On August 22, 2012, the Securities and Exchange Commission (SEC) approved two final rules imposing new disclosure requirements on publicly-traded companies that use "conflict minerals," or are involved in the commercial development of oil, natural gas or minerals and making payments to governments. The first rule requires publicly-traded companies to disclose certain conflict minerals or derivatives used in their production processes. These disclosure requirements could affect a broad spectrum of companies and numerous product markets: e.g., consumer electronics, medical equipment, high-speed tools, machine parts, glass and lamps. The second rule requires disclosure by oil, gas, and minerals companies of certain payments to non-U.S. governments or to the U.S. federal government.
Both reporting requirements were established under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in July 2010 but did not take effect until the SEC finished its rulemaking process. The SEC estimates that thousands of companies will be subject to the disclosure requirements. Further, the SEC estimates that the conflict minerals rule will impose $3-4 billion in compliance costs on companies, and that the rule requiring disclosure of government payments will impose upwards of $1 billion dollars in compliance costs.
Conflict Minerals Rule
Companies subject to or affected by the reporting requirements
Under the SEC's final rule, the reporting requirements apply to companies using so-called conflict minerals, i.e., columbite-tantalite, cassiterite, gold, wolframite or their derivatives in products or their production process. Cassiterite is commonly used in producing tin, such as for joining pipes and electronic circuits. Columbite-tantalite is the ore from which tantalum is extracted. Tantalum is commonly used in electronic components, computers, videogame consoles, digital cameras, carbide tools and jet engine components. Gold is also commonly used in electronic, communications and aerospace equipment. Wolframite is the ore used to produce tungsten, which is used in metal wires, electrodes, and in lighting, electronic, electrical, heating and welding applications.
The reporting requirement only applies for publicly-traded companies using minerals that are "necessary to the functionality or production of a product manufactured by such person." Dodd-Frank stipulated that the reporting requirements also applied to entities contracting for the manufacture of products using the listed conflicts minerals. However, the final rule clarifies that companies will not be required to disclose the use of such minerals if they do not exercise influence over the manufacturing of an item. Thus, companies that, for example, merely affix their brand to a manufactured item, or repair a product manufactured by a third party are not subject to the disclosure requirements.
Many companies that are not subject to the disclosure requirements will, nonetheless, be affected by the final rule. For example, any upstream supplier of a publicly-traded company using minerals in its production process will likely be called upon to document the country or origin and chain of custody of the minerals. In short, entire supply chains for the listed minerals, including the non-U.S. companies in those supply chains, will be affected by the final rule.
Due diligence to ascertain the origin of the conflict minerals
Under the final rule, companies subject to the reporting requirements must conduct a "reasonable country of origin inquiry" to determine whether the minerals it uses are from the DRC or surrounding countries (i.e., Angola, Burundi, Central African Republic, Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia) (DRC countries). The final rule declines to define what constitutes a reasonable country-of-origin inquiry, other than to say that the inquiry must be in good faith and be reasonably designed to determine whether any of the minerals originated from DRC countries. The final rule clarifies, however, that scrap or recycled minerals are deemed to be conflict-free minerals.
If a company knows its minerals are not originating from DRC countries or has no reason to believe its minerals may have originated from DRC countries, the inquiry is over. Similarly, if a company knows its minerals are from scrap or recycled sources, or has no reason to believe the minerals may not be from scrap or recycled sources, the inquiry is over. If, however, a company knows or has reason to believe it obtains minerals from DRC countries, and the company knows or has reason to believe its minerals are not from scrap or recycled sources, the company must prepare a more detailed Conflict Minerals Report.
Public disclosure of findings and conflict minerals reports
If a company determines that either it obtains minerals from a non-DRC country or that its minerals are from scrap or recycled sources, the company must only disclose this finding in the new "Form SD." This form requires a brief description of the company's due diligence efforts and the results of those efforts. In addition, the company must make its findings available on its website.
If, however, a company determines that its minerals are from DRC countries (and not scrap or recycled), the company must prepare a "Conflict Minerals Report." This report must declare the minerals are one of the following: "DRC Conflict Free," "Not Been Found to Be DRC Conflict Free," or "DRC Conflict Undeterminable." Companies are permitted to declare minerals as "DRC Conflict Undeterminable" for the initial period of two years (or four years for smaller reporting companies). In preparing the Conflict Minerals Report, a company must show that it used nationally or internationally recognized due diligence measures to determine the source of its minerals. In addition, companies declaring that the minerals are "DRC Conflict Free" must obtain an independent private sector audit of their Conflict Minerals Report.
Timing for filing disclosure
The first disclosures under the conflict minerals rule are due by May 31, 2014, for calendar year of 2013.
Disclosure of Payments to Governments
Companies subject to reporting requirement
The SEC also approved last week a final rule requiring publicly-traded companies involved in the oil, natural gas, or minerals sectors to disclose certain payments made by the company, or entities controlled by the company (e.g., a subsidiary) to non-U.S. governments or the U.S. federal government. This requirement applies to all companies required to file an annual report with the SEC and which are involved in the commercial development of oil, natural gas or minerals. The term "commercial development of oil, natural gas or minerals" includes exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals or licensing associated with those activities.
Types of payments covered
Many kinds of payments to the government must be reported, including taxes, royalties, fees, production entitlements, bonuses, dividends and infrastructure improvements. Payments that are de minimis - which the final rule defines as payments (whether single payments, or a series of related payments) that do not equal or exceed $100,000 - do not need to be reported. If a payment is subject to the reporting requirements, companies must disclose, among other details, the amount of the payment, the recipient and for which project the payment was made.
Timing for filing disclosure report
The disclosure is required to be filed within 150 days after the end of a company's fiscal year. The new rules begin to apply for any fiscal year ending after September 30, 2013 (i.e., a company whose fiscal year ends October 31 would be required to prepare a report disclosing payments made from November 1, 2012 through October 31, 2013).