SEC Issues Proposed Rule on DRC Countries Conflict Minerals Disclosure

Any issuer for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer would be required to disclose in the body of its annual report whether its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country (DRC countries).

If the conflict minerals originated in a DRC country or if the origin were unknown, that issuer would also be required to furnish a separate report as an exhibit to its annual report that includes, among other matters, a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its conflict minerals.

Comments on the proposed rule are due by January 31, 2011.

Conflict Minerals Include Gold, Cassiterite, Wolframite Used to Make Tin, Jewelry

Conflict minerals are (i) cassiterite, columbite-tantalite, gold, wolframite, or their derivatives, or (ii) any other minerals or their derivatives determined by the Secretary of State to be financing conflict in DRC countries.

Cassiterite is the metal ore that is most commonly used to produce tin, which is used in alloys, tin plating, and solders for joining pipes and electronic circuits. Columbite-tantalite is the metal ore from which tantalum is extracted. Tantalum is used in electronic components, including mobile telephones, computers, video game consoles, and digital cameras, and as an alloy for making carbide tools and jet engine components. Gold is used for making jewelry and, due to its superior electric conductivity and corrosion resistance, is also used in electronic, communications, and aerospace equipment. Wolframite is the metal ore that is used to produce tungsten, which is used for metal wires, electrodes, and contacts in lighting, electronic, electrical, heating, and welding applications.

Certain SEC Report Filers That Use Conflict Minerals Would be Affected

The disclosure requirements of the proposed rule would apply to an issuer if (1) it files reports with the SEC pursuant to Sections 13(a) or 15(d) of the Exchange Act, and (2) conflict minerals are “necessary to the functionality or production of a product manufactured” or contracted to be manufactured by the issuer.

Conflict Mineral Disclosure Would be Divided into 3 Steps

SEC is proposing that the conflict minerals disclosure requirement for conflict minerals be divided into three steps:

• The first step would require the issuer to determine whether it is subject to the Conflict Minerals Provision.
• The second step would require the issuer to determine after a reasonable country of origin inquiry, whether its conflict minerals originated in DRC countries.
• The third step would require an issuer with conflict minerals that originated in DRC countries, or an issuer that is unable to conclude that its conflict minerals did not originate in DRC countries, to furnish a Conflict Minerals Report.

If No Conflict Minerals Originate in DRC Countries, Would Disclose in Body of Report and on Website

Affected issuers would be required to disclose, based on their reasonable country of origin inquiry, in the body of their annual reports whether their conflict minerals originated in DRC countries. If an issuer concludes that its conflict minerals did not originate in DRC countries, the issuer would disclose this determination and the reasonable country of origin inquiry process it used in reaching this determination in the body of its annual report.

Also, the issuer would be required to provide on its Internet website its determination that its conflict minerals did not originate in DRC countries, disclose that this information is available on its website and the Internet address of that site in the body of its annual report, and maintain records demonstrating that its conflict minerals did not originate in DRC countries.

If Conflict Minerals Found, or Unknown, Need Additional Conflict Minerals Report

If the issuer concludes that its conflict minerals did originate in DRC countries, or is unable to conclude that its conflict minerals did not originate in DRC countries, the issuer would similarly disclose this conclusion, note that the Conflict Minerals Report is furnished as an exhibit to the annual report, furnish the Conflict Minerals Report, make available the Conflict Minerals Report on its Internet website, disclose that the Conflict Minerals Report is posted on its Internet website, and provide the Internet address of that site.

Due diligence measures. The proposed rule would require that an issuer provide, in its Conflict Minerals Report, a description of the measures it had taken to exercise due diligence on the source and chain of custody of its conflict minerals. Due diligence measures would include, but would not be limited to, an independent private sector audit of the issuer’s report conducted in accordance with standards established by the Comptroller General of the U.S. Any issuer furnishing such a report would be required, in that report, to certify that it obtained an independent private sector audit of its report, provide the audit report, and make its reports available to the public on its Internet website.

Description of products not “DRC conflict free.” Further, the issuer would be required to include in the Conflict Minerals Report a description of its products manufactured or contracted to be manufactured containing conflict minerals that are not “DRC conflict free,” the facilities used to process those conflict minerals, those conflict minerals’ country of origin, and the efforts to determine the mine or location of origin with the greatest possible specificity. The issuer would be required to exercise due diligence in making these determinations in the Conflict Minerals Report.

(The term “DRC conflict free” would be defined as products that do not contain conflict minerals that “directly or indirectly finance or benefit armed groups” in DRC countries. Conflict minerals that a registrant is unable to determine did not originate in the DRC countries are not ‘‘DRC conflict free.’’ Conflict minerals that a registrant obtains from recycled or scrap sources are considered "DRC conflict free.")

Different Treatment of Conflict Miners from Recycled, Scrap Sources

The proposed rule would allow for different treatment of conflict minerals from recycled and scrap sources than from mined sources due to the difficulty of looking through the recycling or scrap process to determine the origin of the minerals.

SEC Expected to Issue Final Rule by April 15

The Dodd-Frank Act¹ requires the SEC to issue a final rule no later than 270 days after the date of enactment, or April 15, 2011.

¹On July 21, 2010, the President signed into law the conference version of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, in order to impose new requirements on companies that use “conflict minerals” and provide new whistleblower rewards for securities violations, including violations of the FCPA. See ITT's Online Archives or 07/22/10 news, 10072230, for BP summary of this law.

(See ITT's Online Archives or 12/17/10 news, 10121722, for BP summary announcing that the SEC voted to issue this proposed rule.)

SEC contact- John Fieldsend (202) 551-3430

(Release No. 34--63547; File No. S7--40--10, FR Pub 12/23/10)