The Securities and Exchange Commission (the “SEC”) has implemented Congress’ initiative to use disclosure requirements of U.S. securities laws to inhibit the ability of armed groups in the Democratic Republic of the Congo to fund their activities through the exploitation of trade in conflict minerals.
On August 22, 2012, the SEC adopted its final rule requiring issuers that (i) file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (ii) manufacture or contract to manufacture products in which conflict minerals are necessary to the functionality or production of the product to file a report on new Form SD disclosing annually the company’s use of conflict minerals and whether such minerals originated in the Democratic Republic of the Congo (the “DRC”) or an adjoining country.
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated adoption of this rule to address concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance the conflict in the DRC region and furthering an emerging humanitarian crisis.
Conflict minerals include: (i) columbite-tantalite, also known as coltran, which is the metal ore from which tantalum is extracted (tantalum is used in electronic components, including mobile telephones, computers, videogame consoles and digital cameras and as an alloy for making carbide tools and jet engine components); (ii) cassiterite (the metal ore from which tin is extracted and which is used in alloys, tin-plating and solders for joining pipes and electronic circuits); (iii) gold; (iv) wolframite (the metal ore from which tungsten is extracted); (v) derivatives of the foregoing minerals; or (vi) any other mineral or derivative thereof determined by the Secretary of State to be financing conflict in the DRC or adjoining countries.
A company will be required to file a Form SD with the SEC if it meets the following criteria:
- The company files reports with the SEC under the Exchange Act; and
- Conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.
For a conflict mineral to be considered “necessary to the production” of a product, the mineral must be both contained in the product and necessary to the product’s production.
Whether a company is considered to be “contracting to manufacture” is a facts and circumstances determination based on the degree of influence the company has over the product’s manufacturing. A company is considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. If a company simply (i) specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, (ii) affixes its brand, marks, logo, or label to a generic product manufactured by a third party, or (iii) services, maintains, or repairs a product manufactured by a third party, it will not be considered to “contract to manufacture” a product.
An issuer that mines conflict minerals will not be treated as one who manufacturers those minerals unless the issuer also engages in manufacturing, and the final rules exempt any conflict minerals that were “outside the supply chain” (i.e., conflict minerals outside of the covered countries or smelted or fully refined) prior to January 31, 2013.
Requirements. Companies for which conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company will first be required to file a Form SD on June 2, 20141 (for the calendar year 2013) and then annually on each May 31. Disclosures under Form SD will be deemed “filed” with the SEC and, therefore, subject to liability under Section 18 of the Exchange Act.
Content of Form SD. If a company must file Form SD, it must conduct, in good faith, a reasonable “country of origin” inquiry that is designed to determine if the minerals originated in the DRC or an adjoining country or are from scrap or recycled sources. The company must disclose these results on Form SD.
If the company determines that the minerals did not originate in the covered countries or are from recycled or scrap sources, or if the company has no reason to believe that the minerals may have originated in the covered countries or the company reasonably believes that such minerals came from recycled or scrap sources, then it must disclose this determination and describe the reasonable country of origin inquiry it undertook and results on Form SD. This information must also be disclosed on the company’s website, and the company must provide a link to the website address in the Form SD.
If the company knows or has reason to believe that the minerals may have originated in the covered countries, or the company knows or has reason to believe that the minerals may not be from recycled or scrap sources, then the company must exercise “due diligence” on the source and chain of custody of its conflict minerals and, unless the company determines that the conflict minerals did not originate in the DRC or did come from recycled or scrap sources, file a Conflict Minerals Report as an exhibit to the Form SD.
Conflict Minerals Report. The Conflict Minerals Report requires companies to exercise due diligence on the source and chain of custody of their conflict minerals based on a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development (OECD). If the products are determined to be “DRC conflict free,” meaning the minerals may originate from the covered countries but did not finance or benefit armed groups, the company must undertake certain audit and certification requirements. If the products are not determined to be “DRC conflict free,” then it must undertake the audit and certification requirements and provide additional information regarding the product, its processing facilities, the country of origin and efforts made to determine the mine or location of origin.
During a temporary period of two years (four in the case of smaller reporting companies), a company that is unable to determine whether conflict minerals in its products originated in the covered countries or financed or benefited armed groups in those countries or that its conflict minerals came from recycled or scrap sources, may consider their products to be “DRC conflict undeterminable.” If the products are “DRC conflict undeterminable,” then the company must provide additional information regarding the products, the country of origin, if known, the facilities used to process the conflict minerals, if known, efforts made to determine the mine or location of origin and steps it has taken or will take, if any, since the end of the period covered in its most recent Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve due diligence. During the temporary period, no private sector audit of the Conflict Minerals Report will be required.
Minerals from Recycled or Scrap Sources. There are special rules governing the due diligence and Conflict Minerals Report for minerals from recycled or scrap sources. If a company’s conflict minerals are derived from recycled or scrap sources rather than from mined sources, the company’s products containing such minerals are considered “DRC conflict free.”
If a company cannot reasonably conclude after its inquiry that its gold is from recycled or scrap sources, then it is required to undertake due diligence in accordance with the OECD Due Diligence Guidance, and obtain an audit of its Conflict Minerals Report. Currently, gold is the only conflict mineral with a nationally or internationally recognized due diligence framework for determining whether it is recycled or scrap, which is part of the OECD Due Diligence Guidance. For cassiterite, columbite-tantalite and wolframite, if a company cannot reasonably conclude after its inquiry that its minerals are from recycled or scrap sources, until a due diligence framework is developed, the company is required to describe the due diligence measures it exercised in determining that its conflict minerals are from recycled or scrap sources in its Conflict Minerals Report. Such a company is not required to obtain an independent private sector audit regarding such conflict minerals.