Conflicts Minerals Ruling Doesn't Mean Companies Are Off the Hook

The timing of a recent court decision rejecting part of an SEC rule on conflict minerals disclosures could not have been worse. Many companies were already straining to meet the June 2 deadline, and now the court ruling has added another layer of confusion and uncertainty.

Will regulators give companies an extension as they sort out the legal questions the ruling raises? Should companies stay the course and complete the filings as they had planned to? A week after the court invalidated a portion of the rule, the SEC has yet to provide any guidance on how companies should proceed with the impending filing deadline.  

The SEC rule applies to the mining of tin, tungsten, tantalum, and gold in war-torn Central Africa that is considered a source of funding for militant groups. A ruling by the U.S. Court of Appeals for the District of Columbia Circuit earlier this month said the plaintiffs were correct to claim that disclosing the fact their products may contain conflict minerals on company Websites is unconstitutional, compelled speech. The rule now heads to a lower court for a review of whether the SEC's rulemaking, or language in the Dodd-Frank statute itself, caused the free speech conflict.  

Among the possible scenarios: petitioners could seek a stay of the implementation of the rule in order to push required filings beyond the current deadline; the SEC could appeal the decision; the Commission could issue guidance confirming that it expects companies to file their required disclosure except for the specific product descriptions that drew judicial rebuke; the plaintiff's could appeal aspects of the SEC rulemaking that were not invalidated; or, the case could eventually wind its way to the Supreme Court at the behest of either side.

With the fast-approaching deadline, however, companies don't have time to wait to see how most of these scenarios play out. Most legal advisers say companies should continue with efforts to complete the Form SD disclosure on conflict minerals use. No matter what happens in courtrooms, some form of the rule will likely prevail, says Dynda Thomas, a partner with the law firm Squire Sanders. “The underpinnings of the congressional statute remain except for that reporting and product description element that was struck down,” she says. “The statutory directive remains; that has not changed.”

“People should be doing all of the same things they have been doing,” says Michael Littenberg, a partner with the law firm Schulte Roth & Zabel and head of its conflict minerals practice. Since the court issued its opinion, he has fielded calls from nearly 75 clients concerned by the legal ramifications. “Every one of them, on their own, has reached the same decision—they are moving forward with their compliance and not changing anything,” he says. “Companies realize this is the right path.”

In Littenberg's view, the court case, for now at least, shouldn't pose many problems. He goes so far as to describe it as “a big so what” because most companies are far more concerned about complexity and cost than free speech concerns. It remains to be seen whether the SEC will ultimately need to re-write all or part of its rule, but supply chain due diligence will not go away, he says.

Moot Point?

It is expected that many companies will rely on a “conflict minerals undeterminable” status the SEC will allow for the next two years. “I would be even stronger and say that nobody is going to be affected by the court's decision in year one,” Littenberg says.”I'm not aware of a single company that is going to have to say this year that they have conflict minerals in their products.”

The bigger challenge, in these final days of compliance efforts, is the bugaboo that has given companies trouble from the start—obtaining the supply chain transparency they need to accurately assess their exposure to conflict minerals. That aspect remains unaffected by the ruling.

“If somebody is sourcing from places that support conflict, chances are they are not going to know about it because those suppliers are going to do their best to make sure they don't know,” Littenberg says. “They are not going to tell you about it, nor are people who are close to them in the supply chain going to tell you about it.”

“If somebody is sourcing from places that support conflict, chances are they are not going to know about it because those suppliers are going to do their best to make sure they don't know.”

—Michael Littenberg,

Partner,

Schulte Roth & Zabel

Problematic supply chain due diligence, even at this late stage, has led industry groups to step up their outreach. At a corporate responsibility summit for global automakers and suppliers earlier this month, the Automotive Industry Action Group announced an initiative to shift sluggish conflict minerals programs into high gear. A cause for concern, uncovered by a survey it conducted, is that many companies still struggle with the rule's requirements. “We are far from being able to say that all of our reports will meet the deadline,” says Tanya Bolden, corporate responsibility program development manager for AIAG. “There still a long way to go, and a lot of companies really need to begin the due diligence that a lot of our larger companies began some years ago.”

The survey found that nearly half of the 550 companies polled have a policy on conflict minerals reporting, yet only half think they will meet the this year's SEC deadline. In response, AIAG has doubled down on outreach, launching a new Website with information and resources to help OEMs and suppliers get on track.

Work in Progress

The good news, Bolden says, is that all involved, including regulators, understood this was going to be a work in progress. It may take time, but supply chain issues can be resolved on an industry-wide basis much easier than on a company-by-company basis. Cooperation among trade groups is also important. “The challenge for the automotive sector is the complexity of our industry,” she says. “Modern vehicles are often described as computers on wheels, and that's why it was only natural for us to reach out to the electronics industry and work with them.”

KEEPING SCORE

The following is from the new Conflict Minerals Reporting Template version 3.0 published by the Conflict-Free Sourcing Initiative. The multi-industry tool is promoted as a means to standardize supply chain surveys necessitated by the Securities and Exchange Commission's conflict minerals rule.

Source: Conflict-Free Sourcing Initiative.

Bolden's advice to companies that still lag behind: Don't try to do it all on your own. “Networking and collaboration is benefiting those who are part of the discussion, rather than just waiting for the solution to come to them,” she says.

Supply chain visibility is also why the Electronic Industry Citizenship Coalition, another trade group, is promoting a reporting template that its members, and those in other industries, can use. Its new Conflict Minerals Reporting Template (CMRT) 3.0 was published earlier this month in conjunction with the Global e-Sustainability Initiative and Conflict-Free Sourcing Initiative. An older version of the template is widely used for 2014 compliance; the updated version is intended for 2015 reports.

The template is “a vital tool for companies around the world to gather information about the source of materials in their products, and the smelters and refiners that processed those materials,” says Michael Rohwer, program director of the Conflict-Free Sourcing Initiative. “By gathering the same types of information from many levels of the supply chain in a standardized form, companies can make informed choices about conflict minerals in their supply chains.”

The CMRT was developed by companies from multiple industries and is available in several languages. The form itself is a standard Microsoft Excel spreadsheet, a familiar format the group hopes will be easier to use and more widely adopted.

Beyond tracking down suppliers and building a list of conflict-free smelters, the reports will help companies assess due the diligence efforts of vendors big and small, Rohwer says. “It asks a series or questions about what that supplier knows about their supply chain. Have they conducted a similar inquiry? Have they received responses back? Do they know who the smelters and refiners are in their supply chain?” he explains.

“There is an understanding and acceptance that even many of the first-tier suppliers are not going to have good answers to these questions,” Rohwer says. “The purpose of the template is to trickle down, tier-by-tier-by-tier until we end up with good information about all the smelters and refiners in the supply chain.”