Supporting Conflict-Free Sourcing? If So, You Will Be Punished…

By now, you have most likely seen any number of announcements and reviews of SEC’s May 30 initial set of Conflict Minerals Q&A. In our view, it offered little in the way of earth-shattering or disruptive news. However, Question 10 is raising some eyebrows:

(10) Question:
If an issuer determines that the products it manufactures or contracts to manufacture contain conflict minerals from the Democratic Republic of the Congo or an adjoining country, but the products are “DRC conflict free,” is that issuer required to file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit of the Conflict Minerals Report?

Yes. The issuer, however, is not required to disclose the products containing those conflict minerals in its Conflict Minerals Report or provide certain other disclosures specified in Item 1.01(c)(2) of Form SD because those products are “DRC conflict free.”

The upshot is if you know materials in your supply chain are from verified in-region conflict-free initiatives such as Solutions for Hope, capacitor manufacturer KEMET’s “Partnership for Social and Economic Sustainability” or the Conflict Free Tin Initiative, then SEC expects a CMR audit for those CMs for calendar year 2013. This appears to be a disincentive to responsible sourcing, and even counter to the CMR audit deferral period allowed for products that are determined to be DRC Conflict Undeterminable.

The basic questions here:

  • Is Undeterminable decided based on comprehensive knowledge of the complete product (i.e., information known about all four CMs throughout the entire product)?
  • Or does knowledge that some limited component material did originate from DRC negate the classification of the complete product as Undeterminable?
  • Is reporting (and the CMR audit) applicable on a conflict mineral basis, or on a product-level basis?

Where might this lead?

First, different challenges and interpretations are emerging that question if knowledge of some limited component material negates the Undeterminable classification, and therefore if a CMR audit is required in that circumstance. Similarly, we anticipate some companies may challenge the idea that an audit is required for verified non-conflict sources because that could be viewed as a disincentive/barrier to meeting to law’s intent.

Second, some companies have developed DRC Free procurement policies. Such policies benefit issuers by eliminating CMR audit costs, but could be viewed as contrary to the intent/goal of the law. We have ourselves seen companies do this and it is also discussed in a new analysis from the law firm Greenberg Traurig, LLP, published in the National Law Review.

Third, depending on the challenges and interpretations mentioned above, companies who had not planned on conducting a CMR audit may now have to face doing so – and funding it. Conversely, some companies who had made plans/preparations to be audited may no longer do so.

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