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Division of Corporation Finance

Conflict Minerals Disclosure

A Small Entity Compliance Guide1

Introduction

On August 22, 2012, the Securities and Exchange Commission (“SEC”) adopted a new rule and form, as mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), to require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country (together with the DRC, “Covered Countries”). The new rule takes effect on November 13, 2012.

Section 1502 of the Dodd-Frank Act amends the Securities Exchange Act of 1934 to add Section 13(p), which directs the Commission to issue rules requiring certain companies to disclose their use of “conflict minerals” if those minerals are “necessary to the functionality or production of a product” manufactured by those companies or contracted by those companies to be manufactured. Under Section 1502, the term “conflict minerals” includes tantalum, tin, gold, or tungsten. Congress enacted Section 1502 because of concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the DRC region and is contributing to an emergency humanitarian crisis.

The Rule

The new rule applies to a company that uses any conflict minerals if:

  • the company files reports with the SEC pursuant to Exchange Act Sections 13(a) or 15(d); and
     
  • the minerals are “necessary to the functionality or production” of a product manufactured by the company or contracted by the company to be manufactured.

Contracting to manufacture: A company is considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination is based on the company’s facts and circumstances, taking into account the degree of influence the company exercises over the product’s manufacturing. A company is not deemed to have influence over the manufacturing if it 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 manufacturing of the product.

The requirements apply equally to all reporting companies, including small entities and domestic and foreign reporting companies.

Determining Whether Conflict Minerals Originated in the Covered Countries: Under the final rule, a company that uses a conflict mineral is required to conduct a reasonable country of origin inquiry that must be performed in good faith and be reasonably designed to determine whether the conflict mineral originated in the Covered Countries or are from recycled or scrap sources.

If, following this inquiry, the company:

(a) knows that its conflict minerals did not originate in the Covered Countries or that they came from recycled or scrap sources; or

(b) has no reason to believe that its conflict minerals may have originated in the Covered Countries or may not be from recycled or scrap sources,

then in Form SD, a new specialized disclosure form filed with the SEC, the company must disclose its reasonable country of origin inquiry determination and provide a brief description of the reasonable country of origin inquiry it undertook and the results of the inquiry. The company also is required to:

  • disclose this information on its publicly available Internet website; and
     
  • provide the Internet address of that site in its Form SD.

If, following the reasonable country of origin inquiry, the company:

    (a) knows or has reason to believe that its conflict minerals may have originated in the Covered Countries; and

    (b) knows or has reason to believe that its conflict minerals may not be from recycled or scrap sources,

then the company must undertake “due diligence” on the source and chain of custody of its conflict minerals and, unless the company determines through its due diligence that its conflict minerals are not from the Covered Countries or that they come from recycled or scrap sources, file a Conflict Minerals Report as an exhibit to its Form SD filing. The company also is required to:

  • disclose in its Form SD filing that its Conflict Minerals Report is filed as an exhibit to the filing;
     
  • make its Conflict Minerals Report publicly available on its Internet website; and
     
  • provide the Internet address of that site in its Form SD.

What Must be Included in the Conflict Minerals Report: Under the rule, a company that is required to file a Conflict Minerals Report has to exercise due diligence on the source and chain of custody of its conflict minerals. The due diligence measures must conform to a nationally or internationally recognized due diligence framework, such as the Organisation for Economic Co-operation and Development’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (“OECD Due Diligence Guidance”).

DRC Conflict Free: If a company determines that its products are “DRC conflict free,” which means that the conflict minerals in those products may have originated from the Covered Countries but did not finance or benefit armed groups in those countries, then the company has to:

  • describe in its Conflict Minerals Report the measures it has taken to exercise due diligence;
     
  • obtain an independent private sector audit of its Conflict Minerals Report;
     
  • certify that it obtained such an audit;
     
  • include the audit report as part of the Conflict Minerals Report; and
     
  • identify the auditor.

Not Found to be “DRC Conflict Free”: If a company’s products have not been found to be “DRC conflict free,” then the company, in addition to the requirements discussed above, has to describe in its Conflict Minerals Report:

  • the products manufactured or contracted to be manufactured that have not been found to be “DRC conflict free”;
     
  • the facilities used to process the conflict minerals in those products;
     
  • the country of origin of the conflict minerals in those products; and
     
  • the efforts to determine the mine or location of origin with the greatest possible specificity.

DRC Conflict Undeterminable: For a temporary two-year period for all companies and four-year period for smaller reporting companies, if the company is unable to determine whether the minerals in its products:

  • did not originate in the Covered Countries and came from recycled or scrap sources, or
     
  • financed or benefited armed groups in those countries,

then those products would be considered “DRC conflict undeterminable.” In that case, the company must describe the following in its Conflict Minerals Report:

  • the measures it has taken to exercise due diligence;
     
  • its products manufactured or contracted to be manufactured that are “DRC conflict undeterminable”;
     
  • the facilities used to process the conflict minerals in those products, if known;
     
  • the country of origin of the conflict minerals in those products, if known;
     
  • the efforts to determine the mine or location of origin with the greatest possible specificity; and
     
  • the steps it has taken or will take, if any, since the end of the period covered in its most recent Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence.

For those products that are “DRC conflict undeterminable,” the company is not required to obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict minerals in those products.

Recycled or Scrap Due Diligence: There are special rules governing the due diligence and Conflict Minerals Report for minerals from recycled or scrap sources. A company that reasonably believes, after its reasonable country of origin inquiry, that its conflict minerals came from recycled or scrap sources is not required to exercise due diligence or file a Conflict Minerals Report regarding those minerals. It must, however, disclose its reasonable country of origin inquiry determination and provide a brief description of the reasonable country of origin inquiry it undertook and the results of its inquiry in its Form SD filing. It must also disclose this information on its publicly available Internet website and provide the Internet address of the site in that filing. If a company’s conflict minerals are derived from recycled or scrap sources rather than from newly-mined sources, the company’s products containing such minerals are considered “DRC conflict free.”

If a company cannot reasonably conclude after its reasonable country of origin inquiry that its conflict minerals are from recycled or scrap sources, then it would be required to undertake due diligence in accordance with a nationally or internationally recognized due diligence framework, and obtain an audit of its Conflict Minerals Report. Currently, gold is the only conflict mineral with a nationally or internationally recognized due diligence framework for determining whether it is recycled or scrap, which is part of a separate gold supplement to the OECD Due Diligence Guidance.

For the other three conflict minerals, if a company cannot reasonably conclude after its reasonable country of origin inquiry that those minerals are from recycled or scrap sources, until a nationally or internationally recognized due diligence framework is developed for those minerals, the company is required to describe the due diligence measures it exercised in attempting to determine that its conflict minerals are from recycled or scrap sources. Such a company, however, is not required to obtain an independent private sector audit of its Conflict Minerals Report for those conflict minerals.

Independent Private Sector Audit: The independent private sector audit of a company’s Conflict Minerals Report must be conducted in accordance with the standards set forth by the Government Accountability Office (“GAO”). The GAO staff has indicated to our staff that either the standards for Performance Audits or the standards for Attestation Engagements set forth in the GAO’s Government Auditing Standards could be used in this context. Unlike the Attestation Engagement standards, the Performance Audit standards allow auditors other than certified public accountants to perform a Performance Audit. Because Exchange Act Section 13(p) provides that the auditing standards are to be established by the GAO, the GAO is responsible for matters pertaining to the auditing standards, including questions or concerns about the application of such standards.

The objective of the audit is to express an opinion or conclusion on whether the design of the company’s due diligence measures described in the Conflict Minerals Report is in conformity with, in all material respects, the criteria in the nationally or internationally recognized due diligence framework used by the company, and whether the company’s description of the due diligence measures it performed as described in the Conflict Minerals Report is consistent with the due diligence process that it undertook.

Form for and Timing of Disclosure: Under the final rule, the company is required to provide its conflict minerals disclosure in new Form SD. All affected companies will file the new form for the same period, a calendar year, regardless of their fiscal year end. They will be required to make their first Form SD filing on May 31, 2014 for the 2013 calendar year, and annually on May 31 for each calendar year thereafter.

Other Resources

The adopting release for this rule can be found on the SEC’s website at http://www.sec.gov/rules/final/2012/34-67716.pdf.

The SEC’s disclosure forms can be accessed on the agency’s website at http://www.sec.gov/about/forms/secforms.htm.

Section 1502 of the Dodd-Frank Act can be found at http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.

The OECD Due Diligence Guidance is available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.

The gold supplement to the OECD Due Diligence Guidance is available at http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.

The GAO’s Government Auditing Standards are available at http://www.gao.gov/assets/590/587281.pdf.

Contacting the SEC

The SEC’s Division of Corporation Finance is available to assist small companies and others with questions regarding the regulation. You can contact the Division for this purpose at (202) 551-3430 or https://tts.sec.gov/cgi-bin/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning small companies may be directed to the Division’s Office of Small Business Policy at (202) 551-3460 or smallbusiness@sec.gov.

Flowchart Summary of the Final Rule

START
1) Does the issuer file reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act?
• No – Rule does not apply. – END
• Yes – [move on to question (2)]

2) Does the issuer manufacture or contract to manufacture products?
• No – Rule does not apply. – END
• Yes – [move on to question (3)]

3) Are conflict minerals necessary to the functionality or production of the product manufactured or contracted to manufactured?
• No – Rule does not apply. – END
• Yes – [move on to question (4)] 

4) Were the conflict minerals outside the supply chain prior to January 31, 2013?
• Yes –	Rule does not apply. – END
• No, if potentially scrap or recycled – [move to the question (5)]
• No, if newly-mined – [move on to question (6)]

5) Based on the RCOI, does the issuer know or reasonably believe that the conflict minerals come from scrap or recycled?
• Yes – File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and the results of the inquiry. – END
• No – [move on to question (6)]

6) Based on a reasonable country of origin inquiry (RCOI), does the issuer know or have reason to believe that the conflict minerals may have originated in the DRC or an adjoining country (the covered countries)?
• No – File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and the results of the inquiry. – END
• Yes – [move on to question (7)] 

7) Exercise due diligence on the source and chain of custody of its conflict minerals following a nationally or internationally recognized due diligence framework, if such framework is available for a specific conflict mineral.  

In exercising this due diligence does the issuer determine the conflict minerals are not from the covered countries or are from scrap or recycled?
• Yes – File a Form SD that discloses the issuer’s determina¬tion and briefly describes the RCOI and due diligence measures taken and the results thereof. – END
• No – [move on to question (8)]

8) File a Form SD with a Conflict Minerals Report as an exhibit, which includes a description of the measures the issuer has taken to exercise due diligence.  

In exercising the due diligence, was the issuer able to determine whether the conflict minerals financed or benefit¬ted armed groups?
• Yes – The Conflict Minerals Report must also include an independent private sector audit report, which expresses an opinion or conclusion as to whether the design of the issuer’s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the issuer’s due diligence measures is consistent with the process undertaken by the issuer.  

Also, include a description of the products that have not been found to be DRC Conflict Free, the facilities used to process the necessary conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin of those minerals with the greatest possible specificity. – END
• No – [move on to question (9)]

9) Is it less than two years after effective¬ness of the rule (four years for Smaller Reporting Companies)?
• No – The Conflict Minerals Report must also include an independent private sector audit report, which expresses an opinion or conclusion as to whether the design of the issuer’s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the issuer’s due diligence measures is consistent with the process undertaken by the issuer.  

Also, include a description of the products that have not been found to be DRC Conflict Free, the facilities used to process the necessary conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin of those minerals with the greatest possible specificity. – END
• Yes – The Conflict Minerals Report must also include a description of products that are “DRC Conflict Undetermin¬able” and the steps taken or that will be taken, if any, since the end of the period covered in the last Conflict Minerals Report to mitigate the risk that the necessary conflict minerals benefit armed groups, including any steps to improve due diligence.  No audit is required. – END

 

http://www.sec.gov/info/smallbus/secg/conflict-minerals-disclosure-small-entity-compliance-guide.htm


Modified: 11/13/2012