Corporate Governance

The SEC, Social Responsibility, and Conflict Minerals: Crossing a Disclosure Rubicon (Part 4)

By J Robert Brown Jr.

Disclosure requirements apply to any public company that mine conflict minerals, manufacture products that use conflict minerals, or contract to mine/manufacture products that use the minerals.  Moreover, this is true even if the conflict minerals do not originate in the Congo or surrounding countries.  To the extent that the minerals originate elsewhere, companies must disclose in their annual reports that this is the case as well as the "origin inquiry process" used in reaching this determination. 

Assuming the conflict minerals are from the designated area or, as will often be the case, the relevant companies cannot rule this out, they must submit to the Commission (and disclose over the Internet) a "Conflicts Mineral Report" that describes "the measures taken . . .  to exercise due diligence on the minerals' source and chain of custody."  The steps necessary to meet the due diligence requirement were not delineated.  As the Commission noted:

• We believe that the statutory provision contemplates that issuers must use due diligence in their supply chain determinations. We do not believe, however, that it would be appropriate to prescribe any particular guidance for conducting due diligence because the conduct undertaken by a reasonably prudent person may vary and evolve over time.  . . . In particular, we expect that an issuer whose conduct conformed to a nationally or internationally recognized set of standards of, or guidance for, due diligence regarding conflict minerals supply chains would provide evidence that the issuer used due diligence in making its supply chain determinations.

In addition, the Report:

• must 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 origin of the conflict minerals, and 'the efforts to determine the mine or location of origin with the greatest possible specificity.'

Facilities used to process include "the smelter or refinery through which the issuer's minerals passed."

Disclosure is not left entirely to the discretion of the applicable issuer.  Companies also must obtain "an independent private sector audit' of the Report and include the audit report with the Conflict Minerals Report.   

Because the Report applies to companies unable to rule out the possibility that the conflict minerals come from the designated areas, these companies must describe: 

• to the extent known after conducting due diligence, the facilities used to process those conflict minerals and the efforts to determine the mine or location of origin with the greatest possible specificity. An issuer may provide additional disclosure explaining, for example, that although these products are labeled as not 'DRC conflict free' in compliance with our rules implementing the Conflict Minerals Provision, the issuer has been unable to determine the source of the conflict minerals, including whether the conflict minerals in these products benefited or financed armed groups in the DRC countries.

The Report will not be treated as "filed" for purposes of liability under Section 18 of the Exchange Act.

Full post as published by The Race to the Bottom on December 31, 2010 (boomark / email).