11. Exemptions from the term “necessary to the production.”
This Act applies to your public company if your product contains conflict minerals that are “necessary to the functionality or production” of products that you manufacture or contract to be manufactured. The S.E.C.’s guidance on this sentence includes the advice that to be considered “necessary to the production” of your product, a conflict mineral must be both contained in the product and necessary to the product’s production. Accordingly, it is not considered “necessary to the production” 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 “manufacture.”
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 doesn’t 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 “contracting to manufacture” that product.
13. Framework.
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.’s 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.’s 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 “a description of punitive measures that could be taken against individuals or entities whose commercial activities are supporting armed groups and human rights violations” in the DRC.
