Roundtable on Conflict Minerals
By Cydney Posner
The Washington Post probably has the right headline: "SEC struggles to write ‘conflict minerals' regulations for companies." Yesterday afternoon, the SEC, faced with crafting regulations that are well outside its comfort zone and now many months overdue, hosted a roundtable to tackle the Dodd-Frank-mandated disclosure regulations regarding companies' use of "conflict minerals" (gold and the three "T's," tin, tungsten and tantalum) from the Democratic Republic of the Congo (the DRC) and adjoining countries. (For more on this topic, see the Cooley Alert at http://www.cooley.com/64647 and News Briefs dated 7/28/10, 12/2/10, 12/15/10, 12/15/10, 4/28/11, 7/14/11, 7/30/11, 8/5/11, 8/8/11, 8/10/11 and 9/30/11.) With panelists representing a mix of socially responsible investment funds, companies (from GE to Kraft Foods), NGOs, consultants and auditors, the views expressed were predictably mixed.
The roundtable also featured presentations by two of the sponsors of the legislation, Senator Dick Durbin and Rep. Jim McDermott. Senator Durbin spoke movingly of his experience seeing women in the DRC lined up outside medical clinics for treatment of life-threatening injuries suffered in gang rapes, one of the weapons of choice in that war. What's more, he said, the pursuit of these minerals is fueling the war, as these minerals have become valuable largely because of our "insatiable appetite" for iPads and cellphones. Rep. McDermott focused largely on the legislators' expectation that the rules would be governed by "common sense," relying on the types of due diligence practices that companies have performed in the past, with smaller companies piggybacking on efforts made by larger companies. He also spoke of progress already being made: in April, there were no "clean mines"; now, there are at least 500 clean mines. Mindful of the horrific impact the loss of mining business was having on the Congolese, he believed that the DRC might be back up to regular production levels in a year. (I'm paraphrasing, of course.)
The first panel discussed the scope of the rule and the steps that will be required to comply with the rule, such as the need to track the supply chain. The Staff sought input on the contours of definitions of terms, but there was not much evidence of a workable consensus. (Of course, you could say that about almost everything in Washington these days.) As the Post article points out, the Staff was dealing with issues it doesn't normally address: Should the definition of "conflict minerals" cover all derivatives of these minerals or only the three T's? Is there a reliable infrastructure available to track and trace the minerals or is that infrastructure really years away? What areas should be "mapped" as conflict areas? Should the definition of "manufacture" include mining? What is the meaning of "necessary to the functionality or production of a product"? Should the rules cover legacy equipment, and if so, how could that be traced? Should there be a de minimis exception? Should private label products be excluded?
The second panel continued the discussion of required steps and also addressed the disclosure aspects, including the form and timing of the conflict minerals report and the audit of that report. Here, the questions also ventured onto new turf for the Staff: How could tracing and tracking be accomplished? Whether adherence to a specific due diligence framework, such as the OECD (Organization for Economic Cooperation and Development) guidelines, should be mandated or at least established as a safe harbor? Since no OECD guidelines yet exist for gold, should there be a delay in implementation of the rules for gold? (Apparently, those guidelines are due to be released soon.) What kind of audit could be performed on non-financial information and who could perform it (a question that apparently turns on whether the audit is an "attestation engagement"—auditors only – or a "performance engagement" – non-auditors acceptable)? Is the subject matter of the required audits one that the auditing profession could ethically accept? Is it an audit of process and management systems or an audit of contents? There was an almost audible sigh of relief from the Staff when the discussion turned to more familiar territory: whether the required report should be filed with a 10-K or an 8-K and whether the timing of the reports should be synchronized for all companies to facilitate compliance?
Although all participants expressed abhorrence for the violence in the DRC, wanted to alleviate the humanitarian crisis and shared the common objectives of the legislation, company representatives stressed the many obstacles they faced. It's not always easy to feel sympathy for GE and Boeing, but their representatives, arguing strenuously for a phase-in that would be focused on gradual improvement, persuasively emphasized the hundreds of thousands of parts their products use and the thousands of companies on their "fluid" lists of suppliers that provide them. For example, GE buys some products, such as tungsten filaments, directly from the smelter and, as a result, can determine directly whether the smelter is conflict-free. But if GE contracts for the production of products such as refrigerators, which contain many, many parts that use conflict minerals, GE's contact is very attenuated. How could it be assured that the smelters were conflict-free? GE contends that it will take many years of arduous work to identify all of the smelters involved in those products; how could they possibly rely on supplier certifications and contractual flow-down clauses if they believe the task itself is not really feasible in the short term. However, they argue, just starting this process will impose effective pressure on the mines and smelters. One panelist reported that legitimate gold bullion houses could be reliable sources of information, but that the "gray market," which is an important source of raw materials for legitimate markets, cannot be relied on to provide accurate information about mines and smelters. The Boeing representative argued strenuously for the creation of a time-limited "indeterminate origin" category, subject to mandated steps being taken. The representative of Kraft was perhaps the most plaintive as she described how they were caught completely off guard when they realized they were subject to the rule because they packaged some products in tin and was really bereft of any idea as to how to address these issues, even internally (e.g., we don't even have anyone internally to identify what the problematic mineral derivatives are).
Not surprisingly, representatives of socially responsible funds and NGOs, such as the Enough Project and Global Watch, contended that there should be no exemptions and no delays: ten years had elapsed since the UN report on this problem and it was "disingenuous" of industry groups to suggest that many years were required to gear up since there had been many years of warning. The representative from Global Watch argued against any delay in implementation, observing that, historically, companies have always resisted these types of requirements on the basis that they are impossible … until they suddenly aren't impossible. While some programs are not quite ready, he suggested, companies could still begin the process of tracing the minerals back to the smelters and mines. The representative from the Enough Project provided some comfort, at least on one level, by clarifying that he believes companies will be judged primarily at this point on the efforts they are making.
A few panelists did report on progress being made. Some of the companies represented had already begun developing their own supplier chain-of-custody programs or were participating in multi-stakeholder or industry groups. One NGO panelist reported that Apple has already mapped down to 142 smelters in its supply chain. (See also "Apple Making Headway on Mapping Conflict Minerals" and "Apple, Intel Vow to Stop Using 'Conflict Minerals' from Africa", reporting that both Apple and Intel have signed up to the Conflict-Free Smelter (CFS) Program, under which they have agreed to cease using tainted conflict minerals. The CFS program, supported by the EICC (Electronic Industry Citizenship Coalition) and the GeSI (Global e-Sustainability Initiative), provides a list of compliant smelters - http://www.conflictfreesmelter.org/ ) The representative from AMD provided some uplift at the end when he maintained that companies may have difficulty accomplishing what's needed alone, but most companies can work together through programs like the CFS program to identify the clean smelters and find a way to track products back to the smelter level. Moreover, he said, this isn't the first time that companies have been confronted with these types of complex issues. In the past, companies have had to comply with rules addressing complicated problems regarding child labor or hazardous substances – they should be able to adapt those processes for use in this context.