We were recently reminded of a famous and amusing commercial from the 1980s that brought the phrase “parts is parts” into the popular lexicon. But in our case, the subject is conflict minerals rather than chicken.
By now, supplier responses to conflict minerals information requests have filled the in boxes of companies and data management systems. Although not universal, the EICC-GeSI Conflict Minerals Common Reporting Template has become the most common format for collecting the data. One question in the Template that may be seen as relatively benign presents an opportunity for significant implications and interpretations: the declaration scope.
Many companies do not have a definitive way to link specific incoming materials/parts/components to individual products and customers. Consider typical generic commodity components like nuts, bolts, wire and many basic electronic components, which may be stored in a commingled manner in boxes or bins. Another common challenge arises when manufacturers obtain parts from distributors or vendor managed inventories. In these situations, parts from multiple manufacturers are frequently commingled and not differentiated when incorporated into the final product, making it impossible to link specific component manufacturers with any particular final product.
Suppliers creating a company-level (or possibly division-level) conflict minerals declaration ease the burden of connecting the dots – any product may contain any component/material from any of their suppliers, and therefore any smelter and country of origin identified in their supply chain. Easy enough, it seems.
But not so fast. This fully-inclusive perspective is one interpretation of the absence of supplier-product linkages, but there is an opposing view.
Absent the ability to link specific materials/components from specific suppliers (and their identified smelters and countries of origin), is it plausible that an issuer has no reason to believe that their specific materials/components originated from any particular smelter or country of origin, including Covered Countries? Depending on the issuer’s individual facts, circumstances and business risk, this “exclusive approach” may seem viable, but it could be counter to the SEC requirements.
Page 154 of the final release offers an analogy to this situation. To paraphrase, where a material comes from a “mixed smelter” (i.e., a smelter that processes materials from multiple countries including Covered Countries), that circumstance “should provide an issuer with reason to believe that its conflict minerals may have originated in the Covered Countries.” It stands to reason that the concept is the same if the word smelter is replaced with “supplier”.
So while “parts is parts”, we aren’t sure if issuers will be able to argue “what parts is what” or “which parts is where”. Issuers considering an “exclusive approach” should carefully evaluate that in light of the mixed smelter analogy.