As discussed in previous posts, Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directed the SEC to issue a rule defining specific disclosure requirements for issuers for which conflict minerals are "necessary to the functionality or production of a product” manufactured, or contracted to be manufactured, by the issuer. Conflict minerals consist of columbite-tantalite (tantalum), wolframite (tungsten), cassiterite (tin), and gold. Section 1502 was intended to address concerns that the sourcing of certain minerals is supporting the ongoing conflict in the Democratic Republic of Congo.
A draft rule was originally released in December 2010, and has been the subject of considerable debate regarding the expected costs of compliance as well as the efficacy of using disclosure requirements to address human rights concerns.
Pursuant to the legislation, the SEC was required to issue the final rule by April 2011 and thus this rule-making is long delayed. The final vote was 3-2 in favor of the rule, with Commissioners Gallagher and Paredes issuing “No” votes.
Key requirements and features of the final rule are summarized below:
- Issuers that utilize conflict minerals must conduct a reasonable country of origin inquiry reasonably designed to identify whether those minerals may have originated in the Democratic Republic of Congo or adjoining countries (the “Covered Countries”) or are from recycled or scrap sources.
- If, after a good faith inquiry, an issuer utilizing conflict minerals determines , or has reason to believe, that those minerals were newly mined in the Covered Countries, the issuer must conduct due diligence on the source and chain of custody of those minerals. This due diligence should follow a nationally or internationally recognized framework, if such a framework is available for the mineral(s) in question. The SEC notes in the final rule release that the OECD’s due diligence guidance is currently the only nationally or internationally recognized due diligence framework for the covered conflict minerals.
- If, after exercising due diligence, an issuer determines that the conflict minerals originated outside the Covered Country, or are from recycled or scrap sources, the issuer must file a Form SD (newly adopted by the SEC) describing its reasonable country of origin inquiry, its due diligence efforts, and its conclusions.
- Otherwise, after conducting due diligence, the issuer must file a Form SD, with a Conflict Minerals Report as an attached exhibit, containing: a description of its due diligence efforts; a description of any products found not to be “DRC Conflict Free”; the facilities used to process the conflict minerals used in those products; the country of origin of those conflict minerals; and efforts taken to locate the mine or location of origin of those conflict minerals with the greatest possible specificity.
Minerals from Recycled or Scrap Sources
- If, after a good faith inquiry, an issuer utilizing conflict minerals determines, or has reason to believe, that those minerals originated outside the Covered Countries or come from scrap or recycled sources, it must file a Form SD describing its reasonable country of origin inquiry and the company’s conclusions. No further action is required.
- As noted above, if an issuer undertakes due diligence and subsequently determines that the conflict minerals are from recycled or scrap sources, the issuer must file a Form SD describing its reasonable country of origin inquiry, its due diligence efforts, and the results of its due diligence efforts. The issuer does not have to file a Conflict Minerals Report.
Independent Private Sector Audit
- A Conflict Minerals Report must also include an independent private sector audit report expressing an opinion or conclusion as to whether the issuer’s due diligence conforms with the criteria in the applicable due diligence framework and whether the issuer’s description of its due diligence measures is consistent with its actual efforts.
There is a two-year transition period for issuers during which they may be eligible to describe their products as “DRC conflict undeterminable.” The transition period is four years for smaller companies. An issuer may use the “DRC conflict undeterminable” designation if:
- it knows, or has reason to believe, that it utilizes conflict minerals that originated in the Covered Countries and, after conducting due diligence, they are unable to determine whether those conflict minerals financed or benefited armed groups; or
- it has reason to believe that the conflict minerals may have originated from the Covered Countries and may not have come from recycled or scrap sources and, after due diligence, it is unable to determine the country of origin of the conflict minerals, whether those conflict minerals financed or benefited armed groups, or whether the conflict minerals came from recycled or scrap sources.
- Issuers with products that may be described as “DRC conflict undeterminable” must still file a Conflict Minerals report, but the report does not need to be audited.
Filing with the SEC
- Issuers subject to the rule must file a Form SD and the attached Conflict Minerals Report under the Securities Exchange Act. This means that issuers are subject to potential liability under Section 18 of the Exchange Act for false and misleading statements.
No De Minimis Exemption
- The final rule does not contain an exemption for issuers that utilize only small amounts of the covered conflict minerals.
- Issuers subject to the rule must comply beginning on January 1, 2013. Reports issued pursuant to final rule must cover the calendar year (January 1 to December 31) with reports due on May 31 of the following year. The first reports are due on May 31, 2014.
- Issuers that utilize conflict minerals are exempted from the rule if those minerals are “outside the supply chain” prior to January 31, 2013. “Outside the supply chain” is defined as minerals that have smelted or fully refined or, if not smelted or fully refined, if those minerals are outside the Covered Countries.
Costs of Compliance
- In the final rule release, the SEC estimates that the initial cost of compliance with the rule will be approximately $3 billion to $4 billion. The SEC estimates that the annual cost of ongoing compliance will be between $207 million and $609 million.
Initial reactions to the final rule were mixed. Human rights advocates were dismayed at the transition period provided in the final rule, which did not exist in the proposed rule issued in December 2010. Representatives of the business community were pleased with the inclusion of the transition period, as well as provision that issuers who utilize conflict minerals from recycled and scrap sources do not have to produce a Conflict Minerals Report. Members of the business community, however, also expressed continued concerns about the costs of compliance.