Conflict Minerals – Are You a Believer?

You probably heard about the February 4, 2014 debate between Bill Nye The Science Guy and Ken Ham on evolution versus creationism.  The basis of the differing positions is, in our view, the idea of faith versus proof.

You may be scratching your head and asking how this is relevant to conflict minerals.  Well, there may be more to it than it appears.

In recent weeks, the attention of many companies has turned to drafting the SEC Form SD and Conflict Minerals Reports (CMRs).  These companies are looking at the SEC’s disclosure requirements in a different light based on actual supplier responses to conflict minerals information requests.

One conundrum of particular interest concerns what amount of information is adequate for the Reasonable Country of Origin Inquiry (RCOI).  Pages 147 – 149 of the final release offer some guidance on the matter, although there is a great deal of room for interpretation.  The primary points are:

  • General standards were provided, stating that the RCOI “must be reasonably designed and performed in good faith”. 
  • A company that “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” will have satisfied the RCOI.
  • “Reasonably reliable representations” can come from directly from a processing facility or indirectly from companies in an issuer’s supply chain.  In either case, an issuer “must have reason to believe these representations are true given the facts and circumstances surrounding those representations”.
  • Note that the SEC chose not to specify the steps or depth of information necessary to constitute the RCOI, as that will “depend on the available infrastructure at a given time, and the SEC expects that to evolve over time”.

In our opinion, reasonable design can be demonstrated if an issuer uses the EICC Common Reporting Template as the basis for their information collection tool and can provide documentation concerning the process used to select the suppliers to which the information requests were sent.

Good faith effort is certainly subjective, but that may be demonstrated by showing that information requests were sent to suppliers, and the issuer tracks, reviews and conducts follow-up on supplier responses.  We also believe that consistency in executing the process supports good faith efforts by limiting exceptions or special treatment of certain suppliers.  IT solutions can be effective at automating and executing most of these tasks and maintaining back up documentation, although such a system is not required.

One way to read the SEC’s statement on page 148 that “reasonably reliable representations” should identify the 3TG smelters/refiners is that this is only an example, not a requirement, especially when taken in conjunction with their expectation that the infrastructure will evolve over time.  At this time, suppliers may not have identified all their smelters/refiners, as they too might have to rely on representations from their suppliers.

This all sets up the fundamental questions at the heart of the matter:

  • Can an issuer’s RCOI be considered reasonably designed and performed in good faith where suppliers are unable to identify their smelters/refiners because of the “available infrastructure” at this time?
  • Can a supplier provide “reasonably reliable representations” in the absence of identifying smelters/refiners?
  • How much, and what kind of, information is adequate for issuers to decide if they have reason to believe representations are true given the facts and circumstances surrounding those representations?

Back to the question of creationism versus evolution:  do you have faith in your suppliers’ responses that materials from Covered Countries are not in their supply chain?  Is there reason to believe otherwise?  Do you want more proof from your suppliers to support their statements/declarations?

Ultimately, the answer determines the content of the Form SD and the need for the CMR.  Based on the RCOI, if you have no reason to believe that conflict minerals originated in Covered Countries, then no CMR is needed.  Otherwise, you must conduct due diligence even in order to be classified as “DRC Conflict Undeterminable”, and then file a CMR.


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