Following extensive public comment and deliberations on proposed regulations issued in December 2010, the U.S. Securities and Exchange Commission ("SEC"), by a 3-2 vote, adopted final rules on August 23, 2012, requiring companies who file reports under the Securities Exchange Act of 1934 to disclose publicly their use of "conflict minerals" originating from the Democratic Republic of Congo (the "DRC") or surrounding areas. "Conflict minerals" are tin, tantalum, tungsten and gold (often referred to as "3TG"), which are widely used in jewelry, health care devices, automotive and aerospace components, consumer electronics, communications equipment and industrial manufacturing. The rules were developed under authority of Section 1502 of the "Dodd-Frank" Act to incentivize companies not to source their minerals from the DRC where the mineral trade has been exploited to finance a conflict that has created a humanitarian crisis.
The new conflict minerals rules impose substantial compliance and due diligence obligations on SEC reporting companies (whether U.S. or foreign issuers) for which the 3TG minerals are "necessary to the functionality or production" of products that they manufacture or contract to be manufactured. Companies will be required to perform a reasonable "country of origin" inquiry to determine whether their products use 3TG minerals that originate from the DRC or surrounding areas (the "Covered Countries"). If the company (a) knows that the minerals did not originate in the Covered Countries or that they are from scrap or recycled sources, or (b) 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 that determination with a brief description of its inquiry on the company's website and in a new Form SD to be filed with the SEC.
If the company (a) knows or has reason to believe that the minerals may have originated in the Covered Countries, and (b) knows or has reason to believe that the minerals may not be from scrap or recycled sources, then the company must undertake due diligence as to the source and chain of custody of the minerals, file a Conflict Minerals Report with its Form SD, and publish the Conflict Minerals Report on the company's website.
The Conflict Minerals Report must state whether, having conducted due diligence, the company determines that the minerals are "DRC Conflict Free," meaning that the minerals may originate from the Covered Countries, but they were not used to finance or benefit armed groups in the DRC. If the company determines that its products are "DRC Conflict Free," it must:
- obtain an independent private sector audit of its Conflict Minerals Report;
- certify that it has obtained such an audit;
- include the audit report as part of the Conflict Minerals Report; and
- identify the author.
If the company's products have not been found to be "DRC Conflict Free," then the company must engage and certify the independent private sector audit, and its Conflict Mineral Report must disclose:
- 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 the originating location with the greatest possible specificity.
If a company is unable to determine the origin of the 3TG minerals in its products, the SEC provides a two-year grace period (four years for smaller reporting companies) during which the company may report its products as "DRC Conflict Undeterminable." In that case, the company does not need to obtain an independent private sector audit of the Conflict Minerals Report, but it must identify the following information in its Report:
- the products manufactured or contracted to be manufactured that are "DRC Conflict Undeterminable";
- the facilities used to process the minerals in those products, if known;
- the country of origin of the 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 to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve due diligence.
Special rules apply to companies whose products use recycled or scrap 3TG minerals. If the minerals originate from recycled or scrap sources instead of mined sources, the products containing those minerals are considered "DRC Conflict Free." If, after conducting a country of origin inquiry, a company cannot reasonably conclude that any gold being used is from recycled or scrap sources, then the company must undertake due diligence in accordance with guidelines promulgated by the Organization for Economic Cooperation and Development, prepare a Conflict Minerals Report and obtain an independent audit of the report.
If a company cannot reasonably conclude that tin, tantalum or tungsten being used is from recycled or scrap sources, then the company must describe due diligence measures it exercised in its Conflict Minerals Report.
Baker Hostetler is helping clients to understand the new conflict minerals rules and take the necessary steps for compliance. We can assist with country of origin inquiries, adopting appropriate due diligence procedures, conducting supply chain audits, preparing SEC reports and reviewing contract provisions to ensure proper tracing of mineral origins.
For more information on compliance with the SEC's Conflict Minerals rules implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, contact Melvin S. Schwechter (firstname.lastname@example.org, 202.861.1559); Michael S. Snarr (email@example.com, 202.861.1710) or your Baker Hostetler relationship contact.
Authorship Credit: Melvin S. Schwechter and Michael S. Snarr
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