Conflict Mineral Webinar By Assent

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info@assenTcompliance.com w w w. a s s e n T c o m p l i a n c e . c o m Tel: 613.290.8044

Section 1502
Conflict Minerals
Final Rules Passed
– Impact Update
Assent Compliance

jonathan hughes
phone: 613.290.8044
jon.hughes@assentcompliance.com

C u s t o m s o l u t i o n s f o r c o m p l i a n c e [ REAC H | R o H S | CP s i a | RSL | p r o p 6 5 ]

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Agenda

• Introduction to Dodd-Frank Act Section 1502
• Requirements – Proposed Rules vs. Final Rules
• Assent Compliance involvement with Dodd-Frank Act
• Industry Approach
• Risks
• Steps to Compliance
• Final Rules Flowchart
• Timelines
• Assent Compliance Services
• Q&A

C u s t o m s o l u t i o n s f o r c o m p l i a n c y [ REAC H | R o H S | CP s i a | RSL | p r o p 6 5 ]

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 Section 1502 – Dodd-Frank Wall Street
Reform and Consumer Protection Act
The basics
• The Conflict Minerals (3TGs)
• Tin (Cassiterite Ore)
• Tungsten (Wolframite)
• Tantalum (Coltan Ore)
• Gold

• The Countries
• Democratic Republic of Congo • Congo Republic
• Central Africa Republic • Tanzania
• Sudan • Burundi
• Zambia • Rwanda
• Angola • Uganda


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• Conflict Minerals Definition:
• Mined in conditions of armed conflict and abuses of human rights
As per 17 CFR Parts 229 and 249 “The Conflict Minerals” Rule:
“It is the sense of the Congress that the exploitation and trade of conflict minerals originat-
ing in the Democratic Republic of the Congo is helping to finance conflict characterized
by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly
sexual – and gender-based violence, and contributing to an emergency humanitarian situ-
ation therein”

• This situation attracts Media attention
• Child Soldiers
• Sexual assault on a mass scale
• Intimidation and abuse of local populace
• Armed control of mines, trading routes, and other strategic areas

More Media attention = More Consumer attention


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SCOPE
• Companies that register with the SEC
• 10K (US)
• 20F (Foreign)
• 40F (Canadian)
Legal Wording: Issuers that File Reports Under Sections 13(a) and 15(d) of the Exchange Act
• Conflict Minerals “necessary to the functionality or production” of its products manufactured
(or contracted to be manufactured)
• Suppliers to impacted SEC filing companies are affected by the process, even if they are not an
SEC filing company themselves


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 Principal Requirements (as part of annual
reporting to SEC) – PROPOSED RULES
• Reasonable Country of Origin Inquiry
• Trace back of all 3TGs to country of origin
• If all 3TGs did not originate in DRC Countries:
• Disclose the determination
• Disclose the process
• Disclosure on Issuer Internet website
»» Disclose that the information is available on its website
»» Disclose the internet address of the site
• Maintain reviewable records of the investigation and determination


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• If any 3TGs did originate in DRC Countries OR Issuer cannot identify the Country of Origin
(IE: Unknown origin):
• All the above tasks plus
»» Create Conflict Minerals Report
»» Exhibit to annual report
»» Make report available on the Internet website

• All of the above must be audited by a 3rd party
• 10K/20F audited as a part of overall SEC filing
• Conflict Minerals Report, if required, must be audited separately


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 Principal Requirements (as part of
annual reporting to SEC) – FINAL RULES
• Reasonable Country of Origin Inquiry
• Trace back of all 3TGs to country of origin
• Determine if 3TGs are from scrap or recycled sources

Possible Scenarios and Requirements stemming from the RCOI:
Scenario 1:
• If the Issuer knows all 3TGs did not originate in DRC Countries or are from scrap or recycled
sources
OR
• If the Issuer has no reason to believe that the 3TGs may have originated in the covered coun-
tries and may not be from scrap or recycled sources.
Requirements:
• Disclosure of the RCOI on Issuer Internet website
• File Form SD with the SEC as part of annual filings:
»» Disclose the determination
»» Disclose the process
»» Disclose the internet address of the site with the RCOI Information
• Maintain reviewable records of the investigation and determination


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 Principal Requirements (as part of
annual reporting to SEC) – FINAL RULES
CONT’D
Scenario 2:
• If the Issuer knows or has reason to believe that the 3TGs may have originated in the covered countries.
OR
• If the Issuer knows or has reason to believe that the 3TGs may not be from scrap or recycled sources.

Requirements:
• All the above tasks plus
• Create Conflict Minerals Report
• Filed as exhibit to the Form SD
• Make report available on the Internet website

• Same as proposed – All of the above must be audited by a 3rd party
• 10K/20F audited as a part of overall SEC filing
• Conflict Minerals Report, if required, must be audited separately


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Reasonable Country of Origin Inquiry –
The Elements remain the same in the Final Rules
• Issuer must engage their supply chain to determine if any parts or materials purchased from their
suppliers that contain 3TGs, are mined in conditions of armed conflict and abuses of human
rights
• Due Diligence must be applied to ensure that Issuer’s suppliers are providing accurate and timely
information
• Corrective actions must be applied to suppliers who fail to provide appropriate information
• All of the above must be maintained in reviewable business records, disclosed to the SEC and on
Issuer’s website for consumers
• NOTE: Issuer should have an internal document outlining its Conflict Minerals Compliance
Plan along with the process Issuer used to determine the following items:
• Suppliers/Products in scope
• Applicable Due Diligence
• Corrective Action Plan
• Reasonable Country of Origin Inquiry Methodology
• Supply Chain mapping
• Risk Assessment
• Long-term goals (Evolution of Issuer’s Conflict Minerals Compliance Plan)


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Conflict Minerals Report – Updated
• Companies that are required to file a Conflict Minerals Report would have to exercise due
diligence on the source and chain of custody of their conflict minerals.
• A description of the measures the company (Issuer) has taken to exercise due diligence on the
source and chain of custody of its conflict minerals,
• The due diligence measures must conform to a nationally or internationally recognized
due diligence framework, such as the due diligence guidance approved by the Organisation
for Economic Co-operation and Development (OECD).
• Has to include a certified independent private sector audit of the Conflict Minerals Report
that identifies the auditor and is filed to the SEC as part of the Conflict Minerals Report (as
an exhibit to the Form SD).


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If an Issuer’s products have not been found to be “DRC conflict free,” then the Issuer in ad-
dition to the audit and certification requirements would have to describe the following in its
Conflict Minerals Report:
• A description of the products manufactured or contracted to be manufactured containing 3TGs
that are not “DRC conflict free1”
• The facilities used to process those conflict minerals,
• Those conflict minerals’ country of origin,
• The efforts to determine the mine or location of origin with the greatest possible specificity.
• Issuers are required to exercise due diligence in making these determinations in the Conflict
Minerals Report (IE. OECD Due Diligence Guidance).

1
The minerals may originate from the covered countries but did not finance or benefit armed groups


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 NEW Status – Final Rules
• A new status of DRC Conflict Undeterminable now exists:
• To be used when the Issuer does not know where the Conflict Minerals (3TGs) came from
»» Can be used for 2 years for big companies, 4 years for small
»» After that, you need a conflict minerals report if the issuer still does not know
»» Still need to provide evidence that Internationally recognized due diligence
procedures were used
• Example: Due diligence guidance approved by the Organisation for
Economic Co-operation and Development (OECD)


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For this new status, the Conflict Minerals Report elements are similar to the “Not Conflict Free”
status report. It must contain:
• A description of the products manufactured or contracted to be manufactured contain-
ing 3TGs that are “DRC conflict undeterminable.”
• The facilities used to process the conflict minerals in those products, if known.
• The country of origin of the conflict minerals in those products, if known.
• The efforts to determine the mine or location of origin with the greatest possible specificity.
• The steps it has taken or will take, if any, since the end of the period covered in its most
recent Conflict Minerals Report to mitigate the risk that its necessary conflict minerals
benefit armed groups, including any steps to improve due diligence.
• For those products that are “DRC conflict undeterminable,” the Issuer would not be required to
obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict
minerals in those products.


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Requirements – Further Specifics
• Contract Manufacturing – Provision Applies
• Metal is not found in the final product – Provision applies as long as it is “necessary” in the manufac-
turing process (is contained in the product at some point and then either extruded or washed away
for example)
• Organisation for Economic Cooperation and Development (the “OECD”) has developed due dili-
gence guidance for conflict mineral supply chains.
• The GAO Government Auditing Standards and other similar domestic and international standards
should be used as reference/to set the bar for the independent audit
• Reporting requirements are expected to evolve over time
• Inclusion of more minerals
• Increasing levels of due diligence
• Naturally occurring trace amounts exempt
• Unintentionally included trace amounts exempt
• Recycled & scrap materials are exempt There are special rules governing the due diligence and
the Conflict Minerals Report for 3TGs from recycled or scrap sources.


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 Recycled and Scrap Materials –
Final Rules
• Special rules governing the due diligence and Conflict Minerals Report for minerals from re-
cycled or scrap sources:
• If an Issuer’s conflict minerals are derived from recycled or scrap sources rather than from mined
sources, the Issuer’s products containing such minerals are considered “DRC conflict free.”
• If an Issuer cannot reasonably conclude after its inquiry that its gold is from recycled or scrap sources
»» Gold:
• Required to undertake due diligence in accordance with the OECD Due
Diligence Guidance, and get an audit of its Conflict Minerals Report.
• Currently, gold is the only conflict mineral with a nationally or international-
ly recognized due diligence framework for determining whether it is recycled
or scrap, which is part of the OECD Due Diligence Guidance.
»» Tin, Tantalum, Tungsten:
• Currently no nationally or internationally recognized due diligence frame-
work for determining whether it is recycled or scrap
• Until a due diligence framework is developed:
»» The Issuer will be required to describe the due diligence measures it exer-
cised in determining that its conflict minerals are from recycled or scrap
sources in its Conflict Minerals Report.
»» Such an Issuer is not required to obtain an independent private sector
audit regarding such conflict minerals.


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 Other Notables from the Final Rules
De Minimis Thresholds
• Although many comments were made for both sides of the inclusion of de minimis thresholds,
the final rules DO NOT include any. There are several reasons expressed in the final rules as to
why this decision was made, but the first and foremost is:

The Conflict Minerals Statutory Provision (includes) an express limiting factor – namely that a
conflict mineral must be “necessary to the functionality or production” of an issuer’s product to
trigger any disclosure regarding those conflict minerals…(T)his standard focuses on whether
the conflict mineral is “necessary” to a product’s functionality or production; it does
not focus on the amount of a conflict mineral contained in the product. We believe that
Congress understood, in selecting the standard it did, that a conflict mineral used in even a very
small amount could be “necessary” to the product’s functionality or production. If it had intended
that the provision be limited further, so as not to apply to a de minimis use of conflict minerals,
we think Congress would have done so explicitly.


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Generic Products Exemption (and other considerations around “contract to manufacture”):
• An issuer will not be considered to “contract to manufacture” a product (and therefore would
be outside the scope of the Conflict Minerals Regulation) if it does no more than take the fol-
lowing actions:
1. the issuer specifies or negotiates contractual terms with a manufacturer that do not directly re-
late to the manufacturing of the product such as training or technical support, price, insurance,
indemnity, intellectual property rights, dispute resolution, or other like terms or conditions con-
cerning the product, unless the issuer specifies or negotiates taking these actions so as to exercise a
degree of influence over the manufacturing of the product that is practically equivalent to con-
tracting on terms that directly relate to the manufacturing of the product; or
2. the issuer affixes its brand, marks, logo, or label to a generic product manufactured by a
third party; or
3. the issuer services, maintains, or repairs a product manufactured by a third party.


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Assent Compliance’s Involvement with Dodd-Frank
Section 1502
• Meeting with SEC
• Over the course of Monday December 12th and Tuesday December 13th, Assent Compliance
met separately with Commissioner Paredes, Commissioner Walter and Commissioner Aguilar
for 1 hour each to discuss the following items in respect to Dodd Frank Section 1502
»» NAM and Tulane Reports
»» Compliance costs
»» Practical compliance activities
»» Impact on industry
»» Impact on supply chains
»» Feedback on proposed rules


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• On Wednesday December 14th, Assent Compliance participated in Conflict Mineral discussion
panel with the following panelists:
• GE
• AMD
• Brookings Institute
• RIM
• Claigan Environmental
• KEMET

• The panel discussed various issues surrounding Conflict Minerals and fielded questions from
the audience (which was comprised of congress staff, journalists, industry groups and business
representatives)

• Assent Compliance is included 4 times in the Final Rules from the SEC based on our input
at the meeting and on a separate submitted letter we provided to the SEC.


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Industry Approach – Pilot Program
• OECD Pilot Program
• Pilot implementation of OECD’s due diligence standards for procuring conflict mineral
information from Global supply chains

• Based on OECD’s 5 steps:
1. Establish Strong Company Management Systems
2. Identify and Assess Risk in the Supply Chain
3. Design and Implement a Strategy to Respond to Identified Risks
4. Third-Party Audit of Smelters/Refiners‘ Due Diligence Practices
5. Report Annually on Supply Chain Due Diligence


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• 30 companies & industry groups participated including:
• Alcatel Lucent
• GE
• KEMET
• Nokia
• Panasonic
• TI
• IPC
• Lockheed Martin
• HP
• Nokia
• Siemens


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Industry Approach – Pilot Program
• Clarifications
• Companies can use the label “DRC Conflict Free” when:
• “…they and the mineral processors from which they source know and can show that they do not
tolerate nor by any means profit from, contribute to, assist with, or facilitate the commission by
any party of serious human rights abuses associated with the extraction, transport or trade of
minerals.”
• Companies should assess their upstream suppliers are in line with recommended manage-
ment strategies (*these strategies are outlined in the document)
• Big focus on “Evolution” of Conflict Minerals compliance
»» A fully mapped Conflict Mineral chain of custody from your product back to the
mine of origin is not realistic or expected year 1
»» Year 1 Conflict Mineral activities are going to look at a lot different from Year 5 as
local African infrastructure grows and general industry knowledge expands.
»» Ex: Your corrective actions in Years 2 and 3 and just as important as your plan in Year 1


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• Current Tools
• All participants either currently use or plan to use 1 or more of the following compliance tools
»» 3rd party (Ex: Assent Compliance)
»» Industry level (Ex: GeSI Template)
»» Internally designed
• Waiting for promulgation of final rules before investing in a solution
• IPC is developing a data exchange standard
»» Assent Compliance has IPC as a one of its current standards for clients and it is
updated in line with any updates to IPC


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Industry Approach – Current Impacts
• Additional Internal Impacts
• Large global companies with many subsidiaries/legal entities but 1 holding company must
roll up all their data internally
• Extremely challenging when trying to coordinate multiple purchasing departments, supply
chains and ERP platforms.
• Must keep message to suppliers consistent and all corporately developed protocols must be
rolled out to all entities.
»» Training
»» Education
»» Supplier reporting
»» IT platform integration
»» Information consolidation for SEC report
»» Customer/Consumer communication


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• Current Practices
• Majority of companies are using the GeSI Conflict Free Smelter template to gather
information
• Most companies are in the Compliance Development phase with more and more moving
to the Country of Origin phase as the vote on final rules approaches
• Company solutions range from internal solutions to turnkey 3rd party solutions and a
combination of the 2.
»» Some companies such as TriQuiny Semi-Conductor, are hiring 1 full-time person
to track and maintain conflict mineral information as part of their overall sub-
stance management software system
»» Johnson & Johnson expects to spend $1,000,000 with a 3rd party consultant to
develop and design their program
»» After that, 1 full-time Program Director
»» 12 part-time that will grow and shrink as needed
»» Xerox has hired an outside consulting firm for about $100,000 to gather data
from their supply chain (about $100 per supplier)
»» Will do the rest internally including data auditing, program design and
software
»» Target estimates the ONGOING cost will be $600,000 USD per year plus 1 or 2
full-time people added to their 50 person global compliance team
»» Ford estimates it will spend $100,000-$200,000 to modify its existing database


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• At a top-level, most compliance models follow this format:
»» Develop a Compliance Plan
»» Assess Scope
»» Assess Risk
»» Determine Applicable Due Diligence requirements
»» Determine Country of Origin and Reporting methodologies
»» Determine Implementation Plan
»» Determine Corrective Action Plan
»» Determine long-term goals/continuity plan
»» Execute Implementation plan


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 Risks
• Suppliers who do not/cannot provide Conflict Mineral declarations
• May require that Issuer submit a Conflict Mineral Report
• A lot of different entities could be involved internally which will require a lot coordination and
training
• Potentially large and global list of suppliers that must be assessed
• Information MUST be posted ONLINE – Very Public!

Custom solutions for compliancE

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Suggest Approach – 3 Steps to Compliance
• Step 1 – Create a Compliance Plan
• Assess Scope
• Assess Risk
• Determine Applicable Due Diligence requirements
• Determine Country of Origin and Reporting methodologies
• Determine Implementation Plan
• Determine Corrective Action Plan
• Determine long-term goals/continuity plan

• Step 2 – Conduct Reasonable Country of Origin Inquiry
• Survey suppliers
• Assess Due Diligence
• Store as business reviewable records
• Roll up reports for SEC submission – FORM SD
• Provide info on your website
• If your products do use conflict minerals from the DRC/adjoining countries, you provide
a Conflict Mineral Report.
• If you DO NOT KNOW, you have 2 years to determine and then you must provide a
Conflict Mineral Report


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• Step 3 – Conflict Minerals Report (if necessary)
• Companies submitting a Conflict Minerals Report must:
• Exercise due diligence in determining the source and chain of custody of Conflict Minerals
• Certify that a 3rd party audit of the Report was obtained
• List products that are not DRC free and are DRC Conflict Undeterminable
• List facilities used to process those conflict minerals
• Detail the Country of origin
• Show efforts to determine or locate mine of origin with greatest specificity


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 Final Rules Flowchart
Does the issuer file re- Does the issuer
ports with the SEC under manufacture or Are conflict minerals necessary to the
YES YES
sections 13(a) or 15(D) of the contract to functionality or production of the product
exchange act? manufacture products? manufactured or contracted to be
manufactured?
No
No

File does not apply. No
END
YES
YES Were the conflict minerals outside the sup-
ply chain prior to January 31, 2013?

No, if newly mined
No, if potentially scrap or recycled
On a reasonable country of origin inquiry (RCOI), No
YES does the issuer know or have reason to believe that
the conflict minerals may have originated in the DRC Based on the RCOI, does the issuer know or reasonably
or an adjoining country (the covered countries)? believe that the conflict minerals come from scrap or
recycled?

No
YES

File a form SD that discloses the issuer’s determination and
Exercise due diligence on the source and chain of custody of its conflict minerals follow- briefly describes the RCOI and the results of the inquiry.
ing a nationally or internationally recognized due diligence framework, if such framework
END
is available for a specific conflict mineral.
In exercising this due diligence does the issuer determine the conflict minerals are not from
Yes
the covered countries or are from scrap or recycled.
File a form SD the discloses the issuer’s determination and
No briefly describes the RCOI and due diligence measures taken
and the results thereof.
File a form SD with a conflict minerals Report as an exhibit, which includes a description of END
the measures the issuer has taken to exercise due diligence.
In exercising due diligence, was the issuer able to determine whether the conflict minerals
No Is it less than two years after the
financed or benefitted armed groups?
effectiveness of the rule (four years
for smaller Reporting companies)?
Yes

The conflict minerals report must also include and independent private sector audit report, The Conflict minerals Report must also include
which expresses an opinion or conclusion as to whether the design of the issuer’s due diligence No Yes
a description of products that are “DRC Conflict
measures is in conformity with the criteria set forth in the due diligence framework and wheth- Undeterminable” and the steps taken or that will
er the description of the issuer’s due diligence measures is consistent with the process under- be taken, if any, since the end of the period covered
taken by the issuer. Also, include a description of the products that have not been found to be in the last Conflict Minerals Report to mitigate the
DRC Conflict free, the facilities used to process the necessary conflict minerals in those prod- risk that the necessary conflict minerals benefit
ucts, the country of origin of the minerals and the efforts to determine the mine or location or armed groups, including any steps to improve due
origin of those minerals with the greatest possible specificity. END diligence. No audit is required. END


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Timelines
• Still waiting on final rule to be passed by SEC – it has been delayed many times but a vote is
expected on final rules on August 22nd
• First reporting period:
• First full fiscal year (first filing) ending 12 months after the final ruling

TIMELINES ESTABLISHED
• All issuers will file the Form SD for the same period – a calendar year – regardless of their
fiscal year end.
• First specialized disclosure report on May 31, 2014 (for the 2013 calendar year)
• Annually on May 31 for each calendar year thereafter.


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• There can be 5-10 Layers between the mine and the end product
• Apple has 125 suppliers using Tin and they source from 43 smelters around the world
»» Reasonable inquiry throughout this supply chain can take months!

• Because of the supply chain investigation complexity many companies have already started the process
• Apple • RIM
• Intel • Philips
• Motorola • Toshiba
• Nokia • SanDisk
• Microsoft • LG
• Acer


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Assent Compliance Services
• Assent Compliance offers a wide range of Conflict Mineral services ranging from Consulting
support to Software to full Turnkey solutions
• We can help with the following items for the Issuer
• Development of a Compliance Plan
• Implementation and Development of internal Conflict Mineral controls and processes
• Software and database solutions for:
»» Reasonable Country of Origin Inquiries
»» Maintaining Business reviewable records
»» Audit trails
»» Reporting

• Integration of multi-site, multi-ERP databases in order to roll up Supplier and part/mate-
rial information as needed for Conflict Mineral SEC submissions
• Conflict Mineral Report creation and auditing


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 Questions?
Should you have any questions please feel free to ask them at this time.


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