United States

Conflict Minerals Q & A

ARTICLE

On August 22, 2012, the SEC approved a final rule requiring certain issuers to publicly disclose their use of conflict minerals and whether those minerals originated in the Democratic Republic of the Congo or adjoining countries. On April 29, 2014, the SEC issued a statement on the effect of an April 14, 2014 Court of Appeals decision on the Conflict Minerals Rule. The questions and answers below provide a high-level overview of this rule, which primarily is applicable to public companies, but also has some relevance to private companies.  

What are conflict minerals?

Conflict minerals are minerals mined in conditions of armed conflict and human rights abuses, notably in the eastern provinces of the Democratic Republic of the Congo, by the Congolese National Army, and various armed rebel groups, including the Democratic Forces for the Liberation of Rwanda and the National Congress for the Defense of the People. 

Conflict minerals as defined in the SEC’s rule include tantalum, tin, tungsten, and gold, extracted from the Democratic Republic of the Congo or adjoining countries (Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia), and passed through a variety of intermediaries before being purchased by companies that use them to manufacture electronics, jewelry, engine components, communications equipment, wire, packaging, etc.

Why should I care about conflict minerals?

SEC final rule 34-67716, Conflict Minerals, requires certain issuers to publicly disclose their use of conflict minerals (tantalum, tin, tungsten, and gold) and whether those minerals originated in the Democratic Republic of the Congo or adjoining countries (covered countries). The rule outlines a three-step process to help issuers determine (1) whether they are subject to its requirements, (2) whether the conflict minerals originated in a covered country and the resulting disclosure, and (3) the Conflict Minerals Report’s content and supply chain due diligence. Among other requirements, issuers subject to the rule must conduct a comprehensive assessment of their supply chain activities to determine whether their conflict minerals originated from a covered country.

What is the purpose of the rule? 

Ultimately, the purpose of the rule is to require companies using conflict minerals to disclose this fact. Inherently, there is an underlying presumption consumers will demand companies discontinue the use of conflict minerals, once disclosed. There is, however, no prohibition on the use of conflict minerals per se. 

When is the rule effective?

Issuers will be required to provide annual disclosures on a new Form SD to be filed with the SEC. The annual disclosure period spans a calendar year for all issuers – regardless of their fiscal year end. The filing deadline for annual disclosures is May 31. Companies must first comply with the disclosure requirements on May 31, 2014 (for the 2013 calendar year).

Who is impacted by the rule?

The SEC has estimated that approximately 1,200 issuers will be required to submit full Conflict Mineral Reports. This estimate does not account for the non-public companies who supply materials to the “issuers” (but are not themselves SEC-regulated) and therefore will almost certainly be asked to provide representation as to the source of their conflict minerals to meet the demands of those customers. 

Is this rule applicable to all registrants?

The requirements apply equally to all domestic and foreign issuers, including smaller reporting companies. The SEC rule specifically applies to a company that uses minerals including tantalum, tin, gold or tungsten if:

  • The company files reports with the SEC under the Exchange Act.
  • The minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company. 

Is a retailer subject to compliance with the rule? 

Maybe. 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 facts and circumstances, taking into account the degree of influence a 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
  • Specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product 

What are the responsibilities of a company that uses conflict minerals?

Under the final SEC rule, 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 inquiry determines either of the following to be true:

  • The company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources, or
  • The company has no reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources. 

… then 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. In such instances no Conflict Minerals Report will be necessary. 

If the inquiry determines both of the following to be true:

  • The company knows or has reason to believe that the minerals may have originated in the covered countries, and
  • The company knows or has reason to believe that the minerals may not be from scrap or recycled sources. 

… then the company must undertake “due diligence” on the source and chain of custody of its conflict minerals, file a Conflict Minerals Report as an exhibit to the Form SD and make the Conflict Minerals Report publicly available on its website. The due diligence measures must conform to a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organisation for Economic Co-operation and Development.

If a company uses conflict minerals and is not sure whether the minerals originate from covered countries, what is its responsibility?

For a temporary two-year period (or four-year period for smaller reporting companies), if the company is unable to determine whether the minerals in its products originated in the covered countries or financed or benefited armed groups in those countries, then those products are considered “DRC conflict undeterminable.”

If an issuer uses conflict minerals and knows the minerals originate from covered countries, what is its responsibility?

Under the final SEC rule, the issuer will be required to file a Conflict Minerals Report and must 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 due diligence guidance approved by the Organisation for Economic Co-operation and Development. The Conflict Minerals Report should include a description of the due diligence that the issuer undertook. If the issuer has products that “have been found to be DRC conflict undeterminable” or “have not been found to be DRC conflict free,” it does not have to identify the products as such, but should disclose for those products the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.

No company is required to describe its products as “DRC conflict free,” “not found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” If the issuer voluntarily elects to describe any of its products as “DRC conflict free” in its Conflict Minerals Report, it is permitted to do so provided it has obtained an independent, private sector audit report of whether the design of its due diligence framework is in accordance with the nationally or internationally recognized due diligence framework and whether the issuer’s description of the due diligence measures it performed is consistent with the due diligence process that it undertook. Pending further action by the SEC, an independent private sector audit is not required unless a company voluntarily elects to describe a product as “DRC conflict free” in its Conflict Minerals Report.

Under which auditing standards will the audit be performed? 

Existing Government Auditing Standards, such as the standards for attestation engagements or the standards for performance audits, will be applicable. The performance audit can be performed by CPAs or non-CPAs. The attestation engagement typically only is performed by CPAs.