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Dodd-Frank Act:
Section 1502 Compliance
IDENTIFYING AND REPORTING ON
CONFLICT MINERALS IN YOUR SUPPLY CHAIN
Dodd-Frank Act: Section 1502 Compliance
IDENTIFYING AND REPORTING ON CONFLICT MINERALS IN YOUR SUPPLY CHAIN
In 2012 the SEC adopted the long-awaited
The conflict minerals identified in the rule are:
companies that file Exchange Act reports to disclose
• Tin (extracted from cassarite)
conflict mineral disclosures rule mandated under
Section 1502 of the Dodd-Frank Act. It requires
information about the use of conflict minerals that
originate in the Democratic Republic of the Congo
(DRC) and its adjoining countries—Angola, Burundi,
Central African Republic, the Republic of the Congo,
Rwanda, South Sudan, Tanzania, Uganda, and
Zambia—and that are necessary to the functionality
or production of a product manufactured or
contracted to be manufactured by the reporting
company.
Compliance is expected to create a challenge for
many companies, since it will require diligence
programs on upstream supply chains. Private
companies in these supply chains may also be
required to implement some form of compliance
programs to meet the inevitable reporting and
disclosure requests coming from its customers that
are subject to this rule.
• Gold
• Tantalum (extracted from columbite-tantalite,
also known as coltan)
• Tungsten (extracted from wolframite)
The information will be disclosed in a new annual
Form SD, which will be required for annual periods
beginning with calendar year 2013, regardless of
the issuer’s year-end, and have a filing deadline of
May 31, following the calendar year-end. Compliance
with the final rule essentially requires companies to
follow a three-step process:
1. Determine whether the rule applies.
2. Perform a reasonable country-of-origin inquiry
(RCOI).
3. Exercise due diligence.
The following guide provides a detailed look at these
steps en route to compliance with this rule.
Section 1502 Compliance | 2
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Step 1: Determine Whether the Rule Applies
KEY ACTIVITIES IN STEP 1
Review all products to conclude whether
the company manufactures or contracts to
manufacture them.
The SEC didn’t define manufacture as it’s generally
understood, but it did provide guidance on when a
START
Does the issuer file
reports with the SEC
under Sections 13(a) or
15(d) of the Exchange Act?
product a company is contracted to manufacture is
subject to this rule. In making this determination, the
issuer must take into account the degree of influence
YES
NO
the company exercises over the product’s materials,
parts, ingredients, or components. The degree of
influence need not be substantial and will depend on
the facts and circumstances present.
Does the issuer
manufacture or contract
to manufacture products?
The SEC did provide some explicit examples of when
a company is not deemed to have contracted to
manufacture a product:
»» Company only affixes brands, marks, or logos to
a generic product that’s manufactured by a third
party.
»» Company only negotiates contractual terms not
related to manufacturing.
»» Company only services, maintains, or repairs a
product manufactured by a third party.
Review products’ bill of materials to determine
whether conflict minerals are used in the
production process or exist within the products’
purchased components.
YES
NO
Are conflict minerals
necessary to the
functionality or production
of the product?
YES
NO
Were the conflict minerals
outside the supply chain
prior to January 31, 2013?
The rule states that only conflict minerals “contained”
in the product would be considered “necessary.”
This means conflict minerals used in production
NO
YES
that don’t end up in the finished product should be
exempt from triggering an RCOI. This determination
Rule does not apply
may be straightforward for some companies, but
not for others. For example, packaging may in some
instances be viewed as being part of the product.
PROCEED TO STEP 2
END
MOS S A DA MS
STEP 1 ACTIVITIES (CONTINUED)
Assess the functionality of the products in the
absence of conflict minerals.
Again, only conflict minerals “contained” in the
product should be evaluated for purposes of this
assessment. The rule identifies the following key
considerations in making this determination:
»» Is the conflict mineral intentionally added to the
product or any component of the product that isn’t
a naturally occurring by-product?
Section 1502 Compliance | 3
Helping You Comply
The Moss Adams LLP Sustainability
Services Practice has the expertise
to help you get ahead of the curve—
and smooth the transition to full
compliance. Solutions we offer
include:
• Supply chain analysis and
assessment
• Independent assurance services
• Industry and competitor response
benchmarking
»» Is the conflict mineral necessary to the product’s
generally expected function, use, or purpose?
• SEC reporting requirements
»» Is the conflict mineral incorporated for purposes
of ornamentation, decoration, or embellishment
where the primary purpose of the product is not
ornamentation or decoration?
Whether it’s conducting due diligence
or risk assessments on your supply
chain, helping you draft disclosure
report templates, or working with
you to incorporate conflict minerals
into your corporate sustainability
programs, we understand the
requirements of Section 1502 and can
bring our knowledge and experience
to bear on this complex new rule.
• As-needed technical assistance
For more information about our
Section 1502 services or to arrange
a complimentary consultation, visit
www.mossadams.com/sustainability.
Section 1502 Compliance | 4
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Step 2: Perform RCOI
KEY ACTIVITIES IN STEP 2
Develop an RCOI process and create or identify
related data-gathering tools and forms.
The rule doesn’t provide detailed guidance or a
definition of reasonable. Rather, it states that an RCOI
may differ from company to company based on the size
FROM STEP 1
Conduct an inquiry
regarding the origin of the
issuer’s conflict minerals.
of a company, the complexity of its supply chain, its
products, its relationships with suppliers, and so on.
It’s expected that as more companies implement this
rule, a reasonableness standard will evolve as they
coalesce around common practices and supply-chain
certification schemes arise. The rule doesn’t require
certainty to satisfy this reasonableness standard.
Review—or develop, if one doesn’t already exist—
your policy for sourcing conflict minerals.
Does the issuer know or
reasonably believe that
the conflict minerals
come from scrap or are
recycled?
NO
YES
A key component of performing an RCOI will be
to obtain certain representations from suppliers
regarding the use and procurement of conflict
minerals in their products. The rule states only that
the RCOI should be performed in good faith and
designed to determine whether the conflict minerals
Does the issuer know or
have reason to believe
that the conflict minerals
may have originated in the
covered countries?
originated in the covered countries or came from
recycled or scrap sources.
YES
NO
As such, any representations from suppliers may be
considered satisfactory if they indicate the facility
at which their conflict minerals were processed and
demonstrate that those minerals didn’t originate in the
covered countries. When obtaining representations,
File a Form SD that
discloses the issuer’s
determination and briefly
describe the RCOI process
and its results.
the issuer should take into account other information
available regarding the supplier or processing
facility and the faithfulness and quality of those
representations.
PROCEED TO STEP 3
END
Section 1502 Compliance | 5
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Step 3: Exercise Due Diligence
KEY ACTIVITIES IN STEP 3
Choose a framework.
FROM STEP 2
The final rule requires you to apply a nationally or
internationally recognized due diligence framework.
Currently, there’s only one referenced in the final
rule—the Organisation for Economic Co-operation
and Development’s Due Diligence Guidance for
Responsible Supply Chains of Minerals from
Conflict-Affected and High-Risk Areas. It covers the
Using a nationally or
internationally recognized
due diligence framework,
investigate the source and
chain of custody of the issuer’s
conflict minerals. Are they not
from the covered countries,
or are they from scrap or
recycled?
establishment of strong management systems; supply
chain risk assessments; strategies to respond to
NO
YES
identified supply chain risks; independent third-party
audits, monitoring of supply-chain due diligence, and
compliance with supply-chain policies; and reporting
on supply-chain due diligence.
While the rule doesn’t require the use of this
specific framework, any framework you use must
be consistent with Generally Accepted Government
File a Form SD with a conflict
minerals report as an exhibit
that includes a description of
the measures the issuer has
taken to exercise due diligence.
Was the issuer able to
determine whether the conflict
minerals financed or benefited
armed groups?
File a Form SD that discloses
the issuer’s determination and
briefly describe the RCOI and
due diligence measures taken
and the results thereof.
END
Auditing Standards (GAGAS) and have been
established by a body or group that has followed dueprocess procedures. Currently, gold is the only conflict
NO
YES
mineral with a formally established framework from
the OECD. Other conflict minerals may require the use
of different due diligence processes.
Is it less than two years after
effectiveness of the rule (four
years for smaller reporting
companies)?
YES
NO
The conflict minerals report must also
include a description of products that
are DRC Conflict Undeterminable and
the steps taken—or that will be taken,
if any, since the end of the period
covered in the last conflict minerals
report—to mitigate the risk that the
minerals will benefit armed groups,
including any steps to improve due
diligence. No audit is required.
The conflict minerals report must also include an independent audit
report that expresses an opinion or conclusion as to whether the
design of the issuer’s due diligence measures conforms with the
criteria set forth in the framework and whether the description of
the issuer’s due diligence measures is consistent with the process
undertaken by the issuer. Also include a description of the products
that weren’t found to be DRC Conflict Free, the facilities used to
process the conflict minerals in those products, the country of origin
of the minerals, and the efforts to determine the mine or location of
origin of those minerals with the greatest possible specificity.
END
END
Section 1502 Compliance | 6
MOS S A DA MS
STEP 3 ACTIVITIES (CONTINUED)
Determine the period to be covered.
The deadline for filing Form SD is May 31 for annual
periods ending December 31, regardless of a
company’s fiscal year-end. As such, any due diligence
and resulting conflict minerals report would need to
cover the calendar year in which the issuer completes
the manufacture of a product containing conflict
minerals, beginning January 31, 2013.
The procurement of components containing conflict
minerals during the covered period by itself doesn’t
trigger compliance with the rule unless such
components were part of a company’s manufactured
product (whether sold or in finished-goods inventory)
at any point during the covered period. If a company
acquires or otherwise obtains control over another
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company that manufactures or contracts to
manufacture products with conflict minerals—one
that previously wasn’t obligated to disclose under the
rule—the acquiring entity can delay reporting on the
acquired company’s products until the end of the first
reporting calendar year that begins no sooner than
eight months after the effective date of the acquisition.
Determine appropriate audit standards.
Any independent audit of an issuer’s due diligence
and conflict minerals reports should be conducted in
accordance with GAGAS. Issuers can choose to use
either performance or attestation standards.
W W W. M O S S A D A M S . C O M