The end of the first year of SEC’s conflict minerals disclosure regulation is upon us. Program fundamentals should be in place, with suppliers (hopefully) responding to your information requests. Data analytics should be providing information needed to track progress and regulatory determinations. And of course all this should roll up to product classifications, SEC submittals and responses to customers.
Some may feel that the heavy lifting is over. However, we don’t think that is the case. We offer thoughts on matters worth reevaluating in the first quarter of 2014 with regard to 2013 programs and information, which will likely benefit reporting year 2014 as well. Of course we recognize that significant opportunities and clarifications are expected after the initial filings are submitted, made publicly available and SEC provides further guidance or commentary on them.
- It is not too late to define your “due diligence framework” and implement it as defined where needed. A subtle but critical point is the role due diligence plays in the “DRC Conflict Undeterminable” classification, which among other things, allows for a two (or four) year deferral of the Independent Private Sector Audit (“IPSA”) of the CMR. Recall that “DRC Conflict Undeterminable” requires “exercising due diligence” and that section (c)(1)(iv) of the form instructions allow the audit deferral “following [the issuer’s] exercise of appropriate due diligence”.
A clear, specific and focused definition of “due diligence” speeds its implementation, creates the basis for a succinct description of the due diligence framework and measures for the CMR and, where appropriate may lead an issuer to a quicker and more defensible position as undeterminable. We believe the importance of delineating due diligence has not received the attention it truly deserves given what rests on it.
- Drafting the language for the Form SD and possibly the Conflict Minerals Report. As of December 6, 2013, an official version of Form SD had not been published by SEC – and one may not be since the general content and instructions are in the final release. However, this should not be a reason to delay working on the content/language of the SD and CMR. Especially for the first year submittal, multiple internal reviews should be anticipated and we recommend external reviews from multiple perspectives – legal, technical and auditors.
- Deciding what to report in the CMR versus the corporate social responsibility (CSR) report. As we have stated in the past, companies should view the CMR as a regulatory filing rather than the venue for “telling the CSR story”. We believe that a company’s CSR report is a more appropriate place for communicating information that goes beyond the requirements of the form requirements.
- Identifying and describing methods to improve due diligence. For those claiming DRC Conflict Undeterminable status, one of the components of the CMR is to describe “the steps [the company] taken or will take, if any, since the end of the period covered in [the] most recent prior conflict minerals report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence.” Therefore, companies are expected to evaluate the effectiveness of their 2013 program, identify where improvements can be made for calendar year 2014, and report on those in the CMR that is due May 2014.
- Conducting conflict minerals audits of suppliers. This concept is still in its infancy, but we think momentum will increase rapidly. It is valuable to incorporate some level of conflict minerals program review into supplier audits/reviews. Companies must first determine the appropriate scope of the conflict minerals audit activities for their suppliers – including considering adding that as a “bolt on” to an existing supplier audit. One client has decided to conduct conflict minerals audits for all nonresponsive and uncooperative suppliers. Such an approach may provide suppliers an additional incentive to be responsive.
- Improving supplier education. We expect that many companies will apply what has been learned during the first year and adjust education/awareness efforts. Better supplier understanding supports improved information reliability and response rates.
- Achieving alignment with customers’ needs. Customers’ needs are sure to evolve as well, increasing information completion/validity expectations and possibly creating larger gaps between their requirements and SEC compliance. We suggest proactively communicating with customers to track and monitor the changes they are considering/implementing to ensure you can respond properly.
This is not an exhaustive list, of course, and there may be other significant areas of continuous improvement that will require effort through the beginning of 2014 to prepare for the calendar year 2013 filing.
Many companies are seeking third party program reviews. The reviews can target specific program elements, such as product filtering or RCOI processes, or cover the entire program*. Our CMCheckPointSM tool is being used by Fortune 250 companies and others for this purpose. Some companies are conducting self evaluations guided by the tool, others have us facilitate their reviews or ask us to conduct the complete review ourselves. Regardless of the approach, our guided program reviews/evaluations have consistently proven to be valuable, cost effective and efficient.
Finally, upcoming SEC interpretive guidance is likely to impact the filings for calendar year 2013. It is important to monitor SEC’s activities and publications to stay informed on these matters.
* If you are considering a readiness assessment or simulated audit for your CMR, you should read this.