On December 15, 2010, the U.S. Securities Exchange Commission (SEC) issued a proposed rule implementing the provisions of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).1 Section 1502 of the Dodd-Frank Act imposes new reporting requirements on companies who manufacture, or contract to manufacture, products that use the following "conflict minerals" or their derivatives in their products:2
- columbite-tantalite (coltan),
- gold, or
Cassiterite is the most significant source of tin, whereas wolframite is the primary source of the metal tungsten. Products that typically use these minerals include jewelry, computers, mobile telephones, digital cameras, light bulbs, videogame consoles, and electronic and communications equipment.
The new disclosure requirements will apply to companies subject to the reporting requirements of the SEC under the Securities Exchange Act of 1934, as amended. This includes foreign issuers that file annual reports with the SEC on Form 20-F or Form 40-F. Specifically, Section 1502 of the Dodd-Frank Act provides that reporting companies who use any of these conflict minerals in their products must disclose the following in their annual report to the SEC:
- whether those conflict minerals are necessary to the functionality or production of the product; and
- whether those conflict minerals originated in the Democratic Republic of the Congo (DRC) or an adjoining country.3
The SEC's proposed rules provide that companies subject to the conflict minerals provision must provide their disclosure as to whether the conflict minerals originated in the DRC or an adjoining country in their annual reports on Form 10-K, 20-F or 40-F. These disclosures must be based on a "reasonable country of origin inquiry." If a company concludes, after its reasonable inquiry, that the minerals did not originate in the DRC or its adjoining countries, then the company must disclose its conclusion and a description of the inquiry, both in its annual report and on its company website.
If the company determines that the conflict minerals did originate in the DRC or an adjoining country (or that it cannot determine the origin of the minerals or obtains minerals from recycled or scrap sources4), the company must file with the SEC and publish on its company website the following disclosures (referred to as the "Conflict Minerals Report"):
- a description of the measures taken by the company to exercise due diligence on the source and chain of custody of the minerals, including through the use of an independent private sector audit;
- a description of the products manufactured that are not "DRC conflict free." ("DRC conflict free" means that the products do not contain minerals that directly or indirectly finance or benefit armed groups in the Congo or an adjoining country);
- the entity that conducted the private sector audit;
- the facilities used to process the conflict minerals;
- the country of origin of the conflict minerals; and
- the efforts to determine the mine or location of origin with the greatest possible specificity.
In enacting Section 1502, Congress sought to remedy its concern "that the exploitation and trade of conflict minerals originating in the DRC is helping to finance conflict characterized by extreme levels of violence in the eastern DRC, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein." The SEC has requested comments on several aspects of its proposed rules, and the comment period for the proposed rule expires on January 31, 2011. The disclosure requirements of Section 1502 will not become effective until after the SEC adopts a final rule and will apply to the annual report for the fiscal year that begins after the adoption of the final rule. Pursuant to the Act, the SEC has until April 17, 2011 to enact regulations implementing and administering Section 1502.
The Section 1502 disclosure requirements will continue until the president determines that no armed groups continue to be directly involved and benefiting from conflict minerals, but in any event will not be terminated before July 20, 2015. The comptroller general is charged with evaluating the statute's effectiveness in promoting peace and security in the DRC and its adjoining countries on an annual basis, beginning July 20, 2012.
Actions to Be Taken by Companies Subject to the Act
Companies potentially subject to Section 1502 must be prepared to comply with these disclosure requirements as part of their annual reports for the fiscal year that begins after the final rule is adopted. In preparation for these disclosure requirements, such companies will need to determine whether any products they manufacture or contract to manufacture utilize any of the conflict minerals identified. If conflict minerals are used, the company should begin to identify the steps that it will take to support its "reasonable country of origin inquiry." If the reasonable inquiry suggests that a Conflict Minerals Report is required, the company will need to identify a private sector third-party auditor and establish a process to determine the source and chain of custody of those minerals.