The U.S. Securities and Exchange Commission ("SEC")
failed to issue a final rule on conflict minerals regulations
before the end of 2011, and companies still await clear guidance on
the scope of Section 1502 and the nature of the relevant reporting
requirements. In an announcement regarding "upcoming activity" related to the
implementation of Dodd-Frank, the SEC has now indicated that the
final rule for Section 1502 will be adopted between January and
June 2012. Notably, the SEC's announcement indicates that
"this is an estimated timeline and may be subject to
change." The final rule was
originally scheduled to be issued no later than April 15,
The Conflict Minerals Report Requirement
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act requires companies that utilize tin, tungsten,
tantalum, and gold to conduct and disclose
due diligence on their supply chains in order to identify
whether the those minerals originated in the Democratic Republic of
Congo ("DRC") or adjoining countries. If an issuer either
determines that its conflict minerals originated in the DRC
countries, or cannot conclude that the conflict minerals did not
originate in the DRC countries, the issuer will be required to
disclose this information in its annual report. The issuer must
then furnish a Conflict Minerals Report ("CMR") as an
exhibit to the annual report, and must disclose the Internet
address at which this exhibit is available.
The CMR must describe the due diligence that the issuer
conducted on the source and chain of custody of its conflict
minerals. Issuers will be required to describe: products that are
not "DRC conflict free"; the country of origin of those
conflict minerals; the facilities used to process those minerals;
and efforts taken to locate the mine or source of the minerals with
the greatest possible specificity.
The Reporting Timeframe
Section 1502 requires impacted issuers to submit their first
disclosures regarding their first full fiscal year which begins
after the promulgation of the final rule. With a final rule now
delayed again, issuers currently subject to the legislation must
evaluate how to prepare for the future disclosure requirements.
Looking ahead, and based on previous experience, it is most
likely that the SEC will introduce a phased approach for
disclosures, whereby certain initial disclosures will be required
in the first reporting year that will need to be augmented in
subsequent years. Many stakeholders have urged the SEC to adopt a
phased approach in comments to the
proposed regulations issued in December 2010.
Groups calling for a phased approach include the U.S. Chamber of
Commerce, the National Association of Manufacturers, and the House
Financial Services Committee. This could logically take the form of
requiring larger issuers to fully comply in the first year
following the issuance of the final rule, while giving smaller
issuers the benefit of more time to comply. This approach has been
used in several prior instances, including: the requirement for the
inclusion of XBRL (eXtensible Business Reporting Language) data
files in corporate filings; and the requirement, pursuant to
Section 404 of the Sarbanes-Oxley Act, for an independent
auditor's report on the effectiveness of internal controls over
financial reporting (although the requirement for smaller companies
was eliminated by Dodd-Frank).
If the rule is issued in the next few months, issuers with
fiscal years beginning in March/April or June/July would be
required to issue their first reports in early to mid-2013. Issuers
may fear being required to report on due diligence efforts
undertaken during a time period unguided by final regulations, but
that appears unlikely based on the language of Section 1502. That
said, however, issuers with fiscal years beginning soon should be
prepared to hit the ground running and ideally will have identified
appropriate internal groups or departments who would be charged
with collecting the required information in order to facilitate
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In a recent decision, Continental Casualty Co. v. Symons, the Seventh Circuit Court of Appeals made clear that the structure of a transaction will not save it from being set aside as a fraudulent transfer if the facts warrant the transaction's avoidance.