Conflict Minerals Frequently Asked Questions |
The Securities and Exchange Commission’s (SEC’s) final rule on Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Final Rule”) presents many challenges to companies. This list of frequently asked questions is representative of inquiries we have received regarding the Final Rule.
In determining the applicability of the final rule and in executing a compliance plan, companies should consider consulting their internal conflict minerals task force, which may potentially include representatives from supply chain, sourcing, legal, financial reporting, quality, and sustainability. This consultation will be important in understanding what is in scope; and should be documented to reflect the judgment exercised by management.
Should you have additional questions, please feel free to contact our Conflict Minerals Advisory Services team, on the right side of this page.
| Question | Response |
|---|---|
| Background | |
| What are the four specific conflict minerals? | The term “conflict mineral” is defined in Section 1502(e)(4) of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Act) as (A) columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassiterite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives; or (B) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo (DRC) or an adjoining country. |
| Do conflict minerals encompass "strategic materials" like the rare earths? | Presently, the Secretary of State has not designated any other mineral as a conflict mineral. Therefore, the conflict minerals include cassiterite, columbite-tantalite, gold, wolframite, and their derivatives. |
| Which countries are considered to be “adjoining countries”? |
The term “adjoining country” is defined in Section 1502(e)(1) of the Act as a country that shares an internationally recognized border with the DRC, which presently includes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. The proposed rule used the term "adjoining countries" while the final rule uses the term “covered countries”; however, both terms have the same meaning. |
| Is “product” defined in the final rule? | The final rule does not define "product". Depending on a company's business and industry, products may be different. For example, a company that is in the business of building warehouses may find that its product is the warehouse. However, that warehouse may not be considered to be a product for a company whose assembly lines to make widgets are in the warehouse. |
| Potential impact of the ruling on different businesses | |
| In the procurement process, if one specifies the end functionality of a product, but does not specifically call out the materials to be used, is it considered “contract to manufacture”? | In general, the question of whether a company contracts to manufacture a product will depend on the degree of influence exercised by the company on the manufacturing of the product based on the individual facts and circumstances surrounding a company’s business and industry. A company is considered to be contracting to manufacture a product depending on the degree of influence it exerts over the materials, parts, ingredients, or components to be included in any product that contains conflict minerals or their derivatives. The final rule specifically states that a company that is a service provider that specifies to a manufacturer that a cell phone it will purchase from that manufacturer to sell at retail must be able to function on a certain network does not in-and-of-itself exert sufficient influence to “contract to manufacture” the phone. However, a company that assembles components that may contain conflict minerals is subject to the rule even though it does not provide any direction to its supplier in terms of what minerals and materials to use as the minerals are contained in its final product. |
| If a public company is an end-user of products but does not actually sell products are the rules still applicable? | An end user of a product would not likely be considered a manufacturer unless the company contracts to manufacture. |
| Are mining companies exempt from 1502, as no product is manufactured other than the actual metal mined? | The final rule states that a company that mines or contracts to mine conflict minerals is not considered to be manufacturing or contracting to manufacture those minerals unless the company also engages in manufacturing, whether directly or indirectly through contract, in addition to mining. |
| Do the regulations apply to pre-commercial drug products undergoing human clinical development? | Conflict minerals are used in a wide range of products, including but not limited to mobile phones, computers, digital cameras, video game consoles, jewelry, light bulbs, pipes, electronic circuits and automobiles. If pre-commercial drug products undergoing human clinical development, the requirements may not apply. The final rule does not require companies to report on the conflict minerals in materials, prototypes, and other demonstration devices containing or produced using conflict minerals that are necessary to the functionality or production of those items because they are not consider those items to be products. Once a company enters those items in the stream of commerce by offering them to third parties for consideration, the company will be required to report on any conflict minerals necessary to the functionality or production of those products. |
| Is packaging included in the definition of a final end product - packaging that is not essential to the use of the product? | The final rule only applies when a conflict mineral is contained in the final end product (regardless of amount). The October 22nd DBriefs session discussed at length the possible implementation considerations - whether the packaging is a part of the product or necessary to the functionality or production of the product. |
| Does the disclosure guidance include the selling of used products? |
The provision was intended to affect the “exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo [that] is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo.” 1 As noted by some commentators on the proposed rule, however, armed groups in the Covered Countries are financed and benefit from the extraction and illegal taxation of newly mined conflict minerals and their transport, not the use of recycled or scrap conflict minerals. No further revenue or other benefit will be provided to the armed groups from any transaction involving the conflict minerals from recycled or scrap sources because the armed groups “have already extracted their revenue and do not stand to gain with [their] use or sale” 2. Because the purpose of the provision is to provide information about whether minerals used in manufacturing directly or indirectly financed or benefited armed groups in the Covered Countries, and conflict minerals from recycled or scrap sources no longer do so, the SEC believes it is appropriate to deem all products with conflict minerals from recycled or scrap source as “DRC conflict free.” This prevents the final rule from providing a disincentive to use conflict minerals from recycled or scrap sources3 . Conflict minerals are considered to be from recycled or scrap sources if they are from recycled metals, which are reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing4 . |
| Are only products which reach the market covered or are internal products also covered in this rule? | The SEC does not require companies to report on the conflict minerals in materials, prototypes, and other demonstration devices containing or produced using conflict minerals that are necessary to the functionality or production of those items because they do not consider those items to be products. Once a company enters those items in the stream of commerce by offering them to third parties for consideration, the company will be required to report on any conflict minerals necessary to the functionality or production of those products5. |
| What industries are in the “ready now” or “nearly ready” categories? | A number of trade associations and industry organizations have working groups established to assist companies with the compliance process through awareness, education, and highlighting leading practices. Such organizations include the Electronic Industry Citizenship Coalition (“EICC”), Automotive Industry Action Group (AIAG), National Association of Manufacturers (“NAM”), and Retail Industry Leaders Association (“RILA”) to name a few. |
| The Conflict Free Smelter (“CFS”) program is relatively new. When will greater numbers of smelters, especially tin and tungsten be added? | Only a limited number of smelters are certified at this time. Details regarding the certification process, as well as a list of certified smelters, are available at: http://www.conflictfreesmelter.org. The 'CFS Program Indicators' link on this website illustrates the status of smelters in the program. |
| Can a company rely on Material Safety Data Sheets (“MSDS”) to determine if minerals are present in supply chain? | Companies may use various sources of data to determine if conflict minerals are present in their supply chains, which may include MSDS, bill of materials, or other information provided from suppliers. The sufficiency of such evidence is a determination that should be made by the company. |
| If a company determines that it does not use conflict minerals as a result of its due diligence, what level of information must be disclosed as results of the inquiry? | If, as a result of its due diligence, a company determines that its conflict minerals did not originate in the Covered Countries or that its conflict minerals did come from recycled or scrap sources, no Conflict Minerals Report is required; but the company is required, in the body of its specialized disclosure report, to disclose its determination and briefly describe its due diligence and the results of the due diligence. |
| How would this apply to a real estate company? The company controls the general contractor but all materials are acquired already constructed and only need to be installed. How does the company determine if the conflict minerals are material to function of the real estate? | While no formal definition is provided in the final rule for the term "manufacture", as there is a belief that the term is generally understood, there is clarification that constructing a building would not be considered “servicing, maintaining, or repairing a product”, but rather similar to a manufacturing process. Furthermore, the materials used to construct the building/apartment would be considered necessary to the functionality or production of the end-product. The construction of buildings/apartments, as is the subject of the question, would be akin to “making goods or wares by hand or machinery.” |
| How will a typical utility or energy company that does not manufacture a product (other than electricity) be affected? | Companies whose primary product is electricity may want to consider if they manufacture or contract to manufacture products, such as light bulbs, that would be subject to the ruling. |
| If a company is not a manufacturer, or does not contract to manufacture products that contain conflict minerals, does it still need to file a Form SD? | If a company determines it does not manufacture or contract to manufacture products that contain conflict minerals, the company is not required to take any action, make any disclosures, or submit any reports under the Final Rule. |
| Would this new rule apply to a service industry? For example, assume the service provider consumes conflict minerals as part of providing their service. | The rule would only apply to companies whose products contain conflict minerals that are necessary to the functionality or production of the product manufactured. Generally, the rule would not apply to service companies as service companies do not manufacture products. However, if the service company does determine it has conflict minerals necessary to the functionality or production of a product manufactured or contracted to be manufactured, the rule can apply. |
| If an electric utility sells light bulbs that contain conflict minerals to customers, but the utility does not manufacture the light bulbs itself, does “contract to manufacture” and “degree of influence analysis” apply? |
Consistent with the proposed rule, the final rule applies to companies for which conflict minerals are necessary to the functionality or production of a product contracted by that company to be manufactured, including conflict minerals in a component of a product. In general, the question of whether a company contracts to manufacture a product will depend on the degree of influence exercised by the company on the manufacturing of the product based on the individual facts and circumstances surrounding a company’s business and industry. However, a company is not viewed as contracting to manufacture a product if its actions involve no more than affixing its brand, marks, logo, or label to a generic product manufactured by a third party. |
| If a utility company contracts with another company to construct electric transmission lines and a distribution system to be used in its operations to carry electricity to its customers, is the utility company subject to the conflict minerals reporting? |
In order to be subject to the conflict minerals ruling, the utility company would need to be an SEC registrant. Additionally, conflict minerals must be contained in its final product and be “necessary to the functionality or production of the product”. Companies could consider the determination that conflict minerals in tools or machinery used to manufacture a product does not fall under the “necessary to the production” language. Like tools and machines, indirect equipment used to produce a product, such as computers and power lines, does not bring the product that is produced with the equipment into the “necessary to the production” language. However, the company that manufactures or contracts to manufacture the indirect equipment would likely come within the definition of either “necessary to the functionality” or “necessary to the production” for the indirect equipment. |
| Are Japanese owned companies listed on the Nikkei exempt? | The Final Rule applies to any company that files reports with the SEC under Section 13(a) or Section 15(d) of the Exchange Act. However, companies that do not fall under these sections of the Exchange Act may find that they are suppliers for companies that do, and will likely receive inquiries as to the source of the minerals in the products they have sold. |
| Compliance and reporting requirements | |
| When is the due date of the first report? Is there an example of the new form SD? | Companies that are required to file Form SD or a related Conflict Minerals Report by May 31, 2014 for the calendar year beginning January 1, 2013. An example of Form SD is available in Section VI of the Final Rule6 . |
| What are the requirements pertaining to an acquisition? Is there any time period after acquiring a company to incorporate them into our conflict minerals reporting process? |
A company that acquires or otherwise obtains control over a company that manufactures or contracts to manufacture products with conflict minerals necessary to the functionality or production of those products that previously had not been obligated to provide a specialized disclosure report with respect to its conflict minerals will be permitted to delay reporting on the products manufactured by the acquired company until the end of the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition7 . |
| What are the anticipated sanctions for not adhering to the disclosure proposed? | While there is no penalty for using conflict minerals, companies are still subject to the mandates of Exchange Act Section 18(a)8 ; which provides that companies that make false or misleading statements with respect to any material fact shall be liable to any person who, in reliance upon such statement shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. The Final Rule does not create a strict liability for the filed information if it can be established that the company acted in good faith and had no knowledge that the statement was false/misleading. |
| What process does a company need to follow if it is most likely that it does not have conflict minerals and therefore would not file Form SD? | If a company determines that conflict minerals are not necessary to the functionality or production of a product manufactured or contracted to be manufactured, the company is not required to take any action, make any disclosures, or submit any reports under the final rule. |
| Who are you advising to sign the Form SD - Company CFO, Secretary of the Board, other? | The final rule states that the report must be signed on behalf of the registrant by an executive officer. Which executive officer that signs is a decision only the company can make based on their facts and circumstances. However, the signing executive should be involved in the conflict minerals process. |
| How does one apply “outside the supply chain” as of January 31, 2013 (e.g., PO dates, goods received?) | Conflict minerals outside the supply chain before January 31, 2013, are excluded from the reporting requirements. Such minerals are considered outside the supply chain (1) “after smelting of columbite-tantalite, cassiterite, and wolframite minerals”; (2) "after gold has been fully refined"; or (3) "after any conflict mineral, or its derivatives, that have not been smelted or fully refined are located outside of the covered countries."9 In determining whether conflict minerals are outside the supply chain, companies may consider information received from purchase orders, bills of lading, invoices, direct contact with suppliers among others, or any site visits performed. |
| Audit implications | |
| Is the expectation that the independent private sector audit (“IPSA”) be performed by our auditors or another firm? | The IPSA can be performed by the company's financial statement auditor, as it is not considered to impair independence. The work would need to be pre-approved by the Audit Committee as the IPSA is not considered to be part of the financial audit. Whether the audit is performed by the company's current auditor, or another firm, is a decision that should be made by the company. The firm that does perform the IPSA must meet the independence standards of generally accepted government auditing standards (GAGAS). |
| Is a performance audit expected to be cheaper for a company than an examination attestation engagement? | There are similarities and difference between the examination attestation engagement and the performance audit. The procedures to be performed for both the performance audit and attestation engagement could vary depending on the facts and circumstances of the engagement; which would drive the variation in the fee level. Deloitte has published a document comparing the differences between the attestation engagement and performance audit which can be found at: https://techlib.deloitte.com/default.aspx?view=content&id=2_239646 |
| Are there firms, audit or consulting, which are gearing up to focus on offering conflict minerals related audits? | The Big Four audit organizations, as well as other consulting organizations and technology vendors, offer conflict minerals related services. Deloitte's Conflict Minerals Task Force is designed to assist companies in their readiness efforts and reporting requirements. For more information, contact the Deloitte contacts listed on the right side of the page. |
| What should a company consider in deciding what type of GAO audit report to obtain (attestation standards vs. performance audit standards)? | There are a number of differences between an examination attestation engagement and a performance audit, including, but not limited to, who can perform the audit, professional standards the audit is performed under, and what is included within the report. Deloitte has published a document comparing the differences between the attestation engagement and performance audit which can be found at: https://techlib.deloitte.com/default.aspx?view=content&id=2_239646 |
| Can Internal Audit carry out the IPSA of the OECD guidance? | Internal audit does not meet the independence requirements of GAGAS, and therefore, cannot perform the IPSA. |
1See page 229 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
2See page 229 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
3See page 230 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
4See page 231 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
5See page 91 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
6See page 354 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
7See page 354 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
8See page 117 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
9See page 129 of the Final Rule available at: http://www.sec.gov/rules/final/2012/34-67716.pdf
As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
