Companies have until May 31, 2014 to comply with the conflict-minerals provisions of the Dodd-Frank law (Section 1502). Enacted in response to U.S. concern about funding violent activities in the Democratic Republic of the Congo (DRC) and adjoining countries (Covered Countries), Section 1502 seeks to ensure more responsible sourcing by U.S. companies of the minerals — particularly tantalum, tin, gold and tungsten — that often finance violence in the region.
As a result, the conflict minerals rule — promulgated by the Securities and Exchange Commission (SEC) pursuant to Dodd-Frank — requires that U.S. registrants file a Form SD annually with certain disclosures relating to the source of their conflict minerals. In some cases, a Conflict Minerals Report (CMR) may also be required and/or an independent private sector audit (IPSA) obtained.
Conflict minerals compliance is a challenging endeavor. Registrants with necessary conflict minerals must perform a reasonable country of origin inquiry (RCOI) to determine whether minerals originated in a Covered Country. If a RCOI concludes conflict minerals are not from a Covered Country, registrants must still file a Form SD, but no CMR is required.
On the other hand, if conflict minerals are derived from a Covered Country — and are not from scrap or recycled sources — registrants must perform additional due diligence to determine whether the minerals are from a source that provides funding to armed groups in the region. In this case, registrants must file a CMR as well as an IPSA report with Form SD and must include a description of the due diligence measures taken on the source and chain of custody of those conflict minerals. The SEC estimates that approximately 75% of registrants will fall into this latter category.
The CMR must include the following information:
The country of origin of those conflict minerals;
Any efforts made to determine — as specifically as possible — the mine or location of origin;
The facilities used to process those conflict minerals, such as the smelter or refinery through which the issuer’s minerals pass; and
A description of those products not considered "DRC conflict free."
Conflict minerals compliance is an onerous task with thousands of products containing conflict minerals moving through extensive supply chains. For this reason, the SEC has implemented a temporary two-year grace period, during which registrants may report certain products as "DRC conflict undeterminable."
Currently, the SEC does not plan to impose fines for noncompliance, although such penalties could materialize as the rule evolves. Regardless of the legal ramifications, companies are likely to face pressure from human-rights activists, non-governmental organizations and consumer and other market forces to prove their products are conflict free. The potential damage to a company's reputation should be enough incentive to spur conflict minerals compliance.