Regulatory: Answering FAQs about disclosing the use of conflict minerals

How to know what your company needs to disclose, and how

Public companies engaged in manufacturing or contracting to manufacture products will now need to assess, and potentially disclosure, the use of four specific minerals and their origin.

On Aug. 22, the SEC adopted a disclosure requirement unlike any other in the federal securities laws. A new Form SD will require that public companies evaluate the use of certain minerals―columbine-tantalite, cassiterite, gold, wolframite or their derivatives―and make specific disclosures regarding the use and origin of these minerals (referred to collectively as “conflict minerals”).

This new requirement, mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is not driven by a belief that this information is material to investors, but rather seeks to promote transparency and consumer awareness about the use of minerals that may originate from the Democratic Republic of the Congo (DRC) and surrounding countries (the covered countries). Because these minerals have been used to finance armed conflict, legislators believe that public disclosure will provide a means to draw attention to the humanitarian crisis caused by fighting in the region. With the advent of these rules, we see an unprecedented use of the public company reporting regime as a means to address specific public policy interests that are not material to investors.

When must a company disclose the use of conflict minerals?

Public companies must now evaluate if conflict minerals are “necessary to the functionality or production” of a product that the company manufactures or contracts with others to manufacture. There is no di minimis standard in the rule, so public companies will need to evaluate the entirety of their operations to determine whether conflict minerals may be used as part of a product or in the process of manufacturing a product. The conflict minerals, which are also referred to by the SEC as tantalum, tin, gold and tungsten, are widely used in electronics, jewelry, wires, lighting, welding, heating and many other applications.

If a company uses conflict minerals, how does it determine where they came from?

 Any public company that uses these minerals must conduct a reasonable country of origin inquiry to determine whether the minerals originated in the covered countries, or whether the minerals originated from scrap or recycled sources.

What must a company disclose?

If a company knows that the minerals did not originate in the covered countries or are from scrap or recycled materials, 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 a brief description of the country of origin inquiry and the results of that inquiry in Form SD and on its website.

If, after inquiry, the company knows or has reason to believe that the minerals may have originated in the covered countries, or if the company knows or has reason to know that the minerals may not be from scrap or recycled sources, then the company must perform further due diligence on the source and chain of custody of the minerals, and file a Conflict Minerals Report as an exhibit to the Form SD. The Conflict Minerals Report also must be posted on the company’s website.

What must a Conflict Minerals Report say?

If a company determines that its products originate from the covered countries but do not finance or benefit armed groups (referred to as “DRC conflict free”), then the company must also obtain an audit of the Conflict Minerals Report, certify that the audit has been obtained, include the audit report and identify the auditor. If, by contrast, the company does not find that its products are DRC conflict free then, in addition to these requirements, the company must make very specific disclosures about the products using conflict minerals, the origin of those minerals and the efforts to pinpoint that origin. For a limited time (four years for “smaller reporting companies” and two years for all other companies), a company may reach the conclusion of “DRC conflict undeterminable” and provide specific disclosure about the products using the minerals and the origin of the minerals.

What must be done now?

Even though the deadline for the first Form SD is May 31, 2014, those companies engaged in manufacturing or contracting to manufacture products should immediately begin their efforts to identify any conflict minerals used and conduct due diligence on where those minerals come from. The costs of complying with Form SD are expected to be high for public companies, and it will be important to start early in creating a robust process for evaluating the use and origin of conflict minerals. 

Contributing Author

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David Lynn

David M. Lynn is a co-chair of Morrison & Foerster LLP's Public Companies and Securities Practice. Mr. Lynn's practice is focused on advising a wide...

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