By Patricia Jurewicz
With the long-anticipated SEC rule on “Conflict Minerals” coming to a vote tomorrow, you might be wondering what part of the ruling companies, investors, and human rights advocates need to pay attention to. What will determine if it’s a “strong” or a “weak” rule?
To summarize, Section 1502 Conflict Minerals of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2011, outlines what companies have to disclose regarding their use of tin, tantalum, tungsten, or gold that originates in or near the Democratic Republic of the Congo (DRC). If it is determined that the minerals were mined in the DRC or any of the nine adjoining countries, then the company has to file a “Conflict Minerals Report” with the SEC, which includes a description of the products that “are not DRC conflict free,” the efforts to determine the mine of origin, and the due diligence on the source and chain of custody of such minerals. This report will need to be audited for accuracy by a third party.
Here are the key questions that stakeholders will be watching for in tomorrow’s ruling:
1) Who will have to file a Conflict Minerals Report?
Most likely companies who manufacture products with the four stated minerals in them will have to report. However, it is not always black and white. For example, if HTC makes an exclusive phone for Verizon, does Verizon have to report? What about retailers such as a Home Depot, who have their own branded products? Many companies, especially retailers, have not wanted to start putting any systems in place until they hear from the SEC that they will indeed be required to file.
What about non-publicly traded companies? Private companies don’t file annual reports with the SEC, so they will not have to determine if they have to file a Conflict Minerals Report but they are not left unaccountable. If they have any customers who are publicly traded on a US stock exchange and are liable to file a Conflict Minerals Report, the supplying companies will have to report on the origin and mining conditions for their clients to report.2) What level of reporting will be required?
The law states that companies must report on where their minerals originate if they are coming from the DRC or adjoining countries, which has become known as the “reasonable country of origin inquiry.” This will likely be a challenge for many companies since ores from different regions of the world get melted together at the smelter or refiner. This means companies need to at least be able to trace their minerals to a smelter. Depending on the industry and the product, this could be anywhere between two and ten tiers of suppliers to collect information from.
But what if a component manufacturer’s subcontractor doesn’t respond to inquiries? Or his refined metals supplier doesn’t want to provide the information? Is stating the process you went through to try to gather the information good enough? We are looking to the rule to offer that direction.3) Where will companies report the information?
Will it have to be included in the Annual Report, the 10-K? Or can it just be posted on a company’s website and the URL is listed in the annual report? If the Conflict Minerals Report is contained inside the annual report, it would be “filed”, if it’s on the website and just referenced in the annual report, it would be “furnished.” This point is of special interest to sustainable and responsible investors because there is an added level of liability by corporate executives for information that is “filed.”4) When will companies have to file the information?
If companies determine that they do need to file a Conflict Mineral Report, the law says that companies will need to file their report on information gathered in the first full fiscal year after the rule is issued. So if a company’s fiscal year is Jan 1st – Dec 31st, the first report they will have to submit will be about fiscal year 2013 and they will submit it in early 2014. Some companies are encouraging the SEC to declare one calendar date when all companies will have to submit. This would make it easier for suppliers who have multiple customers filing to collect and distribute their information just once every year, rather than meet the timing of many different fiscal periods. In a consolidated industry such as the IT sector, it would be easiest for the entire industry to be asking for the information simultaneously. This might even motivate the unresponsive sub-sub-contractors to provide information.
Will companies have to report on 100% of the materials in their products in their first report? Many companies have been pushing for a “phase in” period, while many NGOs have been animatedly opposed. Last March in a House Appropriations Committee Hearing, Chairman Schapiro made reference to there being a phase in period for companies…. for how long, we are all looking for the rule to say.
Patricia Jurewicz is the Director of the Responsible Sourcing Network, a project of As You Sow. She has been working on corporates social responsibility issues for the past 20 years wearing many of the various hats of the multi-stakeholders she convenes.