On August 22, 2012, the Securities and Exchange Commission (the “SEC”) adopted rules (the “Conflict Minerals Rules”) to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to require certain companies to publicly disclose their use of conflict minerals (gold, tantalum, tin and tungsten) that originated in the Democratic Republic of the Congo or any of its adjoining countries, collectively referred to as the “covered countries.” (1) These new rules impose additional disclosure obligations on affected companies that use conflict minerals in their products.
The Conflict Minerals Rules apply to a company if it files annual reports with the SEC under the Securities Exchange Act of 1934 (a “Registrant”) and if conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the Registrant. If required, a Registrant will file a conflict minerals report on the SEC’s new Form SD (specialized disclosure) by May 31, 2014 (for the 2013 calendar year) and annually on May 31 every year thereafter.
The Conflict Minerals Rules require that all Registrants undertake a three-step analysis to determine whether disclosure is required, and to what extent. Below is a summary for general information regarding the principal requirements of the Conflict Minerals Rules.
Step One: Determine Whether Conflict Minerals Rules Apply
The Conflict Minerals Rules apply if conflict minerals are necessary to the functionality or production of products manufactured or contracted to be manufactured by a Registrant. Conflict minerals included in a tool, machine or equipment used to produce a product (i.e., computers or power lines) or in the production of a product (i.e., as a catalyst), but not contained in the final product, will not subject a Registrant to conflict minerals disclosure. A Registrant that mines conflict minerals will not be subject to the disclosure requirements, unless it also is involved in manufacturing that otherwise requires it to be subject to the Conflict Minerals Rules.
A Registrant that determines that no conflict minerals are necessary to the functionality or production of any of its products is not required to make any conflict minerals disclosures. A Registrant that determines that conflict minerals are necessary to the functionality or production of any of its products must proceed to the next step.
Step Two: Country of Origin Inquiry
If a Registrant determines that it uses conflict minerals, then it must conduct a “reasonable country of origin inquiry” that is reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources. The Conflict Minerals Rules do not specify what is necessary to satisfy the reasonable country of origin inquiry requirement, however, the inquiry may be satisfied based on reasonably reliable representations from suppliers and facilities that produced the conflict minerals. If a Registrant determines that its conflict minerals did not originate in the covered countries or are from scrap or recycled sources, then it only needs to disclose on Form SD the determination, provide a brief description of the inquiry it undertook and the results of the inquiry.
The conflict minerals disclosure is required to be filed on Form SD, which must be signed by an executive officer of the Registrant. The Form SD will be “filed” and not “furnished” with the SEC and will therefore be subject to liability for misleading statements under Section 18 of the Exchange Act. However, no certifications are required to be filed with the Form SD, and the disclosures are not covered by the Sarbanes-Oxley Act CEO/CFO certifications and will not be incorporated into registration statements under the Securities Act of 1933.
Step Three: Diligence the Source and Chain of Custody
If a Registrant determines or has reason to believe that its conflict minerals may have originated from the covered countries or may not be from scrap or recycled sources, the Registrant must undertake due diligence on the source and chain of custody of its conflict minerals and file a Conflict Minerals Report as an exhibit to the Form SD. The due diligence investigation must conform to a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development.
As part of the due diligence investigation, a Registrant must determine whether or not its products are “DRC conflict free” (meaning minerals may originate from the covered countries but did not finance or benefit armed groups). Additional diligence, an independent audit and further disclosures are imposed based on this determination. For a two-year transition period (or four-year period for smaller reporting companies), if a Registrant is unable to determine the origin of its conflict minerals, then those products may be considered “DRC conflict undeterminable,” and while due diligence will be required, an independent audit will not be required during the transition period.
(1) The “covered countries” are the Democratic Republic of the Congo, Angola, Burundi, the Central African Republic, The Republic of Congo, Rwanda, Sudan, Tanzania, Uganda and Zambia.