Section 1502 of the Dodd-Frank Act (the "Act"), passed by Congress in 2010, directed the SEC to issue rules requiring certain companies to disclose their use of so called "conflict minerals" if those minerals are "necessary to the functionality or production of a product" manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten.
Congress enacted Section 1502 of the Act because of concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the Democratic Republic of the Congo (the "DRC") region and is contributing to an emergency humanitarian crisis. Section 1502 of the Act amends the Securities and Exchange Act of 1934 to add Section 13(p).
In an article entitled "Preparing for Conflict Minerals Rule Compliance" which was originally published in the March 2012 issue of Friedman LLP's SEC Impact newsletter, we discussed the extensive scope of this legislation. The SEC believes that some 6,000 listed companies, and the tens of thousands of private companies that are part of their supply chains, may be affected by this little known provision of the Act.
In August 2012, the SEC adopted a final rule (see Conflict Minerals, Exchange Act Release No. 34-67716 (Aug. 22, 2012)), establishing the process by which issuers provide the disclosures required by the specialized corporate disclosure provisions of the Act.
The final rule applies to a company that uses certain minerals including tantalum, tin, gold or tungsten if:
- The company files reports with the SEC under the Exchange Act.
- The minerals are "necessary to the functionality or production" of a product manufactured or contracted to be manufactured by the company.
The final rule requires affected companies to provide the disclosures on a new form to be filed with the SEC (Form SD). All affected issuers are required to file for the same period - a calendar year - regardless of when their fiscal year ends. The first specialized disclosure report is due on May 31, 2014 (for the 2013 calendar year) and annually on May 31 every year thereafter.
A company is considered to be "contracting to manufacture" a product if it has some actual influence over the manufacturing of that product. This determination is based on facts and circumstances, taking into account the degree of influence a company exercises over the product's manufacturing.
A company is not deemed to have influence over the manufacturing if it merely:
- Affixes its brand, marks, logo, or label to a generic product manufactured by a third party.
- Services, maintains, or repairs a product manufactured by a third party.
- Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.
The requirements apply equally to domestic and foreign issuers.
Under the final rule, a company that uses any of the designated minerals is required to conduct a reasonable "country of origin" inquiry that must be performed in good faith and be reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources.
If the inquiry determines either of the following to be true:
- The company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources.
- The company has no reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources.
... then the company must disclose its determination, and provide a brief description of the inquiry it undertook and the results of the inquiry on Form SD.
The company also is required to:
- Make its description publicly available on its Internet website.
- Provide the Internet address of that site in the Form SD.
If the inquiry otherwise determines both of the following to be true:
- The company knows or has reason to believe that the minerals may have originated in the covered countries.
- The company knows or has reason to believe that the minerals may not be from scrap or recycled sources.
... then the company 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 company also is required to:
- Make publicly available the Conflict Minerals Report on its Internet website.
- Provide the Internet address of that site on Form SD.
Under the final rule, companies that are required to file a Conflict Minerals Report must exercise due diligence on the source and chain of custody of their conflict minerals. The due diligence measures 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 (OECD).
A future article will detail what must be included in the Conflict Minerals Report.
The SEC was sued on various grounds to block the SEC's Conflict Minerals Rule, but in its July 23, 2013 decision, the D.C. District Court upheld the SEC final rules for compliance with Section 1502 of the Dodd-Frank Act, rejecting all of the plaintiffs' arguments. The plaintiffs have filed a notice of appeal of the D.C. District Court's decision. Even though the D.C. Court of Appeals has agreed to expedite the case, there will not be a decision from the court until sometime in 2014. Therefore, even if the Conflict Minerals Rule is ultimately set aside by the court, given the nature and amount of work required to meet the May 31, 2014 filing deadline, companies will need to complete a substantial portion of their compliance work before the court reaches its decision.
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