On August 22, 2012, the SEC adopted a rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires issuers to conduct a good faith reasonable country of origin inquiry and publicly disclose their use of conflict minerals originating in the Democratic Republic of Congo (DRC) or an adjoining country (together with the DRC, Covered Countries). The rule in a new Section 13(p) of the Exchange Act and requires issuers to make the disclosure on a new Form SD. Under the rule, issuers filing reports with the SEC under the Exchange Act will be required to disclose the use of tantalum, tin, gold or tungsten if those minerals are "necessary to the functionality or production of a product" manufactured by or contracted to be manufactured by
Issuers governed by the rule must make their first disclosure at the same time — by May 31, 2014 for the 2013 calendar year and annually by May 31 every year thereafter — regardless of when their fiscal year ends.
The rule does not define "contracting to manufacture," "necessary to the functionality" of a product, or "necessary to the production" of a product; however the SEC provides guidance on these terms. For example, the SEC guidance stated that whether an issuer will be considered to "contract to manufacture" a product depends on "the degree of influence it exercises over the materials, parts, ingredients or components to be included in any product that contains conflict minerals or their derivatives." According to the guidance, the following actions will not be deemed to be contracting to manufacture a product:
- the issuer specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product (unless it 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)
- the issuer affixes its brand, marks, logo or label to a generic product manufactured by a third party
the issuer services, maintains or repairs a product manufactured by a third party
The SEC guidance also discusses factors for determining whether a conflict mineral is "necessary to the functionality" or "necessary to the production of a product."
Under the final rule, issuers using any of the designated minerals are required to conduct a reasonable good faith country of origin inquiry to determine whether such minerals originated in a Covered Country, or whether such minerals originated from scrap or recycled sources. The issuer is required to make a disclosure of its determination and briefly describe its inquiry and the results of the inquiry if either of the following is true:
- the issuer determines that its necessary conflict minerals did not originate in a Covered Country or did come from recycled or scrap sources
the issuer has no reason to believe that its necessary conflict minerals may have originated in a Covered Country or it reasonably believes that its necessary conflict minerals did come from recycled or scrap sources
The issuer must make the above disclosure on its publicly available website and under a separate heading to Form SD entitled "Conflict Mineral Disclosure," and provide a link to that website.
Alternatively, if the inquiry otherwise determines both of the following to be true:
the issuer knows or has reason to believe that any of its necessary conflict minerals originated in a Covered Country
the issuer knows or has reason to believe that any of its necessary conflict minerals are not from recycled or scrap sources
Then the issuer must undertake due diligence on the source and chain of custody of its conflict mineral that conforms to a nationally or internationally recognized due diligence framework, and file a Conflict Minerals Report as an exhibit to Form SD. The issuer must make the Conflict Minerals Report publicly available on its website and under a separate heading to Form SD entitled "Conflict Mineral Disclosure," provide a link to that website.
A Conflict Minerals Report must include the following:
Due Diligence. The report must describe the measures the issuer has taken to exercise due diligence on the source and chain of custody of the conflict minerals. The due diligence must conform to a nationally or internationally recognized due diligence framework if available, such as that approved by the Organisation for Economic Co-Operation and Development (OECD). Due diligence shall 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.
Product Description. The report must describe the product as one of the following categories of conflict minerals:
- DRC Conflict Free. Minerals may originate from a Covered Country or from recycled or scrap sources but minerals do not directly or indirectly finance or benefit armed groups of a Covered Country. If an issuer determines minerals are DRC Conflict Free, the issuer must do the following:
- obtain an independent private sector audit of its Conflict Minerals Report
- certify that it obtained such an audit
- include the audit report as part of the Conflict Minerals Report
identify the auditor
- Products not found to be DRC Conflict Free. In addition to the above disclosure, if an issuer determines that necessary conflict minerals are not DRC Conflict Free, then it must also describe the following:
- the products manufactured or contracted to be manufactured that have not been found to be DRC Conflict Free
- the facilities used to process the conflict minerals in those products
- the country of origin of the conflict minerals in those products
the efforts used to determine the mine or location of origin with the greatest possible specificity
DRC Conflict Undeterminable. For a temporary four-year period for smaller reporting companies and a two-year period for all other issuers, issuers that are unable to determine whether their necessary conflict minerals are DRC Conflict Free, must describe the following in their Conflict Minerals Report:
- products manufactured or contracted to be manufactured that are DRC Conflict Undeterminable
- the facilities used to process such conflict minerals
- the country of origin of the conflict minerals, if known
- the efforts used to determine the mine or location of origin with the greatest possible specificity
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
An independent private sector audit is not required regarding DRC Conflict Indeterminable products.
- Recycled or Scrap Due Diligence. Conflict minerals from scrap or recycled sources are governed by special rules. Such minerals are considered "DRC Conflict Free." If an issuer does not reasonably determine that its necessary conflict minerals are from recycled or scrap sources, then it is required to undertake due diligence in accordance with nationally or internationally recognized due diligence standards. Currently, gold is the only conflict mineral with a nationally or internationally recognized due diligence framework (part of the OECD Due Diligence Guidance) for determining whether it is recycled or scrap. Because there is no such recognized standard for the other three minerals, if an issuer cannot reasonably determine that those minerals are from scrap or recycled sources, it must describe the due diligence process in its Conflict Minerals Report. The issuer is not required to obtain a private sector audit regarding such conflict minerals.