October 4, 2012

New Conflict-Minerals Disclosure Rules Impact U.S. and Foreign Companies Using or Supplying Minerals

Thousands of Companies Across Many Industries Are Affected
Holland & Knight Alert
Ronald J. Klein | Ronald A. Oleynik

The Securities and Exchange Commission (SEC) recently approved the much debated "conflict minerals" due diligence disclosure rules originally developed in the Dodd-Frank Wall Street Reform Act of 2010. The rules, which were adopted on August 22, 2012, require public companies to disclose the use of any conflict minerals that “are necessary to the functionality or production of a product manufactured” or “contracted to be manufactured” by that company.

Public companies, and any company that supplies public companies, will have to engage in due diligence for any minerals in their supply chains. They will also have to be ready and willing to handle public relations exercises to protect and/or promote their brand.

The SEC ruling is likely to have moderate to major impacts on consumer and leading original equipment manufacturer (OEM) behavior. Manufacturers and suppliers need to act fast and thoroughly on the compliance, legal and public affairs fronts in order to be able to bolster their corporate social responsibility credentials and protect their customers, consumers and investors.

The process of determining the presence of conflict minerals in products sold and distributed is complex. While the rule does not ban companies from using conflict minerals, it does force companies to identify, verify and audit the source; outline the chain of custody; and make a public disclosure of use.

Do These Disclosure Requirements Affect Your Company?

The rule impacts thousands of companies — both U.S. and foreign — that file reports with the SEC. Any company whose products intentionally include any amount of tin, tantalum, tungsten or gold will face some level of required due diligence, and may be subjected to consumer scrutiny by consumer groups and non-governmental organizations (NGOs). Even private companies that do not file reports with the SEC may need to conduct due diligence, especially if they are suppliers to public companies. Companies that manufacture "in-house" or contract to manufacture any product with these minerals will be affected. There are several industries using these minerals, including the following:

  • electronics
  • information and communications
  • food and beverage
  • agriculture
  • consumer products
  • energy
  • aerospace
  • automotive
  • defense and military
  • transportation
  • jewelry
  • retail
  • medical devices
  • construction
  • diversified industrial manufacturing across a number of applications and markets

Importantly, the final rule has no exemptions for small- to medium-sized companies, no phase-ins and no de minimis exceptions.

Consequences of Not Complying with the Rules

Given extensive and intricate global supply chains, any company whose products intentionally include any amount of tin, tantalum, tungsten or gold must undertake a due diligence process. While there is no direct enforcement mechanism in the SEC's ruling, companies not undertaking the required due diligence will face mounting pressure from customers, competitors and investors. The rules, in essence, provide consumer groups and NGOs with information to use against a company in a negative public relations campaign. In addition to the SEC's rule, industry groups have begun setting their own standards for conflict mineral due diligence, often mirroring the SEC's rule, and in some cases going a step further. These industry efforts along with NGOs and consumer groups will add pressure for companies to comply with the rule and to take necessary steps to strengthen their corporate responsibility.

What Questions Your Company Needs to Ask Today

As a starting point, the following are some questions that are best addressed as soon as possible in order to avoid any negative impact to your company.

Compliance and Regulation

  • Does my company produce or contract to produce any products manufactured with tin, tantalum, tungsten or gold?
  • Are there exemptions, exceptions and phase-ins in the SEC rule that apply to my company?
  • Can we trace these minerals to the exact mine and region of extraction?
  • How do we establish a due diligence program that meets the SEC requirements?
  • Where do we find an independent auditor who is knowledgeable?
  • Are other companies or industries already on top of this issue? Are there lessons learned that our company can benefit from?

Public Relations

  • How can my company anticipate new regulations and ensure we are ready for the new and changing reporting standards?
  • What does having or not having conflict minerals mean for my investors, customers and consumers? What does it mean for my brand?
  • How have my competitors and other companies in my industry reacted to these rules?
  • Is this an opportunity to promote my brand?
  • How do we effectively use this as part of our ongoing government relations strategy?

Holland & Knight Can Assist

During the past two years of development and adoption of the SEC conflict-minerals rule, Holland & Knight's Public Policy & Regulation Group has gained the experience and tools to help you comply and understand the impacts of the rule. Our team has developed and implemented comprehensive strategies for our clients in relation to conflict-minerals disclosure. Utilizing this experience and perspectives to advance your strategic objectives, we can help you navigate this complex, new regulatory regime on a number of fronts, including compliance and regulatory guidance, outreach, strategic communications, and the development of broader public relations and corporate responsibility strategies.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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