The US Securities and Exchange Commission (SEC) has voted in favor (3-2) of a final conflict minerals regulation.

Good as gold? Overall, the final regulation is an improvement over the proposed rule. IPC, the electronics association, says the modified rule addresses 80% of IPC’s voiced concerns about the proposed version.

The SEC has not posted the final regulation text, but is expected to do so shortly. [Update August 27, 2012: click to see Final Rule, a 356-page PDF.]

Compliance will still be a significant burden for industry. But in fairness, the final rule makes reasonable efforts to lower the burden while achieving Congressional intent.

The final rule provides burden relief to industry by:

• establishing a unified reporting schedule
• creating an indeterminate category
• implementing a phase-in period
• removing the requirement that a CMR report is required for any recycled or scrap materials contained in a product

At the center of the final rule are three key amendments from proposed rule:

• Following a reasonable country of origin inquiry, companies unable to determine the origin of the conflict minerals in their product may report the source of their conflict minerals as indeterminate for 2 years. Small companies have 4 years (the SEC did not define a small company as far as we know).
• Unlike the proposal which would have required a CMR for all recycled or scrap sources of conflict minerals, companies need only conduct, disclose and describe a reasonable inquiry to verify that the conflict minerals come from scrap or recycled sources. A CMR is required only if the reasonable inquiry indicates that the source may not be from scrap or recycled sources.
• CMR reports will be filed as part of a new SD form. The deadline for submitting the SD will be May 31 of each year, with data from January to December reported. The first report will be due May 31, 2014 for data from January 2013-December 2013. The SEC had originally proposed that each company would file according to their fiscal year. By providing a uniform reporting deadline, the burden on the supply chain will be reduced.

The Rule itself If adopted by the Commission, the final rule would apply to a company that uses any of the four designated minerals— gold, tin, tantalum or tungsten— if:

• The company files reports with the SEC under the Exchange Act.

• The minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.

Contracting to manufacture. A company would be considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination would be based on the facts and circumstances, taking into account the degree of influence the company exercises over the product’s manufacturing.

A company would not be deemed to have influence over the manufacturing if it merely:

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

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

• Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.

Requirements apply equally to domestic and foreign issuers.

Determining if conflict minerals originated in the DRC or other covered countries

Under the final rule, a company that uses any of the designated minerals would be required to conduct a reasonable ‘country of origin’ inquiry that must be performed in good faith and be reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources.

If the inquiry determines either of the following to be true:

• The company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources.

• The company has no reason to believe that the minerals may have originated in the covered countries and may not be from scrap or recycled sources.

… then the company must disclose its determination, provide a brief description of the inquiry it undertook and the results of the inquiry on a new form (Form SD) filed with the Commission.

Then the company also would be required to:

• Make its description publicly available on its Internet website.

• Provide the Internet address of that site in the Form SD.

If the inquiry otherwise determines both of the following to be true:

• The company knows or has reason to believe that the minerals may have originated in the covered countries.

• The company knows or has reason to believe that the minerals may not be from scrap or recycled sources.

… then the company must undertake “due diligence” on the source and chain of custody of its conflict minerals and file a Conflict Minerals Report as an exhibit to the Form SD.

Then the company also would be required to:

• Make publicly available the Conflict Minerals Report on its Internet website.

• Provide the Internet address of that site on Form SD.

What must be included in the Conflict Minerals Report. Under the final rule, companies that are required to file a Conflict Minerals Report would have to exercise due diligence on the source and chain of custody of their conflict minerals. The due diligence measures must conform to a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development (OECD).

DRC Conflict Free – then what? If a company determines that its products are “DRC conflict free” – that is the minerals may originate from the covered countries but did not finance or benefit armed groups – then the company would have to undertake the following audit and certification requirements:

• Obtain an independent private sector audit of its Conflict Minerals Report

• Certify that it obtained such an audit.

• Include the audit report as part of the Conflict Minerals Report.

• Identify the auditor.

Not “DRC Conflict Free” – If a company’s products have not been found to be “DRC conflict free,” then the company in addition to the audit and certification requirements would have to describe the following in its Conflict Minerals Report:

• The products manufactured or contracted to be manufactured that have not been found to be “DRC conflict free.”

• The facilities used to process the conflict minerals in those products.

• The country of origin of the conflict minerals in those products.

• The efforts to determine the mine or location of origin with the greatest possible specificity.

DRC Conflict Undeterminable – For a temporary two-year period (or four-year period for smaller reporting companies), if the company is unable to determine whether the minerals in its products originated in the covered countries or financed or benefited armed groups in those countries, then those products would be considered “DRC conflict undeterminable.”

Then, in that case, the company must describe the following in its Conflict Minerals Report:

• Its products manufactured or contracted to be manufactured that are “DRC conflict undeterminable.”

• The facilities used to process the conflict minerals in those products, if known.

• The country of origin of the conflict minerals in those products, if known.

• The efforts to determine the mine or location of origin with the greatest possible specificity.

• The steps it has taken or will take, if any, since the end of the period covered in its most recent Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve due diligence.

For those products that are “DRC conflict undeterminable,” the company would not be required to obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict minerals in those products.

Recycled or scrap due diligence. There are special rules governing the due diligence and Conflict Minerals Report for minerals from recycled or scrap sources. If a company’s conflict minerals are derived from recycled or scrap sources rather than from mined sources, the company’s products containing such minerals are considered “DRC conflict free.”

About gold sources If a company cannot reasonably conclude after its inquiry that its gold is from recycled or scrap sources, then it would be required to undertake due diligence in accordance with the OECD Due Diligence Guidance, and get an audit of its Conflict Minerals Report. Currently, gold is the only conflict mineral with a nationally or internationally recognized due diligence framework for determining whether it is recycled or scrap, which is part of the OECD Due Diligence Guidance.

For the other three minerals if a company cannot reasonably conclude after its inquiry that its minerals are from recycled or scrap sources, until a due diligence framework is developed, the company will be required to describe the due diligence measures it exercised in determining that its conflict minerals are from recycled or scrap sources in its Conflict Minerals Report. Such a company is not required to obtain an independent private sector audit regarding such conflict minerals.

Conflict mineral deadlines Under the final rule, the issuer would be required to provide the disclosure on the new Form SD. All issuers will file for the same period – a calendar year – regardless of their fiscal year end. Companies would be required to file their first specialized disclosure report on May 31, 2014 (for the 2013 calendar year) and annually on May 31 for each calendar year thereafter.

References:

SEC relevant page: http://www.sec.gov/news/press/2012/2012-163.htm

IPC relevant page, with kudos to Stephanie Castorina for consistently providing well-crafted messages on the subject: http://www.ipc.org/ContentPage.aspx?pageid=Conflict-Minerals

Software for conflict minerals compliance assurance: http://www.actio.net/default/index.cfm/products/material-disclosure/

For a list of likely-relevant softwares, mostly “cloud” solutions, click here: http://supply-chain-data-mgmt.blogspot.com/2012/08/35-will-outsource-to-saas-or-cloud.html