SEC Proposes Rules to Implement the “Conflict Minerals” Disclosure Requirements of the Dodd-Frank Act: Proposed Rules Would Require Disclosures and Related Procedures Regarding Minerals Found in a Wide Array of Products

Sullivan & Cromwell LLP - January 6, 2011

The SEC has proposed rules under the Securities Exchange Act that would require disclosure of certain information related to “conflict minerals,” as required by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. “Conflict minerals” are defined to include columbite-tantalite, also known as coltan (the precursor to tantalum); cassiterite (a precursor to tin); gold; wolframite (the precursor to tungsten) and their derivatives. These minerals and their derivatives are found in a wide array of products, including computers, mobile telephones and other consumer electronics; jewelry; and various electronic, electrical, communications and aerospace applications. The SEC has indicated that, in light of the many uses of these minerals and their derivatives, it expects the proposed rules to apply to many issuers.

Under the proposed rules, if any conflict minerals are necessary to the functionality or production of a product that an issuer manufactures, or contracts to manufacture, that issuer would be required to conduct a reasonable country of origin inquiry to determine whether those conflict minerals originated in the Democratic Republic of the Congo or an adjoining country. If the issuer determines, based on that inquiry, that any of its conflict minerals originated in one of those countries, or is unable to determine that any of its conflict minerals did not originate in one of those countries, the issuer would be required, among other things, to disclose in its annual report filed with the SEC its conclusion (or inability to reach a conclusion) regarding the origin of the conflict minerals. In these circumstances, or if the conflict minerals came from recycled or scrap sources, the issuer would furnish as an exhibit to its annual report filed with the SEC a Conflict Minerals Report, which would include:

  • a description of the issuer’s due diligence investigation on the source and chain of custody, or recycled or scrap status, of its conflict minerals;
  • certain information about the issuer’s products that are not, or that the issuer cannot determine are not, “DRC conflict free” (recycled or scrap conflict minerals would be deemed to be “DRC conflict free”); and
  • an independent private sector audit of the Conflict Minerals Report.

It is expected that an issuer will be required to begin furnishing conflict minerals disclosures, including, as applicable, Conflict Minerals Reports, for its first fiscal year beginning after April 15, 2011.

In many respects, the proposed rules provide only limited elaboration on the underlying statutory provisions, although the SEC has requested comments on all aspects of the proposals. Comments on the proposed rules are due no later than January 31, 2011.