Conflict Minerals& Your Supply Chain By Juanita Ervin

Content

Executive Summary.......................................................... .1

Background on the Conflict Minerals Regulation............. 2

Requirements, Deadlines and Impact .............................. 3

Industry Response ........................................................... 6

Best Practices in Managing theSupply Chain Due Diligence Process............................... 9

Teaming with Your Contract Manufacturerfor Compliance Activities................................................ 10

Conclusion ..................................................................... .11

On August 22, 2012 the Securities and Exchange Commission (SEC) adopted a new rule pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires publicly-traded companies in the United States to report the use of “Conflict Minerals”.

Under the rule, Conflict Minerals are cassiterite, columbite-tantalite, gold woframite and their derivatives which have been limited to tantalum, tin and tungsten (collectively known as the 3Ts), that are sourced from mines in the Democratic Republic of the Congo (DRC) or surrounding countries (collectively known as the “Covered Countries”.) Currently the list in the final rule includes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia. Both list of Conflict Minerals and the list of Covered Countries can be revised by the U.S. Secretary of State, as needed.

While the reporting requirement only applies to publicly- traded companies, it also impacts any company supplying a company that is required to report since

publicly-traded companies are requiring their suppliers to support their due diligence efforts.

From an electronics industry perspective, components and commonly used materials that could contain the 3Ts include solder, tantalum capacitors, metal wires,electrodes and contacts. Additionally, gold may be used in communications and aerospace equipment.

The first report will be required on May 31, 2014.For the next two years for large companies and four years for smaller companies, reporting can include the classifications of Conflict Minerals Free, not been found to be DRC conflict free or undeterminable. Beginningin 2016-18, undeterminable will not be an option and an independent audit will be required for all companies required to report.

This paper looks at Conflict Minerals regulationsfrom the perspective of a company in the electronics manufacturing services (EMS) in terms of the processes necessary to support disclosure requirements and the likely support services needed over time.

COVERED COUNTRIES

Angola

Burundi

Central African Republic

The Republic of Congo

Rwanda

South Sudan

Tanzania

Zambia

Uganda

Executive Summary

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Background on theConflict Minerals Regulation

Overview

The violent conflict in the Democratic Republic of the Congo (DRC), has been partially financed by the exploitation and trade of conflict minerals originating in the DRC. Armed groups engaged in mining operations in the region are also believed to subject workers and the local population to human rights abuses. The intent of the new SEC reporting requirements was to increase public awareness of this issue and bring greater due diligence to supply chains which may be utilizing these minerals, thereby encouraging companies to find other sources.

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Under Dodd-Frank Section 1502’s new rule, all SEC issuers (both U.S. and foreign companies issuing shares through U.S. exchanges) that manufacture or contract to manufacture products where “Conflict Minerals are necessary to the functionality or production” of the product are subject to the rule.

Under the rule, an issuer first needs to determine whether its manufactured products contain Conflict Minerals necessary to the products’ functionality or their production process. If no Conflict Minerals are present, they are not required to take further action.This applies both to original equipmentmanufacturers (OEMs) and those who

“contract to manufacture”. Companies who private label, meaning affix their brand, marks, logo or label to ageneric product manufactured by a third party, are not subject to the rule. Companies who service, maintain or repair products manufactured by a third party are also not subject to the rule.

Issuers subject to the rule who have productsthat incorporate Conflict Minerals either for functionality or as part of the production process, are next required to determine if those minerals originated in the Covered Countries.

In doing that assessment, SEC guidelines also eliminate products where Conflict Minerals occur as a by-product of the production process and instances where the Conflict Mineral is used as a catalyst but not contained in the final product.

Issuers are expected to conduct a “reasonable country of origin inquiry” (RCOI) if Conflict Minerals are found. The actual steps of the RCOI are not defined.The guidelines do state the that RCOI must be designed to determine if any Conflict Minerals that are not from recycled or scrap sources originated in the Covered Countries and companies must make a good faith effort in their assessment.If it is determined that the Conflict Materials did not originate in a Covered Country or came from recycledor scrap sources, the issuer fills out a special disclosure

report known as Form SD to describe the RCOI used to reach that determination and that is

the extent of the reporting requirement.

If the RCOI indicates that the Conflict Materials came from a Covered Country, or the issuer believes thatit may have come from a Covered

Country additional reporting and ultimately, third-party auditing, is required. In the transition period of the

rule, issuers must conduct due diligence on the source and chain of custody of the

Conflict Materials originating from Covered Companies. The due diligence process must be based

on a nationally or internationally recognized due diligence framework. The guidelines mention the due diligence guidance approved by the Organisation for EconomicCo-operation and Development (OECD) as one example of an acceptable framework.

If the due diligence indicates the Conflict Minerals are not from a Covered Country or have come from recycled or scrap sources, only Form SD must be filed.

Issuers

are

expected to

conduct a

“reasonable

country of origin

inquiry”

(RCOI) if

Conflict Minerals

are

found.

RequirementsDeadlines and Impact

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Additionally, unless the Conflict Minerals are all listed as DRC Conflict Undeterminable, the issuer must obtain an independent private sector audit of its CRM, certify that it obtained the audit, identify the auditor and include the audit documentation with the report. The CRM must also be posted on the issuer’s website.

measures

Countr

yPRODUCT

S

efforts

FAcilitie

sproce

ss

stepsIf undeterminable Conflict Minerals are

listed, the CRM must also describe the

steps being taken or planned, if any, since

the end of the period covered in the most

recent prior CRM, to mitigate the risk that

the products’ necessary Conflict Minerals

benefit armed groups. This should include

any steps which improve the due diligence

process.

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However, if the Conflict Minerals have been determined to have come from a Covered Country or an indeterminate source, a Conflict Minerals Report (CMR) must be filed as an exhibit to Form SD and typically includes:

RequirementsDeadlines and Impact

In terms of implementation of the rule, the following deadlines apply:

Jan-Dec 2013

May 31, 2014

May 31, 2016

May 31, 2018

First effective period for due diligence and reporting

Larger companies can no longer classify

Conflict Materials as undetermin- able and

the independent private sector audit is

required

Smaller companies can no longer classify

Conflict Materials as undetermin- able and

the independent private sector audit is

required.

First

report due. Duringthe first two years for larger companies and four years for smaller companies (less than $75 million in public float or if

unable to determine size of float, less than $50

million in revenue for the fiscal year), no independent private

sectoraudit will be required for undeterminable

users

The SEC revised the proposed rule, in part due to concerns expressed by commenters on the overall cost of compliance. The revised cost is estimated in the $3-4 billion range with ongoing compliance costs in the$207-$609 million range. The full text of the final rule is available here: http://www.sec.gov/rules/final/2012/34-67716.pdf

RequirementsDeadlines and Impact

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These include:

• The Electronic Industry Citizenship Coalition (EICC)in conjunction with the GeSI has developed a number of tools and processes to address both reporting and auditing. Their Conflict Minerals Reporting templateis available at: http://www.conflictfreesourcing. org/conflict-minerals-reporting-template/. The data collected is also used to identify new smelters and refiners that may be candidates for audits under EICC’s Conflict Free Smelter Initiative (CFSI)Conflict Free Smelter Program. EICC maintainsa list of Conflict Free smelters and refiners which is accessible with registration at http://www.conflictfreesourcing.org/conflict-free-smelter-refiner- lists/.

• iPoint Systems has developed the iPCMP system which allows for cascade and roll-up of the EICC-

GeSI data from an issuer’s supply chain instead of managing individual spreadsheets to and fromthose suppliers. Reports can be visible in the iPCMP database, in EICC-GeSI format or stored in the issuer’s Online Storage.

• SiliconExpert Technologies, a provider of electronic component management tools, has developed a Conflict Minerals Module which now provides the conflict mineral status on more than 1,000 suppliers. The Conflict Minerals Module is included for all SiliconExpert Part Search and BOM Manager tool subscribers providing the most up to date conflict mineral statuses, all documents and templates available (EICC, COC, Conflict Mineral Policy, Responsibility Report, History, Etc.), customized views, access to smelter & mining information and more.

In terms of the electronics industry, the best way to control the costs associated with due diligence and reporting costs is through the use of common databases that document status at the lot code/date code level for the bulk of material and components which contain Conflict Minerals. For companies purchasing a wide range of materials, there is also a need for automated systems that roll up supply chain reporting.

Fortunately, industry associations and third party vendors are supporting this effort. While companies can design their own systems there are also a number of third-party tools, either launching or already in place.

Industry Response

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• There are a variety of third-party software Conflict Minerals modules designed to interface with popular ERP systems.

• The Organization for Economic Co-operation and Development (OECD) has published a document titled, “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” which is available at http://www. oecd.org/daf/inv/mne/mining.htm. While the SECrule allows issuers to define their own due diligence process, this document was cited as an example of acceptable guidelines.

• The iTSCi Programme is a joint industry mechanism designed to address Conflict Mineral concerns in the DRC, Rwanda and other Great Lakes Region countries. The Programme establishes traceability in the upstream mineral chain for 3T minerals by working with local governments and their field agents, and assists companies to establish due diligence through independent monitoring on the

ground and regular audits. The Programme supports the practical implementation of the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas as well as the UN Security Council Resolution 1952 (2010) due diligence recommendations. Members are expected to recognize all aspects of these guidelines and cooperate with monitoring, evaluation and audits as required, as well as working on their own company policies and contracts to influence the supply chainin a positive way. Through the implementation of the OECD Guidance, the Programme aims to aid compliance with the US Securities and Exchange Commission (SEC) Rule interpreting the US Dodd Frank law, section 1502 on Conflict Minerals. TheProgramme complements other initiatives, including the Conflict–Free Smelter audit program (CFSI), the ICGLR’s Regional• Certification Initiative, and BGR’s Certified Trading Chains Initiative (CTC). Additional information can be obtained by writing itsci@itri.co.uk

Industry Response

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Industry Response

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In short, there is a growing body of tools and support infrastructure for compliance. The challenge is finding the right mix relative to scope of work and cost objectives.

• The Public-Private Alliance for Responsible Minerals Trade (PPA) is a multi-sector and multi-stakeholder initiativeto support supply chain solutions to conflict minerals challenges in the DRC and the Great Lakes Region (GLR) of Central Africa. The PPA provides funding and coordination support to organizations working within the region to develop verifiable conflict-free supply chains; align chain-of-custody programs and practices;encourage responsible sourcing from the region; promote transparency; and bolster in-region civil society and governmental capacity. Additional information is available at: http://www.resolv.org/site-ppa/.

• The Solutions for Hope Project was announced by Motorola Solutions Inc. and AVX Corporation in July 2011. The project was launched as a pilot initiative to source conflict-free tantalum from the DRC. More informationis available at: http://solutions-network.org/site- solutionsforhope/.

• PC was active in commenting on the SEC rule and the similar EU regulations that are in development. They have developed both fact sheets and due diligence guides on the SEC rule that are available here: https://www.ipc.org/ ContentPage.aspx?pageid=Conflict-Minerals.

• Major audit, tax and advisory firms are offering due diligence and auditing-related services.

Best Practices in Managing the Supply ChainDue Diligence Process

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The OECD publication titled “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High Risk Areas: Second Edition”1, was mentioned in the SEC rule as an example of an acceptable due diligence framework.

The document outlines a five-step process that can be tailored based on the minerals being monitored and each company’s position in the supply chain. The framework elements are paraphrased here for brevity:

Step 1. Establish strong company management systems which include:

• Communication of the Company’s Conflict Minerals policy to suppliers and the public

• An internal management team supporting supply chain due diligence• A system of controls that will provide traceability over the

Conflict Minerals chain of custody• Incorporate Conflict Mineral related clauses in supplier contracts

and assist suppliers in compliance activities, when necessary• Establish a grievance mechanism where any concerns about

reporting accuracy can be shared

Step 2. Identify and assess risk in the supply chain.

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

• Report the findings of the supply chain risk assessment to the company’s designated senior management representative(s)

• Develop and adopt a risk management plan• Implement the risk management plan and report agreed upon metrics

to senior management• Course correct as needed for risk mitigation or changes

in circumstances.

Step 4. Carry out independent third-party audit of supply chain

due diligence at identified points in the supply chain.

Step 5. Report on supply chain due diligence as required.

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Teaming with Your Contract Manufacturerfor Compliance

Activities

While the cause is just, there is no question that the regulation increases costs in the supply chain. And, since electronics manufacturing services (EMS) companies often purchase material on behalf of their customers, they are also oftenthe link in the supply chain which has the bulk of the data collection requirements.

For that reason, it can be valuable for issuers to utilize the most common industry standards and collaborate with their EMS providers in determining due diligence requirements. An EMS provider’s ability in terms of processes and systems to support compliance with the final rule in Dodd Frank Section 1502 should be analyzed during the supplier selection process, if the issuer’s products are likely to trigger reporting requirements.

Since the intent of this rule and the likely intent of any EU rules is to ultimately purge the supply chain of materials classified as not DRC Conflict Free, an EMS provider’s ability to support identification of DRC Conflict Free components

and/or materials over time should be evaluated if it is likely that internal design engineering resources will need to be supplemented. Often tools such as Silicon Expert, which has added a Conflict Minerals module, are already usedfor product lifecycle management (PLM). In short, analyses performed as part of a standard new product introduction (NPI) process or in support of customer redesign efforts can be easily expanded to support elimination of not DRC Conflict Free materials and components.Finally, it is also important to evaluate an EMS supplier’s systems for configuration management and traceability. As an example, Optimum Design Associates utilizes an Unipoint Quality Management System which provides centralized quality data tracking and configuration management/ traceability support. In addition to providing customized quality data reporting, it also provides a centralized product documentation database and required traceability data for customers requiring detailed product history recordkeeping.

Optimum Design

Associates utilizes an

Unipoint QualityManageme

nt System

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Conclusion

11

The SEC’s new rule pursuant to Section 1502 of Dodd Frank will add cost to the supply chain. However, it does provide some flexibility in how companies structure due diligence processes within their supply chains. When electronicproduct manufacturing is outsourced, much of the reporting roll-up is resident at EMS providers. Leveraged to its fullest extent, the EMS business model minimizes fixed cost by sharing the cost of resources of production over its customer base. The same cost reduction synergy exists in compliance processes, when issuers adopt the more commonly accepted reporting templates or utilize systems capable of interfacing with the internal systems suppliers use for data collection and reporting at their level. Teaming with EMS providers to set up systems which not only address the initial reporting requirements, but also support redesign efforts that ultimately minimize future reporting requirements will help lower the costs of compliance further.

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Citations

1. OECD (2013), OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from

Conflict- Affected and High-Risk Areas: Second Edition, OECD Publishing, accessed 27 February

2014; available at: http://dx.doi.org/10.1787/9789264185050-en.

Juanita Ervin is Optimum Design Associate’s Quality Systems

Manager. She can be reached at jervin@optimumdesign.com

About Optimum Design Associates

Optimum Design Associates (ODA) is a leading provider of award winning printed circuit board (PCB) layout, engineering, and in-house turnkey electronics manufacturing services (EMS). Established in 1991, ODA continues to meet the challenge of creating complex, high-density printed PCB layouts for some of the world’s leading high-tech original equipment manufacturers (OEMs). ODA has offices in California and Australia. Its California facility is ITAR-registered and certified to ISO 9001:2008.