Conflict Minerals – A Summary Of The SEC’s Final Rules - Securities

On August 22, 2012, the Securities and Exchange Commission, acting pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted a final rule¹ that will require public companies to make disclosures about the use of "conflict minerals" in the products that they manufacture or contract to manufacture. Congress adopted Section 1502 in order to further the humanitarian goal of ending the violent conflict and rampant human rights abuses in the Democratic Republic of Congo (the "DRC"), which have been partially financed by the exploitation and trade of conflict minerals from the region.

Together, Section 1502 and the final rule define "conflict minerals" as cassiterite (the metal most commonly used to produce tin), columbite-tantalite (also known as coltan, the metal ore from which tantalum is extracted), wolframite (the metal ore that is used to produce tungsten), their derivatives (tin, tantalum, and tungsten), and gold.² A mineral or derivative subsequently determined by the Secretary of State to be funding conflict in the DRC or a country sharing an internationally recognized border with the DRC (together with the DRC, the "Covered Countries"),³ will also be considered a "conflict mineral."

Overview

The final rule requires annual disclosures by public companies for which conflict minerals (regardless of the place of origin of such conflict minerals) are "necessary to the functionality or production" of products that they manufacture or contract to manufacture. Such companies must conduct inquiries into the country of origin of their necessary conflict minerals and disclose the results of those inquiries. If, based on its country of origin inquiry, a company determines that its conflict minerals originated in the Covered Countries and did not come from recycled or scrap sources, or has reason to believe that such conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources, then it must (i) exercise due diligence on the source and chain of custody of such conflict minerals and (ii) prepare an independently audited Conflict Minerals Report that, among other things, describes its due diligence efforts and identifies products containing conflict minerals that directly or indirectly finance or benefit designated armed groups perpetrating serious human rights abuses in the Covered Countries.

All companies providing disclosures under the final rule must do so on a new Form SD, to be filed annually with the SEC on or before May 31st. Information on Form SD will cover a company's conflict minerals disclosure for the prior calendar year, regardless of the company's fiscal year end. The first Form SDs will be due on or before May 31, 2014 and will cover conflict minerals disclosures for calendar year 2013.

The final rule contains a limited exemption for existing stores of conflict minerals as well as a grace period for compliance with respect to conflict minerals necessary to products that are manufactured or contracted to be manufactured by an acquired company. Additionally, for a limited period of time, companies unable to determine whether their conflict minerals directly or indirectly financed or benefitted armed groups in the Covered Countries will be able to describe products containing those minerals as "DRC conflict undeterminable" and will not be required to obtain an independent private sector audit of their Conflict Minerals Report with respect to such conflict minerals.

We discuss the specific requirements of the final rule below. In the adopting release, the SEC provided a useful flowchart summarizing the steps required to comply with the final rule. That flowchart may be found here.

What Companies are Covered?

The final rule applies to any registrant filing reports with the SEC under Section 13(a) or Section 15(d) of the Exchange Act (a "reporting company") for which conflict minerals are "necessary to the functionality or production of a product manufactured or contracted by that registrant to be manufactured."⁴ This broad category of companies includes domestic reporting companies, foreign private issuers, smaller reporting companies, and emerging growth companies.

Applicability of the rule to any particular company and its products will depend on interpretation of the terms "manufacture," "contract to manufacture," "necessary to the functionality," and "necessary to the production." The rule does not define these terms. The SEC does provide interpretive guidance for some of them, which we discuss in more detail below. However, the SEC also emphasizes that determining applicability of the rule will turn in many cases on a facts and circumstances analysis. This may present difficult judgment calls for companies in many cases. Moreover, companies will have to make this determination for each and every one of their products and/or components thereof.

Non-reporting companies are not directly subject to the final rule. Nonetheless, many non-reporting companies are likely to be affected by the rule. A reporting company subject to the rule will need to obtain information on the origins of conflict minerals in its supply chain. In order to meet the needs of the reporting companies, suppliers throughout the chain may need to perform country of origin inquiries or diligence on conflict minerals that may be contained in products or components they supply.

If a reporting company acquires or otherwise obtains control over a company that manufactures or contracts to manufacture products with conflict minerals necessary to the functionality or production of those products, and the acquired company previously had not been required to provide conflict minerals disclosure, then the acquiring company may delay the initial reporting period on products manufactured or contracted to be manufactured by the acquired company until the end of the first calendar year beginning no sooner than eight months after the effective date of the acquisition.⁵

1. Manufacturing and Contracting to Manufacture

The final rule does not define when a company is considered to manufacture a product, relying instead on the generally understood meaning of the term "manufacture." However, in the adopting release the SEC indicated that companies that only service, maintain, or repair products containing conflict minerals will not be considered to be "manufacturing" those products.

Similarly, the final rule does not define the term "contract to manufacture." The SEC opted instead to provide guidance as to the application of the term. According to the guidance provided in the adopting release, whether a company is considered to contract to manufacture a product will depend on the "degree of influence that it exercises over the materials, parts, ingredients, or components to be included in any product that contains conflict minerals." The SEC stated that the degree of influence necessary for a company to be considered to be contracting to manufacture a product will be based on each company's individual facts and circumstances. A company need not exert "substantial" influence or control over the manufacturing of a product to be considered to contract to manufacture that product, nor must a company specifically request that conflict minerals be included in such products in order to be covered by the final rule.

According to the guidance, a company will not be considered to contract to manufacture a product if the company only:

specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product (e.g., training or technical support, price, insurance, indemnity, intellectual property rights, dispute resolution),⁶
affixes its brand, marks, logo, or label to a generic product manufactured by a third party;⁷ or
services, maintains, or repairs a product manufactured by a third party.

A retailer that does no more than offer a generic product under its own brand name or a separate brand name, without any additional involvement by the retailer in the manufacture of that product, is not considered to contract to manufacture that product. If, however, such a retailer has involvement in the product's manufacture beyond attaching a brand name, it would need to consider the relevant facts and circumstances in determining whether its influence reaches a degree so as to be considered contracting to manufacture that product.

Additionally, companies that only mine (or contract to mine) conflict minerals will not be considered to be manufacturing (or contracting to manufacture) products containing those minerals.

2. "Necessary to the Functionality" and "Necessary to the Production"

The final rule does not define when a conflict mineral is "necessary to the functionality" or "necessary to the production" of a product. Instead, such determinations depend on a reporting company's particular facts and circumstances. In the adopting release, the SEC provided guidance on factors to use in determining whether conflict minerals are necessary to the functionality or production of a product.

Significant factors in the determination of whether conflict minerals are necessary to the functionality of a product include:

whether the conflict mineral is contained in the product;⁸
whether a conflict mineral is intentionally added to the product (either by the reporting company or by a third-party component manufacturer), rather than occurring only as a natural by-product;
whether the conflict mineral is necessary to the product's generally expected function, use or purpose;⁹ and
whether the conflict mineral is incorporated in the product for purposes of ornamentation, decoration, or embellishment and whether the primary purpose of the product is mainly ornamentation or decoration.¹⁰

Significant factors in determining whether a conflict mineral is "necessary to the production" of a product include:

whether the conflict mineral is contained in the product,¹¹ rather than used purely as a catalyst or included only in a physical tool, machine, or other indirect equipment (e.g., computers or power lines) used to produce the product;
whether a conflict mineral is intentionally added to the product in the production process (either by the reporting company or by a third-party component manufacturer), rather than being only a naturally occurring by-product; and
whether the conflict mineral is necessary to produce the product.

3. Disclosure Required for Period During Which Manufacture Completed

A reporting company must provide its conflict minerals disclosure for the calendar year in which the manufacture of the product that contains the conflict minerals is completed, regardless of whether the reporting company manufactures the product or contracts to have the product manufactured.¹²

4. No De Minimis Exception

The final rule does not exclude products containing insignificant or trace amounts of conflict minerals, if those conflict minerals are also necessary for the functionality or production of the product. However, under the SEC's guidance, trace amounts of conflict minerals in a product would probably not be considered to be necessary to the functionality or production of a product unless they were intentionally added to the product.¹³

5. Existing Stores of Conflict Minerals Largely Excluded

The final rule does not require disclosure for conflict minerals that are "outside the supply chain" prior to January 31, 2013. The SEC considers conflict minerals to be "outside the supply chain" only in the following instances:

after any columbite-tantalite, cassiterite, and wolframite minerals, or their derivatives, have been smelted; or
after gold has been fully refined; or
after any conflict mineral, or its derivatives, that have not been smelted or fully refined are located outside of the Covered Countries.

This transition period allows reporting companies to move, smelt, or refine existing stocks of conflict minerals and thereby not be subject to the requirements of the final rule with respect to those conflict minerals.

The Reasonable Country of Origin Inquiry and Related Disclosure

1. Reasonable Country of Origin Inquiry

If a reporting company determines that conflict minerals are necessary to the functionality or production of a product that it manufactured or contracted to be manufactured, the company must conduct a reasonable country of origin inquiry (a "RCOI") to determine if those conflict minerals originated in the Covered Countries or are from recycled or scrap sources. While the final rule does not prescribe the actions constituting a RCOI, the SEC stated in the adopting release that the RCOI

must be reasonably designed to determine whether the company's conflict minerals originated in the Covered Countries or came from scrap or recycled sources,
must be performed in good faith, and
may differ among reporting companies based on factors such as a company's size, product mix, and relationships with suppliers.¹⁴

Because the steps necessary to complete the RCOI will depend on the particular company and the available infrastructure, the SEC expects that RCOI processes will evolve over time based on improved supply chain visibility and the results of the reporting company's prior year inquiry.¹⁵

A reporting company need not achieve absolute certainty as to the origin of its necessary conflict minerals in order to satisfy the RCOI standard discussed above. Instead, a reporting company may state that (i) its RCOI was reasonably designed to determine whether its necessary conflict minerals originated in the Covered Countries or did not come from recycled or scrap sources and was performed in good faith, and (ii) the company's conclusion that the conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources was made at that reasonableness level. Importantly, a reporting company may satisfy the RCOI standard if it seeks and obtains reasonably reliable representations identifying the facility where its conflict minerals were processed and demonstrating that those conflict minerals either did not originate in the Covered Countries or came from recycled or scrap sources. Such representations may be obtained directly from the processing facility or indirectly from the reporting company's immediate suppliers, as long as the reporting company has reason to believe that the representations are accurate in light of the relevant facts and circumstances.¹⁶

A reporting company is not required to obtain representations from all of its suppliers, as long is its RCOI is reasonably designed and performed in good faith. Therefore, if a reporting company reasonably designs its RCOI and performs it in good faith, and in doing so receives representations indicating that its conflict minerals did not originate in the Covered Countries, the company may conclude that its conflict minerals did not originate in the Covered Countries, even though it does not hear from all of its suppliers, as long as it does not ignore warning signs or other circumstances to the contrary.¹⁷

2. Analyzing the Results of the RCOI

If, based on its RCOI, a reporting company:

determines that its necessary conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources; or
has no reason to believe that it necessary conflict minerals may have originated in the Covered Countries; or
reasonably believes that its necessary conflict minerals are from recycled or scrap sources;

then that company is not required to exercise any further due diligence on the source or chain of custody of its conflict minerals. Instead, the company is only required to disclose such determination on Form SD and briefly describe its RCOI and the results of its RCOI. The company is also required to provide a link to its website where the disclosure is publicly available.

If, based on its RCOI, a reporting company:

determines that any of its necessary conflict minerals originated in the Covered Countries and did not come from recycled or scrap sources; or
has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources;

then that company must exercise due diligence on its conflict minerals' source and chain of custody. The applicable due diligence standard is discussed below.

Supply Chain Due Diligence and the Conflict Minerals Report

1. Due Diligence on the Source and Chain of Custody of Conflict Minerals

As discussed above, a reporting company, based on its RCOI, may be required to conduct due diligence on the source and chain of custody of its necessary conflict minerals. Such due diligence must follow a nationally or internationally recognized due diligence framework.¹⁸ While the final rule does not mandate a particular due diligence framework, the Organisation for Economic Cooperation and Development's "Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas" is the only currently available standard that satisfies the final rule's requirement.¹⁹

If, as a result of its due diligence, a reporting company determines that its conflict minerals in fact did not originate in the Covered Countries or in fact did come from recycled or scrap sources, then no Conflict Minerals Report is required. The company is still required to disclose this determination on Form SD and briefly describe its RCOI and due diligence and the results of its RCOI and due diligence and provide a link to its website where the disclosure is publicly available.

If, as a result of its due diligence, a reporting company is not able to make the determination described in the preceding paragraph, then the company must file a Conflict Minerals Report as an exhibit to Form SD and provide a link to its website where the Conflict Minerals Report is publicly available.

2. The Contents of the Conflict Minerals Report

The Conflict Minerals Report must include a description of the measures the reporting company has taken to exercise due diligence on the source and chain of custody of its necessary conflict minerals. Whether a reporting company must provide any additional information in its Conflict Minerals Report depends on whether its products containing those necessary conflict minerals are considered to be "DRC conflict free." A product is considered to be "DRC conflict free" if it "does not contain conflict minerals necessary to the functionality or production of that product that directly or indirectly finance or benefit armed groups . . . in the [Covered Countries]."²⁰ Products will be considered "DRC conflict free" if, when the conflict minerals contained in those products are purchased and transported through the supply chain from the mine to the issuer, those conflict minerals do not directly or indirectly finance or benefit armed groups in the Covered Countries, even if some point in the supply chain subsequently becomes controlled by an armed group.²¹

A reporting company whose products are "DRC conflict free" will not have to describe such products in its Conflict Minerals Report. On the other hand, a reporting company with products that are not found to be "DRC conflict free" must, in its Conflict Minerals Report, include a description of:

the facilities used to process the conflict minerals necessary to those products;
the country of origin of such conflict minerals;
the efforts taken to determine the mine or location of origin of those conflict minerals with the greatest possible specificity,²² and
the products containing the necessary conflict minerals.²³

Under the final rule, reporting companies may add information or clarification to their required disclosure in order to address their particular situation.²⁴

3. Conflict Minerals of Indeterminate Origin

A reporting company that is unable to determine whether its products are "DRC conflict free" may, for a limited time, describe such products as "DRC conflict undeterminable." A reporting company describing its products as "DRC conflict undeterminable"²⁵ must exercise due diligence on the source and chain of custody of conflict minerals necessary to those products and submit a Conflict Minerals Report describing:

its due diligence;
the steps it has taken or will take, if any, since the end of the period covered in its most recent prior Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups (including any steps to improve its due diligence);
the country of origin of its conflict minerals, if known;
the facilities used to process the conflict minerals, if known; and
the efforts to determine the mine or location of origin with the greatest possible specificity, if applicable.²⁶

A reporting company whose products are "DRC conflict undeterminable" will not be required to obtain an independent private sector audit of its Conflict Minerals Report (the audit requirement is discussed in more detail below).

Reporting companies may use the "DRC conflict undeterminable" classification for the first two years of reporting under the final rule (i.e., for disclosure covering calendar years 2013 and 2014), and smaller reporting companies may use the classification for the first four years of reporting (i.e., for disclosure through calendar year 2016). After the two/four year transition period, companies that otherwise would use the "DRC conflict undeterminable" classification must instead state that their conflict minerals "have not been found to be 'DRC conflict free'" and provide the disclosure required for such products as described above.

4. Independent Audit Requirement

A reporting company must obtain an independent private sector audit of its Conflict Minerals Report, except with respect to due diligence regarding (i) conflict minerals in products that are described as "DRC conflict undeterminable" and for which the company is unable to determine the country of origin and/or whether such conflict minerals directly or indirectly financed or benefitted armed groups in the Covered Countries (as described above) and (ii) whether conflict minerals came from recycled or scrap sources if there is no nationally or internationally recognized due diligence framework specific to recycled or scrap sources for that conflict mineral. A company that is required to obtain an independent private sector audit of its Conflict Minerals Report must also certify that it obtained the audit and include the certification in the Conflict Minerals Report.²⁷

The final rule does not require an audit of the entire Conflict Minerals Report. Instead, the independent auditor must express an opinion or conclusion as to:

whether the design of the reporting company's due diligence measures as described in the Conflict Minerals Report, with respect to the period covered by the report, is, in all material respects, in conformity with the criteria set forth in the nationally or internationally recognized due diligence framework used by the reporting company, and
whether the reporting company's description of the due diligence measures that it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that it actually undertook.

The audit must be performed in accordance with standards promulgated by the Government Accountability Office ("GAO"). The GAO has indicated that it does not intend to develop new standards for the independent private sector audit of the Conflict Minerals Report. Therefore, these audits will be conducted under existing government auditing standards, such as the standards for Attestation Engagements²⁸ or the standards for Performance Audits.²⁹

Independent private sector auditors of Conflict Minerals Reports must comply with any independence standards established by the GAO. The SEC stated in the adopting release that it would not be inconsistent with the independence requirements of Rule 2-01 of Regulation S-X if a reporting company's independent public accountant also performs the independent private sector audit of the company's Conflict Minerals Report. However, the audit of the Conflict Minerals Report would be considered a "non-audit service" subject to the pre-approval requirements of Rule 2-01(c)(7) of Regulation S-X and the fees related to the audit would need to be included in the "All Other Fees" category of the reporting company's principal accountant fee disclosures.³⁰

5. Conflict Minerals from Recycled or Scrap Sources

Conflict minerals from recycled or scrap sources are considered to be "DRC conflict free," and therefore reporting companies are not required to prepare a Conflict Minerals Report with respect to such conflict minerals. Under the final rule, conflict minerals are considered to be from recycled or scrap sources if they are from recycled metals (i.e., reclaimed end-user or post-consumer products) or scrap processed metals created during product manufacturing, including 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 and/or gold. This definition of recycled or scrap sources, which mirrors the OECD definition, excludes partially processed or unprocessed minerals, or by-products from another ore.

If a reporting company with necessary conflict minerals that it originally thought were from recycled or scrap sources has reason to believe, following its RCOI, that those conflict minerals may not be from recycled or scrap sources, it must exercise due diligence that conforms to a nationally or internationally recognized due diligence framework, if such a framework is available. If, following due diligence, the company is unable to determine that its necessary conflict minerals came from recycled or scrap sources, it must provide a Conflict Minerals Report with respect to those conflict minerals. Currently, the OECD's supplement for gold is the only nationally or internationally recognized due diligence framework for any conflict mineral from recycled or scrap sources. Reporting companies that may have obtained conflict minerals other than gold from recycled or scrap sources must exercise due diligence without the benefit of a due diligence framework.³¹

Location, Timing and Legal Status of Conflict Minerals Disclosure

Reporting companies must provide their conflict minerals disclosure for the previous calendar year on a new Form SD, which must be filed with the SEC by May 31 each year, beginning on May 31, 2014. Disclosure on Form SD will cover conflict minerals necessary for the functionality or production of products manufactured or contracted to be manufactured by a reporting company during the previous calendar year, regardless of the company's fiscal year. A Conflict Minerals Report, if necessary, will be attached as an exhibit to the Form SD. Form SD is signed by an executive officer of the reporting company on behalf of the reporting company. In addition to filing on Form SD, a reporting company must make its conflict minerals disclosure and its Conflict Minerals Report, if applicable, available on its website for one year.

Form SD will be considered "filed" for purposes of the private civil liability provision contained in Section 18 of the Exchange Act. Under Section 18, a person who makes a false or misleading statement of a material fact may be found liable to anyone who, in reliance on such statement, purchased or sold securities at a price affected by such statement and suffered damages. There is no liability, however, if the person making the statement can prove he or she acted in good faith and had no knowledge that the statement was false or misleading. Form SD disclosures will also be subject to anti-fraud liability under Rule 10b-5.

Because conflict minerals disclosure is provided on Form SD and not as part of Form 10-K or 10-Q, such information is not part of the disclosure that principal executive and financial officers must certify under Sections 302 and 906 of Sarbanes-Oxley. Form SD will not be deemed incorporated by reference into any registration statement under the Securities Act, unless the issuer affirmatively elects to so incorporate it.

Footnotes

¹^See ^{Release No. 34-66716,
Conflict Minerals (Aug. 12, 2012), available at} ^{http://sec.gov/rules/final/2012/34-67716.pdf} ^{(the "adopting release").} ² ^{Note that these minerals are referred to
as "conflict minerals" regardless of their country of
origin.} ³ ^{Covered Countries presently include the
DRC, Angola, Burundi, Central African Republic, the Republic of the
Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia.}

⁴^{This definition also includes conflict
minerals in a component of a product manufactured or contracted to
be manufactured by a company.} ⁵ ^{For example, if a reporting company
acquired a previously non-reporting company on April 29, 2013, it
could delay conflict minerals disclosure with regards to the
acquired company until the year beginning January 1, 2014 (which
means that the first public disclosure would be by May 31, 2015).
If the company were acquired on May 2, 2013, the reporting company
could delay such conflict minerals disclosure until calendar year
2015 (with the first public disclosure by May 31,
2016).} ⁶ ^{This exception does not apply if the
company negotiates such terms so as to exercise a degree of
influence over the manufacturing of the product that is practically
equivalent to contracting on terms that directly relate to the
manufacturing of the product.} ⁷ ^{Such companies are considered to be mere
"sales channels," rather than to be outsourcing
manufacturing of the generic products.} ⁸ ^{Conflict minerals must be contained in a
product to trigger the determination of whether the conflict
mineral is "necessary to the functionality" of the
product.} ⁹ ^{If a product has several generally
expected functions, uses and purposes, and if a conflict mineral is
necessary to any of these, then it is necessary to the
functionality of the product.} ¹⁰ ^{For example, the gold in a gold pendant
hanging from a necklace is incorporated in that pendant for
purposes of ornamentation, decoration or embellishment and would be
considered to be necessary to the functionality of that pendant
because the pendant's primary purpose is ornamentation or
decoration.} ¹¹ ^{Conflict minerals must be contained in a
product to trigger the determination of whether the conflict
mineral is "necessary to the production" of the
product.} ¹² ^{For example, a company that completes the
manufacture of a product with necessary conflict minerals on
December 30, 2018 must provide disclosure regarding the conflict
minerals in that product for the 2018 calendar year (that is, on or
before May 31, 2019). If the same company completes the manufacture
of the same product on January 2, 2019, disclosure regarding the
conflict minerals in that product would fall under disclosures for
the 2019 calendar year (filed with the SEC on or before May 31,
2020). The same logic applies to products contracted to be
manufactured for the reporting company – the date that
the reporting company completes the manufacturing of a product
incorporating the component product with the necessary conflict
minerals will determine the reporting period. Note, however, that
if the contract manufacturer is itself a reporting company, it must
provide disclosure regarding the necessary conflict minerals in the
component product that it manufactures for the year in which such
manufacture is completed, regardless of when the end product
incorporating that component is manufactured by its
customer.} ¹³ ^{For example, metal alloys, including cold
rolled steel, hot rolled steel, and stainless steel, contain tin
only as a contaminant, such that it is not a part of the
specification of those alloys. Therefore, the tin in those alloys
is not intentionally added, and the SEC would not consider the tin
"necessary to the functionality or production" of those
alloys or a product containing those alloys.} ¹⁴ ^{A reporting company may not conclude
that, due to the large (or small) amount of conflict minerals it
uses in its products or the large (or small) number of its products
that include conflict minerals, it is unreasonable for that company
to conduct any inquiry into the origin of its conflict minerals.
Rather, such a company must make some inquiry into the origin of
its conflict minerals.} ¹⁵ ^{The SEC did not adopt a proposed
requirement for companies to maintain reviewable business records
supporting the conclusions of their RCOI's. However,
maintaining such records may be useful in demonstrating compliance
with the final rule and may be required by a due diligence
framework applied by such companies.} ¹⁶ ^{For example, a reporting company would
have reason to believe representations from a processing facility
were true if that facility had received a "conflict-free"
designation from a recognized industry group that requires an
independent private sector audit of the smelter, or if an
individual processing facility had obtained an independent private
sector audit that is made publicly available. Conversely, a
reporting company must heed warning signs or other circumstances
indicating that its conflict minerals may in fact have originated
in the Covered Countries or have not come from recycled or scrap
sources.} ^See ^{OECD DUE DILIGENCE
GUIDANCE FOR RESPONSIBLE SUPPLY CHAINS OF MINERALS FROM
CONFLICT-AFFECTED AND HIGH-RISK AREAS, 33 (2011), available
at} ^{http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf} ^{(providing a number of examples, including whether conflict
minerals are claimed to originate form a country that has limited
known reserves of the conflict mineral in question).} ¹⁷ ^{It is likely that such a company would
need to receive representations from suppliers of a substantial
portion of its necessary conflict minerals in order for reliance on
such representations in satisfaction of the RCOI to be considered
"reasonable."} ¹⁸ ^{Whether a reporting company may rely on
the reasonable representations of suppliers and/or smelters in
satisfying its due diligence mandate will depend, in part, on the
nationally or internationally recognized due diligence standard
employed by the reporting company.} ¹⁹^See ^{OECD DUE DILIGENCE
GUIDANCE FOR RESPONSIBLE SUPPLY CHAINS OF MINERALS FROM
CONFLICT-AFFECTED AND HIGH-RISK AREAS (2011),} ^{available at}^{http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf}^. ²⁰ ^{"Armed groups" are to be
identified annually by the State Department in its Country Reports
on Human Rights Practices relating to the Covered
Countries.} ²¹ ^{For example, if a reporting company's
conflict minerals are purchased from a mine that does not benefit
armed groups in the Covered Countries at the time of purchase, and
such mine subsequently comes under the control of an armed group
which takes the money previously provided to the miner by the
reporting company in order to purchase the conflict minerals that
already left the mine, the products containing those conflict
minerals may be considered "DRC conflict free" even
though the money used to purchase the conflict minerals does
subsequently benefit the armed group.} ²² ^{In the adopting release, the SEC conceded
that, as a practical matter, it is very difficult, if not
impossible, to trace conflict minerals to their mine or other
location of origin after columbite-tantalite, cassiterite, and
wolframite have been smelted initially and after gold has been
refined initially, other than through the smelter or
refiner.} ²³ ^{Reporting companies will have flexibility
to describe such products based on their individual facts and
circumstances.} ²⁴ ^{For example, a reporting company may
include the statutory definition of "DRC conflict free"
in its disclosure while making it clear that "DRC conflict
free" has a very specific meaning. In the adopting release,
the SEC provided examples of such disclosure:}

^{[I]n addition to the disclosure in the Conflict Minerals
Report, the issuer could state: "The following is a
description of our products that have not been found to be
"DRC conflict free" (where 'DRC conflict free' is
defined under the federal securities laws to mean that a product
does not contain conflict minerals necessary to the functionality
or production of that product that directly or indirectly finance
or benefit armed groups in the Democratic Republic of the Congo or
an adjoining country)." Alternatively, an issuer that is still
unable to determine the origin of some of its conflict minerals
after the two-year or four-year period, might state: "We have
been unable to determine the origins of some of our conflict
minerals. Because we cannot determine the origins of the minerals,
we are not able to state that products containing such minerals do
not contain conflict minerals that directly or indirectly finance
or benefit armed groups in the Democratic Republic of the Congo or
an adjoining country. Therefore, under the federal securities laws
we must describe the products containing such minerals as having
not been found to be 'DRC conflict free.' Those products
are listed below."}

²⁵^{Reporting companies are not required to
use the categories "DRC conflict free" and "DRC
conflict undeterminable" in any physical labeling of their
products; the final rule does not require physical
labeling.} ²⁶ ^{A reporting company that is unable to
determine the origin of its conflict minerals or unable to
determine whether its conflict minerals came from recycled or scrap
sources, may also be unable to determine the processing facility or
country of origin of those conflict minerals. Therefore, such a
company only has to describe the processing facilities if they are
known, and is not required to disclose the country of
origin.} ²⁷ ^{The certification will take the form of a
statement in the Conflict Minerals Report that the company obtained
an independent private sector audit.} ²⁸ ^{GAGAS Attestation Engagement standards
require that auditors be "licensed certified public
accountants, persons working for a licensed certified public
accounting firm or for a government auditing organization, or
licensed accountants in states that have multi-class licensing
systems that recognize licensed accountants other than certified
public accountants."} ²⁹ ^{GAGAS Performance Audit standards allow
auditors other than certified public accountants to perform a
Performance Audit.} ³⁰ ^{Additionally, if the accountant were to
provide services that extended beyond the scope of the independent
private sector audit of the Conflict Minerals Report, the
accountant would need to consider whether those services were
inconsistent with Rule 2-01 of Regulation S-X.} ³¹ ^{When and if a nationally or
internationally recognized due diligence framework is adopted for
such recycled or scrap conflict minerals, reporting companies will
have up to two calendar years to implement the framework in their
own due diligence efforts. If the due diligence framework becomes
available prior to June 30 of a calendar year, the first reporting
period in which reporting companies must use the framework for that
conflict mineral will be the subsequent calendar year; if the
framework is not available until after June 30 of a calendar year,
reporting companies are not required to use that framework for that
conflict mineral until the second calendar year following its
availability.}

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.