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SEC Adopts Conflict Minerals Disclosure RequirementsAugust 22, 2012
On August 22, 2012, by a 3-2 vote, the Securities and Exchange Commission adopted final rules to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules will require issuers that file annual reports with the Commission to provide annual disclosure regarding their use of “conflict minerals” that:
- are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company, and
- originated in the Democratic Republic of Congo or any of its adjoining countries (Angola, Burundi, the Central African Republic, The Republic of Congo, Rwanda, Sudan, Tanzania, Uganda and Zambia).
For purposes of the new disclosure requirement, the term “conflict minerals” is defined to include:
- Columbite-Tantalite, also known as coltan (the metal ore from which tantalum is extracted);
- Cassiterite (the metal ore from which tin is extracted);
- Wolframite (the metal ore from which tungsten is extracted); and
- any other mineral or its derivatives as subsequently determined by the Secretary of State.
Under these new disclosure requirements, issuers must file an annual conflict minerals report on new Form SD. All issuers subject to the new requirements will file a report on new Form SD for the same period – a calendar year – regardless of their fiscal year-end. These issuers will be required to file their first Form SD for this purpose on May 31, 2014 (for the 2013 calendar year) and annually on May 31 for each calendar year thereafter. Information included on Form SD will be “filed” and not “furnished” with the Commission and will be subject to Section 18 of the Securities Exchange Act of 1934. Form SD filings, however, will not be subject to the annual CEO/CFO certification. Information disclosed on Form SD will not be incorporated by reference into reports and statements under the Securities Act unless the issuer does so affirmatively.
The Conflict Minerals Disclosure Requirements
The new conflict minerals requirements apply to all issuers -- both domestic issuers and foreign private issuers -- that file annual reports with the SEC under the Exchange Act. These new requirements mandate that all such issuers undertake a three-step analysis to determine whether disclosure is required, and if so, the extent of that disclosure.
Each issuer must determine whether conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by that issuer.
The Commission did not define the key terms in this analysis, including the terms “manufacture,” “contract to manufacture” or “necessary to the functionality or production.” Instead, the meanings of these terms will be subject to the facts and circumstances of each issuer. The Commission did, however, clarify that the new requirements will not apply to issuers that mine conflict minerals unless they were also involved in some kind of manufacturing and thereby became subject to the rules.
The Commission also provided guidance regarding the meaning of “contracting to manufacture.” In this regard, an issuer is “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination will be based on the facts and circumstances, taking into account the degree of influence the company exercises over the actual manufacturing of the product. Accordingly, a company will not be 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; or
- specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.
Although it did not define the term “necessary to the functionality or production,” the Commission did note that, to meet this standard, a conflict mineral needs to be necessary for a product’s generally accepted use, function or purpose and actually contained in the product. Accordingly, conflict minerals used as catalysts in production would not be included unless the conflict material is also contained in the final product.
Companies concluding that no conflict minerals are necessary to the functionality or production of any of their products are not subject to the new conflict mineral disclosure requirements. Companies concluding that conflict minerals are necessary to the functionality or production of any of their products must undertake Step Two.
The issuer must perform a “reasonable country of origin inquiry” regarding whether such necessary conflict minerals originated in any of the Covered Countries.
An issuer that determines that it uses conflict minerals must then conduct a good faith “reasonable country of origin inquiry” with regard to those minerals. This inquiry must be reasonably designed to determine whether any of its minerals originated in a covered country or are from scrap or recycled sources.
An issuer will have a disclosure obligation if this inquiry results in either of the following determinations:
- the issuer knows that the minerals did not originate in a covered country or are from scrap or recycled sources, or
- the issuer has no reason to believe that the minerals may have originated in a covered country and may not be from scrap or recycled sources.
If the issuer’s inquiry results in either of these determinations, the issuer will be required to:
- file a Form SD that discloses that determination, provides a brief description of the inquiry it undertook, and the results of the inquiry; and
- make the description of its inquiry available on its website and provide the Internet address of its website disclosure in its Form SD.
The issuer’s “reasonable country of origin inquiry” will also determine whether further steps are necessary. Specifically, the issuer will be required to undertake additional steps and provide additional disclosures if:
- 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 recycled or scrap sources.
If the issuer determines both of these factors, it will then be required to:
- undertake “due diligence” on the source and chain of custody of its conflict minerals;
- file a Conflict Minerals Report as an exhibit to its Form SD;
- make the Conflict Minerals Report publicly available on its website; and
- provide the Internet address of that website in its Form SD.
Perform due diligence on the necessary conflict minerals source and chain of custody.
An issuer that is required to file a Conflict Minerals Report will have to exercise due diligence on the source and chain of custody of its conflict minerals. The Commission did not specify the manner in which an issuer should undertake this due diligence; rather, these due diligence measures are required to conform to a nationally or internationally recognized due diligence framework (such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development for tin, tantalum and tungsten (available here) and for gold (available here)). Following this due diligence, an issuer’s obligations will depend on whether its products are “DRC Conflict Free,” “Not ‘DRC Conflict Free,’” or “DRC Conflict Undeterminable.”
If an issuer determines that its minerals are “DRC Conflict Free”
If an issuer determines that its minerals may have originated from the covered countries but did not finance or benefit armed groups, then the issuer will be required to:
- 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; and.
- identify the auditor.
The objective of the independent private sector audit of the Conflict Minerals Report will be:
- whether the due diligence framework conforms to a nationally or internationally recognized due diligence framework; and
- whether the company actually performed the due diligence as described in the Conflict Minerals Report.
If an issuer is not able to determine that its minerals are “Not ‘DRC Conflict Free’”
The issuer will be required to include the audit and certification requirements discussed above and, in addition, 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; and
- the efforts to determine the mine or location of origin with the greatest possible specificity.
If an issuer is not able to determine whether its minerals are “DRC Conflict Free”
For a two-year period following the initial operation of the new requirements (this period is four years for “smaller reporting companies”), an issuer will have to report that those products were “DRC conflict undeterminable.” In this situation, an issuer will be required to 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; 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 necessary conflict minerals benefit armed groups, including any steps to improve due diligence.
For those products that are “DRC conflict undeterminable,” the company will not be required to obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict minerals in those products.
Requirements regarding minerals from recycled or scrap sources
If a company’s conflict minerals are derived from recycled or scrap sources, the company’s products containing such minerals will considered “DRC conflict free.” In this regard, the due diligence must be undertaken in accordance with an internationally recognized due diligence framework. As the Commission noted, however, the only existing framework relates to gold. Accordingly:
- If an issuer cannot reasonably conclude after its inquiry that its gold is from recycled or scrap sources, then it will be required to undertake due diligence in accordance with the OECD Due Diligence Guidance (available here), and get an audit of its Conflict Minerals Report.
- Until a nationally or internationally recognized due diligence framework for determining whether Columbite-Tantalite, Cassiterite or Wolframite are recycled or scrap, if a company cannot reasonably conclude after its inquiry that its minerals are from recycled or scrap sources, the company will be required to describe the due diligence measures it exercised in determining that such conflict minerals are from recycled or scrap sources in its Conflict Minerals Report. Such a company will not be required to obtain an independent private sector audit regarding such conflict minerals.
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For more information regarding this guidance please contact your regular O’Melveny & Myers LLP attorney or the authors of this release.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Marty Dunn, an O'Melveny partner licensed to practice law in the District of Columbia and Maryland, David Lavan, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, and Lilit Voskanyan, an O'Melveny associate licensed to practice law in the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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