Compliance: Source of Minerals Gets New Scrutiny

Sept. 25, 2012
New rule offers framework for disclosing materials originating from conflict regions.

On Aug. 22, 2012, the Securities and Exchange Commission (SEC) adopted a final rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This important and sweeping rule is effective for products manufactured in 2013, and the first annual reports are due May 31, 2014, and on May 31 every year thereafter. It obligates companies using minerals that might have come from conflict zones to disclose their use. Because such minerals are utilized in catalysts or directly in production, the rule will impact many industrial sectors, including chemical manufacturing, electronics, paints and coatings, and automotive. Further, as the list of “conflict” minerals expands, others industries will be brought in under the scope of the rule.
Congress enacted Section 1502 due to concerns that armed groups exploiting and trading minerals is helping finance conflict in the Democratic Republic of the Congo (DRC), and contributing to a humanitarian crisis. The final rule applies to companies that use minerals identified as conflict, which include tantalum, tin, gold, or tungsten, if the company files reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act; and the conflict minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.  

Companies that strictly mine conflict minerals aren’t affected by the rule unless they also engage in manufacturing. Also, the rule doesn’t apply to conflict minerals “outside the supply chain” prior to January 31, 2013. Conflict minerals are outside the supply chain if they have been smelted or fully refined, or outside the covered countries.

Country of Origin Inquiry
A public company that uses a conflict mineral must conduct a reasonable “country of origin” inquiry. If the inquiry determines the company knows — or has reason to believe — the minerals didn’t originate in the covered countries, or are 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 on a new form to be filed with the SEC. The company must make its description publicly available on its website and provide the address of that site on the SEC form.

If the inquiry determines the company knows or has reason to believe the minerals may have originated in the covered countries, and 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 and file a Conflict Minerals Report (CMR) as an exhibit to Form SD. The company also must make the report publicly available on its website and provide the address of that site on the form.

Contents of Conflict Minerals Report
Companies that file a CMR must exercise due diligence on the source and chain of custody of their conflict minerals. The due diligence must conform to a recognized framework, such as the due diligence guidance approved by the Organization for Economic Cooperation and Development (OECD). If the measures determine that although the minerals originated from the covered countries, but they didn’t finance or benefit armed groups, then the company may designate the minerals as “DRC Conflict Free.” To confirm this designation, the company must obtain an independent certified private sector audit of its CMR, include the audit report and identify the auditor in the CMR.

Companies that are unable to determine whether the minerals in its products originated in a covered country or financed or benefited armed groups may designate their products as “DRC Conflict Undeterminable” for a temporary period of two years after the final rule’s effective date. The period for small businesses is four years. Under this temporary designation, the company must include certain information in its CMR.

If a company determines its conflict minerals are derived from recycled or scrap sources, its products are considered “DRC Conflict Free.” For gold, a company must use the OECD Due Diligence Guidance and obtain an independent audit of its CMR. For all other minerals, the company must describe the due diligence measures it used to determine its conflict minerals are from recycled or scrap sources in its CMR, but an independent private sector audit isn’t required.
The final SEC rule is an improvement over the proposed rule. The rule includes a two-year phase-in period, a welcome relief to industry. Companies that determine the covered minerals derive from scrap or recycled materials are exempt from providing additional information to SEC, also an important improvement from the proposed rule.

An important collateral implication of the final rule is the establishment of a recognized and validated approach to conducting “supply-chain due diligence.” The availability of this approach could well be used in other voluntary or mandatory disclosure contexts.

LYNN BERGESON is Chemical Processing's Regulatory Editor. You can e-mail her at [email protected].
Lynn is managing director of Bergeson & Campbell, P.C., a Washington, D.C.-based law firm that concentrates on chemical industry issues. The views expressed herein are solely those of the author.

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