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1 Conflict minerals provision of the Dodd-Frank Act: Debrief of SEC s final rules September 5, 2012 Administration information learning credits Administrative information for CPE: CPE regulations require online participants take part in online questions You must respond to a minimum of 4 questions in order to be eligible for CPE credit Polling gquestions will appear on your media player on top of the slides Send Questions via Ask a Question Button Help Desk: or outside the U.S. at You can print out presentation slides from the Supporting Material icon Administrative information for CLE: To request CLE credit, Elizabeth Quinn (EQuinn@KSLAW.com) All participants who certify that they attended the entire session and wish to receive CLE credit will receive a Universal Certificate of Attendance. Stay tuned for (and make note of) the verification code at the end of the webcast. King & Spalding is an accredited provider of CLE credit in California (Provider #10947), Georgia, New York, Texas and by application in Virginia. Note to New York Barred Lawyers: The content of this program is considered both Transitional and Non-Transitional. The webcast format is only approved for Experienced Lawyers. 2 1

2 Agenda Introduction Overview of Final Rules Roundtable discussion Concluding remarks Q&A 3 Today s presenters Jim Low Partner, KPMG LLP Keith Townsend Partner, King & Spalding Jim chairs KPMG s Americas FS Regulatory Center of Excellence focusing on Dodd-Frank. Jim is an Audit partner in KPMG LLP s (KPMG) Financial Services practice in the Minneapolis office and has extensive industry experience serving large, diversified financial services organizations. Keith has significant experience in advising public company clients on Securities and Exchange Commission (SEC) reporting and disclosure requirements, corporate governance issues, and other corporate/securities matters. His clients and transactions have spanned a number of industries, including the real estate, life sciences, healthcare, technology, consumer products, manufacturing, and banking industries. 4 2

3 Today s presenters (continued) Bala Lakshman Director, KPMG LLP Jeff Perry Attorney, King & Spalding Bala is a member of KPMG s Strategic Services Group, specializing in supply chain diligence. He has over 10 years of professional experience and has advised numerous clients in the tech, telecom, aviation, and manufacturing sectors. Prior to KPMG, Bala worked with the consulting firm Bain & Co. as a Case Team leader, where he specialized in operations excellence. His other work experience includes Philips Semiconductors as a process engineering manager and Tata Steel in India as an engineer. Jeff is an attorney with the Litigation and Antitrust Practice Group in Washington, D.C. His practice focus includes advising a broad spectrum of industry clients in regulatory and litigation matters. His work experience includes representing major energy companies in litigation matters; assisting in the resolution of construction disputes involving critical facilities; and helping clients to understand, anticipate, and quickly respond to a wide range of regulatory challenges, both in the United States and abroad. 5 SEC s three-step compliance process Do you use conflict minerals? Determine country of origin Conduct supply chain due diligence 6 3

4 Step one: Do you use conflict minerals? Rule applies to SEC reporting companies where conflict minerals are necessary to the functionality or production of a product manufactured by the company or contracted by the company to be manufactured Meaning of Manufactured Meaning of Contracted to be manufactured Are 3TGs necessary to functionality or production of a product? Additional Considerations Not defined by rules SEC deems term to be generally understood. Company that only services, maintains, or repairs a product containing conflict minerals is not considered to be manufacturing that product Depends on the degree of influence a company exercises over the materials, parts, ingredients, or components to be included in any product that contains conflict minerals Necessary to Functionality Intentionally added? Necessary to the product s generally expected function? Is the primary purpose of the product ornamentation or decoration? Necessary to Production Intentionally included in the production process? Included in the product? Necessary to produce the product? Exempts minerals outside the supply chain prior to January 31, 2013 Exempts products where 3TG metals may exist in production/tools but not in final product No de minimis exception included in final rules 7 Step two: Determine country of origin General Inquiry Does the company have reason to believe (or know) that conflict minerals may have originated in the covered countries Actions that constitute a Reasonable Country of Origin Inquiry (RCOI) vary according to a company s facts and circumstances Practice Pointers Does the company have reason to believe that conflict minerals may have originated in the covered countries? Inquiry can be satisfied if a company obtains reasonably reliable representations that minerals did not originate in the covered countries, or that they are from recycled or scrap sources As long as the company has a reason to believe such representations are true Reason to believe a processing facility s representations if the facility received a conflict-free designation Take into account any applicable warning signs or other suspicious circumstances Source: STATE DEPARTMENT, HUMANITARIAN INFORMATION UNIT, DEMOCRATIC REPUBLIC OF THE CONGO MINERAL EXPLOITATION BY ARMED GROUPS MAP (Jun. 14, 2011), available at 8 4

5 Step three: Conduct supply chain due diligence Exercise due diligence on the source and chain of custody of conflict minerals. Follow an internationally or nationally recognized framework. Has due diligence determined that conflict minerals are not from the covered countries or are from scrap or recycled materials? No File Form SD and Conflict Minerals Report as an exhibit. Include description of due diligence measures. Was due diligence able to determine whether the conflict minerals financed or benefitted armed groups? Yes Yes No File Form SD disclosing determination and describe the RCOI, due diligence measures, and results. Less than two years after effective date of rule (four years for smaller reporting companies)? Conflict Minerals Report must include independent private sector audit report expressing opinion as to whether (1) design of due diligence measures conforms to criteria set forth in framework and (2) description of due diligence measures is consistent with process undertaken. Report must include a description of products not DRC Conflict Free, the facilities used to process the minerals necessary to the products, the country of origin of the minerals, and efforts to determine the mine or location of origin of the minerals. End No End Conflict Minerals Report must include Yes a description of products that are DRC Conflict Undeterminable and the steps taken since end of period covered in the last report to mitigate risk that necessary minerals benefit armed groups. No audit is required. End 9 Filing of conflict minerals information Location of Conflict Minerals Information Companies will provide conflict minerals disclosures in the body of a new specialized disclosure report on a new form, the Form SD A company must also make its conflict minerals disclosure available on its Web Site for one year Filing of Conflict Minerals Information Form SD, including Conflict Minerals Report, is to be filed under the Exchange Act and thereby subject to potential Section 18 liability Uniform Reporting Period Disclosures cover the calendar year regardless of a company s fiscal year Form SD covering the prior year must be filed by May 31 First reporting period will be from January 1 to December 31, 2013, and the first Form SD must be filed by May 31, 2014 Only Applies to Public Reporting Companies Rule applies to issuers that file reports under 13(a) or 15(d) of the Exchange Act 10 5

6 Roundtable session Roundtable session 11 Conflict minerals policies Final rule from the SEC: An issuer s policies with respect to the sourcing of conflict minerals will generally form a part of the issuer s reasonable country of origin inquiry, and therefore would generally be required to be disclosed in the issuer s Form SD. Organisation for Economic Co-operation operation Distribution of companies that have a policy with a reference to conflict minerals and Development (OECD) guidelines: Adopt, and clearly communicate to suppliers and the public, a company policy for the supply chain of 8% minerals originating from conflict-affected and 3% 3% high-risk areas. This policy should incorporate Electronics 5% the standards against which due diligence is to Semicondutors be conducted 43% Consumer Products 77 companies have a reference to conflict 8% minerals as part of corporate or sustainability policy outlines on their Web sites (as of Q1 2012). Extractives Telecom Industrial Products Policies vary widely. Themes include commitment to sourcing from only conflict-free 30% Others regions, supplier requirements/expectations, reference to the Dodd-Frank legislation, or an acknowledgement of the issue. Securities and OECD Due Diligence Release No ; Minerals from Conflict-Affected Sources: Exchange Commission, 17 CFR Parts 240 and 249b, File No. S ; Guidance for Responsible Supply Chains of and High-Risk Areas 12 6

7 Difference between RCOI and due diligence The final rule has differentiated between RCOI and supply chain due diligence: Final rule and OECD guidelines reference smelter identification as a key step for RCOI. If the result of the RCOI does not indicate that all 3TG material came from conflict-free smelters or recycled sources, then further supply chain due diligence will be required to determine whether the conflict minerals financed or benefitted armed groups. Implications for downstream companies 1. Strong incentive for companies to source (directly or indirectly) only from CFS-certified smelters. This translates to greater motivation for companies to disengage from suppliers who do not report/source from non-cfs-certified smelters. 2. CFS only sourcing could be reflected in many companies eventual conflict minerals policies. 3. Most companies will lack the resources to perform additional due diligence beyond the smelter. Hence companies will rely on industry association, trade groups, and DRC-based NGOs to assist in determining chain of custody (also mentioned in OECD guidelines). Chain of custody for gold from the DRC region is almost nonexistent with only one legally operating gold mine. However, this is not expected to be a major issue for U.S. companies since: I. Most of the gold in the supply chain is from recycled materials II. The DRC accounts for only 1 percent of the world s gold supply. 13 Ideally, where should a company want to be two years from now? August 22, 2012 Final rule issued by the SEC January December 2013 First effective period for due diligence and reporting May 31, 2014 First report due May 31, 2016 Indeterminate not an option for large companies May 31, 2018 Indeterminate not an option for small companies August 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2018 Possible conclusions from due diligence First two years (or four for smaller companies) Conflict Minerals Free Not been found to be DRC conflict free Undeterminable Beyond two years (or four years for smaller companies) Conflict Minerals Free Not been found to be DRC conflict free (even if undeterminable) Not a desirable outcome from PR/customer point of view Audit trigger for Undeterminable Independent private sector audit not required for Undeterminable issuers Independent private sector audit required for all issuers Source: Securities and Exchange Commission, 17 CFR Parts 240 and 249b, Release No ; File No. S

8 What should a company do now Summary of KPMG s four-step approach Develop strategy, use OECD guidelines, assist in policy development Identify suppliers of 3TG metals and conduct RCOI and due diligence Institutionalize process Prepare SEC disclosure 1.1 Identify key stakeholders to communicate roles 2.1 Compile listing of affected products (containing 3TG) and responsibilities and map to their suppliers 1.2 Develop criteria to determine 2.2 Develop Standard Operating terms such as contract to Procedure (SOP) manufacture, necessary for 2.3 Develop plan to functionality, etc. assess gaps/risks with 1.3 Develop detailed one-, two-, suppliers and develop and four-year plan to address communication materials CM requirements 2.4 Distribute supplier 1.4 Conduct awareness training communication material and for key stakeholders conduct supplier training 1.5 Current-state analysis in 2.5 Execute supplier survey relation to OECD guidelines. and analyze results 1. 6 Develop conflict minerals towards RCOI policy 2.6 Validate responses and perform supplier follow-ups as necessary 2.7 Perform additional due diligence on conflict-free status if necessary 3.1 Roll out SOP and processes to identified business units (in case of a Pilot) 3.2 Perform test procedures against OECD guidelines 3.3 Compile results of control testing 3.4 Develop remediation plan for deficiencies identified during test procedures 3.5 Identify and prioritize improvement opportunities 3.6 Update project plan and CM program roadmap describing the due diligence process 4.1 Compile Conflict Minerals Disclosure/Report including documentation of steps taken 4.2 Full disclosure of products and facilities used that are affected 4.3 Prepare for external audit if necessary 4.4 Incorporate lessons learned for next year s effort. Make changes to noncompliant suppliers and/or supplier agreements to facilitate positive outcome in future years 15 Consider running a Pilot program KPMG s Dodd-Frank conflict minerals clients have taken both a Pilot approach as well as tackling all products at once Pilot program All products at one ( Big bang ) Description Select one product family, division, or Consider all products for due diligence category for initial investigation, at once followed by all remaining products Pros Allows development of a process which can be subsequently rolled out on a larger scale Early identification of pitfalls Fewer resources required Total company focus on objective Potentially faster route to full implementation Cons Potentially adds implementation time More resources required than through Pilot approach Suitable for companies with A large number of products and suppliers to consider Few products and suppliers that are covered by the rule 16 8

9 What does contract to manufacture really mean? Whether a company is considered to contract to manufacture a product depends on the degree of influence it exercises over materials, parts, ingredients, or components A company is not considered to contract to manufacture a product if it does no more than: Negotiate contractual terms that do not relate to manufacturing Affix its brand to a generic product Service, maintain, or repair Company merely specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, such as: Price Insurance Tech support IP rights Third party manufactures generic products that include a company s: Brand Marks Logo Label Companies that service, maintain, or repair a product manufactured by a third party Jewelry retailers Degree of influence needs to be determined jointly by Legal and Sourcing/merchandizing Potential PR backlash by defining too narrowly Trade-offs to be made Difficulty completing due diligence by defining too broadly 17 Smelter certification Final rule from the SEC:..we do view an issuer as satisfying the reasonable country of origin inquiry standard if it seeks and obtains reasonably reliable representations indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources.. An issuer would have reason to believe representations were true if a processing facility received a conflict-free free designation by a recognized industry group that requires an independent private sector audit of the smelter. Conflict Free Smelter Program update from EICC-GeSi Source: Securities and Exchange Commission, 17 CFR Parts 240 and 249b, Release No ; File No. S Source:

10 Final thoughts Questions and Answers 19 Contact us KPMG King & Spalding Jim Low Partner, KPMG Keith Townsend Partner, King & Spalding Bala Lakshman Director, KPMG Jeff Perry Attorney, King & Spalding

11 KPMG s association with other industry groups and leading organizations on conflict minerals Automotive Industry Action Group Aerospace Industry Association World Gold Council Invited by Automotive Industry Action Group to join the legislation council and help develop guidelines for member companies KPMG professional assisted to develop the association s working group on conflict minerals and serves as secretary to the conflict minerals advisory panel Conducted a set of information Webinars to educate members on conflict minerals; currently developing a presentation for the next quarterly conference Appointment by the World Gold Council s (WGC) Steering Group on Conflict Free Gold to assist in the development of its assurance standards for conflict-free gold for WGC and its 23 members OECD Active participant at the second joint meeting on the implementation of OECD-UN due diligence recommendations for responsible mineral supply chains Provided advisory assistance to the OECD on the responsible gold guidelines United Nations EICC-GeSI KPMG is a member sponsored by the United Nations (UN) Global Compact Principles for Responsible Investment Initiative In November, KPMG presented Conflict Minerals to the Expert Group Meeting on Responsible Business Investment in High-Risk Areas KPMG was asked to assist the UN to review and develop its first annual report on the implementation of the responsible business guidelines Active participant in all EICC-GeSI s Extractives Group workshops on Conflict Minerals 21 KPMG's experience with clients conflict minerals compliance efforts We are currently supporting several conflict minerals engagements with well-known clients in the U.S. and overseas Our recent conflict minerals engagements Client Scope Overall Project Lead* Global manufacturer of consumer health care products Development of a supply chain due diligence policy for conflict minerals Development of process for due diligence in compliance with OECD guidelines Compliance Reporting: Prepare the requisite it disclosures based on exposure to conflict (approx $65 billion in revenue) minerals Japanese Consumer Simultaneous Pilot runs for three independent business units to understand the usage Electronics manufacturer of 3TG metals in the supplier network and risk diagnostic using OECD criteria (approx $100 billion in revenue) Used the EICC-GeSi questionnaire to survey global suppliers Assisting with the implementation and rollout to the rest of the company Diversified Industrial Development of a due diligence strategy for conflict minerals ($60+ billion in revenue) Development of process for due diligence Creation of an auditable process Semiconductor manufacturer Telecom ($10+ billion in revenue) Helped the company develop baseline due diligence requirement in the form of common policy guidelines to be followed by business units Shared industry leading practices in the due diligence and helped with documentation of findings ($10 billion in revenue) y g p g p International Retailer ($100+ billion in revenue) Assisting with development of strategy, policy, and framework to achieve compliance Developing an Auditable Standard Operation Procedure Plans to assisting in evaluating supplier response and follow-up actions Plans to assist with regular internal audits to track overall progress Primary: Procurement/IR/ Legal Secondary: Corporate Social Responsibility Primary: Corporate Social Responsibility Secondary: Procurement/ IR/Legal Primary: Procurement Secondary: Engineering/ Legal/Finance Primary: Supplier Quality Secondary: Legal Primary: Compliance Secondary: Controller Aerospace manufacturer ($50+ billion in revenue) Assisting with supplier training and workshops to train suppliers on the due diligence requirements under Section 1502 Primary: Procurement Secondary: Supply Chain Note: *It is expected that ownership of the process will change during different phases of the project 22 11

12 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 12