E-Bulletin: SEC Adopts Final Conflict Minerals Rule on August 22, 2012
Sills Egsgard E-Bulletin published August 22, 2012. A PDF copy of this bulletin is available at: http://www.lexmercantile.com/uploads/Conflict%20Minerals%20Bulletin%20Aug%2022.final.pdf
On August 22, 2012, the U.S. Securities and Exchange Commission ("SEC") adopted a final rule that imposes new disclosure and reporting obligations on companies whose products contain so-called "conflict minerals". This long-awaited Rule specifies in detail, the reporting obligations to be met by certain companies who deal with products incorporating conflict minerals.
This E-Bulletin provides you with a brief overview of the history and content of the new "Conflict Minerals Rule" and a description of its implications for your company.
What is the Conflict Minerals Rule?
In 2010, the US Congress passed section 1502 of the Dodd Frank Act designating the following minerals as "conflict minerals": cassiterite, columbite-tantalite (coltan), wolframite, derivatives of these minerals including tin, tantalum and tungsten, and gold. The objective of the law is to force public disclosure of the source of conflict minerals to show that proceeds from the purchase of the minerals are not used to finance armed conflict in the Democratic Republic of Congo and neighbouring countries.
In December 2010, a proposed Conflict Minerals Rule was released, and public comments were solicited on the proposed Rule. A roundtable discussion was held in October 2011 with industry stakeholders, who provided substantial feedback on the Rule. Owing to the controversial nature of some of the Rule's provisions and opposition from some quarters of the business community, adoption of the final Rule was repeatedly delayed until August 22, 2012.
To whom will the Conflict Minerals Rule apply?
The conflict mineral rules apply to any US issuer subject to the reporting requirements of the US Securities Exchange Act, where the conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer. The SEC has made it clear in its Rule that US-issuing mining companies are excluded from the disclosure requirements where such companies engage solely in mining, without further manufacturing of the product after extraction. However, where mining companies also engage in manufacturing activities whether directly or by contract, they will be fully subject to the disclosure requirements.
These disclosure obligations will arise not only for US-listed companies, but may also be required by your customers if your company's products are part of the supply chain for a US-listed company.
In contrast to the Sarbanes-Oxley legislation, whose impact was confined largely to the financial reporting and IT aspects operations of companies, the Conflict Minerals Rule will impact a relatively greater number of corporate functions, ranging from product design and development to sourcing and procurement, supply chain relationships, finance and IT.
What disclosure will be required?
Issuers are required to file for each calendar year, regardless of the company's fiscal year. The first disclosure report is due on May 31, 2014 for the 2013 calendar year. US issuers will be required to state in their annual SEC reports whether any conflict minerals in their products originated in the Democratic Republic of Congo ("DRC"), or an adjoining country. If so, that company will have to file a separate report describing the due diligence measures undertaken on the source and chain of custody of its conflict minerals.
If a company cannot determine whether the product financed or benefited armed groups, the issuer will be obliged to identify the products as not "DRC conflict-free".
Specific provisions apply to issuers using recycled or scrap conflict minerals. Such entities will also be required to conduct an inquiry as to the origin of their minerals but are not automatically subject to the requirement to conduct due diligence of their supply chain and file a conflict minerals report. Should it be determined later on that any of the minerals in the supply chain originated, or may have originated, in the covered countries, or are not in fact recycled or scrap, the issuer will be required to conduct due diligence and file the required reports.
Implementation of the reporting requirements may be delayed in the case of issuers having difficulty in tracking the supply chain and providing confirmation of the origin of the minerals they are using. Such issuers will have the option, for a limited time period, of reporting that their products are "conflict undeterminable". The time period is two years for large companies, and four years for small and medium-sized entities. There is no small- and medium-sized company exemption.
Private Sector Sourcing Initiatives
Private industry groups have already developed their own specific due diligence processes tailored to the specific characteristics of their respective sectors. Examples include the Electronic Industry Citizenship Coalition ("EICC") and Global e-Sustainability Initiative ("GeSI") conflict free smelter program audit protocols for gold, tantalum, tin and tungsten. Members EICC and GeSI include Apple, Cisco, Best Buy, Sony, Toshiba, HP, Xerox, Microsoft, Verizon, RIM and Bell. Other industry groups, such as the Automotive Industry Action Group(whose members include Chrysler, Ford, and GM) and the Aerospace Industry Association have already issued letters to their suppliers providing them with advance notice of the upcoming SEC conflict mineral rule requirements.
How can Sills Egsgard LLP help?
Sills Egsgard LLP can work with your company's staff and other professional advisors to navigate the requirements resulting from the conflict mineral legislation, including due diligence requirements emanating from customers in your supply chain. Such steps may include:
- review of company management systems and drafting compliance policies as necessary
- identifying and assessing risk in the supply chain, assisting in preparation of supplier certifications and communications, and revising
standard form contracts as necessary
- assisting in the design and implementation of a strategy to respond to identified risks
- assisting in identifying proper independent third-party audit of supply chain due diligence
- review of reporting procedures and reports on supply chain due diligence
We would be happy to discuss your company's specific requirements further with you.
About Sills Egsgard LLP
Sills Egsgard LLP is a boutique law firm based in Toronto specializing in regulatory compliance issues for both Canadian and foreign enterprises. Our lawyers combine solid legal knowledge and experience gained through years of practice in some of Canada's most prestigious law firms, with experience living and working in developing countries and a thorough familiarity with international trade. Our multi-disciplinary skills and experience are provided to our clients at cost-effective prices owing to our low overheads.