Conflict Mineral Reporting Requirement Outlined in Forthcoming SEC Regulations
The Securities and Exchange Commission voted unanimously Dec. 15 to propose new regulations implementing a recent law requiring specific disclosures concerning products that may contain conflict minerals from the Democratic Republic of the Congo or adjoining countries. Conflict minerals include columbite-tantalite, gold, wolframite and their derivatives and are used in the manufacture of a wide range of goods, including cell phones, computers and video game systems, medical equipment, high-speed tools, machine parts, glass and lamps. The regulations have not yet been published in the Federal Register, but comments are due no later than Jan. 31, 2011.
(In related news, the Globe and Mail reports that the leaders of 11 nations in central Africa signed this week a pledge to “implement a regional certification system to track [conflict] minerals as they are exported from Africa.” Mechanisms to be pursued include a “system in which minerals are tagged at their point of origin” and a “database to make it easier to identify and track minerals that originate in areas of conflict.”)
According to an SEC fact sheet, the proposed rule includes the following provisions.
Companies Required to Report
Companies would be required to file a conflict minerals report if (a) they file reports with the SEC under the Exchange Act and (b) conflict minerals are necessary to the functionality or production of a product they manufacture or contract to be manufactured. A company would be considered to be contracting to manufacture a product if (a) it has any influence over the product’s manufacturing or (b) it offers a generic product under its own brand name or a separate brand name, regardless of whether it has any influence over the manufacturing specifications of the product, provided that it has contracted to have the product manufactured specifically for itself. The requirements would apply equally to domestic and foreign companies and to smaller reporting companies.
Determining and Disclosing Origination
Affected companies would have to disclose in their annual reports whether their conflict minerals originated in the DRC or an adjoining country. This disclosure would be based on a reasonable country of origin inquiry.
If the company concludes that its conflict minerals did not originate in the DRC countries it would disclose this determination and the reasonable country of origin inquiry process used in reaching it. The company would also be required to make the disclosure available on its Web site, provide the Internet address of that site and maintain records demonstrating that its conflict minerals did not originate in the DRC countries.
If the company concludes that its conflict minerals did originate in the DRC countries or is unable to conclude that its conflict minerals did not originate in the DRC countries, it must disclose this conclusion, note that the conflict minerals report is furnished as an exhibit to its annual report, furnish the conflict minerals report, make that report available on its Web site, disclose that the report is posted on its Web site and provide the Internet address of that site.
Conflict Minerals Report
The conflict minerals report would include a description of the measures the company has taken to exercise due diligence on the source and chain of custody of its conflict minerals, including a certified independent private sector audit of the report that identifies the auditor and is furnished as part of the report. Companies would have to include in this report (a) a description of the products manufactured or contracted to be manufactured containing conflict minerals that are not “DRC conflict free,” as defined in the rules, (b) the facilities used to process those conflict minerals, (c) those conflict minerals’ country of origin, and (d) the efforts to determine the mine or location of origin with the greatest possible specificity. Companies would also have to disclose the due diligence they used in making their determinations, such as whether they used any nationally or internationally recognized standards or guidance for due diligence.
Recycled or Scrap Sources
If a company’s conflict minerals are derived from recycled or scrap sources rather than from mined sources, the company would be permitted to file a conflict minerals report stating that and providing the basis for that determination. Companies would be required to exercise due diligence in determining that their conflict minerals are recycled or scrap.
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