SEC Likely to Scrutinize Due Diligence, Smelter Data in Next Conflict Mineral Filings

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Yin Wilczek

Feb. 13 — In the next conflict mineral disclosures, the Securities and Exchange Commission likely will scrutinize more closely whether issuers should file both a Form SD and a conflict minerals report (CMR), experts suggest.

That is going to be “very, very critical” this year, said Lawrence Heim, director at Elm Sustainability Partners LLC, during a Feb. 11 webcast sponsored by

Companies that file a Form SD but do not file a CMR will be looked at more closely, agreed Michael Littenberg, a partner at Schulte Roth & Zabel LLP in New York. “Certainly companies may want to go back and revisit where they are relative to the marketplace on this.”

In addition, the commission will expect better disclosures around smelters and refiners, Littenberg and Heim said.

Inaugural Disclosures 

Last year, about 1,300 companies filed their first-ever disclosures regarding their use of tin, tantalum, gold and tungsten—the so-called “conflict minerals”—from the Democratic Republic of Congo and surrounding countries. 

Under commission rules, issuers that use conflict minerals must conduct a reasonable country-of-origin inquiry (RCOI) to determine whether the minerals come from the covered countries and explain in their Forms SD the steps they took. If they know or believe that the minerals may have come from the covered countries, they must undertake due diligence on the source and chain of custody of the minerals. Unless they find through the due diligence process that their minerals are not from the covered countries or are from exempt recycled or scrap sources, they must file a CMR as an exhibit to their Forms SD.

The second disclosures—covering calendar year 2014—are due June 1.

Heim noted that of the 1,300 filings last year, 23 percent only filed a Form SD while the remaining 77 percent filed both a Form SD and a CMR. He added that many of the companies that filed only a Form SD did not offer good explanations for why they did not attach a CMR. “The quality of information for the first-year filings on which people made RCOI decisions may not really have been at an evolved state of maturation to where too many companies really should have relied on that,” he said.

Heim also noted that Keith Higgins, director of the SEC Division of Corporation Finance, last year made “oblique” references to companies' failure in their disclosures to adequately distinguish between their RCOIs and due diligence processes. “What Higgins said is perhaps an omen that those companies” that filed only a Form SD and are thinking of continuing that in 2015 “may want to reassess” that decision, he said.

Deficiency Area 

Littenberg said that data about smelters and refiners was an area of deficiency in the 2014 filings. Only about 20 percent of companies included smelter and refiner data, and they did not do a good job on the disclosure, he said. He noted that among other problems, the companies didn't clarify the basis for the information they included, including whether the smelters were actually or potentially in their supply chains, and whether the certification information was current.

“Smelter and refinery disclosure is going to take on increased importance this year,” Littenberg said. Many companies will be reporting it for the first time now that they have some additional visibility with respect to their supply chains, and other companies may be adding new smelters and refiners to their list, he said.

Heim added that two events have given the matter more visibility: the discovery last year that North Korea may have been the source of gold used by some suppliers to major U.S. companies and the list of global conflict mineral processing facilities released by the Department of Commerce in September 2014.

“Between these two” events, it is “going to be of greater importance for issuers to undertake more effort on their own to gather information and make some type of inquiry into those smelters and refiners that may not be verified or audited by” the Conflict-Free Sourcing Initiative, but are on the Commerce Department list, Heim said.

Moreover, Littenberg urged issuers to build enough time into gathering smelter data. Companies were not prepared last year for the amount of work involved, and many of them had to scramble to get the information before the disclosure deadline, he said.

Biggest Criticism 

Littenberg said the biggest criticism he heard consistently from nongovernmental organizations (NGOs) and socially responsible investors (SRIs) was that the 2014 filings were hard to follow. Accordingly, companies should focus on “readability and comprehension” in their 2015 submissions, he said. He offered some best-practice takeaways:

• There should be more compartmentalization in the filings, such as with respect to program design, due diligence steps and future action items. If issuers find that they ultimately have to subject their disclosures to an independent private sector audit, the clear separation of the due diligence portion of the report will make it easier for the auditor, Littenberg said.

• There should be a more methodical discussion of the Organisation for Economic Cooperation and Development's due diligence framework so that relevant items are discussed in logical order.

• The filings should be in plain English, with the use of bullets and paragraphs to make the disclosures easier to read.


Christine Robinson, a senior manager at Deloitte & Touche LLP, suggested that companies take a step back and think about what their readers know and what kind of detail they need. If the reader can't get through the disclosure, the company cannot receive credit for all its work, she said.

David Lynn, a Washington-based partner at Morrison & Foerster LLP and editor of, also suggested that companies that did not file last year should take a look at the 2014 submissions to see if others in their industries did.

NGO, SRI Campaigns 

If companies do that, they should keep in mind that the “pack is going to move” and that “where the pack was last year isn't necessarily where the pack will be this year,” Littenberg warned. He added that this year's filings will be more important than 2014's because they will be the ones that the NGOs and SRIs scrutinize and use as the basis for their campaigns—such as shareholder proposals—and other decisionmaking. “We may see some of that next year” with respect to this year's disclosures, he said.

Littenberg also suggested that companies stop viewing their conflict minerals compliance in a “silo.” Instead, they should look holistically at their supply chains and corporate social responsibilities, including such matters as the recent anti-human trafficking amendments to the Federal Acquisition Regulation. Ultimately, the holistic approach will increase efficiency and reduce risk for issuers, he said.

In the meantime, Lynn said it is not clear whether the ongoing litigation at the U.S. Court of Appeals for the District of Columbia over the SEC's conflict minerals rule will move quickly enough to impact this year's filings. Issuers are in “the same state of uncertainty that” they were in last year, he said.

The D.C. Circuit in November agreed to rehear its decision that parts of the rule violated the First Amendment. 

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at


Request Corporate on Bloomberg Law