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Between a Rock and a Hard Place: The Remix

March 7, 2013 Dodd-Frank
Rock and Hard Place

In our Fall 2012 issue of the Public Company Forum, we provided a brief overview of the SEC’s final rules regarding conflict minerals disclosure and a plan for moving forward to rule implementation.

One of our suggested action steps was to document your analysis of whether the rules apply to your company.

While the SEC’s decision making flow chart is helpfully comprehensive, there are so many check points and exceptions that the document may prove to be unwieldy for many. Furthermore, although the rules are broadly worded and encompass a surprisingly wide array of operations, most companies ultimately will conclude that they do not apply.

What is needed from the outset – before you get too far into the weeds – is an effective, straightforward method to determine, as a threshold matter, whether future analysis is warranted, which we offer here.

First, does your company manufacture products? The SEC does not define the term “manufacture” in its final rules. Instead, it relies on the common definition of the term, which the SEC indicates does not cover those issuers that only service, maintain or repair products containing conflict minerals.

Even if your company does not manufacture products, the rules may apply if you contract to manufacture your products. The SEC relies on a facts and circumstances determination when considering whether a company “contracts to manufacture” its products. Applicability depends on the degree of influence exercised by the issuer on the manufacturing of the product in light of the issuer’s business and industry.

We recommend that you solicit written responses to both of these questions from all key operations personnel, even if you are confident that the answer is “no,” in order to memorialize your compliance with your disclosure controls and procedures.

If these first two questions are answered in the negative, the rules do not apply. If either question is answered in the affirmative, the evaluation must continue.

Next, determine whether the product contains any “conflict minerals.” Conflict minerals include gold, cassiterite, columbite-tantalite and wolframite, and their derivatives, which include tantalum, tin and tungsten, that originate in the Democratic Republic of the Congo (the DRC) or any country adjoining the DRC.

If the product contains a conflict mineral, you must then ask whether the mineral is necessary to the product’s production or functionality. The SEC failed to define how the mineral might be necessary to the product’s production or functionality, but did offer some guidance on how to think through such a facts and circumstances analysis.

The SEC also cautions companies to not rely on a de minimis exception to these rules. If any trace of a conflict mineral appears in the product, and it is necessary to the product’s functionality or production, the rule is triggered.

The questions above are threshold questions that determine whether the conflict minerals rules apply to your company.  If you find yourself subject to these rules, your analysis must continue to determine what, if any, type of disclosure is required for those companies whose products contain conflict minerals.  Throughout this process, recall these disclosure controls and procedures best practices:

  • Your analysis should include top management as well as those with direct knowledge of your supply chain.
  • Document all investigations, inquiries of vendors and internal evaluations.
  • Prepare a written report which analyzes applicability of the rules for each product line, division or department.
  • Consider whether it would be appropriate to obtain from certain vendors certifications as to the absence of conflict minerals or the origins thereof.
  • Review each product, division or department on an annual basis.
  • Review and evaluate these disclosure controls and procedures for effectiveness in a formal session conducted by top management on a quarterly basis.

Related: Between a Rock and a Hard Place: Conflict Minerals Compliance (Public Company Forum, Fall 2012)

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