The US Securities and Exchange Commission (SEC) has released a final rule on conflict minerals that is expected to have a broad impact on many companies, both public and private. The rule implements Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its reporting requirements are designed to help investors understand the risks in a company’s reputation and supply chain. This same information will also help consumers understand the extent to which companies are using minerals sold by armed groups to fund conflict and abuses of human rights in Africa. For public companies, the rule requires annual reporting to the SEC and on companies’ websites of information about the sources of minerals, such as gold and a group known as the 3Ts (tantalum, tin, and tungsten). This Messenger summarizes the requirements and challenges that lie ahead, including the effects on private companies, and it explains how MHM can help.

1. October 2012
MHMMessenger
TM
M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
SEC’s Final Rule on Conflict Minerals Casts a Wide Net Impacting Public
Companies and Certain Private Companies
The US Securities and Exchange Commission (SEC) • Step 1: Determine if the company is covered
has released a final rule on conflict minerals that is by the conflict minerals rule. The first step is to
expected to have a broad impact on many companies, determine whether the company is subject to the
both public and private. The rule implements Section requirements of the conflict minerals rule. Issuers
1502 of the Dodd-Frank Wall Street Reform and of securities are subject to the requirements if
Consumer Protection Act. Its reporting requirements they: (1) file reports with the SEC under Exchange
are designed to help investors understand the risks in Act Sections 13(a) or 15(d), (This scope would
a company’s reputation and supply chain. This same include any company other than a registered
information will also help consumers understand the investment company that files periodic exchange
extent to which companies are using minerals sold by act reports with the SEC), and (2) conclude that
armed groups to fund conflict and abuses of human conflict minerals are necessary to the functionality
rights in Africa. For public companies, the rule requires or production of a product they manufacture or
annual reporting to the SEC and on companies’ contract to manufacture. Conflict minerals are
websites of information about the sources of minerals, necessary for many products that contain electronic
such as gold and a group known as the 3Ts (tantalum, components, and the companies that manufacture
tin, and tungsten). This Messenger summarizes the products containing conflict minerals can be found
requirements and challenges that lie ahead, including in a wide range of industries, including technology,
the effects on private companies, and it explains how aerospace, automotive, industrial products,
MHM can help. consumer packaged goods, and jewelry. Retailers
that carry private labeled products can also be
The three-step process subject to the requirements because they have a
contract and influence over the manufacturing of
The final rule establishes a three-step process the products.
to help public companies meet the new reporting
requirements. The intent of this process is to provide • Step 2: Determine if the conflict minerals
companies with flexibility to tailor the requirements to originated in a covered country. The second
their particular facts and circumstances and thereby step is for the company to conduct a reasonable
avoid unnecessary costs. The basic steps are country of origin inquiry (RCOI) to determine
highlighted below. whether any of the conflict minerals originated in
one of the covered countries or are from scrap or
recycled sources. The outcome of this step will
determine: (1) the nature of the information that
our roots run deep TM (Continued on Page 2)
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2. MHMMessenger
(Continued from Page 1)
must be reported to the SEC, and (2) whether or not How your company may be affected
a portion of the information must be audited. The
covered countries are the Democratic Republic of Both public and private companies should take time
the Congo and adjoining countries (i.e., Angola, now to consider how best to react to this rule. Public
Burundi, Central African Republic, the Republic companies that are subject to the rule must file their
of the Congo, Rwanda, South Sudan, Tanzania, first reports for calendar year 2013 by May 31, 2014.
Uganda, and Zambia). The final rule exempts any The information must be made available on company
conflict minerals that are outside the supply chain websites, as well as reported to the SEC. Although the
prior to Jan. 31, 2013, meaning the minerals have SEC’s reporting requirements apply only to issuers of
been smelted or fully refined, or if they have not certain securities, private companies that compete in
been smelted or fully refined, they are outside the the same industries and/or are involved in the supply
covered countries. chains for products that use these minerals may
also be affected. For example, nonpublic companies
• Step 3: Exercise due diligence, file appropriate that are not subject to the rule may wish to report
report, and obtain private audit if required. the information voluntarily on their websites, and
All companies subject to the rule are required to nonpublic companies of all sizes that supply conflict
file a Form SD with the SEC. The details of the minerals as raw materials or as part of components
report will depend on the information obtained for larger finished products should be prepared to
as part of the RCOI and due diligence process. receive information requests from their customers. In
Based on its inquiries and information, a company connection with these requests, management may be
may conclude its products are “DRC conflict asked to certify the source of the conflict minerals in
free,” “not DRC conflict free,” or “DRC conflict their products.
undeterminable.” If the company concludes that
its conflict minerals have financed or benefitted How MHM can help
armed groups, then its conflict minerals report
must include an independent private sector audit To take the initiative and respond effectively, CFOs will
report that includes an opinion as to whether the need to acquire knowledge, expertise and services
design of the issuer’s due diligence measures in new and emerging areas. MHM can help in these
is in conformity with criteria established in an ways:
acceptable due diligence framework. These audits
are conducted in accordance with Generally • Provide additional information about the three-step
Accepted Government Auditing Standards process described in the SEC’s rule and the steps
(commonly known as “Yellow Book” audits). The involved in compliance with that rule.
only acceptable framework at this time is the
OCED Due Diligence Guidance for Responsible • Provide briefings on how to apply the five basic
Supply Chains of Minerals from Conflict-Affected steps in the OECD’s framework for due diligence.
and High Risk Areas. This framework contains a These steps are as follows:
supplement for tin, tantalum, and tungsten; and
the OCED has issued a separate supplement for
gold.
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3. MHMMessenger
(Continued from Page 2)
1. stablish strong company management
E For more information
systems.
The following flowcharts were adapted from the
2. dentify and assess risks in the supply chain.
I flowchart in the SEC’s final rule.
3. esign and implement a strategy to respond
D
to identified risks. If you would like additional information, please contact
Rich Howard of MHM’s Professional Standards Group
4. arry out an independent third-party audit.
C or your MHM service professional. You can reach Rich
directly at rhoward@cbiz.com or 949-450-4402.
5. eport annually on supply chain due
R
diligence.
• Provide advice for nonpublic companies on
preparing for and responding to supply chain
inquiries.
• Provide audits of conflict mineral reports for public
companies by GAGAS-certified CPAs.
• Provide sources of industry-specific information
and contacts.
• Provide sources of information about state and
municipal governmental initiatives for companies
doing business with the government.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.
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4. MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Steps 1 and 2
Does the issuer file reports with the
SEC under Sections 13(a) or 15(d) of
the Exchange Act?
NO
YES
Does the issuer manufacture or
contract to manufacture products?
NO
YES
Are conflict minerals necessary to the
functionality or production of the product
manufactured or contracted to be
manufactured?
NO
YES
YES Were the conflict minerals outside the
supply chain prior to January 31, 2013?
NO, if potentially scrap or recycled NO, if newly mined
Based on a reasonable Based on the RCOI, does the
country of origin inquiry issuer know or have reason
(RCOI), does the issuer NO to know that the conflict
know or reasonably minerals may have originated
believe that the conflict in the DRC or an adjoining
minerals come from scrap country (the covered
or recycled? countries)?
NO YES
YES
File a Form SD that discloses
Rule does not apply. the issuer’s determination and Go to next page.
briefly describes the RCOI and
the results of the inquiry.
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5. MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Step 3
Exercise due diligence on the source and chain of custody
Continued from of issuer’s conflict minerals following a nationally or
previous page. internationally recognized due diligence framework, if such
framework is available for a specific conflict mineral.
In exercising due diligence, does the issuer determine the
conflict minerals are not from the covered countries or are
from scrap or recycled?
NO
YES
File a Form SD with a Conflict Minerals Report as an exhibit,
which includes a description of the measures the issuer has
taken to exercise due diligence. In exercising due diligence,
was the issuer able to determine whether the conflict
minerals financed or benefitted armed groups?
NO
YES
Is it less than two years after effectiveness of the rule (four
years for Smaller Reporting Companies)?
YES
NO
File a Form SD that The Conflict Minerals The Conflict Minerals Report must also
discloses the issuer’s Report must also include include an independent private sector
determination and a description of products audit report, which expresses an opinion
briefly describes the that are “DRC Conflict or conclusion as to whether the design of
RCOI and the due Undeterminable” and the the issuer’s due diligence measures is in
diligence measures steps taken or that will be conformity with the criteria set forth in the
taken and the results taken, if any, since the end due diligence framework and whether the
thereof. of the period covered in description of the issuer’s due diligence
the last Conflict Minerals measures is consistent with the process
Report to mitigate the risk undertaken by the issuer. Also, include
that the necessary conflict a description of the products that have
minerals benefit armed not been found to DRC conflict free, the
groups, including any steps facilities used to process the necessary
to improve due diligence. conflict minerals in those products, the
No audit is required. 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.
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