Complying with New Conflict Minerals Rules

Time is of the essence. Medical device companies have less a year to comply with the conflict minerals due-diligence disclosure rules approved last summer by the U.S. Securities and Exchange Commission (SEC).

Originally developed in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules require publicly traded companies to disclose the use of any “conflict minerals” (3TGs – tin, tantalum, tungsten and gold) harvested from the Democratic Republic of Congo and adjoining countries (“DRC countries, according to the statute”), where war atrocities, human slavery and other human rights violations are commonplace. The rules command companies and their suppliers to describe the efforts they take to “exercise due diligence on the conflict minerals’ source and chain of custody” and file a new SEC form SD beginning in 2014 for the 2013 calendar year. The initial reporting period for tracking compliance efforts began in January.

“As of today, you have less than 12 months to comply with these new rules. And compliance is going to be a difficult process,” Travis Miller, vice president of regulatory services and business development at Foresite Systems, warned attendees of last week’s MPO Summit in Salt Lake City, Utah. “There is no wiggle room. If your supply chain is not conflict-free, then you are not conflict-free, either.”

One of the challenges of conflict mineral compliance, Miller noted, is the level of trace elements of 3TGs found in many medical devices. Tin and gold, for instance, are used to solder metals, tungsten and tantalum are popular for their radiopaque characteristics, and tantalum capacitors are used in numerous electronic devices. While it is difficult for any company to trace its own flow of materials in raw form back to component suppliers, the Dodd-Frank rules require even deeper due diligence to determine the actual location of the mineral smelter. There are no penalties for using conflict minerals in products, but the regulations require companies to perform a “reasonable country of origin inquiry.”

During his summit presentation, Miller shared several tips for successful conflict mineral compliance. They included:

• Prepare a tremendous amount of supplier communication, education and outreach to inform suppliers of the new requirements.
• Develop a mechanism to source declaratiions (this will take time and resources).
• Carefully review responses from suppliers. This may entail adopting a risk-based approach to adequately prioritize the supply chain. Make sure skilled personnel review documents for accuracy.
• Go beyond Tier 1 suppliers and consider compliance issues posed by distributors and contract manufacturers.
• Ensure an independent, third-party auditor conducts the required audit required under the Dodd-Frank rules. The audit will help the SEC determine whether companies’ due diligence efforts are consistent with the government’s approved process.