Following a lengthy delay, the Securities and Exchange Commission has adopted rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act that relate to reporting requirements regarding “conflict minerals” originating in the Democratic Republic of the Congo and adjoining countries (“covered countries”). Companies are required to comply with the new rules beginning with the calendar year ending December 31, 2013 by filing conflict minerals disclosures and, if required, a specialized disclosure report on the new SEC Form SD by May 31, 2014.1

WHAT ARE “CONFLICT MINERALS”?

Conflict minerals include cassiterite, columbite-tantalite, gold, wolframite and their derivatives (which are limited to tantalum, tin and tungsten, unless the Secretary of State determines that additional derivatives are financing conflict in the covered countries) or any other minerals or derivatives determined by the Secretary of State to be financing conflict in the covered countries whether or not they actually financed or benefitted armed groups.

IS MY COMPANY SUBJECT TO THE RULES EVEN THOUGH MY BUSINESS DOESN’T USE CONFLICT MINERALS?

All public companies in the United States, including domestic companies, foreign private issuers and smaller reporting companies, are potentially subject to the rules. The rules apply to any company for which conflict minerals are necessary to the functionality or production of a product manufactured or contracted by that company to be manufactured. Once it is determined that conflict minerals are necessary to the functionality or production of a product manufactured or contracted by the company to be manufactured, the company will be required to report certain conflict minerals information. If, however, a company determines that no conflict minerals are necessary to the functionality or production of a product manufactured or contracted by such company to be manufactured, the company “is not required to take any action, make any disclosures, or submit any reports” under the rules.

When Conflict Minerals are Necessary to a Product. The rules do not define when conflict minerals are “necessary to the functionality” of a product or when they are “necessary to the production” of a product; however, the SEC has indicated that in determining whether conflict minerals are “necessary to the functionality” of a product, a company should consider:

  • whether a conflict mineral is contained in and intentionally added to the product or any component of the product and is not a naturallyoccurring by-product,
  • whether a conflict mineral is necessary to the product’s generally expected function, use or purpose, and
  • if a conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.

Based on the applicable facts and circumstances, any of these factors, either individually or in the aggregate, may be determinative as to whether conflict minerals are “necessary to the functionality” of a given product.

In determining whether its conflict minerals are “necessary to the production” of a product, a company should consider:

  • whether conflict minerals are 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 minerals are necessary to produce the product.

The SEC has confirmed that conflict minerals in a physical tool or machine used to produce a product do not fall under the “necessary to the production” category of the rules.

It is important to note that there is no de minimis exception with respect to this “necessary to a product” aspect of the rules.

Manufacture. The rules do not define the term “manufacture” because, the SEC indicated, the SEC believes such term is generally understood; however, the SEC has indicated that it does not consider a company that merely services, maintains or repairs a product containing conflict minerals to be “manufacturing” a product.

Contracts to Manufacture. In general, the question of whether a company contracts to manufacture a product will depend on the degree of influence exercised by the company on the manufacturing of the product and will be based on the individual facts and circumstances surrounding the company’s business and industry. The rules do not define when a company contracts to manufacture a product because, although the SEC believes the concept is intuitive at a basic level, it concluded that for “contracts to manufacture” to cover companies operating in the wide variety of the impacted industries and structured in various manners, any definition of that term would be so complicated as to be unworkable. The SEC has indicated, however, that a company should not be viewed as contracting to manufacture a product if its actions involve no more than:

  • specifying or negotiating contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, such as training or technical support, price, insurance, indemnity, intellectual property rights, dispute resolution or other like terms or conditions concerning 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.

Outside the Supply Chain. The rules exclude any conflict minerals that are “outside the supply chain” prior to January 31, 2013. Conflict minerals are considered to be “outside the supply chain” only after:

  • any columbite-tantalite, cassiterite and wolframite minerals have been smelted,
  • gold has been fully refined, or
  • any conflict mineral, or its derivatives, that have not been smelted or fully refined are located outside of the covered countries.

Timing. A company with conflict minerals necessary to the functionality or production of a product it manufactures or contracts to be manufactured is required to provide the SEC with a specialized disclosure report on Form SD by May 31 of each calendar year, beginning on May 31, 2014, reporting on the preceding calendar year (regardless of the company’s fiscal year end). Therefore, the first reporting period for all companies will be from January 1, 2013 to December 31, 2013, and the first specialized disclosure report on Form SD must be filed on or before May 31, 2014. The information in such report must also be made available on the company’s website for one year.

HOW DO WE DETERMINE WHETHER CONFLICT MINERALS ORIGINATED IN THE DEMOCRATIC REPUBLIC OF THE CONGO OR ADJOINING COUNTRIES?

Once a company determines that conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company, the rules require the company to determine whether those conflict minerals originated in any of the covered countries. If so, the company must submit a specialized disclosure report on Form SD to the SEC concerning those conflict minerals that originated in the covered countries, and make that report available on its website. To determine whether their conflict minerals originated in the covered countries, the rules require companies with necessary conflict minerals to conduct a reasonable country of origin inquiry.

Country of Origin Inquiry. The rules do not specify what steps and outcomes are necessary to satisfy the reasonable country of origin inquiry requirement because, the SEC states, such a determination depends on each company’s particular facts and circumstances. A reasonable country of origin inquiry can differ among companies based on the company’s size, products, relationships with suppliers or other factors. Even though the rules do not specify the steps necessary to satisfy the reasonable country of origin inquiry requirement, they do include general standards governing the inquiry and the steps required as a result of the inquiry. To satisfy the reasonable country of origin inquiry requirement, a company’s inquiry must be reasonably designed to determine whether the company’s conflict minerals originated in any of the covered countries, or came from recycled or scrap sources, and it must be performed in good faith. If a 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 any of the covered countries or came from recycled or scrap sources, a company will be viewed as having satisfied the reasonable country of origin inquiry standard.

Due Diligence Inquiry. If (1) a company determines that, based on its reasonable country of origin inquiry, its necessary conflict minerals did not originate in the covered countries or did come from recycled or scrap sources, or (2) based on its reasonable country of origin inquiry, the company has no reason to believe that its conflict minerals may have originated in the covered countries or the company reasonably believes that its conflict minerals are from recycled or scrap sources, the company is not required to exercise due diligence on its conflict minerals’ source or chain of custody or file a conflict minerals report with respect to such conflict minerals. Instead, the company is only required, in the body of its specialized disclosure report on Form SD, to disclose its determination and briefly describe the reasonable country of origin inquiry it undertook in making its determination and the results of the inquiry it performed.

However, a company is required to exercise due diligence on its conflict minerals’ source and chain of custody and provide a conflict minerals report if the company knows or has reason to believe that it has necessary conflict minerals that originated in any of the covered countries and knows or has reason to believe that such minerals did not come from recycled or scrap sources. If, as a result of that due diligence, such company determines that its conflict minerals did not originate in any of the covered countries or that its conflict minerals did come from recycled or scrap sources, no conflict minerals report is required, but the company is required, in the body of its specialized disclosure report on Form SD, to disclose its determination and briefly describe its due diligence and the results of the due diligence. If, based on its due diligence, the company determines that its conflict minerals did originate in one of the covered countries, and did not come from recycled or scrap sources, the company is required to submit a conflict minerals report. If, based on its due diligence, the company cannot determine the source of its conflict minerals, it is also required to submit a conflict minerals report.

Due Diligence Standard. The rules require that a company describe the due diligence it exercised in determining the source and chain of custody of its conflict minerals and that such diligence follow a nationally or internationally recognized due diligence framework. The rules do not mandate that a company use any particular nationally or internationally recognized due diligence framework, but do indicate that the “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” by The Organisation for Economic Cooperation and Development satisfies the SEC’s criteria and may be used as a framework for purposes of satisfying the rules’ requirement.

WHAT GOES IN A COMPANY’S CONFLICT MINERALS REPORT AND WHEN DOES IT NEED TO BE AUDITED?

Any company that, after its reasonable country of origin inquiry, knows that its conflict minerals originated in a covered country and did not come from recycled or scrap sources must provide a conflict minerals report that includes a description of the measures the company has taken to exercise due diligence on the source and chain of custody of those conflict minerals, which measures shall include an independent private sector audit of the conflict minerals report. The rules also require a company that, after its reasonable country of origin inquiry, had reason to believe that its conflict minerals may have originated in a covered country and may not have come from recycled or scrap sources and, after the exercise of due diligence, still has reason to believe that its conflict minerals may have originated in a covered country and may not have come from recycled or scrap sources, to provide a conflict minerals report that includes a description of the measures the company has taken to exercise due diligence on the source and chain of custody of those conflict minerals, which measures shall also include an independent private sector audit of the conflict minerals report.

Independent Private Sector Audit Report. A required independent private sector audit must be conducted in accordance with the standards established by the Comptroller General of the United States as part of the company’s due diligence on the source and chain of custody of its conflict minerals. Entities performing an independent private sector audit of the conflict minerals report must comply with any independence standards established by the Government Accountability Office. The SEC has indicated that it is not adopting any additional independence requirements. The auditor’s report must be filed with the conflict minerals report.

The SEC indicated that the objective of the independent private sector audit is to express an opinion or conclusion as to whether the design of a company’s due diligence framework as set forth in the conflict minerals report, with respect to the period covered by such report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by such company, and whether such company’s description of the due diligence measures it performed as set forth in the conflict minerals report, with respect to the period covered by such report, is consistent with the due diligence process that the company undertook.

Additional Content. Unless a company’s products are “DRC conflict free,” the conflict minerals report must include a description of the facilities used to process those conflict minerals, the country of origin of those conflict minerals and the efforts to determine the mine or location of origin with the greatest possible specificity. A company with conflict minerals originating in a covered country must include in its conflict minerals report a description of the company’s products that are “not DRC conflict free.” The rules do not define “not DRC conflict free,” but instead define “DRC conflict free” as those products that “do not contain minerals that directly or indirectly finance or benefit armed groups” in any of the covered countries.

Temporary Relief for Companies That Can’t Make the Required Determinations. During a temporary period, instead of requiring companies that are unable to determine that their conflict minerals did not originate in the covered countries, that their conflict minerals that originated in the covered countries did not directly or indirectly finance or benefit armed groups or that their conflict minerals came from recycled or scrap sources to describe their products as not “DRC conflict free”, the rules permit such companies to describe products containing those conflict minerals as “DRC conflict undeterminable.” A company with products that are “DRC conflict undeterminable” is required to exercise due diligence on the source and chain of custody of its conflict minerals and submit a conflict minerals report describing:

  • its due diligence,
  • the steps it has taken or will take, if any, since the end of the period covered in its most recent prior conflict minerals report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence,
  • the country of origin of the conflict minerals, if known,
  • the facilities used to process the conflict minerals, if known, and
  • the efforts made to determine the mine or location of origin with the greatest possible specificity, if applicable.

Such company is not, however, required to obtain an independent private sector audit of that conflict minerals report.

The “undeterminable” reporting alternative, however, is only permitted temporarily. For all companies, this alternative will be permitted for the first two reporting cycles in 2013 and 2014. For smaller reporting companies, this alternative will be permitted for the first four reporting cycles from 2013 through 2016. Beginning with the third reporting period, from January 1, 2015 to December 31, 2015 for all non-smaller reporting companies, and the fifth reporting period, from January 1, 2017 to December 31, 2017 for smaller reporting companies, each such company will have to describe products in its conflict minerals report as having “not been found to be ‘DRC conflict free.’”