On August 22, 2012, the United States Securities and Exchange Commission (SEC) adopted Rule 13p-1 and Form SD under the Securities Exchange Act of 1934, as amended, which together with adopting Release No. 34-67716, provide a three-step framework that companies must use to determine whether their products contain “Conflict Minerals” originating in the Democratic Republic of the Congo (DRC) and adjoining countries and related disclosure requirements. Issuers must comply with Rule 13p-1 with respect to the calendar year beginning January 1, 2013, with the first reports on Form SD due on May 31, 2014.

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 13(p) to the Securities Exchange Act of 1934. This provision requires the SEC to promulgate reporting requirements for issuers that use specified Conflict Minerals originating in the DRC and adjoining countries. In enacting Section 1502, Congress intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of Conflict Minerals. To accomplish this goal, Congress chose to use the securities laws disclosure requirements to bring greater public awareness to the source of Conflict Minerals used by public companies and to promote the exercise of due diligence on Conflict Mineral supply chains.1

Rule 13p-1 is applicable to all issuers that file reports under Section 13(a) or Section 15(d) of the Exchange Act, including domestic companies, smaller reporting companies and foreign private issuers.

Definitions

  • Covered Countries consist of the DRC and any country that shares an internationally recognized border with that country. These additional countries presently include Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.
  • Conflict Minerals consist of cassiterite, columbite-tantalite (coltan), gold, wolframite and their derivatives, which are limited to tantalum, tin and tungsten (unless the US Secretary of State determines that additional derivatives are financing conflict in the Covered Countries), or any other mineral or its derivatives determined by the US Secretary of State to be financing conflict in the Covered Countries. As stated in the Release, cassiterite is the metal ore that is most commonly used to produce tin, columbite-tantalite is the metal ore from which tantalum is extracted (used in electronic components, certain tools and jet engine components), and wolframite is the metal ore that is used to produce tungsten (used for metal wires, electrodes and contacts in various applications).
  • A DRC conflict free product is a product that does not contain Conflict Minerals necessary to the functionality or production of that product that directly or indirectly finance or benefit armed groups (as defined in Form SD) in the Covered Countries. Conflict Minerals that an issuer obtains from recycled or scrap sources are considered DRC conflict free.
  • A DRC conflict undeterminable product is one with respect to which the issuer is unable to determine, after exercising its required due diligence (as described below), whether or not such product qualifies as DRC conflict free.

The Three-Step Framework

Step 1: Issuers Covered by the Conflict Minerals Provision

Determination of Whether Disclosure on Form SD is Required

Analysis

As an initial matter, an issuer must determine whether Conflict Minerals are “necessary to the functionality or production of a product manufactured or contracted to be manufactured by such issuer.”

  • The term “manufacture” was deemed to be generally understood and is therefore not defined.
  • The term “contract to manufacture” is also undefined, but its applicability will depend on the degree of influence the issuer exercises over the materials, parts, ingredients or components to be included in any product that contains Conflict Minerals.
    • The Release specifies certain activities that will not be viewed as manufacturing or contracting to manufacture a product (including mining or contracting to mine Conflict Minerals, unless the issuer also engages in manufacturing, whether directly or indirectly through contract, in addition to mining).
  • Whether Conflict Minerals are “necessary” to the functionality or production of a product will depend on the issuer’s particular facts and circumstances. In making this determination, an issuer should consider the following:
    • Whether the Conflict Mineral is contained in and intentionally added to a product or component and is not a naturally occurring by-product.
    • Whether the Conflict Mineral is necessary to produce the product.
    • Whether the Conflict Mineral is necessary to the product’s generally expected function, use or purpose.
    • If the Conflict Mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.
  • The following will not be deemed “necessary”: catalysts, if the Conflict Mineral is not contained in the product; contaminants; and Conflict Minerals contained in tools or machines used to make a product and/or indirect equipment used to produce a product, such as computers and power lines.
  • There is no de minimus exception.
  • If an issuer does not meet the foregoing standard, no disclosure, report or other action is required.

Consequence

  • If any Conflict Minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by an issuer, the issuer must: (1) determine whether those Conflict Minerals originated in the Covered Countries or if they are from recycled or scrap sources; and (2) provide the SEC with a specialized disclosure report on Form SD by May 31st of each year (commencing May 31, 2014), reporting on the preceding calendar year, as described in Step 2 below.
    • Note that an issuer may delay the initial reporting period on products manufactured by an acquired company until the first calendar year beginning no sooner than eight months after the effective date of the acquisition.

Step 2: Determining Whether Conflict Minerals Originated in the Covered Countries And the Required Disclosure

Reasonable Country of Origin Inquiry (RCOI)

If an issuer determines that Conflict Minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by it, the issuer must then determine whether those Conflict Minerals originated in the Covered Countries or if they did, whether they are from recycled or scrap sources. To make this determination, the issuer must conduct in good faith a reasonable country of origin inquiry (RCOI). The following general standards are applicable to the RCOI:

Details of the RCOI

  • The RCOI must be reasonably designed to determine whether the issuer’s Conflict Minerals originated in the Covered Countries, and, if they did, whether they came from recycled or scrap sources, and must be performed in good faith.
  • An issuer will satisfy the RCOI standard if it seeks and obtains reasonably reliable representations indicating the facility at which its Conflict Minerals were processed and demonstrating that those Conflict Minerals did not originate in the Covered Countries or came from recycled or scrap sources.
    • Representations may come either directly from the processing facility or indirectly through the issuer’s immediate suppliers, but the issuer must have reason to believe these representations are true given the facts and circumstances surrounding them (for example, if a processing facility received a “conflict free” designation by a recognized industry group, or obtained an independent private sector audit that is made publicly available).
      • An issuer is not required to receive representations from all of its suppliers.2
      • Certainty is not required to satisfy the RCOI standard—conclusions can be made at the “reasonableness” level.
    • An issuer’s policies with respect to the sourcing of Conflict Minerals will generally form a part of the issuer’s RCOI, and would generally be required to be disclosed in the issuer’s Form SD, as discussed below.
    • An issuer must also take into account any applicable warning signs or other circumstances indicating that its Conflict Minerals may have originated in the Covered Countries or did not come from recycled or scrap sources.

RCOI Disclosure

  • If the issuer determines, based on its RCOI, that: (1) its necessary Conflict Minerals did not originate in the Covered Countries or did come from recycled or scrap sources, or, (2) it has no reason to believe that its necessary Conflict Minerals may have originated in the Covered Countries, or (3) based on its RCOI, it reasonably believes that its necessary Conflict Minerals are from recycled or scrap sources, the issuer is not required to exercise due diligence on its Conflict Minerals’ source or chain of custody or file a Conflict Minerals Report (described below) with respect to such Conflict Minerals. Instead, the issuer is required to disclose, in the body of a specialized disclosure report on new Exchange Act Form SD (under a separate “Conflict Minerals Disclosure” heading), its determination, and briefly describe the RCOI it undertook in making its determination and the results of the inquiry it performed to demonstrate the basis for concluding it is not required to submit a Conflict Minerals Report. The issuer is required to disclose this information on its publicly available internet website and provide a link to this website in its Form SD (under the “Conflict Minerals Disclosure” heading).

Due Diligence Requirement on Source and Chain of Custody

  • If based on its RCOI, the issuer knows that any of its necessary Conflict Minerals originated in the Covered Countries and are not from recycled or scrap sources, or has reason to believe that its necessary Conflict Minerals may have originated in the Covered Countries and has reason to believe they may not be from recycled or scrap sources, the issuer must exercise due diligence on its Conflict Minerals’ source and chain of custody.
    • Framework: The due diligence must conform to a nationally or internationally recognized due diligence framework, if such a framework is available for the Conflict Mineral. The Organisation for Economic Co-operation and Development has developed an internationally recognized system of due diligence: “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict- Affected and High-Risk Areas.”
    • Form SD: If, as a result of its due diligence, the issuer determines that its Conflict Minerals did not originate in the Covered Countries or did come from recycled or scrap sources, no Conflicts Mineral Report (discussed below) is required. However, the issuer is required, in the body of its specialized disclosure report on Form SD (under a “Conflict Minerals Disclosure” heading), to disclose its determination and briefly describe its RCOI and due diligence efforts, and the results of such inquiry and due diligence efforts, which disclosures should demonstrate why the issuer believes the Conflict Minerals did not originate in the Covered Countries or came from recycled or scrap sources. The issuer is required to disclose this information on its publicly available internet website and provide a link to such website in its Form SD (under the “Conflict Minerals Disclosure” heading).
    • Conflict Minerals Report: If, as a result of its due diligence, the issuer determines that its Conflict Minerals did originate in the Covered Countries and did not come from recycled or scrap sources, or the issuer still has reason to believe that its Conflict Minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources, the issuer must file a Conflict Minerals Report (CMR) as an exhibit to its Form SD, and provide the CMR on its publicly available internet website. The CMR must include a description of the measures the issuer has taken to exercise due diligence on the source and chain of custody of those Conflict Minerals. The issuer is also required to submit a CMR if, based on its due diligence, the issuer cannot determine the source of its Conflict Minerals. The issuer is required to disclose that it has filed a CMR (under the “Conflict Minerals Disclosure” heading) and provide a link to its internet website where the CMR is publicly available.

Step 3: Conflict Minerals Report’s Content and Supply Chain Due Diligence

  • The CMR must include a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its Conflict Minerals, which due diligence measures must include an independent private sector audit of the CMR conducted in accordance with the standards established by the Comptroller General of the United States (Audit).
  • The CMR must include a statement that that the issuer obtained an Audit (which shall constitute an Audit certification) and provide the Audit report.
  • The CMR must provide a description of the products manufactured or contracted to be manufactured that have not been found to be DRC conflict free, identify the entity that conducted the Audit (if such entity is not identified in the Audit report), and disclose the facilities used to process the Conflict Minerals (smelter or refinery), the country of origin of the Conflict Minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.
  • Any issuer that manufactures products or contracts for products to be manufactured that are DRC conflict undeterminable must disclose the steps it has taken or will take, if any, since the end of the period covered in its most recent prior CMR to mitigate the risk that its necessary Conflict Minerals benefit armed groups, including any steps to improve its due diligence.

Recycled and Scrap Minerals

  • If an issuer has reason to believe, as a result of its RCOI, that its Conflict Minerals may have originated in the Covered Countries and may not have been from recycled or scrap sources, it must exercise due diligence. If it is unable to determine that the Conflict Minerals came from recycled or scrap sources, it would then be required to provide a CMR.
  • Recycled and scrap minerals are defined as recycled metals, which are reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing, and include excess, obsolete, defective, and scrap metal materials that contain refined or processed metals that are appropriate to recycle in the production of tin, tantalum, tungsten and/or gold.
  • Minerals partially processed, unprocessed, or a by-product from another ore will not be included in the definition of recycled metal.
  • An issuer must utilize a nationally or internationally recognized due diligence framework if and when available. If no such framework exists, an Audit will not be required for the section of the CMR pertaining to due diligence on that recycled or scrap Conflict Mineral.

Independent Private Sector Audit of Conflict Minerals Report

The objective of the Audit is to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures, as set forth in, and with respect to the period covered by, the CMR, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and whether the issuer’s description of the due diligence measures it performed as set forth in the CMR, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook.

  • The Audit is to use existing government auditing standards (GAGAS).
  • The entities performing the Audit of the CMR must comply with any independence standards established by the US Government Accountability Office.
  • An issuer’s independent public accountant may also perform the Audit—this will be considered a non-audit service subject to audit committee pre-approval requirements; fees should be included in the “All Other Fee” category of principal accountant fee disclosures.

Temporary Period Provisions/DRC Conflict Undeterminable

  • The temporary provisions described below are available to all issuers for the first two years of reporting and to smaller reporting companies for the first four years of reporting (Temporary Period).
  • During the Temporary Period, issuers will be permitted to describe their products as “DRC conflict undeterminable” if the products conform to the applicable definition.
  • The issuer must conduct due diligence and prepare and file a CMR describing the products, its due diligence, the steps it has taken or will take, if any, since the end of the period covered in its most recent CMR, to mitigate the risk that its necessary Conflict Minerals benefit armed groups (including any steps to improve its due diligence), describing the country of origin of the Conflict Minerals, if known, the facilities used to process the Conflict Minerals, if known, and the efforts to determine the mine or location of origin with the greatest possible specificity, if applicable. An Audit of the CMR will not be required.
  • After the Temporary Period, if an issuer is unable to determine that its Conflict Minerals did not originate in the Covered Countries, that such Conflict Minerals originating in the Covered Countries did not directly or indirectly finance or benefit armed groups, or that such Conflict Minerals did not come from recycled or scrap sources, the issuer must provide a CMR that describes products containing those Conflict Minerals as having “not been found to be DRC conflict free,” and must provide an Audit of this CMR. An issuer is permitted to add disclosure or clarification to this designation.

Also Noteworthy

  • The Release states that issuers whose Conflict Minerals did not finance or benefit armed groups may describe their products containing those minerals as “DRC conflict free” in their specialized report, provided that the issuer is able to determine on the basis of due diligence conducted in accordance with a nationally or internationally recognized due diligence framework that such products are “DRC conflict free” as defined.
  • Form SD exempts any Conflict Minerals that are “outside the supply chain” prior to January 31, 2013, i.e., after any columbite-tantalite, cassiterite and wolframite minerals have been smelted; after gold has been fully refined; or after any Conflict Mineral that has not been smelted or fully refined is located outside of the Covered Countries.
  • An issuer must make its ConflictMinerals disclosure or its CMR available on its internet website for one year.
  • The specialized disclosures and the CMR will cover the calendar year regardless of the issuer’s fiscal yearend, and the specialized disclosure report covering the prior year must be provided each year by May 31st.  Form SD, including any CMR and Audit reports, will be “filed” under the Exchange Act and thereby subject to potential Exchange Act Section 18 liability.
  • An issuer must provide its Conflict Minerals information for the calendar year in which the manufacture of a product that contains any Conflict Minerals is completed, irrespective of whether the issuer manufactures the product or contracts to have the product manufactured.
  • The SEC is also requiring issuers to disclose certain resource extraction payment information on Form SD.

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