Conflict minerals provision of the Dodd-Frank Act: Debrief of … Webcast... · industries,...

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Conflict minerals provision of the Dodd-Frank Act: Debrief of

SEC’s final rules

September 5, 2012

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© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printedin the U.S.A. NDPPS 107681

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Agenda

Introduction

Overview of Final Rules

Roundtable discussion

Concluding remarks – Q&A


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Today’s presenters

Keith TownsendPartner, King & Spalding

Jim LowPartner, KPMG LLP

Keith has significant experience in advising public company clients on Securities and Exchange Commission (SEC) reporting and disclosure requirements, corporate governance issues, and other corporate/securities matters. His clients and transactions have spanned a number of industries, including the real estate, life sciences,

Jim chairs KPMG’s Americas’ FS Regulatory Center of Excellence focusing on Dodd-Frank.

Jim is an Audit partner in KPMG LLP’s (KPMG) Financial Services practice in the Minneapolis office and has extensive industry experience serving large, diversified financial services organizations


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industries, including the real estate, life sciences, healthcare, technology, consumer products, manufacturing, and banking industries.

financial services organizations.

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Today’s presenters (continued)

Bala LakshmanDirector, KPMG LLP

Jeff PerryAttorney, King & Spalding

Bala is a member of KPMG’s Strategic Services Group, specializing in supply chain diligence. He has over 10 years of professional experience and has advised numerous clients in the tech, telecom, aviation, and manufacturing sectors. Prior to KPMG, Bala worked with the consulting firm Bain & Co. as a Case Team leader, where he

Jeff is an attorney with the Litigation and Antitrust Practice Group in Washington, D.C. His practice focus includes advising a broad spectrum of industry clients in regulatory and litigation matters. His work experience includes representing major energy companies in litigation matters; assisting in the resolution of construction disputes involving


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firm Bain & Co. as a Case Team leader, where he specialized in operations excellence. His other work experience includes Philips Semiconductors as a process engineering manager and Tata Steel in India as an engineer.

assisting in the resolution of construction disputes involving critical facilities; and helping clients to understand, anticipate, and quickly respond to a wide range of regulatory challenges, both in the United States and abroad.

SEC’s three-step compliance process

1 2 3

Do you use conflictminerals?

Determine country of origin

Conduct supply chain due diligence


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Step one: Do you use conflict minerals?

Are 3TGs “necessary to functionality or production” of a

product?

Meaning of “Contracted to be manufactured”

Meaning of “Manufactured”

Rule applies to SEC reporting companies where conflict minerals are necessary to the functionality or production of a product manufactured by the company or contracted by the company to be manufactured

Additional Considerations

■ Not defined by rules–SEC deems term to be generally understood.

■ Company that only services, maintains, or repairs a product containing conflict minerals is not considered to be

■ Depends on the degree of influence a company exercises over the materials, parts, ingredients, or components to be included in any product that contains conflict minerals

■ “Necessary to Functionality”

– Intentionally added?

– Necessary to the product’s generally expected function?

– Is the primary purpose of the product ornamentation or decoration?

■ “Necessary to Production”

■ Exempts minerals outside the supply chain prior to January 31, 2013

■ Exempts products where 3TG metals may exist in production/tools but not in final


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“manufacturing” that product

■ Necessary to Production

– Intentionally included in the production process?

– Included in the product?

– Necessary to produce the product?

product

■ No de minimisexception included in final rules

General Inquiry

■ Does the company have reason to believe (or know) that conflict minerals may have originated in the covered countries

■ Actions that constitute a Reasonable Country of Origin

Step two: Determine country of origin

Inquiry (RCOI) vary according to a company’s facts and circumstances

Practice Pointers

■ Does the company have reason to believe that conflict minerals may have originated in the covered countries?

– Inquiry can be satisfied if a company obtains reasonably reliable representations that minerals did not originate in the covered countries, or that they are from recycled or scrap sources


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– As long as the company has a reason to believe such representations are true

■ Reason to believe a processing facility’s representations if the facility received a “conflict-free” designation

■ Take into account any applicable warning signs or other suspicious circumstances

Source: STATE DEPARTMENT, HUMANITARIAN INFORMATION UNIT, DEMOCRATIC REPUBLIC OF THE CONGO MINERAL EXPLOITATION BY ARMED GROUPS MAP (Jun. 14, 2011), available at https://hiu.state.gov/Products/DRC_MineralExploitation_2010Jun28_HIU_U182.pdf.

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Step three: Conduct supply chain due diligence

Exercise due diligence on the source and chain of custody of conflict minerals. Follow an internationally or nationally recognized framework. File Form SD disclosing determination

and describe the RCOI, due diligence measures, and results.Has due diligence determined that

conflict minerals are not from the Yes

File Form SD and Conflict Minerals Report as an exhibit. Include description of due diligence measures.

Conflict Minerals Report must include a description of products that are “DRC Conflict Undeterminable” and the steps taken since end of period covered in the last report to mitigate risk that necessary minerals benefit armed groups. No audit is required.

covered countries or are from scrap or recycled materials?

Less than two years after effective date of rule (four years for smaller

reporting companies)?

Was due diligence able to determine whether the conflict minerals financed

or benefitted armed groups?

No

Yes

No

No

Yes

End

End


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Conflict Minerals Report must include independent private sector audit report expressing opinion as to whether (1) design of due diligence measures conforms to criteria set forth in framework and (2) description of due diligence measures is consistent with process undertaken.

Report must include a description of products not DRC Conflict Free, the facilities used to process the minerals necessary to the products, the country of origin of the minerals, and efforts to determine the mine or location of origin of the minerals.

Yes

End

Filing of conflict minerals information

Location of Conflict Minerals Information

Companies will provide conflict minerals disclosures in the body of a new specialized disclosure report on a new form, the Form SD

A company must also make its conflict minerals disclosure il bl it W b Sit favailable on its Web Site for one year

“Filing” of Conflict Minerals Information

Form SD, including Conflict Minerals Report, is to be “filed” under the Exchange Act and thereby subject to potential Section 18 liability

Uniform Reporting Period

Disclosures cover the calendar year regardless of a company’s fiscal year

Form SD covering the prior year must be filed by May 31

First reporting period will be from January 1 to D b 31 2013 d th fi t F SD t b fil d b


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December 31, 2013, and the first Form SD must be filed by May 31, 2014

Only Applies to Public Reporting Companies

Rule applies to issuers that file reports under § 13(a) or § 15(d) of the Exchange Act

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Roundtable session

Roundtable session


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Conflict minerals policies

Final rule from the SEC: “An issuer’s policies with respect to the sourcing of conflict minerals will generally form a part of the issuer’s reasonable country of origin inquiry, and therefore would generally be required to be disclosed in the issuer’s Form SD.”

Organisation for Economic Co-operation Distribution of companies that have a policy with a Organisation for Economic Co operationand Development (OECD) guidelines: “Adopt,and clearly communicate to suppliers and thepublic, a company policy for the supply chain of minerals originating from conflict-affected and high-risk areas. This policy should incorporate the standards against which due diligence is to be conducted…”

reference to conflict minerals

43%8%

5%

3%3%

8%

Electronics

Semicondutors

Consumer Products

Extractives

Telecom

77 companies have a reference to conflict minerals as part of corporate or sustainability policy outlines on their Web sites


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30%

Telecom

Industrial Products

Others

Sources: Securities and Exchange Commission, 17 CFR Parts 240 and 249b, Release No. 34-67716; File No. S7-40-10; OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas

y p y(as of Q1 2012).

Policies vary widely. Themes include commitment to sourcing from only conflict-free regions, supplier requirements/expectations, reference to the Dodd-Frank legislation, or an acknowledgement of the issue.

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Difference between RCOI and due diligence

The final rule has differentiated between RCOI and supply chain due diligence:

Final rule and OECD guidelines reference smelter identification as a key step for RCOI.

If the result of the RCOI does not indicate that all 3TG material came from conflict-free smelters or recycled sources, then further supply chain due diligence will be required to determine whether the conflict minerals financed or benefitted armed groups.financed or benefitted armed groups.

Implications for downstream companies

1. Strong incentive for companies to source (directly or indirectly) only from CFS-certified smelters. This translates to greater motivation for companies to disengage from suppliers who do not report/source from non-CFS-certified smelters.

2. “CFS only” sourcing could be reflected in many companies’ eventual conflict minerals policies.

3. Most companies will lack the resources to perform additional due diligence beyond the smelter. Hence companies will rely on industry association, trade groups, and DRC-based NGOs to assist in determining chain of custody (also mentioned in OECD guidelines)


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chain of custody (also mentioned in OECD guidelines).

“Chain of custody” for gold from the DRC region is almost nonexistent–with only one legally operating gold mine. However, this is not expected to be a major issue for U.S. companies since:

I. Most of the gold in the supply chain is from recycled materials

II. The DRC accounts for only 1 percent of the world’s gold supply.

August 22, 2012Final rule issued

by the SEC

January–December 2013First effective period

for due diligence and reporting

May 31, 2016“Indeterminate” not

an option for large companies

May 31, 2018“Indeterminate” not

an option for small companies

Ideally, where should a company want to be two years from now?

May 31, 2014First report due

August 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Jan 2018

First two years (or four for smaller companies)

Beyond two years (or four years for smaller companies)

Possible conclusions from due diligence

Conflict Minerals Free

Not been found to be “DRC conflict free”

Undeterminable

Conflict Minerals Free

Not been found to be “DRC conflict free” (even if undeterminable)

Not a desirable

outcome from PR/customer point of view


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Audit trigger for “Undeterminable”

Independent private sector audit not required for Undeterminable issuers

Independent private sector audit required for all issuers

Source: Securities and Exchange Commission, 17 CFR Parts 240 and 249b, Release No. 34-67716; File No. S7-40-10

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What should a company do now – Summary of KPMG’s four-step approach

1.1 Identify key stakeholders to communicate roles

2.1 Compile listing of affected products (containing 3TG)

3.1 Roll out SOP and processes to identified business units

4.1 Compile Conflict Minerals Disclosure/Report including

Develop strategy, use OECD guidelines, assist in policy development

Identify suppliers of 3TG metals and conduct RCOI

and due diligenceInstitutionalize process Prepare SEC disclosure

1 2 3 4

and responsibilities

1.2 Develop criteria to determine terms such as “contract to manufacture,” “necessary for functionality,” etc.

1.3 Develop detailed one-, two-, and four-year plan to address CM requirements

1.4 Conduct awareness training for key stakeholders

1.5 Current-state analysis in relation to OECD guidelines.

1 6 D l fli t i l

p ( g )and map to their suppliers

2.2 Develop Standard Operating Procedure (SOP)

2.3 Develop plan to assess gaps/risks with suppliers and develop communication materials

2.4 Distribute supplier communication material and conduct supplier training

2.5 Execute supplier survey and analyze results towards RCOI

(in case of a Pilot)

3.2 Perform test procedures against OECD guidelines

3.3 Compile results of control testing

3.4 Develop remediation plan for deficiencies identified during test procedures

3.5 Identify and prioritize improvement opportunities

3.6 Update project plan and CM program roadmap describing th d dili

p gdocumentation of steps taken

4.2 Full disclosure of products and facilities used that are affected

4.3 Prepare for external audit if necessary

4.4 Incorporate lessons learned for next year’s effort. Make changes to noncompliant suppliers and/or supplier agreements to facilitate positive outcome in future years


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1. 6 Develop conflict minerals policy 2.6 Validate responses and

perform supplierfollow-ups as necessary

2.7 Perform additional due diligence on conflict-free status if necessary

the due diligence process

Consider running a Pilot program

Pilot program All products at one (“Big bang”)

Description Select one product family division or Consider all products for due diligence

KPMG’s Dodd-Frank conflict minerals clients have taken both a Pilot approach as well as tackling all products at once

Description Select one product family, division, or category for initial investigation, followed by all remaining products

Consider all products for due diligence at once

Pros • Allows development of a process which can be subsequently rolled out on a larger scale

• Early identification of pitfalls • Fewer resources required

• Total company focus on objective• Potentially faster route to full

implementation

Cons • Potentially adds implementation time • More resources required than through


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y p q gPilot approach

Suitable for companies with

• A large number of products and suppliers to consider

• Few products and suppliers that are covered by the rule

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What does “contract to manufacture” really mean?

Negotiate contractual terms that

Whether a company is considered to “contract to manufacture” a product depends on the degree of influence it exercises over materials, parts, ingredients, or components

A company is not considered to “contract to manufacture” a product if it does no more than:

■ Company merely specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, such as:■ Price■ Insurance■ Tech support■ IP rights

■ Third party manufactures generic products that include a company’s:■ Brand■ Marks■ Logo■ Label

Service, maintain, or repairAffix its brand to a generic productNegotiate contractual terms that do not relate to manufacturing

■ Companies that service, maintain, or repair a product manufactured by a third party■ Jewelry retailers


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■ IP rights

Potential PR backlash by defining too narrowly Trade-offs to be made Difficulty completing due

diligence by defining too broadly

“Degree of influence” needs to be determined jointly by Legal and Sourcing/merchandizing

Smelter certification

Final rule from the SEC:

• “…..we do view an issuer as satisfying the reasonable country of origin inquiry standard if it seeks and obtains reasonably reliable representations indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources…..”

• “An issuer would have reason to believe representations were true if a processing facility received a “conflict free” designation by a recognized industry group that requires an independent private sector

Conflict Free Smelter Program update from EICC-GeSi

conflict-free designation by a recognized industry group that requires an independent private sector audit of the smelter….”


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Source: Securities and Exchange Commission, 17 CFR Parts 240 and 249b, Release No. 34-67716; File No. S7-40-10Source: http://www.conflictfreesmelter.org/CFSindicators.htm

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Final thoughts

Questions and Answers


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Contact us

Jim Low

Partner, KPMG

Keith Townsend

Partner, King & Spalding

KPMG King & Spalding

[email protected]

Bala Lakshman

Director, KPMG

[email protected]

[email protected]

Jeff Perry

Attorney, King & Spalding

[email protected]


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www.kpmg.com/conflictminerals

[email protected]

www.kslaw.com

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KPMG’s association with other industry groups and leading organizations on conflict minerals

KPMG professional assisted to develop the association’s working group on conflict minerals and serves as secretary to the conflict minerals advisory panel Aerospace Industry

Automotive Industry

Action Group

Invited by Automotive Industry Action Group to join the legislation council and help develop guidelines for member companies

Conducted a set of information Webinars to educate members on conflict minerals; currently developing a presentation for the next quarterly conference

Association

World Gold Council Appointment by the World Gold Council’s (WGC) Steering Group on Conflict Free Gold to assist in the

development of its assurance standards for conflict-free gold for WGC and its 23 members

OECD

Active participant at the second joint meeting on the implementation of OECD-UN due diligence recommendations for responsible mineral supply chains

Provided advisory assistance to the OECD on the responsible gold guidelines

KPMG is a member sponsored by the United Nations (UN) Global Compact – Principles for


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EICC-GeSI Active participant in all EICC-GeSI’s Extractives Group workshops on Conflict Minerals

United Nations

KPMG is a member sponsored by the United Nations (UN) Global Compact Principles for Responsible Investment Initiative

In November, KPMG presented Conflict Minerals to the Expert Group Meeting on Responsible Business Investment in High-Risk Areas

KPMG was asked to assist the UN to review and develop its first annual report on the implementation of the responsible business guidelines

KPMG's experience with clients’ conflict minerals compliance efforts

We are currently supporting several conflict minerals engagements with well-known clients – in the U.S. and overseas

Our recent conflict minerals engagements

Client Scope Overall Project Lead*

Global manufacturer of consumer health care products

■ Development of a supply chain due diligence policy for conflict minerals

■ Development of process for due diligence in compliance with OECD guidelines

C li R ti P th i it di l b d t fli t

Primary: Procurement/IR/ Legal

S d C tproducts

(approx $65 billion in revenue)■ Compliance Reporting: Prepare the requisite disclosures based on exposure to conflict

mineralsSecondary: Corporate Social Responsibility

Japanese Consumer Electronics manufacturer

(approx $100 billion in revenue)

■ Simultaneous Pilot runs for three independent business units to understand the usage of 3TG metals in the supplier network and risk diagnostic using OECD criteria

■ Used the EICC-GeSi questionnaire to survey global suppliers

■ Assisting with the implementation and rollout to the rest of the company

Primary: Corporate SocialResponsibility

Secondary: Procurement/ IR/Legal

Diversified Industrial

($60+ billion in revenue)

■ Development of a due diligence strategy for conflict minerals

■ Development of process for due diligence

■ Creation of an auditable process

Primary: Procurement

Secondary: Engineering/ Legal/Finance

Semiconductor manufacturer – Telecom


■ Helped the company develop baseline due diligence requirement in the form of common policy guidelines to be followed by business units

■ Shared industry leading practices in the due diligence and helped with documentation

Primary: Supplier Quality

Secondary: Legal


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($10 billion in revenue) y g p g pof findings

International Retailer


■ Assisting with development of strategy, policy, and framework to achieve compliance

■ Developing an Auditable “Standard Operation Procedure”

■ Plans to assisting in evaluating supplier response and follow-up actions

■ Plans to assist with regular internal audits to track overall progress

Primary: Compliance

Secondary: Controller

Aerospace manufacturer


■ Assisting with supplier training and workshops to train suppliers on the due diligence requirements under Section 1502

Primary: Procurement

Secondary: Supply Chain

Note: *It is expected that ownership of the process will change during different phases of the project

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© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. NDPPS 107681

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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