Conflict Mineral Disclosure Rules

by Orrick - Structured Finance Group
Contact

The Securities and Exchange Commission (“SEC”) recently adopted final disclosure and reporting rules requiring certain public companies to disclose information about their use of “conflict minerals” originating in the Democratic Republic of the Congo (the “DRC”) or an adjoining country. The new rules are mandated by the Dodd-Frank Act and address concerns that trading in conflict minerals by armed groups is helping to finance conflicts in the DRC region and contributing to a humanitarian crisis. Companies are required to comply with the new disclosure rules for the calendar year beginning January 1, 2013, with the first disclosures due on May 31, 2014 and annually on May 31 thereafter.

As defined in the Dodd-Frank Act, conflict minerals include gold, tin, tantalum, tungsten and their derivatives, and any other minerals or their derivatives determined by the Secretary of State to be financing conflicts in covered countries. At present, the countries covered by these rules are the DRC, Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia (each, a “Covered Country”).

The new rules require disclosure by a public company if it manufactures, or contracts to have manufactured, a product that includes a conflict mineral that is needed to produce or operate the product, and mandate that issuers pursue a three-step analysis to determine the character of any required disclosure.

The conflict mineral disclosure rules are particularly relevant to suppliers of electronics products since electronic devices commonly require one or more conflict minerals to function properly. Electronics companies will often want to focus on approaches to the inquiry required by step 2 of the review process contemplated by the rules–that is, a reasonable inquiry into the derivation of conflict minerals used in the companies’ products.

Step One

First, an issuer must determine whether a product that it manufactures or contracts to be manufactured includes any volume of a conflict mineral that is “necessary to the functionality or production” of a product. SEC guidance on this step advises issuers to determine: (1) whether their product contains a conflict mineral; (2) whether the conflict mineral was intentionally added during the product’s production process; and (3) whether the conflict mineral is necessary to produce the product or cause the product to function properly.

Whether a company “contracts to manufacture” a product depends largely on the degree of influence exercised by the issuer on manufacturing of the product. The SEC has indicated that issuers will not be viewed as “contracting to manufacture” a product if their actions involve no more than: (1) specifying or negotiating contractual terms with a manufacturer that do not relate directly to manufacturing of the product; (2) affixing its brand, marks, logo, or label to a generic product manufactured by a third party; or (3) servicing, maintaining, or repairing a product manufactured by a third party. But it is understood, for example, that a semiconductor supplier that relies on third party foundries for production of its products would ordinarily be covered by the rules.

As to any given product of an issuer, if it does not include a conflict mineral or the conflict mineral is not necessary for the product’s functionality or production, the issuer is not required to make any disclosure under the rules and need not proceed to step 2. To “off ramp” at step one, though, the issuer should have a reasonable basis to conclude that its product satisfies one of these tests.

Step Two

If application of step one reveals that the new rules require disclosure action by an issuer, it must conduct a reasonable, good faith inquiry to determine whether conflict minerals used for its product(s) derive from mining in a Covered Country–a reasonable “country-of-origin inquiry.” The rules do not mandate a specific approach to a reasonable country-of-origin inquiry on the grounds that the character of an issuer’s inquiry will depend on the facts and circumstances of it and its products. The SEC has advised simply that the inquiry must be reasonably designed to determine whether the issuer’s conflict minerals fall into one of two categories such that it need not proceed to step three: (1) the conflict minerals did not originate in a Covered Country; or (2) the conflict minerals derive from scrap or recycled sources.

If a company determines that its conflict minerals did not originate in a Covered Country or are from recycled or scrap sources, or, if the company has no reason to believe that the minerals may have originated in a Covered Country or are from scrap or recycled sources, then the inquiry ends. The issuer is to disclose this information to the SEC on new SEC Form SD and describe the steps it completed in making this determination. The issuer must also place the description of its finding and reasonable country-of-origin inquiry on its public Internet site and provide the URL of its Form SD disclosure.

Expert assessments are ongoing regarding approaches to a country-of-origin inquiry that the SEC would consider to be adequate. Written certifications of suppliers would typically play a central role in such inquiries, but SEC guidance suggests that, as to a supplier that incorporates a conflict mineral into a supplied item, a certification alone would be inadequate. Rather, the issuer would also need to obtain from the supplier either: (1) the report of a reputable third-party auditor in support of a representation that conflict minerals did not derive from a Covered Country or are from recycled or scrap sources; or (2) proof of a “conflict-free” designation by a recognized industry group that requires an independent private sector audit of the supplier’s smelter.

Step Three

If an issuer determines that its product uses a conflict mineral that originated in a Covered Country and that did not come from recycled or scrap sources, the issuer must proceed to step 3. The issuer will also be required to file a Conflict Minerals Report as an exhibit to its Form SD, and make that report publicly available on its Web site, together with its Form SD.

An issuer that is required to file a Conflict Minerals Report must perform due diligence on the conflict minerals source and chain of custody, which is to be summarized and included in the final Conflict Minerals Report submitted to the SEC with the Form SD. The subject of the step three inquiry is whether operations in a Covered Country from which conflict minerals derived help to finance armed conflict. Companies performing due diligence are required to do so in conformance with a nationally or internationally recognized due diligence framework, such as the OECD Due Diligence Guidance. Following this due diligence, the issuer’s remaining obligations depend on whether its products are “DRC conflict free,” “Not DRC conflict free,” or “DRC conflict undeterminable.”

  • If an issuer determines that conflict minerals originated in a Covered Country but did not finance or benefit armed groups, the issuer must obtain an independent private sector audit of its Conflict Minerals Report, certify that it obtained such audit, include it in the Conflict Minerals Report and identify the auditor.
  • If an issuer determines that its minerals are not DRC conflict free, the Conflict Minerals Report must describe the applicable products, facilities used to process those minerals, the country of origin of the conflict minerals, and the efforts to determine the location of origin.
  • If an issuer is unable to determine whether the conflict minerals came from a Covered Country, came from recycled or scrap sources, or directly or indirectly financed or benefitted armed groups in a Covered Country, the company is–during a two to four-year grace period–permitted to not perform the independent private sector audit. The issuer is still required to disclose in its Conflict Minerals Report the steps it has taken or will take to mitigate the risk that its conflict minerals benefit armed groups, the country of origin of the conflict minerals (if known), the facilities used to process the conflict minerals (if known), and the efforts to determine the mine or location of origin with the greatest possible specificity.

The policy permitting an “undeterminable” finding is scheduled to last through the first two calendar years following the effective date of the rules (November 13, 2012) for all registrants and the first four calendar years for smaller reporting companies.

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.

© Orrick - Structured Finance Group | Attorney Advertising

Written by:

Orrick - Structured Finance Group
Contact
more
less

Orrick - Structured Finance Group 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.
Custom Email Digest
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.