Elmgroup Blog

Conflict Minerals Up in the Air – Literally and Figuratively

Currently I am in air somewhere above the midwest, but through the magic of in-air wifi, am able to post this in our efforts to keep readers updated. By now, we expect our readers are well aware of this week’s court decision on NAM’s challenge to the SEC conflict minerals disclosure.  The court upheld almost every aspect of the rule, striking down NAM’s challenge on: No de minimis exemption Triggering due diligence where issuers have “reason to believe” that conflict minerals “may have originated” in covered countries Applicability to contract manufacturing The temporary “DRC Conflict Undeterminable” status The SEC’s approach to quantifying the benefits of the disclosure The sole issue the court sided with NAM on was that of compelling issuers to disclose products as “not been found to be DRC Conflict Free.”  In plain English, it boils down to what few words are used to disclose products that are NOT DRC conflict free. The court’s explanation is summed up as follows: … it is far from clear that the description at issue—whether a product is “conflict free”—is factual and non- ideological. Products and minerals do not fight conflicts. The label “conflict free” is a metaphor that conveys moral responsibility […]

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Guest View: D.C. Circuit Strikes Down Conflict Minerals Rules

Editors note:  In the coming days, there will be a great deal of legal analysis of today’s US Appellate court decision.  Our friend Brink Dickerson, a partner in the Atlanta office of Troutman Sanders, graciously agreed to offer us his views.  Brink can be contacted at brink.dickerson@troutmansanders.com. In less time than many expected, this morning (April 14, 2014) the Court of Appeals for the D.C. Circuit handed down its decision in the National Association of Manufacturers’ challenge to the conflict minerals rules that the SEC adopted in response to Section 1502 of the Dodd-Frank Act. The Court ruled that the requirement that companies report whether any of their products are not “DRC conflict free” violates the prohibition against compelled speech.  The Court held that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.”  The Court analogized requiring this disclosure to requiring issuers to “disclose the labor conditions of their factories abroad or the political ideologies of their board members, as part of their annual reports,” which would be “obviously repugnant to the First Amendment.” A critical question in the Court’s analysis was the appropriate standard for the […]

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US Court of Appeals Rules Conflict Minerals Rule Violates Free Speech

Reuters has reported on the decision from the US Court of Appeals for the District of Columbia Circuit violates free speech by compelling companies to “state on their website that any of their products have not been found to be…conflict free.” The decision itself can be downloaded here. The legal battle isn’t over just yet, though.  The case was sent back down to the lower court for more proceedings.  We hope to post our analysis and commentary from other experts soon.

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Highlights From CorporateCounsel.net, Meredith Cross on Form SD/CMR Filings

On April 9, 2014, TheCorporateCounsel.net hosted a presentation “Conflict Minerals: Tackling Your First Form SD”.  The featured speaker was Meredith Cross, former Director of the Division of Corporation Finance at the SEC.  Although we did not participate,  some of the highlights of the presentation that were reported to us  are: Issuers should affirmatively document if none of its products contain conflict minerals. As May 31, 2014 is the inaugural filing for Form SD and CMRs, there is no precedent to or standard disclosure.  But it is best to be “in the pack” rather than an outlier – don’t have the longest or the shortest report.  The CMR does not need to be any longer than is necessary for compliance and be clear and concise.  The presenter commented that a 10 page SD/CMR is probably too long.  Our view:  We have heard that one well known firm has a template CMR that is 20+ pages.  Our opinion is in most cases, that length is not warranted and may create unintended consequences. Issuers that are “DRC Conflict Undeterminable” should ensure they explain what they are going to do to improve their due diligence and compliance going forward. SEC isn’t likely to be looking […]

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Five “Must Know’s” About SEC’s New Conflict Minerals Q&A

With a few days gone by since SEC published their new Q&A, we have been able to read them more carefully and thoughtfully.  Most of the Q&A address matters we already considered resolved or that we felt had an emerging industry consensus already aligned with the answers provided.  Given that, we won’t rehash those.  Instead, we highlight and comment on some of details and subtleties we believe shed new light on the compliance activities, definitions and the disclosure. Clarifications of DRC Undeterminable A product is “DRC Conflict Undeterminable” until a company determines that all applicable 3TG in that product did/did not originate in a Covered Country, or that the 3TG did/did not directly or indirectly finance or benefit armed groups in those countries. If any of an issuer’s products are “DRC conflict undeterminable”, the issuer is not required to obtain an IPSA of its Conflict Minerals Report in part or in its entirety.  Our view:  This may be a surprise (or relief) to some. From our perspective, although we raised questions publicly about product-level IPSAs, we didn’t hold that view in our client engagements. IPSA Objectives Our view:  Further clarification was provided on the specified objectives of the IPSA.  The […]

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PwC New Survey on Conflict Minerals Compliance Preparations Offers Surprises

Global accountancy PwC released a new survey on companies’ compliance efforts for SEC’s conflict minerals disclosures.  The survey, conducted in February 2014, offers a number of valuable insights into Dodd Frank Section 1502 compliance.  We recommend reading the report in its entirety, but our view of the highlights is below.  Our general takeaways are that many companies still have much work ahead for the May 31, 2014 filing, and efforts are overwhelmingly geared toward regulatory compliance rather than other goals or value creation. 25% of the respondents indicated they are still in early stages of compliance – mainly conducting the RCOI.  However, 11% have not completed the product applicability determination/screening phase. Only 4% have created a draft disclosure as of the survey date. 62% of respondents have one to two full time resources working on conflict minerals programs, with 21% more having three to five full time resources. From our experience, staff originally had (and may still have) other job functions, but conflict minerals compliance has become their full time job. 90% of respondents view the efforts as a regulatory compliance measure, but are also trying to find ways to create value from the time and expenditures involved. Use of […]

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SEC Issues Second Round of Conflict Minerals Q&As

SEC has finally issued its second set of its conflict minerals Q&As. These provide more information on the independent private sector audit (IPSA), certain aspects of the IPSA trigger whether RCOI activities should be described in the CMR the extent of the description of the due diligence measures that is required for the CMR; and applicability of “DRC Conflict Undeterminable” category The SEC’s answers to most of the questions posed are fully aligned with guidance we have offered to many clients. View the Q&A here.  

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Are Unverified Processing Facilities in Your Smelter/Refiner List?

We are hearing on an increasingly frequent basis about suppliers providing names of facilities that are reportedly 3TG smelters or refiners, but are not included in the EISS-GeSI verified smelter listing that is included in the Conflict Minerals Common Reporting Template. What does this mean, and what should you do? We had a conversation last week with someone intimately familiar with the CFSI and the verified smelter list who offered some thoughts. First off, the list of verified smelters and refiners (those listed in the “Standard Smelter Names” tab of the Template) is not exhaustive.  This is indicated in the header on that page, which states that the list “does not represent … all smelters worldwide.”  The list is based on those that have been identified by EICC, GeSI and CFSI members primarily within the electronics supply chain, although the gold list relies heavily on the jewelry and gold industries. Those in industrial and commercial sectors that have identified additional smelters not included in the CFSI Standard Smelter List are faced with the question of what to do with these.  We have seen companies going in different directions, such as: Taking a position that smelters/refiners not on the verified list […]

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Summary from the Ethical Sourcing Forum’s Conflict Minerals “Mini Lab”

Last week, Elm delivered a “mini lab” on current condlict minerals issues at the Ethical Sourcing Forum held in New York City.  The Forum drew over 150 attendees representing many of the world’s most recognized brands from retail, apparel, jewelry and consumer products. The session avoided basics/background matters and focused on timely issues including: Relevant examples of level of influence on contract manufacturing that may or may not trigger disclosure Key concepts and interpretations of “reasonably reliable representations” and “reason to believe,” especially relating to implications of company level information from suppliers rather than parts level information. Defining “due diligence” as a subset of the five steps of the OECD Guidance Content and future evolution of the Form SD and Conflict Minerals Reports for the US Securities and Exchange Commission Updates on AICPA and The Auditing Roundtable guidance on the independent private sector audits (IPSAs) Not surprisingly, the topic of most interest was that of the Form SD and CMR content and length.  Overwhelmingly, Forum attendees indicated a desire to develop a clear, concise and brief submittal for the 2013 filing.  Among the factors in determining content is identifying the audience for which the report is written.   Several expressed […]

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SEC Commissioner Speaks to Accountability for Sustainability Accounting

SEC Commissioner Daniel Gallagher made remarks last week at the 26th Annual Corporate Law Institute held at Tulane University Law School.  His comments centered on his views of the current condition of corporate governance and the role of the SEC and the Commissioners.  In that light, he stated  “We must also take exception to efforts by third parties that attempt to prescribe what should be in corporate filings.  It is the Commission’s responsibility to set the parameters of required disclosure.” Gallagher called attention to “[t]he somewhat confusingly-named Sustainability Accounting Standards Board” or (SASB).  SASB is a non-profit entity that, according to their website “provides standards for use by publicly-listed corporations in the U.S. in disclosing material sustainability issues for the benefit of investors and the public.” However, Gallagher was less than supportive of the group and clarified that “the SASB does not actually promulgate accounting standards, nor does it limit itself to sustainability topics, although I suppose it is in fact a Board.”  He continued to voice concern about overreaching or non-mandated SEC disclosures: The Commission does not and should not delegate to outside, non-governmental bodies the responsibility for setting disclosure requirements.  So while companies are free to make whatever […]

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