SEC Issues Proposed Rules Regarding Conflict Minerals

10 February 2011 Publication
Author(s): Mark T. Plichta

Legal News Alert: Transactional & Securities

On December 15, 2010, the SEC issued proposed rules to implement the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The SEC estimates that these proposed rules will increase compliance and disclosure costs for approximately 6,000 of the companies that file periodic reports with the SEC under Exchange Act Sections 13(a) or 15(d), including foreign private issuers and smaller reporting companies. Manufacturers and certain retailers are the companies that most likely would be impacted by the proposed rules. This alert discusses the proposed rules and steps that companies should take in light of the proposed rules.

Under the proposed rules, any reporting company for which conflict minerals are “necessary to the functionality or production” of a product that the company either manufactures or contracts to be manufactured would be required to disclose annually whether in the past year it used conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country (DRC Countries).

“Conflict minerals” are defined by Dodd-Frank as:

  • Columbite-tantalite, also known as coltan (metal ore from which tantalum is extracted, which is used in electronic components, including mobile telephones, computers, videogame consoles, and digital cameras, and as an alloy for making carbide tools and jet engine components)
  • Cassiterite (metal ore that is most commonly used to produce tin, which is used in alloys, tin plating, and solders for joining pipes and electronic circuits)
  • Gold (used for making jewelry and, due to its superior electric conductivity and corrosion resistance, is also used in electronic, communications, and aerospace equipment)
  • Wolframite (metal ore that is used to produce tungsten, which is used for metal wires, electrodes, and contacts in lighting, electronic, electrical, heating, and welding applications)
  • Derivatives of any of the listed minerals
  • Any other mineral or its derivatives determined by the U.S. Secretary of State to be financing conflict in the DRC Countries

Determining If a Company Is Covered by the Proposed Rules

The SEC does not propose to define the phrase “necessary to the functionality or production,” although it did request comment on whether it should. The SEC stated in its proposing release that if a mineral is necessary, it is covered by the rule regardless of the amount of mineral involved. Further, the SEC intends the rules to include products if the mineral is necessary to the production process, even if the mineral is not ultimately included in the final product.

A product would be considered to have been contracted to be manufactured by a company if:

  • The company has any influence over the product’s manufacturing
  • The company offers a generic product under its own brand name or a separate brand name, regardless of whether the company has any influence over the manufacturing specifications of the product, provided the company has contracted to have the product manufactured specifically for itself

Determining Whether Conflict Minerals Originated in the DRC Countries and Resulting Disclosure

Under the proposed rules, a company would be required to disclose in its annual report on Form 10-K, Form 20-F, or Form 40-F, as applicable, whether its conflict minerals originated in the DRC Countries. This disclosure would be based on a reasonable country of origin inquiry.

The SEC did not include in the proposed rules a standard for determining whether a country of origin inquiry is reasonable. The SEC did state in its proposing release that the extent of a company’s inquiry would be based on that company’s particular facts and circumstances and that companies would not need to make this determination with absolute certainty. However, the proposed rules would not permit issuers to satisfy their country of origin disclosure requirement by concluding that there is “no evidence” that their conflict minerals originated in the DRC Countries and not provide any further information regarding their conflict minerals.

If a company concludes that its conflict minerals did not originate in the DRC Countries, the company would disclose this determination and the process it used in reaching this determination in its annual report. The company also would be required to make the disclosure regarding this determination available on its Web site, provide the Internet address of that Web site in its annual report, and maintain records supporting this determination.

If a company concludes that its conflict minerals did originate in the DRC Countries, or is unable to conclude that its conflict minerals did not originate in the DRC Countries, the company would disclose this conclusion in its annual report along with a notice that it has furnished a Conflict Minerals Report as an exhibit to its annual report. In addition to furnishing the Conflict Minerals Report with its annual report, the company would be required to make the Conflict Minerals Report available on its Web site and include a disclosure in its annual report that the Conflict Minerals Report is posted on its Web site along with the Internet address of that Web site.

Conflict Minerals Report and Supply Chains Due Diligence

Under the proposed rules, the Conflict Minerals Report would include a description of the measures the company had taken to exercise due diligence on the source and chain of custody of its conflict minerals. These measures would include an independent private-sector audit of the company’s report conducted in accordance with standards established by the Comptroller General of the United States. A company would be required to furnish the auditor’s report as part of the Conflict Minerals Report. A company also would have to certify in the Conflict Minerals Report that the company obtained this audit of the report.

Further, the company would be required to include in the Conflict Minerals Report a description of its products manufactured or contracted to be manufactured containing conflict minerals that are not DRC Conflict Free, the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.

The term “DRC Conflict Free” is defined in the Exchange Act as “products that do not contain conflict minerals that directly or indirectly finance or benefit armed groups” in the DRC Countries. If a company’s products contain conflict minerals that do not directly or indirectly finance or benefit armed groups in the DRC Countries, the company may describe such products as DRC Conflict Free, whether or not the minerals originated in the DRC Countries.

Companies also would be required to disclose the due diligence they used in making their determinations, such as whether they used any nationally or internationally recognized standards or guidance for due diligence.

Notably, the Conflict Minerals Report, including the audit report, would not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent specifically incorporated by reference. Therefore, unless an auditor’s report is specifically incorporated by reference into a company’s registration statement, a company would not need to file a consent from that auditor with such registration statement. Nor would the company need to file a consent from that auditor with its annual report.

Recycled or Scrap Sources

If a company’s conflict minerals are derived from recycled or scrap sources rather than from mined sources, the company would be permitted to file a Conflict Minerals Report stating that its conflict minerals were obtained from recycled or scrap sources and providing the basis on which it believes its conflict minerals are recycled or scrap. Companies would be required to exercise due diligence in determining that their conflict minerals were recycled or scrap and the Conflict Minerals Report would be subject to the independent audit requirement. Conflict minerals obtained from recycled or scrap sources are considered DRC Conflict Free.

Steps to Be Taken

If the SEC adopts the final rules in April 2011 as required by Dodd-Frank, companies with a December 31 fiscal year-end would be required to provide the disclosures required by the conflict minerals provisions in their first annual reports filed after December 31, 2012. Companies may wish to begin the process now of gathering the additional information necessary to comply with these new disclosure requirements and consider discussing with their suppliers the source of conflict minerals used in their products.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Mark T. Plichta
Milwaukee, Wisconsin

James M. Reeves
Milwaukee, Wisconsin

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