On August 22, 2012, the Securities and Exchange Commission (SEC) adopted its final rule requiring annual disclosure of the use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country (collectively, the Covered Countries).1 The new rule implements the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted due to concerns that the exploitation and trade of conflict minerals originating in the DRC is helping to finance conflict in the DRC and contributing to an emergency humanitarian situation that warrants the new disclosure requirements.
The disclosure will be required in an annual Form SD filed with the SEC on May 31 of each year, beginning on May 31, 2014 for the 2013 calendar year.
You can view the SEC final rule release here.
Who Is Subject to the Rule
The new rule applies to domestic and foreign companies (issuers) that (i) file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) use conflict minerals that are necessary to the functionality or production of a product manufactured or contracted to manufactured by the issuer. If an issuer does not meet both of the above criteria, the issuer is not required to take any action, make any disclosures, or submit any reports under the new rule.
"Conflict minerals" are defined to include columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives (which are currently limited to tantalum, tin, and tungsten), as well as any other mineral, or its derivatives, determined by the Secretary of State to be financing conflict in a Covered Country.
The determination of whether a conflict mineral is deemed "necessary to the functionality or production" of a product is based on facts and circumstances. In determining whether a conflict mineral is "necessary to the functionality" of a product, an issuer should consider:
- whether the conflict mineral is intentionally added to the product or any component of the product and is not a naturally-occurring by-product;
- whether the conflict mineral is necessary to the product's generally expected function, use, or purpose; and
- if the conflict mineral is incorporated for purposes of ornamentation, decoration, or embellishment, whether the primary purpose of the product is ornamentation or decoration.
In determining whether a conflict mineral is "necessary to the production" of a product, an issuer should consider:
- whether the conflict mineral is intentionally included in the product's production process (other than tools, machines, or equipment used to produce the product);
- whether the conflict mineral is included in the product; and
- whether the conflict mineral is necessary to produce the product.
For a conflict mineral to be deemed necessary to the production of a product, the conflict mineral must be both contained in the product and necessary to the product's production. If a conflict mineral is used as a catalyst to produce a product but is not otherwise contained in the product, then the conflict mineral is not deemed necessary to the production of the product.
An issuer is considered to be "contracting to manufacture" a product if it has actual influence over the manufacturing of that product. The determination is based on facts and circumstances and depends on the degree of influence an issuer exercises over the materials, parts, ingredients, or components to be included in a product containing conflict minerals or their derivatives. An issuer is not considered to be "contracting to manufacture" a product if it merely:
- specifies or negotiates 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);
- affixes its brand, marks, logo, or label to a generic product manufactured by a third party; or
- services, maintains, or repairs a product manufactured by a third party.
The new rule does not consider issuers that mine conflict minerals as manufacturing or contracting to manufacture those minerals unless the issuer also engages in manufacturing, whether directly or indirectly through contract, in addition to mining. Additionally, the rule exempts from the disclosure requirements any conflict minerals that are "outside the supply chain" prior to January 31, 2013. A conflict mineral is "outside the supply chain" if (i) it has been smelted or fully refined prior to January 31, 2013, or (ii) if not smelted or fully refined, it is physically located outside the Covered Countries prior to January 31, 2013.
Reasonable Country of Origin Inquiry
If an issuer meets both of the above criteria and is therefore subject to the rule, the issuer must conduct a good faith reasonable country of origin inquiry that is reasonably designed to determine whether any of its conflict minerals originated in a Covered Country or are from recycled or scrap sources.
Following its reasonable country of origin inquiry, if the issuer (i) knows that its conflict minerals did not originate in the Covered Countries or knows that they came from recycled or scrap sources, (ii) has no reason to believe its conflict minerals may have originated in the Covered Countries, or (iii) reasonably believes its conflict minerals came from recycled or scrap sources, then in all such cases the issuer must file a Form SD with the SEC that discloses its determination, describes briefly the reasonable country of origin inquiry it undertook and the results of the inquiry.
Requirement for Due Diligence and Preparation of Conflict Minerals Report
Following its reasonable country of origin inquiry, if (i) the issuer knows or has reason to believe that its conflict minerals originated in a Covered Country, and (ii) the issuer knows or has reason to believe that its conflict minerals did not come from recycled or scrap sources, then the issuer must undertake due diligence on the source and chain of custody of its conflict minerals. The due diligence measures must conform to a nationally or internationally recognized due diligence framework, if one is available for the specific conflict mineral, such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development (OECD). Following that due diligence, the issuer must prepare a Conflict Minerals Report to be filed as an exhibit to its Form SD, unless the issuer determines, based on its due diligence, that its conflict minerals did not originate in a Covered Country or that its conflict minerals did come from recycled or scrap sources. An issuer that does not need to file a Conflict Minerals Report based upon the results of its due diligence must still submit a Form SD and publish on its website its determination and the steps it took in its inquiry and due diligence.
What to Include in a Conflict Minerals Report
The Conflict Minerals Report must include:
- a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its conflicts minerals;
- a certified independent private sector audit2 identifying the auditor; and
- a statement certifying that the issuer obtained the independent audit.
If an issuer determines that its products do not contain conflict minerals that finance or benefit armed groups in the Covered Countries, then those products are considered "DRC conflict free." If an issuer's products have not been found to be "DRC conflict free," then the Conflict Minerals Report must also describe 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 to determine the mine or location of origin with the greatest possible specificity.
In addition, in recognition of the fact that tracing the steps up the supply chain could be a difficult process, for a temporary transition period of two years (four years for smaller reporting companies) an issuer who is unable to determine whether the conflict minerals in its products originated from Covered Countries or came from recycled or scrap sources or financed or benefited armed groups may consider those products to be "DRC conflict undeterminable." The issuer must describe in its Conflict Minerals Report the products that are "DRC conflict undeterminable," the facilities used to process the conflict minerals in those products (if known), the efforts to determine the mine or location of origin with the greatest possible specificity (if known), and the steps the issuer 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. No independent audit will be required with respect to "DRC conflict undeterminable minerals" during the transition period. At the end of the transition period, if the issuer still has "DRC conflict undeterminable" products, the issuer must describe such products as not having been found to be "DRC conflict free" and must comply with the independent audit and Conflict Minerals Report requirements.
Special Provision for Recycled or Scrap Sources
The new rule contains a special provision for conflict minerals that come from recycled or scrap sources, as the SEC determined that proceeds from these sources are not considered to be financing or benefitting armed groups in the Covered Countries. If the issuer concludes after conducting its "reasonable country of origin inquiry" that the conflict minerals it uses derive from recycled or scrap sources rather than from mined sources, then the products are considered "DRC conflict free." However, if the issuer has reason to believe that the conflict minerals it uses may not be from recycled or scrap sources, then it is required to undertake due diligence regarding whether those conflict minerals are from recycled or scrap sources using a nationally or internationally recognized due diligence framework, if any, available for the particular recycled or scrap source conflict mineral. The OECD has approved a gold supplement to the OECD's due diligence guidelines. Gold is presently the only conflict mineral with a nationally or internationally recognized due diligence framework for recycled or scrap sources, and the SEC anticipates that issuers will use the OECD gold supplement to conduct their diligence for recycled or scrap gold. If the issuer is unable to determine after such due diligence that the conflict minerals came from recycled or scrap sources, the issuer must file a Conflict Minerals Report.
When Information Must be Disclosed
Issuers that are subject to the new rule must file a Form SD with the SEC by May 31 of each calendar year beginning on May 31, 2014 for the 2013 calendar year. An issuer must also make its disclosure or the Conflict Minerals Report itself available on its website for one year and include its website address in the Form SD.
The Form SD must cover the calendar year from January 1 to December 31 regardless of the issuer's fiscal year end. Disclosure is to be provided for the calendar year in which the issuer completes the manufacture of a product that contains any conflict minerals or the year in which the issuer's contract manufacturer completes the manufacture of a product that contains any conflict minerals.
An issuer that obtains control over a company that manufactures or contracts for the manufacturing of products containing conflict minerals and that previously had not been obligated to provide conflict minerals disclosure may delay reporting on the acquired company's products until the end of the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition.
The Form SD, including any Conflict Minerals Report submitted as an exhibit to the Form SD, will be considered "filed" and therefore subject to liability under Section 18 of the Securities Exchange Act of 1934. However, because the Form SD is separate from the issuer's Form 10-K or 20-F, it will not be covered by those forms' CEO and CFO certifications or automatically incorporated by reference into an issuer's shelf registration statement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
