Disclosure Issuers Want Feedback on First Disclosures As They Prepare Next Conflict Mineral Filings

Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...

By Yin Wilczek

Sept. 30 — After the first-ever filings for conflict minerals disclosures in June, some issuers now are asking: is anyone even paying attention?

To date, the Securities and Exchange Commission has not issued an official statement about the first wave of disclosures detailing public companies' use of conflict minerals from the Democratic Republic of Congo and adjacent countries (12 CARE 606, 6/6/14), Jeffrey Perry, King & Spalding, Atlanta, said Sept. 30.

Companies would like “feedback on a broader basis about the impacts that the rule is having'' and “on the direction” in which they headed for their year one reports, Perry said, speaking at a Bloomberg BNA webinar. Some companies now are saying, “I submitted my year one report and no one has even looked at them,” he said. “So why am I going to push myself in year two if I'm not sure that anyone is actually taking notice?”

In other discussions, Perry and Lawrence Heim, director of Elm Consulting Group International LLC, said they expect more issuers to file conflict mineral disclosures next year. Heim also suggested that issuers have started taking a harder line with their suppliers to ensure they get the information they need.

The panelists said they expressed their personal views and did not speak on behalf of their respective organizations.

`Necessary' to Product 

1934 Securities Exchange Act Rule 13p-1 requires U.S. public companies and foreign private issuers to disclose their use of so-called “conflict minerals”—gold, tantalum, tin and tungsten from the DRC and surrounding region—if those minerals are “necessary” to a product they made (10 CARE 859, 8/24/12).

About 1,300 issuers—substantially fewer than anticipated by the SEC—filed their first-ever disclosures in June, which covered their use of the minerals in calendar year 2013 (12 CARE 606, 6/6/14).

Although the SEC has not issued an official statement on the filings, Keith Higgins, director of the SEC Division of Corporation Finance, Sept. 12 offered key observations on the disclosures, suggesting that they have been reviewed by the staff (12 CARE 1164, 9/19/14). Higgins said he spoke his own opinions, which did not necessarily reflect those of the commission.

At the webinar, Heim offered some findings of the inaugural filings based on an in-depth study by Elm Consulting and Georgetown Law School. He said that of the 1,300 filings, about 23 percent filed a Form SD only, while 77 percent filed a conflict minerals report, which provides for more expanded disclosures.

Thirty-eight percent of the filers disclosed their supplier numbers, Heim continued. The issuer with the most number of suppliers—38,700—was Caterpillar Inc., while the average number of suppliers disclosed by the filers was 743.

Four IPSAs 

Heim added that four issuers provided independent private-sector audits (IPSAs) of their filings. Two of the IPSAs were attestations performed by certified public accountants while two were performance audits performed by non-CPAs. “So there seems to be some uptake” of the SEC's attempt to lower compliance costs by allowing IPSAs to be undertaken by non-CPAs, he said. “I think we will continue to see the number of IPSAs grow in 2014” and a number of non-CPA firms doing the work.

Based on the Elm/Georgetown study, Heim also offered five major “takeaways”:

  •  the disclosures had more to do with complying with the SEC's requirements rather than responding to other stakeholders, such as nongovernmental organizations;
  •  issuers focused on developing and implementing their conflict minerals programs rather than deriving final results;
  •  to reduce costs, issuers screened their products and suppliers rather than survey all their suppliers;
  •  issuers focused on educating their suppliers rather than terminating them; and
  •  issuers relied on tools developed by the Conflict-Free Sourcing Initiative rather than on company-specific tools and audits.

Among other observations, Heim said he was surprised to see conflict minerals disclosures from two issuers who labeled themselves as insurance companies, one of which was Berkshire Hathaway, Inc. Both filers formerly were private equity firms that now are public holding companies with various businesses, including insurance and manufacturing, he said. As to why other PE firms in the same situation have not filed, “I'm just wondering if they have found an exclusion or they made a determination that” the rule didn't apply to them for whatever reason.

Looking Ahead 

Going forward, Heim said that “consensus” positions have developed for the disclosures that will allow for better filtering of products and suppliers for next year's filings. However, he warned that there is still uncertainty about whether issuers may rely on a June letter by Keller & Heckman LLP—posted to the SEC's website—that suggested that staff consider nonmetallic forms of conflict minerals not to be covered by the rule.

Perry noted that the unofficial guidance creates a difficult situation for compliance professionals who have to advise companies on the requirements. He also described the informal interpretation as “interesting. “Although the rule does not contain a de minimis exception,” the interpretation appears to suggest that the staff in essence is reading a de minimis exception into the requirements, he said.

Heim said that ultimately, issuers must examine their own situations and perform a risk-benefit analysis to determine whether they want to rely on the unofficial position for nonmetallic conflict minerals.

In other comments, Heim said that for next year's filings, issuers are expanding reviews of their smelter/refiner information and data from their suppliers.

Issuers, with the help of third-party vendors or through internal resources, are beginning to incorporate some type of annual quality audit into information provided by their suppliers, Heim said. They are “not looking at invoices,” but rather conducting “first level, high-level confirmations” of the data. The issuers also have started taking a firmer stance with respect to their suppliers, he added. “We are” starting to see “a hard line drawn in the sand” where “supplier termination may be more imminent than we would expect.”

More Filings in 2015?

The panelists could not agree on whether there will be a vast difference in the number of issuers that will file disclosures next year. Heim suggested that there will be a “large uptick,” although he said it is doubtful that it will reach the 6,000 issuers originally anticipated by the SEC. The 1,300 that filed in the first year was a “fluid number,” he said.

“I do indeed know that there are a few companies that should have filed but did not file for whatever reason,” Heim said. “I know there have been some business changes, some initial public offerings, a couple of other things that have happened.”

Although Perry agreed that there will be more filers, “I don't anticipate it will be significantly more than 1,300,” he said.

Meanwhile, several ongoing developments could impact conflict mineral issuers and the disclosure requirements, the panelists said. For one, the U.S. Court of Appeals for the District of Columbia may want to rehear a panel decision finding that part of the rule violated issuers' First Amendment rights (12 CARE 1060, 9/5/14).

In addition, the European Union is developing conflict minerals requirements that it plans to implement in early 2015, Perry said. The EU requirements, as they now stand, appear to apply voluntarily, and to conflict minerals importers rather than manufacturers, he added. “What we see come out of the EU may be something completely different from what U.S. public companies are getting used to complying with.”

Moreover, Perry cited President Obama's July 8 Executive Order that expanded the Treasury Department Office of Foreign Asset Control sanctions for the DRC. The expanded sanctions target the exploitation of DRC resources to finance certain activities and may be broad enough to encompass SEC conflict minerals filers, he said. “It's not a four-alarm fire but it does at least pique the interest of those” interested in conflict minerals and the SEC filings.

Big Question 

In the meantime, the $64 million question is whether the filings are actually helping to stem the violence in the DRC, Heim said. “The answer depends on whom you ask,” he added.

Heim cited an Enough Project study suggesting that the disclosure requirements have led to a significant decrease in the involvement of armed groups in the DRC (12 CARE 670, 6/20/14). On the other hand, public policy experts have refuted the findings, arguing that the armed conflict is a result of culture and governance that cannot be fixed by U.S. disclosure rules, he said.

Perry suggested that ultimately, it is too early to say. “We're still at year one of the reporting,” and the rule's intention was to build on itself, he said. “So I would say give it till year two to judge” how effective it has been in remediating conditions in the DRC.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com

The Keller & Heckman letter is available at http://www.sec.gov/comments/s7-40-10/s74010-596.pdf.