“Conflict Minerals” are the latest subject of the Securities Exchange Commission’s (“SEC”) efforts to beef-up disclosure obligations of publicly traded companies. New rules, proposed by the SEC on December 15, 2010, would require disclosures about the use of conflict minerals in manufactured products. See 75 Fed. Reg. 80948 (Dec. 23, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63547fr.pdf. These new disclosure rules were mandated by the Dodd-Frank Financial Reform Act (the “Act”), which was passed by Congress in July 2010. Under the Act, conflict minerals are defined as columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives such as tantalum, tungsten, and tin, or any other minerals that the Secretary of State determines help to finance the conflict in the Democratic Republic of Congo (“DRC”) and adjoining countries.1 Conflict minerals are used in a wide assortment of products, including mobile telephones, televisions, laptop computers, digital cameras, digital video recorders, and jewelry.
The SEC’s proposed rules would require that public companies report whether any of the products they manufacture2 or contract to be manufactured3 contain conflict minerals “necessary to the functionality or production”4 of such products, which originate in the DRC or an adjoining country. SEC advises that due diligence will be required to determine the source and chain-of-custody of any potential conflict minerals, including “performing investigative measures that a reasonably prudent person would perform in the management of his or her own property.” A company that concludes, after conducting due diligence, that its products contain necessary conflict minerals that did not originate in the DRC or adjoining countries, must disclose this “DRC conflict free” determination on its company Web site and in its annual SEC report. The annual SEC report would also have to include a description of the “reasonable” process by which the reporting company determined the country of origin of its “DRC conflict free” conflict minerals.
If, alternatively, a company determines that its products contain necessary conflict minerals that in fact originated in the DRC or adjoining countries (or if it cannot definitively conclude that its conflict minerals did not originate in the DRC countries), then that company must prepare a Conflict Minerals Report. The Conflict Minerals Report should: (1) identify the country of origin (or specify that the country of origin is not known) and chain-of-custody; (2) describe the products manufactured or contracted to be manufactured that contain conflict minerals that are not “DRC conflict free” (or that cannot be definitively determined to be “DRC conflict free”); (3) identify the facilities used to process the conflict minerals; and (4) describe the efforts to determine the mine or location of origin with the greatest possible specificity. The Conflict Minerals Report must be audited by an independent auditor, and both the Conflict Minerals Report and the audit report should be appended to the annual SEC report. All reports required by the proposed conflict minerals disclosure rules must be made available to the public on a company Web site.
The proposed rules are currently open for public comment until March 2, 2011. While the SEC has not stated when it plans to finalize the proposed rules, it is required under the Act to issue final rules no later than April 15, 2011 (270 days after the date of the Act’s enactment).