October 2012MHMMessenger                                                           TMM AY E R H O F F M A N M C C A N N P....
MHMMessenger(Continued from Page 1)     must be reported to the SEC, and (2) whether or not                    How your co...
MHMMessenger(Continued from Page 2)       1.	 stablish strong company management         E                                ...
MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Steps 1 and 2                                   Does the issu...
MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Step 3                           Exercise due diligence on th...
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SEC's Final Rule on Conflict Minerals Casts a Wide Net

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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.

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SEC's Final Rule on Conflict Minerals Casts a Wide Net

  1. 1. October 2012MHMMessenger TMM 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 MA publication of the Professional Standards GroupSEC’s Final Rule on Conflict Minerals Casts a Wide Net Impacting PublicCompanies and Certain Private CompaniesThe US Securities and Exchange Commission (SEC) • Step 1: Determine if the company is coveredhas released a final rule on conflict minerals that is by the conflict minerals rule. The first step is toexpected to have a broad impact on many companies, determine whether the company is subject to theboth public and private. The rule implements Section requirements of the conflict minerals rule. Issuers1502 of the Dodd-Frank Wall Street Reform and of securities are subject to the requirements ifConsumer Protection Act. Its reporting requirements they: (1) file reports with the SEC under Exchangeare designed to help investors understand the risks in Act Sections 13(a) or 15(d), (This scope woulda company’s reputation and supply chain. This same include any company other than a registeredinformation will also help consumers understand the investment company that files periodic exchangeextent to which companies are using minerals sold by act reports with the SEC), and (2) conclude thatarmed groups to fund conflict and abuses of human conflict minerals are necessary to the functionalityrights in Africa. For public companies, the rule requires or production of a product they manufacture orannual reporting to the SEC and on companies’ contract to manufacture. Conflict minerals arewebsites of information about the sources of minerals, necessary for many products that contain electronicsuch as gold and a group known as the 3Ts (tantalum, components, and the companies that manufacturetin, and tungsten). This Messenger summarizes the products containing conflict minerals can be foundrequirements 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 beThe three-step process subject to the requirements because they have a contract and influence over the manufacturing ofThe final rule establishes a three-step process the products.to help public companies meet the new reportingrequirements. The intent of this process is to provide • Step 2: Determine if the conflict mineralscompanies with flexibility to tailor the requirements to originated in a covered country. The secondtheir particular facts and circumstances and thereby step is for the company to conduct a reasonableavoid unnecessary costs. The basic steps are country of origin inquiry (RCOI) to determinehighlighted 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 thatour roots run deep TM (Continued on Page 2) © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  2. 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. (Continued on Page 3) © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  3. 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. © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  4. 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 disclosesRule does not apply. the issuer’s determination and Go to next page. briefly describes the RCOI and the results of the inquiry. © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  5. 5. MHM Messenger 21-12 Appendix: Conflict Minerals Flow Chart – Step 3 Exercise due diligence on the source and chain of custodyContinued from of issuer’s conflict minerals following a nationally orprevious 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. © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.

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