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Conflict minerals: Due diligence, disclosure lessons for compliance (Part 2)

The four conflict minerals — tantalum, tin, tungsten and gold

This post is the second in a series of three on the topic of conflict minerals.

The first post examined the origins of the reporting requirement, and this installment will explore what constitutes sufficient due diligence in an investigation of a company and its supply chain.

I spoke with two attorneys who counsel clients in the area on conflict-mineral due diligence and reporting to find out more about the processes companies should implement to comply with the law.

Zachary Brez, co-chair of the securities and futures enforcement practice at Ropes & Gray in New York said the law defines “conflict zones” as the Democratic Republic of the Congo (DRC) and any of its adjoining areas.

The minerals that are covered by the law are gold, tantalum, tungsten (aka, wolframite) and tin (known collectively as “3TG.”).

Companies that file with the SEC and might use conflict minerals in their end products must comply with Section 1502, plus those state laws that also require tracing and reporting, such as California, Massachusetts, Maryland and Connecticut, Brez said.

“Also, although we think of circuit boards, mobile phones and jewelry as those subject to conflict-mineral use, companies should also check the equipment they use to build their final products, such as the drills they employ. The SEC does not require an analysis of such equipment, but it could be considered best practice to do so,” Brez said.

“Although private companies are not directly subject to the rule, if they are part of a public company’s supply chain, they will need to follow many of the same compliance procedures as public companies,” he said.

Companies have to do their due diligence immediately. “Unless the rule is overturned on appeal in the D.C. Circuit Court – the hearing was a month ago – corporate filings on conflict-mineral due diligence will be mandatory in their June 2nd filings,” he said.

In October 2012, the nation’s biggest trade associations, including the National Association of Manufacturers (NAM), the Business Roundtable and the U.S. Chamber of Commerce, filed a federal lawsuit to stop the disclosure rules, from going into effect.

The SEC won the first round of NAM v. SEC. Oral arguments before the D.C. Circuit’s three-judge panel on appeal focused (in part) on the SEC’s decision to leave out an exception for products that contain only trace amounts of conflict minerals and whether the reporting obligations violate the First Amendment by mandating speech.

“It might not matter much at the end of the day what the court rules, since companies still need to be sensitive to the concerns of commercial and even retail customers, many of which are focused on the responsible sourcing of 3TG,” said Michael Littenberg, head of the public companies practice, and a widely published author on conflict minerals compliance, at Schulte Roth & Zabel in New York.

“Furthermore, as peer companies began to focus on this area of compliance and make it part of their public-facing Corporate Responsibility Programs, it has put pressure on other companies to follow suit,” he said.

“Some companies, especially those with robust or forward-looking programs, have concluded, ‘it took years, and perhaps even decades, to build our brand, and we’re not going to risk damage to the brand (in this age of viral communication when a brand can take a significant hit overnight) over perceived deficiencies in our direct or indirect minerals sourcing practices,'” he pointed out.

What should companies be doing now to prepare? We will explore this in our next and final installment of this series.

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Julie DiMauro is the executive editor of FCPA Blog and can be reached here.

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