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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.

The three-step process

The final rule establishes a three-step process to help public companies meet the new reporting requirements. The intent of this process is to provide companies with flexibility to tailor the requirements to their particular facts and circumstances and thereby avoid unnecessary costs. The basic steps are highlighted below.

MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM

A publication of the Professional Standards Group

October 2012

MHMMessenger

SEC’s Final Rule on Conflict Minerals Casts a Wide Net Impacting Public Companies and Certain Private Companies

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• Step 1: Determine if the company is covered by the conflict minerals rule. The first step is to determine whether the company is subject to the requirements of the conflict minerals rule. Issuers of securities are subject to the requirements if they: (1) file reports with the SEC under Exchange Act Sections 13(a) or 15(d), (This scope would include any company other than a registered investment company that files periodic exchange act reports with the SEC), and (2) conclude that conflict minerals are necessary to the functionality or production of a product they manufacture or contract to manufacture. Conflict minerals are necessary for many products that contain electronic components, and the companies that manufacture products containing conflict minerals can be found in a wide range of industries, including technology, aerospace, automotive, industrial products, consumer packaged goods, and jewelry. Retailers that carry private labeled products can also be subject to the requirements because they have a contract and influence over the manufacturing of the products.

• Step 2: Determine if the conflict minerals originated in a covered country. The second step is for the company to conduct a reasonable country of origin inquiry (RCOI) to determine 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

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must be reported to the SEC, and (2) whether or not a portion of the information must be audited. The covered countries are the Democratic Republic of the Congo and adjoining countries (i.e., Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia). The final rule exempts any conflict minerals that are outside the supply chain prior to Jan. 31, 2013, meaning the minerals have been smelted or fully refined, or if they have not been smelted or fully refined, they are outside the covered countries.

• Step 3: Exercise due diligence, file appropriate report, and obtain private audit if required. All companies subject to the rule are required to file a Form SD with the SEC. The details of the report will depend on the information obtained as part of the RCOI and due diligence process. Based on its inquiries and information, a company may conclude its products are “DRC conflict free,” “not DRC conflict free,” or “DRC conflict undeterminable.” If the company concludes that its conflict minerals have financed or benefitted armed groups, then its conflict minerals report must include an independent private sector audit report that includes an opinion as to whether the design of the issuer’s due diligence measures is in conformity with criteria established in an acceptable due diligence framework. These audits are conducted in accordance with Generally Accepted Government Auditing Standards (commonly known as “Yellow Book” audits). The only acceptable framework at this time is the OCED Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas. This framework contains a supplement for tin, tantalum, and tungsten; and the OCED has issued a separate supplement for gold.

How your company may be affected

Both public and private companies should take time now to consider how best to react to this rule. Public companies that are subject to the rule must file their first reports for calendar year 2013 by May 31, 2014. The information must be made available on company websites, as well as reported to the SEC. Although the SEC’s reporting requirements apply only to issuers of certain securities, private companies that compete in the same industries and/or are involved in the supply chains for products that use these minerals may also be affected. For example, nonpublic companies that are not subject to the rule may wish to report the information voluntarily on their websites, and nonpublic companies of all sizes that supply conflict minerals as raw materials or as part of components for larger finished products should be prepared to receive information requests from their customers. In connection with these requests, management may be asked to certify the source of the conflict minerals in their products.

How MHM can help

To take the initiative and respond effectively, CFOs will need to acquire knowledge, expertise and services in new and emerging areas. MHM can help in these ways:

• Provide additional information about the three-step process described in the SEC’s rule and the steps involved in compliance with that rule.

• Provide briefings on how to apply the five basic steps in the OECD’s framework for due diligence. These steps are as follows:

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MHMMessenger

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MHMMessenger

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.

1. Establish strong company management systems.

2. Identify and assess risks in the supply chain.

3. Design and implement a strategy to respond to identified risks.

4. Carry out an independent third-party audit.

5. Report annually on supply chain due 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.

For more information

The following flowcharts were adapted from the flowchart in the SEC’s final rule.

If you would like additional information, please contact Rich Howard of MHM’s Professional Standards Group or your MHM service professional. You can reach Rich directly at rhoward@cbiz.com or 949-450-4402.

Does the issuer file reports with the SEC under Sections 13(a) or 15(d) of

the Exchange Act?

Does the issuer manufacture or contract to manufacture products?

Are conflict minerals necessary to the functionality or production of the product

manufactured or contracted to be manufactured?

Were the conflict minerals outside the supply chain prior to January 31, 2013?

Based on a reasonable country of origin inquiry (RCOI), does the issuer

know or reasonably believe that the conflict

minerals come from scrap or recycled?

Based on the RCOI, does the issuer know or have reason

to know that the conflict minerals may have originated

in the DRC or an adjoining country (the covered

countries)?

Rule does not apply.File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and

the results of the inquiry.

Go to next page.

MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Steps 1 and 2

YESNO

NO

NO

NO

NO YESYES

YES

YES

YES

NO, if potentially scrap or recycled NO, if newly mined

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Exercise due diligence on the source and chain of custody of issuer’s conflict minerals following a nationally or

internationally recognized due diligence framework, if such framework is available for a specific conflict mineral.

Continued from previous page.

In exercising due diligence, does the issuer determine the conflict minerals are not from the covered countries or are

from scrap or recycled?

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?

Is it less than two years after effectiveness of the rule (four years for Smaller Reporting Companies)?

File a Form SD that discloses the issuer’s

determination and briefly describes the RCOI and the due diligence measures

taken and the results thereof.

The Conflict Minerals Report must also include a description of products

that are “DRC Conflict Undeterminable” and the steps taken or that will be taken, if any, since the end

of the period covered in the last Conflict Minerals Report to mitigate the risk that the necessary conflict

minerals benefit armed groups, including any steps to improve due diligence.

No audit is required.

The Conflict Minerals Report must also include an independent private sector

audit report, which expresses an opinion or conclusion as to whether the design of the issuer’s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the issuer’s due diligence measures is consistent with the process undertaken by the issuer. Also, include a description of the products that have

not been found to DRC conflict free, the facilities used to process the necessary conflict minerals in those products, the

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.

MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Step 3

YES

YES

YES NO

NO

NO

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