2016 Conflict Minerals Compliance

Little over a month is left until conflict minerals filings are due (May 31, 2016) for 2015.  Under a rule adopted by the U.S. Securities and Exchange Commission (SEC), as required by the Dodd-Frank Act of 2010, public companies must disclose specified information relating to certain metals and minerals used in their products. 

Conflict minerals — referring to columbite-tantalite, from which tantalum is produced;  cassiterite, from which tin is produced;  gold;  wolframite, from which tungsten is produced;  and their derivatives — have broad commercial application in products ranging from cars to computers and in industries such as electronics and communications, aerospace, automotive, healthcare and manufacturing.  The trade in these minerals funds long-running violence in the Democratic Republic of Congo (DRC), as profits flow to the armed groups that control the mines and are used for personal gain or to further violent agendas.

The SEC Conflict Minerals Rule applies to all reporting companies, including foreign private issuers with registered securities.  Broadly speaking, it requires a company to do the following:

1. First determine whether conflict minerals are necessary for the functionality or production of any products that the company or its consolidated subsidiaries manufacture or contract others to manufacture for them;
2. Next establish whether the necessary conflict minerals originated in the DRC or certain neighbouring countries by making a “reasonable country of origin inquiry,” the results of which must be reported on a specialized disclosure form filed with the SEC and posted on the company’s website; and Finally, if the company concludes the necessary conflict minerals may have originated from a conflict region, (a) conduct heightened due diligence on its supply chain and chain of custody, and (b) file a Conflict Minerals Report (CMR) with the SEC and publish the CMR on its website.

None of this is new.  Previously, however, if any minerals were “not found to be conflict free,” a company was obliged to disclose this on its website or label its products accordingly.  However, as a result of a recent legal challenge, companies may now stand down from this additional requirement.  According to the DC Court of Appeals, compelling companies to declare whether their products are “conflict free” violates companies’ First Amendment rights.  Although the SEC was expected to file a petition for a writ of certiorari seeking Supreme Court review of that determination, ultimately the U.S. Department of Justice decided, in consultation with the SEC, not to do so.

As a result, no company is required to describe its products as “DRC conflict free” or having “not been found to be DRC conflict free.”  An issuer can, of course, do so, and if it does must assess the due diligence framework it used to complete its CRM in an Independent Private Sector Audit (IPSA).  The purpose of the IPSA is to ensure the issuer’s framework conforms to the selected nationally or internationally recognized due diligence framework (i.e., the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas). 

More specifically, the IPSA must detail for the relevant time period:  (1) whether the design of the issuer’s due diligence framework as set forth in its CMR conforms materially to the criteria set forth in the nationally or internationally recognized due diligence framework the company used, and (2) whether the company’s description of the due diligence it performed as described in the CMR coheres with the due diligence process it undertook.