Category: Business Law
On August 22, 2012, after a considerable delay and substantial public input, the Securities and Exchange Commission (SEC) commissioners approved (by a vote of 3-2) final disclosure rules required by the Dodd-Frank Act regarding what are known as "conflict minerals." The dissenting commissioners raised a number of concerns, including the cost to comply especially by smaller public companies.
So what does this mean? All manufacturers (more on that definition in a moment) must conduct a review beginning no later than Jan. 1, 2013 to confirm that its products do not contain certain minerals from specified countries and then possibly certify the results to the SEC and the public no later than May 31, 2014, as a part of another new SEC form known as Form SD (as in "specialized disclosure").
What minerals are included? Gold, cassiterite (used to make tin), wolframite (used to make tungsten), columbite-tantalite (used to make tantalum), certain related products and any other minerals specified by the U.S. Secretary of State. These minerals often are critical in the manufacturing of common electronic devices such as mobile phones, computers and tablets, aerospace equipment, medical equipment and, of course, jewelry.
What foreign countries are impacted? If the supply chain sources the conflict minerals from the Democratic Republic of Congo or any adjoining country (known as the DRC or covered countries), then the manufacturer has a potential problem and more expensive reporting requirements.
Are all public companies impacted? No. The SEC estimates that approximately 6,000 issuers will be impacted by these new disclosure rules. Efforts to exclude smaller reporting companies and emerging growth companies (per the JOBS Act) were unsuccessful. Foreign private issuers are not excluded. However, before any disclosure obligations are triggered, public companies must manufacture or contract to manufacture products that are necessary for the functionality or production of the products sold. While "contracting to manufacture" has not been defined by the SEC, there is guidance that would exclude companies that:
· merely affix their brand name to a product manufactured by a third party,
· service or repair products manufactured by a third party, or
· negotiate or specify contractual terms with a third-party manufacturer that do not relate to the manufacturing of the product.
Said another way, it is clear that the SEC is intending to include reporting companies that have actual influence over the manufactured products being sold as opposed to products produced by others but sold by retailers or basic resellers. To assist, the SEC's final rules even included a flow chart (see it here) that outlines the various scenarios for the manufacturing company depending on the circumstances.
What are the required disclosures? Subject to some grace periods described below, the companies must first determine whether it or its contract manufacturer sources any of the conflict minerals that are necessary for the functionality or production of its products. If not, then the questioning can end. If yes, further inquiry is required:
· After a reasonable "country of origin" check, did the conflict minerals originate from any of the DRC Countries?
· Does the company have a reason to believe that the conflict minerals may have originated in any of the DRC Countries?
If the answer to both is no, then the Form SD would be filed disclosing the conclusion with similar disclosure on the company's website. If the answer to either question is yes or if the reporting company is unable to confirm that both questions can be answered in the negative, then the reporting and investigation (and costs) will continue.
· The company must undertake a reasonable inquiry into the source and chain of custody of the conflict minerals.
· Did the inquiry conclude that the conflict minerals are "DRC-conflict free?" That is, did the sale of the conflict minerals finance or benefit armed groups within the DRC Countries?
If the conflict minerals are found to be DRC-conflict free, then the reporting company must disclose its conclusion on Form SD, submit a conflict minerals report to the SEC and post the report on its website. Importantly, the inquiry must follow certain guidelines and be audited by an independent auditor. If the conflict minerals are not found to be DRC-conflict free, then the reporting company must also include the following in its conflict minerals report:
· Country of origin;
· Facilities used to produce the minerals in those countries;
· The efforts undertaken to locate the mine or location of origin as specifically as possible; and
· The products impacted (that is, not found to be DRC-conflict free).
Temporarily, those companies that are not able to confirm that the conflict minerals are DRC-conflict free, may take advantage of the grace periods discussed below. The final rules also include special rules for those utilizing scrap or recycled sources rather than mined sources.
What are the critical reporting dates? The Form SD must be filed by May 31 with respect to the prior calendar year regardless of the reporting company's fiscal year. The first Form SD would be due May 31, 2014 for calendar 2013. Accordingly, supply chain tracking may need to begin for some reporting companies on Jan. 1, 2013. In response to public comment, the SEC's final rules include grace periods. For up to two years (four years for smaller reporting companies), companies may disclose certain minerals as "DRC-conflict indeterminable" rather than "DRC-conflict free" if they are not able to establish whether the minerals sourced from the DRC Countries financed or benefited armed groups in those countries. Under this safe harbor, the same information required to be disclosed under the "Non-DRC-Conflict Free" rules would have to be disclosed but not audited. Also, the disclosure must include a description of the steps taken or planned to reduce the risk that the conflict minerals are in fact benefiting armed groups in the DRC Countries.
Conclusion. Given the controversy surrounding the proposed rules, the close approval vote and given that the adopting release is more than 300 pages, we can expect more controversy and potentially efforts to roll-back some of the more oppressive features. While these rules may be another well-intentioned byproduct of the Dodd-Frank Act, there is no question that they can impact a very large number of reporting companies given the widespread use of the conflict minerals in many of the products that are manufactured every day. Stay tuned for further developments.
For further information, please contact Joseph DeGroff at (317) 236-2435 or firstname.lastname@example.org or any member of Ice Miller’s Private Equity and Venture Services Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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