Implementing Section
1502 of the Dodd-Frank Act, the SEC adopted regulations requiring companies to make specialized disclosure
about conflict minerals. The vote to adopt the regulation was 3-2, with
Commissioners Paredes and Gallagher dissenting. The requirements apply equally
to domestic and foreign issuers.
Section 1502 directs
the Commission to issue rules requiring companies to disclose their use of
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. The SEC rule would
apply to a company that uses any of the four designated minerals if the company
files reports with the SEC under the Exchange Act and the minerals are necessary
to the functionality or production of a product manufactured or contracted to
be manufactured by the company.
A company would be
considered to be contracting to manufacture a product if it has some actual
influence over the manufacturing of that product. This determination
would be based on the facts and circumstances, taking into account the degree
of influence the company exercises over the product’s manufacturing. A
company would not be deemed to have influence over the manufacturing if it
merely affixes its brand or logo to a generic product manufactured by a third
party, services, maintains, or repairs a product manufactured by a third party,
or specifies or negotiates contractual terms with a manufacturer that do not
directly relate to the manufacturing of the product.
Under the final
rule, a company that uses any of the designated minerals would be required to
conduct a reasonable good faith country of origin inquiry 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 that the
company knows that the minerals did not originate in the covered countries or are
from scrap or recycled sources or the company has no reason to believe that the
minerals may have originated in the covered countries and may not be from scrap
or recycled sources, then the company must disclose its determination, provide
a brief description of the inquiry it undertook and the results of the inquiry
on new Form SD filed with the Commission.
The company also
would be required to make its description publicly available on its Internet
website and provide the Internet address of that site in the Form SD.
Under the final regulations,
companies that are required to file a Conflict Minerals Report would have to
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 Organization for Economic Co-operation and Development (OECD).
If a company determines
that its products are DRC conflict free, that is the minerals may originate
from the covered countries but did not finance or benefit armed groups, then
the company would have to obtain an independent private sector audit of its
Conflict Minerals Report, certify that it obtained such an audit, include the
audit report as part of the Conflict Minerals Report, and identify the auditor.
The independent audit would verify that the company’s
due diligence was conducted in conformity with an internationally recognized due
diligence guideline, which essentially means the OECD Due Diligence Guidance,
which the staff noted is the only internationally recognized due diligence
guideline.
The OECD Due Diligence
Guidance for responsible supply chains of conflict minerals is a five-step due diligence
regime for use by any company potentially sourcing minerals or metals from
conflict-affected areas. Broadly, the guidance recognizes that, while specific
due diligence requirements will differ depending on the mineral and the
position of the company in the supply chain, companies should review their
choice of suppliers and sourcing decisions and integrate into their management
systems a five-step framework for risk-based diligence for responsible supply
chains of minerals from conflict areas.
The first step is to
establish strong management systems under which companies can adopt and
communicate to suppliers a policy for the supply chain of minerals originating
from conflict areas, a policy incorporating the standards against which due
diligence is to be conducted. The company must also structure internal
management to support supply chain due diligence and establish a system of
controls over the mineral supply chain, including a chain of custody.
The second and third
steps are to identify and assess risk in the supply chain of adverse impacts in
light of the standards of the company’s supply chain policy and implement a
strategy to respond to identified risks. A risk management plan should be
implemented and monitored and the performance of risk mitigation efforts
tracked.
The fourth step is
to carry out an independent third-party audit of due diligence at identified points
in the supply chain. The fifth step is to publicly report on the company’s supply
chain due diligence policies and practices.
If a company’s products
have not been found to be DRC conflict free, then the company in addition to
the audit and certification requirements would have to describe in its Conflict
Minerals Report the products manufactured or contracted to be manufactured 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 the conflict
minerals in those products, and the efforts to determine the mine or location
of origin with the greatest possible specificity.
For a temporary
two-year period, or four-year period for smaller reporting companies, if the
company is unable to determine whether the minerals in its products originated
in the covered countries or financed or benefited armed groups in those countries,
then those products would be considered DRC conflict undeterminable. In that
case, the company must describe in its Conflict Minerals Report its products
manufactured that are DRC conflict undeterminable, the facilities used to
process the conflict minerals in those products, the country of origin of the
conflict minerals in those products, the efforts to determine the mine or
location of origin with the greatest possible specificity, and the steps it has
taken or will take, if any, since the end of the period covered in its most
recent Conflict Minerals Report to mitigate the risk that its necessary
conflict minerals benefit armed groups, including any steps to improve due
diligence.
For those products
that are DRC conflict undeterminable, the company would not be required to
obtain an independent private sector audit of the Conflict Minerals Report
regarding the conflict minerals in those products.
There are special
rules governing the due diligence and Conflict Minerals Report for minerals
from recycled or scrap sources. If a company’s conflict minerals are
derived from recycled or scrap sources rather than from mined sources, the
company’s products containing such minerals are considered DRC conflict free.
If a company cannot
reasonably conclude after its inquiry that its gold is from recycled or scrap
sources, then it would be required to undertake due diligence in accordance
with the OECD Due Diligence Guidance, and get an audit of its Conflict Minerals
Report. Currently, gold is the only conflict mineral with a nationally or
internationally recognized due diligence framework for determining whether it
is recycled or scrap, which is part of the OECD Due Diligence
Guidance.
For the other three
minerals, if a company cannot reasonably conclude after its inquiry that its
minerals are from recycled or scrap sources, until a due diligence framework is
developed, the company will be required to describe the due diligence measures
it exercised in determining that its conflict minerals are from recycled or
scrap sources in its Conflict Minerals Report. Such a company is not
required to obtain an independent private sector audit regarding such conflict
minerals.
Under the final
rule, the issuer would be required to provide the disclosure on the new Form SD.