On August 22, 2012, after a vigorous public debate and a 3-to-2 vote, the U.S. Securities and Exchange Commission (SEC) adopted final rules related to “conflict minerals” that originate in the Democratic Republic of Congo (DRC) or the countries adjoining the DRC (collectively “Covered Countries”).1 Companies that file reports with the SEC, including domestic issuers, foreign private issuers and smaller reporting companies, are subject to the rules if conflict minerals are “necessary to the functionality or production” of a product manufactured by a reporting company. Companies that are subject to the conflict minerals rules must determine, following a “reasonable country of origin inquiry,” whether their conflict minerals did in fact originate in a Covered Country. If they did, the company is required to submit a certified report to the SEC that includes a description of the measures the company has taken to exercise due diligence regarding the source and chain of custody of such minerals. The term “conflict minerals” includes columbite-tantalite, cassiterite, gold, wolframite, their derivatives or any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Covered Countries. Many of these minerals are commonly used in products such as cellphones, light bulbs and jewelry. The SEC has previously estimated that approximately 6,000 companies will be affected by this rule.
Adoption of a rule on conflict minerals was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). A late addition to Dodd-Frank, Section 1502 added Section 13(p) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and reflected Congress’ effort to mitigate the humanitarian crisis in Central Africa, based on the assumption that international trade in valuable minerals originating in the Covered Countries fuels violence in the region. The final rule is similar to the proposed rule in many respects, but does contain several important differences, which are noted below.
What Is Covered by the Conflict Minerals Rule?
The final rule, Rule 13p-1 of the Exchange Act, applies to any company subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act and for which conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company. If a company’s products do not contain conflict minerals, then it has no disclosure obligations under the final rule.
Whether a company will be considered to be “contracting to manufacture” a product will depend upon the degree of influence a company exercises over the product’s manufacturing. A company will not be deemed to have influence over a product’s manufacturing if it:
- affixes its brand, marks, logo or label to a generic product manufactured by a third party;
- services, maintains or repairs a product manufactured by a third party; or
- specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.
What Must Registrants Do?
If a reporting company uses conflict minerals, then it must conduct a “reasonable country of origin inquiry,” to be performed in good faith and reasonably designed to determine whether any of its conflict minerals originate from Covered Countries or are from scrap or recycled sources (as opp osed to mined sources). If the company:
- finds that its minerals did not originate in a DRC country or are from scrap or recycled sources; or
- has no reason to believe that the minerals may have originated in Covered Countries or may not be from scrap or recycled sources;
then the company must disclose this determination in its annual report, including a description of the inquiry it undertook and the results of the inquiry, using the new Form SD. The company must also make this information available on its website, and provide the Internet address of the website in the Form SD. Note that the Form SD will be considered “filed” and not furnished, and will thus be subject to Exchange Act Section 18 liability. The Form SD must be signed on behalf of a registrant by an executive officer.
On the other hand, if the company’s inquiry indicates that both of the following are true:
- The company knows or has reason to believe that the minerals may have originated in the Covered Countries; and
- The company 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 it uses and file a Conflict Minerals Report as an exhibit to the Form SD. The company must also make the Conflict Minerals Report available on its website, and provide the applicable Internet address in the Form SD. The due diligence that companies required to file a Conflict Minerals Report must perform must conform to a nationally or internationally recognized due diligence framework, such as that provided by the Organization for Economic Cooperation and Development (OECD).
If after due diligence a company determines that its products a re “DRC conflict free,” meaning the conflict minerals it utilizes may originate from Covered Countries but do not finance or benefit armed groups, then the company must have its Conflict Minerals Report audited by an independent private sector auditor, certify that it obtained the audit and include the audit report as part of the Conflict Minerals Report. The company must also identify the auditor.
If a company’s products have not been found to be “DRC conflict free,” then the company, in addition to the above audit and certification requirements, must describe in its Conflict Minerals Report the following:
- 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 undertaken to determine the mine or location of origin, using the greatest possible specificity.
In a departure from the proposed rule, companies that cannot immediately determine the source of conflict minerals can describe the products using such minerals as “DRC conflict undeterminable” for up to two years (four years for smaller reporting companies). In this case, the company must describe in its Conflict Minerals Report the following:
- the products manufactured or contracted to be manufactured that have not been found to be “DRC conflict undeterminable”;
- the facilities used to process the conflict minerals in those products, if known;
- the country of origin of the conflict minerals in those products, if known;
- the efforts undertaken to determine the mine or location of origin, using the greatest possible specificity; and
- the steps it has taken, or will take, if any, since the end of the period covered in its most recent Conflict Minerals Report to mitigate the risk that its conflict minerals benefit armed groups, including any steps to improve its due diligence.
For products that are “DRC conflict undeterminable,” the company is not required to obtain an audit of the Conflict Minerals Report, at least as it relates to the conflict minerals in those products.
What Efforts Will Satisfy the Due Diligence Requirements?
The SEC created special rules governing the due diligence and Conflict Minerals Report for minerals from recycled or scrap sources. If a company can reasonably conclude that its conflict minerals are from recycled or scrap sources rather than mined sources, then it need not file a Conflict Minerals Report. If a company cannot reasonably conclude that any gold it utilizes is from recycled or scrap sources, then it is required to undertake due diligence in accordance with the OECD Due Diligence Guidance, and obtain an audit of its Conflict Minerals Report. The SEC singles out gold because it says gold is the only conflict mineral with a nationally or internationally recognized due diligence framework for determining whether it is recycled or scrap, which is part of the OECD Due Diligence Guidance. For the other three conflict minerals (columbite-tantalite, cassiterite and wolframite), if a company cannot reasonably conclude after its inquiry that its minerals are from recycled or scrap sources, until a widely recognized due diligence framework is developed, the company is required to describe in its Conflict Minerals Report the due diligence measures it exercised in determining that its conflict minerals are from recycled or scrap sources. In such cases a company is not required to obtain an independent private sector audit regarding these conflict minerals.
The SEC noted that it is not making reporting companies prove a negative, in that the final rule, unlike the proposed rule, does not make reporting companies prove minerals they use did not originate from Covered Countries. Instead, reporting companies must only conduct due diligence on the minerals and file a Conflict Minerals Report if they know or have reason to believe the minerals originated from Covered Countries.
The final rule, in keeping with the approach set forth in the proposal, also does not require product labels indicating whether a product is considered conflict free or not.
What Are the Reporting Deadlines?
Reporting companies that must file a Form SD must do so by May 31, 2014. No matter what fiscal year a company uses, the first Form SD will be based upon the 2013 calendar year.
Please click here to view the flowchart summary of the final rule the SEC included in the final rule release.