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SEC Finalizes Rules on Conflict Minerals

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On Wednesday, the SEC took a long-awaited step in fulfilling one of its responsibilities under the Dodd-Frank Act. The U.S.regulator finalized a rule requiring public companies to disclose the use of conflict minerals—defined as cassiterite, columbite-tantalite, gold, and wolframite—in their manufacturing of products. More specifically, companies that use conflict minerals, necessary to the functionality or production of a manufactured product, must annually disclose whether any of those minerals originated in the Democratic Republic of the Congo or an adjoining country.

The use of these minerals is widespread in manufacturing companies, and the SEC acknowledges this new rule will apply to many public issuers. In perhaps a more poignant acknowledgement, the SEC admits that some companies may incur “significant compliance costs” as a result of implementing the new rule; although the SEC attempted to reduce this burden.

Why will compliance be so costly for companies? Those affected by the rule will have to undergo a rigorous multi-step process to determine the origins of the minerals. First, a public company must determine whether it uses conflict minerals in the production or functionality of a product. Under certain circumstances, companies contracting to manufacture a product must also take this first step. With no bright-line rules in place, each management team must rely on the SEC’s guidance to determine whether the rule applies. Companies concluding that their products are without conflict minerals are free of any additional regulatory obligations. Companies finding the opposite to be true, however, will be required to move to the next step.

Companies using conflict minerals will then conduct a reasonable inquiry into the minerals’ origins. If the inquiry reveals that the minerals come from the Congo or one of the surrounding countries, the company must then exercise due diligence on the source and chain of custody of the materials. Based upon this review, an additional independent audit may be triggered to assess whether proper due diligence measures were followed.

Finally, companies using any conflict minerals will be required to disclose the measures taken in a country of origin investigation and, in some cases, the identity of any products manufactured with conflict minerals. Additional disclosures may be required in certain circumstances.

This rule goes into effect on Jan.1, 2013, but the first reports with the described disclosures are due May 31, 2014. Until then, boards of directors have a significant oversight responsibility—while management will undertake the multi-step process, boards must ensure the inquiry and due diligence procedures are in compliance with the rule.

The description above only scratches the surface of a long and complex rule. Those interested in obtaining more information should take advantage of SEC resources and previous reports by NACD. We have followed this issue from the beginning and produced several informative pieces. For a brief synopsis of the rule and its implications, view our latest NACD BoardVision. For a deeper understanding of this rule’s background, view this Directorship article and this NACD blog entry.