The SEC’s New Conflict Minerals RuleAn Overview for Manufacturers and Their Suppliers

A White Paper by Charles F.G. Kuyk, III, and Meghan K. Rzepczynski

December 2012

Audit  |  Tax  |  Advisory  |  Risk  |  Performance

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Under the Securities and Exchange Commission’s new Conflict Minerals Rule, publicly traded manufacturers whose products incorporate certain minerals mined in and around the Democratic Republic of the Congo will need to disclose the use of those minerals in annual filings starting in 2013. The objective of the rule is to discourage the use of conflict minerals – tantalum, tin, gold, and tungsten – and reduce the assets of the Congolese militias that control their sale. This paper summarizes key issues facing manufacturers and their suppliers as they prepare to comply with the Conflict Minerals Rule.

IntroductionOn Aug. 22, 2012, the Securities and Exchange Commission (SEC) adopted a final rule requiring both domestic and foreign issuers (SEC registrants) to disclose their use of certain “conflict minerals” mined in the Democratic Republic of the Congo (DRC) or adjacent countries if those minerals are “necessary to the functionality or production” of products that those issuers manufacture.

What prompted the SEC to promulgate this regulation? A provision of 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act, the bulk of which addresses reform measures affecting the financial services industry. Specifically, Section 1502 of the Dodd-Frank Act directed the SEC to develop regulations requiring manufacturers to disclose their use of tantalum, tin, gold, and tungsten, which are used in a variety of goods including mobile phones, computers, automobiles, and many other consumer and commercial products.

Armed rebels in the DRC rely on the sale of conflict minerals to finance their terrorist campaigns, which have killed or injured many people in Central Africa. The Conflict Minerals Rule is an effort to deter those sales and reduce resources available to these militias.

Registered companies first must determine whether they fall under the requirements of this rule and, if so, take steps to develop a cost-effective and efficient response plan that includes policies, procedures, and documentation related to the sourcing of minerals used in their manufacturing processes and products. For many companies, complying with the rule will prove challenging because they have not previously researched and documented the source of materials in their products’ supply chains.

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The SEC’s New Conflict Minerals Rule: An Overview for Manufacturers and Their Suppliers

TrendsWhat Is the Conflict Minerals Rule?The Conflict Minerals Rule, through public disclosure of companies’ mineral supply chains,1 strives to provide transparency on the origin of certain minerals so as to discourage or eliminate the use of conflict minerals. This will, in turn, reduce or eliminate the funding of armed groups responsible for extreme violence and human rights abuses in the DRC and adjoining countries.

SEC Chairwoman Mary L. Schapiro testified in her opening statement at the SEC Open Meeting on Aug. 22, 2012, that:

“The statute explains that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the region and that the emergency humanitarian crisis there warrants these disclosure requirements.2”

As described in the statute, Congress:

“… intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC. This section explains that the exploitation and trade of conflict minerals by armed groups is helping to finance the conflict and that the emergency humanitarian crisis in the region warrants the disclosure requirements established by Exchange Act Section 13(p).3”

What Are Conflict Minerals?The Dodd-Frank Act defines conflict minerals as “(A) columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassiterite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives; or (B) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the DRC or an adjoining country.4” (See Exhibit 1.)

Exhibit 1: Covered Countries Map

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What Does the Rule Require?In general, if issuers manufacture products containing such minerals, the Conflict Minerals Rule requires that they conduct a “reasonable inquiry” about the origins of their minerals to determine if they originate from the covered countries.

Issuers using recycled or scrap conflict minerals also must conduct inquiries to confirm that the minerals are, indeed, recycled or scrap, but they will not be required to conduct due diligence of their supply chain and file a Conflict Minerals Report. Instead, recycled and scrap conflict minerals are considered to be DRC conflict-free.

Under the Conflict Minerals Rule, reasonable inquiry requires companies to examine their products, procurement processes, and supply chains closely to determine the extent to which they are incorporating conflict minerals into their products. This will require issuers to develop policies, procedures, and documentation related to the sourcing of minerals used in their manufacturing processes.

The Conflict Minerals Rule includes a flowchart (Exhibit 2) depicting how issuers determine if they must disclose their use of conflict minerals and the decision steps to be followed. As the flowchart indicates, the general steps issuers must follow include:

1. Determining if their company is a manufacturer or if it contracts to manufacture;

2. Determining if their company uses conflict minerals necessary to the functionality or production of its products;

3. Conducting a country-of-origin inquiry;

4. Performing supply chain due diligence; and

5. Preparing a Form SD and Conflict Minerals Report, including an independent audit.

No de Minimis ExceptionFollowing the issuance of its Proposing Release, the SEC requested comments on the rule, including whether there should be a de minimis threshold in the rule based on 1) the amount of conflict minerals used by an issuer in a particular product or, 2) the overall enterprise, and, if so, whether such a threshold would be consistent with the Conflict Minerals Statutory Provision.

After considering the comments, the SEC made no provision in its final rule for a de minimis exception, in part because the statute itself did not contain a de minimis exception. Furthermore, the requirement that the minerals be “necessary to the functionality or production” of a product had no de minimis threshold because conflict minerals used even in a very small amount could be considered “necessary” to the product’s functionality or production.

The Conflict Minerals Report must also include an independent private sector audit report, which expresses an opinion or conclusion as to whether the design of the issuer’s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the issuer’s due diligence measures is consistent with the process undertaken by the issuer. Also, include a description of the products that have not been found to be DRC Conflict Free, the facilities used to process the necessary conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin of those minerals with the greatest possible specificity.

Y Y

Y

N

Y N

N

Y

N

Y

Y N

Does the issuer manufacture or contract to manufacture products?

Exercise due diligence on the source and chain of custody of its conflict minerals following a nationally or internationally recognized due diligence framework, if such framework is available for a specific conflict mineral.

In exercising this due diligence, does the issuer determine the conflict minerals are not from the covered countries or are from scrap or recycled?

The Conflict Minerals Report must also include a description of products that are “DRC Conflict Undeterminable” and the steps taken or that will be taken, if any, since the end of the period covered in the last Conflict Minerals Report to mitigate the risk that the necessary conflict minerals benefit armed groups, including any steps to improve due diligence. No audit is required.

END

END

Rule does not apply.

END

Based on a reasonable country of origin inquiry (RCOI), does the issuer know or have reason to believe that the conflict minerals may have originated in the DRC or an adjoining country (the covered countries)?

File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and the results of the inquiry.

END

File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and due diligence measures taken and the results thereof.

END

Does the issuer file reports with the SEC under Sections 13(a) or 15(d) of

the Exchange Act?

START

Based on the RCOI, does the issuer know or reasonably believe that the conflict minerals come from scrap or recycled?

Are conflict minerals necessary to the functionality or production of the product manufactured or contracted to be manufactured?

YNIs it less than two years after effectiveness of the rule (four years for Smaller Reporting Companies)?

N

N N

Y

if newly mined if potentially scrap or recycledN

Were the conflict minerals outside the supply chain prior to January 31, 2013?

Source: SEC Final Rule, “Conflict Minerals,” Release No. 34-67716, Flowchart Summary of Final Rule, page 33

Exhibit 2: Conflict Minerals Rule Flowchart

File a Form SD with a Conflict Minerals Report as an exhibit, which includes a description of the measures the issuer has taken to exercise due diligence.

ln exercising the due diligence, was the issuer able to determine whether the conflict minerals financed or benefitted armed groups?

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Contract to ManufactureThe Dodd-Frank Act modifies the Securities Exchange Act of 1934. The modification to Section 13(p)(1)(A)(ii) of the Securities Exchange Act requires issuers that file a Conflict Minerals Report to describe their products manufactured or “contracted to be manufactured” that are not DRC conflict-free. Thus, products that are manufactured by third parties and incorporate conflict minerals might require reporting by the issuer. Although the rule does not define the term “manufacture,” it does provide a definition of “contract to manufacture.”

Determining whether an issuer must comply with the rule is based on the degree of influence the company exercises over the manufacture of a product. The Conflict Minerals Rule has excluded any issuer as contracting to manufacture a product if the issuer does no more than the following:

1. Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product (for example, provides training or technical support for the product or provides insurance or intellectual property rights);

2. Affixes its brand, marks, logo, or label to a generic product manufactured by a third party; or

3. Services, maintains, or repairs a product manufactured by a third party.5

Current Industry InitiativesA number of current industrywide initiatives seek to promote transparency of the conflict minerals supply chain and thereby assist issuers in fulfilling the objectives of the Organisation for Economic Co-operation and Development (OECD) Guidance. Many downstream manufacturers will find it difficult to identify enterprises upstream from their direct suppliers. In such cases, issuers might cooperate with other companies in their industry with which they share suppliers through industry associations. A brief summary of some of these industry initiatives follows.6

EICC/GeSI

The Electronic Industry Citizenship Coalition (EICC) is an association of 65 global electronics companies established to improve social, economic, and environmental conditions in the electronic supply chain. EICC has teamed with the Global e-Sustainability Initiative (GeSI), to develop a standard conflict minerals reporting template and dashboard tool that companies can use to question suppliers. The template can be customized for a company’s use and is available for download on the EICC-GeSI website.

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The SEC’s New Conflict Minerals Rule: An Overview for Manufacturers and Their Suppliers

In addition to creating the Reporting Template and Dashboard, the EICC and GeSI initiated a program to certify smelters and refiners through their Conflict-Free Smelter (CFS) Program. Throughout 2012, smelters and refiners processing tantalum, tin, tungsten, and gold will be audited using the protocols of the CFS Program. Smelters and refiners are not required to participate in the program, but when a smelter or refiner is found to be compliant, the smelter or refiner will be listed as compliant on the EICC-GeSI’s published compliance list. Individuals have the ability to access the lists published by the EICC and GeSI through the website sponsored by the CFS Program.

AIAG

The Automotive Industry Action Group (AIAG) established its Conflict Minerals Work Group in late 2010 to help member companies understand the effect of conflict minerals within the automotive industry and to establish due diligence activities.

RILA

The Retail Industry Leaders Association (RILA) partnered with legal and technical authorities to help retailers understand the compliance requirements of the Conflict Minerals Rule. By working with industry leaders and identifying the compliance efforts of other industry groups, RILA plans to develop a uniform compliance approach for retailers that includes specific mechanisms for communicating with suppliers.

PPA

The Public-Private Alliance for Responsible Minerals Trade (PPA) is a joint initiative between governments and companies to develop supply chain solutions to address the conflict minerals challenges in the DRC and Great Lakes Region of Central Africa. The PPA supports pilot programs to produce fully traceable supply chains that have been validated and would be considered credible to companies, civil society, and governments. In addition, the PPA provides resources to companies facing the reporting requirements of the Conflict Minerals Rule and will be a platform for dialogue among government, industry, and civil society participants.

OECD Pilot Program

In August 2011, the OECD began a year-long pilot program after issuing the “Supplement on Tin, Tantalum, and Tungsten,” a part of the “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas” (Supplement Guidance). The goal of the pilot program is to examine and assist with the implementation of the Supplement Guidance, act as a forum for program participants, and identify best practices, tools, and methodologies for implementing the Supplement Guidance. The OECD will release a total of six reports, three covering the upstream supply chain and three covering the downstream supply chain.7

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Thirty companies (22 of which have agreed to disclose their participation) and three industry associations currently are participating in the downstream pilot program (Exhibit 3). As of October 2012, the OECD released two downstream implementation reports:

1. The “Downstream Pilot Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas: Baseline Report on the Supplement on Tin, Tantalum, and Tungsten” (Baseline Report) released in November 2011 details the various levels of implementation among the participating companies, describes the extent of current practices, and outlines the initial challenges faced by the pilot participants.

2. The “Downstream Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas: Cycle 2 Interim Progress Report on the Supplement on Tin, Tantalum, and Tungsten” (Cycle 2 Report) released in June 2012 provides detailed information about current practices and tools used in developing both systems and processes for due diligence.8

Exhibit 3: Industries and Companies Participating in Downstream Pilot Program

Industry Associations

AIAG Automotive Industry Action Group

EICC-GeSI Electronic Industry Citizenship Coalition and Global e-Sustainability Initiative

IPC Association Connecting Electronics Industries

Companies That Have Disclosed Participation

Alcatel Lucent KEMET

Alpha (Cookson Performance Materials) Lockheed Martin Corp.

Boeing Co. Nokia

Circuit Connect Inc. Oracle Corp.

Epic Technologies LLC Panasonic Corp.

Flextronics International Plansee Group Service GmbH

Ford Motor Co. Royal Philips Electronics

Foxconn Electronics Inc. Siemens AG

Freescale Semiconductor Inc. Texas Instruments Inc.

General Electric Co., Lighting Division TriQuint Semiconductor

Hewlett-Packard Co. Unisem Group

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The SEC’s New Conflict Minerals Rule: An Overview for Manufacturers and Their Suppliers

An important finding from the Cycle 2 Report is the flexibility with which companies are implementing the OECD’s guidance. That is, a variety of compatible approaches have been developed by pilot participants to perform the necessary due diligence.

Other important findings from the pilot program to consider when developing and implementing due diligence processes include:9

1. A majority of pilot participants have established policies related to conflict minerals. Most of the established policies describe companies’ commitments, due diligence activities, and supplier requirements with regard to conflict minerals.

2. Some pilot participants are communicating with all of their suppliers or at least Tier 1 suppliers, while other pilot participants are using a risk-assessment methodology to prioritize suppliers.

3. Many of the pilot participants are relying on industry processes to obtain information about the due diligence processes at smelters as opposed to communicating with the smelters directly. At the time the Cycle 2 Report was published, the EICC-GeSI CFS Program was the only industry initiative in place to certify third-party audits of smelters. Unfortunately, smelters have reported being overwhelmed by requests from multiple industry sources. The smelters noted a lack of coordination among the ITRI Tin Supply Chain Initiative (iTSCi), CFS, and OECD initiatives.

4. A majority of pilot participants, both companies and industry associations, have identified confidentiality issues while engaging their suppliers. To address those issues, participants are developing contract clauses and nondisclosure agreements and using data collection and other tools that do not require the identification of suppliers within a company’s supply chain.

5. Pilot participants noted that many suppliers may not understand or have access to the information contained in the OECD Guidance or Section 1502 of the Dodd-Frank Act, because the suppliers are not subject to Section 1502 or because of language barriers. This lack of awareness stresses the importance of supplier education. To educate suppliers, pilot participants are sending letters, developing webinars, holding one-on-one meetings, and establishing shared-service centers.

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1. Mines

2. Trading houses

3. Exporters

4. Transit countries

5. Re�ners/Smelters

6. Electronics companies

Upstream

ChallengesForm SD and the Conflict Minerals ReportIf an issuer’s conflict minerals originated in one of the covered countries, the rule requires the issuer to file a report with the SEC using the new Form SD (Specialized Disclosure Report) and attach a Conflict Minerals Report describing the due diligence measures the company conducted to identify the source(s) and chain of custody of the conflict minerals within its supply chain. The due diligence procedures must include an independent private sector audit of the Conflict Minerals Report.

In addition, the report must include a description of the products manufactured or contracted to be manufactured that are not DRC conflict-free, the facilities used to process the conflict minerals, the minerals’ country of origin, and the efforts undertaken in determining the origin of the minerals. This information must be filed by the issuer and available to the public on the issuer’s website.

Issuers must comply with the rule by providing annual conflict minerals information through Form SD for the calendar year beginning Jan. 1, 2013. The first report is due by May 31, 2014, for calendar year 2013. Each issuer must provide its conflict minerals information on a calendar-year basis regardless of the entity’s fiscal year.

Affected Industries and CompaniesMany U.S. industries and companies will be affected by the new Conflict Minerals Rule. As the final rule states, nearly 6,000 issuers could be affected. One manufacturing industry association stated that, based on its research, of these nearly 6,000 issuers, the average issuer would have between 2,000 and 10,000 first-tier suppliers that would be

required to provide information on the origin of the minerals in the parts and components that they provide to their issuers.10

As might be expected, the rule will have a different impact on individual companies and industries. However, it is anticipated to have the greatest effect on the following industries: aerospace, automotive, communications, computers, electronics, industrial machinery, jewelry, lighting, and medical equipment.

The Conflict Minerals Supply ChainOne of the complicating factors companies face as they work to comply with the Conflict Minerals Rule is the complexity and opacity of the conflict minerals supply chain. As illustrated in its study of the conflict minerals supply chain within the electronics industry, the Enough Project11 described six stages in the chain as presented in Exhibit 4.

Exhibit 4: The Supply Chain

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The SEC’s New Conflict Minerals Rule: An Overview for Manufacturers and Their Suppliers

As the chain is traced upward from electronics companies to mines (upstream), it can become increasingly difficult to follow the trail. As discovered in the Enough Project’s research:

“… (I)t is a dangerous business to provide transparency to this trade. One leading merchant told us that he would be killed if he went on camera to talk about how the trade works.”

“… (T)he laws prohibiting exporters from buying minerals from unregistered traders are weakly enforced, making it all too easy for minerals of dubious origin to enter the market.”12

When tracing the material supply chain from an electronics company (often the SEC registrant) back to its sources, refiners or smelters are often the critical link because once the mineral ore is refined into metal, it becomes impossible to distinguish between minerals originating in the covered countries from minerals sourced from other countries. For this reason, much of the transparency burden for identifying and documenting the source of minerals can occur at this stage of the supply chain.

Of course, even within the sixth or final stage of the supply chain, there typically are numerous substages in the chain as the original equipment manufacturer (OEM) often relies on tiers of material suppliers for its product components. Because most companies historically have had no need to document their products’ supply chain, they lack the information and systems necessary to trace and document the sources of materials in their products.

■ Upstream companies include miners (artisanal and small-scale or large-scale producers), local traders or exporters from the country of mineral origin, international concentrate traders, mineral reprocessors, smelters, and refiners.

■ Downstream companies include metal traders and exchanges, component manufacturers, product manufacturers, OEMs, and retailers.13

Country-of-Origin InquiryIf a company determines that conflict minerals are “necessary to the functionality or production” of its products, it must conduct a reasonable country-of-origin inquiry to determine whether any of the minerals originated in a covered country or are from recycled or scrap sources.

The final Conflict Minerals Rule does not prescribe the actions that an issuer must undertake to complete a reasonable country-of-origin inquiry. However, the inquiry must be “reasonably designed to determine whether any of its conflict minerals originated in the Covered Countries or are from recycled or scrap sources, and must perform the inquiry in good faith.”14

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If an issuer determines that its conflict minerals did not originate from a facility (such as a smelter or mine) in the covered countries or came from recycled or scrap sources, it must disclose such determination in Form SD and briefly describe the country-of-origin inquiry it followed in reaching that determination.

A company could make such a determination based on representations from the facility or from suppliers if the company is confident that such representations are reliable. Furthermore, some industries have identified certain processing facilities as DRC conflict-free based on independent audits, which would provide a company with an independent confirmation that its minerals did not originate in a covered country.15

SolutionsSupply Chain Due DiligenceIf an issuer determines that the minerals contained in its products might have originated in any of the covered countries, or that its minerals might not be recycled or scrap, the issuer must conduct due diligence of its supply chain to determine if the conflict minerals financed armed groups in the covered countries. The issuer must then report its findings in Form SD and the associated Conflict Minerals Report and obtain an independent audit of its report.

To comply with the Conflict Minerals Rule, companies will need to map their supply chain of materials from end products to their source through their suppliers. Of course, each company and each industry has a unique supply chain with varying numbers and levels of suppliers and distributors and varying degrees of existing supply chain information. However, few companies, whether OEMs or suppliers, currently possess the information systems needed to adequately comply with the rule.

The OECD GuidelinesDuring the comment period following its issuance of the proposed rules, the SEC received numerous recommendations that issuers should base their due diligence procedures on a nationally or internationally recognized due diligence framework if such a framework were to exist for the specific conflict mineral. Some respondents recommended that the final rule incorporate or adopt the due diligence guidelines published in 2011 by the OECD. In the final rule, the SEC recognized that, “Presently, it appears that the only nationally or internationally recognized due diligence framework available is the due diligence guidance approved by the (OECD).”16

Thus, the OECD’s “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas” (OECD Guidance)17 publication is the current framework for companies to consider when planning and executing their conflict minerals due diligence procedures.

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The SEC’s New Conflict Minerals Rule: An Overview for Manufacturers and Their Suppliers

As described in the OECD Guidance:

“The Guidance was developed through a multi-stakeholder process with in-depth engagement from OECD and eleven countries of the International Conference on the Great Lakes Region (Angola, Burundi, Central African Republic, Republic of Congo, Democratic Republic of Congo, Kenya, Rwanda, Sudan, Tanzania, Uganda and Zambia), industry, civil society, as well as the United Nations. Three multi-stakeholder consultations were held, with two in Paris in December 2009 and April 2010 and a joint ICGLR-OECD consultation in Nairobi in September 2010 where Brazil, Malaysia and South Africa were also represented. As a result, the Guidance is practically-oriented, with emphasis on collaborative constructive approaches to complex challenges.”

“This Guidance is intended to serve as a common reference for all suppliers and other stakeholders in the mineral supply chain and any industry-driven schemes which may be developed, in order to clarify expectations concerning the nature of responsible supply chain management of minerals from conflict-affected and high-risk areas.”

OECD’s Five-Step FrameworkThe OECD Guidance recommends that companies integrate into their corporate management systems the “Five-Step Framework for Risk-Based Due Diligence in the Mineral Supply Chain” set out in Annex 1 of the guidance. The five steps are:

1. Establish strong company-management systems.

2. Identify and assess risk in the supply chain.

3. Design and implement a strategy to respond to identified risks.

4. Carry out an independent third-party audit of supply chain due diligence at identified points in the supply chain.

5. Report on supply chain due diligence.

Addressing the entirety of the five-step framework is beyond the scope of this paper. However, of significant interest to issuers (typically downstream component manufacturers, product manufacturers, OEMs, and retailers) faced with establishing their conflict mineral policies and procedures are two of the substeps within Step 1:

C. “Establish a system of controls and transparency over the mineral supply chain. This includes a chain of custody or a traceability system or the identification of upstream actors in the supply chain. This may be implemented through participation in industry-driven programs.

D. “Strengthen company engagement with suppliers. A supply chain policy should be incorporated into contracts and/or agreements with suppliers. Where possible, assist suppliers in building capacities with a view to improving due diligence performance.”18

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To determine a chain of custody or traceability of minerals supplied by upstream enterprises in the supply chain, downstream companies should identify the due diligence processes of the smelters in their supply chain and determine if those processes conform to the OECD guidance. This could include issuers relying on conflict-free certifications of smelters from industrywide programs, which would help issuers fulfill their obligations under the rule.

Tracing minerals in a company’s products or subcomponents generally is not possible once the minerals have been refined. Therefore, through a combination of establishing internal controls over their immediate suppliers and participating in industrywide programs evaluating the refiners, downstream issuers will make considerable progress toward satisfying the due diligence requirements. These steps, coupled with incorporating conflict minerals supply chain policy language in supplier contracts, will contribute significantly to satisfying the due diligence provisions within the Conflict Minerals Rule.

Documenting the Product Supply ChainA key priority in fulfilling the due diligence requirements is developing a dynamic database of the material supply chain of a downstream issuer’s products.

Most manufacturers have information regarding product components and related suppliers within their existing bill of material (BOM), manufacturing resource planning (MRP), or enterprise resource planning (ERP) systems. However, not many have recorded information related to the entire supply chain of materials incorporated into their products, particularly with regard to country of origin, which is necessary to comply with the Conflict Minerals Rule. For this reason, issuers will need to collect, organize, evaluate, and report supply chain information from suppliers.

Because most downstream issuers manufacture products with hundreds or thousands of component parts, each one of which might come from one or more suppliers, they must rely on their suppliers for the supply chain data. In most cases this will mean that a controlled survey of suppliers will be necessary. The survey should be structured to:

■ Collect all pertinent information about upstream suppliers and country of origin;

■ Support the capture of information within a searchable database for consistency and subsequent data mining;

■ Be auditable; and

■ Be scalable for annual updates since products, product components, and suppliers change over time.

Ideally, the conflict mineral survey solution will be Web-based to support online data entry by both issuer and suppliers, and will have dynamic Q&A functionality that adds, revises, or even automatically answers questions based on responses that suppliers input earlier in the survey.

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The SEC’s New Conflict Minerals Rule: An Overview for Manufacturers and Their Suppliers

ConclusionWhile the SEC’s Conflict Mineral Rule was issued only recently, considerable guidance exists from the OECD, industry groups, and other organizations to aid manufacturers in complying with the rule. Despite the recent legal challenge by the U.S. Chamber of Commerce and the National Association of Manufacturers to the U.S. Court of Appeals District of Columbia Circuit to review the rule, Section 1502 of the Dodd-Frank Act remains the current law, and companies should not wait for the outcome of this legal challenge to begin planning their compliance procedures. Even if the Conflict Minerals Rule is stayed pending the resolution of the court challenge or even struck down, companies that use or are suspected of using conflict minerals likely will remain in the crosshairs of socially responsible investors and consumer groups.

In developing conflict minerals supply chain information for use in completing Form SD and the Conflict Minerals Report, issuers should take full advantage of the lessons learned from existing industry initiatives and implement robust and flexible data-gathering mechanisms to accommodate the complexities of their products and procurement supply chains.

By carefully designing and managing dynamic supply chain surveys tailored to companies’ products and suppliers, issuers will be in a strong position to produce reliable and auditable conflict minerals disclosures.

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Contact InformationCharlie Kuyk, CPA/ABV, CFE, CVA, is a director with Crowe Horwath LLP in the Chicago office. He can be reached at 312.899.7014 or charlie.kuyk@crowehorwath.com.

Meghan Rzepczynski, CPA, CFE, CMA, and Six Sigma Green Belt, is with Crowe in the Chicago office. She can be reached at 312.857.7389 or meghan.rzepczynski@crowehorwath.com.

1 The term “supply chain” in this context refers to the integrated system of activities and organizations involved in moving minerals from their point of extraction at a mine downstream to their integration into final end products for sale to customers.

2 Opening Statement at the SEC Open Meeting, http://www.sec.gov/news/speech/2012/spch082212mls.htm

3 “Conflict Minerals,” Securities and Exchange Commission, Final Rule – Release No. 34-67716, Aug. 22, 2012, p. 7, www.sec.gov/rules/final/2012/34-67716.pdf.

4 Ibid, p. 6.

5 Ibid, pp. 21-22.

6 More information on industry initiatives can be found in OECD’s June 2012 publication, “Downstream Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas – Cycle 2 Interim Progress Report on the Supplement on Tin, Tantalum, and Tungsten.”

7 “Downstream Pilot Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas: Baseline Report on the Supplement on Tin, Tantalum, and Tungsten,” the Organisation for Economic Co-operation and Development, November 2011, p. 7. “Upstream Pilot Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas: Baseline Report on the Supplement on Tin, Tantalum, and Tungsten,” the Organisation for Economic Co-operation and Development, November 2011, p. 3.

8 “Downstream Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas: Cycle 2 Interim Progress Report on the Supplement on Tin, Tantalum, and Tungsten,” the Organisation for Economic Co-operation and Development, June 2012, pp. 5-8.

9 Ibid, pp. 5-8, 16, 20, 40, 51.

10 “Conflict Minerals,” Securities and Exchange Commission, Final Rule – Release No. 34-67716, Aug. 22, 2012, p. 247.

11 “From Mine to Mobile Phone: The Conflict Minerals Supply Chain,” http://www.enoughproject.org/files/minetomobile.pdf

12 Ibid, p. 4.

13 “Supplement on Tin, Tantalum and Tungsten,” part of “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas,” the Organisation for Economic Co-operation and Development, August 2011, pp. 32-33.

14 “Conflict Minerals,” Securities and Exchange Commission, Final Rule – Release No. 34-67716, Aug. 22, 2012, p. 25.

15 See, for example, the Electronic Industry Citizenship Coalition Global e-Sustainability Initiative Conflict-Free Smelter Assessment Program at http://www.conflictfreesmelter.org/cfshome.htm

16 “Conflict Minerals,” Securities and Exchange Commission, Final Rule – Release No. 34-67716, Aug. 22, 2012, p. 28.

17 OECD (2011), “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas,” OECD Publishing, http://dx.doi.org/10.1787/9789264111110-en

18 “Five-Step Framework for Risk-Based Due Diligence in the Mineral Supply Chain,” Annex 1 of the OECD Due Diligence Guidance.