SEC Working to Issue DRC Conflict Minerals Disclosure Final Rule

(Conflict minerals are defined as: (i) cassiterite, columbite-tantalite (coltan), gold, wolframite; or their derivatives; or (ii) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country (collectively, DRC countries).)

Would Have to Disclose Whether or Not Conflict Minerals Originate in DRC Countries

As proposed, the rule would require 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 to disclose in its annual report and on its website whether or not its conflict minerals originated in DRC countries. If the issuer determines that its conflict minerals did originate in the DRC countries or is unable to conclude that they did not, that issuer would also be required to furnish a separate report that includes a description of the measures taken to exercise due diligence on the source and chain of custody of its conflict minerals, etc.

SEC proposed that the conflict minerals disclosure requirement for conflict minerals be divided into the following three steps:

• Determine if subject to provision. An issuer would have to determine if it is subject to the conflict minerals provisions of the Dodd-Frank Act, which only affect a “person described” (i.e., a person for whom “conflict minerals are necessary to the functionality or production of a product manufactured by such person and who files reports with the SEC pursuant to Section 13(p)(1)(A) of the Securities Exchange Act of 1934, as amended). If not, the issuer would not be required to take any action, make any disclosures, or submit any reports. However, if an issuer meets this definition, they would move to the second step.

• Determine if conflict minerals originate in DRC countries or not & disclose. The second step would require the issuer to determine after a reasonable country of origin inquiry, whether or not its conflict minerals originated in DRC countries. If the issuer determines that (a) its conflict minerals did not originate in the DRC countries, the issuer would disclose this determination and the reasonable country of origin inquiry it used in reaching this determination in the body of its annual report and on its website. If the issuer determines that (b) its conflict minerals did originate in the DRC countries, or (c) it is unable to conclude that its conflict minerals did not originate in the DRC countries, the issuer would similarly disclose this information in the body of its annual report and on its website and move to the third step.

• Issue separate report. The third step would require an issuer for which (b) or (c) above applies (i.e, their conflict minerals originated in DRC countries or they are unable to conclude that they did not originate in DRC countries) to furnish a separate “Conflict Minerals Report.” Among other things, this report would provide a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its conflict minerals; a description of any of its products that contain conflict minerals that it is unable to determine did not ‘‘directly or indirectly finance or benefit armed groups’’ in the DRC countries; etc.

(See ITT’s Online Archives 10122326 and 11020328 for summaries of SEC’s December 2010 proposed rule and extension of the comment period.)

Act Called for SEC to Issue Final Rule by April 15, 2011

The Dodd-Frank Act required the SEC to issue a final rule no later than 270 days after the date of enactment, or by April 15, 2011, but it did not meet this deadline. The SEC later said that it would issue the final rule by end of 2011, a goal that it also failed to meet.

SEC sources now state that they are working to issue the final rule “as soon as possible” but declined to give an estimated timeframe.

Separate from State’s Interim Guidance on Conflict Mineral Due Diligence

The SEC sources add that its proposed rule is separate from the interim guidance issued by the State Department in July 2011 encouraging companies to establish due diligence procedures before the SEC final rule is issued and to work on structuring their supply chain relations in order to encourage legitimate, conflict-free trade, including conflict-free minerals sourced from the DRC. (See ITT’s Online Archives 11072225 for summary of State’s July 2011 guidance on conflict mineral due diligence.)

¹On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111--203), which among other things amended the Securities Exchange Act of 1934 to impose new requirements on companies that use “conflict minerals.” It also provided new whistleblower rewards for securities violations, including violations of the FCPA. (See ITT's Online Archives 10072230 for summary of the law.)

SEC’s December 23, 2011 proposed rule available here.