15 Tips for Complying with the Conflict Minerals Provision of the Dodd Frank Act
The Dodd Frank Wall Street Reform and Consumer Protection Act came into effect on January 1 this year, and Section 1502 on Conflict Minerals requires compliance from all public companies that are listed with the Securities and Exchange Commission (S.E.C.) under Sections 13(a) or 15(d). The law requires these issuers to examine their supply chain to determine if they manufacture or contract to manufacture products that contain conflict minerals that are necessary to the functionality or production of those products. If so, issuers must then investigate whether those conflict minerals originated in any of the ten countries covered by this law. Â Conflict minerals are defined as cassiterite, columbite-tantalite (coltan), gold, and wolframite, as well as their â3Tâ derivatives tin, tantalum and tungsten.
The law and the S.E.C.âs Final Rule on the law are complex and nuanced.Â With that in mind, here are some key insights, provisions and subtleties of the law and Final Rule that can help your compliance efforts:
1. Be careful what sources you trust.
- The law and the regulation are very complicated with many nuances â even experts and trusted lawyers have (unintentionally) misrepresented the tenets of the rule in their articles and presentations.
- Question any source published prior to August 22, 2012. This is the date the S.E.C.âs Final Rule was adopted which amended and clarified prior interpretations of the law.
2. Exemption for minerals that are outside your supply chain.
If your conflict minerals are outside your supply chain by January 31, 2013, you are exempt from this rule. âOutside the supply chainâ means outside of the covered countries, or, if the minerals are still in the covered countries, if they have already been smelted or fully refined by January 31. The âcovered countriesâ are: the Democratic Republic of the Congo (DRC) and its nine adjoining countries: Tanzania, Zambia, Republic of Congo, Central African Republic, Angola, Uganda, Rwanda, South Sudan and Burundi.
3. No de minimis.
There is no de minimis exception. Even if only trace amounts of a conflict mineral are in your products, you are still subject to this rule.
If you acquire a company that must comply with this law, and that company had not previously been obligated to provide a specialized disclosure report for its conflict minerals, then you may be able to delay reporting on the acquired companyâs products until a following reporting period.
5. Future conflict minerals?
The law not only includes the listed minerals and derivatives but also covers any other mineral or its derivatives that the Secretary of State determines is financing conflict in the covered countries. According to internal sources, there is nothing on the docket to be added to this list at this point. Currently, the included minerals and derivatives are: cassiterite/tin, columbite-tantalite (coltan)/tantalum, gold, and wolframite/tungsten.
6. Repairing is not manufacturing.
The S.E.C. clarifies in the Final Rule that the law does not include an issuer that only services, maintains or repairs a product.
7. Assembling is manufacturing.
The S.E.C. also clarifies that the law does include companies that manufacture a product by assembling that product out of materials, substances, or components, so that would include for example many auto and electronics manufacturers. If your final product contains a component that has conflict minerals in it, then you are considered to be manufacturing a product with conflict minerals, under this Act.
8. Timing of disclosures for components with conflict minerals.
You must disclose the required information for the calendar year in which the manufacture of a product that contains any conflict minerals is completed. A helpful tip is that the calendar year does not necessarily apply if as a manufacturer you include a component in your product and that component contains necessary conflict minerals â even if that component was manufactured that year, you still are only required to report for the calendar year in which you complete your finished product that contains that component.
9. Timing of disclosures for possession of conflict minerals.
Similarly, the calendar year does not apply to possession of conflict minerals during that year. So if you possess conflict minerals, but do not complete production of the product containing the conflict minerals, then you donât report that product for that year.
Because the disclosure is required to be âfiledâ with the S.E.C. (instead of just âfurnishedâ), this makes issuers subject to Exchange Act Section 18 liability for fraudulent or false reporting on your conflict minerals. This is a change from the proposed rule. The liability under Section 18 of the Securities Exchange Act of 1934 means that you can be sued for making false or misleading statements by anyone who relied upon such information to purchase or sell a security, and also for damages and attorneyâs fees, among other provisions.
11. Exemptions from the term ânecessary to the production.â
This Act applies to your public company if your product contains conflict minerals that are ânecessary to the functionality or productionâ of products that you manufacture or contract to be manufactured. The S.E.C.âs guidance on this sentence includes the advice that to be considered ânecessary to the productionâ of your product, a conflict mineral must be both contained in the product and necessary to the productâs production. Accordingly, it is not considered ânecessary to the productionâ of your product if the conflict mineral is used as a catalyst but is not actually contained in the product. Similarly excluded are conflict minerals in tools and machinery that contain conflict minerals and are used in production; they are only subject to this rule if the conflict minerals are also present in the product.
12. Exemptions from the term âmanufacture.â
The Act covers entities that manufacture or contract to manufacture products. However, the S.E.C. guidance says that if an issuer merely specifies or negotiates contractual terms with a manufacturer that doesnât directly relate to the manufacturing of a product, or if it simply affixes its brand, marks, label or logo to a generic product that is manufactured by a third party, then the entity would not be considered to be âcontracting to manufactureâ that product.
The final rule requires an issuer who files a Conflict Minerals Report to use a nationally or internationally recognized due diligence framework, if such a framework is available for the specific conflict mineral that you use. At the time the S.E.C. published the Final Rule, only one framework was known: the OECD Due Diligence Guidance for Responsible Supply Chains. The OECD guidance includes supplements on tin, tantalum, tungsten and gold.
14. Court challenge.
The S.E.C.âs rules may come under legal scrutiny, as the U.S. Chamber of Commerce and two other groups have petitioned the U.S. Court of Appeals for the District of Columbia Circuit to review the S.E.C.âs Final Rule on this Act. If you are interested to know more about the court challenge there is an analysis of the petition and possible outcomes on the 3E Company blog.
15. Punitive measures?
You may be wise to expect future legislation on this topic, including punitive measures. The text of the Act includes language directing the Secretary of State, in consultation with USAID, to submit a strategy to address linkages between commercial products and human rights abuses, armed groups, and the mining of conflict minerals, and Congress directs the Secretary to include âa description of punitive measures that could be taken against individuals or entities whose commercial activities are supporting armed groups and human rights violationsâ in the DRC.
It can also be helpful to know that a number of initiatives exist that may help your compliance efforts. The Government Accountability Office issued a report last year on âGlobal and In-region Supply Chain Initiatives,â which includes industry associations, multilateral organizations, and other stakeholders that have already developed programs and tools that may help your company and your suppliers comply with this rule.
The Securities and Exchange Commission emphasizes that these rules must be interpreted from primary texts and on a case by case basis, considering your companyâs particular set of facts and circumstances.
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), Sec. 1502 Conflict Minerals
S.E.C. Final Rule on Section 1502 of the Dodd-Frank Act
Kirsten Wallerstedt is senior regulatory analyst, global supply chain, for 3E Company. Ms. Wallerstedt is presenting a webinar on this topic on April 17, 2013.
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