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CONFLICT MINERALS (SECTION 13(P) OF THE SECURITIES EXCHANGE ACT OF 1934)

SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 240 and 249b

[Release No. 34-67716; File No. S7-40-10]

RIN 3235-AK84

CONFLICT MINERALS


AGENCY: Securities and Exchange Commission.


ACTION: Final rule.


SUMMARY: We are adopting a new form and rule pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the use of conflict minerals. Section 1502 added Section 13(p) to the Securities Exchange Act of 1934, which requires the Commission to promulgate rules requiring issuers with conflict minerals that are necessary to the functionality or production of a product manufactured by such person to disclose annually whether any of those minerals originated in the Democratic Republic of the Congo or an adjoining country. If an issuer’s conflict minerals originated in those countries, Section 13(p) requires the issuer to submit a report to the Commission that includes a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody. The measures taken to exercise due diligence must include an independent private sector audit of the report that is conducted in accordance with standards established by the Comptroller General of the United States. Section 13(p) also requires the issuer submitting the report to identify the auditor and to certify the audit. In addition, Section 13(p) requires the report to include a description of the products manufactured or contracted to be manufactured that are not "DRC conflict free," the facilities used to process the conflict minerals, the country of 2




origin of the conflict minerals, and the efforts to determine the mine or location of origin. Section 13(p) requires the information disclosed by the issuer to be available to the public on its Internet website.



DATES:



Effective Date: November 13, 2012.


Compliance Date: Issuers must comply with the final rule for the calendar year beginning January 1, 2013 with the first reports due May 31, 2014.


FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel in the Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, 100 F Street, NE, Washington, DC 20549-3628.


SUPPLEMENTARY INFORMATION: We are adopting new Rule 13p-11 and new Form SD2 under the Securities Exchange Act of 1934 ("Exchange Act").3


1 17 CFR 240.13p-1.


2 17 CFR 249.448.


3 15 U.S.C. 78a et seq.





TABLE OF CONTENTS




I. BACKGROUND AND SUMMARY




A. Statutory Provision


B. Summary of the Proposed Rules


C. Summary of Comments on the Proposed Rules


D. Summary of Changes to the Final Rule


E. Flowchart Summary of the Final Rule


II. DISCUSSION OF THE FINAL RULE


A. "Conflict Minerals" Definition


1. Proposed Rules


2. Comments on the Proposed Rules


3. Final Rule


B. Step One – Issuers Covered by the Conflict Mineral Provision 3


1. Issuers That File Reports Under the Exchange Act


a. Proposed Rules


b. Comments on the Proposed Rules


i. Issuers that File Reports Under Sections 13(a)


and 15(d) of the Exchange Act


ii. Smaller Reporting Companies


iii. Foreign Private Issuers


c. Final Rule


2. "Manufacture" and "Contract to Manufacture" Products


a. Proposed Rules


b. Comments on the Proposed Rules


i. "Manufacture"


ii. "Contract to Manufacture"


c. Final Rule


i. "Manufacture"


ii. "Contract to Manufacture"


3. Mining Issuers as "Manufacturing" Issuers


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


4. When Conflict Minerals Are "Necessary" to a Product


a. Proposed Rules


b. Comments on the Proposed Rules


i. "Necessary to the Functionality"


ii. "Necessary to the Production"


iii. De Minimis Threshold


c. Final Rule


i. Contained in the Product


ii. Intentionally Added


iii. "Necessary to the Functionality"


iv. "Necessary to the Production"


v. De Minimis Threshold


C. Location, Status, and Timing of Conflict Minerals Information


1. Location of Conflict Minerals Information


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


2. "Filing" of Conflict Minerals Information


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


3. Uniform Reporting Period


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


4. Time Period for Providing Conflict Minerals Information 4


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


5. Conflict Minerals Already in the Supply Chain


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


6. Timing of Implementation


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


D. Step Two – Determining Whether Conflict Minerals Originated


in the Democratic Republic of the Congo or Adjoining Countries and the Resulting Disclosure


1. Reasonable Country of Origin Inquiry


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


2. Disclosures in the Body of the Specialized Disclosure Report a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


E. Step Three – Conflict Minerals Report’s Content and Supply


Chain Due Diligence


1. Content of the Conflict Minerals Report


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


2. Due Diligence Standard in the Conflict Minerals Report


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


3. Independent Private Sector Audit Requirements


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


i. Auditing Standards


ii. Auditor Independence


iii. Audit Objective


4. Recycled and Scrap Minerals


a. Proposed Rules


b. Comments on the Proposed Rules


c. Final Rule


i. Definition of "Recycled and Scrap Sources"


ii. Due Diligence for Conflict Minerals from


"Recycled and Scrap Sources" 5


F. Other Matters


III. ECONOMIC ANALYSIS


A. Introduction


B. Benefits and Costs Resulting from the Mandatory Reporting Requirement


1. Benefits


2. Cost Estimates in the Comment Letters


a. General Comments


b. Specific Comments


i. Manufacturing Industry Association


Comments


ii. Electronic Interconnect Industry


Association Comments


iii. University Group Comments


iv. Environmental Consultancy Company


Comments


v. Other Specific Comments


C. Benefits and Costs Resulting from Commission’s Exercise of Discretion


1. Reasonable Country of Origin Inquiry


2. Information in the Specialized Disclosure Report


3. "DRC Conflict Undeterminable"


4. "Contract to Manufacture"


5. Nationally or Internationally Recognized Due Diligence


Framework (Including Gold)


6. Liability for the Audit and Audit Certifications


7. Audit Objective


8. Conflict Minerals from Recycled and Scrap Sources


9. Conflict Minerals "Outside the Supply Chain"


10. Conflict Mineral Derivatives


11. Method and Timing of Disclosure on Form SD


12. "Necessary to the Functionality or Production"


13. Categories of Issuers


14. Not Including Mining Issuers as Manufacturing Issuers


D. Quantified Assessment of Overall Economic Effects


IV. PAPERWORK REDUCTION ACT


A. Background


B. Summary of the Comment Letters


C. Revisions to PRA Reporting and Cost Burden Estimates


1. Estimate of Conducting Due Diligence, Including the Audit


2. Estimate of Preparing the Disclosure


3. Revised PRA Estimate


V. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS


A. Reasons for, and Objectives of, the Final Action


B. Significant Issues Raised by Public Comments


C. Small Entities Subject to the Final Rule 6


D. Reporting, Recordkeeping, and Other Compliance Requirements


E. Agency Action to Minimize Effect on Small Entities


VI. STATUTORY AUTHORITY AND TEXT OF THE FINAL RULE



I. BACKGROUND AND SUMMARY


A. Statutory Provision



On December 15, 2010, we proposed a number of amendments to our rules4 to implement the requirements of Section 1502 ("Conflict Minerals Statutory Provision") of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act"),5 relating to new disclosure and reporting obligations by issuers concerning "conflict minerals"6 that originated in the Democratic Republic of the Congo ("DRC") or an adjoining country7 (together with the DRC, the "Covered Countries").8 Section 1502 amended the Exchange Act by adding new Section 13(p).9 New Exchange Act Section 13(p) requires us to promulgate disclosure and reporting regulations regarding the use of conflict


4 Conflict Minerals, Release No. 34-63547 (Dec. 15, 2010) [75 FR 80948] (the "Proposing Release").


5 Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).


6 The term "conflict mineral" is defined in Section 1502(e)(4) of the Act as (A) columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassiterite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives; or (B) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.


7 The term "adjoining country" is defined in Section 1502(e)(1) of the Act as a country that shares an internationally recognized border with the DRC, which presently includes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia.


8 In the Proposing Release, we referred to the DRC and its adjoining countries as the "DRC Countries." In this release, we use the term "Covered Countries" instead. Both terms have the same meaning. For consistency within this release, there are instances when we refer to the text of the Proposing Release and use the term "Covered Countries" instead of "DRC Countries," which was used in the Proposing Release.


9 15 U.S.C. 78m(p). 7 8


columbite-tantalite or cassiterite that was mined or extracted in the DRC by groups that committed serious human rights and other violations. See S. 3058, 110th Cong. (2008). As a further example, in the 111th Congress, then-Senator Brownback introduced S. 891, the Congo Conflict Minerals Act of 2009. See S. 891, 111th Cong. (2009). This bill would have required U.S.-registered companies selling products using conflict minerals to disclose annually to the Commission the country of origin of these minerals and, if the country of origin was one of the Covered Countries, to disclose the mine of origin. Additionally, later in the 111th Congress, then-Senator Brownback sponsored S.A. 2707, which was similar to S. 891. See S.A. 2707, 111th Cong. (2009). We note also that the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006 states that the National Security Strategy of the United States, dated September 17, 2002, concludes that disease, war, and desperate poverty in Africa threatens the United States’ core value of preserving human dignity and threatens the United States’ strategic priority of combating global terror. See Pub. L. 109-456 (Dec. 22, 2006). See also U.S. GOVT ACCOUNTABILITY OFFICE, GAO-12-763, CONFLICT MINERALS DISCLOSURE RULE: SEC’S ACTIONS AND STAKEHOLDER-DEVELOPED INITIATIVES (Jul. 2012) (discussing the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006), available at http://www.gao.gov/products/GAO-12-763.


13 See Section 1502(d)(2)(A) of the Act (stating that two years after enactment of the Act and annually thereafter, "the Comptroller General of the United States shall submit to the appropriate congressional committees a report that includes" an "assessment of the effectiveness" of the Conflict Minerals Statutory Provision "in promoting peace and security" in the Covered Countries).


14 See Exchange Act Section 13(p)(4) (stating that the provision "shall terminate on the date on which the President determines and certifies to the appropriate congressional committees…that no armed groups continue to be directly involved and benefitting from commercial activity involving conflict minerals").


that Congress intended to promote peace and security.13 For example, the Conflict Minerals Statutory Provision states that once armed groups no longer continue to be directly involved and benefiting from commercial activity involving conflict minerals, the President may take action to terminate the provision.14 To accomplish the goal of helping end the human rights abuses in the DRC caused by the conflict, Congress chose to use the securities laws disclosure requirements to bring greater public awareness of the source of issuers’ conflict minerals and to promote the exercise of due diligence on conflict mineral supply chains. By doing so, we understand Congress’s main purpose to have been to attempt to inhibit the ability of armed groups in the Covered Countries to fund their activities by exploiting the trade in conflict minerals. Reducing the use of such conflict minerals is intended to help reduce funding for the armed groups contributing to the conflict and thereby put pressure on such groups to end the conflict. The 9 10




Berman, Congressman Jim McDermott, Congressman Donald Payne, Congressman Gregory Meeks, and Congressmember Karen Bass (Feb. 16, 2012) ("Sen. Leahy et al.") (asserting that an issuer’s conflict minerals information is "critical to both investors and to capital formation" because "when a publicly traded company relies on an unstable black market for inputs essential to manufacturing its products it is of deep material interest to investors").



18 The term "person described" is defined in Exchange Act Section 13(p)(2) as one who is required to file reports under Exchange Act Section 13(p)(1)(A), and for whom the conflict minerals are necessary to the functionality or production of a product manufactured by such person. Exchange Act Section 13(p)(1)(A) does not provide a definition but refers back to Exchange Act Section 13(p)(2).


19 Exchange Act Section 13(p)(2)(B).


20 See Exchange Act Section 13(p)(1)(E) (stating that each issuer "shall make available to the public on the Internet website of such [issuer] the information disclosed under" Exchange Act Section 13(p)(1)(A)).


21 See Exchange Act Section 13(p)(1)(A)(i).


22 See id. (requiring in the Conflict Minerals Report "a description of the measures taken by the person to exercise due diligence on the source and chain of custody of such [conflict] minerals, which measures shall include an independent private sector audit of such report"). The Conflict Minerals Statutory Provision assigns certain responsibilities to other federal agencies. In developing our proposed rules, our staff has consulted with the staff of these other agencies in developing our proposed rules. These agencies include,


Exchange Act Section 13(p) mandates that we promulgate regulations requiring that a "person described"18 disclose annually whether any "conflict minerals" that are "necessary to the functionality or production of a product manufactured by such person"19 originated in the Covered Countries, and make that disclosure publicly available on the issuer’s Internet website.20 If such a person’s conflict minerals originated in the Covered Countries, that person must submit a report ("Conflict Minerals Report") to us that includes a description of the measures taken by the person to exercise due diligence on the minerals’ source and chain of custody.21 Under Exchange Act Section 13(p), the measures taken to exercise due diligence "shall include an independent private sector audit" of the Conflict Minerals Report that is conducted according to standards established by the Comptroller General of the United States, in accordance with our promulgated rules, in consultation with the Secretary of State.22 The person 11




including the Government Accountability Office (the "GAO"), which is headed by the Comptroller General of the United States, and the United States Department of State.



23 See Exchange Act Section 13(p)(1)(A)(ii) (stating that the issuer must provide a description of the "entity that conducted the independent private sector audit in accordance with" Exchange Act Section 13(p)(1)(A)(i)").


24 As noted in Exchange Act Section 13(p)(1)(B), if an issuer is required to provide a Conflict Minerals Report that includes an independent private sector audit, that issuer "shall certify the audit" and that certified audit "shall constitute a critical component of due diligence in establishing the source and chain of custody of such minerals."


25 The term "DRC conflict free" is defined in Exchange Act Section 13(p)(1)(A)(ii) and Exchange Act Section 13(p)(1)(D). Exchange Act Section 13(p)(1)(A)(ii) defines "DRC conflict free" as "the products that do not contain minerals that directly or indirectly finance or benefit armed groups in the" Covered Countries. Similarly, Exchange Act Section 13(p)(1)(D) defines "DRC conflict free" as products that do "not contain conflict minerals that directly or indirectly finance or benefit armed groups in the" Covered Countries. We note that the definitions in the two sections are slightly different in that Exchange Act Section 13(p)(1)(A)(ii) refers to "minerals" without any limitation, whereas Exchange Act Section 13(p)(1)(D) refers specifically to "conflict minerals." We believe, based on the totality of the Conflict Minerals Statutory Provision, that "DRC conflict free" is meant to refer only to "conflict minerals," as that term is defined in Section 1502(e)(4) of the Act, that directly or indirectly finance or benefit armed groups in the Covered Countries, and not to all minerals that directly or indirectly finance or benefit armed groups in the Covered Countries.


26 See Exchange Act Section 13(p)(1)(A)(ii).


27 See Exchange Act Section 13(p)(1)(E).


submitting the Conflict Minerals Report must also identify the independent private sector auditor23 and certify the independent private sector audit.24


Further, according to Exchange Act Section 13(p), the Conflict Minerals Report must include "a description of the products manufactured or contracted to be manufactured that are not DRC conflict free,"25 the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and "the efforts to determine the mine or location of origin with the greatest possible specificity."26 Also, Exchange Act Section 13(p) dictates that each person described "shall make available to the public on the Internet website of such person" the conflict minerals information required by Exchange Act Section 13(p)(1)(A).27 12





B. Summary of the Proposed Rules




We proposed rules to apply to certain issuers that file reports with us under Exchange Act Sections 13(a)28 or 15(d).29 Based on the Conflict Minerals Statutory Provision, we proposed a disclosure requirement for conflict minerals that would divide into three steps. The first step would have required an issuer to determine whether it was subject to the Conflict Minerals Statutory Provision. An issuer would have only been subject to the Conflict Minerals Statutory Provision if it was a reporting issuer for which conflict minerals were "necessary to the functionality or production of a product manufactured"30 or contracted to be manufactured by such person. If an issuer did not meet that definition, the issuer was not required to take any action, make any disclosures, or submit any reports. If, however, an issuer met this definition, that issuer would move to the second step.


28 15 U.S.C. 78m(a).


29 15 U.S.C. 78o(d).


30 Exchange Act Section 13(p)(2).




The second step would have required the issuer to determine after a reasonable country of origin inquiry whether its conflict minerals originated in the Covered Countries. If the issuer determined that its conflict minerals did not originate in the Covered Countries, the issuer was to disclose this determination and the reasonable country of origin inquiry it used in reaching this determination in the body of its annual report. The issuer also would have been required to provide on its Internet website its determination that its conflict minerals did not originate in the Covered Countries, disclose in its annual report that the disclosure was posted on its Internet website, and 13


disclose the Internet address on which this disclosure was posted. It would further have been required to maintain records demonstrating that its conflict minerals did not originate in the Covered Countries. Such an issuer would not have any further disclosure or reporting obligations with regard to its conflict minerals.


If, however, the issuer determined that its conflict minerals did originate in the Covered Countries, if it was unable to conclude that its conflict minerals did not originate in the Covered Countries, or if it determined that its conflict minerals were from recycled or scrap sources, the issuer would have been required to disclose this conclusion in its annual report. Also, the issuer would have been required to note that the Conflict Minerals Report, which included the certified independent private sector audit report, was furnished as an exhibit to the annual report; furnish the Conflict Minerals Report; make available the Conflict Minerals Report on its Internet website; disclose that the Conflict Minerals Report was posted on its Internet website; and provide the Internet address of that site. This issuer would then have moved to the third step.



Finally, the third step would have required an issuer with conflict minerals that originated in the Covered Countries, or an issuer that was unable to conclude that its conflict minerals did not originate in the Covered Countries, to furnish a Conflict Minerals Report. The proposed rules would have required an issuer to provide, in its Conflict Minerals Report, a description of the measures it had taken to exercise due diligence on the source and chain of custody of its conflict minerals, which would have included a certified independent private sector audit of the Conflict Minerals Report that identified the auditor and was furnished as part of the Conflict Minerals Report. Further, the issuer would have been required to include in the Conflict Minerals Report a 14 If any of its products contained conflict minerals that did not "directly or indirectly finance or benefit" these armed groups, the issuer would be permitted to describe such products in the Conflict Mineral Report as "DRC conflict free" whether or not the minerals originated in the Covered Countries. In addition, the issuer would have been required to disclose in the Conflict Minerals Report the facilities used to process those conflict minerals, those conflict minerals’ country of origin, and the efforts to determine the mine or location of origin with the greatest possible specificity. 15 On January 28, 2011, we extended the comment period for the proposal from January 31, 2011 to March 2, 2011.Additionally, in response to suggestions from commentators,we held a public roundtable on October 18, 2011 ("SEC Roundtable") at which invited participants, including investors, affected issuers, human rights organizations, and other stakeholders, discussed their views and provided input on issues related to our required rulemaking.In conjunction with the SEC Roundtable, we requested further comment.We received approximately 420 individual comment letters in response to the proposed rules, with approximately 145 of those letters being received after the SEC Roundtable, and over 40 16 We also received approximately 13,400 form letters from those supporting "promptly" implementing a "strong" final rule regarding the Conflict Minerals Statutory Provision,with approximately 9,700 of those letters requesting some specific requirements in the final rule,and two petitions supporting the proposed amendments with an aggregate of over 25,000 signatures. 17 and other interested parties and stakeholders. In general, most commentators supported the human rights objectives of the Conflict Minerals Statutory Provision and the proposed rules.As discussed in greater detail throughout this release, however, many of these commentators provided recommendations for revising the proposed rules and suggested modifications or alternatives to the proposal. Only a few commentators generally opposed the Conflict Minerals Statutory Provision and/or our adoption of any rule based on the provision.One commentator recommended that the proposed rules be withdrawn entirely "and that the potential costs, supply chain complexities, and other practical obstacles to 18 19 and at least one such commentator indicated that the final rule would adversely affect employment in the United States.One commentator, however, suggested that there could be some "business benefits" from complying with the final rule beyond the humanitarian benefits discussed by Congress.This commentator argued that such benefits could include eliminating any competitive disadvantage to companies already engaged in ensuring their conflict mineral purchases do not fund conflict in the DRC, providing an opportunity to improve a company’s existing risk management and supply chain management, stimulating innovation, supporting companies’ requests for conflict minerals information from suppliers through legal mandate, and preparing companies to meet a new generation of expectations for greater supply chain transparency and accountability.20




that create the disclosure regime mandated by Congress by means of Exchange Act reporting requirements. We discuss our revisions with respect to each proposed rule amendment in more detail throughout this release.



D. Summary of Changes to the Final Rule



We are adopting a three-step process, as proposed, but some of the mechanisms within the three steps have been modified in response to comments. We recognize that the final rule will impose significant compliance costs on companies who use or supply conflict minerals, and in modifying the rule we tried to reduce the burden of compliance in areas in which we have discretion while remaining faithful to the language and intent of the Conflict Minerals Statutory Provision that Congress adopted. A flowchart presenting a general overview of the conflict minerals rule that we are adopting is included following the end of this section. The chart is intended merely as a guide, however, and issuers should refer to the rule text and the preamble’s more complete narrative description for the requirements of the rule.



The first step continues to be for an issuer to determine whether it is subject to the requirements of the Conflict Minerals Statutory Provision. Pursuant to the Conflict Minerals Statutory Provision, the Commission is required to promulgate regulations requiring certain conflict minerals disclosures by any "person described," which, under the Conflict Minerals Statutory Provision, includes one for whom "conflict minerals are necessary to the functionality or production of a product manufactured by such person"49. As in our proposal, under the final rule this includes issuers whose conflict minerals are


49 Exchange Act Section 13(p)(2). 21 If an issuer does not meet this definition, the issuer is not required to take any action, make any disclosures, or submit any reports under the final rule. If, however, an issuer meets this definition, that issuer moves to the second step. 22




the product); (2) the issuer affixes its brand, marks, logo, or label to a generic product manufactured by a third party; or (3) the issuer services, maintains, or repairs a product manufactured by a third party.


Similarly, the determination of whether a conflict mineral is deemed "necessary to the functionality" or "necessary to the production" of a product depends on the issuer’s particular facts and circumstances, as discussed in more detail below. But to assist issuers in making their determination, we provide guidance for issuers. In determining whether a conflict mineral is "necessary to the functionality" of a product, an issuer should consider: (1) whether the conflict mineral is intentionally added to the product or any component of the product and is not a naturally-occurring by-product; (2) whether the conflict mineral is necessary to the product’s generally expected function, use, or purpose; and (3) if conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.


In determining whether a conflict mineral is "necessary to the production" of a product, an issuer should consider: (1) whether the conflict mineral is intentionally included in the product’s production process, other than if it is included in a tool, machine, or equipment used to produce the product (such as computers or power lines); (2) whether the conflict mineral is included in the product; and (3) whether the conflict mineral is necessary to produce the product. In this regard, we are modifying our guidance from the proposal such that, for a conflict mineral to be considered "necessary to the production" of a product, the mineral must be both contained in the product and necessary to the product’s production. We do not consider a conflict mineral "necessary 23


to the production" of a product if the conflict mineral is used as a catalyst, or in a similar manner in another process, that is necessary to produce the product but is not contained in that product.


Further, in a change from the proposal and in response to comments suggesting that including mining would expand the statutory mandate, the final rule does not treat an issuer that mines conflict minerals as manufacturing those minerals unless the issuer also engages in manufacturing. Additionally, the final rule exempts any conflict minerals that are "outside the supply chain" prior to January 31, 2013. Under the final rule, conflict minerals are "outside the supply chain" if they have been smelted or fully refined or, if they have not been smelted or fully refined, they are outside the Covered Countries. In response to comments, the final rule allows issuers that obtain control over a company that manufactures or contracts for the manufacturing of products with necessary conflict minerals that previously had not been obligated to provide a specialized disclosure report for those minerals to delay reporting on the acquired company’s products until the end of the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition.


As suggested by commentators, the final rule modifies the proposal as to the location, timing, and status of any conflict minerals disclosures and any Conflict Minerals Report. The final rule requires an issuer to provide the conflict minerals disclosures that would have been in the body of the annual report in the body of a new specialized disclosure report on a new form, Form SD. An issuer required to provide a Conflict Minerals Report will provide that report as an exhibit to the specialized disclosure report. Additionally, based on comments that it will reduce the burdens on supply chain 24


participants, the final rule requires that the conflict minerals information in the specialized disclosure report and/or in the Conflict Minerals Report cover the calendar year from January 1 to December 31 regardless of the issuer’s fiscal year end, and the specialized disclosure report covering the prior year must be provided each year by May 31. Further, in a change from the proposal, urged by multiple commentators, the final rule requires Form SD, including the conflict minerals information therein and any Conflict Minerals Report submitted as an exhibit to the form, to be "filed" under the Exchange Act and thereby subject to potential Exchange Act Section 18 liability. The proposal would have required the information to be "furnished."



The second step continues to require an issuer to conduct a reasonable country of origin inquiry regarding the origin of its conflict minerals. Consistent with the proposal, and the position of certain commentators,52 the final rule does not prescribe the actions for a reasonable country of origin inquiry that are required, as the required inquiry depends on each issuer’s facts and circumstances. However, in a change from the proposed rules, to clarify the scope of the required inquiry as requested by certain other commentators,53 the final rule provides general standards applicable to the inquiry.


52 Some commentators agreed that, to allow for greater flexibility, the reasonable country of origin inquiry standard should either not be defined or that only general guidance should be provided. See, e.g., letters from Apparel & Footwear Association (Mar. 2, 2011) ("AAFA"); AngloGold; ArcelorMittal (Oct. 31, 2011) ("ArcelorMittal"); Industry Group Coalition I; IPC I; Information Technology Industry Council (Feb. 24, 2011) ("ITIC I"); International Precious Metals Institute (Jan. 19, 2011) ("IPMI I"); Jewelers Vigilance Committee, American Gem Society, Manufacturing Jewelers & Suppliers of America, Jewelers of America, and Fashion Jewelry & Accessories Trade Association (Mar. 2, 2011) ("JVC et al. II"); NAM I, Retail Industry Leaders Association and Consumer Electronics Retailers Coalition (Mar. 2, 2011) ("RILA-CERC"); Semiconductor Industry Association (Mar. 2, 2011) ("Semiconductor"); SIF I; TriQuint Semiconductor, Inc. (Jan. 26, 2011) ("TriQuint I"); and WGC II.


53 Some commentators argued that either the reasonable country of origin inquiry standard should be defined or that there should specific guidance regarding the standard. See, e.g., letters from Business Roundtable (Mar. 2, 2011) ("Roundtable"), CRS I, Department of State (Mar. 24, 2011) ("State II"), 25




EARTHWORKS’ No Dirty Gold Campaign (Mar. 2, 2011) ("Earthworks"), Enough Project I, Ethical Metalsmiths (Feb. 28, 2011) ("Metalsmiths"), General Board of Church and Society of the United Methodist Church (Apr. 19, 2012) ("Methodist Board"), Global Witness (Feb. 28, 2011) ("Global Witness I"), Howland Greene Consultants LLC (Jan. 28, 2011) ("Howland"), International Conference of the Great Lakes Region (Jan. 31, 2011) ("ICGLR"), National Association of Evangelicals (Feb. 17, 2012) ("Evangelicals"), New York City Bar Association (Jan. 31, 2011) ("NYCBar I"), New York City Bar Association (Feb. 8, 2012) ("NYCBar II"), Personal Care Products Council (Mar. 1, 2011) ("PCP"), Presbyterian Church USA (Feb. 23, 2012) ("Presbyterian Church II"), Semiconductor Equipment and Materials International (Feb. 15, 2011) ("SEMI"), Sen. Durbin / Rep. McDermott, Tantalum-Niobium International Study Center (Jan. 27, 2011) ("TIC"), Twenty-four organizations of the Multi-Stakeholder Group (Mar. 2, 2011) ("MSG I"), and World Evangelical Alliance (Feb. 17, 2012) ("Evangelical Alliance").



Specifically, the final rule provides that, to satisfy the reasonable country of origin inquiry requirement, an issuer must conduct an inquiry regarding the origin of its conflict minerals that is reasonably designed to determine whether any of its conflict minerals originated in the Covered Countries or are from recycled or scrap sources, and must perform the inquiry in good faith. The final rule requires an issuer that determines that its conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources to disclose in its specialized disclosure report its determination and in its specialized disclosure report briefly describe the reasonable country of origin inquiry it used in reaching the determination and the results of the inquiry. The requirement for an issuer to briefly describe its inquiry and the results of the inquiry is a change from the disclosure required in the proposed rules.


Also, in a change from the proposal, the final rule modifies the trigger for determining whether or not an issuer is required to proceed to step three under the rule. The proposed rules would have required an issuer to conduct due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report if, based on its reasonable country of origin inquiry, it determined that its conflict minerals 26


originated in the Covered Countries or was unable to determine that its conflict minerals did not originate in the Covered Countries, or if its conflict minerals came from recycled or scrap sources. Under the final rule, an issuer must exercise due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report if, based on its reasonable country of origin inquiry, the issuer knows that it has necessary conflict minerals that originated in the Covered Countries and did not come from recycled or scrap sources, or if the issuer has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources.


As an exception to this requirement, however, an issuer that must conduct due diligence because, based on its reasonable country of origin inquiry, it has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources is not required to submit a Conflict Minerals Report if, during the exercise of its due diligence, it determines that its conflict minerals did not, in fact, originate in the Covered Countries, or it determines that its conflict minerals did, in fact, come from recycled or scrap sources. Such an issuer is still required to submit a specialized disclosure report disclosing its determination and briefly describing its inquiry and its due diligence efforts and the results of that inquiry and due diligence efforts, which should demonstrate why the issuer believes that the conflict minerals did not originate in the Covered Countries or that they did come from recycled or scrap sources. On the other hand, if, based on its reasonable country of origin inquiry, an issuer has no reason to believe that its conflict minerals may have originated in the Covered Countries, or, based on its reasonable country of origin inquiry, an issuer 27


reasonably believes that its conflict minerals are from recycled or scrap sources, the issuer is not required to move to step three. In another change from the proposal, the final rule does not require an issuer to retain reviewable business records to support its reasonable country of origin conclusion, although maintenance of appropriate 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.


As noted above, if the issuer knows that it has necessary conflict minerals that originated in the Covered Countries, or if the issuer has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources, the issuer must move to the third step. The third step, consistent with the proposal, requires such an issuer to exercise due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report describing its due diligence measures, among other matters. As noted above, however, the final rule requires an issuer to provide its Conflict Minerals Report as an exhibit to its specialized disclosure report on Form SD, instead of as an exhibit to its annual report on Form 10-K, Form 20-F, or Form 40-F, as proposed.



Generally, the content of the Conflict Minerals Report is substantially similar to the proposal. One modification from the proposal, based on comments we received, is that the final rule requires an issuer to use a nationally or internationally recognized due diligence framework, if such a framework is available for the specific conflict mineral. We are persuaded by commentators that doing so will enhance the quality of an issuer’s due diligence, promote comparability of the Conflict Minerals Reports of different 28 This requirement should make the rule more workable and less costly than if no framework was specified. Presently, it appears that the only nationally or internationally recognized due diligence framework available is the due diligence guidance approved by the Organisation for Economic Co-operation and Development ("OECD").29 30




minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources and the information they gathered as a result of their subsequently required exercise of due diligence failed to clarify the conflict minerals’ country of origin, whether the conflict minerals financed or benefited armed groups in those countries, or whether the conflict minerals came from recycled or scrap sources. These issuers will have already conducted a reasonable country of origin inquiry, and their undeterminable status would be based on the information they were able to gather from their exercise of due diligence. However, if these products also contain conflict minerals that the issuer knows directly or indirectly financed or benefited armed groups in the Covered Countries, the issuer may not describe those products as "DRC conflict undeterminable." Also, during the transition period, issuers with products that may be described as "DRC conflict undeterminable" are not required to have their Conflict Minerals Report audited. Such issuers, however, must still file a Conflict Minerals Report describing their due diligence, and must additionally describe the steps they have taken or will take, if any, since the end of the period covered in their most recent prior Conflict Minerals Report, to mitigate the risk that their necessary conflict minerals benefit armed groups, including any steps to improve their due diligence.


This temporary provision will apply for the first two reporting calendar years after effectiveness of the final rule for all issuers that are not smaller reporting companies, and for the first four reporting calendar years after effectiveness of the final rule for smaller reporting companies. We believe it is appropriate to allow a two-year temporary period, in recognition that, as commentators noted, the processes for tracing conflict minerals through the supply chain must develop further to make such determinations for the issuer 31


community at large. Also, we believe it is appropriate to allow an additional two years to this temporary period for smaller reporting companies because, as commentators noted, smaller companies may face disproportionally higher burdens than larger companies and a longer temporary period may help alleviate some of those burdens. After the four-year period for smaller reporting companies and two-year period for all other issuers, issuers that have proceeded to step three but are unable to determine that their conflict minerals did not originate in the Covered Countries or are unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups must describe their products containing those conflict minerals as not having been found to be "DRC conflict free."



Unlike the proposed rules, the final rule requires issuers with necessary conflict minerals exercising due diligence regarding whether their conflict minerals are from recycled or scrap sources to conform the due diligence to a nationally or internationally recognized due diligence framework, if one is available for a particular recycled or scrap conflict mineral. A gold supplement to the OECD’s due diligence guidance has been approved by the OECD.58 This gold supplement is presently the only nationally or internationally recognized due diligence framework for any conflict mineral from recycled or scrap sources of which we are aware. Therefore, we anticipate that issuers will use the OECD gold supplement to conduct their due diligence for recycled or scrap gold. We are not aware that the OECD or any other body has a similar recycled or scrap


58 See OECD, DUE DILIGENCE GUIDANCE FOR RESPONSIBLE SUPPLY CHAINS OF MINERALS FROM CONFLICT-AFFECTED AND HIGH-RISK AREAS: SUPPLEMENT ON GOLD (2012), available at http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf. 32 due diligence framework for the other conflict minerals. Issuers with conflict minerals without a nationally or internationally recognized due diligence framework are still required to exercise due diligence in determining that their conflict minerals were from recycled or scrap sources. The due diligence that must be exercised regarding such conflict minerals focuses only on whether those conflict minerals are from recycled or scrap sources. In such circumstances where a nationally or internationally recognized due diligence framework becomes available for any such conflict mineral, issuers will be required to utilize that framework in exercising due diligence to determine that conflict minerals are from recycled or scrap sources.



E. Flowchart Summary of the Final Rule 33 34



II. DISCUSSION OF THE FINAL RULE


A. "Conflict Minerals" Definition


1. Proposed Rules



The Conflict Minerals Statutory Provision defines the term "conflict mineral" as cassiterite, columbite-tantalite, gold, wolframite, or their derivatives, or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Covered Countries.59 We used the same definition of this term in the proposed rules. As we discussed in the Proposing Release, cassiterite is the metal ore that is most commonly used to produce tin, which is used in alloys, tin plating, and solders for joining pipes and electronic circuits.60 Columbite-tantalite is the metal ore from which tantalum is extracted. Tantalum is used in electronic components, including mobile telephones, computers, videogame consoles, and digital cameras, and as an alloy for making carbide tools and jet engine components.61 Gold is used for making jewelry and is used in electronic, communications, and aerospace equipment.62 Finally, wolframite is the metal ore that is used to produce tungsten, which is used for metal wires, electrodes, and


59 Section 1502(e)(4) of the Act. Presently, the Secretary of State has not designated any other mineral as a conflict mineral. Therefore, the conflict minerals include only cassiterite, columbite-tantalite, gold, wolframite, or their derivatives.


60 Tin Statistics and Information, U.S. GEOLOGICAL SURVEY, available at http://minerals.usgs.gov/minerals/pubs/commodity/tin/.


61 Niobium (Columbium) and Tantalum Statistics and Information, U.S. GEOLOGICAL SURVEY, available at http://minerals.usgs.gov/minerals/pubs/commodity/niobium.


62 Gold Statistics and Information, U.S. GEOLOGICAL SURVEY, available at http://minerals.usgs.gov/minerals/pubs/commodity/gold. 35 Based on the many uses of these minerals, we expect the Conflict Minerals Statutory Provision to apply to many companies and industries and, thereby, the final rule to apply to many issuers.


TO VIEW MORE INFORMATION REGARDING THE USE OF CONFLICT MINERALS, AS REQUIRED BY SECTION 13(P) OF THE SECURITY EXCHANGE ACT OF 1934:


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