As more companies complete their conflict minerals Reasonable Country of Origin Inquiry (RCOI) and smelter/refiner verification for their CY2015 SEC disclosures, many are surprised to find diminishing data gaps and uncertainties prevalent in previous years. Information is better, widely available and more smelters/refiners have been audited. Generally speaking, this is good news. But it creates a conundrum for some issuers who might not have expected this development yet, especially given the status of the legal challenge to the SEC’s conflict minerals disclosure rules. What’s the problem, you may be asking. It all comes down to how you summarize the information.
Let’s begin our trip Down The Rabbit Hole.
A product can be classified as “DRC Conflict Free” (using that term for ease of discussion) as a result of the RCOI or from subsequent due diligence. When RCOI processes conclude that the company has no reason to believe that any necessary 3TG in a product may have originated from Covered Countries, or that the necessary 3TG originated from 100% recycled or scrap materials, the product(s) is/are “DRC Conflict Free” because no materials originate from Covered Countries. In this case, the filing issuer must only submit a Form SD and no Independent Private Sector Audit (IPSA) is required.
If the RCOI indicates that some necessary 3TG may have originated from a Covered Country and did not originate from 100% recycled or scrap materials, additional due diligence is required. Two outcomes of the due diligence are generally possible – (1) confirmation that 3TG may have originated (or did indeed originate) from a Covered Country, or (2) a finding that the initial RCOI indication was incorrect and the 3TG did not originate from a Covered Country after all. In the second outcome, the relevant materials/products are considered “DRC Conflict Free” as discussed in the above paragraph. See Final Release, pages 151 – 152, and Section (c) of Item 1.01 – Conflict Minerals Disclosure and Report. In the case of the first outcome, filing issuer must submit a Conflict Minerals Report (CMR) in addition to the Form SD. This is the situation where a smelter/refiner sources from a Covered Country but doing so does not fund or benefit armed groups as verified by the Conflict Free Sourcing Program (CFSP) or similar programs.
Because of the NAM v. SEC lawsuit, issuers filing the SEC conflict minerals disclosure are not compelled to provide specific conclusionary or determination wording in CY2015 CMRs. Any such wording in a CMR is voluntary, but where the phrase “DRC Conflict Free” is used – or the status is strongly implied – an IPSA is required*. Don’t forget, the determinations (or lack thereof) are to be made at the product level, not the company level. Aggregating different product determinations to come up with an “averaged” (or diluted) determination for the entire company is not appropriate, which itself adds to the complexity. The CMR does not need to include the product names/descriptions for products that are “DRC Conflict Free”, nor must the CMR include the list of smelters/refiners associated with “DRC Conflict Free” products. See Final Release, pages 183 and 194, and Section (c)(2) of Item 1.01 – Conflict Minerals Disclosure and Report.
To sum it up – if due diligence confirms that at least one product contains 3TG that may have originated (or did indeed originate) from Covered Countries AND is “DRC Conflict Free”, then you must choose how to approach your CMR language for the product(s).
- If you voluntarily use the words “DRC Conflict Free” in the CMR for any product(s), then an IPSA must be conducted. But the CMR does not have to include names/descriptions for the product(s), nor must the CMR include a list of smelters/refiners associated with the product(s).
- If you do not to use the words “DRC Conflict Free” in the CMR for any product(s), then no IPSA is required. But the CMR must include names/descriptions for the product(s) and the list of smelters/refiners associated with the product(s).
Technically speaking, the IPSA is limited to applicable CMR wording specific to only the DRC Conflict Free products, but practically speaking, the due diligence framework design and measures undertaken will most likely be company-level processes rather than product-level processes. We expect in reality, an IPSA will typically have a company-level scope.
Finally, we are frequently asked how to balance SEC filing language with customer requirements for being Conflict Free. The answer is actually simple – you probably don’t need to. Customers generally rely on the technical information submitted directly to them, for instance through a CMRT, rather than what is filed with the SEC. Some customers may cross-reference the two, but that isn’t very likely given that everyone faces the same filing deadline. And companies sophisticated enough to do this are very likely to be sophisticated enough to understand the differences.
Please feel free to call us with any questions.
* Again, the IPSA is not required for Form SD-only filers, even if the phrase “DRC Conflict Free” is used. The IPSA is only applicable to CMRs.