Dodd-Frank Act Conflict Minerals Provisions - Skadden

Dodd-Frank Act Conflict Minerals Provisions September 2011
Dodd-Frank Act
Conflict Minerals Provisions
September 2011
If you have any questions regarding
the matters discussed in this alert,
please contact the following attorneys
or your regular Skadden contact.
Brian V. Breheny
202.371.7180
brian.breheny@skadden.com
Marc S. Gerber
202.371.7233
marc.gerber@skadden.com
Andrew J. Brady
202.371.7344
andrew.brady@skadden.com
Amber K. Finney
202.371.7379
amber.finney@skadden.com
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Arps, Slate, Meagher & Flom LLP
and its affiliates for educational and
informational purposes only and is
not intended and should not be construed
as legal advice. This alert is
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applicable state laws.
Preliminary Preparedness Checklist 1
• Is the company an issuer that files reports pursuant to Sections 13(a) or
15(d) of the Securities Exchange Act of 1934?
□ If no, then no other action is required under the proposed
conflict minerals rules.
□ If yes, then proceed to next step.
• Does the company use “conflict minerals” 2 that are “necessary to the
functionality or production of a product” that it either manufactures or
contracts to be manufactured? 3
□ If no, then no other action is required under the proposed
conflict mineral rules.
□ If yes, then proceed to next step.
• Conduct a “reasonable country of origin inquiry” 4 to determine whether
the conflict minerals originate from the Democratic Republic of the Congo
or an adjoining country (“DRC country”). 5
□ If the company concludes that the conflict minerals did not
originate in a DRC country, then no further action would be
required under the proposed conflict mineral rules. Under the
proposed rules, the company would disclose this determination
and the reasonable country of origin inquiry process it used
in reaching this determination in its annual report and on its
website.
□ If the company concludes that the conflict minerals did originate
in a DRC country, or cannot determine the origin of the conflict
minerals or obtains minerals from recycled or scrap sources, 6
then proceed to the next step. Under the proposed rules, the
company would be required to disclose its conclusion in its
annual report and on its website and to furnish a report (referred
to as the “Conflict Minerals Report”) to the SEC as an exhibit to
its annual report. 7
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Dodd-Frank Act Conflict Minerals Provisions September 2011
• Establish supply chain due diligence process. 8
□ Identify the suppliers or manufacturers who supply conflict minerals or products
containing conflict minerals and the source of such conflict minerals. 9
□ Determine whether the conflict minerals are used to “directly or indirectly finance or
benefit armed groups.”
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□ Establish a record-keeping process and policies for maintaining this information.
□ Consider establishing record-keeping policies, procedures and/or conflict mineral
standards with suppliers and manufacturers.
• Identify a third-party independent auditor that will conduct and certify an independent private
sector audit.
• Prepare Conflict Minerals Report.
ENDNOTES:
1 This checklist was prepared based on the conflict minerals rules proposed by the SEC on December 15,
2010 (http://www.sec.gov/rules/proposed/2010/34-63547.pdf) to implement Section 1502 of the Dodd-Frank
Act. The SEC will need to adopt final rules before the conflict minerals provisions become effective. Those
final SEC rules are expected to be adopted before December 31, 2011.
2 “Conflict minerals” is defined in Section 1502(e)(4) of the Dodd-Frank 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 DRC
countries [defined below].” These materials are commonly found in such products as jewelry, computers,
mobile telephones, digital cameras, videogame consoles, and electronic and communications equipment.
3 In a comment letter submitted by Senator Richard J. Durbin and Representative Jim McDermott to the
SEC on its proposed conflict minerals rules, the Congressmen stated that the conflict mineral rules should
“exempt pure retailers” who sell products over which retailers have no influence regarding their manufacture
(i.e., third-party products). The Congressmen asserted that companies that contract for the manufacturing
of products over which they have any influence regarding the manufacturing of those products would be
subject to the conflict mineral rules. Additionally, the Congressmen stated that the conflict mineral rules
were intended to apply to companies selling generic products under their own brand name or a separate
brand name that they have established, regardless of whether such companies have any influence over the
manufacturing specifications of those products, as long as such company has contracted with another party
to have the product manufactured specifically for such company.
4 The SEC did not propose rules setting forth the steps required to satisfy the reasonable inquiry standard.
The SEC did note, however, that an inquiry would be based on the facts and circumstances of each company
and that the standard would not require absolute certainty.
5 Countries that adjoin the Democratic Republic of the Congo include Angola, Burundi, the Central African
Republic, the Republic of Congo (a separate country from the Democratic Republic of the Congo), Rwanda,
Sudan, Tanzania, Uganda and Zambia.
6 If companies obtain conflict minerals from recycled or scrap sources, then such company may consider
the minerals to be “DRC conflict free” and would furnish a Conflict Minerals Report subject to special
rules. Under the proposed rules, conflict minerals that are “reclaimed end-user or post-consumer products”
would be considered “recycled,” but if such materials are partially processed, unprocessed, or a byproduct
from another ore, then such materials would not be considered “recycled.”
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Dodd-Frank Act Conflict Minerals Provisions September 2011
7 The proposed conflict minerals rules include specific disclosure requirements for the Conflict Minerals
Report, including a description of the measures taken by the company to exercise due diligence on the
source and chain of custody of its conflict minerals. These due diligence measures would include, but would
not be limited to, an independent private sector audit of the company’s report conducted in accordance with
standards established by the comptroller general of the United States.
8 On July 15, 2011, the U.S. Department of State issued a statement encouraging companies to “begin
immediately to structure their supply chain relationships in a responsible and productive manner to
encourage legitimate, conflict-free trade, including conflict-free minerals sourced from the DRC and the
Great Lakes region.” The State Department noted that starting this process immediately would “facilitate
useful disclosures under Section 1502 . . . .” A copy of the statement can be found at: http://www.state.
gov/e/eeb/diamonds/docs/168632.htm.
9 Due diligence should include a description of products, the facilities used to process the conflict minerals,
and the mine or location of origin of those conflict minerals. In its July 2011 statement referenced above,
the State Department endorsed “the guidance issued by the Organisation for Economic Co-operation and
Development (OECD) and encourage[d] companies to draw upon this guidance as they establish their due
diligence practices” and encouraged “companies, whether or not they are subject to the Section 1502
disclosure requirement, that are within the supply chain of these minerals to exercise due diligence based
on the OECD guidance and framework as a means of responding to requests from subject suppliers and
customers.” A copy of the OECD’s “Due Diligence Guidance for Responsible Supply Chains of Minerals from
Conflict-Affected and High-Risk Areas” can be found at: http://www.oecd.org/dataoecd/62/30/46740847.
pdf. There have been recent reports, however, that the OECD has launched a pilot program to review
and revise its conflict minerals guidelines in response to complaints by companies that the guidelines
are difficult to use and may not meet the requirements of the SEC’s rules. For additional information
see: http://www.ipc.org/ContentPage.aspx?pageid=IPC-Invited-to-Participate-in-Pilot-Evaluation-of-OECD-
Conflict-Minerals-Due-Diligence-Guide.
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