Monday, September 26, 2011

House Democrats Urge SEC to Quickly Finish Dodd-Frank Conflict Minerals Regulations and Use OECD Due Diligence Guidelines

In a letter to SEC Chair Mary Schapiro, four prominent House Democrats, including Rep. Barney Frank (D-MASS) urged the SEC to quickly complete the conflict minerals regulations implementing Section 1502 of the Dodd-Frank Act. The letter also said that the SEC should incorporate the OECD due diligence guidance in the regulations. Section 1502 of the Act requires companies that report to the SEC to disclose the measures they use to certify that their products do not contain conflict minerals from the Congo. Companies also have to track their supply chains back to a mineral's origin.

Earlier this year, the SEC announced that the issuance of final rules for Section 1502 would be delayed beyond the April 17 date established in law. Noting that we are now almost five months past that April deadline, the House Democrats said that, unless the regulations are promulgated soon, an entire year of implementation could be missed, since the law requires companies to begin reporting in the first fiscal year after regulations are finalized. For many companies, the fiscal year begins in January. The lawmakers also said that delays in implementation will seriously undermine the aim of the provision to reduce violence on the ground as quickly as possible and will send the wrong message to companies about the importance of this provision.

The lawmakers also advised the SEC that companies should not be allowed to report that the minerals in their products are of
"indeterminate origin". Rather, if companies fail to determine the origin ofthe minerals in their products, they must describe them as "Not DRC conflict free" in their Conflict Minerals report. Otherwise, reasoned the Representatives, a perverse incentive is created for companies not to exercise full due diligence, which could result in "indeterminate" mineral characterizations that would render the determinations meaningless . In addition, they noted that Section 1502(b) intended for all manufacturing companies that use minerals in their products, regardless of how small the percentage or what label they manufacture under, to be required to trace and disclose information on their supply chains. This intention should be reflected in the final regulations, said the House Members.

The House Democrats encouraged the SEC to build upon the OECD by adopting the five step due diligence framework set out in the OECD's "Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas". The OECD guidance was developed in coordination with a broad range of companies, non-governmental organizations, processing facilities, and regional governments. It represents an international consensus on how to approach the minerals trade without contributing to violence and human rights violations. In July, the Department of State endorsed this framework.

The OECD Due Diligence Guidance for responsible supply chains of conflict minerals is a five step risk-based due diligence regime for use by any company potentially sourcing minerals or metals from conflict-affected areas. The final version of the Guidance was approved by the OECD Investment and Development Assistance committees n December 2010.

Broadly, the Guidance recognizes that, while specific due diligence requirements and processes will differ depending on the mineral and the position of the company in the supply chain, companies should review their choice of suppliers and sourcing decisions and integrate into their management systems a five-step framework for risk-based due diligence for responsible supply chains of minerals from conflict areas.

The first step is to establish strong management systems under which companies can adopt and communicate to suppliers a policy for the supply chain of minerals originating from conflict areas, a policy incorporating the standards against which due diligence is to be conducted. The company must also structure internal management to support supply chain due diligence and establish a system of controls over the mineral supply chain, including a chain if custody. The supply chain policy should also be incorporated into contracts with suppliers. The company should establish a company-level, or industry-wide, grievance mechanism as an early-warning risk-awareness system.

The second and third steps are to identify and assess risk in the supply chain of adverse impacts in light of the standards of the company’s supply chain policy and implement a strategy to respond to identified risks. A risk management plan should be implemented and monitored and the performance of risk mitigation efforts tracked.

The fourth step is to carry out an independent third-party audit of due diligence at identified points in the supply chain. The fifth step is to publicly report on the company’s supply chain due diligence policies and practices.