On August 25, 2012, the U.S. Securities and Exchange Commission (SEC) adopted a final rule implementing § 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1502 requires persons who manufacture any products with certain minerals, known as “conflict minerals,” that are necessary to the functionality or production of the product to annually disclose whether such conflict minerals originated in the Democratic Republic of the Congo (DRC) or an adjoining country (the “Covered Countries”). Conflict minerals are those minerals or their derivatives that are determined to be financing conflict in the Covered Countries, and by requiring disclosure of the source of conflict minerals, Congress intended to further the goal of ending the conflict. Persons required to make such disclosures must file a report with the SEC describing the measures taken by the issuer to exercise due diligence on the source and chain of custody of such minerals and describing those products manufactured or contracted to be manufactured by the issuer that are not “DRC conflict free.”
The final rule implementing these requirements (the “Conflict Minerals Rule”) provides the following three-step framework for evaluating whether a company must make this disclosure: (1) initial determination; (2) reasonable country of origin inquiry; and (3) supply chain due diligence and Conflict Minerals Report. The Conflict Minerals Rule also provides new Form SD to enable a company to make the required disclosures
Step 1 – Initial Determination
A company is subject to the Conflict Minerals Rule if it: (1) files reports under § 13(a) or § 15(d) of the Exchange Act; and (2) manufactures or contracts to manufacture products with conflict minerals that are necessary to the functionality or production of the product. Conflict minerals are:
- columbite-tantalite (coltan);
- their derivatives, which are limited to tantalum, tin, and tungsten; and
- any other mineral or its derivatives determined by the U.S. Secretary of State to be financing conflict in the Covered Countries.
A company that only services, maintains or repairs a product containing conflict minerals is not manufacturing a product for purposes of the requirements. Additionally, a company that mines conflict minerals is not considered to be manufacturing under this rule. A company may be contracting to manufacture a product based on the degree of influence it exerts over the materials, parts, ingredients or components to be included in the products that contain conflict minerals; however, a company whose actions involve no more than the following are not contracting to manufacture a product:
- Specifying or negotiating contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, unless the company 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;
- Affixing its brand, marks, logo, or label to a generic product manufactured by a third party; or
- Servicing, maintaining, or repairing a product manufactured by a third party.
The SEC also offered the following guidance for a company to determine whether conflict minerals are necessary to the functionality or production of a product:
- Necessary to the functionality of the product: The company should evaluate 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; whether a conflict mineral is necessary to the product’s generally expected function, use, or purpose; or, if a conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.
- Necessary to the production of the product: The company should evaluate 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.
If a company does not manufacture or contract to manufacture products with conflict minerals that are necessary to the functionality or production of the product, the company is not subject to the Conflict Minerals Rule and does not have to file a Form SD. All other companies are subject to the Conflict Minerals Rule and must next evaluate the country of origin of the conflict minerals.
Step 2 – Reasonable Country of Origin Inquiry
Once a company has determined that it is subject to the Conflict Minerals Rule, it must conduct a reasonable country of origin inquiry. This inquiry must be conducted in good faith and must be reasonably designed to determine whether any of the conflict minerals used in its products originated in the Covered Countries or are from recycled or scrap sources. The Covered Countries include the Democratic Republic of the Congo, Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. The reasonable country of origin inquiry can be satisfied if the company 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. The company must have reason to believe that the representations are true and must take into account any applicable warning signs indicating that its conflict minerals may have originated in the Covered Countries. A company may have reason to believe that the representations are true if the processing facility has received a “conflict-free” designation or has obtained an independent audit that is publicly available.
If a company can determine based on this inquiry that its conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources, or if it has no reason to believe that its conflict minerals originated in the Covered Countries, or if it reasonably believes that its conflict minerals came from recycled or scrap sources, the company must file a Form SD with the SEC, disclosing under a separate heading in Form SD entitled “Conflict Minerals Disclosure” the determination the company made with respect to the source of its conflict minerals, the reasonable country of origin inquiry that the company undertook and the results of the inquiry. The company must also disclose this information on its publicly available website and include a link to the website in its Conflict Minerals Disclosure section on Form SD.
On the other hand, if a company knows that any of its conflict minerals originated in the Covered Countries and are not from recycled or scrap sources, or has reason to believe that its conflict minerals may have originated in the Covered Countries and has reason to believe that they may not be from recycled or scrap sources, the company must then proceed with supply chain due diligence.
Step 3 – Supply Chain Due Diligence and Conflict Minerals Report
After the reasonable country of origin inquiry, a company that either knows or has reason to believe that any of its conflict minerals originated in the Covered Countries and are not from recycled or scrap sources must conduct a due diligence review of the source and chain of custody of its conflict minerals and such review must be conducted under a nationally or internationally recognized due diligence framework, if available for that conflict mineral. The Final Release specifically notes that the OECD (Organisation for Economic Co-operation and Development) “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” satisfies these criteria. Other evaluation standards may be used, but they must have been established by a group or body using due-process procedures and must be consistent with the criteria standards established by the U.S. Government Accountability Office in its Government Auditing Standards.
If a company determines in the due diligence review that its conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources, the company must comply with the disclosure requirements of step two of the framework. All other companies must prepare a Conflict Minerals Report to be filed as an exhibit to Form SD. As part of the due diligence process, this Conflict Minerals Report must be audited by an independent private sector auditor. The objective of the audit is to express a conclusion as to whether the due diligence undertaken by the company conformed with the standards set forth in the due diligence framework used and whether the description of the due diligence contained in the Conflict Minerals Report conforms with the process that occurred.
The Conflict Minerals Report must contain, among other things: (1) a discussion of the due diligence review of the source and chain of custody of the company’s conflict minerals; (2) a statement that the company has obtained an independent private sector audit; (3) the audit report prepared by the auditor; and (4) a description of any products that are not “DRC conflict free,” the facilities used to process the conflict minerals in those products, the country of origin of the conflict minerals, and the efforts to determine the mine or original location or origin.
During the first two calendar years for all companies and the first four calendar years for smaller reporting companies, a company will not be required to submit an audit report with respect to the conflict minerals in any products that are “DRC conflict undeterminable.” However, a company must still provide a description of those products; the facilities used to process the conflict minerals in those products; the country of origin of the conflict minerals, if known; and the efforts to determine the mine or original location or origin. The company must also disclose the steps it has taken or will take to mitigate the risk that its conflict minerals benefit armed groups, including steps to improve its due diligence. In the third or fifth year, as applicable, a company must describe “DRC conflict undeterminable” products as not being “DRC conflict free” and must comply with all applicable requirements, including the independent audit.
The Conflict Minerals Report must be included as an exhibit to the company’s Form SD and a separate section in Form SD entitled “Conflict Minerals Disclosure” must disclose that the Conflict Minerals Report has been filed. This Conflict Minerals Report must also be disclosed on the company’s publicly available website and a link to the website must be included in the Conflict Materials Disclosure on Form SD.
Companies must comply with the Conflict Minerals Rule beginning January 1, 2013, with the first reports on Form SD due on May 31, 2014, for the 2013 calendar year. This disclosure must be provided on a calendar year basis even if the company’s fiscal year is not the calendar year. Companies must also provide disclosure for the calendar year in which it completes manufacturing on a product containing conflict minerals or in which a company with which it contracts for the manufacture of a product containing conflict minerals completes manufacturing.
The first disclosure deadline is still a year and a half away; however, if a company is subject to the Conflict Minerals Rule, compliance with the reasonable country of origin inquiry and any required due diligence review may be costly and time-consuming. Companies should begin now by evaluating whether they manufacture or contract to manufacture any product containing conflict minerals that are necessary to the functionality or production of the product.