Conflict Minerals Rule
Detroit Chapter of the IIA in Partnership with
Experis Finance Presents
CONFLICT MINERALS RULES
January 16, 2013
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Conflict Minerals Rule
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Conflict Minerals Rule
Earning CPE Credit
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– Attend the webcast on individual computers (one person per
computer)
– Answer polling questions asked throughout the webcast
When answering polling questions, select your answer and then click
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Conflict Minerals Rules
Overview & Compliance
Considerations
Michelle Search-Winters, CPA
National Director, Technical Accounting and Financial Reporting
Center of Expertise
January 16, 2013
Conflict Minerals Rule
Conflict Minerals Rule
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Conflict Minerals Rule
Conflict Minerals Rule
• SEC adopted the rule, mandated by the Dodd-Frank Act, in August
2012
– Likely to directly impact half of all public companies
– Rule may indirectly impact 10x that many public and non-public companies
• Rule attempts to use securities law to effect social policy change
– Exploitation & trade of conflict minerals provides funding for armed groups
responsible for violence and human rights violations in the Democratic
Republic of the Congo (DRC) and surrounding region
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Conflict Minerals Rule
Conflict Minerals Rule
• The new rule requires issuers with “conflict minerals” that are
 necessary to the functionality or production of a product
manufactured or contracted to be manufactured by such issuer to
 conduct supply chain due diligence and
 make annual disclosures in a new Form SD related to
 whether any of those conflict minerals originated in the
Democratic Republic of Congo or an adjoining country.
• Adjoining or covered countries include DRC, Central African Republic, South
Sudan, Uganda, Rwanda, Burundi, Zambia, Angola, Republic of the Congo
and Cabinda. DRC is separated from Tanzania by Lake Tanganyika.
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Conflict Minerals Rule
Reference
map of
Africa
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Conflict Minerals Rule
Conflict Minerals Rule
• What are “Conflict Minerals”?
– Currently include tantalum, tin, gold and tungsten, regardless of where
they have originated
• and other minerals that the US Secretary of State names in the future
• Sometimes referred to as 3T’s and a G
• Use of these minerals is pervasive
– Most products containing electronic components
– Industries impacted include technology, electronics, aerospace,
automotive, industrial products, jewelry, and consumer goods
• Cell phones, computers, televisions, cars, planes, boats, jewelry,
appliances, clothing, shoes, toys…..
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Conflict Minerals Rule
Applicability of New Rule
• An issuer is subject to the new rule if:
– The issuer files Exchange Act reports with the SEC and
– Conflict Minerals are necessary to the functionality or production of a
product that it manufactures or contracts to manufacture.
• An “issuer” for this rule includes any company (other than a registered
investment company) that files periodic Exchange Act reports with the SEC
– Includes domestic companies, foreign private issuers, smaller reporting
companies, and voluntary filers (including debt-only filers)
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Conflict Minerals Rule
Polling Question #1
How many public companies is the Conflict Minerals
Rule likely to directly impact?
1. About 25 percent
2. About 50 percent
3. Almost 75 percent
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Conflict Minerals Rule
Conflict Minerals Rule
• Three-step process
Step 1) Determine if conflict minerals are necessary to the functionality or
production of products manufactured, or contracted to be manufactured. If
yes…
Step 2) Based on a reasonable “country of origin” inquiry, determine whether
there is reason to believe that the conflict minerals may have originated in the
DRC region
• If no, or minerals come from recycled sources, file Form SD describing
the inquiry and results
• If yes…
Step 3) Exercise due diligence on the source and chain of custody of conflict
minerals following a nationally or internationally recognized due diligence
framework.
• Include an audited Conflict Minerals Report as an exhibit to Form SD.
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Conflict Minerals Rule
Step One
• To determine whether a mineral is necessary to the functionality or
production of a product an issuer should consider:
– Whether the mineral is contained in and intentionally added to the product
(not a naturally occurring by-product); or
– Necessary to the product’s function, use or purpose
– Incorporated for the primary purpose of ornamentation, decoration or
embellishment
• The rule does not define “necessary to the functionality,” or
“necessary to production.”
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Conflict Minerals Rule
Necessary to Functionality
• Issuers that do not meet the definition have no further requirements
under the rules
• This could be a highly complex analysis
– For example, a piece of clothing has a zipper that contains tin
• Is the zipper functional (required to use the product) or decorative (on a
sleeve for decoration)?
– All generally expected functions, uses or purposes of a multi-use product
need to be evaluated
– Analysis may have to be performed on a product by product basis
• Same zipper could be functional in one product and decorative in
another
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Conflict Minerals Rule
Necessary to Production
• Conflict minerals must be contained in the final product sold or offered
for consideration by the issuer to be in scope of the rule
• Minerals used as catalysts in production must be completely removed
from the final product to be excluded from the rule
– Even trace amounts would be considered applicable
• Conflict minerals indirectly used in production are excluded from the
provision
– If present in tools or machines used in production but not contained in the
final product
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Conflict Minerals Rule
Manufacture and Contract to Manufacture
• SEC believes term “manufacture” to be generally understood
– Referenced dictionary definition
• Noted that issuers who only service, maintain or repair products
containing conflict minerals are not considered “manufacturers” for
application of the rule
• Mining issuers are generally excluded from the scope of
“manufacturer”
– Mining companies that manufacture product in addition to mining are
subject to the rule
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Conflict Minerals Rule
Manufacture and Contract to Manufacture
• Issuers that contract to manufacture products containing conflict
minerals must evaluate the degree of influence over the
manufacturing process
– If terms don’t directly relate to manufacturing, limited to adding brands or
logos, or include only servicing or maintaining, may be excluded from the
rule
– SEC views influence on a sliding scale from ‘none” to “significant”
– Companies will need to carefully assess influence, often on a contract by
contract basis
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Conflict Minerals Rule
Polling Question #2
The “Necessary to Production” category includes those conflict
minerals used in any production machinery as well as those
contained in the final product.
1. True
2. False
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Conflict Minerals Rule
Step Two
• If conflict minerals are necessary to the functionality of products
manufactured or contracted to manufacture, must determine if
minerals originated in covered countries
– “Reasonable Country of Origin Inquiry (RCOI)”
• Rule does not define RCOI but provides guidance
– “must be reasonable designed to determine whether the issuer’s conflict
minerals did originate in covered countries or did come from recycled or
scrap sources and must be performed in good faith”
• Consider obtaining representations from suppliers
– Indicate originating mine or facility
– Indicate if from covered countries or not
– Indicate if scrap or recycled sources
– If from covered countries, identity as “conflict free” or not
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Conflict Minerals Rule
Supplier Responses
• Issuers must also consider if responses from supplies are reasonable
– Consider “red flags” that may indicate exceptions to responses
• May not need to receive representations from ALL supplies
– Need to make a good faith effort to receive representations
– Will need to do some reasonable analysis of suppliers where
representations are not received
• Other approaches to RCOI can be considered depending on the
nature of supply chain, etc.
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Conflict Minerals Rule
Conclusion of Step Two
• No need to move to due diligence if conflict minerals:
– Did not originate from covered countries or no reason to believe so
– Came from recycled or scrap sources or reason to believe so
• Scrap or recycled materials
– Reclaimed end-user or post consumer products or scrap processed
materials created during manufacturing
– Includes scrap material that contained refined or processes metals that are
appropriate in the production of 3Ts and G
– Unprocessed, partially processed and by-product production are explicitly
excluded from the definition of scrap or recycled material.
– If supplier asserts minerals are from recycled / scrap sources, issuer must
ensure that statement is reasonable
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Conflict Minerals Rule
Step Three
• If issuer knows or has reason to believe that its conflict minerals
originated in covered countries and are not scrap/recycled sources,
must perform due diligence
– Due diligence includes procedures to determine the origin and chain of
custody of its conflict minerals
• Due diligence must follow a nationally / internationally recognized
framework and be consistent with Generally Accepted
Governmental Auditing Standards (GAGAS)
– Currently only framework for conflict minerals is the OECD’s “Due
Diligence Guidance for Responsible Supply Chains of Minerals from
Conflict-Affected and High-Risk Areas”.
– OECD framework has a supplement for the 3Ts and also for gold
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Conflict Minerals Rule
Step Three
• OECD framework includes five elements:
– Establish Strong Company Management Systems
– Identify and Assess Risk in the Supply Chain
– Design and Implement a Strategy to Respond to Identified Risk
– Carry out Independent 3rd Party Audit of Supply Chain
– Report on Supply Chain Due Diligence
• http://www.oecd.org/
• http://www.oecd.org/investment/guidelinesformultinationalenterprises/46
740847.pdf
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Conflict Minerals Rule
Due Diligence Outcomes
• Three outcomes from Due Diligence
1) Minerals are scrap / recycled sources or not from covered countries
• No Conflict Minerals Report is required
• Must disclose description of due diligence, results and final
determination in form SD
2) Minerals originate from covered countries
• Must include Conflict Minerals Report in form SD
• Report must be audited
• Additional disclosures required
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Conflict Minerals Rule
Due Diligence Outcomes
3) Source of conflict minerals is undeterminable
• Assertion can only be made after due diligence is performed
• Still must file Conflict Minerals Report in form SD, including description
of due diligence, steps taken to minimize risk that conflict minerals
benefit armed groups, identify facilities used to process minerals if
knows and efforts to determine location of origin
• May indicate “undeterminable” for 2 years (4 years for smaller reporting
companies)
• Subsequently must apply full provisions of the rule
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Conflict Minerals Rule
Outside of Supply Chain
• Rule provides exclusion for conflict minerals “outside the supply chain”
prior to January 31, 2013
• Exclusion includes:
– Minerals already smelted
– Gold fully refined
– Conflict minerals located outside the covered countries
• Provides relief for issuers who may already have stockpiles of conflict
minerals in the supply chain
• Products made with pre-January 31, 2013 stockpiles would be
excluded from the 2013 From SD disclosure
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Conflict Minerals Rule
Polling Question #3
Please tell us your IIA member status
1. Member Detroit Chapter
2. Member Other Michigan Chapter
(Not Detroit)
3. Non-member
4. Student
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Conflict Minerals Rule
Filing and Transition
• New Form SD is due by May 31 of each year, regardless of the
registrant’s year end
– Audited Conflict Minerals Report with Form SD if source believed to be
DRC region
• Transition Period
– 2 years (4 years for smaller reporting companies)
– Describe products as “DRC conflict undeterminable”
• No audit required
• Must perform due diligence & file Form SD
• Initial form SD for calendar year 2013 due May 31, 2014
• Form SD is considered “filed” (not just “furnished”) and creates liability
to companies who may be sued for false or misleading statements
• No financial statement or 10-K/10-Q disclosure requirements
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Conflict Minerals Rule
Independent Audit Requirements
• Rule requires an independent private sector audit to express an
opinion on:
– Appropriateness of design of the due diligence framework
– Accuracy of the description of the execution of the due diligence process
undertaken by the issuer
• Auditor is not required to express an opinion on:
– Effectiveness of the due diligence measures performed
– Whether the issuer’s conflict minerals are DRC conflict free
• Audit must be performed in accordance with GAO standards and likely
under existing GAGAS rules
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Conflict Minerals Rule
Compliance Considerations
• Issuers subject to the rule should conduct a comprehensive
assessment of their supply chain activities to determine whether their
conflict minerals originated from a covered country
• Materiality of content of the conflict minerals doesn’t matter
– How much gold is in the product, for example, doesn’t matter to the
compliance requirements
• Finance groups will likely not have the expertise to manage
compliance on their own
– Many organizations are looking to supply chain and purchasing executives
to lead the effort
• Sales, purchasing, operations, legal and finance must all work together
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Conflict Minerals Rule
Compliance Considerations
• Other participants in an issuer's supply chain are affected by the rule,
regardless of whether they are public or nonpublic companies
– component manufacturers, smelters, and mining companies performing
mineral extraction
• The SEC estimates that companies (and their affected suppliers) will
likely incur significant compliance costs.
• Non-Public companies will be significantly impacted
– Products containing conflict minerals may be components of other products
– Asked by customers to provide information about supply chain and may be
asked to provide certifications on an on-going basis.
– Could incur significant cost for compliance even though not directly
required to comply with the rule
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Conflict Minerals Rule
Polling Question #4
Requirements include that an independent auditor
opine on:
1. Appropriateness of the due diligence framework
2. Effectiveness of the due diligence measures
3. Whether the issuer’s minerals are DRC conflict free
4. All the above
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Conflict Minerals Rule
Steps for Compliance
• Identify if issuer is subject to the rule
• Identify what products may contain conflict minerals
• Determine functionality of conflict minerals to products
• Design a plan to perform the RCOI
• Integrate the OECD framework into company processes
• Nonpublic companies should be proactive in working with customers
to determine their information requirements
• Consider working with industry groups to determine industry specific
best practices for compliance
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Conflict Minerals Rule
SEC decision tree for
applying conflict
minerals rule
http://www.sec.gov/rules/final/2012/34-67716.pdf
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Conflict Minerals Rule
Questions
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Conflict Minerals Rule
For more information
Michelle Search-Winters, CPA
National Director
Technical Accounting & Financial Reporting Center of Expertise
(303) 885-9796
michelle.search@experis.com
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Conflict Minerals Rule
THANK YOU!
Please join us for additional chapter events:
– February 15th – Chapter Meeting
• Our Chapter’s 70th anniversary celebration
• Doug Anderson, Dow Chemical, and Mike Peppers, IIA North America
Board
– March 11 – 13 – Annual Spring Conference at U of M
Dearborn
– April 9th – Chapter Meeting
• Student Night
 Visit www.iiadetroit.org for additional information and registration details
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Conflict Minerals Rule
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