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Conflict Minerals: Not Just for Public Companies – What Every Manufacturer and Distributor Needs to Know Donald P. Doherty Mary Anne O’Connell Allison B. Eardley
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Conflict Minerals Team
Donald P. Doherty Partner Mary Anne O’Connell Partner Allison B. Eardley Associate
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Background & Scope of Rules
Under Dodd-Frank, the SEC was required to adopt rules requiring disclosure related to use of “conflict minerals.” The purpose was to further the humanitarian goal of ending the violent conflict in the Democratic Republic of Congo (“DRC”), which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC.
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Background & Scope of Rules
“Conflict minerals” are defined as: Tin; Tantalum; Tungsten; or Gold; Originating from the DRC and adjoining countries
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Background & Scope of Rules
The rules establish assessment and reporting requirements for public companies whose products contain conflict minerals that are necessary to the functionality or production of the product. Conflict minerals are considered “necessary to the functionality or production of a product” if they are: Intentionally added to the product Necessary to the product’s generally expected function Not incorporated primarily for the purpose of decoration
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Background & Scope of Rules
Public companies are required to design and implement a due diligence process to identify the sources of any “conflict minerals” contained in products it manufactures or contracts to be manufactured. If the conflict minerals originated in the DRC or adjoining countries, then the company must submit a report to the SEC.
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Background & Scope of Rules
Reporting companies are required to conduct an independent audit of the report and must make the disclosure publically available. The first reporting period is January 1, through December 31, 2013, with the first disclosure report due to SEC on May 31, 2014. Because of the difficulty in identifying the source of these minerals, the SEC allows a filing of “Indeterminate” for the first two years.
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Who Must Comply? Are you publicly reporting? (not investment company)
Do you manufacture products? Do you “contract to manufacture” products? Do you exercise influence over materials, parts, ingredients, or components? Not enough to: specify non-manufacturing contract terms (e.g., delivery and payment) affix logo to generic product made by others; or service or repair third party product
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Who Must Comply? START Does the company file reports with the SEC under Section 13(a) or 15(d) of the Exchange Act? Does the company manufacture or contract to manufacture products? Are conflict minerals necessary to the functionality or production of the product manufactured or contracted to be manufactured? YES YES NO NO Rules do not apply END NO YES Were the conflict minerals outside the supply chain prior to January 31, 2013? YES NO Must comply
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Who Must Comply? Are any of the conflict minerals “necessary to the functionality or production” of one of your products? YES - Even if only included in “generic” component - metal in wires in an office furniture system NO - In packaging only (unless packaging IS your product) – beer companies, potato chips NO - Accidentally added (tainting) POSSIBLY – Ornamentation, decoration, embellishment – if the primary purpose of the product NO - Transportation and delivery services – railroads and trucks not responsible for reporting the presence of conflict minerals in their vehicles NO – Machinery you use to make your products includes 3TG
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Who Must Comply? Public retailers not subject to the rule unless they contract to manufacture – for example, private labeling Typically, distributors (even if public) not subject to SEC reporting requirements, BUT will be asked to assist public companies in tracking conflict minerals through the supply chain
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How Are Companies Complying?
Many are complying by using the OECD Due Diligence Guidance. Organization for Economic Cooperation and Development (OECD) has developed a lengthy guidance document.
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OECD Guidance Describes a Five Step Process
Establishment of a company-wide conflict minerals management system. (OECD Step 1)
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OECD Guidance Describes a Five Step Process (continued)
Identification and risk assessment of product parts and assemblies in supply chain that may contain conflict minerals. (OECD Step 2) Identification of affected suppliers and implementation of a “Reasonable Country of Origin Inquiry” – this often involves the use of a reporting template.
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OECD Guidance Describes a Five Step Process (continued)
Development and deployment of an appropriate risk-based strategy for further diligence. (OECD Step 3)
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Gathering Information From Suppliers – Many are using a standardized template
Electronic Industry Citizenship Coalition (EICC) Global eSustainability Initiative (GeSI). The EICC/GeSI created a standardized template called the Conflict Minerals Reporting Template (“CMRT”) used to report or collect due diligence information on the source of conflict materials. The CMRT is available for all companies to use and can be downloaded at
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Conflict Materials Reporting Template
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Gathering Information From Suppliers – Many are using a standardized template (continued)
The CMRT is used to reduce the reporting burden on the supply chain so a consistent reporting template can be used across the industry in order to avoid multiple formats.
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Examples of Customer Requests & Responses
A typical request from a customer to a supplier or distributor will contain a cover letter explaining the conflict minerals reporting obligations of the customer and will request that the supplier or distributor complete the standardized CMRT or otherwise disclose sourcing information. Even if a company is not subject to the reporting requirements, or is not located in the U.S., in order to facilitate the customer’s reporting obligations, these non-reporting companies will likely be required by their customers to comply with the request in order to maintain the business relationship.
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Examples of Customer Requests & Responses (continued)
If a receiving party is unable to accurately verify the source of its materials, the party should use commercially reasonable efforts to obtain as much information as available to answer the questions to the best of its ability.
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Examples of Customer Requests & Responses (continued)
A distributor, or other supplier, may respond that they are not subject to Dodd Frank and do not have to report. However, the customer is likely to not consider this helpful. Some are taking a more pro-active position and committing resources to support manufacturers in their attempt to track conflict minerals.
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Some Companies Are Trying to Use this “Burden” to Their Advantage
Example: We are committed to supporting our manufacturers in their efforts to track conflict minerals in their supply chain. We have assembled a strategic team to guide and coordinate its efforts moving forward. We will make this information available to our customers.
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Supporting Communication Between Manufacturers and Customers By:
We are: Reaching out to Suppliers to solicit supplier statements regarding their position on conflict minerals and to determine whether they are DRC conflict-free. Creating a repository on website for the statements and data gathered from its suppliers. Reviewing, managing and updating supplier data as it becomes available. Providing assistance and support to customers. Providing continuing education.
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Commercial Contracting Issues - Distributors and Suppliers
OECD says that manufacturers and other downstream companies should “establish internal controls over their immediate suppliers and may coordinate efforts through industry--‐wide initiatives to build leverage over sub--‐suppliers, overcome practical challenges and effectively discharge the [OECD] due diligence recommendations…” So – you will be asked to agree to include conflict material provisions in your contracts – be ready to respond
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Commercial Contracting Issues - Distributors and Suppliers
Set up a procedure for responding to certification and other requests from customers Who is likely to receive requests? Who should reply? – not the sales person!
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Commercial Contracting Issues - Distributors and Suppliers
Establish policies for your customer contracts - your customers likely to start asking for reps and warranties – for example that all of products you sell them are conflict mineral free that you do no sourcing from the DRC or adjoining countries Be careful in giving conflict mineral free very complex determination change over time – and you can’t monitor it easily
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Commercial Contracting Issues - Distributors and Suppliers
Agreeing not to source from the DRC may be easier – given the small volume of 3TG that comes from covered countries
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Commercial Contracting Issues - Distributors and Suppliers
Many not for profits and socially focused institutional investors are fighting this approach, as it hurts the “good” mines as well as the bad ones – and therefore the economy of the DRC and surrounding countries
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Commercial Contracting Issues - Distributors and Suppliers
What should you do instead? Agree to cooperate to verify sources of 3TG and, if appropriate work with your customer to find alternative materials or sources Ask for a copy of your public company customers’ conflict minerals policies If you are public, agree to comply with Dodd-Frank and to require suppliers to source responsibly
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Commercial Contracting Issues - Distributors and Suppliers
Results of manufacturing industry survey from August (MAPI): 9.7 - average number of employees working on some aspect of conflict minerals compliance 83% - companies using multi-function teams for compliance efforts - some in combination with a single leader (29%) 81% - companies designated internal leaders
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Commercial Contracting Issues - Distributors and Suppliers
75% - companies begun initial discussions of the rule’s applicability 55% - companies in the process of identifying involved suppliers 57% - companies in process of identifying potentially affected products 52% - companies in process of responding to supplier questionnaires 51% - companies in process of establishing a framework for the reasonable country of origin inquiry
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This is not going away – no relief is expected from the court challenge to the regulations – and even if the appeals court strikes the rules, the statute remains Other countries are starting to consider similar (and in some cases more onerous) regulations 3TG are everywhere:
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Resources EICC/GeSI partnership – reporting template and conflict-free smelter program ITR and tin industry – certification of a few tin smelters DRC government has launched regional certificates on origin of minerals Evaluation Report from Motorola, AVX and other manufactures – to validate the AVX pipeline for tantalum
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Questions?
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Thank You
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