The US Securities and Exchange Commission (the "SEC") has adopted new rules to implement Section 13(p) of the US Securities Exchange Act of 1934 (the "Exchange Act"), which was added by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act").
New Exchange Act Rule 13p-1 and Form SD require companies reporting under the Exchange Act to disclose their use of certain "conflict minerals," including tantalum, tin, gold and tungsten.1 The new rule requires issuers that are subject to conflict mineral disclosures to conduct a country of origin inquiry to determine whether its conflict minerals originated in the Democratic Republic of the Congo ("DRC") or an adjoining country2 (together with the DRC, the "Covered Countries") or are from scrap or recycled sources, and depending on the results of such inquiry, to conduct due diligence on the source and chain of custody of its conflict minerals and obtain an audit of its conflict minerals report.
Applicability and Scope
A company is required to provide conflict mineral disclosure if (i) it is a reporting issuer under Section 13(a) or 15(d) of the Exchange Act, and (ii) conflict minerals are necessary to the functionality or production of its products that it manufactures or contracts to manufacture. The new rule applies to all such issuers, including smaller reporting companies, non-US companies that qualify as "foreign private issuers" and Canadian issuers that file under the Multijurisdictional Disclosure System.
All issuers that are required to provide conflict mineral disclosure must do so in new Form SD and file the Form SD on or before May 31, 2014 (for the 2013 calendar year) and on or before May 31 annually thereafter.
Disclosure to Be Filed not Furnished
The conflict mineral disclosure on Form SD will be considered "filed" with the SEC and therefore subject to liability under Section 18 of the Exchange Act for material misstatements or omissions. This characterization is a change from the SEC's December 15, 2010 proposed rule, which originally provided that the required disclosure only would be deemed "furnished" to the SEC and therefore not subject to heightened liability under Section 18. However, consistent with the proposed version, the conflict mineral disclosure is not required to and will not be deemed to be incorporated by reference into other SEC filings unless the issuer does so affirmatively. The conflict mineral disclosure is also not subject to the annual officer certifications under the Exchange Act.
"Necessary to Functionality or Production" and "Contract to Manufacture"
If conflict minerals are necessary to the functionality or production of a product that an issuer manufactures or contracts to manufacture, such issuer must, at a minimum, perform a reasonable country of origin inquiry, as further discussed below.
While the rule does not define the phrases "necessary to functionality" and "necessary to production," in adopting the rule, the SEC indicated that, in determining whether conflict minerals are necessary to the functionality of a product, an issuer should consider (i) whether a conflict mineral is contained in and intentionally added to the product or any component of the product and is not a naturally-occurring by-product; (ii) whether a conflict mineral is necessary to the product's generally expected function, use or purpose; or (iii) if a 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 conflict minerals are "necessary to the production" of a product, an issuer should consider whether a conflict mineral is contained in the product and intentionally added in the product's production process, including the production process of any component of the product, and whether the conflict mineral is necessary to produce the product.
Similarly, while the rule does not define the phrase "contract to manufacture," in adopting the rule, the SEC indicated that an issuer would not be viewed as contracting to manufacture a product if its actions involve no more than (i) specifying or negotiating contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, unless the issuer specifies or negotiates taking these actions so as to exercise a degree of influence over the manufacturing of the product that is practically equivalent to contracting on terms that directly relate to the manufacturing of the product; (ii) affixing its brand, marks, logo, or label to a generic product manufactured by a third party; or (iii) servicing, maintaining, or repairing a product manufactured by a third party.
In addition, in adopting the rule, the SEC clarified that issuers that mine or contract to mine conflict minerals are not deemed to be "manufacturing or contracting to manufacture" unless such mining issuer engages in manufacturing, either directly or indirectly, in addition to mining.
Reasonable Country of Origin Inquiry
Issuers subject to the new rule are required to conduct a reasonable country of origin inquiry of their conflict minerals, except for conflict minerals that are outside of the supply chain prior to January 31, 2013. The inquiry must be (i) conducted in good faith and (ii) reasonably designed to determine whether any of its conflict minerals originated in the Covered Countries or are from scrap or recycled sources. Conflict minerals are deemed outside the supply chain prior to January 31, 2013 if such conflict minerals have been smelted or refined, or if not smelt or refined, are physically located outside the Covered Countries, in each case, prior to January 31, 2013.
If, after conducting the country of origin inquiry, the issuer determines that the minerals did not originate in the Covered Countries or are from scrap or recycled sources, or the issuer has no reason to believe that the minerals may have originated in the Covered Countries or reasonably believes that the minerals are from scrap or recycled sources, then the issuer must disclose its determination and provide a brief description of the inquiry it undertook and the results of the inquiry on Form SD. The issuer must also make its description publicly available on its website and provide the internet address of that site in the Form SD.
Due Diligence and Conflict Minerals Report
After conducting the country of origin inquiry, if the issuer determines or has reason to believe that the minerals may have originated in the Covered Countries or determines or has reason to believe that the minerals may not be from scrap or recycled sources, then the issuer must undertake due diligence on the source and chain of custody of its conflict minerals. Due diligence measures must conform to nationally or internationally recognized methodologies for due diligence, such as guidance developed by the Organisation for Economic Co-operation and Development ("OECD"). In addition, the issuer must file a conflict minerals report, which describes the measures the issuer has taken to exercise due diligence on the source and chain of custody of its conflict minerals, as an exhibit to the Form SD. The issuer must also make publicly available the conflict minerals report on its internet website and provide the internet address of that site on Form SD.
Determining That Products Are "DRC Conflict Free"
An issuer may determine that its products are "DRC Conflict Free" even if conflict minerals are necessary to a product's functionality or production, and such conflict minerals originated from the Covered Countries, but only if such conflict minerals did not directly or indirectly finance or benefit armed groups in the Covered Countries.
Audit and Certification Requirements
If the issuer determines that its products are "DRC Conflict Free," then the issuer is required, in addition to filing a conflict minerals report, to take several audit and certification steps. First, the issuer must obtain an independent private sector audit of its conflict minerals report. The issuer must then certify that it obtained such an audit. The issuer must include the audit report as part of the conflict minerals report, and the issuer must identify the auditor in the report.
Minerals not Found to Be "DRC Conflict Free"
If the issuer's products are not found to be "DRC Conflict Free," in addition to filing a conflict minerals report and the audit and certification requirements noted above applicable to issuers whose products are "DRC Conflict Free," the issuer also must describe in its conflict minerals report (i) the products manufactured or contracted to be manufactured that have not been found to be "DRC Conflict Free," (ii) the facilities used to process the conflict minerals in those products, (iii) the country of origin of the conflict minerals in those products and (iv) the efforts to determine the mine or location of origin with the greatest possible specificity.
Minerals That Are "DRC Conflict Undeterminable"
For a temporary period of the first two years following adoption of the new rule (or, for smaller reporting companies, a temporary four-year period), if the issuer is unable to determine whether the conflict minerals in its products originated in the Covered Countries or financed or benefited armed groups in those countries, then an issuer may describe such products as "DRC Conflict Undeterminable." For those products that are "DRC Conflict Undeterminable," the issuer is not required to obtain an independent private sector audit of the conflict minerals report regarding the conflict minerals in those products. However, an issuer is still required to file a Form SD, including a conflict minerals report with respect to such products that are "DRC Conflict Undeterminable." This report must describe (i) the specific products manufactured or contracted to be manufactured that are "DRC Conflict Undeterminable," (ii) the facilities used to process the conflict minerals in those products, if known, (iii) the country of origin of the conflict minerals in those products, if known, (iv) the issuer's efforts to determine the mine or location of origin with the greatest possible specificity, and (v) the 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.
Special Rules for Recycled or Scrap Sources
Conflict minerals are deemed to be from recycled or scrap sources if they are reclaimed from end-user or post-consumer products, or scrap processed metals created during product manufacturing and includes excess, obsolete, defective, and scrap metal materials which contain refined or processed metals that are appropriate to recycle in the production of tin, tantalum, tungsten and/or gold, but excludes minerals partially processed, unprocessed or a by-product from another ore.
Special rules govern due diligence for conflict minerals from recycled or scrap sources. The rule requires issuers exercising due diligence regarding whether their conflict minerals are from recycled or scrap sources to conform their due diligence to a nationally or internationally recognized due diligence framework, if one is available for a particular recycled or scrap conflict mineral. The OECD has approved a gold supplement to its due diligence guidance, and this gold supplement is presently the only nationally or internationally recognized due diligence framework for any conflict mineral from recycled or scrap sources. Issuers with conflict minerals without a nationally or internationally recognized due diligence framework are still required to exercise due diligence in determining that their conflict minerals were from recycled or scrap sources.
The new conflict mineral disclosure rule has wide-ranging compliance implications for issuers that are required to file conflict mineral disclosures. Issuers that may be subject to disclosure requirements but have not already begun to establish a compliance and due diligence management framework should consider doing so. The time, effort and resources needed with product component identification, supply chain mapping, data collection, country of origin inquiry, due diligence and preparation of disclosure under the Form SD and, if required, the conflict mineral report will be significant for many issuers.