Conflict Minerals Update for Device Manufacturers

Under the SEC’s conflict minerals rules, public companies must disclose in an annual Form SD and associated Conflict Minerals Report (a “CMR”) certain information regarding any tin, tantalum, tungsten, and gold (collectively “3TG”) that is “necessary to the functionality or production” of any products that they manufacture or have contracted to be manufactured.

The rules have been the subject of considerable criticism since their adoption and have been challenged in federal court.  On April 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit sided with industry groups in ruling that certain provisions of the rule violated the First Amendment.  Specifically, the court ruled that the First Amendment was violated by a requirement that companies disclose whether any of the products that they manufacture or contract to have manufactured contain 3TG that directly or indirectly finance or benefit armed groups.  While this ruling was welcome, it also created additional uncertainty, since the court stopped short of ruling on whether other provisions of the rule were invalid.

The case will now return to the district court in which the suit was originally filed.  Public companies and industry groups have pressed the SEC to stay the rule until the district court has an opportunity to make a final decision following the Court of Appeals opinion.

On April 29, 2014, the SEC’s Division of Corporation Finance issued a statement addressing the effect of that opinion on the SEC’s conflict minerals reporting rule.  This SEC guidance states:

  • Companies that do not need to file a CMR should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook.
  • For those companies that are required to file a CMR, the report should include a description of the due diligence that the company undertook.
  • If a company filing a CMR has products that fall within the scope of Items 1.01(c)(2) or 1.01(c)(2)(i) of Form SD (i.e., its products either have not been found to be DRC conflict free or are DRC conflict undeterminable), it need not identify the products as “not found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” However, the company should disclose, for those products, the facilities used to produce the 3TG, the country of origin of the minerals, and the efforts to determine the mine or location of origin.

The following are a few observations that might be useful for companies preparing Forms SD and Conflict Mineral Reports in light of the ruling and subsequent staff statement:

  1. Companies are seriously considering whether to identify the products as “not found to be ‘DRC conflict free’” or “DRC conflict undeterminable.”   Since that is no longer required, we understand that many (if not most) companies will remove these statements from the CMR. We expect that consumer-facing industries, such as consumer electronics companies, are more likely to identify their products as DRC Conflict Free, if true, than companies in other industries.
  2. Companies are not required to and most will not disclose the products covered by the CMR on an individual product basis (i.e., identifying the products covered as “wrenches” rather than “socket wrenches,” “combination wrenches,” “allen wrenches,” “pipe wrenches,” etc.).
  3. Companies that are required to prepare the CMR may wish to include their description of the reasonable country of origin inquiry in the CMR. To be consistent with the processes followed, companies could make clear that the reasonable country of origin inquiry required by the rule was incorporated into the due diligence process.
  4. To demonstrate adherence to the OECD guidance, companies should consider, in addition to describing the OECD guidance at a high level, describing the specific steps to be followed as part of the guidance. As part of this disclosure, companies are not required to include in the CMR detailed data about the number of suppliers contacted, how many responded, and similar matters, but we understand that many (but certainly not all) companies may choose to do so.
  5. The rule requires that companies provide a description of the facilities used to process the 3TG in a company’s products, the country of origin of the 3TG in those products, and the efforts to determine the mine or location of origin with the greatest possible specificity. Notwithstanding this requirement, we understand that many companies will have little to report due to insufficient or unreliable supplier responses.  Consequently, we expect that many companies will indicate that they have been unable to definitively determine the identity of the smelters from which their suppliers source 3TG or the mine or location of origin of the 3TG included in the covered products.

Covington lawyers are working with many companies, including medical device manufacturers, as they draft their 3TG reports.  Please contact Keir Gumbs (kgumbs@cov.com) or David Engvall (dengvall@cov.com) if you have any questions about these matters.