New Rule From The United States Securities And Exchange Commission Regarding 'Conflict Minerals'

On August 22, 2012, the U.S. Securities and Exchange Commission ("SEC") adopted a final rule requiring SEC reporting companies to disclose annually whether any "conflict minerals" necessary to the functionality or production of their manufactured products originated in the Democratic Republic of Congo ("DRC") or an adjoining country (together with the DRC, the "Covered Countries").

The term "conflict mineral" is defined to mean columbite-tantalite (colton), cassiterite, gold, wolframite, and their derivatives (which currently are limited to tantalum, tin and tungsten, often referred to as the "3Ts").1 Because these minerals are widely used in many industries, including jewelry, health care devices, automotive and aerospace components, electronics, lighting and heating products, communications equipment and industrial manufacturing, the rule will have a very broad application.

As stated in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the origin of this rule lies in Congress' concerns regarding the exploitation and trade of conflict minerals originating in the DRC and adjoining countries. To further the humanitarian goal of ending the violent conflict in the region, which has been partially financed by the exploitation and trade of conflict minerals, Congress "chose to use the securities laws disclosure requirements to bring greater public awareness of the source of the issuers' conflict minerals and to promote the exercise of due diligence on conflict minerals supply chains."2

The rule was adopted by a 3-2 vote following extensive public comment and deliberations on a proposed rule published in December 2010. The rule imposes potentially burdensome diligence and disclosure obligations on all domestic and foreign issuers required to file reports under the Securities Exchange Act of 1934, as amended (the "1934 Act"), including Canadian reporting companies that file reports under the U.S. Multijurisdictional Disclosure System (MJDS). The first reporting period under the rule for all issuers will be from January 1, 2013 through December 31, 2013, and the first specialized disclosure report must be filed with the SEC on or before May 31, 2014. Issuers subject to the rule must also make their disclosures publicly available on their Internet websites.

Overview of the Process: How the Rule Works

As a first step, an issuer must determine whether it is subject to Section 1502 of Dodd- Frank (new Section 13(p) of 1934 Act) and the conflict minerals rule. The rule applies only to issuers that file reports under the 1934 Act3 whose conflict minerals are necessary to the functionality or production of a product manufactured by that issuer or contracted by that issuer to be manufactured.4 Issuers not meeting these criteria are not required to take any action, make any disclosures, or submit any reports under the final rule.

The rule does not define "manufacture," relying instead on the generally understood meaning of that word.5 Whether an issuer "contracts to manufacture" a product will depend on the degree of influence exercised by the issuer on the manufacture of the product based on the individual facts and circumstances in each instance. Some actual influence over the materials, parts, ingredients or components of the product is required, but the rule does not specify a particular degree of influence. Mining activity, in and of itself, does not constitute "manufacturing" for the purposes of the rule.

The final rule does not define when a conflict mineral is "necessary to the functionality or production" of a product, and that determination will depend on the issuer's particular facts and circumstances. The adopting release provides guidance with respect to making the determination. First, the product must contain a conflict mineral, i.e., conflict minerals that are catalysts or otherwise used in the production of a product but are completely washed away are not subject to the rule (but will be if any amount of the mineral remains). Second, the conflict mineral must be intentionally added to the product or a component of the product (rather than being a naturally occurring by-product) or intentionally added in the product's production process. Third, the conflict mineral must be necessary to either the product's generally expected function, use or purpose (or at least one of these if there are multiple functions, uses or purposes) or necessary to produce the product. If the primary purpose of the product is mainly ornamentation or decoration (e.g., jewellery), it is more likely that conflict minerals added for ornamentation or decorative purposes is "necessary to the functionality" of the product whereas...