Canada: SEC Proposes Rules Regarding Disclosure of Conflict Minerals and Payments to Governments

Last Updated: January 21 2011
Article by Michael Pickersgill

On December 15, 2010, the SEC issued proposed rules under sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Under these rules, mining companies filing with the SEC, including foreign private issuers, may soon become subject to new obligations and disclosure rules relating to the use of conflict minerals and payments made to foreign governments.

Conflict Minerals

Section 1502 of the Dodd-Frank Act obligates the SEC to adopt regulations that would require certain filers to disclose whether any products that are manufactured by such person contain certain minerals that originated in the Democratic Republic of Congo or an adjoining country (DRC country).

The proposed SEC rule would apply to issuers that file annual reports with the SEC under the U.S. Securities Exchange Act of 1934, including foreign private issuers, and for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by the issuer.

Although the term "manufacture" is not defined in the draft rules, the SEC has indicated that it views mining companies as being manufacturers of minerals for purposes of this provision. In addition, the SEC has indicated that this provision applies to retailers that contract for the manufacture of products and retain influence over the manufacturing process. The rules would also apply to retailers selling generic products under their own brand name or a separate brand name that they have established, regardless of whether the issuers have any influence over the manufacturing of the products, as long as the issuer has contracted with another party to manufacture the product specifically for that issuer.

Conflict minerals are defined to include gold, columbite-tantalite (coltan), cassiterite, wolframite, any of their derivatives or any other mineral that the Secretary of State of the United States determines is financing conflict in a DRC country.

Issuers subject to the rule would be required to use reasonable efforts to determine the country of origin of the subject minerals and disclose in its annual report whether any such conflict minerals originated in a DRC country. An issuer that concludes that its conflict minerals did not originate in a DRC country would disclose that determination and the process undertaken to get comfortable with it. An issuer that concludes that conflict minerals did originate in a DRC country, or is unable to conclude that the minerals did not originate in such country, must prepare a "Conflict Mineral Report" in accordance with the requirements of the Dodd-Frank Act and the SEC rules. This report will require an independent audit and must be disclosed as an exhibit to the issuer's annual report and posted on the issuer's website.

As currently formulated, the rule will create a significant due diligence requirement for affected companies to address these issues with their supply chains. Accordingly, it is reasonable to expect that mining companies will face increasing attention and scrutiny from end-use customers and intermediaries that may be required to exercise due diligence in establishing the source and chain of custody of their raw mineral components.

Payments to Governments

Section 1504 of the Dodd-Frank Act directed the SEC to promulgate regulations that would require any resource-extraction issuer that is required to file reports with the SEC to disclose payments of any kind made to a government or governmental agency.

The proposed SEC rule would apply to issuers required to file an annual report with the SEC, including foreign private issuers, and that engage in the exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals, or the acquisition of a licence for any of these activities. The SEC expressly excludes activities that are "ancillary or preparatory" to development, such as the manufacture of a drill bit or transportation services.

Payments will include those made in respect of the commercial development of oil, natural gas and minerals and that are not de minimis. This expressly includes taxes, royalties, fees (including licence fees), production entitlements, bonuses and other material benefits that are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.

The proposed SEC rule mandates that a resource-extraction issuer disclose in an annual report – in an interactive format – the type and total amount of payments made for each project relating to the commercial development of oil, natural gas or minerals as well as the type and total amount of these payments made to each government. In addition, certain detailed information regarding the payments will be required, including currency and timing of payments.

Request for Comments

As part of its releases, the SEC has requested comments on a number of questions relating to the proposed rules, including whether the provisions should apply to "foreign private issuers." The proposed rules can be accessed at conflict minerals and payments to governments. The SEC has requested comments by January 31, 2011. The Dodd-Frank Act requires that final rules be in place by April 15, 2011, and will apply to an issuer's first full year ending after the issuance of the final rules (the year ending December 31, 2012 for issuers with a calendar year-end).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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