On August 22, 2012, the U.S. Securities and Exchange Commission (“SEC”) voted on implementation rules for Sections 1502 and 1504 of the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”).  

Section 1502 of the Dodd Frank Act deals with conflict minerals disclosure (“Rule 1502”). As discussed in a previous article this Rule 1502 will impact issuers for which "conflict minerals[1] are necessary for the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer" and which are also required to file reports with the SEC under the Securities Exchange Act of 1934 (the “Act”), including foreign reporting issuers such as foreign private issuers which file annual reports on Form 20-F and eligible Canadian issuers which file annual reports on Form 40-F (“Affected Issuers”). It is important to note that such Affected Issuers do not include mining companies, unless such companies also engage in the manufacturing of the product.  Below are some of the main points:

  • An Affected Issuer is required to conduct a reasonable ‘country of origin’ inquiry that must be performed in good faith and be reasonably designed to determine whether any of its minerals originated in the covered countries[2] or are from scrap or recycled sources.
  • If the inquiry determines either of the following to be true:
  1. The Affected Issuer knows that the minerals did not originate in the covered countries or are from scrap or recycled sources; or
  2. The Affected Issuer has no reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources.

[Emphasis added.]

… then the Affected Issuer must disclose its determination, provide a brief description of the inquiry it undertook and the results of the inquiry on Form SD.

  • The Affected Issuer is also is required to: (a) make its description publicly available on its Internet website; and (b) provide the Internet address of that site in the Form SD.
  • If the inquiry otherwise determines both of the following to be true:
  1. The Affected Issuer knows or has reason to believe that the minerals may have originated in the covered countries; and

  1. The Affected Issuer knows or has reason to believe that the minerals may not be from scrap or recycled sources.

[Emphasis added.]

then the Affected Issuer must undertake “due diligence” on the source and chain of custody of its conflict minerals and file a Conflict Minerals Report as an exhibit to the Form SD. Such report must include an independent private sector audit report.

  • The Affected Issuer is also required to: (a) make publicly available the Conflict Minerals Report on its Internet website; and (b) provide the Internet address of that site on Form SD.

Transition Period:

  • For a temporary two-year period (or four-year period for smaller reporting companies), if the Affected Issuer is unable to determine whether the minerals in its products originated in the covered countries or financed or benefited armed groups in those countries, then those products are considered “DRC conflict indeterminable.” In this case, the Affected Issuer must still file a Conflict Minerals Report, but the report does not need to be audited.

SEC Filing:

  • Affected Issuers must file annually a Form SD and attach the Conflict Minerals Report under the Act. This means that issuers are subject to potential liability under Section 18 of the Act for false and misleading statements.
  • Affected Issuers 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 Rule 1502 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:

  • The SEC estimates that the initial cost of compliance with Rule 1502, as an aggregate for all Affected Issuers, will be approximately $3 billion to $4 billion. The SEC estimates that the annual cost of ongoing compliance for all Affected Issuers will be between $207 million and $609 million. Rule 1502 is expected to be challenged in court by business groups, citing prohibitive costs to the industry.

Section 1504 of the Dodd Frank Act requires companies engaged in the development of oil, natural gas, or minerals to disclose certain payments made to the U.S. government or foreign governments (“Rule 1504”). Just as in Rule 1502, Rule 1504 will impact issuers required to file reports with the SEC under the Act, including foreign reporting issuers such as foreign private issuers which file annual reports on Form 20-F, and eligible Canadian issuers which file annual reports on Form 40-F (“Affected Issuers”). In addition, the Affected Issuers are required to disclose payments made by a subsidiary or another entity controlled by the Affected Issuers.

Below are some of the main points:

  • Affected Issuers need to disclose payments that are:
  1. made to further the commercial development of oil, natural gas, or minerals, including exploration, extraction, processing, and export, or the acquisition of a license for any such activity;
  1. “not de minimis”, which means any payment (whether a single payment or a series of related payments) that equals or exceeds $100,000 during the most recent fiscal year; and
  1. within the types of payments specified in the rules, including taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and infrastructure improvements. These types of payments generally are consistent with the types of payments that the Extractive Industries Transparency Initiative suggests should be disclosed.
  • Affected Issuers need to disclose, among other things, 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 the payments, by category, and the project of the resource extraction issuer to which the payments relate. Rule 1504 leaves the term “project” undefined, but provides some guidance on the SEC’s views of what a “project” would be.

SEC Filing:

  • The Affected Issuers must file annually a Form SD and include the information required in an exhibit, electronically tagged using the eXtensible Business Reporting Language (XBRL) format. Just as with Rule 1502, issuers will be subject to potential liability under Section 18 of the Act  for false and misleading statements
  • The Affected Issuer would be required to file the form on the SEC public database (EDGAR) no later than 150 days after the end of its fiscal year.
  • The Affected Issuer would be required to comply with the new rules for fiscal years ending after Sept. 30, 2013. For the first report, most Affected Issuers may provide a partial report disclosing only those payments made after Sept. 30, 2013.

For a summary and a copy of the final rules please see links below :

Section 1502: http://www.sec.gov/news/press/2012/2012-163.htm

Section 1504: http://www.sec.gov/news/press/2012/2012-164.htm