The Securities and Exchange Commission adopted a rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country.
The regulatory reform law directed the Commission to issue rules requiring certain companies to disclose their use of conflict minerals that include tantalum, tin, gold, or tungsten if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. Companies are required to provide this disclosure on a new form to be filed with the SEC called Form SD.
After proposing the rule in 2010, the Commission hosted a roundtable in October 2011 to assist in finalizing the rule.
“I am pleased that the Commission has finalized this very challenging project in such a thoughtful manner,” said SEC Chairman Mary L. Schapiro. “We have received significant public input on this rulemaking, and in response we incorporated many changes from the proposal that are designed to address concerns about the costs. I believe the final rule faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”
Under the final rule, issuers are required to file for the same period — a calendar year — regardless of when their fiscal year ends. Companies will file their first specialized disclosure report on May 31, 2014 (for the 2013 calendar year) and annually on May 31 every year thereafter.
The rule exempts companies that don’t exert direct control over the manufacture of such products. For example, companies that attach their brand or label to a generic product made by another company aren’t covered by the rule. Further involvement beyond that and a company would need to consider all the facts and circumstances to determine if the rule applied to them.
The final rule applies to a company that uses minerals including tantalum, tin, gold or tungsten if:
• The company files reports with the SEC under the Exchange Act.
• The minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.
The final rule requires a company to provide the disclosure on a new form to be filed with the SEC (Form SD).
A company is considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination is based on facts and circumstances, taking into account the degree of influence a company exercises over the product’s manufacturing.
A company is not deemed to have influence over the manufacturing if it merely:
• 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.
• Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.
The requirements apply equally to domestic and foreign issuers.
Responsible Party’s Duties
Under the final rule, a company that uses any of the designated minerals 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 or are from scrap or recycled sources.
If the inquiry determines either of the following to be true:
• The company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources.
• The company has no reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources.
… then the company must disclose its determination, provide a brief description of the inquiry it undertook and the results of the inquiry on Form SD.
The company also is required to:
• Make its description publicly available on its Internet website.
• Provide the Internet address of that site in the Form SD.
If the inquiry otherwise determines both of the following to be true:
• The company knows or has reason to believe that the minerals may have originated in the covered countries.
• The company knows or has reason to believe that the minerals may not be from scrap or recycled sources.
… then the company 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.
The company also is required to:
• Make publicly available the Conflict Minerals Report on its Internet website.
• Provide the Internet address of that site on Form SD.
What Must Be in the Report
Under the final rule, companies that are required to file a Conflict Minerals Report must exercise due diligence on the source and chain of custody of their conflict minerals. The due diligence measures must conform to a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organization for Economic Co-operation and Development (OECD).
DRC Conflict Free — If a company determines that its products are “DRC conflict free” — that is the minerals may originate from the covered countries but did not finance or benefit armed groups — then the company must undertake the following audit and certification requirements:
• 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.
• Identify the auditor.
What If Products Aren’t Conflict-Free?
If a company’s products have not been found to be “DRC conflict free,” then the company in addition to the audit and certification requirements must describe the following 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.
• 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 the company 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 undeterminable.”
In that case, the company must describe the following in its Conflict Minerals Report:
• Its products manufactured or contracted to be manufactured that are “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 to determine the mine or location of origin with the greatest possible specificity.
• 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 necessary conflict minerals benefit armed groups, including any steps to improve due diligence.
For those products that are “DRC conflict undeterminable,” the company is not required to obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict minerals in those products.
Recycled or Scrap Due Diligence
There are special rules governing the due diligence and Conflict Minerals Report 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, the company’s products containing such minerals are considered “DRC conflict free.”
If a company cannot reasonably conclude after its inquiry that its gold is from recycled or scrap sources, then it is required to undertake due diligence in accordance with the OECD Due Diligence Guidance, and get an audit of its Conflict Minerals Report. Currently, 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 minerals, if a company cannot reasonably conclude after its inquiry that its minerals are from recycled or scrap sources, until a due diligence framework is developed, the company is required to describe the due diligence measures it exercised in determining that its conflict minerals are from recycled or scrap sources in its Conflict Minerals Report. Such a company is not required to obtain an independent private sector audit regarding such conflict minerals.
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