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Journal entry — SEC issues final conflict minerals rule

Published on: Aug 24, 2012

This week, the SEC issued a final rule1 implementing Section 1502 of the Dodd-Frank Act.2 Section 1502 instructs the SEC to promulgate regulations that require issuers to annually disclose a description of the measures they took to “exercise due diligence on the source and chain of custody of such conflict minerals.”

The SEC had issued a related proposed rule in December 2010 that it expected to finalize in April 2011, but because of concerns raised by stakeholders in over 400 comment letters and at a roundtable discussion in October 2011, the SEC delayed issuance of the final rule to consider the feedback and evaluate the rule’s implementation costs, which the SEC estimated would be between $3 and $4 billion. See Deloitte’s November 29, 2011, Heads Up for a discussion of the proposal’s key provisions and constituent feedback.

Because the concepts underpinning the conflict minerals rule are rooted in the statutory language of the Dodd-Frank Act, the final rule’s provisions are generally consistent with those in the proposal. However, several of the key “mechanisms” were changed. For example, although the final rule retains the proposal’s three-step process for evaluating a registrant’s use of conflict minerals,3 under the final rule, the registrant is required to file such information with the SEC in a newly created Form SD rather than furnish the information as an exhibit to its annual report (e.g., Form 10-K, 20-F, or 40-F).4 Some of the final rule’s key provisions and the changes made to the proposed rule are discussed in detail below.

Determining Whether a Registrant Is Within the Scope of the Final Rule

All SEC registrants need to assess whether they use covered minerals5 and whether such covered minerals are “necessary to the functionality or production” of either (1) products they manufacture or (2) products that they have contracted to third parties for manufacture. Like the proposed rule, the final rule does not define certain key terms such as “necessary to the functionality or production” or “contract to manufacture,” but it outlines key factors for consideration.

As part of determining whether a conflict mineral is necessary to the functionality or production, registrants must assess whether the conflict mineral is necessary to the product and contained in the final product. Accordingly, registrants should consider whether a conflict mineral:

  • Was added intentionally to the product or its components and not a naturally occurring by-product.
  • Was added intentionally to the production process (however, the final rule explicitly excludes tools, machinery, and equipment from such a determination).
  • Is necessary to a product’s “generally expected function, use, or purpose.”
  • Was added for “purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.”
  • Was used only as a catalyst in the production process. If so, it is excluded from the scope of the final rule unless it remains in the final product.
  • Was not merely mined. The final rule does not regard mining as a manufacturing process and thus explicitly excludes mining issuers unless they are also manufacturers.

The final rule specifies that in considering the use of conflict minerals in products that have been contracted for manufacture, registrants would evaluate such products on the basis of whether the registrant exerted influence over the third party’s manufacturing process. The following indicators would be insufficient to establish such exertion of influence:

  • The registrant’s logo, brand, or label was merely affixed to generic products.
  • Involvement is limited to servicing or maintaining a third party’s manufactured product.
  • Negotiations of contract terms are not directly related to the manufacturing of the product.

Reasonable Country-of-Origin Inquiry and Due Diligence Requirement

Upon concluding that it uses covered minerals in its products and that they are necessary to the products’ functionality or manufacture, the registrant is required to conduct a reasonable country-of-origin inquiry to determine whether any of its minerals are from a covered country (i.e., the Democratic Republic of Congo (DRC) and adjoining countries) or originated from scrap or recycled materials. Like the proposed rule, the final rule does not define “reasonable” or prescribe an inquiry process, but it notes that such inquiry should be performed in good faith. If a registrant concludes that covered minerals are not from the DRC or are from scrap and recycled sources, under the final rule the registrant must briefly describe its country-of-origin process in its Form SD and provide such description on its Internet Web site. Although the final rule removes a registrant’s requirement to maintain records supporting its reasonable country-of-origin process, it suggests that keeping such records “may be useful in demonstrating compliance with the final rule, and may be required by any nationally or internationally recognized due diligence framework applied by an issuer.”

Conversely, if a registrant (1) has affirmatively concluded or “has reason to believe” that covered minerals may have originated in a covered country or (2) has reason to believe that such minerals may not be from scrap or recycled materials, the registrant must perform due diligence on its supply chain to determine its sources and chain of custody. The final rule retains the requirement for a registrant to file a Conflict Minerals Report but to include it as an exhibit to its Form SD. It also stipulates that a registrant’s due diligence process must be performed in accordance with a nationally or internationally recognized due diligence framework.6 The requirement to perform due diligence on such a framework, if one is available, was added to promote comparability and provide independent private sector auditors with a basis upon which to evaluate management’s assertions. Also unchanged from the proposed rule is the requirement for a registrant to post its Conflict Minerals Report on its Internet Web site.

The final rule retains the audit requirement from the proposed rule and carries forward the requirement that an independent private sector audit (IPSA) be performed in accordance with the “Yellow Book.”7 In response to constituent concerns about the nature of the IPSA, the SEC summarized the audit objective in the final rule as follows:

The audit’s objective is to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and whether the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook.

Conflict Minerals Report and IPSA Requirement

While the final rule generally does not change what registrants must provide in their Conflict Minerals Report, it indicates that such report should also discuss the nationally or internationally accepted framework that a registrant used to perform its due diligence on the source and chain of custody of its conflict minerals. A registrant must also classify its minerals as (1) DRC conflict free, (2) not been found to be “DRC conflict free,” or (3) DRC conflict undeterminable, as follows:

  • DRC conflict free — This classification indicates that, while there might be minerals from a covered country in the registrant’s products, the registrant has conducted due diligence and concluded that such minerals did not originate from the DRC or did not finance or benefit armed groups. When a registrant concludes that its products are DRC conflict free, in addition to filing a Conflict Minerals Report, it would be required to (1) obtain an IPSA report of its Conflict Minerals Report, (2) certify that it obtained such an audit, (3) include the audit report as part of its Conflict Minerals Report, and (4) identify the auditor conducting the audit.
  • Not been found to be “DRC conflict free” — This conclusion results when a registrant’s products might have covered minerals that originated from covered countries and the minerals may have aided in financing or benefiting armed groups. In addition to obtaining an IPSA report and complying with certification requirements, a registrant in this category must describe in its Conflict Minerals Report (1) any of its products that have not been found to be DRC conflict free, (2) the production facilities it used to process the minerals, (3) the country from which the minerals originated, and (4) the efforts it employed to identify the mine or location of origin for these minerals.
  • DRC conflict undeterminable — This temporary designation, which is limited to two years (four years for smaller reporting companies), may apply when a registrant is unable to determine whether the covered minerals in its products originated from a covered country or financed or benefited armed groups. Although an IPSA report is not required, the registrant’s Conflict Minerals Report must contain additional disclosures, including (1) the products in this classification, (2) the production facilities it used to process minerals, (3) the country from which the minerals originated, (4) efforts it employed to identify the mine or location of origin for the minerals, and (5) the steps it took to improve due diligence since the end of the most recent period covered by the Conflict Minerals Report.

Transition and Next Steps

Unlike the proposed rule, the final rule requires all registrants to file Form SD on a calendar-year basis (regardless of their fiscal year-ends) beginning with the first calendar year ending on December 31, 2013, with such reports due on May 31, 2014 (and on May 31 each year thereafter).

Watch for Deloitte’s upcoming Heads Up for additional information on the final rule.


[1] SEC Final Rule Release 34-67716, Conflict Minerals.

[2] Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the Securities Exchange Act of 1934 by adding Section 13(p).

[3] The three-step process involves (1) determining whether the conflict-minerals rule applies to the registrant, (2) performing a reasonable country-of-origin inquiry for determining whether conflict minerals in a registrant’s process originated in a covered country, and (3) fulfilling requirements related to supply-chain due diligence and the independent private sector audit.

[4] In explaining the rationale for requiring a registrant to “file” the conflict minerals information as opposed to “furnishing” it as originally proposed, the final rule highlights that Section 18 of the Exchange Act of 1934 does not create a liability but rather holds a registrant liable for misleading statements unless it can establish that it acted in good faith and did not knowingly provide false information. In addition, the change requiring registrants to file the information on a new form (outside of the registrant’s annual report to the SEC) was made to address preparer concerns regarding the propriety of including such information within CEO and CFO annual certifications.

[5] Conflict minerals are called “covered minerals” in the final rule and represent certain named minerals including tin, tantalum, tungsten, and gold (often referred to as “3Ts+G”) and their derivatives that originate from the Democratic Republic of Congo and adjoining countries.

[6] Currently, the only nationally or internationally recognized framework available is the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas (and the related Supplement on Gold), issued by the Organization for Economic Co-operation and Development.

[7] Audit standards established by the U.S. Comptroller General that may consist of either a performance audit or an attestation engagement.

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