Guest Blog by T. Markus Funk
In the morning hours of Aug. 22, law firms, boardrooms and compliance professionals around the globe were humming with anticipation (or perhaps more accurately, laboring under a chilly frisson of dread). The cause for this collective anxiety was the SEC’s much-anticipated – and much-delayed – announcement of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s final disclosure and reporting rules (the “rules”) concerning “conflict minerals” (generally tin, gold, tantalum or tungsten or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of Congo or adjoining countries). Would one man’s well-intentioned humanitarian effort once again become another’s costly export of moral imperatives for difficult-to-achieve public policy objectives?
The SEC approved the highly controversial Rules by a narrow 3-2 vote. The net result is that a considerable swath of corporate America, including many retailers, must now conduct “a reasonable inquiry” into the origins of those minerals and disclose any use of them on a new Exchange Act filing (“Form SD”).
Moving from the general to the specific, the rules apply to public companies using any (yes, even trace amounts of) conflict minerals, where the minerals are “necessary to the functionality or production” of an item the company (1) makes itself or (2) contracts a third party to make on its behalf.
Critically, the latter “contract to manufacture” provision applies to retailers and other corporations who have others manufacture products for the business, provided the corporation has “any influence” (a term that is left intentionally undefined and thus amendable to broad interpretation) over the manufacturing process. So if you, for example, are a retailer who directs a manufacturer to custom-make a certain product for you that contains some amounts of gold or tin, then there is a very good chance that you will fall under the rules’ considerable scope.
National Retail Federation Vice President Jonathan Gold noted in his post-announcement statement, “It’s very important that a distinction be made between a retailer who is acting as a manufacturer and has control over what is in a product and the vast majority who do not.” According to Gold, “While retailers abhor the violence in the Congo, compliance with these regulations could still be extremely difficult, and there is considerable debate on whether filing reports with the SEC will make any difference.”
The SEC estimates that the rules will affect as many as 6,000 listed companies both foreign and domestic. Private businesses, moreover, will be pulled into the rule’s orbit to the extent they supply SEC-registered companies. Companies must compile their data every calendar year, starting Jan. 1, 2013, and file their first Form SD by May 31, 2014
Retailers subject to the rules’ oversight and disclosure requirements who have not yet established a compliance and due diligence management frameworks should consider doing so. Although some of the rules’ mechanics lack definition, here are some basic steps retailers should consider taking:
Determine whether the rules may apply to you:
- Are you a Section 13(a) or 15(d) issuer?
- Do you, as part of your business, either (1) manufacture products or (2) contract with others to manufacture products for you while having “any influence” over these manufacturing activities?
- If the answer to the immediately foregoing is yes, are conflict minerals (generally tin, gold, tantalum or tungsten or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of Congo) “necessary” to the product’s “functionality” or production?
Create conflict minerals risk profiles based on:
- Preliminary lists of products potentially containing conflict minerals.
- Key supplier documents and agreements.
- Targeted interviews of personnel with supply chain oversight.
- Prioritized lists of potential problem areas and ways to address them.
- Assemble an internal conflict minerals compliance team with representatives from manufacturing, engineering, procurement, finance and legal.
- Build a work plan, timeline and compliance budget
Design and implement a practical supply chain compliance program, including a:
- Conflict minerals code of conduct setting forth expectations for employees and transaction partners (including suppliers).
- Compliance questionnaire for suppliers.
- Supplier compliance database.
- Risk management plan.
- Customized “country of origin” inquiry program.
- A database of supplier personnel who should receive conflict minerals compliance materials.
- Develop questionnaires and certifications for suppliers and determine any additional supplier documentation, due diligence and compliance requirements.
- A risk-management plan covering procedures for suspending or terminating suppliers that violate procurement policies, and consider alternative sources for conflict minerals.
- An integrated method of addressing the conflict minerals rules, FCPA, California Transparency in Supply Chains Act, and other laws and regulations bearing on your supply chain due diligence and oversight obligations.
Train relevant employees and key suppliers regarding:
- Conflicts minerals rules and resources.
- Best practices for supply chain investigation and oversight.
- Cross-training for key suppliers with greatest risk exposure.
- Distribute an initial written communication to suppliers educating them on the Rules and your company’s compliance obligations.
For the text of the 356-page “Final Rules,” click here.
T. Markus Funk is a former federal prosecutor who previously worked for the State Department and a Perkins Coie partner who helped launch the firm’s Corporate Social Responsibility and Supply Chain Compliance Practice (the first such dedicated practice among the 100 largest law firms in the United States). He can be reached at MFunk@perkinscoie.com.
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