The deadline is approaching for companies to comply with the SEC's disclosure rules relating to the presence of conflict minerals in manufactured products. Conflict minerals are minerals whose production contributes to the financing of armed conflict and human rights abuses in and around the Democratic Republic of the Congo (DRC). The disclosure rules apply to SEC-reporting companies, including MJDS companies and other foreign private issuers, if conflict minerals are necessary to the functionality or production of a product that the company manufactures or contracts to have manufactured.1
The required conflict minerals disclosure must appear in a specialized disclosure report filed with the SEC on Form SD, which is due annually by May 31 for the prior calendar year. This bulletin summarizes the steps that SEC-reporting companies should be taking to prepare their first Form SD. The SEC's flow chart showing these steps is reproduced in Appendix A.
Step 1: Determine Whether or Not the Company is Subject to the Conflict Minerals Rules
An SEC-reporting company is subject to the rules if conflict minerals are necessary to the functionality or production of a product that the company (or any of its consolidated subsidiaries) manufactures or contracts to have manufactured. Conflict minerals are defined as
- columbite-tantalite (coltan) and its derivative tantalum, commonly used in electronic devices such as computers, cell phones, cameras and automobile parts,
- cassiterite and its derivative tin, commonly used for tin cans and in various electronic equipment parts,
- wolframite and its derivative tungsten, commonly used in durable tools and hard-wearing parts and products such as drill bits and golf club heads,
- gold, commonly used in jewelry, dental products and electronics, and
- any other mineral or derivative that is determined by the U.S. Secretary of State to be financing conflict in the DRC or an adjoining country.2
Companies do not have to comply with the new rules in respect of conflict minerals that were outside the supply chain (i.e., the minerals were already smelted or fully refined or were already outside the DRC or an adjoining country) before January 31, 2013.
Step 2: Conduct a Reasonable Country-of-Origin Inquiry
If a company is subject to the conflict minerals rules, it must conduct a reasonable country-of-origin inquiry to determine whether the conflict minerals in any of its products originated in the DRC or an adjoining country or were from recycled or scrap sources. Based on this inquiry, if the company
- has no reason to believe that the conflict minerals in any of its products originated in the DRC or an adjoining country, or
- reasonably believes that the conflict minerals came from recycled or scrap sources,3
then the company must file a Form SD disclosing its findings and briefly describing the country-of-origin inquiry that was undertaken. This information must also be posted on the company's website. If a company cannot make either of the determinations above, then it must proceed to step 3.
Step 3: Conduct Due Diligence on the Source and Chain of Custody of Conflict Minerals
Based on its country-of-origin inquiry in step 2, if a company has reason to believe that any of its products contain conflict minerals that may have originated in the DRC or an adjoining country and may not be from recycled or scrap sources, then the company must conduct due diligence to determine the source and chain of custody of the conflict minerals. This due diligence work must conform to a nationally or internationally recognized due diligence framework.4 At present, the only such framework is the OECD's Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.5
Conflict Minerals Not from the DRC or an Adjoining Country or from Recycled or Scrap Sources
Based on its due diligence work, if a company is able to determine that
- its conflict minerals are not from the DRC or an adjoining country, or
- the conflict minerals came from recycled or scrap sources,
then the company's products may be categorized as DRC conflict-free. In that case, the company's Form SD must disclose this determination and briefly describe the country of origin inquiry and due diligence measures that were undertaken. The Form SD information must also be disclosed on the company's website.
Conflict Minerals Report and Independent Audit
If a company is unable to determine that its conflict minerals did not come from the DRC or an adjoining country and also cannot confirm that they came from recycled or scrap sources, then the company must include a Conflict Minerals Report as an exhibit to its Form SD. The Conflict Minerals Report must be posted on the company's website and must disclose the measures that the company undertook to exercise due diligence on the source and chain of custody of the conflict minerals. The Conflict Minerals Report must be independently audited, and the audit report must express an opinion or conclusion as to whether
- the design of the company's due diligence measures conformed, in all material respects, to the criteria set forth in the due diligence framework that the company used, and
- the company's disclosure is accurate in describing the due diligence measures that were undertaken on the source and chain of custody of the conflict minerals.
Conflict Minerals Financing or Benefitting Armed Groups
The final component of the company's due diligence process is to attempt to determine whether or not the conflict minerals in its products directly or indirectly financed or benefitted armed groups in the DRC or an adjoining country.6 If the company can rule this out, then it may categorize its products as DRC conflict-free. For products that cannot be categorized as DRC conflict-free, the company's Conflict Minerals Report must disclose
- the relevant products,
- the facilities used to process the conflict minerals in the products,
- the country of origin of the conflict minerals, and
- the company's efforts to determine the mine or location of origin of the conflict minerals with the greatest possible specificity.
Temporary Grace Period for Products that are DRC Conflict-Undeterminable
If a company is unable to determine whether or not its conflict minerals directly or indirectly financed or benefitted armed groups, then the company may, in its 2014 Conflict Minerals Report, categorize the products as DRC conflict-undeterminable.7 In that case,
- an independent audit of the Conflict Minerals Report is not required,
- the facilities used to process the conflict minerals and their country of origin need only be described to the extent known by the company, and
- the company must disclose the steps that have been or will be taken, if any, to mitigate the risk that its conflict minerals benefit armed groups, including any steps to improve the company's due diligence.
Beginning in 2015,8 companies may no longer categorize any products as DRC conflict-undeterminable and all of the regular rules must be complied with, including the independent audit requirement.
1 Mining companies are not treated as manufacturers, so they are not subject the new rules by virtue of their mining activities.
2 An adjoining country is one that shares an internationally recognized border with the DRC, which presently incudes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.
3 Conflict minerals are considered to be from recycled or scrap sources if they are from recycled metals, which are reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing. Recycled metal includes excess, obsolete, defective and scrap metal materials that contain refined or processed metals that are appropriate to recycle in the production of tin, tantalum, tungsten or gold. Minerals partially processed, unprocessed, or a by-product from another ore are not considered recycled.
4 A nationally or internationally recognized due diligence framework means one that was established following due-process procedures, including the broad distribution of the framework for public comment, and is consistent with the criteria standards in the Government Auditing Standards established by the Comptroller General of the United States.
5 This framework is available at http://www.oecd.org/corporate/mne/mining.htm.
6 An armed group means one that is identified as a perpetrator of serious human rights abuses in annual Country Reports on Human Rights Practices under sections 116(d) and 502B(b) of the Foreign Assistance Act of 1961 relating to the DRC or an adjoining country.
7 For smaller reporting companies, which generally means those with a worldwide public float of less than US$75 million, these modified rules apply from 2014 to 2016 inclusive.
8 2017 for smaller reporting companies.
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.