On August 22, 2012, the SEC adopted final rules concerning the disclosure of conflict minerals as required by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final conflict minerals disclosure rules are contained in new Rule 13p-1 and new Form SD and will be effective November 13, 2012. 

Summary. The final rules require SEC reporting companies (“issuers,” including foreign private issuers and smaller reporting companies) to conduct a reasonable inquiry and provide related disclosure concerning the country of origin of conflict minerals that are necessary to the functionality or production of products manufactured or contracted by the issuer to be manufactured. If the issuer determines that its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country (the “DRC Countries”) and are not from recycled or scrap sources, or has reason to believe that its conflict minerals may have originated in the DRC Countries and may not be from recycled or scrap sources, it must exercise further due diligence on the source and chain of custody of its conflict minerals and, depending on the results of such due diligence, may also be required to file a Conflict Minerals Report as an exhibit to its Form SD that will be filed with the SEC. In most such cases, the issuer must also obtain an independent private sector audit of the Conflict Minerals Report. Conflict minerals are defined as columbite-tantalite (tantalum), wolframite (tungsten), cassiterite (tin), and gold. 

Flowchart. The SEC has provided a flowchart to assist issuers in compliance with the rules. The flowchart is viewable below, or you can access a downloadable version by clicking here.

Changes From Proposed Rules

The SEC first issued proposed rules on conflict minerals disclosures back in December 2010 which generated extensive comments and controversy. The final rules are substantially the same as the proposed rules, but contain some important changes in response to concerns raised during the comment process. The principal changes from the proposed rules include:

  • Conflict minerals disclosure will be made in a separate SEC filing of a new Form SD rather than as part of the Form 10-K as originally proposed. 
  • Conflict minerals disclosure will be based on a calendar year, beginning with calendar year 2013, regardless of the issuer’s fiscal year-end. The new Form SD is required to be filed with the SEC by May 31 of each year beginning May 31, 2014 for calendar year 2013.
  • During a transition period of two years (four years for smaller reporting companies), issuers who are not able to determine whether their necessary conflict minerals originated in the DRC Countries, came from recycled or scrap sources, or financed or benefited  armed groups in the DRC Countries, may describe their products as “DRC conflict undeterminable” and are not required to have their Conflict Minerals Report audited with respect to such products.
  • Any conflict minerals “outside the supply chain” prior to January 31, 2013 are exempt from the final rules. Conflict minerals are considered “outside the supply chain” if they have been smelted or fully refined or are outside the DRC countries prior to January 31, 2013 (e.g., existing inventory or stockpiles).
  • An issuer that mines conflict minerals is deemed not to be manufacturing those minerals unless the issuer engages in manufacturing in addition to mining.
  • Form SD, including the conflict minerals information and any Conflict Minerals Report included as an exhibit to the Form SD, are considered “filed” rather than “furnished” under SEC rules.

Three-Step Process to Comply

Consistent with the proposed rules, the final rules provide a three-step process of compliance. 

Step One—Determine whether you are subject to the requirements of the Conflict Minerals Rules

You are subject to the requirements of the Conflict Minerals Rules if:

  1. You file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (i.e., Form 10-K, Form 10-Q, Form 20-F, etc.), including domestic companies, foreign private issuers and smaller reporting companies,
  2. You manufacture products or contract with a third party to manufacture products, and
  3. Conflict minerals are “necessary to the functionality or production” of such products.

If you do not meet these requirements, then you are not subject to the Conflict Minerals Rules and you are not required to take any action, make any disclosures, or submit any reports concerning conflict minerals. If you determine that you are not subject to the Conflict Minerals Rules, it would be prudent to retain records concerning how you made that determination and the process you followed.

In this regard, the SEC does not define the terms “contract to manufacture,” “necessary to the functionality” of a product or “necessary to the production” of a product, but it does provide some guidance on applying these terms. 

An issuer will not be considered to “contract to manufacture” a product if the issuer does no more than take the following actions:

  • Specify or negotiate contract terms with a manufacturer that do not directly relate to the manufacturing of the product.
  • Affixes its brand, marks, logo, or label to a generic product manufactured by a third party.
  • Services, maintains, or repairs a product manufactured by a third party.

In determining whether a conflict mineral is “necessary to the functionality” of a product, the SEC advises that you should consider:

  • Whether the conflict mineral is intentionally added to the product or any component of the product and is not a naturally-occurring by-product.
  • Whether any conflict mineral is necessary to the product’s generally expected function, use, or purpose.
  • If the conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.

In determining whether a conflict mineral is “necessary to the production” of a product, the SEC advises that you should consider:

  • Whether the conflict mineral is intentionally included in the product’s production process, other than if it is included in a tool, machine, or equipment used to produce the product.
  • Whether the conflict mineral is contained in the product.
  • Whether the conflict mineral is necessary to produce the product. 

Note that the conflict mineral must be contained in the product to be considered “necessary to the production” of the product.

No De Minimis Exception

The final rule does not contain an exception for de minimis amounts of a conflict mineral. However, an issuer with de minimis amounts of conflict minerals in its products would be subject to the Conflict Minerals Rules only if the de minimis amounts of the conflict minerals are necessary for the functionality or production of a product. 

Step Two—If Applicable, Conduct Reasonable Inquiry to Determine Country of Origin of the Conflict Minerals

If conflict minerals are necessary to the functionality or production of a product manufactured by or for an issuer, then the issuer must conduct a reasonable country of origin inquiry to determine whether its conflict minerals originated in the DRC Countries or if the conflict minerals are from scrap or recycled sources. The inquiry must be made in good faith, and be reasonably designed to determine whether any conflict minerals originated in the DRC Countries or are from recycled or scrap sources.

The final rules do not define what constitutes a reasonable country of origin inquiry, but they provide general guidance concerning how to satisfy the inquiry:

  • The reasonable country of origin inquiry standard would be satisfied if the issuer obtains reasonably reliable representations indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the DRC Countries or came from recycled or scrap sources.
  • An issuer must take into account any applicable warning signs or other circumstances indicating that its conflict minerals may have originated in the DRC Countries or did not come from recycled or scrap sources.
  • An issuer would have reason to believe representations were true if a processing facility received a “conflict free” designation by a recognized industry group that requires an independent private sector audit of a smelter, or, if an individual processing facility is not part of the industry group’s “conflict free” designation process, the facility obtained an independent private sector audit that is made publicly available.
  • An issuer is not required to receive representations from all of its suppliers. If the issuer reasonably designs an inquiry and performs the inquiry in good faith, and in doing so receives representations indicating that its conflict minerals did not originate in the DRC Countries, the issuer may conclude that its conflict minerals did not originate in the DRC Countries, even though it does not hear from all of its suppliers, as long as it does not ignore warning signs or other circumstances indicating that the remaining amount of its conflict minerals originated or may have originated in the DRC Countries.

Whether you go to Step Three depends on the results of your Reasonable Country of Origin Inquiry.

No Further Supply Chain Due Diligence and No Conflict Minerals Report Required. An issuer does not have to conduct further due diligence on the conflict minerals’ source and chain of custody and does not have to file a Conflict Minerals Report with respect to such conflict minerals, if, based on its reasonable country of origin inquiry, the issuer:

  • Determines that its necessary conflict minerals did not originate in the DRC Countries,
  • Determines that its necessary conflict minerals did come from recycled or scrap sources,
  • Has no reason to believe that its conflict minerals may have originated in the DRC Countries, or
  • Reasonably believes that its conflict minerals are from recycled or scrap sources.

Instead, the issuer is only required to disclose its determination in the Form SD along with a brief description of the reasonable country of origin inquiry it undertook in making its determination and the results of the inquiry it performed. The issuer must also disclose this information on its public website and provide a link to this website in the Form SD.

Further Supply Chain Due Diligence and Conflict Minerals Report Required. However, an issuer must proceed to Step Three and conduct due diligence on its conflict minerals’ source and chain of custody and may be required to file a Conflict Minerals Report if, based on its reasonable country of origin inquiry, the issuer:

  • Knows that it has necessary conflict minerals that originated in the DRC Countries and did not come from recycled or scrap sources, or
  • Has reason to believe that its necessary conflict minerals may have originated in the DRC Countries and may not have come from recycled or scrap sources.

Step Three—If Applicable, Conduct Further Supply Chain Due Diligence and Complete Conflict Minerals Report

Due Diligence Requirements. The objective of the further supply chain due diligence is to determine whether the necessary conflict minerals (i) are “DRC Conflict Free,” (ii) financed or benefited armed groups in the DRC countries, or (iii) are from recycled or scrap sources. An issuer’s due diligence must follow a nationally or internationally recognized due diligence framework, if such a framework is available for the specific conflict mineral.  Such a framework is required, states the SEC, in order to provide an independent private sector auditor with a structure by which to assess an issuer’s due diligence. The SEC further states that the “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” prepared by the Organization for Economic Co-operation and Development (OECD) satisfies this requirement and may be used as a framework for purposes of satisfying the final rule’s requirement that an issuer exercise due diligence in determining the source and chain of custody of its conflict minerals.

Conflict Minerals Report Required. If, as a result of its due diligence, the issuer determines that its conflict minerals did not originate in the DRC Countries or determines that its conflict minerals did come from recycled or scrap sources, a Conflict Minerals Report is not required, but the issuer must disclose its determination in its Form SD and briefly describe the reasonable country of origin inquiry and the due diligence efforts it undertook in making its determination and the results of the inquiry and due diligence efforts it performed. The issuer also must disclose this information on its public website and provide a link to this website in the Form SD. Otherwise, a Conflict Minerals Report is required to be filed as an exhibit to the Form SD and the issuer must provide the Report on its public website.

Conflict Minerals Report Contents. The Conflict Minerals Report must include:

  • A description of the measures taken to exercise due diligence on the source and chain of custody of the conflict minerals, which must include an independent private sector audit of the Conflict Minerals Report conducted in accordance with standards established by the Comptroller General of the United States,
  • A certification statement that the issuer has obtained an independent private sector audit of the Conflict Minerals Report,
  • The audit report prepared by the auditor,
  • Identification of the independent private sector auditor, and
  • Subject to the temporary “DRC Conflict Undeterminable” period described below, for any products that have not been found to be “DRC Conflict Free”, a description of those products, the facilities used to process the necessary conflict minerals in those products, the country of origin of the necessary conflict minerals in those products, and the efforts to determine the mine or location of origin with the greatest possible specificity.  Products can be described as “DRC Conflict Free” if the issuer determines that the conflict minerals in its products do not finance or benefit armed groups in the DRC Countries, or are from recycled or scrap sources.

Temporary “DRC Conflict Undeterminable” Status. During a temporary transition period of two years (four years for smaller reporting companies), if an issuer is unable to determine that its minerals meet the statutory definition of “DRC Conflict Free,” the issuer may describe their products as “DRC conflict undeterminable,” if:

  • After due diligence, they are unable to determine if their conflict minerals financed or benefited armed groups in the DRC Countries, or
  • After reasonable country of origin inquiry, they had reason to believe that their necessary conflict minerals may have originated in the DRC Countries and may not have come from recycled or scrap sources and, subsequent due diligence failed to clarify the conflict minerals’ country of origin, whether the conflict minerals financing or benefited armed groups in the DRC Countries, or whether the conflict minerals came from recycled or scrap sources.

During the transition period, such issuers with products that may be described as “DRC conflict undeterminable” are not required to have their Conflict Minerals Reports audited. However, such issuers must still file a Conflict Minerals Report describing their due diligence and describing the steps they have taken or will take, if any, since the end of the period covered in their most recent prior Conflict Minerals Report, to mitigate the risk that their necessary conflict minerals benefit armed groups, including any steps to improve due diligence. 

Action Items

Based on the proposed rules issued in December 2010, many issuers have already conducted evaluations and investigations into the minerals used in their products and minerals used by suppliers in their supply chains in order to determine the anticipated applicability of the final conflict minerals rules. If not already addressed, issuers should consider the following actions:

  • Establish an interdisciplinary conflict minerals compliance team consisting of personnel from areas such as purchasing, engineering, manufacturing, legal, etc. to be responsible for ongoing compliance with the conflict minerals rules. The conflict minerals compliance team would be responsible for developing, designing and implementing the conflict minerals compliance program within your company, conducting necessary inquiries and due diligence, compiling the necessary data and information and, if applicable, completing the Form SD and any Conflict Minerals Report.
  • Conduct an internal review and assessment to determine whether conflict minerals are contained in your products, and if so, whether such conflict minerals are “necessary to the functionality or production of products manufactured or contracted . . . to be manufactured”. 
  • If applicable, begin to plan for an assessment of the country of origin of the necessary conflict minerals in your products. Develop a process and protocol to request and confirm information from your supply chain concerning conflict minerals.
  • If applicable, begin planning for possible further supply chain due diligence inquiry that must meet a nationally or internationally recognized due diligence framework, such as the OECD due diligence framework.  Investigate available methods to determine the location and facility where conflict minerals were obtained. 
  • If you expect to have to provide a Conflict Minerals Report and to obtain an audit of the Report, begin discussions with your auditor (or commence a process to select an auditor) so that your due diligence and reporting process is developed and conducted in a manner consistent with the audit process the auditor will need to follow.
  • Maintain a good written record of the issuer's deliberations and actions in connection with all phases of its conflict minerals due diligence and decision-making process.

We also suggest that you work with any industry associations with which your company participates to take advantage of any industry initiatives to assist companies in compliance with the conflict minerals rules