SEC Adopts Conflict Mineral Disclosure Rules

by Perkins Coie
Contact

The Securities and Exchange Commission recently adopted final disclosure and reporting rules as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring certain public companies to disclose on a new Form SD their use of conflict minerals originating in the Democratic Republic of the Congo (the DRC) or an adjoining country. 

For companies subject to these new rules, as described below, compliance will be required on a calendar year basis (regardless of a company's fiscal year) beginning January 1, 2013.  The first report on Form SD will be due May 31, 2014 (and on every May 31 thereafter).  See the flowchart issued by the SEC for an understanding of the steps required to comply with these new rules.  The Form SD and the conflict minerals information disclosed therein, will be deemed "filed" (not "furnished") under the Securities Exchange Act of 1934 and will be subject to Section 18 of the Exchange Act, which deals with liability for any false or misleading statements.

This Update summarizes the key elements of these new rules and provides practical guidance.

What Are Conflict Minerals? 

As defined in the Dodd-Frank Act, conflict minerals include gold, tin, tantalum, tungsten and their derivatives. Conflict minerals also include any other mineral or mineral derivative as determined by the secretary of state to be financing conflict in the DRC or an adjoining country.  "Adjoining countries" presently includes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.  The DRC and its adjoining countries are referred to in these new rules as "covered countries."

Which Companies Are Subject to the New Disclosure Rules?

Companies That Meet All of the Specified Conditions.  Companies that meet all of the following conditions will need to comply with these new rules:

  • The company files reports with the SEC under Section 13(a) or 15(d) of the Exchange Act (including foreign issuers);
  • The company manufactures or contracts to manufacture a product; and
  • Conflict minerals are "necessary to the functionality or production" of such product.

These new rules do not define the phrases "contract to manufacture," "necessary to the functionality" of a product or "necessary to the production" of a product.  However, in the adopting release, the SEC provides some guidance for companies to determine whether they meet the second or third conditions described above. 

  • “Contract to Manufacture” a Product.  Whether a company "contracts to manufacture" a product will depend on the degree of influence the subject company exercises over the materials, parts, ingredients or components that are included in any product containing conflict minerals or their derivatives.  The SEC expressly provides that a company will not be considered to "contract to manufacture" a product if it does no more than:
    • specify or negotiate contractual terms with a manufacturer that do not directly relate to the manufacturing of the product;
    • affixes its brand, logo, label or marks to a generic product manufactured by a third party; or
    • services, maintains or repairs a product manufactured by a third party.

These new rules do not treat companies that mine conflict minerals as "manufacturers" of those minerals unless the company also engages in manufacturing.

  • Conflict Mineral "Necessary to the Functionality" of a Product.  The determination of whether a conflict mineral is "necessary to the functionality" of a product will depend on the specific company's facts and circumstances.  When making its determination, a company should consider:
    • whether the conflict mineral is intentionally added to the product or any component of the product and whether it 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 a conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.
  • Conflict Mineral "Necessary to the Production" of a Product.  The determination of whether a conflict mineral is "necessary to the production" of a product also requires a facts and circumstances analysis.  The SEC expressly provides, however, that in order for a conflict mineral to be considered "necessary to the production" of a product, the mineral must be both contained in the product and necessary to the product's production.  The SEC provides the following factors for consideration:
    • whether the conflict mineral is intentionally included in the product's production process, other than if it is included in a tool, machine or piece of 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.

If conflict minerals are outside the company's supply chain prior to January 31, 2013, the company will not be subject to these new rules.

What Must a Company Subject to these New Rules Do?

Conduct a Reasonable Country of Origin Inquiry and File a Form SD.  A company that determines that it is subject to these new rules must conduct a reasonable country of origin inquiry for its conflict minerals.  The SEC does not prescribe the specific actions for such inquiry, as each company's inquiry will depend on the particular facts and circumstances. The SEC does, however, require that the company's inquiry be conducted in good faith and reasonably designed to determine whether any of its conflict minerals originate in the covered countries or are from recycled or scrap sources.

  • Next Steps—Alternative 1.  Based on its reasonable country of origin inquiry, if a company knows or has reason to believe that its conflict minerals
    • may have originated in a covered country, or
    • may not be from recycled or scrap sources,

then the company must then conduct due diligence on the source and chain of custody of its conflict minerals and may be required to file a Conflict Minerals Report (as more fully described below) as an exhibit to its Form SD, depending on the outcome of its supply chain due diligence.

  • Next Steps—Alternative 2.  Alternatively, if, based on its reasonable country of origin inquiry, a company
    • knows that its conflict minerals did not originate in a covered country or are from scrap or recycled sources, or
    • has no reason to believe that its conflict minerals may have originated in a covered country or may not be from scrap or recycled sources,

then the company need only file a Form SD disclosing the company's determination and briefly describing the reasonable country of origin inquiry and the results of the inquiry. 

May Need to Exercise Due Diligence on Source and Chain of Custody and File a Conflict Minerals Report with the Form SD.  A company that is required to exercise due diligence on the source and supply chain of its conflict minerals must follow a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development (the OECD).  Unless a company determines, as a result of its due diligence exercise, that its conflict minerals are not from a covered country or are from recycled or scrap sources, it will be required to file a Conflict Minerals Report as an exhibit to its Form SD.  The Conflict Minerals Report must reflect the company's determination, based on its due diligence, of whether its products are "DRC Conflict Free" or "Not DRC Conflict Free."  The issuer must also obtain an independent private sector audit of the report.  Certain certification and disclosure requirements must also be included in the Conflict Minerals Report with each determination.  The independent private sector audit must (i) express an opinion regarding whether the due diligence conducted by the company conforms with a nationally or internationally recognized due diligence framework (the OECD guidance is the only such framework currently available), and (ii) express an opinion about whether the company did, in fact, engage in the due diligence according to the company's stated framework.

No CEO/CFO Certifications for Form SD.  The Form SD will not require certifications from the company's chief executive officer or chief financial officer, such as those that are required to accompany annual and quarterly reports filed with the SEC on Forms 10-K and 10-Q, and Form SD will not be incorporated by reference into a company's other SEC filings unless a company chooses to do so.

Temporary Relief for Products Deemed "DRC Conflict Undeterminable."  For a temporary 2-year period, or 4-year period for smaller reporting companies, if a company is unable to determine whether the minerals in its products originated from a covered country or were used to finance or benefit armed groups in the covered countries, the company may determine that its products are "DRC Conflict Undeterminable."  During such period, the company will still be required to file a Conflict Minerals Report and include certain disclosures similar to those required for "Not DRC Conflict Free" products, but the company will not need to obtain an audit.  Under these circumstances, the company will need to disclose in its Conflict Minerals Report the steps it has taken or intends to take to mitigate the risk that the conflict minerals contained in its products are benefiting armed groups in the covered countries.

Minerals from Recycled or Scrap Sources.  Products containing minerals from recycled or scrap sources are considered "DRC Conflict Free."  Specific rules govern the due diligence framework and Conflict Minerals Report disclosures for such minerals, and the requirements may differ according to mineral type.

Practical TIps:

What Can a Company Do Now to Prepare to Comply With these New Rules?

1. Create a Conflict Minerals Risk Profile

  • Develop a preliminary list of products that potentially contain conflict minerals.
  • Conduct targeted interviews of personnel with supply chain oversight to determine if conflict minerals are "necessary to the functionality or production" of a company product.
  • If commercially feasible, consider removing conflict minerals from the supply chain prior to January 1, 2013 to avoid the inquiry and audit burdens of these new rules.

2. Design and Implement a Practical Supply Chain Compliance Program

  • If conflict minerals are "necessary to the functionality or production" of a company product, begin planning a reasonable country of origin inquiry.
  • Consider developing a source and chain of custody due diligence process and framework.
  • Consider how to integrate supply chain compliance efforts into existing anti-corruption (e.g., U.S. Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act) and compliance programs and how to leverage efforts in those areas to comply with these new rules.
  • Consider implementing a Conflict Minerals Code of Conduct setting forth expectations for employees and transaction partners (including suppliers).
  • Consider creating Conflict Minerals compliance questionnaires and certification procedures for suppliers.

3. Train Relevant Employees

  • Begin preparing best-practices conflict minerals training programs for employees who are responsible for supply chain management and oversight.
  • Begin preparing customized training for key suppliers with the greatest risk exposure.

 

Additional Information

You can find the full text of the SEC’s adopting release containing these new rules at http://www.sec.gov/rules/final/2012/34-67716.pdf.

You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to public companies on our website.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie
Contact
more
less

Perkins Coie on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!