Preparing for the 2015 Conflict Minerals Filing and Improving Compliance Programs

Pursuant to Section 1502 of the Dodd-Frank Act, the SEC promulgated new disclosure and reporting requirements concerning the use of certain conflict minerals (tantalum, tin, tungsten and gold) originating in the Democratic Republic of the Congo and certain adjoining countries (each a “Covered Country”). The new rule requires reporting companies to disclose whether conflict minerals are present in their products, whether they originated in a Covered Country, and the extent of the company’s due diligence effort with respect to the inquiries made and the measurers taken to determine the origin of the minerals and whether the products are conflict free. Reporting companies must file their annual Form SD and, depending upon the outcome of the due diligence, a Conflict Minerals Report, by the June 1, 2015 deadline. As companies prepare for the second year of filings, and in light of the pending litigation challenging the rule, many companies are looking for guidance.

The conflict minerals rule contemplates a three-step compliance process. First, companies are required to determine whether any conflict minerals are necessary to the functionality or production of a product in the company’s manufacturing chain. Second, companies that do identify such necessary conflict minerals must conduct a good faith reasonable country of origin inquiry (“RCOI”) that is reasonably designed to determine whether any of those conflict minerals originated in a Covered Country. Depending upon the outcome of the RCOI, companies that have “no reason to believe” their conflict minerals may have originated in a Covered Country, or “reasonably believe these minerals came from recycled or scrap sources,” must file a Form SD stating as much. Third, companies that have reason to believe that their conflict minerals may have originated in a Covered Country, and may not be from scrap or recycled sources, are required to exercise due diligence on the source and chain of custody of those minerals. Based upon the outcome of the company’s due diligence efforts, the company may be required to file a Conflict Minerals Report identifying the measures taken, the results found and whether or not their products are determined to be ‘conflict-free.’ Regardless of the outcome of the due diligence process, the company will have to file a Form SD disclosing its determination from the due diligence process, briefly describe the RCOI analysis and disclose the results.

Despite the continuing legal challenges to the conflict minerals rule, the SEC issued guidance in April 2014 indicating that, although companies are no longer required to characterize their products as either “conflict-free” or “not conflict-free,” companies must still comply with all other disclosure requirements under the rule.

In order to prepare for the June 1, 2015 deadline for this year’s Form SD filings, companies should initiate the conflict minerals compliance process as soon as possible. As an initial matter, companies should review the  previous filings of industry peer companies to identify potential areas of improvement for their 2015 compliance program and to benchmark their disclosure against their peers’ filings. One of the other early action items for companies is establishing levels at which to perform RCOI and other due diligence efforts. As a result of increased visibility into companies’ conflict minerals supply chains, the results of the prior year’s due diligence efforts, and feedback from certain organizations, we expect that many companies will be enhancing their compliance efforts in 2015. 

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