On August 22, 2012, the Securities and Exchange Commission adopted final rules implementing Sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requiring (1) SEC-reporting companies to disclose their use of certain minerals that originate in certain countries and (2) SEC-reporting companies engaged in resource extraction activities to disclose certain payments made to the U.S. or any foreign government. Companies are required to make these new disclosures on a new Form SD to be filed with the SEC on EDGAR.
Section 1502 of the Dodd-Frank Act, which added Section 13(p) to the Securities Exchange Act of 1934, directed the SEC to issue rules requiring companies to disclose their use of certain minerals that include tantalum, tin, gold or tungsten if those minerals (1) originated in the Democratic Republic of the Congo ("DRC") or an adjoining country and (2) are "necessary to the functionality or production of a product" manufactured or contracted to be manufactured by those companies. Congress enacted Section 1502 because of concerns that the conflict minerals trade was helping to finance conflict in the DRC region and was contributing to a humanitarian crisis.
The SEC's new rules apply equally to domestic and foreign issuers and to smaller reporting companies that are subject to the reporting requirements of the Exchange Act and that use the "conflict minerals."
Contracting to Manufacture
A company is considered to be "contracting to manufacture" a product only if it has actual influence over the manufacturing of the product, which is determined based on facts and circumstances. A company is not deemed to have such influence if it merely brands or labels a product manufactured by a third party, repairs a product manufactured by a third party or negotiates with a manufacturer terms that do not directly relate to the manufacture of the relevant product.
Country of Origin Inquiry
Under the new rules, if a company uses any of the designated conflict minerals, it must undertake a reasonable, good faith "country of origin" inquiry that is reasonably designed to determine whether the minerals originated from the designated countries or are from scrap or recycled sources.
If the company determines that it (1) knows that the minerals did not originate in the designated countries or are from scrap or recycled sources, (2) has no reason to believe the minerals may have originated in the designated countries or (3) reasonably believes that the minerals did come from scrap or recycled sources, then the company must disclose on Form SD its determination and a brief description of its inquiry and the results of the inquiry. The company must also make its description publicly available on its website and provide the address of that site in its Form SD.
If the company determines that it both (1) knows or has reason to believe that the minerals may have originated in the designated countries and (2) knows or has reason to believe that the minerals may not be from scrap or recycled sources, then the company must perform due diligence on the source and chain of custody of the conflict minerals that conforms to a nationally or internationally recognized due diligence framework and file a "Conflict Minerals Report" (discussed below) as an exhibit to its Form SD. The company must also make its Conflict Minerals Report publicly available on its website and provide the address of that site on its Form SD.
All conflict mineral reporting will be on a calendar year basis, with the Form SD required to be filed annually by May 31.
Conflict Minerals Report
A company that is required to file a Conflict Minerals Report must perform due diligence, in conformity with a nationally or internationally recognized due diligence framework (for instance, the due diligence guidance for responsible supply chains approved by the Organisation for Economic Cooperation and Development (the "OECD Due Diligence Guidance")), on the source and chain of custody of conflict minerals it uses.
DRC Conflict Free
If a company filing a Conflict Minerals Report determines that its products are "DRC conflict free"—that the minerals may originate in the designated countries, but did not finance or benefit armed groups—then it must 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 and identify the auditor.
Not DRC Conflict Free
If a company's products have not been found to be "DRC conflict free," then, in addition to complying with the audit and certification requirements described above, the company must describe in its Conflict Minerals Report:
- 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; and
- the efforts to determine the mine or location of origin with the greatest possible specificity.
DRC Conflict Undeterminable
For a temporary two-year period (or four-year period for smaller reporting companies), if a company is unable to determine whether the minerals in its products originated in the designated countries or financed or benefited armed groups in those countries, then those products are considered "DRC conflict undeterminable." In that case, the company must describe in its Conflict Minerals Report:
- the products manufactured or contracted to be manufactured that are DRC conflict undeterminable;
- the facilities used to process the conflict minerals in those products;
- the country of origin of the conflict minerals in those products;
- the efforts to determine the mine or location of origin with the greatest possible specificity; and
- the steps it has taken or will take 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 steps to improve due diligence.
For DRC conflict undeterminable products, the company would not be required to obtain an independent private sector audit of the Conflict Minerals Report regarding such products. After the temporary transition period expires, DRC conflict undeterminable products will be considered not to be DRC conflict free.
Special Rules for Minerals from Recycled or Scrap Sources
If a company's conflict minerals are derived from recycled or scrap sources, rather than from mined sources, its products containing such minerals are considered DRC conflict free. With respect to gold (which is currently the only conflict mineral with a nationally or internationally recognized due diligence framework for determining whether it is recycled or scrap) if a company cannot reasonably conclude that its gold is from recycled or scrap sources, then it must undertake due diligence in accordance with the OECD Due Diligence Guidance and obtain an independent private sector audit of its Conflict Minerals Report. With respect to other minerals, if a company cannot reasonably conclude that such minerals are from recycled or scrap sources, until a nationally or internationally recognized due diligence framework is developed, it must describe its due diligence measures in its Conflicts Minerals Report but it will not be required to obtain an audit regarding such conflict minerals.
To help companies understand the somewhat complicated conflict mineral disclosure rules, the SEC in its final rule release included a flowchart (attached as Annex A to this Client Alert) which summarizes the application of the new rules for a reporting company determining its disclosure obligations with respect to conflict minerals.
Resource Extraction Payments
Section 1504 of the Dodd-Frank Act, which added a new Section 13(q) to the Exchange Act, directs the SEC to issue rules requiring the disclosure of certain payments made by resource extraction issuers (those engaged in the commercial development of oil, natural gas or minerals) to the U.S. or any foreign government.
The new rules require a company to disclose payments made to governments if it is required to file an annual report with the SEC and it engages in the commercial development of oil, natural gas or minerals. The resource extraction issuer would also be required to disclose payments made by its subsidiaries or other entities that it controls (such control being determined by a facts and circumstances analysis). The requirements apply equally to domestic and foreign issuers and to smaller reporting companies that meet the definition of resource extraction issuer.
Under the new rules, a resource extraction issuer must disclose payments to the U.S. or any foreign government (including any subnational government) that are (1) made to further the commercial development of oil, natural gas or minerals, (2) "not de minimis" ($100,000 or more during the issuer's most recent fiscal year) and (3) within the types of payments specified in the rules, which include taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends and infrastructure improvements. "Commercial development of oil, natural gas or minerals" is defined to include exploration, extraction, processing and export, or the acquisition of a license for such activities. The new rules also clarify the types of taxes, fees, bonuses and dividends that are required to be disclosed, which are generally consistent with the types of payments that the Extractive Industries Transparency Initiative1suggests should be disclosed.
The rules require a resource extraction issuer to disclose information about such payments made to further the commercial development of oil, natural gas or minerals, including:
- the type and total amount of payments made for each project;
- the type and total amount of payments made to each government;
- the total amounts of payments by category;
- the currency used for such payments;
- the financial period in which such payments were made;
- the business segment of the issuer that made such payments;
- the governments that received such payments; and
- the projects to which the payments relate.
The term "project" is undefined to allow for flexibility in applying the term in different contexts.
The new rules require a resource extraction issuer to disclose the information in an annual filing on the new Form SD. The information must be included in an exhibit to the annual Form SD and electronically tagged using the eXtensible Business Reporting Language (XBRL) format. The rules require all issuers to provide the XBRL information, including foreign private issuers who do not otherwise file XBRL information. The issuer must file the Form SD no later than 150 days after the end of its fiscal year.
All reports on new Form SD, whether for conflict mineral disclosure or resource extraction payment disclosure, will be required to be "filed" and not simply "furnished" and thus will be subject to Section 18 liability under the Exchange Act. However, they will not be automatically incorporated by reference into filings under the Exchange Act or the Securities Act of 1933 unless the company specifically incorporates them by reference. Furthermore, since they will not be part of a company's Exchange Act annual reports on Form 10-K or 20-F (as originally proposed), the certifications by a company's principal executive and financial officers required to be filed as exhibits to its annual report will not cover these disclosures.
Issuers must comply with the new conflict minerals disclosure rules for the calendar year beginning January 1, 2013, with the first reports due May 31, 2014. A complete copy of the SEC's adopting release for the new conflict minerals disclosure rules (Release No. 34-67716) can be found at www.sec.gov/rules/final/2012/34-67716.pdf.
Resource extraction issuers must comply with the new resource extraction payment disclosure rules for fiscal years ending after September 30, 2013. For the first report, the SEC has indicated that most issuers can provide a partial report, covering only those payments made after September 30, 2013, but thereafter reports covering the full fiscal year will be required no later than 150 days after the end of the issuer's fiscal year. A complete copy of the SEC's adopting release for the new resource extraction disclosure rules (Release Nos. 34-67717) can be found at www.sec.gov/rules/final/2012/34-67717.pdf.
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