Reporting Deadline for Conflict Minerals Near for SEC Registrants

Due Diligence |Energy & Resources|Public Companies

By Kurt Herdman

The deadline for filing the conflict minerals disclosures as required by the SEC as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) is just around the corner, June 2, 2014.  Included in the Dodd-Frank Act was Section 1502, which directed the SEC to issue rules requiring certain companies to disclose the use of conflict minerals, as a way to put pressure on companies that source these minerals from certain countries where the funds from the sale of these minerals are often used by armed groups to fund conflicts within these regions and to infringe on human rights. 

There are four types of conflict minerals, tin, tantalum, tungsten, and gold (commonly referred to as 3TG) that can originate from the Democratic Republic of the Congo (DRC) or an adjoining country, which are referred to as “Covered Countries” in the Dodd-Frank Act.  A company is subject to the requirements of the Dodd-Frank Act if it is required to file or voluntarily file reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act, and conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured.  The Organization for Economic Co-operations and Development (OECD) has provided a list of products containing these minerals, which include products such as electronics, lighting, certain alloys and power tools (see below for a link to the OECD’s listing).

Putting further pressure on the upcoming reporting deadline was a recent case in the U.S Court of Appeals for the District of Columbia Circuit (Court) that issued a partial stay in the reporting requirements of the Dodd-Frank Act, particularly the requirement for companies to “state on their website that any of their products have not been found to be… conflict free,” which was found to be a violation of the First Amendment to the Constitution.  Despite some additional efforts to stay the other reporting provisions of the Dodd-Frank Act, the SEC still expects companies to file any reports required by the final conflict minerals rule by June 2, 2014.

Essentially, the SEC prescribes a three-step process.  Step 1 is to determine if the company is subject to the conflict minerals final rule (as outlined above).  Step 2 is to perform a “reasonable country of origin inquiry” designed to determine if conflict minerals originated in the covered countries or are from recycled or scrap sources.  If at Step 2 the company determines that the conflict minerals are from non-conflict countries or recycled or scrap sources, then the company would be required to file in Form SD information regarding the inquiries made and the results of those inquiries.  If the company determines that conflict minerals are from covered countries, then a Company would be required to undertake due diligence on the source and chain of custody of the conflict minerals and file a Conflict Minerals Report as an exhibit to its Form SD.

The SEC also requires a company that wants to voluntarily report that its products are “conflict free” in its conflict minerals report to have an independent private sector audit on the design of the company’s due diligence framework, as well as to determine if the procedures performed were consistent with the established due diligence framework.  

Ultimately, the Dodd-Frank Act requirements as they relate to conflict minerals will make companies and the general public more aware of the use of these materials in products.  Companies utilizing conflict minerals from Covered Countries should be prepared for increased scrutiny from their customers and other interested parties as to the use of these materials as outlined in their public disclosures.

Useful Links:

OECD Illustrative List of Products

SEC Final Rule - Section 1502 Dodd-Frank Wall Street Reform and Consumer Protection Act

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