• Prepare for a Fast-Paced Year of Conflict-Minerals Compliance
  • January 13, 2014
  • Law Firm: Holland Hart LLP - Denver Office
  • The 2010 Dodd-Frank financial reform legislation has moved the term "conflict minerals" from the province of advocates and diplomats to regulators at the Securities and Exchange Commission (SEC) and to compliance departments at tens of thousands of companies. This trend will accelerate in 2014, with a number of critical milestones and developments. Companies with gold, tin, tantalum, or tungsten in their supply chains must be prepared for the ride.

    For conflict-minerals watchers, the year began on January 7, with an oral argument before the D.C. Circuit Court of Appeals. The U.S. Chamber of Commerce and other industry associations challenged the regulations issued by the SEC to implement Dodd Frank Section 1502 on a number of grounds.1 After a judge in the District Court for the District of Columbia granted summary judgment in favor of the SEC in July, the industry associations appealed.2

    The oral argument reportedly3 focused on the appellants' claims that the regulatory reporting requirements violate the First Amendment by requiring an affirmative statement on whether a company's products are, or are not, "DRC Conflict-Free." The industry also argued that the SEC overstepped its authority by not including a de minimis provision for companies that use small amounts of the minerals and by not allowing for uncertainty in reporting on supply-chain information that can be difficult and expensive to gather. Media reports suggest that at least two of the D.C. Circuit judges may be more receptive to the industry arguments than the District Court. It is possible that a decision against the SEC would affect only certain provisions of the regulations or the decision could result in the regulations being vacated in their entirety. The ruling should be issued in the next few months.

    Companies should be aware of the following pending deadlines and trends in conflict-minerals compliance and implementation while the D.C. Circuit deliberates:

    • First reports due May 31, 2104. The regulations require annual filers with the SEC to file a newly created Form SD with the SEC. Form SD identifies whether products are "DRC Conflict Free" or "Not DRC Conflict Free" (or, during a phase-in period, "DRC Conflict Undeterminable") In many cases companies must have an independent private-sector audit performed on the information presented to the SEC. The company must also publish much of this information on its website. The first reports are due by May 31, 2014.
    • Formulate a Multi-Year Compliance and Reporting Strategy. Section 1502 does not prohibit use of minerals that fund conflict; it simply requires awareness and transparency. This leaves open the question of what the SEC's precise enforcement role will be, and it places as much emphasis on how a company reports as it does on what a company reports. Companies like Intel have grabbed recent headlines by establishing entirely "conflict-free" supply chains.4 Most companies will not be able to take a step like this in the next year, or even the next three years. Instead, companies need to establish reasonable and meaningful goals and then ensure that they can demonstrate year-on-year progress along the way. Some of the leading non-governmental organizations have emphasized that they will focus much more on process and progress than final results in their review of company reporting in the early years.5
    • Develop a "Post-Phase In" Compliance Program. The Section 1502 regulations enable companies to report "DRC Conflict Undeterminable" during an interim period of two years for "large" reporting companies (a company with more than $75 million of public equity float or revenues more than $50 million) and a period of four years for "smaller" reporting companies below these thresholds. Nearly all companies are expected to take advantage of the phase-in and report "DRC Conflict Undeterminable" because of the ongoing assessment of their supply chains and the fact that this category is generally exempt from the auditing requirements. For larger companies, however, the two-year exemption ends with 2014, meaning that compliance programs that are operational on January 1, 2015, must be able to generate more responsive data. Non-reporting companies receiving data requests from customers and suppliers should expect even more rigorous requests—and review of responses—in 2015.
    • Watch Europe. As companies focus on their Section 1502 compliance programs and reporting, with perhaps one eye on the D.C. Circuit, they should also pay attention to likely conflict-minerals regulations in the European Union. The EU undertook a "public consultation" in the first part of 2013 to evaluate the need for regulations,6 and despite some apparent internal disagreements on scope and structure, most signs point to the issuance of a first policy statement by the EU in the early months of 2014.7 With European Parliament elections set for mid-2014, it is unlikely any EU action on conflict minerals would take effect until 2015 or perhaps even 2016, but there will almost certainly be action. And it may be even broader in scope than Section 1502, with companies likely needing to evaluate their supply chains for support of conflict anywhere in the globe, rather than just Central Africa.8


    1For a summary of Section 1502, the SEC regulations, and the District Court opinion, see the Holland & Hart Update from August 2013, "Supply Chain Regulation Drifts Downstream" (available at http://www.hollandhart.com/supply&under;chain&under;regulation&under;drifts&under;downstream/).
    2Opinion available at https://ecf.dcd.uscourts.gov/cgi-bin/show&under;public&under;doc?2013cv0635-37.
    3See, e.g., Andrew Ackerman, Appeals Court Expresses Doubts About SEC Rule on Conflict Minerals," The Wall Street Journal, January 7, 2014 (available at http://online.wsj.com/news/articles/SB10001424052702304617404579306772047974880).
    4Intel's CEO made the announcement at the 2014 Consumer Electronics Show. See, e.g., Joe Miller, "Intel Vows to Stop Using 'Conflict Minerals' in New Chips," January 7, 2014 (available at http://www.bbc.co.uk/news/technology-25636001).
    5See, e.g., Darren Fenwick and Patricia Jurewicz, Expectations for Companies' Conflict Minerals Reporting, September 2013 (available at http://www.enoughproject.org/files/Expectations-for-Companies-Conflict-Minerals-Reporting.pdf). Analysis of this report can be found in Brad Brooks-Rubin, "Radiohead and Dodd-Frank: Survive Section 1502 with 'No Surprises,'" MetalMiner, September 23, 2013 (available at http://agmetalminer.com/2013/09/23/radiohead-and-dodd-frank-survive-section-1502-with-no-surprises/).
    6See, http://trade.ec.europa.eu/consultations/?consul&under;id=174.
    7See, e.g., http://www.euractiv.com/development-policy/eu-conflict-minerals-law-hangs-b-news-531698.
    8See, e.g., http://trade.ec.europa.eu/doclib/docs/2013/october/tradoc&under;151848.pdf (speech by EU Parliamentarian Karl de Gucht indicating that the EU regulations would look at support of conflict anywhere).