by David J. Levine, McDermott Will & Emery LLP
On Wednesday, August 22, 2012, the US Securities and Exchange Commission (SEC) issued final rules to implement section 1502 of the Dodd-Frank Act—the “conflict minerals” law. Companies whose products contain conflict minerals—including gold, tungsten, tantalum and tin (3T+G)—should determine as soon as possible whether and how the new rules apply to them.
No one opposes the intent of the law—to curtail funding of groups committing human rights violations in the Congo region of central Africa. Its implementation has been controversial from the start, however, with businesses uncertain how they will be affected and with the SEC uncertain how to regulate this area. In fact, two of five SEC Commissioners voted against adoption of the final rules because of concerns about unintended consequences for regulated businesses and for the very persons in Africa the law was written to protect.
An essential element of the rules is a reporting requirement imposed on public US companies (issuers) that manufacture products that use conflict minerals. The final rules, unlike the proposed rules issued in January 2011, create a new Form SD to facilitate conflict minerals reporting, rather than simply requiring content in each issuer’s annual report to the SEC. The Form SD will be due May 31 each year starting in 2014, and will cover the preceding calendar year.
Like the proposed rules, the final rules provide a three-step framework for the reporting requirement. First, a company must determine if it is subject to conflict minerals reporting requirements; based on a fact-specific review, companies must establish whether they manufacture or contract to manufacture products for which conflict minerals are necessary for the functionality or production of a product. Issuers who “contract for manufacture” of products containing 3T+G could also be subject to the new rules. Second, issuers that use 3T+G minerals in any of their products must conduct a “reasonable country of origin inquiry” to determine whether the 3T+G minerals used in the products originated in the covered African countries or whether they were scrap or recycled. The results of this inquiry must be reported on Form SD as well as on the company’s internet website, the address for which must also be included on Form SD. Third, if the inquiry provides reason to believe that any of the 3T+G minerals used originated in the covered countries, the issuer will be required to file and post to its website an independently audited Conflict Minerals Report detailing the steps taken to ensure the 3T+G minerals used in its products did not benefit the militias committing atrocities in the Congo region. This provides a mechanism for affected issuers to certify that any 3T+G sourced from the Congo region is “conflict-free.”
The final rule removes a requirement from the proposed rules that issuers using recycled or scrap 3T+G minerals provide the Conflict Minerals Report. Also, if after its reasonable country of origin inquiry a company cannot determine the origin of the conflict minerals used in its products, it will be allowed to report its products as Conflict Mineral Undeterminable for the first two years of the reporting requirement (four years in the case of small issuers), effectively giving issuers a two- or four-year phase-in period during which to construct supply-chain tracking systems.
The cost and burden for companies to comply with the new final rules will vary according to specific circumstances. There is no question, though, that the cumulative costs for businesses will be substantial; the final rule effectively requires a full accounting of entire supply chains, with issuers needing to be able to trace conflict minerals used in their products back to the smelters where they originated.
On the enforcement front, it remains unclear how vigorous the SEC will be in monitoring compliance or in penalizing any violations of the new rules. However, the requirement under the final rules that companies “file” the new Form SD with the SEC—instead of merely “furnishing” it, as the proposed rules would have required—may subject non-compliant companies to potential liability under section 18 of the Securities Exchange Act.
David J. Levine is a partner in the International Trade Practice of the law firm McDermott Will & Emery LLP. He may be contacted at DLevine@mwe.com, 202-756-8153.
Topic tags: board of directors, conflict minerals, corporate governance, Dodd-Frank Wall Street Reform and Consumer Protection Act, Securities and Exchange Commission