the status of conflict mineral laws in the u.s. and abroad

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The Status of Conflict Mineral Laws in the U.S. & Abroad

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Today’s Presenter

Travis MillerAssent ComplianceGeneral Counsel







Agenda

US Conflict Minerals

Legal Challenges Update

GAO Report Debrief

EU Rules Status

Questions

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Assent ComplianceINTRODUCTION







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U.S. Conflict Minerals







101: What are Conflict Minerals?

⬥ 3TGs ■ Tin■ Tungsten■ Tantalum■ Gold

⬥ Originate from the Democratic Republic of the Congo (DRC) and adjoining countries

⬥ Companies must perform due diligence to

ensure they are sourced in an ethical manner

⬥ Public companies must comply with Section 1502 of the Dodd-Frank Act







101: What is the CMRT?

Conflict Minerals Reporting Template

⬥ NGO-created data exchange standard designed to help companies perform their reasonable country of origin inquiry (RCOI)

⬥ Tied to the CFSI, which is used to identify and perform smelter due diligence

⬥ Version-controlled document (currently on version 4.10)






© Assent Compliance 2016

Valid: It has been verified as a smelter/refiner by a third-party such as the CFSI, or independently by Assent.

Invalid: It has been confirmed not to be a 3TG smelter/refiner.

Undetermined: It is a new entry that is not confirmed as Valid or Invalid. These profiles require further investigation via our research and outreach program. The conclusion of this process is the candidate smelter being labeled Valid or Invalid.

When a candidate smelter entry is received from an industry organization or by supplier submission on a CMRT, the first step is to cross-reference the incoming data against existing profiles in the Assent Database for a match based on indicators such as: unique smelter ID (CID#), metal, facility location and name.

If a match is found in the database, the duplicate information is merged into one accurate profile.

If no matching profile exists, one is created and populated with information gathered by the Smelter Team. The profile is then analyzed and assigned a status of Valid, Invalid or Undetermined.

The Assent Smelter Program: Validation Process

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The Legal Obligations❖ Legal Requirements:

◆ Must be in material conformance with OECD Guidance◆ OECD Guidance requires the following:

■ Policy consistent with model policy■ Risk management system■ Internal accountability system■ Contractual provision■ Data retention policy■ Grievance mechanism







The Legal Obligations❖ Legal Requirements:

◆ Must be in material conformance with OECD Guidance.◆ OECD Guidance requires the following:

■ Policy consistent with model policy■ Risk management system■ Internal accountability system■ Contractual provision■ Data retention policy■ Grievance mechanism

❖ Best Practices:◆ Process document/playbook◆ Supply chain data collection survey/RCOI◆ Documentation due diligence







A History of Litigation❖ In response to Court of Appeals decision on April 14, 2014, SEC issues

guidance on April 29, 2014.








guidance on April 29, 2014.❖ Industry petitions SEC to stay rule on April 29, 2014.








guidance on April 29, 2014.❖ Industry petitions SEC to stay rule on April 29, 2014.❖ SEC issues order, partially staying the rule on May 2, 2014.








guidance on April 29, 2014.❖ Industry petitions SEC to stay rule on April 29, 2014.❖ SEC issues order partially staying the rule on May 2, 2014.❖ Industry files motion for emergency stay of rule with Court of Appeals on

May 5, 2014.









May 5, 2014.❖ Court of Appeals denies emergency motion to stay on May 14, 2014.









May 5, 2014.❖ Court of Appeals denies emergency motion to stay on May 14, 2014.❖ SEC files petition for rehearing with Court of Appeals on May 29, 2014.









May 5, 2014.❖ Court of Appeals denies emergency motion to stay on May 14, 2014.❖ SEC files petition for rehearing with Court of Appeals on May 29, 2014.❖ Court of Appeals grants petition for panel rehearing on November 18, 2014;

orders SEC and NAM to file supplemental briefs.










orders SEC and NAM to file supplemental briefs.❖ SEC files supplemental brief on December 8, 2014.










orders SEC and NAM to file supplemental briefs.❖ SEC files supplemental brief on December 8, 2014.❖ Decided August 18, 2015. Law unchanged, except product declarations.










orders SEC and NAM to file supplemental briefs.❖ SEC files supplemental brief on December 8, 2014.❖ Decided August 18, 2015. Law unchanged except product declarations.❖ The SEC and intervener (Amnesty International) do not file a petition for a

writ of certiorari to the Supreme Court by the April 7, 2016 deadline.







Where Did This Leave Us?

❖ The ruling of the court of appeals was a narrow one. The bottom line is the court of appeals determined that requiring a company to make a statement in an SEC filing posted to its website that its products were “not found to be ‘DRC conflict-free’” was too much under these circumstances and would be in violation of the constitution, because it would be “forced speech.”

What Does This Mean?

❖ In short — as of today, the decision of the SEC not to file the petition for a writ does not change what companies should be doing as they work toward their annual filings. Rules are still in force, no further legal challenges are available to industry.







Summarizing the April 2014 SEC Guidance❖ No company is required to describe its products as “DRC conflict free,” “having not been

found to be DRC conflict free,” or “DRC conflict undeterminable”.❖ If a company voluntarily elects to describe any of its products as “DRC conflict free” in its

conflict minerals report, it must obtain an independent private sector audit (IPSA) on its due diligence








found to be ‘DRC conflict free,’” or “DRC conflict undeterminable”❖ If a company voluntarily elects to describe any of its products as “DRC conflict free” in its


❖ For products that are not described as “DRC conflict free,” companies must disclose smelters/refiners that processed the conflict minerals in those products, if they are known

❖ For products that are not described as “DRC conflict free,” companies must disclose country of origin of the conflict minerals in those products, if they are known

❖ For products that are not described as “DRC conflict free,” companies must disclose their efforts to determine the mine or location of origin of their conflict minerals








found to be ‘DRC conflict free,’” or “DRC conflict undeterminable”❖ If a company voluntarily elects to describe any of its products as “DRC conflict free” in its


❖ For products that are not described as “DRC conflict free,” companies must disclose smelters/refiners that processed the conflict minerals in those products, if they are known

❖ For products that are not described as “DRC conflict free,” companies must disclose country of origin of the conflict minerals in those products, if they are known

❖ For products that are not described as “DRC conflict free,” companies must disclose their efforts to determine the mine or location of origin of their conflict minerals

❖ The transition period allowing companies to use the “DRC conflict undeterminable” descriptor has expired for most companies (“smaller reporting companies” still have a year). The SEC has stated informally that, for now, companies may still use this term notwithstanding the end of the transition period. But, since the SEC has indicated that no specific descriptions are required, any labels or descriptors could be used in the filings.







This Litigation Really Only Accomplished One Thing❖ Public companies listed on a US stock exchange do not have to call out and identify

specific products that contain materials originating from people working under terrible conditions in the war-torn center of Africa.







This litigation really only accomplished one thing❖ Public companies listed on a U.S. stock exchange do not have to call out and

identify specific products that contain materials originating from people working under terrible conditions in the war-torn center of Africa.

However, there are other wheels in motion.







This Litigation Really Only Accomplished One Thing❖ Public companies listed on a US stock exchange do not have to call out and identify

specific products that contain materials originating from people working under terrible conditions in the war torn-center of Africa.

However, there are other wheels in motion.

❖ Efforts have shifted from litigating conflict minerals to attempting to defund enforcement or repeal the consumer protection aspects of the Dodd-Frank rules.◆ July 7, 2016 - Rep. Bill Huizenga (R-Mich.) includes amendment to restrict any

funding from H.R. 5485 appropriations bill to go toward the enforcement of Section 1502 of Frank-Dodd. (Currently in front of Senate)

◆ September 9, 2016 - Rep. Jeb Hensarling (R-Tex.) introduced H.R. 5983 Financial Choice Act of 2016 that repeals numerous consumer protection controls passed since the financial crisis including conflict minerals disclosures. (Currently in front of House)







Exploring the Hypotheticals

❖ What would happen if:

◆ H.R. 5485 appropriations bill is signed into law and Section 1502 of Dodd-Frank is defunded?









◆ H.R. 5485 appropriations bill is signed into law and Section 1502 of Dodd-Frank is defunded?

◆ Answer: This would be odd. The law would still exist, as would the obligation for publicly-traded companies to file Form SDs, CMRs and conduct RCOIs. However, the SEC would be prohibited from using funds from the appropriations bill to prosecute (which they have never done).

◆ However, the SEC and DOJ could still pursue companies in different ways. For example, the FCPA extraction rules, or possibly even for defrauding investors.









⬥ H.R. 5983 Financial Choice Act of 2016 repeals numerous consumer protection controls passed since the financial crisis is passed?









⬥ H.R. 5983 Financial Choice Act of 2016 repeals numerous consumer protection controls passed since the financial crisis is passed?

⬥ Answer: Conflict minerals repeal would be trivial in relation to the other consumer protections this act repeals, so the amount of regulatory work and policy/program adjustments would be highly significant.









⬥ Neither bills/acts become law?









⬥ Neither bills/acts become law?

⬥ Answer: We are back to the status quo; however, we have a government audit report released by the General Accounting Office (GAO) that discusses how much more work is needed to fulfill the goals of the conflict minerals regulation.







The Significance of the GAO Report

❖ As the most likely scenario, reviewing the GAO Report offers some significant highlights into what regulators are doing and thinking about industries efforts.

❖ Here are the highlights of the report:⬥ The regulators believe the program is producing tangible

results:■ “As a result of country-of-origin inquiries, an estimated

19 percent more companies that filed a specialized disclosure form (Form SD) with the Securities and Exchange Commission (SEC) reported that they knew or had reason to believe they knew the source of the conflict minerals in their products in 2015 than in 2014.”

GAO








❖ Here are the highlights of the report:⬥ The regulators believe industry is telling them conflict minerals surveys need to

continue to allow additional due diligence to be performed:■ “An estimated 79 percent of the companies that filed a Form SD performed

due diligence, an estimated 67 percent of them reported they were unable to confirm the source of the conflict minerals in their products, and about 97 percent of them reported that they could not determine whether the conflict minerals financed or benefited armed groups in the Democratic Republic of the Congo (DRC) and adjoining countries.”








❖ Here are the highlights of the report:⬥ The regulators interpret industry’s uncertainty statements to present the

following barriers to the program being successful:■ “Facilities that process conflict minerals pose challenges to the disclosure

efforts of companies filing a Form SD because ● (1) these facilities generally rely on documentary evidence about the

origin of conflict minerals, which may be susceptible to fraud; and ● (2) multiple levels of processing operations introduce fraud risk and may

increase the cost associated with disclosures. ■ Industry and other stakeholders have developed or are pursuing efforts to

mitigate these risks, such as chemical “fingerprinting” to verify documentary evidence.”








❖ Here are the highlights of the report:⬥ The regulators believe the absence of more prescriptive legislation is at least

partially to blame:■ “As of July 2016, the Department of Commerce (Commerce) had not

submitted a report that was required in January 2013, assessing the accuracy of the Independent Private Sector Audits (IPSA) filed by some companies that filed a Form SD, nor had it developed a plan to do so. Ten companies filed the audits between 2014 and 2015 as part of their Conflict Minerals Reports, none of which Commerce has assessed. Commerce officials said they established a team in March 2016, but they noted that they did not have the knowledge, skills, or expertise to conduct IPSA reviews or to establish best practices.”







The Significance of the GAO ReportWhat is the proposed outcome of this?

❖ Seems the GAO is advocating for more governmental efforts being dedicated to the conflict minerals rules.

❖ They want the Commerce Department to perform their obligations and begin assessing the accuracy of due diligence conducted by filing companies.

❖ The Commerce Department agreed.❖ Generally speaking, the take-away is that the government believes there is a need

for more government oversight and attention to the conflict minerals rules now that the legal changes are over.

❖ Industry should anticipate this additional oversight and review to begin in the coming years.







EU Conflict Minerals







❖ The U.S. Conflict Minerals rules were changing the way the globe sources minerals.

❖ Europe’s NGO community was upset by the lack of action, so when minimal efforts were proposed, there was significant push back.

❖ In response, the EU trialogue began with a goal to evaluate how the new EU regulations could add value to the global discourse, given the prevalence and impact of the U.S. regulation.

Origin of the EU Conflict Minerals Rules Europe Felt Pressure to Pass a Law In Response to the U.S. Rules







Europe Develops a Regulation to Build on the OECD and U.S. Regulations

Trialogue Talks Continue

The EU Framework that evolved had a few key attributes:

i. Obligations are placed on upstream supply chain (smelters & refiners)

ii. Metals & minerals imported into EU are in scope

iii. Small volume importers exempted from these obligations

iv. Requirements to boost supply chain due due diligence on EU downstream companies

v. Builds on OECD Due Diligence Guidance







There are a few nuances that could prove highly impactful

What Is Unique About This Regulation? Due diligence for smelters and refiners will be mandatory.

❖ To date, all companies using the EICC CMRT and CFSI program have been relying upon assessments performed by NGOs.

❖ The EU regulations suggest that mandatory due diligence requirement will be applied, which suggests the government will put forth a due diligence standard.

❖ A government-driven due diligence standard could well conflict with, or force a change to, the CFSI program.

❖ Assessments are underway to evaluate existing programsand to measure their alignment with OECD Due Diligence Guidelines➢ CFSI, DMCC, LBMA, iTSCI, RJC








What Is Unique About This Regulation?

Due diligence for importers will be mandatory.

The EU Conflict Minerals regulation appears to be following the European model of ensuring importers comply with domestic regulations (think RoHS, REACH, CE).

Generally, EU rules on importers means there are customs inspections and controls at each member state.

Under a regime of this nature, there will also likely be a EU-centric “declaration of conformity” attestation required or some other similar format.

Caveats on recycled grandfathering, recycled materials, and by-products.








What Is Unique About This Regulation?

Product-level declarations might be included in the rule.

❖ The original U.S. rules were product-centric, e.g. mandating that companies would have to survey the supply chain and attest if specific products were “conflict-free” or not.

❖ Industry fought hard to prevent this from occurring based on the amount of work anticipated and the desire to avoid having to declare products as being not conflict-free.

❖ It was only an unexpected constitutional legal challenge on the grounds of forced speech that kept product-level declarations from being the norm.

❖ This same argument is unlikely to work in the EU.







Summarizing the Potential Obligations

Non-EU Manufacturer:Must assess conformance customer requirements

Non-EU Smelter/Refiner:Mandatory due diligence might be required to import

EU Smelter/Refiner:Mandatory government-driven due diligence obligations will apply

EU Manufacturers:Subject to disclosure and due diligence obligations

Importer of Products:Conform to any EU product-level declarations that arise from a voluntary or mandatory regime







Will Product Importers be Impacted by the Law?

Statement from the European Commission:

“The Commission will develop performance indicators specific to the responsible sourcing of conflict minerals. By means of such guidelines, relevant companies with more than 500 employees that are required to disclose non-financial information in conformity with Directive 2014/95/EU would be encouraged to disclose specific information in relation to products containing 3TGs. Furthermore, the Commission will create additional tools to increase, on a voluntary basis, the transparency and visibility of conflict minerals supply chain due diligence practices by all interested downstream companies.

The Commission will declare in a written statement at the adoption of the Regulation in the European Parliament that it will consider making additional legislative proposals targeted at EU companies with products containing 3TGs in their supply chain should it assess that the aggregate efforts of EU market on the responsible global supply chain of minerals is insufficient to leverage responsible supply behaviour in producer countries, or should it assess that the buy-in of downstream operators that have in place supply chain due diligence systems in line with the OECD guidance is insufficient.”







Be Prepared for Potential Indirect Requirements

❖ Customers may utilize the law to mandate the same obligations to those not covered by its mandatory provisions

❖ Institutional buyers (Hospitals, Universities, Telecoms) may include these requirements as part of their tendering process

❖ EU Accounting Directive (Non-Financial Reporting) requires CSR filings in 2017. It will be hard to imagine that CM would falling outside the scope of CSR disclosure obligations







One More Hypothetical

❖ What would happen if⬥ The U.S. conflict minerals laws were completely repealed in advance or near the

implementation of the EU conflict minerals regime?







One More Hypothetical❖ What would happen if

⬥ The U.S. conflict minerals laws were completely repealed in advance or near the implementation of the EU conflict minerals regime?

⬥ Answer: In all likelihood, conflict minerals program would not go away, they would just shift to a EU-centric mindset.

⬥ Industry would have to re-structure corporate governance and policy documents, to focus on the EU regime in lieu of the U.S. one.







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