United States: Broad Reach Of SEC’s Conflict Mineral Rules Affects Many Public Companies In The Consumer Product Industry

The Securities and Exchange Commission's conflict mineral rules adopted in August 2012 have been a topic of hot debate among not only manufacturing industry groups, but also retail industry groups, given the extensive conflict mineral diligence obligations imposed on public companies in the manufacturing and retail sectors.

The rules affect a wide range of consumer industries, including electronics, automotive, and jewelry. In addition, although many retailers are not covered by the rules, those retailers that exert some influence over the manufacturing process of the products they sell, such as by identifying the materials, parts or components to be included in the product, may be covered by the rules.

The SEC's conflict mineral rules were upheld by the U.S. District Court for the District of Columbia in July 2013 following a challenge to the rules by the National Association of Manufacturers, The Business Roundtable and the U.S. Chamber of Commerce. The plaintiffs appealed this decision and oral arguments for this case were held in January 2014, but it is not clear whether the court will reach its decision before the upcoming filing deadline for disclosures relating to the conflict mineral rules. We have provided below an overview of the rules as well as general guidance regarding compliance with the new rules. However, the rules are fairly unusual and complex and a number of aspects of the rules remain unclear, as discussed further below.

BACKGROUND ON THE CONFLICT MINERAL RULES

The rules require public companies to annually disclose information about their use of specific "conflict minerals" originating in the "Covered Countries." The "conflict minerals" are gold, columbite-tantalite (coltan), cassiterite, and wolframite (including their derivatives, tantalum, tin and tungsten). The "Covered Countries" are the Democratic Republic of the Congo, Republic of the Congo, Central African Republic, South Sudan, Uganda, Rwanda, Burundi, Tanzania, Zambia and Angola.

THREE-STEP COMPLIANCE PROCESS

The SEC's conflict mineral rules envision a three-step compliance process:

  1. First, a company must determine whether it is covered by the rules with respect to its use of conflict minerals.
  2. Second, a company that is covered by the conflict mineral rules must conduct a "reasonable country of origin inquiry" designed to determine if the conflict minerals originated in the Covered Countries or are from recycled or scrap sources.
  3. Third, a company that determines that its conflict minerals originated in the Covered Countries and are not from recycled or scrap sources (or has reason to believe that its conflict minerals may have originated in the Covered Countries and may not be from recycled or scrap sources) must exercise due diligence on the source and chain of custody of its conflict minerals. The company also may need to file a Conflict Minerals Report, as discussed further below.

Public disclosures by companies that are covered by the rules will be made using the new SEC Form SD. The first Form SD disclosure is required to be made with the SEC on May 31, 2014. The disclosure in the form will cover the calendar year beginning January 1, 2013. For each subsequent year, the Form SD will need to be filed by May 31 with respect to the prior calendar year.

Step 1 – Determining Whether a Company is Covered by the Rules.

A public company will be covered by the rules if conflict minerals are (1) "necessary to the functionality" or production of (2) a "product" (3) that is manufactured by the company or "contracted to be manufactured" by the company.

A. "Necessary to the functionality" of the product or production.

The SEC has provided certain factors that companies should consider in determining whether a conflict mineral is necessary to the functionality of a product, such as:

  • whether a conflict mineral is contained in and intentionally added to the product or any component of the product and is not a naturally occurring by-product;
  • whether a conflict mineral is necessary to the product's generally expected function, use, or purpose; and
  • if a conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.

The SEC has also provided the following factors that companies should consider in determining whether a conflict mineral is necessary to the production of a product:

  • whether the conflict mineral is intentionally included in the product's production process, other than if it is included in a tool, machine or equipment used to product the product;
  • whether the conflict mineral is included in the product; and
  • whether the conflict mineral is necessary to product the product.

B. Meaning of "product."

The rules do not directly address the question of what constitutes a product. However, the SEC has stated that in order to be a product, it must be an item that enters the stream of commerce by being offered to third parties for consideration.

C. Whether a company "manufactures" or "contracts to manufacture" a product or component.

There is no definition in the rules of the term "manufacture," because the SEC believes that the meaning of this term is generally understood. The SEC has stated that a company is not considered to have manufactured a product if it only services, maintains or repairs a product. Whether a product is "contracted to be manufactured" by a company depends on the degree of influence the company exercises over the manufacturing of the product. This would include the company's influence over the materials or components to be included in the product. Whether a company exercises influence over the manufacturing of a product for purposes of the conflict mineral rules will be a fact-intensive analysis. Accordingly, this portion of the rule may apply to many retailers who exert some influence over aspects of the manufacturing process of the products they sell.

The SEC has made clear that in order to be covered by the rules, a company must have some actual influence over the manufacturing of the product. The SEC has further stated that a company should not be viewed as "contracting to manufacture" a product if it does no more than:

  • specify or negotiate contractual terms that do not directly relate to the manufacturing of the product;
  • affix its brand, marks, logo or label to a generic product manufactured by a third party; or
  • service, maintain or repair a product manufactured by a third party.

Step 2 – Reasonable Country of Origin Inquiry.

If a company determines that it is covered by the rules, it must conduct a "reasonable country of origin inquiry." This inquiry must be designed to determine if conflict minerals originated in the Covered Countries or come from recycled or scrap sources.

The rules do not provide the steps a company should follow to meet the reasonable country of origin inquiry requirement. However, the SEC has stated that one method of meeting the reasonable country of origin inquiry requirements would be to follow the "supplier engagement" approach in the OECD Due Diligence Guidance, which contemplates that a company would engage with the suppliers in their supply chain to make inquiries about the source of the conflict minerals as well as the smelters or refineries used to process the minerals.

If a company's reasonable country of origin inquiry results in a conclusion that the conflict minerals in the company's products came from recycled or scrap sources, then the company does not need to file a Conflict Minerals Report with the SEC. The rules provide that if the company's products containing conflict minerals from recycled or scrap sources, then the company can describe those products as "DRC conflict free."

Conflict minerals are deemed to be from recycled or scrap sources if the minerals are from recycled metals (which are reclaimed end-user or post-consumer products), or scrap processed metals (created during product manufacturing).

A company will not be required to proceed to Step 3 below (and therefore will not be required to file a Conflict Minerals Report as an exhibit to the Form SD) if the company knows or reasonably believes, following its reasonable country of origin inquiry, that the conflict minerals in its products did not originate in the Covered Countries, or that such conflict minerals came from recycled or scrap sources. For a company whose products contain conflict minerals but where the company is not required to file a Conflict Minerals Report, the Form SD filed by the company must describe the company's reasonable country of origin inquiry and the company's resulting determination that its products did not originate in the Covered Countries (or came from recycled or scrap sources).

Step 3 – Supply Chain Due Diligence and Conflict Minerals Report.

If a company knows (or has reason to believe) based on its country of origin inquiry that (1) the conflict minerals necessary to the functionality or production of its products did originate in the Covered Countries and (2) the conflict minerals are not (or may not be) from recycled or scrap sources, then the company is required by the rules to (A) exercise due diligence with respect to the source and chain of custody of the conflict minerals and (B) file a Conflict Minerals Report as an exhibit to its Form SD with the SEC. The due diligence exercise is aimed at determining the origin and chain of custody of the conflict minerals and whether the minerals financed or benefited armed groups in the Covered Countries.

The Conflict Minerals Report must include certain information, including a description of the measures taken to exercise due diligence on the source and custody chain of the conflict minerals as well as an independent private sector audit of the report. For calendar years 2013 and 2014 only, if the company conducts a due diligence inquiry but is unable to reach a conclusion as to whether its products containing conflict minerals are "DRC conflict free," it must still file the Conflict Minerals Report but no independent private sector auditor is necessary and the company would provide alternative disclosures, including describing the applicable products as "DRC conflict undeterminable."

CONCLUSION

The SEC's conflict minerals rules impose substantial due diligence and disclosure requirements on a broad range of public companies in the consumer products industry, and many interpretative issues with respect to the rules remain. With the first disclosures under the rules required on May 31, 2014, with respect to calendar year 2013, public companies should now have in place a system of controls and procedures designed to comply with the rules.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions