On August 22, the Securities and Exchange Commission adopted a final rule implementing disclosure and reporting requirements regarding the use by issuers of conflict minerals from the Democratic Republic of the Congo (DRC) and adjoining countries (collectively, the Covered Countries) added as Section 13(p) to the Securities Exchange Act of 1934 (Exchange Act) by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. “Conflict minerals” are tantalum, tin, gold, tungsten, their derivatives, or any other minerals or their derivatives determined by the US Secretary of State to be financing conflict in the Covered Countries.
The final rule applies to issuers who file reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act and for which conflict minerals are “necessary to the functionality or production of a product to be manufactured by the company” or “contracted to be manufactured.” If an issuer determines it does not utilize conflict minerals or their derivatives in any production or manufacturing process (which includes components used in assembling a product as well as products manufactured for the issuer under contract), the rule would not require the issuer to take any action or make any disclosures with respect to conflict minerals. The final rule applies to domestic companies, foreign private issuers and smaller reporting companies. Conflict minerals disclosures will be filed on new Form SD, rather than in an issuer’s Annual Report on Form 10-K.
Issuers that use conflict minerals will be required to determine, after a reasonable country of origin inquiry, whether their conflict minerals originated in the Covered Countries. Such inquiry must be performed in good faith and reasonably designed to determine if any of the issuer’s conflict minerals either (1) originated in the Covered Countries or (2) are from scrap or recycled sources. If the issuer determines that either (1) it knows that its conflict minerals did not originate in the Covered Countries or are from recycled or scrap sources, or (2) it has no reason to believe that the conflict minerals may have originated in the Covered Countries or may not be from scrap or recycled sources, the issuer must disclose on Form SD the determination and describe both the process and results of the reasonable country of origin inquiry it used in reaching this determination. The issuer would also be required to make this disclosure available on its website, disclose in its Form SD the Internet address where this disclosure is posted, and maintain records demonstrating that its conflict minerals did not originate in the Covered Countries.
If the issuer either (1) knows or has reason to believe that its conflict minerals may have originated in the Covered Countries, or (2) knows or has reason to believe that its conflict minerals may not actually be from recycled or scrap sources, then the issuer must perform a due diligence inquiry on the source and chain of custody of its conflict minerals and file a Conflict Minerals Report as an exhibit to its Form SD. In a change from the proposed rules, the due diligence inquiry performed regarding the conflict minerals must conform to a nationally or internationally recognized due diligence framework.
The Conflict Minerals Report is required to contain different information depending on the results of this diligence inquiry and must be posted on the issuer’s website. If, after the due diligence inquiry, the issuer is able to determine that the minerals in its products did not finance or benefit armed groups, it can classify its products as “DRC conflict free.” Such an issuer must obtain a private sector audit of its Conflict Minerals Report from an independent auditing firm, and in its Conflict Minerals Report must (1) certify that it obtained such audit, (2) identify the auditor and (3) include the audit report of such auditor. If an issuer determines that its products are not “DRC conflict free,” then such issuer must also include in its Conflict Minerals Report (in addition to the audit requirements described above) (a) a list of the products either manufactured or contracted to be manufactured by such issuer that have been determined not to be “DRC conflict free,” (b) information regarding the facilities used to process the conflict minerals contained in such listed products, (c) the country of origin of the conflict minerals contained in such listed products, and (d) a description of what efforts were undertaken by the issuer to determine the mine or location of origin of its conflict minerals with the greatest possible specificity.
The final rule also added an additional potential classification, “DRC conflict undeterminable.” For a two-year period beginning after the initial implementation of the rule (four years for “smaller reporting companies”), if an issuer is unable to determine whether or not the conflict minerals in its products originated in the Covered Countries or benefited armed groups in the Covered Countries, it can classify such products as “DRC conflict undeterminable.” As a result of this classification, the issuer must provide the following information in its Conflict Minerals Report: (1) a list of the products that it has classified as “DRC conflict undeterminable,” (2) information regarding the facilities used to process the conflict minerals contained in such products, (3) the country of origin of the conflict minerals contained in such products, if known, (4) a description of what efforts were undertaken by the issuer to determine the mine or location of origin of its conflict minerals with the greatest possible specificity, and (5) a description of the steps it has taken or will take, if any, to improve its due diligence process and mitigate the risk that its necessary conflict minerals may benefit armed groups. No private sector audit is required for a Conflict Minerals Report that deals solely with products classified as “DRC conflict undeterminable.”
Under the final rule, the conflict minerals disclosure will cover each calendar year period, regardless of the issuer’s fiscal year end, and disclosure covering the previous calendar year period will be due on May 31 of each year. For issuers required to file Form SD, the first such form must be filed by May 31, 2014, for calendar year 2013.
Click here to view the adopting release for the rule (Release No. 34-67716). The final rule and compliance considerations will be discussed further in an upcoming Katten Client Advisory.