By Cydney Posner
You might remember that the SEC's prescription for conflict minerals disclosure on Form SD is rather sparse. As reported in thecorporatecounsel.net blog and in this article from Compliance Week, along comes a coalition of activists to fill in the gaps for us and tell us what they are "expecting" to see in companies' Forms SD.
The paper, "Expectations for Companies' Conflict Minerals Reporting," http://enoughproject.org/reports/expectations-companies-conflict-minerals-reporting, authored by Responsible Sourcing Network and the Enough Project, "articulate[s] key reporting components that are important to many SRIs [socially responsible investors] and NGOs and to suggest indicators that can be tracked over time to allow for comparability between reports and measure improvement." While Compliance Week observes that the authors were "both influential in the legislative effort," and may continue to benefit from the "receptive ear [of] legislators and regulators [, who may exhibit] a similar willingness [to] support their suggestions and demands going forward," the paper should not be viewed as an official interpretation of SEC rules or otherwise the voice of the SEC in indicating any requirements.
The first section of the paper describes "the key elements that stakeholders believe should be included in an issuer's conflict minerals policy and program, which should form the basis of its reporting to the SEC. The second section explains the steps an issuer should undertake to determine the origin of the minerals in its products. The third section explains the four due diligence processes an issuer should undertake to ensure its supply chain practices respect human rights and do not contribute to conflict: (1) identify risks in its supply chain; (2) ensure compliance to its policy and program; (3) respond to identified risks and non-compliance; and (4) describe the policies and communication used to implement the previous processes. The fourth sec¬tion asks issuers to report on the steps they are taking to ensure a conflict-free Congo, not a Congo-free product. Stakeholders expect issuers to include in their filings to the SEC any initiatives or activities they are undertaking or will undertake to support a clean mineral trade in the DRC."
As you can see from the paper's own description, not surprisingly, the "expectations" go well beyond SEC requirements (and the paper acknowledge that to be the case). For example, the SEC does not require companies to take any steps to "ensure a conflict-free Congo." The stakeholders, however, want to see processes and baselines, and caution that they will be monitoring whether companies "demonstrate continuous improvement in subsequent reports. An issuer can use its SEC reporting to demonstrate its leadership, its proactive efforts to address conflict minerals, and its commitment to addressing egregious human rights abuses linked to the manufacturing of its products. SRIs and NGOs will look poorly upon issuers that postpone robust reporting or file a report that simply ticks a box. Conversely, stakeholders will publicly acknowledge issuers that actively demonstrate efforts to address the issue, provide transparent procedures and results, and make progress over time." "Competitive evaluations" are anticipated. But even if companies are not imbued with a competitive spirit on this particular topic, it still makes sense to review the paper to see whether there are some elements that may be helpful guidance in completing the Form. <br> <br>For example, with regard to the company's conflict minerals policy, the stakeholders would like to see a description of the policy and how it has been communicated within the company and to suppliers, along with the nature of the training that has organized. In addition, they recommend that the policy be referenced in supplier agreements and that suppliers be required to adopt their own robust policies. As a best practice (defined as proactive efforts beyond any required by the rules), they recommend that companies commit to source conflict-free 3TG from the "covered countries" and to use 3TG minerals from conflict-free smelters, audited by the CFS Program or an equivalent as they become available. Of course, since most of the conflict minerals originate outside the covered countries, a commitment of that kind, although understandable as an effort to avoid devastating artisanal miners in the DRC, may prove to be difficult to implement. The GAO report (see my email of 8/12/13) indicates that the amount of 3TG that comes from the DRC is surprisingly small: about 12% of the global tantalum supply and less than 1% of the global tungsten supply was mined in the DRC in 2011, and about 3% of the global tin supply, and less than 1% of the global gold supply, was mined in the DRC in 2010.
With regard to the RCOI (reasonable country of origin inquiry), the paper indicates that companies should Identify and publish general product categories that contain necessary 3TG and/or disclose the percentage of affected products for each mineral, thus permitting progress to be measured over time, and describe the steps to be taken to achieve a reduction in products containing 3TG material of undeterminable origin. Companies should also indicate their expected responses to red flags. Among best practices, companies should engage with industry groups or multi-stakeholder groups that focus on identifying country of origin, such as the CFS program.
In connection with due diligence risk identification, companies that have identified the relevant smelters (or refiners, in the case of gold) in their supply chains should assess the smelters' due diligence procedures against the OECD "Due Diligence Guidance." Where a company has joined an industry smelter-validation scheme (e.g., the CFS Program), the company should describe the steps to ensure that smelters are complying with the company's conflict minerals policy and/or appear on the "CFS validated conflict-free smelter" lists. The company should also describe steps taken to ensure supplier compliance with the company's policy, for example, by contractually obligating suppliers to source from conflict-free smelters validated by the CFS Program, obligating suppliers to adopt policies or conducting sub-supplier surveys. Companies should also disclose steps to remediate issues of noncompliance, as well as supplier contractual language to implement all of these steps. Among best practices, the paper recommends that companies support smelters in becoming verified as conflict free.
Finally, the paper encourages companies to support clean minerals trade initiatives in the covered countries and report on these activities in their Forms SD. In addition to mandatory reporting requirements, the paper encourages companies to adopt a "holistic approach to supporting a clean minerals trade in the DRC," including through various diplomatic and humanitarian efforts.