Form SD and Conflict Minerals Reports: Short Story or Novel?

In recent weeks, companies have been toiling away at their Form SDs and Conflict Minerals Reports (CMRs).  Since 2014 will be the inaugural year of these filings, much confusion and interpretation exists about their content.  We offer our thoughts on two trending approaches we see – the short story and the novel – and related considerations for the submittals.

The short story

Bearing in mind that the Form SD and CMRs are governmental filings, many issuers plan to fulfill the requirements in a concise manner and leave additional narrative to their corporate social responsibility or sustainability reports (CSR).  In this way, the lines are not blurred between what is required and what is beyond the requirements.  It also provides more freedom and flexibility for companies to “tell their story” through the CSR report without concern of misinterpretation by regulators or other legal consequences of statements/information filed with a federal agency.  Almost every Elm Sustainability Partners client has adopted our focused three page SD/CMR format developed to meet this need.

The novel

Examples of SD/CMR novels we have seen are two to three times the length (by number of pages) of our short disclosure.  It is not uncommon for a conflict minerals IT system to generate a novel-style draft or template report.  They can contain lengthy discussions of the process of selecting/screening suppliers, sending information requests, reviewing and processing the incoming information and various quantitative metrics.  This is all interesting, but far beyond the requirements and creates potential risk of providing too much information and opportunities for misinterpretation.

Although few CMRs for 2013 are likely to be subject to the independent private sector audit (IPSA), conducting an IPSA of some language in the novels would be difficult.  The novel unnecessarily broadens the IPSA scope and increases its complexity, time and cost. “Wiggle words” and vague/overly general wording prevalent in some of the disclosures cannot be audited.  Moreover, some descriptions of due diligence measures place the conflict minerals IT provider (and the system’s internal workings) within the scope of the IPSA.

Writing for your readers?

Typically, SEC disclosures are intended for the “average investor” in making informed investment decisions based on financial data.  The users of conflict minerals disclosures are not likely to be the average investor, but NGO groups, customers, the media and investors in the socially-responsible investment niche.  Some experts suggest writing the SD/CMR to this expected audience, which aligns with the novel-style report.  However, it is our view that these groups already look to corporate CSR reports for that type of information.  And as mentioned above, a longer narrative can bring more opportunities for unintended legal consequences that don’t exist in CSR reporting.

SEC as the Editor-in-Chief

Nothing we have seen in the final release indicates that a company’s 2013 filing format or descriptions lock that company into the same approach for subsequent years.  As a matter of fact, it is clear throughout the final release that the SEC expects information and related reporting to evolve over time.  So while some observers have stated that the SEC may flag issuers who change their disclosures significantly year-over-year, we believe the opposite is more likely.  Issuers whose SD/CMRs remain static could be perceived as not paying attention to relevant industry developments, not attempting to improve the submittal and essentially “phoning it in”.  This scenario seems more likely to attract the SEC’s attention than good faith improvements resulting in significant changes year-over-year.

Epilogue

For this year, it may not be critical to view the CMR through some of these perspectives (such as the auditor viewpoint for “undeterminable” filings).  It is widely accepted that the May 2014 filing will be considered a learning experience with variability in approaches.  At the same time, issuers should evaluate multiple factors in deciding what best suits them while also ensuring the disclosure language aligns with that decision.

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