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On August 22, 2012, the Securities and Exchange Commission
adopted final rules relating to "conflict minerals"
originating in the Democratic Republic of the Congo and adjoining
countries (currently, Angola, Burundi, Central African Republic,
the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda
and Zambia) (together the "Covered Countries"). Adoption
of the rules was required pursuant to section 1502 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The
minerals regulated under these rules are: cassiterite (tin),
columbite-tantalite (tantalum), gold, wolframite (tungsten), any
additional minerals as determined by the Secretary of State and
their derivatives.
Determination of Applicability of Conflict Minerals
Rules
Public companies are subject to the conflict minerals rules if
conflict minerals are "necessary to the functionality or
production" of a product they manufacture or a product they
contract to be manufactured by third parties. Companies subject to
the conflict minerals rules are required to determine, following a
"reasonable country of origin inquiry," whether their
conflict minerals originated in the Covered Countries or are
derived from scrap/recycled materials.1
If a company determines that it is subject to the conflict
minerals rules, it will be required to disclose such determination
in a new Form SD.
Reasonable Country of Origin Inquiry
The "reasonable country of origin inquiry" must cover
all conflict minerals that are necessary to the functionality or
production of the reporting company's products. The SEC has not
defined "reasonable country of origins inquiry" and has
instead stated that such determination should be based on an
individualized facts and circumstances determination.
If a company determines that its conflict minerals did not
originate in a Covered Country or originated in a Covered Country
but were derived from scrap/recycled materials,2 its
products qualify as "DRC conflict free." The
determination must be disclosed in its Form SD and on its website.
If a company determines that any of its conflict minerals are not
DRC conflict free, it will be required to disclose this
determination in its Form SD, prepare a conflict minerals report to
be furnished as an exhibit to its Form SD and publicly disclose
this information on its website.
Due Diligence and Conflict Minerals
Report
If a company determines that any of its conflict minerals are
not DRC conflict free, it must conduct due diligence on the source
and chain of custody of its conflict minerals and include a
description of such diligence procedures in its report. A
company's report must also include a description of the
products manufactured or contracted to be manufactured containing
the conflict minerals, the facilities used to process those
conflict minerals, the country of origin of those conflict minerals
and the efforts made to determine the mine or location of origin
with the greatest possible specificity. The SEC has not set forth
specific due diligence standards, but has indicated that a
company's conduct should conform, where available for the
specific conflict mineral, to nationally or internationally
recognized standards of, or guidance for, due diligence regarding
conflict mineral supply chains. A company must also obtain, and
certify to, an independent audit validating its findings.
If a company, after conducting its due diligence, is unable to
determine the source of its conflict minerals it can designate its
products as "conflict undeterminable" and defer the audit
of its report for up to two years. Smaller reporting companies are
permitted to use this designation for up to four years. Such
companies, however, must still file a report, and must describe the
steps they have taken or will take to mitigate the risk that their
conflict minerals benefit armed groups, including steps to improve
their due diligence.
Initial Form SD Filings
All companies subject to the conflict minerals rules will be
required to file their initial Form SD by May 31, 2014, for the
calendar year ending December 31, 2013.
Footnotes
1 The conflict minerals rules do not apply to any
conflict minerals that are outside of the supply chain prior to
January 31, 2013.
2 A company must exercise due diligence regarding whether
their conflict minerals are from scrap/recycled materials. Such due
diligence must conform to a recognized national or international
due diligence framework, if available, for the particular
scrap/recycled conflict mineral.
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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