On August 22, 2012, the Securities and Exchange Commission (SEC) adopted, by a 3-to-2 vote, a final rule to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires new disclosures by reporting issuers concerning their use of conflict minerals (generally tantalum, tin, gold, or tungsten) that originated in the Democratic Republic of the Congo or an adjoining country (together, the DRC countries). The final rule is available at http://www.sec.gov/rules/final/2012/34-67716.pdf.

Section 1502 of the Dodd-Frank Act amended the Securities Exchange Act by adding a new Section 13(p), which requires the SEC to promulgate disclosure and reporting regulations regarding the use of conflict minerals from the DRC countries. According to the Dodd-Frank Act, the extreme levels of violence in the eastern Democratic Republic of the Congo financed by the exploitation and trade of conflict minerals originating in the DRC countries led Congress to enact this provision.

Overview

The SEC's final rule is summarized in a flow chart issued by the SEC, which can be found at the end of this alert. The rule requires any reporting issuer that uses conflict minerals as a necessary part of the functionality or production of a product manufactured or contracted to be manufactured by that issuer to disclose to the SEC on a specialized new disclosure form (Form SD) whether those conflict minerals originated in a DRC country. Issuers are required to file Forms SD for the same time period—a calendar year—regardless of when their individual fiscal years end, and each issuer must file its first Form SD on May 31, 2014 (for the 2013 calendar year) and annually on May 31 each year thereafter.

If the conflict minerals originated (or the issuer has reason to believe they originated) in a DRC country and did not come from scrap or recycled sources, or if the issuer cannot determine the source of the conflict materials, the issuer is required to file a separate "Conflict Minerals Report" as an exhibit to the Form SD that includes, among other things, a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its conflict minerals. In most circumstances, the issuer also is required to have an independent private-sector audit of the issuer's Conflict Minerals Report conducted in accordance with standards established by the Comptroller General of the United States. The Conflict Minerals Report must include a certification that such audit has been completed, as well as a copy of the audit report. The issuer must post these reports on its public website.

Acknowledging that the processes for tracing conflict minerals through the supply chain may need further development before an issuer can make a definitive determination on their source, the final rule provides that, for a two-year temporary period (four years for smaller reporting companies), an issuer may conclude that its products are "DRC conflict undeterminable" after exercising due diligence.

Analysis of Whether Disclosure Is Required

The first step in analyzing whether disclosures are required under the final rule is to determine whether a company is a reporting issuer that manufactures or contracts to manufacture products for which conflict minerals are necessary to those products' functionality or production.

Applicable to Reporting Issuers Only

The final rule applies to issuers that file reports (i.e., Forms 10-Q, 10-K, 20-F, and 8-K) with the SEC under Securities Exchange Act Sections 13(a) or 15(d). The final rule applies to domestic companies, foreign private issuers, and smaller reporting companies, including any such company that is an emerging growth company.

What Are Conflict Minerals?

The final rule defines "conflict minerals" as the following: (i) columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which are limited to tantalum, tin, and tungsten, unless the Secretary of State determines that additional derivatives are financing conflict in the DRC countries; or (ii) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the DRC countries.

The following are common uses of these minerals:

• Cassiterite is a metal ore that is most commonly used to produce tin and is used in alloys, tin plating, and solders for joining pipes and electronic circuits
• Columbite-tantalite is a metal ore from which tantalum is extracted, and tantalum is used in electronic components, including mobile telephones, computers, video-game consoles, and digital cameras, and as an alloy for making carbide tools and jet engine components
• Gold is used for making jewelry and also is used in electronic, communications, and aerospace equipment
• Wolframite is a metal ore used to produce tungsten, which is used for metal wires, electrodes, and contacts in lighting, electronic, electrical, heating, and welding applications

Due to the many uses of these conflict minerals, the final rule is likely to apply to many companies and industries.

The final rule exempts any conflict minerals that are outside the supply chain—that is, if they have been smelted or fully refined—before January 31, 2013.

What Does It Mean to "Contract to Manufacture a Product"?

The final rule does not define what it means to "contract to manufacture a product," but the SEC provides some guidance for issuers in the final rule release. The SEC notes that an issuer contracts to manufacture a product when it has some actual influence over the manufacturing of that production based on a facts and circumstances test. The final rule release clarifies that the SEC will not view an issuer as contracting to manufacture a product if the issuer's actions involve only:

• specifying or negotiating contractual terms with a manufacturer that do not directly relate to the manufacturing of the product;
• affixing its brand, marks, logo, or label to a generic product manufactured by a third party; or
• servicing, maintaining, or repairing a product manufactured by a third party.

When Are Conflict Minerals "Necessary" to a Product?

The final rule does not define "necessary to the functionality" or "necessary to the production," but in the final rule release, the SEC provided guidance regarding the interpretation of these phrases. In response to comments on the proposed rule, the SEC determined that only a conflict mineral that is contained in the product should be considered necessary to the functionality or production of the product.

The final rule release advises issuers to consider the following factors when assessing if the conflict mineral is necessary to the functionality of the product:

• whether a conflict mineral is contained in and intentionally added to the product or any component of the product and is not a naturally occurring by-product;
• whether a conflict mineral is necessary to the product's general expected function, use, or purposes; 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.

In order to be deemed necessary to production, a conflict mineral must appear in the final product. Therefore, an issuer that only uses tools made of conflict minerals to produce a device will not fall within the disclosure requirements of the final rule. However, if a conflict mineral is used as a catalyst as part of production and appears in the final product, then the conflict mineral is necessary to production and the issuer is subject to the final rule.

Determining Whether Conflict Minerals Originated in the DRC Countries

If conflict minerals are necessary to the functionality or production of a product manufactured by a reporting issuer, the rules require the issuer to disclose on Form SD whether those conflict minerals originated in the DRC countries. In order to make such disclosure, the issuer must make a reasonable country-of-origin inquiry in good faith to determine whether its conflict minerals originated in the DRC countries or if the materials are from scrap or recycled sources. In certain cases, the issuer will need to undertake a due diligence exercise beyond the reasonable country-of-origin inquiry and disclose the results of that exercise.

Reasonable Country-of-Origin Inquiry

Although the final rule does not specify steps and outcomes necessary to satisfy the reasonable country-of-origin inquiry, it does include general standards governing the inquiry and steps required as a result of the inquiry.

Under the final rule, the issuer's reasonable country-of-origin inquiry must be:

• conducted in good faith and
• reasonably designed to determine whether the issuer's conflict minerals originated in the DRC countries or are from recycled or scrap resources.

The SEC states that it views an issuer as satisfying the reasonable country-of-origin inquiry if it obtains reasonably reliable representations identifying the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the DRC countries, or that they came from recycled or scrap sources. The issuer must have reason to believe that these representations are true and must take into account any warning signs or other circumstances indicating that the conflict minerals it uses may have originated in the DRC countries or did not come from recycled or scrap sources. For example, if a processing facility received a "conflict-free" designation from certain recognized industry groups or if the facility itself obtained and made publicly available a private-sector audit certifying it as "conflict-free," then the issuer has reason to believe the representations are true. The issuer is not required to receive representations from all of its suppliers, so long as its inquiry is reasonably designed and conducted in good faith.

Issuers Not Required to Undertake Further Due Diligence Exercise

The issuer is not required to exercise further due diligence on its conflict minerals' sources or chain of custody, or file the Conflict Minerals Report described below as an exhibit to its Form SD, if—after completing its reasonable country-of-origin inquiry—the issuer:

• determines that the conflict minerals it uses did not originate in the DRC countries,
• determines that the conflict minerals it uses came from recycled or scrap sources,
• has no reason to believe that the conflict minerals it uses originated in the DRC countries, or
• reasonably believes that the conflict minerals it uses are from recycled or scrap resources.

However, the issuer must file a Form SD disclosing its determination and summarizing its reasonable country-of-origin inquiry and the results of the inquiry. The issuer also must disclose this information on its public website and provide a link to this website on the Form SD.

Issuers Required to Undertake Due Diligence Exercise

The issuer must exercise further due diligence on the source or chain of custody of the conflict minerals it uses if, after completing its reasonable country-of-origin inquiry, it:

• determines that the conflict minerals it uses originated in the DRC countries and did not come from recycled or scrap sources,
• has reason to believe that the conflict minerals it uses originated in the DRC countries and may not come from recycled or scrap sources, or
• cannot determine the source of the conflict minerals it uses.

Due Diligence Requirements

Issuers required to exercise due diligence measures on the source and chain of custody of the conflict minerals must use due diligence measures that conform to a nationally or internationally recognized due diligence framework, such as the guidance approved by the Organisation for Economic Cooperation and Development (OECD), which is available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.

If, after exercising due diligence measures on the source and chain of custody of the conflict minerals, the issuer concludes that the conflict minerals it uses did not originate in the DRC countries or came from recycled or scrap sources, then the issuer is not required to complete and file a Conflict Minerals Report with its Form SD, but it must disclose its reasonable country-of-origin inquiry, due diligence efforts, and the results of the inquiry and due diligence efforts on a Form SD. The issuer also must disclose this information on its public website and provide a link to this website on the Form SD.

If the issuer cannot reach such a conclusion, it must file a Conflict Minerals Report as an exhibit to its Form SD (as described in more detail below), post its Conflict Minerals Report on its public website, and provide a link to this website on the Form SD.

DRC Conflict Undeterminable

Beginning in calendar year 2013, for a period of two years (or four years for smaller reporting companies), products can be considered "DRC conflict undeterminable" if an issuer is unable to determine whether the conflict minerals it uses originated in the DRC or countries adjoining the DRC, or financed or benefited armed groups in those countries. For products that are "DRC conflict undeterminable," the issuer is not required to obtain an independent private-sector audit of the Conflict Minerals Report regarding the conflict minerals in those products.

Conflict Minerals Report

A Conflict Minerals Report identifies whether an issuer's product that uses conflict minerals is "DRC conflict free," meaning the product does not contain conflict minerals that directly or indirectly finance or benefit armed groups in the DRC countries, or that the product has not been found to be "DRC conflict free."

The Conflict Minerals Report must include:

• a description of the due diligence measures that the issuer undertook to determine the source and chain of custody of its conflict minerals, or diligence measures that the issuer undertook in determining that the conflict minerals came from recycled or scrap sources, including a certified independent private-sector audit of the Conflict Minerals Report conducted in accordance with the standards established by the Comptroller General of the United States;
• a certification by the issuer that it obtained such an independent private-sector audit;
• a description of the issuer's products 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 those conflict minerals, and the efforts made to determine the mine or location of origin with the greatest possible specificity;
• for any products that are "DRC conflict undeterminable" or contracts for such products to be manufactured, the steps the issuer has taken or will take to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence; and
• the audit report prepared by the independent private-sector auditor, which would identify the entity that conducted the audit.

The objectives of the independent private-sector audit are to express an opinion or conclusion as to whether:

• the design of the issuer's due diligence measures conforms with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and
• the issuer's description of the due diligence measures it performed as set forth in the Conflict Minerals Report with respect to the period covered by the report is consistent with the due diligence process that the issuer undertook.

In a change from the proposed rules, an issuer must file, rather than furnish, the Conflict Minerals Report with the SEC, subjecting the issuer to potential liability under Section 18 of the Securities Exchange Act.

Effective Date

Although the rule goes into effect 60 days after publication in the Federal Register, issuers must comply with the disclosure requirements for the calendar year beginning January 1, 2013, with the first report due by May 31, 2014. The issuer must file the Form SD by May 31 of the following year, regardless of the issuer's fiscal year.

California Conflict Minerals Law

On October 9, 2011, the governor of California approved Senate Bill 861, which precludes issuers that are in violation of the SEC's conflict minerals reporting requirements under Section 13(p) described above from contracting with state agencies in California.

Specifically, if an issuer "has been found to be in violation of Section 13(p) . . . by final judgment or settlement," such issuer will not be eligible to bid on or submit a proposal for a contract with a California state agency for goods or services related to products or services that resulted in the company's need to comply with the conflict minerals rules.

What to Do Now

There are several steps companies can take now to prepare for the upcoming disclosures:

• If you have not already done so, establish an internal working group with representatives from appropriate areas of your company, such as manufacturing, engineering, procurement, finance, and legal, to prepare for compliance with the conflict minerals disclosure rules.
• If you have not already done so, make a preliminary assessment of whether your company manufactures or contracts to manufacture products that contain the conflict minerals specified above, and, if so, whether the conflict minerals are "necessary to the functionality or production" of the product.
• If the results of the preliminary assessment indicate that your company uses conflict minerals that are necessary to the functionality or production of a product, conduct a preliminary assessment of the country of origin of the conflict minerals used. In addition, take steps to obtain reasonably reliable representations identifying the facility at which the conflict minerals were processed and demonstrating that those conflict minerals did not originate in the DRC countries or came from recycled or scrap sources.
• Prepare for the possibility of needing to undertake a further due diligence exercise by becoming familiar with the OECD due diligence framework identified above.
• As appropriate, you may wish to establish corporate policies related to conflict minerals in your supply chains. If the policy includes a practice of imposing requirements on suppliers, include such terms in supplier agreements going forward and consider whether amendments are required to existing supplier agreements to address the policy.
• Because of the growing importance of corporate social responsibility generally, companies should consider whether to include conflict-minerals-related disclosure as part of a larger corporate social responsibility program. For example, and if applicable, such a program also could include company policies regarding slavery and human trafficking in supply chains. As previously described in a WSGR Alert, last year California enacted legislation requiring website disclosure of a company's efforts (if any) to address risks related to slavery and human trafficking in their supply chains.

For any questions or for more information on these or any related matters, please contact your regular Wilson Sonsini Goodrich & Rosati attorney or any member of the firm's corporate and securities practice.

SEC Flowchart Summary of Final Conflict Minerals Disclosure Rule