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July 17, 2013
SEC's conflict minerals rule

An estimated 6,000 companies, including foreign companies, are facing new and costly disclosure requirements regarding their use of conflict minerals.  Essentially, the companies must publicly disclose whether minerals that include gold, tungsten, and tin originated in the Democratic Republic of the Congo (DRC) or an adjoining country.  The requirement is contained in Section 1502 of the 2010 Dodd-Frank Act and is intended to address concerns that the exploitation and trade of conflict minerals by armed groups is financing conflict in the DRC region and contributing to an emergency humanitarian crisis. 

The manner in which companies address the issue of conflict minerals is closely related to sustainable practices and environmental justice and should be linked to those topics in corporate policies and procedures and reports to shareholders.

Initial report by May 31, 2014

In August 2012, the Securities and Exchange Commission (SEC) published regulations to implement Section 1502.  The rule requires disclosure only and does not prohibit the use of conflict minerals.  The first required disclosure reports cover calendar year 2013 and must be submitted on SEC Form SD no later than May 31, 2014. 

The SEC estimates the initial cost of compliance for all regulated entities at $3 billion to $4 billion, with an annual cost of ongoing compliance at between $207 million and $609 million.  The National Association of Manufacturers disagrees with these estimates and says companies will spend between $9 million and $16 million to comply with the rule.

The SEC recently published answers to many frequently asked questions (FAQs) about the applicability of the regulations. 

Provisions of the rule

Applicability provisions and requirements in the SEC regulations include the following:

  • A company is subject to Section 1502 reporting if it uses the conflict minerals, files reports with the SEC under the Exchange Act, and the minerals are “necessary to functionality or production” of a product manufactured or contracted to be manufactured by the company.
  • A company is considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product.  The degree of influence necessary for a company to be considered contracting to manufacture a product is based on a company’s individual facts and circumstances. 
  • The degree-of-influence criterion is not met if a company “merely”:
    • Affixes its brand, marks, logo, or label to a generic product manufactured by a third party;
    • Services, maintains, or repairs a product manufactured by a third party; or
    • Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacture of the product.
  • A company that uses any of the designated minerals is required to conduct a “reasonable” country-of-origin inquiry that must be performed in good faith and be reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources.
  • If the company either (a) knows that the minerals did not originate in the covered countries or are from scrap or recycled sources; or (b) has no reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources, the company must disclose its determination and provide a brief description of the inquiry it undertook and the results of the inquiry on Form SD.
  • If the company knows or has reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources, the company must undertake due diligence on the source and chain of custody of its conflict minerals and file a conflict minerals report on Form SD.
  • If a company determines that the minerals originated in a covered country but did not benefit armed groups, the company must meet specified auditing and certification requirements.
  • If the minerals have not been found to be DRC conflict-free, the auditing/certification requirements must be met along with additional requirements, including identification of the products and the facilities that processed the minerals and description of efforts to determine the mine or location of origin. 

Issues the SEC addresses in its FAQs include mining activities that do not trigger disclosure and packaging and servicing equipment that are not considered products or parts of products.

Click here for SEC’s conflict minerals rule and the FAQs. 

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