rule are referred to collectively as affected companies. Although the conflict minerals rule technically applies only to reporting companies, it also significantly impacts non-reporting companies worldwide that are directly or indirectly a part of the supply chains of reporting companies. This is because affected reporting companies must collect information from companies in their supply chains. Some estimates place the number of affected nonreporting companies in the hundreds of thousands, ranging from small businesses to large companies and both domestic and foreign. Therefore, many non-reporting companies also must be familiar with the conflict minerals rule. WHEN MUST COMPANIES CONDUCT DILIGENCE AND MAKE DISCLOSURE? Under the conflict minerals rule, all affected companies, regardless of their fiscal year, must make conflict minerals disclosure for the first time by May 31, This disclosure must cover the 2013 calendar year. Some newly public companies will be able to take advantage of a one-year extension (see Acquired and New Public Company Extension). Affected companies must make conflict minerals disclosure annually thereafter by May 31 of each year, covering the most recently-completed calendar year. Disclosure Requirements The conflict minerals rule requires affected companies to make disclosure on Form SD, and in some cases on an exhibit to the form. Both Form SD and this exhibit must be filed, rather than furnished, with the SEC. This means companies have potential liability under Section 18 of the Exchange Act for heir conflict minerals disclosure. Form SD will not, however, be incorporated by reference into a company s registration statements under the Securities Act of 1933 unless the company elects to do so. In addition, failure to timely file a Form SD does not impact a company s eligibility to use Form S-3 (Question 12, conflict minerals FAQs). For more information on S-3 eligibility, see Practice Note, Registration Statement: Form S-3: Eligibility Requirements for Form S-3. 38

39 Affected companies also must post certain conflict minerals disclosure on their websites. The rule requires increasing levels of diligence and disclosure depending on a company s use of conflict minerals and country of origin of the minerals (see Box, Diligence Flow Chart, pg 55). Diligence Requirements Under the rule, an affected company must make disclosure about conflict minerals contained in the company s applicable products that were manufactured during the calendar year covered by the report (Instruction 5 to Item 1.01, Form SD). The key date here is the day that the manufacture of each finished product containing conflict minerals is completed. Therefore: A company that manufactures its own products must look to the date it completes manufacture of each product containing conflict minerals. Even if the conflict minerals in a company s product are included in component parts of the product that were themselves manufactured by a third party, a company must always look to the date the manufacture of its own final product was completed. A company that is required to report on conflict minerals manufactured by a third-party contract manufacturer must look to the date that third party manufacturer completes manufacture of the company s product, and not to the date of delivery. This means that, for purposes of the first required conflict minerals disclosure due May 31, 2014, companies generally must conduct diligence and report on conflict minerals in their products that had a completion of manufacture date between January 1, 2013 and December 31, Acquired and New Public Company Extension The conflict minerals rule provides relief to any reporting company that acquires a target company that both: Uses conflict minerals in a way that triggers the rule. Was not, before the acquisition, required to make conflict minerals disclosure (for example, because it was not a reporting company). In this situation, the acquirer is not required make conflict minerals disclosure about the target company s conflict minerals until the end of the first calendar year beginning eight months or more after the effective date of the acquisition (Instruction 3 to Item 1.01, Form SD). The staff of the SEC s Division of Corporation Finance (staff) has stated that it will not object if a newly public company begins making conflict minerals disclosure on this same timeline (Question 11, conflict minerals FAQs). In other words, a new public company can make its first conflict minerals disclosure for the first calendar year that begins eight months or more after the effective date of its IPO registration statement. This means that a company that goes public any time after May 1 of a 39

40 given calendar year will not have to make conflict minerals disclosure for that year. Company Compliance Progress Companies remain at different stages of the compliance implementation process. For a detailed list of actions companies in the earlier stages of implementing their conflict minerals rule compliance program should consider, see Preparing for Conflict Minerals Rule Compliance: Company Action Items Checklist ( 7468). For a summary of disclosure discussing compliance efforts that some companies have included in their periodic reports, see Practice Note, What s Market: Disclosure on Conflict Minerals Risks 2013 ( LEGAL CHALLENGE TO SECTION 1502 AND THE CONFLICT MINERALS RULE In October 2012, a group of business organizations filed suit in the US Court of Appeals for the District of Columbia Circuit against the SEC (National Association of Manufacturers, et al. v. U.S. Securities and Exchange Commission, No (D.C. Cir., filed October 19, 2012)). On May 2, 2013, the case was transferred to the US District Court for the District of Columbia (National Association of Manufacturers, et al. v. U.S. Securities and Exchange Commission, 1:13-cv RLW (D.D.C., transferred May 2, 2013)). The suit sought to vacate or modify the conflict minerals rule, arguing that it is arbitrary and capricious under the Administrative Procedure Act. The suit also challenged both the rule and Section 1502 under the First Amendment to the US Constitution. On July 23, 2013, the District Court granted summary judgment to the SEC, rejecting the challenge to the conflict minerals rule and Section The decision means that the conflict minerals rule continues in effect as adopted. On August 13, 2013, the business organizations appealed to the Court of Appeals (National Association of Manufacturers, et al. v. U.S. Securities and Exchange Commission, No (D.C. Cir., filed Aug. 13, 2013)). The Court of Appeals is considering the appeal on an expedited schedule that requires the reply brief to be filed by November 13, For more information on the litigation and links to and summaries of key court documents, see Practice Note, Conflict Minerals Rule Challenge: Litigation Tracker ( Considering a Possible Appeal in Compliance Planning The Court of Appeals could disagree with the District Court and vacate the conflict minerals rule on appeal. Companies naturally might want to wait until the appeal is resolved to begin their compliance efforts. However, considering that the first Form SD is due on June 2, 2014, companies are unlikely to have enough of a cushion to wait for resolution of the appeal before implementing their compliance programs. 40

41 Companies may also wish to consider that even if the conflict minerals rule is eventually struck down on appeal, some level of diligence into the source of minerals in company products may still be necessary: To address customer conflict free supply chain initiatives and supply chain mapping. To protect the company s reputation and brand image. In light of the expected demand for conflict free sourcing by many non-governmental organizations (NGOs), socially responsible investors and consumer groups. Companies that have already expended significant effort to establish conflict free supply chains will likely continue these initiatives regardless of the litigation s outcome. Other companies are expected to remain focused on creating a conflict free supply chain as part of their broader corporate social responsibility program, to obtain a competitive advantage in the marketplace or to avoid adverse publicity. STEPS OF THE CONFLICT MINERALS DILIGENCE PROCESS This section discusses the steps of the conflict minerals diligence process. Depending on what the company learns in each step, the rule may or may not require the company to continue to the next step. For a flow chart depicting the three steps of conflict minerals diligence, see Box, Diligence Flow Chart. DILIGENCE STEP 1: ASCERTAIN THE COMPANY S USE OF CONFLICT MINERALS Step 1 of the diligence process involves determining whether conflict minerals are contained in products manufactured or contracted to be manufactured by the company and, if so, whether those conflict minerals are necessary to the functionality or production of the products. If they are not, the company has no obligations to make disclosure or conduct further diligence under the rule. This question can be broken down into three separate diligence inquiries, discussed in this section. If the company answers all three of these questions affirmatively, it must move on to diligence Step 2 (see Diligence Step 2: Determine Minerals Country of Origin) unless the relevant minerals qualify for a limited exception based on the fact they were refined or removed from the DRC region before January 31, 2013 (see Outside the Supply Chain Exception). Does the Company Manufacture or Contract to Manufacture Products? The conflict minerals rule only applies to companies that manufacture or contract to manufacture products. The rule does not define these terms, and the adopting release notes the term manufacture is generally understood. Companies engaged in fabricating products are clearly covered by the rule, even if the products they make contain components themselves manufactured by third parties. However, it is less clear whether companies that sell products, but do not make them, are covered. These 41

42 companies, including retailers, must determine whether they contract to manufacture products using the guidance in the adopting release. According to the adopting release, whether a company has contracted to manufacture a product depends on the degree of influence the company exercised over the product s manufacture, meaning its materials, parts, ingredients or components. While this standard is not triggered by the company having simply any influence over the manufacture, it can be triggered by a level of influence less than substantial. For example, a telephone network operator that orders telephones from a third party manufacturer probably has not contracted to manufacture those telephones if it simply tells the third party the phones must work on the operator s network (even though the company has exercised some influence over the manufacturing). However, a retailer that specifies that gold must be included in a product it orders from a third party manufacturer would have contracted to manufacture the product (even though this might not constitute substantial influence over the manufacturing). Furthermore, there is no distinction between the components of a product that a company directly manufactures or contracts to manufacture and generic components that are included in a product. Therefore, a company would have to conduct a reasonable country of origin inquiry with respect to the conflict minerals included in generic components included in a product to the extent the product and the conflict minerals are otherwise in scope (Question 5, conflict minerals FAQs). The release goes on to specify that a company generally has not contracted to manufacture a product if it does no more than: Specify or negotiate contract terms with a manufacturer that do not directly relate to the manufacturing of the product (for example, technical support or indemnity terms). Affix the company s brand, marks, logo or label on a generic product manufactured by a third party, including contracting to have the company s logo etched into a generic product (see additional guidance in Question 4 of the conflict minerals FAQs). Service, maintain or repair a product manufactured by a third party. Mining companies should note that, under the rule, companies that mine conflict minerals or contract for conflict minerals to be mined are not covered by the rule solely because of their mining activities (Instruction 1 to Item 1.01, Form SD). The staff has confirmed that companies that engage in certain activities associated with mining (such as transporting, crushing and milling ore) are also not covered by the rule solely because of these activities (Question 2, conflict minerals FAQs). While the term product is not defined in the conflict minerals rule, the staff has offered guidance on its meaning. The guidance clarifies that packaging or containers used in the display, transport or sale of a product are not considered part of the product under 42

43 the rule. The guidance states that this is true even when a product s packaging is necessary to preserve the product up to and following the product s purchase. The guidance notes that once the consumer starts to use a product, the packaging is generally discarded (Question 6, conflict minerals FAQs). In addition, the guidance states that a company s used capital equipment that it later sells is not considered to be the company s product for purposes of the rule (Question 8, conflict minerals FAQs). The guidance also clarifies that equipment a company uses to provide a service to its customers is not considered a product to the extent that the equipment is retained by the service provider, is to be returned to the service provider or is intended to be abandoned by the customer following the terms of service. Therefore, for example, a cruise line operator (the example included in the FAQ) would not be required to report on conflict minerals contained in its ships (Question 7, conflict minerals FAQs). While the conflict minerals FAQs resolved several uncertainties about the meaning of product for purposes of the rule, many companies will face additional interpretive questions when applying these concepts to their operations. Resolving these questions will necessarily be fact-specific. Companies should discuss these issues with counsel. Are Conflict Minerals Contained in the Products? A company must next determine if any conflict minerals are contained in the products it manufactures or contracts to be manufactured. The question of whether a product the company makes or contracts to be made contains conflict minerals may not be obvious from a visual analysis. In some cases, this information will be available in: Material content data forms. Company declaration forms. Engineering specifications. Bills of materials. Product part codes. However, in many cases, companies do not have information on all of the materials in their products because they purchase component parts of their products from third parties, or are not familiar with all of the component materials contained in products manufactured for them. A company may not have the internal resources to determine whether a component or contract manufactured product the company purchases contains conflict minerals. A company in that situation may need to: Survey its suppliers directly to inquire whether relevant products contain conflict minerals. Hire consultants to assist it with supply chain diligence. 43

44 Any survey of suppliers at this stage of the diligence process should, for the sake of efficiency, also include the additional inquiries that may be required under the latter two steps of the conflict minerals diligence process. Conflict minerals are used in a diverse range of products and in many industries. For a table listing common uses of conflict minerals, see Box, Conflict Minerals: Industries and Applications. Many companies that assumed their products would not fall within the scope of the rule have discovered after a preliminary inquiry that at least some of their products contain conflict minerals. Reporting companies therefore should not assume that they are not covered by the rule. Most public companies will need to conduct some supply chain diligence. Are Conflict Minerals Necessary? Conflict minerals contained in a product will not trigger the rule unless the minerals are either: Necessary to the product s functionality. Necessary to the production of the product. Companies must determine whether their products that contain conflict minerals meet either standard. The conflict minerals rule does not contain a bright-line definition of when a conflict mineral is necessary to the functionality of a product. The adopting release indicates that this is a facts and circumstances determination. The release states that, in making this determination, companies should consider whether the conflict minerals in the product: Were intentionally added (as opposed to being naturally occurring by-products or contaminants). For example, tin is often found as an unintentional contaminant in some forms of steel, even though it is not a specification of the steel. Are necessary to the product s generally expected function, use or purpose. The adopting release notes that a product may have multiple generally accepted functions (for example, a smartphone s functions may include making and receiving calls, checking , browsing the internet and listening to stored music). If mainly in the product for decorative purposes, whether decoration is the primary purpose of the product itself. For example, gold in a gold necklace would be necessary to the necklace s functionality. The rule also does not define the concept of necessary to the production of a product, and, according to the adopting release, this is also a facts and circumstances determination. Importantly, the adopting release indicates that even if a conflict mineral was used in, and necessary to, the product s production process, the rule will not be 44

45 triggered by this use unless the conflict mineral is also contained in the final product. This guidance recognizes that it may be impossible for a company to determine whether a conflict mineral was used in the production process of a product when the product no longer has any physical trace of this use. This guidance means that using a conflict mineral (such as gold) as a catalyst in a product s production process will not, standing alone, trigger the rule. In addition, the rule is not triggered by the fact that a physical tool or machine used to produce a product itself contained conflict minerals. This prevents the rule from being triggered solely by the fact that, for example, capital equipment used in the production of a product contains conflict minerals. Likewise, indirect equipment containing conflict minerals, such as power lines and computers used in a production process, will not trigger the rule. The rule has no de minimis exception for very small amounts of conflict minerals included in a product that otherwise meet this standard. Outside the Supply Chain Exception If the company answers all three of the above questions affirmatively, it must move on to diligence Step 2 unless it qualifies for the so-called outside the supply chain exception. If this exception applies to the conflict minerals in a company s products, the company does not have to make any conflict minerals disclosure or take any further action concerning those conflict minerals. Conflict minerals are considered outside the supply chain if, by January 31, 2013, the minerals were either: Fully smelted (in the case of the three Ts and their corresponding minerals) or refined (in the case of gold). Located outside the covered countries (for a discussion of this term, see Diligence Step 2: Determine Minerals Country of Origin). (Item 1.01(d)(7) and Instruction (4) to Item 1.01, Form SD). This exception recognizes that determining the origin of minerals already at those points in the supply chain will probably be impossible. Further, requiring companies to conduct diligence and make disclosure on these minerals will not further the policy goal of Section 1502, since the proceeds of minerals already at those points in the supply chain can no longer benefit armed groups in the DRC. To the extent it is still possible, companies should consider taking steps to ensure they can take advantage of the outside the supply chain exception, including: Taking an inventory of all conflict minerals and relevant products they already possessed before January 31, Requesting certifications from suppliers identifying minerals and relevant products that are outside the supply chain that the company receives from the suppliers on or after January 31,

46 DILIGENCE STEP 2: DETERMINE MINERALS COUNTRY OF ORIGIN If a company determines in diligence Step 1 that conflict minerals contained in its products are necessary to their functionality or production, and the outside the supply chain exception does not apply, the company must move on to diligence Step 2. In Step 2, the company must conduct a reasonable country of origin inquiry to determine whether its conflict minerals originated in the DRC or an adjoining country (a covered country) or whether the minerals originated from recycled or scrap sources. The covered countries include: The DRC Angola Burundi Central African Republic The Republic of the Congo Rwanda South Sudan Tanzania Uganda Zambia Recycled and scrap conflict minerals are given special treatment under the rule, and a company is not required to trace their origin further back than the determination that they come from recycled or scrap sources. This recognizes that it is impossible, as a practical matter, to trace the source of minerals past the recycling or scrap process. A company can consider its conflict minerals to be from recycled or scrap sources if the minerals meet the detailed definition in Item 1.01(d)(6) of Form SD. Generally, the minerals must be from reclaimed end-user or post-consumer products or scrap processed metals created during product manufacturing, and cannot be partially processed or unprocessed minerals, or minerals that are a by-product from another ore. Reasonable Country of Origin Inquiry The rule does not contain a bright-line standard for conducting the reasonable country of origin inquiry. The adopting release indicates that the specific steps of the inquiry will depend on: The issuer s facts and circumstances, including its size, products, relationships with suppliers and other factors. The available infrastructure at the time. However, in order to satisfy the rule, the inquiry must be: Reasonably designed to determine whether the conflict minerals originated in a covered country or are from recycled or scrap sources. Performed in good faith. (Item 1.01(a), Form SD). The adopting release specifically notes that one way a company could conduct the inquiry would be for the company to obtain a representation from the facility that processed the conflict minerals (the smelter or, in the case of gold, the refiner) about 46

47 the source of the minerals. The company could obtain this directly from the processor or indirectly from immediate suppliers in its supply chain. The company would need to have a reason to believe a processor s representation is true given all facts and circumstances, including any red flags that raise doubt. The release notes that a company would have reason to believe a representation is true if the processor was identified as processing only DRC conflict free minerals by a recognized industry group that requires an independent audit of processors (or the processor had independently obtained an audit of it sourcing operations). This approach is consistent with the Organization for Economic Cooperation and Development s (OECD) diligence guidance for downstream companies (see Practice Note, Conflict Minerals Rule Compliance Resources: OECD Guidance and Related Resources ( Companies pursuing this approach might be able to rely in part on the Electronic Industry Citizenship Coalition (EICC) and the Global e-sustainability Initiative (GeSI) conflict free smelter program (see Practice Note, Conflict Minerals Compliance Resources: EICC-GeSI Resources ( to satisfy the reasonable country of origin inquiry. Notably, the adopting release states that a company is not necessarily required to receive representations covering all of its conflict minerals in order for its inquiry to be reasonable and in good faith. The conflict minerals rule may create an incentive for some companies to seek to structure their supply chain so that they can affirmatively determine that their conflict minerals originated outside of the covered countries (see Next Steps). Putting aside the practical implementation and other potential issues presented by this approach, a company could seek to do this by requiring that its suppliers of conflict minerals, or component parts or products containing conflict minerals, purchase them only from sources ultimately traceable to smelters and/ or refiners who source only from outside the covered countries. Most of the companies participating in the OECD s downstream pilot program indicated that they do not intend to embargo conflict minerals from the covered countries. Instead, they have indicated that the intend to source minerals responsibly from these in accordance with available international standards contained in the OECD guidance, working through various means such as industry programs and constructive engagement with suppliers. For more information on the OECD downstream pilot program, see Practice Note, Conflict Minerals Compliance Resources, Pilot Implementation Program ( Under either approach, companies should consider requiring their direct suppliers to include flowdown clauses in their contracts with sub-suppliers. Flow-down clauses obligate the sub-suppliers to abide by the same requirements that the company is requiring of the direct supplier. 47

48 Next Steps A company does not need to go on to Step 3 of the diligence process if either: It affirmatively determines that its conflict minerals originated outside the covered countries or came from recycled or scrap sources. Based on its reasonable country of origin inquiry, it has no reason to believe that its conflict minerals may have originated in a covered country or it reasonably believes that its conflict minerals are from recycled or scrap sources. However, the company must file a Form SD that discloses its determination and briefly describes its reasonable country of origin inquiry. The adopting release recognizes that the length and content of this description will vary among companies and will vary over time as visibility of mineral supply chains improves. The release indicates the purpose of the description is to allow stakeholders to assess, track the progress over time of and form their own views on, the company s efforts. The adopting release also states that this description must include a discussion of the company s conflict mineral sourcing policies. The company must include this same disclosure on its website, and include a link to its website in the Form SD. A company must go on to Step 3 of the diligence process if either: It knows that its conflict minerals originated in a covered country and did not come from recycled or scrap sources. Based on its reasonable country of origin inquiry, it has reason to believe that its conflict minerals may have originated in a covered country and may not have come from recycled or scrap sources. DILIGENCE STEP 3: DETAILED DUE DILIGENCE AND REPORTING ON SUPPLY CHAIN The conflict minerals rule requires heightened due diligence and disclosure if, based on the company s reasonable country of origin inquiry (Step 2), it knows that any of its conflict minerals originated in a covered country and were not from recycled or scrap sources, or if it has reason to believe that any of its conflict minerals may have originated in a covered country and that they may not be from recycled or scrap sources. Purpose and Design of the Diligence The goal of diligence Step 3 is to gather information on the source and chain of custody of the company s conflict minerals that did or it has reason to believe may have originated in the covered countries. Under the rule, a company is required to conduct diligence Step 3 in conformance with a nationally or internationally recognized due diligence 48

49 framework, if one is available for the relevant conflict mineral. The adopting release notes that, currently, the only general framework that satisfies this standard is the OECD guidance (see Practice Note, Conflict Minerals Rule Compliance Resources: OECD Guidance and Related Resources ( us.practicallaw.com/ )). The OECD s general guidance and mineral-specific supplements can be used to conduct Step 3 due diligence. Currently, the OECD s gold supplement is the only recognized guidance for conducting due diligence to determine whether minerals come from recycled or scrap sources. This means that, currently, there is no nationally or internationally recognized due diligence framework for other types of conflict minerals to determine whether they come from recycled or scrap sources. Under the rule, companies that must conduct due diligence in this or another circumstance in which there is no recognized standard still must exercise appropriate due diligence, but they must do so without the benefit of a recognized due diligence framework. The rule includes transition provisions that specify when a company must switch to using a recognized framework after one becomes available. If a nationally or internationally recognized due diligence framework becomes available for the necessary conflict mineral prior to June 30 of a calendar year, the company must use that framework in the subsequent calendar year. If the due diligence guidance does not become available until after June 30 of a calendar year, the company is not required to use that framework until the second calendar year after the framework becomes available to provide a full calendar year before implementation. As the adopting release highlights, Section 1502 gives the SEC the ability to determine that a particular due diligence process is unreliable. If the SEC makes this determination, the company s conflict minerals report will not satisfy the requirements of the conflict minerals rule. This would subject the company to potential liability for violations of Sections 13(a) or 15(d) of Exchange Act. Results of the Diligence A company has an easier disclosure burden if, after Step 3 diligence, it determines or has reason to believe that its conflict minerals either: Did not originate in a covered country. Did come from recycled or scrap sources. In this situation, the company only must file a Form SD that discloses its determination and briefly describes its Step 2 and Step 3 diligence efforts and their results. This description must include a discussion of the company s conflict mineral sourcing policies. The company must include this same disclosure on its website, and include a link to its website in the Form SD. If the company s Step 3 due diligence leads to any other conclusion, the company must prepare a conflict minerals report and file it as an exhibit to its Form SD (see Conflict Minerals Report). 49

50 CONFLICT MINERALS REPORT Companies that must prepare a conflict minerals report must file it as an exhibit to the Form SD and make the report available on the company website. The body of the Form SD must disclose that a conflict minerals report is being filed and include a link to the company website. The report must describe the company s diligence process (see Diligence Description), include certain disclosures about the company s products containing conflict minerals and the origin of those minerals (see Disclosure about Company s Products and Conflict Minerals Origin) and include, subject to limited exceptions, an independent private sector audit report and certain statements about the audit (see Audit Report Disclosure). Diligence Description The conflict minerals report must describe the measures the company took to exercise due diligence on the source and chain of custody of the company s conflict minerals. As discussed, under the rule, the company is required to conduct due diligence in conformance with a nationally or internationally recognized due diligence framework, if available (see Purpose and Design of the Diligence). Disclosure about Company s Products and Conflict Minerals Origin Depending on the results of the company s Step 3 due diligence, the conflict minerals report must include one or more of the following disclosures about the company s products containing conflict minerals for which Section 3 due diligence was required: DRC conflict free products: If a company affirmatively determines that the conflict minerals in the products did not directly or indirectly finance or benefit an armed group (as defined in Form SD) in a covered country, it may describe the products as DRC conflict free. It is not, however, required to specifically identify which of its products contain the minerals (Question 10, conflict minerals FAQs). 50

51 DRC conflict undeterminable products: This is a temporary designation that any company may take advantage of in its conflict minerals report for calendar years 2013 and 2014, and SRCs can take advantage of in their conflict minerals reports for calendar years A company can categorize products as DRC conflict undeterminable if, after conducting Step 3 due diligence, the company is unable to determine whether or not the products are DRC conflict free. With respect to these products, the company must describe: The products containing the relevant minerals. The rule gives companies flexibility on how to identify the specific products. The steps it has taken or will take since the end of the period covered by its last conflict minerals report to mitigate the risk that its conflict minerals benefit armed groups, including any steps to improve the company s due diligence. If known, the smelter or refiner used to process the conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin with the greatest possible specificity. Not DRC conflict free/not been found to be DRC conflict free products: If the company determines that the conflict minerals in its products did directly or indirectly finance or benefit an armed group in a covered country, it must describe its products containing the minerals as not DRC conflict free. If, after the DRC conflict undeterminable option is no longer available to a company, that company cannot determine whether its products are DRC conflict free, it can describe its products containing the minerals as not been found to be DRC conflict free, rather than not DRC conflict free. Companies are permitted to include explanatory disclosure explaining what RC conflict free means, and why the company is unable to say that its products meet the definition. The adopting release includes model disclosure for this scenario. 51

52 In either case, the company must go on to describe the smelter or refiner used to process the conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin with the greatest possible specificity. The adopting release recognizes that, as a practical matter, it is very difficult or impossible to trace conflict minerals to their mine or other location of origin after they have been smelted or refined. The staff has given additional guidance on how a company is required to identify products that are DRC conflict undeterminable or not been found to be DRC conflict free. It has clarified, among other things, that the company is not required to provide model numbers of these products. A company may describe its products based on the company s own facts and circumstances and in terms commonly understood in its industry (Question 9, conflict minerals FAQs). Audit Report Disclosure The company s conflict minerals report generally must be audited (for detailed information about the conflict minerals audit, see Conflict Minerals Audit). The conflict minerals report must state that the company has obtained the audit, identify the auditor if the auditor is not identified in the audit report and provide the audit report prepared by the auditor. A company does not need to obtain a conflict minerals audit regarding the conflict minerals in any products described as DRC conflict undeterminable. This means that, if all of the company s conflict minerals fall with this category in a given year, it would not need to obtain the audit of its conflict minerals report for that year. CONFLICT MINERALS AUDIT As discussed, each company that is required to file a conflict minerals report must also obtain an independent audit, unless the company is taking advantage of the temporary DRC conflict undeterminable category for all of its conflict minerals (see Conflict Minerals Report). The objective of the audit is to express an opinion or conclusion on whether, for the covered period: The design of the company s due diligence process described in its conflict minerals report is in conformity in all material respects with the recognized due diligence framework used by the company. The company s description of the due diligence measures that it performed is consistent with the due diligence process that it undertook. Under the rule, an audit is not required for any portion of the conflict minerals report dealing with company due diligence on conflict minerals for which a recognized due diligence framework does not exist (as discussed, this would apply if a company had done Step 3 diligence on certain recycled or scrap metals). Notably, the rule does not require the auditor to express an opinion on the company s conclusion in the conflict minerals report on whether its products are DRC conflict free. The audit must be performed in accordance with existing Government Auditing Standards established 52

53 by the Government Accountability Office (GAO). The standards for either performance audits or attestation engagements may be used for the audit. Therefore, auditors other than certified public accountants may perform the audit. However, the auditor must comply with the independence standards established by the GAO. The adopting release notes that the GAO will be responsible for responding to question or concerns about the application of its standards to the conflict minerals audit. According to the adopting release, it is not inconsistent with the auditor independence requirements in Rule 2-01 of Regulation S-X for the company s independent public accountant to also perform the conflict minerals audit. The release notes, however, that the conflict minerals audit would be considered a non-audit service and therefore subject to the pre-approval requirements for non-audit services. OTHER SUPPLY CHAIN LEGISLATION Companies affected by the conflict minerals rule should also be aware of similar legislative initiatives at the federal, state and municipal levels. The California Transparency in Supply Chains Act, which became effective in January 2012, requires companies to disclose on their website (or on request, if they have no website) their efforts to ensure that their supply chains are free from slavery and human trafficking. This legislation applies to retail sellers and manufacturers, public or private, doing business in California that have annual gross worldwide receipts exceeding $100 million. Under this legislation, a company is doing business in California if it meets one of the requirements of Section of the California Revenue and Taxation Code. In addition, California s SB 861, which became effective in August 2012, bars companies that commit certain violations of Section 1502 from submitting to California state agencies bids to provide goods or services that are related to products or services that are the reason the company must comply with the rule. Maryland has enacted a similar law. Maryland s HB 425, which became effective in October 2012, prohibits state agencies from obtaining supplies from companies that violate Section The Pittsburgh City Council unanimously passed a proclamation on conflict minerals on April 19, 2011, calling for electronic companies and other industries to take the necessary steps to remove conflict minerals from their supply chain. The proclamation urges the US executive leadership to help establish an international certification system for minerals coming from Central Africa to ensure they are not contributing to conflict. The city of St. Petersburg, Florida passed a resolution in October 2011 favoring verifiably conflict free products in future purchasing and investment decisions. The Business Transparency on Trafficking and Slavery Act, H.R. 2759, was proposed in the US 53

54 House of Representatives during the session. This bill, which had received bipartisan support, would require reporting companies with over $100 million in worldwide receipts to disclose in their annual reports any steps they have taken to identify and address child and forced labor in their supply chains. This bill was not voted on in committee and no decision has been made with respect to the bill being reintroduced. If reintroduced and enacted, this bill is likely to require many companies to conduct supply chain diligence similar to the requirements under the conflict minerals rule. 54

55 DILIGENCE FLOW CHART The following SEC flow chart depicts the steps of diligence required by the conflict minerals rule. Does the issuer file reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act? YES Does the issuer manufacture or contract to manufacture products? YES Are conflict minerals necessary to the functionality or production of the product manufactured or contracted to manufactured? NO NO NO Rule does not apply YES Were the conflict minerals outside the supply chain prior to January 31, 2013? YES N O, if newly mined N O, if potentially scrap or recycled Based on a reasonable country of origin inquiry (RCOI), does the issuer know or have reason to believe that the conflict minerals may have originated in the DRC or an adjoining country (the covered countries)? Based on the RCOI, does the issuer know or reasonably believe that the conflict minerals come from scrap or recycled? YES NO Exercise due diligence on the source and chain of custody of its conflict minerals following a nationally or internationally recognized due diligence framework, if such framework is available for a specific conflict mineral. In exercising this due diligence does the issuer determine the conflict minerals are not from the covered countries or are from scrap or recycled? NO YES NO YES File a Form SD that discloses the issuer s determination and briefly describes the RCOI and the results of the inquiry File a Form SD that discloses the issuer s determination and briefly describes the RCOI and due diligence measures taken and the results thereof. File a Form SD with a Conflict Minerals Report as an exhibit, which includes a description of the measures the issuer has taken to exercise due diligence. In exercising the due diligence, was the issuer able to determine whether the conflict minerals financed or benefitted armed groups? YES Is it less than two years after effectiveness of the rule (four years for Smaller Reporting Companies)? The Conflict Minerals Report must also include an independent diligence. No audit is required. Private sector audit report, which expresses an opinion or conclusion as to whether the design of the issuer s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the issuer s due diligence measures is consistent with the process undertaken by the issuer. Also, include a description of the product that have not been found to be DRC Conflict Free, the facilities used to process the necessary conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin of those minerals with the greatest possible specificity. NO NO YES The Conflict Minerals Report must also include a description of products that are DRC Conflict Undeterminable and the steps taken or that will be taken, if any, since the end of the period covered in the last Conflict Mineral Report to mitigate the risk that the necessary conflict minerals benefit armed groups, including any steps to improve due The Conflict Minerals Report must also include an independent diligence. No audit is required. 55

56 CONFLICT MINERALS: INDUSTRIES & APPLICATIONS While not exhaustive, this chart lists some common uses of conflict minerals. CONFLICT MINERAL DERIVATIVE METAL INDUSTRIES APPLICATIONS Cassiterite Tin Electronics Automotive Industrial equipment Construction Columbite-tantalite Tantalum Electronics Medical equipment Industrial tools Aerospace Gold Gold Jewelry Electronics Aerospace Wolframite Tungsten Electronics, lighting Industrial machinery Solders for joining pipes and circuit Automobile parts Tin plating of steel Alloys (bronze, brass, pewter) Capacitors Hearing aids and pacemakers Carbide tools Jet engine components Jewelry Electric plating and wiring Jet engine components Metal wires, electrodes, electrical contacts Heating and welding 56

57 FOR MORE INFORMATION For more information, search for the following resources on the Practical Law Company website. TOPICS Corporate Governance & Continuous Disclosure Non-US Issuers Supply of Goods and Services PRACTICE NOTE: OVERVIEW Conflict Minerals Rule Compliance Toolkit Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of Summary of the Dodd-Frank Act: SEC Authority & Selected Securities Act & Exchange Act Provisions PRACTICE NOTES Conflict Minerals Rule Challenge: Litigation Tracker Conflict Minerals Rule Compliance Resources Corporate Social Responsibility and the Supply Chain What s Market: Disclosure on Conflict Minerals Risks What s Market: Disclosure on Conflict Minerals Risks CHECKLISTS Conflict Minerals Disclosure Requirements Checklist Preparing for Conflict Minerals Rule Compliance: Company Action Items Checklist ARTICLES Market Roundup: Conflict Minerals Policies Webinar: Conflict Minerals: Understanding the Final Rules and Preparing to Comply For the links to the documents referenced in this note, please visit our online version at 57

58 CONFLICT MINERALS & YOUR ACCOUNTANT By Sara Ellison, KPMG International This article provides recommendations for building a transparent, auditable supply chain. 58

59 CONFLICT MINERALS COMPLIANCE & BEYOND: KPMG S RECOMMENDATIONS FOR BUILDING A TRANSPARENT, AUDITABLE SUPPLY CHAIN KEY QUESTIONS TO CONSIDER: 1. What should an executive know before commencing a conflict minerals program? What are the first steps who is involved and what actions does the team need to take? What Officer will sign form SD? What is the internal representation process needed in order for that Officer to sign Form SD? What other countries are considering legislation similar to Section 1502? 2. What is your Financial Statement Auditor s role in your conflict minerals program? What trigger an audit and what will the audit look like? Could an audit be triggered in Year 1? What are the independence considerations for the audit firm? 3. What are the leading trends among companies with regards to setting up and implementing their conflict minerals compliance programs? Which industries/companies have been leaders or laggards? How are companies approaching their program (tool selection, team development, outsourcing pieces of the program)? 4. How can KPMG support a company toward compliance with Section 1502? What are the services that KPMG offers to clients? KPMG has a host of materials that can be found at Check out KPMG s thought provoking Point of View series, Conflict minerals and beyond What audit firm can provide the independent private sector audit? 59

60 Question 1: What should an executive know before commencing a conflict minerals program? Companies reporting to the SEC should, without delay, set up a structure to manage compliance. Most organizations have never had to analyze their supply chain in the way they will be expected to do under the conflict minerals provision. They will have to reorganize themselves to ensure the process is smooth and efficient. Departments that hardly talk to one another will have to collaborate. (See Governance structure image) Governance Structure for Section 1502 (Illustrative) AUDIT COMMITTEE BOARD OF DIRECTORS INTERNAL AUDIT EXTERNAL AUDIT CEO Governance Steps for Section 1502 Companies should create an executive steering committee CFO/COO formulates strategic plan for compliance CEO then board signs off on plan Compliance group executes plan External auditor signs off on audit CFO Finance COO Supply Chain Procurement CSR Corporate changes that are far-reaching, complex and difficult usually require strong support from the C-suite as a first step. Compliance with Section 1502 is no different. The changes should be led by C-level executives, because the process is likely to extend throughout the company. So you need a big initiative, says Koichi Iguchi, Partner in Business Performance Advisory at KPMG in Japan. Adds Jim Low, KPMG Audit Partner: The entire C-suite will be involved in year one, because compliance with Section 1502 is so novel and it could affect business models. The board and the CEO will drive strategy. The SEC will require companies to provide the public disclosure on a new form filed with the commission, called Form SD. This filing requirement is likely to add a certain degree of liability for companies statements concerning the source of 60

61 their materials. At the behest of the CEO and the board, the CFO therefore should be the one to formulate a strategic plan for compliance. Building a Section 1502 reporting structure below the CFO and COO is likely to be demanding. At least four corporate departments will be required to work together: supply chain/procurement, legal counsel, finance and internal audit (and CSR, if it exists in the company). The audit committee will be expected to be involved in the same way as it would with any financial statement to the SEC and as there is a requirement for an external audit of the conflict minerals report. Some companies that have an office for sustainability or corporate social responsibility (CSR) are including this department in the process. One of the initial steps a company should take in setting up the conflict minerals governance program is to determine which officer will be responsible for signing Form SD. Equally as important, the company should establish what will be the internal process for members of company s management to sign off on the process and protocols in order for that officer to sign off on Form SD. The signor will need to rely on the information from those in the chain of the company s hierarchy that the company has suitably followed the three steps required by the SEC final rule, as well as conducted the necessary due diligence. We are over halfway through the first reporting period and in less than 9 months companies will be filing their firs Form SD and if necessary, their Conflict Minerals reports on May 31, For companies who have not started to comply with Section 1502 of the Act, they will need to act quickly to get their own house in order. Many companies are struggling with the complexity of the conflict minerals regulations; here are some helpful key takeaways from the experience of KPMG teams: Centralized projects can help reduce variances in approach by subsidiaries. Develop clear ongoing communication with suppliers and provide training to assist in their understanding of required responses to improve response rates and quality. Procurement categories are a good place to begin scoping, but they often do not complete 3TG identification. Proper product due diligence requires internal information systems to contain accurate and searchable bills of material information. Therefore, the support and involvement of the Chief Information Officer is vital, and data and analytic capabilities can offer assistance to ensuring all areas of the supply chain are reviewed. Up-front product due diligence is critical in reducing the number of suppliers to be surveyed to maintain manageable survey process. 61

62 It s essential for the topic to be embraced as a means of business improvement, rather than merely a costly compliance exercise, says Lynton Richmond, Partner, Energy Natural Resources in KPMG s advisory services practice in London. But there is an alternative way to view the compliance process. If companies and their myriad suppliers see that they all have something to gain from a more transparent supply chain, then it is likely to be a lot easier to comply with Section 1502 and to gain improvements in business performance. Many companies expect that further regulation of the supply chain will follow the rules on conflict minerals, whether in the US or elsewhere. If they are right, then setting up a compliance strategy for Section 1502 will prepare companies well for other regulations that may follow. When companies currently conduct their due diligence, they should ensure that the process will withstand an audit under GAGAS. LEVEL DEFINITIONS Tactical Level Strategic Level Tone at the top Mission & Vision for all functions including procurement Supply Policies Commodities/segments Chief executive and board establish ethical and financial goals for company Long-term goals of supply chain management for the company and suppliers/customers; set mission for supply chain functions; integrate supply chain goals into incentives and performance objectives for the company Encompasses the involvement of the supply chain function in decisions affecting product, process and supplier selection; draw directive supply policies for commodities/segments Operational Level Supplier Selection Contract Supplier Performance Measurement All activities related to Supplier Selection (product specification; supplier selection), Contracting of Supplier and Supplier Performance Measurement (monitoring and evaluation) Procurement/ordering Source: Conflict minerals and beyond Part Three: Optimizing the supply chain, KPMG International

63 Question 2: What is your Financial Statement Auditor s role in your conflict minerals program? Once the supply chain has been mapped, in certain circumstances the Conflict Minerals report (CMR) will require an independent private sector audit (IPSA). Based on the SEC s consultation with the U.S. Government Accountability Office (GAO), the GAO determined that existing Generally Accepted Government Auditing Standards (GAGAS), such as the standards for Attestation Engagements or for Performance Audits will be applicable. The final rule concludes the audit objective is to express opinion or a conclusion as to whether the design of the issuer s due diligence measures are in conformity with the criteria set forth in a nationally or internationally recognized due diligence framework used by the issuer, such as the OECD s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, and whether 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. INDEPENDENT THIRD PARTY AUDIT Audit objective is to express an opinion or conclusion as to: 1. Whether the DD framework materially conforms with a national or internationally recognized standard 2. Whether the issuer s description of the DD measures it performed are consistent with the DD process the issuer actually undertook *Companies may file Undeterminable for 2 years if all three steps have been completed annually and neither category is known; no audit or product description required. STEP TOWARD CM COMPLIANCE 1. File Form SD Identify 3TG in products Conduct responsible country of origin search Perform due diligence 2. File a Conflict Mineral Report disclosing: Due diligence on source and chain of custody Steps taken/to be taken to mitigate risk 3TGs benefited armed groups Any further steps to improve due diligence Country of origin in the Covered Countries, if known Smelting facilities that processed the 3TGs, if known Efforts to determine mine or origin with greatest possible specificity Describe products that are not DRC conflict free 3. Independent Audit Report 4. Website link to disclosure 63

64 CATEGORIES THAT TRIGGER AN AUDIT ILLUSTRATIVE CATEGORY AUDIT REQUIRED DESCRIPTION SEC FACT SHEET REFERENCE Conflict Free Company has determined that What Must Be included Covered Countries Yes products contain 3TG from the DRC and surrounding in the Conflict Minerals Report DRC Conflict Free countries and are conflict-free Not Conflict Free Company has determined its What Must Be Included Yes product(s) contain 3TG from the DRC and surrounding countries in the Conflict Minerals Report Not Been Found and are not conflict-free to Be DRC Conflict Free Undeterminable During the temporary transition What Must Be Included period company must include in the Conflict Minerals No for Undeterminable the same information required in a report Report DRC Conflict Undeterminable for products that have not been found to be DRC Conflict-Free Recycled/Scrap If a company s 3TG are derived What Must Be Included Tin, Tantalum, from recycled or scrap sources, in the Conflict Minerals Tungsten, and Gold No the company is required to Report Recycled or describe the DD measures Scrap Due Diligence to determine this status Sources:

65 In the final rule the SEC points out that the independent private sector auditor must comply with any independence standards established by the GAO. Regardless of whether the IPSA for the CMR is done as a performance audit or an attestation examination engagement, the independence requirements are the same under Yellow Book; likewise the objective of the IPSA remains the same and the auditor is required to obtain reasonable assurance that evidence is sufficient and appropriate to support the auditors findings and conclusions in both a performance audit and an attestation examination engagement. Any services involving management responsibilities would be prohibited. The financial statement auditor of an SEC issuer is not precluded from performing an independent private-sector audit of that client s conflict minerals report, according to non authoritative guidance prepared by an AICPA task force. Further, if a firm is performing an audit of the issuer s financial statements, that firm should already be complying with SEC and PCAOB independence rules and must continue to do so with regard to conflict minerals-related non audit services. As the firm is not performing the IPSA of the CMR, independence requirements of GAGAS are not applicable. 1 Many companies may find it easiest to comply with the audit requirement by using the same firm that audits their financial statements, but the SEC rule has left room for flexibility; the final rule says that the audit of the Conflict Minerals Report can either be an attest engagement performed by an auditing firm or a performance audit that doesn t necessarily have to be performed by a CPA. The American Institute of Certified Public Accountants has set up a conflict minerals task force for Conflict Minerals and has website for conflict minerals resources to answer questions related to Independence and other frequently asked questions. (AICPA Conflict Minerals Resources) Since this compliance process is novel and complex, it is best to bring in the external auditor at an early stage. A number of companies are looking to their auditors early to ensure that they are developing a process that will meet the SEC criteria. Companies need to act quickly to determine who will audit their Conflict Minerals Reports, Jim Low, KPMG Partner says. Companies will be in a better position if their auditors are kept informed perhaps through quarterly reviews on management s processes. If companies wait too long to figure out who will perform the conflict minerals audit, the auditors could face a time crunch, particularly if they also are auditing a company s financial statements. If you re a calendar-year company, your auditors have to deal with your year-end financials and the

66 filing of your 10-K, Low said. Two months later you re going to have to file your Form SD [with the accompanying Conflict Minerals Report as an exhibit]. And that does not give your auditors a lot of time to plan, perform, and design an audit. Whether or not a company anticipates needing the external audit, the auditors should be brought into the process near the beginning and not at the end, when the annual statement is delivered to the SEC. The clearer the governance structure of compliance the better, for this will determine the audit trail and will enable the external auditors to know where to find the information needed to sign off on the measures taken to exercise due diligence over the supply chain. Question 3: What are the leading trends among companies with regards to setting up and implementing their conflict minerals compliance programs? Industry organizations are taking the lead to help companies to develop tactics to aid in tracking and reporting that could potentially help companies certify the source of their metals. Industry organizations are leveraging the work of multiple companies to find common methods for suppliers to provide information on sourcing of their raw materials to end users, which could spare the suppliers a nightmarish collection of different compliance document requests. The Electronic Industry Citizenship Coalition (EICC) and Global e-sustainability Initiative have created the Conflict-Free Smelter Program, a process for certifying that participating smelters are getting their raw materials from conflict-free sources, which ultimately could establish the smelters as the key verification point for companies large and small. The Automotive Industry Action Group (AIAG) introduced a sponsored tool designed to survey automotive suppliers and collect responses in a database for use by the group s members. It has issued a letter to inform the industry s suppliers about Section 1502 and has suggested activities suppliers can undertake in order to assist the original equipment manufacturers in meeting the compliance requirements. Additionally, the AIAG has developed a list of frequently asked questions to assist companies as they begin to plan for compliance. The Aerospace Industries Association has a conflict minerals working group that has helped to draft communications to suppliers and is assisting its members to achieve compliance with Section Some aerospace companies have held a series of symposia for its suppliers to educate them about conflict minerals. 66

67 Closed-pipe supply line: An alternative method of securing conflict-free shipments of minerals is to verify that the source is conflict free and then set up a secure closed-pipe supply line to deliver the ore to users. AVX, a US manufacturer of electronic components, set up a closed-pipe supply line in 2011 along which to ship conflict-free tantalum ore from the DRC. Similarly. Industry partners convened with the Dutch government have started a conflict-free tin sourcing program in the DRC. This program demonstrates how the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas can be implemented on the ground with positive results. The CFTI supply chain is a conflict-free design, piloting new tracking and tracing procedures to ensure the conflict-free status of the supply chain The Electronics industry is furthest ahead in developing a conflict minerals program. KPMG identified 197 companies included a conflict minerals disclosure in their annual reports for The majority of companies filing disclosures represented the Electronics (40%) and Diversified Industrials (28%). Similarly, 40% of KPMG s current conflict minerals engagements are with electronics manufacturers. Companies should develop a policy regarding conflict minerals and should communicate it clearly to suppliers and the wider community. The final rule states that an issuer s publicly stated policy on conflict minerals could form part of the company s reasonable country of origin inquiry (RCOI) and would therefore be disclosed in its Form SD. This approach will not only enable the company to comply with the law; it will also communicate to suppliers an Issuers commitment and philosophy towards this rule. KPMG research identified 90 companies disclosing conflict minerals policy online, with over 70% of these representing the technology industry. As companies develop a strategy, we are seeing a number of approaches as we work with our clients. KPMG recommends adopting a four-step approach to compliance. Step one is to develop a compliance strategy, using the due diligence guidelines created by the Organization for Economic Cooperation and Development (OECD). Step two is to identify 3TG suppliers and conduct RCOI and, if necessary, due diligence of the supply chain. Step three is to design a process that is replicable on an annual basis. Step four is to prepare for SEC disclosure, with a conflict minerals report if necessary) as required by the final rule. Companies should prepare for an external audit if necessary. Companies are picking all or some of these areas to go it alone or hire support. Increasingly we are seeing companies inquire about using a tool for the survey of suppliers. Selecting a tool allows clients to report and monitor information from a network of suppliers. The right tools will save time and money and provide the necessary information needed to prepare and support the CM Report. 67

68 Question 4: How can KPMG support a company toward compliance with Section 1502? KPMG s team of professionals in our member firms can assist in gap-analysis reviews to define the impact of proposed regulatory reform from a people, process, technology, data requirements, reporting, and analytical perspective. We assign the right people those with relevant experience to understand the company s major economic, operating, and regulatory risks and factor in the company s unique needs, dynamics, and culture. Based on extensive experience with past due diligence and reporting requirements, KPMG has developed a simple process to help companies address the conflict minerals provision. The process involves the following key steps: Identify use of tin, tantalum, tungsten, and gold (3TG) conflict minerals in products manufactured or assembled Identify and survey suppliers of 3TG metals Perform a risk assessment using tools and Organization for Economic Cooperation and Development guidelines Prepare disclosure statements in accordance with the SEC requirements Institutionalize a process that helps provide annual updates conveniently Perform an independent conflict minerals audit Check out KPMG s thought provoking Point of View series, Conflict minerals and beyond. Conflict Minerals and beyond Part one: developing a global compliance strategy Conflict Minerals and Beyond Part Two: A More Transparent Supply Chain Conflict minerals and beyond Part three: Optimizing the supply chain 68

69 CONFLICT MINERALS COMPLIANCE SURVEY RESULTS Assent Compliance Conflict Minerals Survey Results Over 270 responses received Even spread of companies by size and industry For a look at the survey questions, you can go here: 69

70 Q1 DOES YOUR COMPANY FILE 10K, 20F OR 40F REPORTS WITH THE SEC (EX: IS YOUR COMPANY LISTED ON THE NYSE?)? ANSWERED: 270 SKIPPED: % 38.52% 54.07% Yes No I don t know ANSWER CHOICES RESPONSES Yes 54.07% 146 No 38.52% 104 I don t know 7.41% 20 TOTAL

71 Q2 PLEASE INDICATE YOUR COMPANY S SIZE, BASED ON ITS MARKET CAPITALIZATION, ACCORDING TO THE CRITERIA BELOW: ANSWERED: 266 SKIPPED: 4 Mega-Cap Large-Cap Mid-Cap Small-Cap Micro-Cap Nano-Cap 0% 20% 40% 60% 80% 100% ANSWER CHOICES RESPONSES Mega-Cap: Over $200 Billion 2.26% 6 Large-Cap: Over $10 Billion 21.05% 56 Mid-Cap: $2 Billion $10 Billion 18.05% 48 Small-Cap: $250 Million $10 Billion 30.08% 80 Micro-Cap: Below $250 Million 9.77% 26 Nano-Cap: Below $50 Million 18.80% 50 TOTAL

72 Q3 PLEASE SELECT THE INDUSTRIES/VERTICALS THAT YOUR COMPANY OPERATES IN: ANSWERED: 268 SKIPPED: 2 Automotive Aerospace Consumer Goods Defense Electrical & Electronics Industrial Medical Personal Care Retailer Other 0% 20% 40% 60% 80% 100% ANSWER CHOICES RESPONSES Automotive 27.61% 74 Aerospace 21.64% 58 Consumer goods 23.13% 62 Defense 18.66% 50 Electrical & Electronics 57.46% 154 Industrial 36.57% 98 Medical 30.60% 82 Personal Care 7.46% 20 Retailer 8.96% 24 Other 15.67% 42 TOTAL

73 Q4 HOW LONG HAS YOUR COMPANY BEEN PREPARING FOR CONFLICT MINERALS? ANSWERED: 266 SKIPPED: 4 >1 Year 6-12 Months 3-6 Months <3 Months We haven t begun 0% 20% 40% 60% 80% 100% ANSWER CHOICES RESPONSES >1 year 41.35% months 31.58% months 12.03% 32 <3 months 6.77% 18 We have not begun preparations 8.27% 22 TOTAL

74 Q1 HOW LARGE IS YOUR INTERNAL CONFLICT MINERALS WORKING GROUP? ANSWERED: 268 SKIPPED: % 13.43% 1 Employee 16.42% 19.40% 2-4 Employees 5-8 Employees 32.09% 9+ Employees There is currently no formal workgroup ANSWER CHOICES RESPONSES 9 employees or greater 13.43% employees 19.40% employees 32.09% 86 1 employee 16.42% 44 There is currently no formal workgroup 18.66% 50 TOTAL

75 Q6 HAVE YOU RETAINED SPECIALIST OUTSIDE LEGAL COUNSEL WITH EXPERTISE ON THE CONFLICT MINERALS RULE? ANSWERED: 266 SKIPPED: 4 Yes No 0% 20% 40% 60% 80% 100% ANSWER CHOICES RESPONSES Yes 22.56% 60 No 77.44% 203 TOTAL

76 Q7 ARE YOU CURRENTLY USING OR PLANNING TO USE 3RD PARTY SUPPORT SERVICES? ANSWERED: 252 SKIPPED: 18 Yes No 0% 20% 40% 60% 80% 100% ANSWER CHOICES RESPONSES Yes 31.51% 92 No We will be using internal resources only 63.49% 160 TOTAL

77 Q8 BELOW, WE HAVE LISTED STANDARD PHASES IN A CONFLICT MINERALS PROGRAM. PLEASE CHECK ANY OF THE PHASES THAT YOUR ORGANIZATION HAS BEGUN OR COMPLETED: ANSWERED: 268 SKIPPED: 2 *Participants were allowed to select more than one option We have begun/completed our Scope... We have adopted a policy... We have sent out a Dear Supplier... We have distributed a questionnaire... We have adopted a compliance frame... We have begun/completed Due Diligence... We have begun/completed Form SD... None of the Above 0% 20% 40% 60% 80% ANSWER CHOICES RESPONSES We have begun/completed our Scope Determination for Conflict Minerals 63.43% 170 We have adopted a policy statement relating to Conflict Minerals sourcing 55.97% 150 We have sent out a Dear Supplier letter to our vendors 49.25% 132 We have distributed a questionnaire/survey to our vendors 41.04% 110 We have adopted a compliance framework that is consistent with the OECD framework 29.10% 78 We have begun/completed our Due Diligence & Risk Assessment 35.07% 92 We have begun/completed Form SD and CMR preparations 8.21% 22 None of the above 11.94% 32 TOTAL

78 Q9 WILL YOU BE USING THE EICC-GESI CONFLICT MINERALS REPORTING TEMPLATE, A CUSTOM FORM OR AN ALTERNATE METHOD TO QUERY YOUR SUPPLY CHAIN? ANSWERED: 260 SKIPPED: % 21.54% 65.38% EiCC-Gesi Custom Form Other ANSWER CHOICES RESPONSES EiCC-Gesi Conflict Minerals Reporting template 65.38% 170 Custom form 21.54% 56 Other 13.08% 34 TOTAL

79 Q10 WHAT DO YOU EXPECT WILL BE THE GREATEST RISK TO CONFLICT MINERALS COMPLIANCE FOR YOUR ORGANIZATION? (ALTHOUGH ALL LIKELY APPLY, PLEASE CHOOSE THE ONE WHICH REPRESENTS THE GREATEST RISK IN YOUR OPINION). ANSWERED: 266 SKIPPED: 4 A lack of clarity... A lack of supplier information... Non-Issuers... Insufficient internal resources... Uncertainty... Our peers will be ahead of us... NGO, shareholder, customer, consumer... Other 0% 20% 40% 60% 80% ANSWER CHOICES RESPONSES A lack of clarity in the rules (Ex: What constitutes reason to believe?) 12.03% 32 A lack of supplier information/supplier knowledge regarding Conflict Minerals 62.41% 166 Non-Issuers, who have no legal requirements to comply will not cooperate with our requests 8.27% 22 Insufficient internal resources or relevant expertise 7.52% 20 Uncertainty over what constitutes an OECD compliant due diligence framework 3.01% 8 Our peers will be ahead of us in their compliance efforts 0.75% 2 NGO, shareholder, customer, consumer or grass roots pressure or attention 1.50% 4 Other 4.51% 12 TOTAL

80 Q11 WHAT HAS BEEN THE GREATEST DIFFICULTY SO FAR WITH RESPECT TO YOUR CONFLICT MINERALS PROGRAM? (ALTHOUGH ALL LIKELY APPLY, PLEASE CHOOSE THE ONE WHICH REPRESENTS THE GREAT- EST DIFFICULTY IN YOUR OPINION): ANSWERED: 268 SKIPPED: 2 Getting our compliance program started... Getting internal cooperation... Establishing a budget and timetable Determining Scope Working with IT systems to extract/collate... Obtaining supplier responses Evaluating suppliers responses... Other 0% 20% 40% 60% 80% ANSWER CHOICES RESPONSES Getting our compliance program started 13.43% 36 Getting internal cooperation within our organization 8.96% 24 Establishing a budget and timetable 2.24% 6 Determining Scope 11.19% 30 Working with IT systems to extract/collate internal data and conduct our supplier inquiry 8.21% 22 Obtaining supplier responses 35.82% 96 Evaluating suppliers responses/conducting due diligence 12.69% 34 Other 7.46% 20 TOTAL

81 ASSENT SURVEY RESULTS ANALYSIS COMPANIES WHO HAVE BEEN PREPARED FOR >1 YEAR Fair split between issuers and non-issuers, size of company and industry Higher proportion looking to use the EICC form Have made further progress Are twice as likely to view Lack of clarity in the rules as a higher risk than Lack of Supplier Knowledge LOOKING AT DIFFERENT INDUSTRIES Aerospace & Automotive & Industrial Majority are large, listed and prepared Larger teams and using 3rd party support Getting program started and conducting due diligence viewed as a bigger problem compared to obtaining responses from suppliers Electrical & Electronics Smaller companies but over 85% have been preparing for at least 6 months (and 50% for 1 year or more) Have progressed further down the path of compliance (majority have at least begun or completed their first pass RCOI) Overwhelmingly use EICC template Communicating with Supply Chain is the greatest problem Defense Overall the best prepared and progressed (not a single company identified as not having begun their efforts). Uses most amount of 3rd party support Retail Majority NOT using EICC Has the highest proportion of companies either unprepared or in the earliest phases of adoption Using a proportionately high amount of 3rd party support Obtaining supplier responses viewed as on the 5th greatest obstacle 81

82 LESSONS LEARNED 1. Preparedness is the key a. The data consistently shows a positive knock on effect on all other aspects of a company s process b. It is very hard to replace time 2. A standard form such as the EICC is good but a Custom form may have its uses depending on your industry a. Both are superior to a simple DOC 3. Use a Risk-based approach a. Helps align your internal processes, provides direction and acts as proof of Due Diligence 4. Your biggest risk will come from smaller, non-issuers a. Generally less prepared b. Less formalized internal processes 5. The size of your team should be somewhat proportionate to the size of your company a. Even mid and lower caps will have a hard time complying with a team of one 82

83 CONFLICT MINERAL RESOURCE CENTRE SOFTWARE SERVICE PROVIDERS: Assent Compliance: Contact: Jonathan Hughes ipoint: PTC: LAW FIRMS: Baker Hostetler: Contact: Nicole Schnarre Schulte, Roth & Zabel LLP: Contact: Michael Littenberg ACCOUNTING FIRMS: KPMG International: Contact: Sara Ellison CONFLICT FREE SMELTER PROGRAM THE SEC FINAL RULES OECD GUIDANCE EICC GESI TEMPLATE 83

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