[Federal Register Volume 77, Number 177 (Wednesday, September 12, 2012)]
[Rules and Regulations]
[Pages 56274-56365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-21153]
[[Page 56273]]
Vol. 77
Wednesday,
No. 177
September 12, 2012
Part II
Securities and Exchange Commission
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17 CFR Parts 240, 249, and 249b
Conflict Minerals; Disclosure of Payments by Resource Extraction
Issuers; Final Rules
Federal Register / Vol. 77 , No. 177 / Wednesday, September 12, 2012
/ Rules and Regulations
[[Page 56274]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34-67716; File No. S7-40-10]
RIN 3235-AK84
Conflict Minerals
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting a new form and rule pursuant to Section 1502
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
relating to the use of conflict minerals. Section 1502 added Section
13(p) to the Securities Exchange Act of 1934, which requires the
Commission to promulgate rules requiring issuers with conflict minerals
that are necessary to the functionality or production of a product
manufactured by such person to disclose annually whether any of those
minerals originated in the Democratic Republic of the Congo or an
adjoining country. If an issuer's conflict minerals originated in those
countries, Section 13(p) requires the issuer to submit a report to the
Commission that includes a description of the measures it took to
exercise due diligence on the conflict minerals' source and chain of
custody. The measures taken to exercise due diligence must include an
independent private sector audit of the report that is conducted in
accordance with standards established by the Comptroller General of the
United States. Section 13(p) also requires the issuer submitting the
report to identify the auditor and to certify the audit. In addition,
Section 13(p) requires the report to 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. Section 13(p)
requires the information disclosed by the issuer to be available to the
public on its Internet Web site.
DATES: Effective Date: November 13, 2012.
Compliance Date: Issuers must comply with the final rule for the
calendar year beginning January 1, 2013 with the first reports due May
31, 2014.
FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel in the
Office of Rulemaking, Division of Corporation Finance, at (202) 551-
3430, 100 F Street NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are adopting new Rule 13p-1 \1\ and new
Form SD \2\ under the Securities Exchange Act of 1934 (``Exchange
Act'').\3\
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\1\ 17 CFR 240.13p-1.
\2\ 17 CFR 249.448.
\3\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Background and Summary
A. Statutory Provision
B. Summary of the Proposed Rules
C. Summary of Comments on the Proposed Rules
D. Summary of Changes to the Final Rule
E. Flowchart Summary of the Final Rule
II. Discussion of the Final Rule
A. ``Conflict Minerals'' Definition
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rule
B. Step One--Issuers Covered by the Conflict Mineral Provision
1. Issuers That File Reports Under the Exchange Act
a. Proposed Rules
b. Comments on the Proposed Rules
i. Issuers that File Reports Under Sections 13(a) and 15(d) of
the Exchange Act
ii. Smaller Reporting Companies
iii. Foreign Private Issuers
c. Final Rule
2. ``Manufacture'' and ``Contract To Manufacture'' Products
a. Proposed Rules
b. Comments on the Proposed Rules
i. ``Manufacture''
ii. ``Contract To Manufacture''
c. Final Rule
i. ``Manufacture''
ii. ``Contract To Manufacture''
3. Mining Issuers as ``Manufacturing'' Issuers
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
4. When Conflict Minerals Are ``Necessary'' to a Product
a. Proposed Rules
b. Comments on the Proposed Rules
i. ``Necessary to the Functionality''
ii. ``Necessary to the Production''
iii. De Minimis Threshold
c. Final Rule
i. Contained in the Product
ii. Intentionally Added
iii. ``Necessary to the Functionality''
iv. ``Necessary to the Production''
v. De Minimis Threshold
C. Location, Status, and Timing of Conflict Minerals Information
1. Location of Conflict Minerals Information
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
2. ``Filing'' of Conflict Minerals Information
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
3. Uniform Reporting Period
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
4. Time Period for Providing Conflict Minerals Information
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
5. Conflict Minerals Already in the Supply Chain
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
6. Timing of Implementation
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
D. Step Two--Determining Whether Conflict Minerals Originated in
the Democratic Republic of the Congo or Adjoining Countries and the
Resulting Disclosure
1. Reasonable Country of Origin Inquiry
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
2. Disclosures in the Body of the Specialized Disclosure Report
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
E. Step Three--Conflict Minerals Report's Content and Supply
Chain Due Diligence
1. Content of the Conflict Minerals Report
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
2. Due Diligence Standard in the Conflict Minerals Report
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
3. Independent Private Sector Audit Requirements
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
i. Auditing Standards
ii. Auditor Independence
iii. Audit Objective
4. Recycled and Scrap Minerals
a. Proposed Rules
b. Comments on the Proposed Rules
c. Final Rule
i. Definition of ``Recycled and Scrap Sources''
ii. Due Diligence for Conflict Minerals From ``Recycled and
Scrap Sources''
F. Other Matters
III. Economic Analysis
A. Introduction
B. Benefits and Costs Resulting From the Mandatory Reporting
Requirement
1. Benefits
2. Cost Estimates in the Comment Letters
a. General Comments
b. Specific Comments
i. Manufacturing Industry Association Comments
ii. Electronic Interconnect Industry Association Comments
iii. University Group Comments
iv. Environmental Consultancy Company Comments
v. Other Specific Comments
C. Benefits and Costs Resulting From Commission's Exercise of
Discretion
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1. Reasonable Country of Origin Inquiry
2. Information in the Specialized Disclosure Report
3. ``DRC Conflict Undeterminable''
4. ``Contract To Manufacture''
5. Nationally or Internationally Recognized Due Diligence
Framework (Including Gold)
6. Liability for the Audit and Audit Certifications
7. Audit Objective
8. Conflict Minerals From Recycled and Scrap Sources
9. Conflict Minerals ``Outside the Supply Chain''
10. Conflict Mineral Derivatives
11. Method and Timing of Disclosure on Form SD
12. ``Necessary to the Functionality or Production''
13. Categories of Issuers
14. Not Including Mining Issuers as Manufacturing Issuers
D. Quantified Assessment of Overall Economic Effects
IV. Paperwork Reduction Act
A. Background
B. Summary of the Comment Letters
C. Revisions to PRA Reporting and Cost Burden Estimates
1. Estimate of Conducting Due Diligence, Including the Audit
2. Estimate of Preparing the Disclosure
3. Revised PRA Estimate
V. Final Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Final Action
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Rule
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority and Text of the Final Rule
I. Background and Summary
A. Statutory Provision
On December 15, 2010, we proposed a number of amendments to our
rules \4\ to implement the requirements of Section 1502 (``Conflict
Minerals Statutory Provision'') of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (``Act''),\5\ relating to new disclosure
and reporting obligations by issuers concerning ``conflict minerals''
\6\ that originated in the Democratic Republic of the Congo (``DRC'')
or an adjoining country \7\ (together with the DRC, the ``Covered
Countries'').\8\ Section 1502 amended the Exchange Act by adding new
Section 13(p).\9\ New Exchange Act Section 13(p) requires us to
promulgate disclosure and reporting regulations regarding the use of
conflict minerals from the Covered Countries.\10\
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\4\ Conflict Minerals, Release No. 34-63547 (Dec. 15, 2010) [75
FR 80948] (the ``Proposing Release'').
\5\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\6\ The term ``conflict mineral'' is defined in Section
1502(e)(4) of the 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 Democratic
Republic of the Congo or an adjoining country.
\7\ The term ``adjoining country'' is defined in Section
1502(e)(1) of the Act as a country that shares an internationally
recognized border with the DRC, which presently includes Angola,
Burundi, Central African Republic, the Republic of the Congo,
Rwanda, South Sudan, Tanzania, Uganda, and Zambia.
\8\ In the Proposing Release, we referred to the DRC and its
adjoining countries as the ``DRC Countries.'' In this release, we
use the term ``Covered Countries'' instead. Both terms have the same
meaning. For consistency within this release, there are instances
when we refer to the text of the Proposing Release and use the term
``Covered Countries'' instead of ``DRC Countries,'' which was used
in the Proposing Release.
\9\ 15 U.S.C. 78m(p).
\10\ See Exchange Act Section 13(p)(1)(A). This Exchange Act
Section requires that the Commission promulgate rules no later than
270 days after the date of enactment.
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As reflected in the title of Section 1502(a), which states the
``Sense of the Congress on Exploitation and Trade of Conflict Minerals
Originating in the Democratic Republic of the Congo,'' in enacting the
Conflict Minerals Statutory Provision, Congress intended to further the
humanitarian goal of ending the extremely violent conflict in the DRC,
which has been partially financed by the exploitation and trade of
conflict minerals originating in the DRC. This section explains that
the exploitation and trade of conflict minerals by armed groups is
helping to finance the conflict and that the emergency humanitarian
crisis in the region warrants the disclosure requirements established
by Exchange Act Section 13(p).\11\
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\11\ See Section 1502(a) of the Act (``It is the sense of the
Congress that the exploitation and trade of conflict minerals
originating in the Democratic Republic of the Congo is helping to
finance conflict characterized by extreme levels of violence in the
eastern Democratic Republic of the Congo, particularly sexual- and
gender-based violence, and contributing to an emergency humanitarian
situation therein, warranting the provisions of section 13(p) of the
Securities Exchange Act of 1934, as added by subsection (b).'').
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Similarly, the legislative history surrounding the Conflict
Minerals Statutory Provision, and earlier legislation addressing the
trade in conflict minerals, reflects Congress's motivation to help end
the human rights abuses in the DRC caused by the conflict.\12\ Other
parts of the Conflict Minerals Statutory Provision also point to the
fact that Congress intended to promote peace and security.\13\ For
example, the Conflict Minerals Statutory Provision states that once
armed groups no longer continue to be directly involved and benefiting
from commercial activity involving conflict minerals, the President may
take action to terminate the provision.\14\ To accomplish the goal of
helping end the human rights abuses in the DRC caused by the conflict,
Congress chose to use the securities laws disclosure requirements to
bring greater public awareness of the source of issuers' conflict
minerals and to promote the exercise of due diligence on conflict
mineral supply chains. By doing so, we
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understand Congress's main purpose to have been to attempt to inhibit
the ability of armed groups in the Covered Countries to fund their
activities by exploiting the trade in conflict minerals. Reducing the
use of such conflict minerals is intended to help reduce funding for
the armed groups contributing to the conflict and thereby put pressure
on such groups to end the conflict. The Congressional object is to
promote peace and security in the Covered Countries.\15\
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\12\ The Congo conflict has been an issue raised in the United
States Congress for a number of years. For example, in the 109th
Congress, then-Senator Sam Brownback, along with Senator Richard J.
Durbin and then-Senator Barack Obama, among others, co-sponsored S.
2125, the Democratic Republic of Congo Relief, Security, and
Democracy Promotion Act of 2006. See Public Law 109-456 (Dec. 22,
2006) (stating that the National Security Strategy of the United
States, dated September 17, 2002, concludes that disease, war, and
desperate poverty in Africa threatens the United States' core value
of preserving human dignity and threatens the United States'
strategic priority of combating global terror). The legislation
committed the United States to work toward peace, prosperity, and
good governance in the Congo. As another example, in the 110th
Congress, then-Senator Brownback and Senator Durbin introduced S.
3058, the Conflict Coltan and Cassiterite Act, which would have
prohibited the importation of certain products containing columbite-
tantalite or cassiterite that was mined or extracted in the DRC by
groups that committed serious human rights and other violations. See
S. 3058, 110th Cong. (2008). As a further example, in the 111th
Congress, then-Senator Brownback introduced S. 891, the Congo
Conflict Minerals Act of 2009. See S. 891, 111th Cong. (2009). This
bill would have required U.S.-registered companies selling products
using conflict minerals to disclose annually to the Commission the
country of origin of these minerals and, if the country of origin
was one of the Covered Countries, to disclose the mine of origin.
Additionally, later in the 111th Congress, then-Senator Brownback
sponsored S.A. 2707, which was similar to S. 891. See S.A. 2707,
111th Cong. (2009). We note also that the Democratic Republic of
Congo Relief, Security, and Democracy Promotion Act of 2006 states
that the National Security Strategy of the United States, dated
September 17, 2002, concludes that disease, war, and desperate
poverty in Africa threatens the United States' core value of
preserving human dignity and threatens the United States' strategic
priority of combating global terror. See Pub. L. 109-456 (Dec. 22,
2006). See also U.S. Gov't Accountability Office, GAO-12-763,
Conflict Minerals Disclosure rule: SEC's Actions and Stakeholder-
Developed Initiatives (Jul. 2012) (discussing the Democratic
Republic of Congo Relief, Security, and Democracy Promotion Act of
2006), available at http://www.gao.gov/products/GAO-12-763.
\13\ See Section 1502(d)(2)(A) of the Act (stating that two
years after enactment of the Act and annually thereafter, ``the
Comptroller General of the United States shall submit to the
appropriate congressional committees a report that includes'' an
``assessment of the effectiveness'' of the Conflict Minerals
Statutory Provision ``in promoting peace and security'' in the
Covered Countries).
\14\ See Exchange Act Section 13(p)(4) (stating that the
provision ``shall terminate on the date on which the President
determines and certifies to the appropriate congressional committees
* * * that no armed groups continue to be directly involved and
benefitting from commercial activity involving conflict minerals'').
\15\ See Exchange Act Section 1502(c)(1)(B)(i) (stating that the
Secretary of State, in consultation with the Administrator of the
United States Agency for International Development, shall submit to
Congress a plan to ``promote peace and security'' in the Covered
Countries).
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Congress chose to use the securities laws disclosure requirements
to accomplish its goals. In addition, one of the co-sponsors of the
provision noted in a floor statement that the provision will ``enhance
transparency'' and ``also help American consumers and investors make
more informed decisions.'' \16\ Also, as discussed throughout the
release, a number of commentators on our rule proposal, including co-
sponsors of the legislation and other members of Congress, have
indicated that the Conflict Minerals Statutory Provision will provide
information that is material to an investor's understanding of the
risks in an issuer's reputation and supply chain.\17\
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\16\ See 156 Cong. Rec. S3976 (daily ed. May 19, 2010)
(statement of Sen. Feingold) (``Mr. President, I am pleased to be an
original cosponsor of two amendments to the Restoring American
Financial Stability Act that seek to ensure there is greater
transparency around how international companies are addressing
issues of foreign corruption and violent conflict that relate to
their business. Creating these mechanisms to enhance transparency
will help the United States and our allies more effectively deal
with these complex problems, at the same time that they will also
help American consumers and investors make more informed
decisions.'').
\17\ See, e.g., letters from Aditi Mohapatra of Calvert Asset
Management Company, Inc. on behalf of 49 investors, including the
Social Investment Forum and Interfaith Center of Corporate
Responsibility (Mar. 2, 2011) (``SIF I''); Boston Common Asset
Management, LLC, Calvert Asset Management Co., Inc., Interfaith
Center on Corporate Responsibility, Jesuit Conference of the United
States, Marianist Province of the US, Mercy Investment Services,
Inc., Missionary Oblates of Mary Immaculate, Responsible Sourcing
Network, Sustainalytics, Trillium Asset Management, and Tri-State
Coalition for Responsible Investment (Feb. 1, 2012) (``SIF II'');
Calvert Investments (Oct. 18, 2011) (``Calvert''); General Board of
Pension and Health Benefits of The United Methodist Church (Mar. 7,
2011) (``Methodist Pension''); State Board of Administration of
Florida (Feb. 3, 2011) (``FRS''); and Teachers Insurance and Annuity
Association and College Retirement Equities Fund (Mar. 2, 2011)
(``TIAA-CREF''). See also letters from Catholic Relief Services
(Feb. 8, 2011) (``CRS I'') (``We submit these comments with the hope
the SEC will consider the need of investors to access information to
make sound business decisions that reflect both their social and
their financial concerns.''); Enough Project (Mar. 31, 2011)
(``Enough Project II'') (stating that advancing the ``goal of
resolving a humanitarian crisis that continues to cause countless
deaths and unimaginable suffering'' is ``of great interest to many,
including investors''); Senator Richard J. Durbin and Representative
Jim McDermott (Feb. 28, 2011) (``Sen. Durbin/Rep. McDermott'')
(suggesting that the provision's purposes were both to end conflict
in the DRC and to provide current information for investors, and the
latter purpose is identical to the purpose of requiring the
disclosure of other information in an issuer's the periodic reports)
and Senator Patrick Leahy, Senator Christopher Coons, Congressman
Howard Berman, Congressman Jim McDermott, Congressman Donald Payne,
Congressman Gregory Meeks, and Congressmember Karen Bass (Feb. 16,
2012) (``Sen. Leahy et al.'') (asserting that an issuer's conflict
minerals information is ``critical to both investors and to capital
formation'' because ``when a publicly traded company relies on an
unstable black market for inputs essential to manufacturing its
products it is of deep material interest to investors'').
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Exchange Act Section 13(p) mandates that we promulgate regulations
requiring that a ``person described'' \18\ disclose annually whether
any ``conflict minerals'' that are ``necessary to the functionality or
production of a product manufactured by such person'' \19\ originated
in the Covered Countries, and make that disclosure publicly available
on the issuer's Internet Web site.\20\ If such a person's conflict
minerals originated in the Covered Countries, that person must submit a
report (``Conflict Minerals Report'') to us that includes a description
of the measures taken by the person to exercise due diligence on the
minerals' source and chain of custody.\21\ Under Exchange Act Section
13(p), the measures taken to exercise due diligence ``shall include an
independent private sector audit'' of the Conflict Minerals Report that
is conducted according to standards established by the Comptroller
General of the United States, in accordance with our promulgated rules,
in consultation with the Secretary of State.\22\ The person submitting
the Conflict Minerals Report must also identify the independent private
sector auditor \23\ and certify the independent private sector
audit.\24\
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\18\ The term ``person described'' is defined in Exchange Act
Section 13(p)(2) as one who is required to file reports under
Exchange Act Section 13(p)(1)(A), and for whom the conflict minerals
are necessary to the functionality or production of a product
manufactured by such person. Exchange Act Section 13(p)(1)(A) does
not provide a definition but refers back to Exchange Act Section
13(p)(2).
\19\ Exchange Act Section 13(p)(2)(B).
\20\ See Exchange Act Section 13(p)(1)(E) (stating that each
issuer ``shall make available to the public on the Internet Web site
of such [issuer] the information disclosed under'' Exchange Act
Section 13(p)(1)(A)).
\21\ See Exchange Act Section 13(p)(1)(A)(i).
\22\ See id. (requiring in the Conflict Minerals Report ``a
description of the measures taken by the person to exercise due
diligence on the source and chain of custody of such [conflict]
minerals, which measures shall include an independent private sector
audit of such report''). The Conflict Minerals Statutory Provision
assigns certain responsibilities to other federal agencies. In
developing our proposed rules, our staff has consulted with the
staff of these other agencies in developing our proposed rules.
These agencies include, including the Government Accountability
Office (the ``GAO''), which is headed by the Comptroller General of
the United States, and the United States Department of State.
\23\ See Exchange Act Section 13(p)(1)(A)(ii) (stating that the
issuer must provide a description of the ``entity that conducted the
independent private sector audit in accordance with'' Exchange Act
Section 13(p)(1)(A)(i)'').
\24\ As noted in Exchange Act Section 13(p)(1)(B), if an issuer
is required to provide a Conflict Minerals Report that includes an
independent private sector audit, that issuer ``shall certify the
audit'' and that certified audit ``shall constitute a critical
component of due diligence in establishing the source and chain of
custody of such minerals.''
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Further, according to Exchange Act Section 13(p), the Conflict
Minerals Report must include ``a description of the products
manufactured or contracted to be manufactured that are not DRC conflict
free,'' \25\ 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.'' \26\ Also, Exchange Act Section 13(p) dictates that each
person described ``shall make available to the public on the Internet
Web site of such person'' the conflict minerals information required by
Exchange Act Section 13(p)(1)(A).\27\
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\25\ The term ``DRC conflict free'' is defined in Exchange Act
Section 13(p)(1)(A)(ii) and Exchange Act Section 13(p)(1)(D).
Exchange Act Section 13(p)(1)(A)(ii) defines ``DRC conflict free''
as ``the products that do not contain minerals that directly or
indirectly finance or benefit armed groups in the'' Covered
Countries. Similarly, Exchange Act Section 13(p)(1)(D) defines ``DRC
conflict free'' as products that do ``not contain conflict minerals
that directly or indirectly finance or benefit armed groups in the''
Covered Countries. We note that the definitions in the two sections
are slightly different in that Exchange Act Section 13(p)(1)(A)(ii)
refers to ``minerals'' without any limitation, whereas Exchange Act
Section 13(p)(1)(D) refers specifically to ``conflict minerals.'' We
believe, based on the totality of the Conflict Minerals Statutory
Provision, that ``DRC conflict free'' is meant to refer only to
``conflict minerals,'' as that term is defined in Section 1502(e)(4)
of the Act, that directly or indirectly finance or benefit armed
groups in the Covered Countries, and not to all minerals that
directly or indirectly finance or benefit armed groups in the
Covered Countries.
\26\ See Exchange Act Section 13(p)(1)(A)(ii).
\27\ See Exchange Act Section 13(p)(1)(E).
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B. Summary of the Proposed Rules
We proposed rules to apply to certain issuers that file reports
with us under Exchange Act Sections 13(a) \28\ or 15(d).\29\ Based on
the Conflict Minerals Statutory Provision, we proposed a disclosure
requirement for conflict minerals that would divide into three
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steps. The first step would have required an issuer to determine
whether it was subject to the Conflict Minerals Statutory Provision. An
issuer would have only been subject to the Conflict Minerals Statutory
Provision if it was a reporting issuer for which conflict minerals were
``necessary to the functionality or production of a product
manufactured'' \30\ or contracted to be manufactured by such person. If
an issuer did not meet that definition, the issuer was not required to
take any action, make any disclosures, or submit any reports. If,
however, an issuer met this definition, that issuer would move to the
second step.
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\28\ 15 U.S.C. 78m(a).
\29\ 15 U.S.C. 78o(d).
\30\ Exchange Act Section 13(p)(2).
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The second step would have required the issuer to determine after a
reasonable country of origin inquiry whether its conflict minerals
originated in the Covered Countries. If the issuer determined that its
conflict minerals did not originate in the Covered Countries, the
issuer was to disclose this determination and the reasonable country of
origin inquiry it used in reaching this determination in the body of
its annual report. The issuer also would have been required to provide
on its Internet Web site its determination that its conflict minerals
did not originate in the Covered Countries, disclose in its annual
report that the disclosure was posted on its Internet Web site, and
disclose the Internet address on which this disclosure was posted. It
would further have been required to maintain records demonstrating that
its conflict minerals did not originate in the Covered Countries. Such
an issuer would not have any further disclosure or reporting
obligations with regard to its conflict minerals.
If, however, the issuer determined that its conflict minerals did
originate in the Covered Countries, if it was unable to conclude that
its conflict minerals did not originate in the Covered Countries, or if
it determined that its conflict minerals were from recycled or scrap
sources, the issuer would have been required to disclose this
conclusion in its annual report. Also, the issuer would have been
required to note that the Conflict Minerals Report, which included the
certified independent private sector audit report, was furnished as an
exhibit to the annual report; furnish the Conflict Minerals Report;
make available the Conflict Minerals Report on its Internet Web site;
disclose that the Conflict Minerals Report was posted on its Internet
Web site; and provide the Internet address of that site. This issuer
would then have moved to the third step.
Finally, the third step would have required an issuer with conflict
minerals that originated in the Covered Countries, or an issuer that
was unable to conclude that its conflict minerals did not originate in
the Covered Countries, to furnish a Conflict Minerals Report. The
proposed rules would have required an issuer to provide, in its
Conflict Minerals Report, a description of the measures it had taken to
exercise due diligence on the source and chain of custody of its
conflict minerals, which would have included a certified independent
private sector audit of the Conflict Minerals Report that identified
the auditor and was furnished as part of the Conflict Minerals Report.
Further, the issuer would have been required to include in the Conflict
Minerals Report a description of its products manufactured or
contracted to be manufactured containing conflict minerals that it was
unable to determine did not ``directly or indirectly finance or benefit
armed groups'' in the Covered Countries. The issuer would identify such
products by describing them in the Conflict Mineral Report as not ``DRC
conflict free.'' \31\ If any of its products contained conflict
minerals that did not ``directly or indirectly finance or benefit''
these armed groups, the issuer would be permitted to describe such
products in the Conflict Mineral Report as ``DRC conflict free''
whether or not the minerals originated in the Covered Countries. In
addition, the issuer would have been required to disclose in the
Conflict Minerals Report the facilities used to process those conflict
minerals, those conflict minerals' country of origin, and the efforts
to determine the mine or location of origin with the greatest possible
specificity.
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\31\ The definition of the term ``DRC conflict free'' in our
proposed rules would be identical to the definition in Exchange Act
Section 13(p)(1)(D).
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The proposed rules would have allowed for different treatment of
conflict minerals from recycled and scrap sources. An issuer with such
conflict minerals would have been required to furnish a Conflict
Minerals Report that described the measures taken to exercise due
diligence in determining that its conflict minerals were from recycled
or scrap sources and to provide the reasons for believing, based on its
due diligence, that its conflict minerals were from recycled or scrap
sources. Such an issuer would also have been required to obtain a
certified independent private sector audit of the Conflict Minerals
Report.
C. Summary of Comments on the Proposed Rules
The Proposing Release requested comment on a variety of significant
aspects of the proposed rules. The original comment period in the
Proposing Release was to end on January 31, 2011. Prior to that date,
however, we received requests for an extension of time for public
comment on the proposal to allow for, among other matters, the
collection of information and to improve the quality of responses.\32\
On January 28, 2011, we extended the comment period for the proposal
from January 31, 2011 to March 2, 2011.\33\ Additionally, in response
to suggestions from commentators,\34\ we held a public roundtable on
October 18, 2011 (``SEC Roundtable'') at which invited participants,
including investors, affected issuers, human rights organizations, and
other stakeholders, discussed their views and provided input on issues
related to our required rulemaking.\35\ In conjunction with the SEC
Roundtable, we requested further comment.\36\ We received approximately
420 individual comment letters in response to the proposed rules, with
approximately 145 of those letters being received after the SEC
Roundtable, and over 40 letters regarding the Conflict Minerals
Statutory Provision prior to the
[[Page 56278]]
proposed rules.\37\ We also received approximately 13,400 form letters
from those supporting ``promptly'' implementing a ``strong'' final rule
regarding the Conflict Minerals Statutory Provision,\38\ with
approximately 9,700 of those letters requesting some specific
requirements in the final rule,\39\ and two petitions supporting the
proposed amendments with an aggregate of over 25,000 signatures.
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\32\ See letters from Advanced Medical Technology Association,
Aerospace Industries Association, American Association of Exporters
and Importers, American Automotive Policy Council, Business Alliance
for Customs Modernization, IPC--Association Connecting Electronics
Industries Joint Industry Group, National Association of
Manufacturers, National Electrical Manufacturers Association,
National Foreign Trade Council, National Retail Federation, Retail
Industry Leaders Association, Semiconductor Equipment and Materials
International, TechAmerica, USA*ENGAGE, and U.S. Chamber of Commerce
(Dec. 16, 2010) (``Advanced Medical Technology Association et
al.''); Jewelers Vigilance Committee, American Gem Society,
Manufacturing Jewelers & Suppliers of America, Jewelers of America,
and Fashion Jewelry & Accessories Trade Association (Jan. 10, 2011)
(``JVC et al. I''); National Mining Association (Jan. 3, 2011)
(``NMA I''); National Stone, Sand Gravel Association (Jan. 13, 2011)
(``NSSGA''); Representative Spencer Bachus (Jan. 25, 2011) (``Rep.
Bachus''); Robert D. Hormats, Under Secretary of State for Economic,
Energy, and Agricultural Affairs, and Maria Otero, Democracy and
Global Affairs (Jan. 25, 2011) (``State I''); and World Gold Council
(Jan. 7, 2011) (``WGC I'').
\33\ Conflict Minerals, Release No. 34-63793 (Jan. 28, 2011) [76
FR 6110].
\34\ See, e.g., letter from United States Chamber of Commerce
(Feb. 28, 2011) (``Chamber I'').
\35\ See Press Release, Securities and Exchange Commission, SEC
Announces Agenda and Panelists for Roundtable on Conflict Minerals
(Oct. 14, 2011), available at http://www.sec.gov/news/press/2011/2011-210.htm.
\36\ Roundtable on Issues Relating to Conflict Minerals, Release
No. 34-65508 (Oct. 7, 2011) [76 FR 63573].
\37\ To facilitate public input on rulemaking required by the
Act, the Commission provided a series of email links, organized by
topic, on its Web site at http://www.sec.gov/spotlight/regreformcomments.shtml. The comments relating to the Conflict
Minerals Statutory Provision are located at http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml (``Pre-Proposing Release Web site''). These
comments were received before we made public the Proposing Release
or proposed rules and are separate from the comments we received
after we published the Proposing Release and proposed rules, which
are located at http://www.sec.gov/comments/s7-40-10/s74010.shtml
(``Post-Proposing Release Web site''). Many commentators provided
comments on both the pre- and post-Proposing Release Web sites.
Generally, our references to comment letters refer to the comments
on the post-Proposing Release Web site. When we refer to a comment
letter from the Pre-Proposing Release Web site, however, we make
that clear in the footnote.
\38\ See form letters A (urging us to institute ``strong
rules''), B (urging that the final rule not allow the legislation's
intent to be compromised and to keep the ``LEGISLATION STRONG''
(emphasis in original)), E (indicating ``deep disappointment and
concern'' that the final rule had not been adopted, and urging us to
``release a strong, final rule''), F (urging us to ``promptly issue
strong final regulations''), G (stating that delays in adopting a
final rule will ``significantly hinder progress toward a legitimate
mining sector in eastern'' DRC, and urging us to ``urgently release
final regulations on conflict minerals''), H (calling on us to
``release a strong, final rule as soon as possible''), and I (urging
us to ``issue strong final rules as soon as possible'').
\39\ See form letters A (stating that the final rule should,
among other requirements, include gold and metals mining companies,
apply to all possible companies, require that conflict minerals
disclosures be filed, include strong and defined due diligence, and
define recycled metals as 100% post-consumer metals), G (stating
that the final rule should ``incorporate the UN Group of Experts and
OECD due diligence guidelines' concept of mitigation''), H (stating
that the final rule should, among other requirements, reject any
delays or phased-in implementation, adopt the ``OECD due diligence
standard,'' have equal reporting for all conflict minerals, include
all companies regardless of size, define terms narrowly, define the
reasonable country of origin inquiry, have issuers file reports, and
not include a de minimis category for conflict minerals), and I
(stating that the final rule must, among other requirements, reject
an indeterminate origin category, define the reasonable country of
origin standard, and adopt the ``OECD Due Diligence standard'').
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The comment letters came from corporations, professional
associations, human rights and public policy groups, bar associations,
auditors, institutional investors, investment firms, United States and
foreign government officials,\40\ and other interested parties and
stakeholders. In general, most commentators supported the human rights
objectives of the Conflict Minerals Statutory Provision and the
proposed rules.\41\ As discussed in greater detail throughout this
release, however, many of these commentators provided recommendations
for revising the proposed rules and suggested modifications or
alternatives to the proposal. Only a few commentators generally opposed
the Conflict Minerals Statutory Provision and/or our adoption of any
rule based on the provision.\42\ One commentator recommended that the
proposed rules be withdrawn entirely ``and that the potential costs,
supply chain complexities, and other practical obstacles to
implementation be more fully analyzed before new rules are proposed.''
\43\
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\40\ Among the foreign officials to provide comment letters was
the DRC's Minister of Mines. See letters from Martin Kabwelulu,
Minister of Mines, Democratic Republic of the Congo (July 15, 2011)
(``DRC Ministry of Mines I''); Martin Kabwelulu, Minister of Mines,
Democratic Republic of the Congo (Oct. 15, 2011) (``DRC Ministry of
Mines II''); and Martin Kabwelulu, Minister of Mines, Democratic
Republic of the Congo (Nov. 8, 2011) (``DRC Ministry of Mines
III'').
\41\ See, e.g., letters from Advanced Medical Technology
Association, American Apparel & Footwear Association, American
Association of Exporters and Importers, Consumer Electronics
Association, Consumer Electronics Retailers Coalition, Emergency
Committee for American Trade, IPC-Association Connecting Electronics
Industries, Joint Industry Group, National Association of
Manufacturers, National Foreign Trade Council, National Retail
Federation, Retail Industry Leaders Association, TechAmerica, and
USA Engage (Mar. 2, 2011) (``Industry Group Coalition I'') (stating
its ``support [for] the underlying goal of Sec. 1502 to prevent the
atrocities occurring'' in the Covered Countries); American Bar
Association (Jun. 20, 2011) (``ABA'') (stating that it ``supports
and endorses the humanitarian efforts to end the armed conflict in
the eastern Democratic Republic of the Congo''); Chamber I (stating
that it ``supports the fundamental goal, as embodied in Section 1502
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(`Dodd-Frank Act'), of preventing the exploitation of conflict
minerals for the purpose of financing human rights violations within
the Democratic Republic of Congo''); National Association of
Manufacturers (Mar. 2, 2011) (``NAM I'') (stating its ``support the
underlying goal of Sec. 1502 to address the atrocities occurring in
the'' Covered Countries); and World Gold Council (Feb. 28, 2011)
(``WGC II'') (stating that it ``believes it is important to state
[its] support for the humanitarian goals of Section 1502'').
\42\ See, e.g., letters from Michael Beggs (Jan. 12, 2012)
(``Beggs''), Charles Blakeman (Oct. 9, 2011) (``Blakeman I''), Gary
P. Bradley (Sept. 19, 2011) (``Bradley''), Joseph Cummins (Dec. 20,
2011) (``Cummins''), Walter Grail (Oct. 1, 2011) (``Grail''),
Kirtland C. Griffin (Jun. 16, 2011) (``Griffin''), Clark Grey Howell
(Sep. 20, 2011) (``Howell''), Edward Lynch (Dec. 16, 2011)
(``Lynch''), and Melanie Matthews (Sep. 19, 2011) (``Matthews'').
\43\ See letter from Chamber I. See also letters from Chamber II
(reiterating the withdrawal request from its initial comment letter
and requesting we open a second comment period regarding the
proposed rules), Chamber III (requesting that we allow companies
additional time for commenting on the proposed rules), and United
States Chamber of Commerce (Jul. 11, 2012) (``Chamber IV'')
(requesting that we re-propose the rule and re-open the comment
period).
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Also, although they may have offered their support of the human
rights concerns underlying the Conflict Minerals Statutory Provision
and the proposed rules, some commentators were concerned about
potentially negative effects of the Conflict Minerals Statutory
Provision and the resulting rule. In this regard, some of those
commentators argued that the provision and/or rule could lead to a de
facto boycott or embargo on conflict minerals from the Covered
Countries,\44\ other of these commentators suggested that the
[[Page 56279]]
provision and/or rule could compel speech in a manner that violates the
First Amendment,\45\ and at least one such commentator indicated that
the final rule would adversely affect employment in the United
States.\46\ One commentator, however, suggested that there could be
some ``business benefits'' from complying with the final rule beyond
the humanitarian benefits discussed by Congress.\47\ This commentator
argued that such benefits could include eliminating any competitive
disadvantage to companies already engaged in ensuring their conflict
mineral purchases do not fund conflict in the DRC, providing an
opportunity to improve a company's existing risk management and supply
chain management, stimulating innovation, supporting companies'
requests for conflict minerals information from suppliers through legal
mandate, and preparing companies to meet a new generation of
expectations for greater supply chain transparency and
accountability.\48\
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\44\ See, e.g., letters from AngloGold Ashanti Limited (Jan. 31,
2011) (``AngloGold''), Bureau d'Etudes Scientifiques et Techiques
(Dec. 26, 2011) (``BEST II''), Competitive Enterprise Institute
(Mar. 2, 2011) (``CEI I''), Competitive Enterprise Institute (Aug.
22, 2011) (``CEI II,''), F[eacute]d[eacute]ration des Enterprises du
Congo (Oct. 28, 2011) (``FEC II''), G[eacute]n[eacute]rale des
Coop[eacute]ratives Mini[egrave]res du Sud Kivu (Apr. 8, 2011)
(``Gecomiski''), IPC--Association Connecting Electronics Industries
(Mar. 2, 2011) (``IPC I''), ITRI Ltd. (Feb. 25, 2011) (``ITRI II''),
London Bullion Market Association (Mar. 2, 2011) (``LBMA I''),
London Bullion Market Association (Aug. 5, 2011) (``LBMA II''),
Minister of Energy and Minerals of the United Republic of Tanzania
(May 23, 2011) (``Tanzania I''), Ministry of Mines and Energy of the
Republic of Burundi (May 12, 2011) (``Burundi''), North Kivu
Artisanal Mining Cooperatives Representative (Mar. 1, 2011)
(``Comimpa''), Pact Inc. (Mar. 2, 2011) (``Pact I''), Pact Inc.
(Oct. 13, 2011) (``Pact II''), Representative Christopher J. Lee
(Feb. 3, 2011) (``Rep. Lee''), Soci[eacute]t[eacute] Mini[egrave]re
du Maniema SPRL (Mar. 21, 2012) (``Somima''), Verizon Communications
(Jun. 24, 2011) (``Verizon''), and WGC II. But see letters from
Enough Project (Mar. 2, 2011) (``Enough Project I'') (``Enough notes
that critics of the legislation are quick to predict that private
sector investors and companies may walk away from the Congo if faced
with meaningful due diligence and reporting requirements. On the
contrary, Congo's mineral reserves are too great for world markets
to ignore.''), International Corporate Accountability Roundtable
(Aug. 24, 2011) (``ICAR II'') (recognizing that ``[c]ritics of the
law are arguing that whatever its intentions, it will in practice
end the trade in minerals mined in the east of Congo,'' and that,
although ``mineral exports from the region have dropped
significantly in recent months, and that this has forced many
artisanal miners to seek alternative livelihoods,'' which ``has
serious implications for miners and their families,'' the ``downturn
stems from a six month suspension of mining and trading activities
imposed by the Congolese government and an overly restrictive
interpretation of Dodd Frank by industry associations'' and the
``idea that the current hiatus is a permanent shut-down of the trade
is misplaced, however.''), Andrew Matheson (Oct. 26, 2011)
(``Matheson II'') (``No such embargo exists, nor is an embargo
contemplated by the multi[hyphen]stakeholder group, the EICC/GeSI
initiative, or ITRI. Import statistics show that minerals continue
to be sourced in substantial volumes from the DRC, for example
tantalum ores going into China.''), and Sen. Durbin/Rep. McDermott
(``NGO experts in Congo note that only approximately one percent of
the Congolese workforce depends on mining, so even if a de facto ban
came to pass--which we doubt--the economic impact would not be as
great as commonly assumed.'').
\45\ See, e.g., letters from Taiwan Semiconductor Manufacturing
Company Ltd. (Jan. 27, 2011) (``Taiwan Semi''), Tiffany & Co. (Feb.
22, 2011) (``Tiffany''), and Washington Legal Fund (Mar. 30, 2011)
(``WLF'').
\46\ See letter from Rep. Lee (``Ultimately, these new
regulations may cost U.S. jobs and send them overseas.'').
\47\ See letter from Green Research (Jan. 27, 2012) (``Green
II''). See also letter from Green Research (Oct. 29, 2011) (``Green
I'') (stating that, although ``[i]t seems clear that, by most
accounting, there are costs of compliance'' of the Conflict Minerals
Statutory Provision, ``there are benefits as well'').
\48\ See id.
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We have reviewed and considered all of the comments that we
received relating to the rulemaking. The final rule reflects changes
from the proposed rules made in response to many of these comments. As
discussed throughout this release, we are adopting final rules designed
to provide flexibility to issuers to reduce their compliance costs. At
the same time, our final rules retain the requirements from our
proposed rules that create the disclosure regime mandated by Congress
by means of Exchange Act reporting requirements. We discuss our
revisions with respect to each proposed rule amendment in more detail
throughout this release.
D. Summary of Changes to the Final Rule
We are adopting a three-step process, as proposed, but some of the
mechanisms within the three steps have been modified in response to
comments. We recognize that the final rule will impose significant
compliance costs on companies who use or supply conflict minerals, and
in modifying the rule we tried to reduce the burden of compliance in
areas in which we have discretion while remaining faithful to the
language and intent of the Conflict Minerals Statutory Provision that
Congress adopted. A flowchart presenting a general overview of the
conflict minerals rule that we are adopting is included following the
end of this section. The chart is intended merely as a guide, however,
and issuers should refer to the rule text and the preamble's more
complete narrative description for the requirements of the rule.
The first step continues to be for an issuer to determine whether
it is subject to the requirements of the Conflict Minerals Statutory
Provision. Pursuant to the Conflict Minerals Statutory Provision, the
Commission is required to promulgate regulations requiring certain
conflict minerals disclosures by any ``person described,'' which, under
the Conflict Minerals Statutory Provision, includes one for whom
``conflict minerals are necessary to the functionality or production of
a product manufactured by such person''.\49\ As in our proposal, under
the final rule this includes issuers whose conflict minerals are
necessary to the functionality or production of a product manufactured
or contracted by that issuer to be manufactured.\50\ If an issuer does
not meet this definition, the issuer is not required to take any
action, make any disclosures, or submit any reports under the final
rule. If, however, an issuer meets this definition, that issuer moves
to the second step.
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\49\ Exchange Act Section 13(p)(2).
\50\ See Exchange Act Section 13(p)(1)(ii) (requiring a person
described to include a description of certain of the person's
products that were manufactured by the person, or were contracted by
the person to be manufactured).
---------------------------------------------------------------------------
In the final rule, some aspects of the first step differ from the
proposed rules based on comments we received. Consistent with the
proposal, the final rule does not define the phrases ``contract to
manufacture,'' ``necessary to the functionality'' of a product, and
``necessary to the production'' of a product. In response to comments,
however, we provide additional guidance for issuers to consider
regarding whether those phrases apply to them.\51\ The guidance states
that whether an issuer will be considered to ``contract to
manufacture'' a product depends on the degree of influence it exercises
over the materials, parts, ingredients, or components to be included in
any product that contains conflict minerals or their derivatives. An
issuer will not be considered to ``contract to manufacture'' a product
if it does no more than take the following actions: (1) The issuer
specifies or negotiates contractual terms with a manufacturer that do
not directly relate to the manufacturing of the product (unless it
specifies or negotiates taking these actions so as to exercise a degree
of influence over the manufacturing of the product that is practically
equivalent to contracting on terms that directly relate to the
manufacturing of the product); (2) the issuer affixes its brand, marks,
logo, or label to a generic product manufactured by a third party; or
(3) the issuer services, maintains, or repairs a product manufactured
by a third party.
---------------------------------------------------------------------------
\51\ In the Proposing Release, although we did not provide
guidance for the other phrases, we provided some guidance for the
phrase ``necessary to the production'' of a product. As discussed
below, we are revising the guidance for this phrase.
---------------------------------------------------------------------------
Similarly, the determination of whether a conflict mineral is
deemed ``necessary to the functionality'' or ``necessary to the
production'' of a product depends on the issuer's particular facts and
circumstances, as discussed in more detail below. But to assist issuers
in making their determination, we provide guidance for issuers. In
determining whether a conflict mineral is ``necessary to the
functionality'' of a product, an issuer should consider: (1) Whether
the conflict mineral is intentionally added to the product or any
component of the product and is not a naturally-occurring by-product;
(2) whether the conflict mineral is necessary to the product's
generally expected function, use, or purpose; and (3) if conflict
mineral is incorporated for purposes of ornamentation, decoration or
embellishment, whether the primary purpose of the product is
ornamentation or decoration.
In determining whether a conflict mineral is ``necessary to the
production'' of a product, an issuer should consider: (1) Whether the
conflict mineral is intentionally included in the product's production
process, other than if it is included in a tool, machine, or equipment
used to produce the product (such as computers or power lines); (2)
whether the conflict mineral is included in the product; and (3)
whether the conflict mineral is necessary to produce the product. In
this regard, we are modifying our guidance from the proposal such that,
for a conflict mineral to be considered ``necessary to the production''
of a product, the mineral must be both contained in the product and
necessary to the product's production. We do not consider a conflict
mineral ``necessary to the production'' of a product if the conflict
mineral is used as a catalyst, or
[[Page 56280]]
in a similar manner in another process, that is necessary to produce
the product but is not contained in that product.
Further, in a change from the proposal and in response to comments
suggesting that including mining would expand the statutory mandate,
the final rule does not treat an issuer that mines conflict minerals as
manufacturing those minerals unless the issuer also engages in
manufacturing. Additionally, the final rule exempts any conflict
minerals that are ``outside the supply chain'' prior to January 31,
2013. Under the final rule, conflict minerals are ``outside the supply
chain'' if they have been smelted or fully refined or, if they have not
been smelted or fully refined, they are outside the Covered Countries.
In response to comments, the final rule allows issuers that obtain
control over a company that manufactures or contracts for the
manufacturing of products with necessary conflict minerals that
previously had not been obligated to provide a specialized disclosure
report for those minerals to delay reporting on the acquired company's
products until the end of the first reporting calendar year that begins
no sooner than eight months after the effective date of the
acquisition.
As suggested by commentators, the final rule modifies the proposal
as to the location, timing, and status of any conflict minerals
disclosures and any Conflict Minerals Report. The final rule requires
an issuer to provide the conflict minerals disclosures that would have
been in the body of the annual report in the body of a new specialized
disclosure report on a new form, Form SD. An issuer required to provide
a Conflict Minerals Report will provide that report as an exhibit to
the specialized disclosure report. Additionally, based on comments that
it will reduce the burdens on supply chain participants, the final rule
requires that the conflict minerals information in the specialized
disclosure report and/or in the Conflict Minerals Report cover the
calendar year from January 1 to December 31 regardless of the issuer's
fiscal year end, and the specialized disclosure report covering the
prior year must be provided each year by May 31. Further, in a change
from the proposal, urged by multiple commentators, the final rule
requires Form SD, including the conflict minerals information therein
and any Conflict Minerals Report submitted as an exhibit to the form,
to be ``filed'' under the Exchange Act and thereby subject to potential
Exchange Act Section 18 liability. The proposal would have required the
information to be ``furnished.''
The second step continues to require an issuer to conduct a
reasonable country of origin inquiry regarding the origin of its
conflict minerals. Consistent with the proposal, and the position of
certain commentators,\52\ the final rule does not prescribe the actions
for a reasonable country of origin inquiry that are required, as the
required inquiry depends on each issuer's facts and circumstances.
However, in a change from the proposed rules, to clarify the scope of
the required inquiry as requested by certain other commentators,\53\
the final rule provides general standards applicable to the inquiry.
Specifically, the final rule provides that, to satisfy the reasonable
country of origin inquiry requirement, an issuer must conduct an
inquiry regarding the origin of its conflict minerals that is
reasonably designed to determine whether any of its conflict minerals
originated in the Covered Countries or are from recycled or scrap
sources, and must perform the inquiry in good faith. The final rule
requires an issuer that determines that its conflict minerals did not
originate in the Covered Countries or did come from recycled or scrap
sources to disclose in its specialized disclosure report its
determination and in its specialized disclosure report briefly describe
the reasonable country of origin inquiry it used in reaching the
determination and the results of the inquiry. The requirement for an
issuer to briefly describe its inquiry and the results of the inquiry
is a change from the disclosure required in the proposed rules.
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\52\ Some commentators agreed that, to allow for greater
flexibility, the reasonable country of origin inquiry standard
should either not be defined or that only general guidance should be
provided. See, e.g., letters from Apparel & Footwear Association
(Mar. 2, 2011) (``AAFA''); AngloGold; ArcelorMittal (Oct. 31, 2011)
(``ArcelorMittal''); Industry Group Coalition I; IPC I; Information
Technology Industry Council (Feb. 24, 2011) (``ITIC I'');
International Precious Metals Institute (Jan. 19, 2011) (``IPMI
I''); Jewelers Vigilance Committee, American Gem Society,
Manufacturing Jewelers & Suppliers of America, Jewelers of America,
and Fashion Jewelry & Accessories Trade Association (Mar. 2, 2011)
(``JVC et al. II''); NAM I, Retail Industry Leaders Association and
Consumer Electronics Retailers Coalition (Mar. 2, 2011) (``RILA-
CERC''); Semiconductor Industry Association (Mar. 2, 2011)
(``Semiconductor''); SIF I; TriQuint Semiconductor, Inc. (Jan. 26,
2011) (``TriQuint I''); and WGC II.
\53\ Some commentators argued that either the reasonable country
of origin inquiry standard should be defined or that there should
specific guidance regarding the standard. See, e.g., letters from
Business Roundtable (Mar. 2, 2011) (``Roundtable''), CRS I,
Department of State (Mar. 24, 2011) (``State II''), EARTHWORKS' No
Dirty Gold Campaign (Mar. 2, 2011) (``Earthworks''), Enough Project
I, Ethical Metalsmiths (Feb. 28, 2011) (``Metalsmiths''), General
Board of Church and Society of the United Methodist Church (Apr. 19,
2012) (``Methodist Board''), Global Witness (Feb. 28, 2011)
(``Global Witness I''), Howland Greene Consultants LLC (Jan. 28,
2011) (``Howland''), International Conference of the Great Lakes
Region (Jan. 31, 2011) (``ICGLR''), National Association of
Evangelicals (Feb. 17, 2012) (``Evangelicals''), New York City Bar
Association (Jan. 31, 2011) (``NYCBar I''), New York City Bar
Association (Feb. 8, 2012) (``NYCBar II''), Personal Care Products
Council (Mar. 1, 2011) (``PCP''), Presbyterian Church USA (Feb. 23,
2012) (``Presbyterian Church II''), Semiconductor Equipment and
Materials International (Feb. 15, 2011) (``SEMI''), Sen. Durbin/Rep.
McDermott, Tantalum-Niobium International Study Center (Jan. 27,
2011) (``TIC''), Twenty-four organizations of the Multi-Stakeholder
Group (Mar. 2, 2011) (``MSG I''), and World Evangelical Alliance
(Feb. 17, 2012) (``Evangelical Alliance'').
---------------------------------------------------------------------------
Also, in a change from the proposal, the final rule modifies the
trigger for determining whether or not an issuer is required to proceed
to step three under the rule. The proposed rules would have required an
issuer to conduct due diligence on the source and chain of custody of
its conflict minerals and provide a Conflict Minerals Report if, based
on its reasonable country of origin inquiry, it determined that its
conflict minerals originated in the Covered Countries or was unable to
determine that its conflict minerals did not originate in the Covered
Countries, or if its conflict minerals came from recycled or scrap
sources. Under the final rule, an issuer must exercise due diligence on
the source and chain of custody of its conflict minerals and provide a
Conflict Minerals Report if, based on its reasonable country of origin
inquiry, the issuer knows that it has necessary conflict minerals that
originated in the Covered Countries and did not come from recycled or
scrap sources, or if the issuer has reason to believe that its
necessary conflict minerals may have originated in the Covered
Countries and may not have come from recycled or scrap sources.
As an exception to this requirement, however, an issuer that must
conduct due diligence because, based on its reasonable country of
origin inquiry, it has reason to believe that its necessary conflict
minerals may have originated in the Covered Countries and may not have
come from recycled or scrap sources is not required to submit a
Conflict Minerals Report if, during the exercise of its due diligence,
it determines that its conflict minerals did not, in fact, originate in
the Covered Countries, or it determines that its conflict minerals did,
in fact, come from recycled or scrap sources. Such an issuer is still
required to submit a specialized disclosure report disclosing its
determination and briefly describing its inquiry and its due diligence
efforts and the results of that inquiry and due diligence efforts,
which should demonstrate why the issuer believes that the conflict
minerals did not originate in the Covered Countries
[[Page 56281]]
or that they did come from recycled or scrap sources. On the other
hand, if, based on its reasonable country of origin inquiry, an issuer
has no reason to believe that its conflict minerals may have originated
in the Covered Countries, or, based on its reasonable country of origin
inquiry, an issuer reasonably believes that its conflict minerals are
from recycled or scrap sources, the issuer is not required to move to
step three. In another change from the proposal, the final rule does
not require an issuer to retain reviewable business records to support
its reasonable country of origin conclusion, although maintenance of
appropriate records may be useful in demonstrating compliance with the
final rule, and may be required by any nationally or internationally
recognized due diligence framework applied by an issuer.
As noted above, if the issuer knows that it has necessary conflict
minerals that originated in the Covered Countries, or if the issuer has
reason to believe that its necessary conflict minerals may have
originated in the Covered Countries and may not have come from recycled
or scrap sources, the issuer must move to the third step. The third
step, consistent with the proposal, requires such an issuer to exercise
due diligence on the source and chain of custody of its conflict
minerals and provide a Conflict Minerals Report describing its due
diligence measures, among other matters. As noted above, however, the
final rule requires an issuer to provide its Conflict Minerals Report
as an exhibit to its specialized disclosure report on Form SD, instead
of as an exhibit to its annual report on Form 10-K, Form 20-F, or Form
40-F, as proposed.
Generally, the content of the Conflict Minerals Report is
substantially similar to the proposal. One modification from the
proposal, based on comments we received, is that the final rule
requires an issuer to use a nationally or internationally recognized
due diligence framework, if such a framework is available for the
specific conflict mineral. We are persuaded by commentators that doing
so will enhance the quality of an issuer's due diligence, promote
comparability of the Conflict Minerals Reports of different issuers,
and provide a framework by which auditors can assess an issuer's due
diligence.\54\ This requirement should make the rule more workable and
less costly than if no framework was specified. Presently, it appears
that the only nationally or internationally recognized due diligence
framework available is the due diligence guidance approved by the
Organisation for Economic Co-operation and Development (``OECD'').\55\
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\54\ The proposed rules would not have required the use of a
particular due diligence framework, but the Proposing Release
indicated that an issuer whose conduct conformed to a nationally or
internationally recognized set of standards of, or guidance for, due
diligence regarding its conflict minerals supply chain would provide
evidence that the issuer used due diligence in its Conflict Minerals
Report.
\55\ See OECD, OECD Due Diligence Guidance for Responsible
Supply Chains of Minerals from Conflict-Affected and High-Risk Areas
(2011), available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
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As proposed, the final rule requires an independent private sector
audit of an issuer's Conflict Minerals Report. However, in response to
comments, we modified the proposal such that the final rule specifies
an audit objective. The audit's objective is to express an opinion or
conclusion as to whether the design of the issuer's due diligence
measures as set forth in the Conflict Minerals Report, with respect to
the period covered by the report, is in conformity with, in all
material respects, the criteria set forth in the nationally or
internationally recognized due diligence framework used by the issuer,
and whether the issuer's description of the due diligence measures it
performed as set forth in the Conflict Minerals Report, with respect to
the period covered by the report, is consistent with the due diligence
process that the issuer undertook. Also, consistent with the proposal,
the final rule refers to the audit standards established by the GAO.
The GAO staff has indicated to our staff that the GAO does not intend
to establish new standards for the Conflict Minerals Report audit.
Instead, the GAO plans to look to its existing Government Auditing
Standards (``GAGAS''), which is commonly referred to as ``the Yellow
Book.''\56\
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\56\ See U.S. Gov't Accountability Office, GAO-12-331G,
Government Auditing Standards 2011 Revision (Dec. 2011), available
at http://www.gao.gov/assets/590/587281.pdf.
---------------------------------------------------------------------------
Unlike the proposed rule, which would have required descriptions in
the Conflict Minerals Report of an issuer's products that ``are not
`DRC conflict free,''' where ``DRC conflict free'' means that they ``do
not contain minerals that directly or indirectly finance or benefit
armed groups in the'' Covered Countries, the final rule requires
descriptions in the Conflict Minerals Report of an issuer's products
``that have not been found to be `DRC conflict free.''' We believe this
change will lead to more accurate disclosure.
As suggested by a number of commentators, the final rule also
modifies the proposal by providing a temporary transition period for
two years for all issuers and four years for smaller reporting
companies.\57\ During this period, issuers may describe their products
as ``DRC conflict undeterminable'' if they are unable to determine that
their minerals meet the statutory definition of ``DRC conflict free''
for either of two reasons: First, they proceeded to step three based
upon the conclusion, after their reasonable country of origin inquiry,
that they had conflict minerals that originated in the Covered
Countries and, after the exercise of due diligence, they are unable to
determine if their conflict minerals financed or benefited armed groups
in the Covered Countries; or second, they proceeded to step three based
upon the conclusion, after their reasonable country of origin inquiry,
that they had a reason to believe that their necessary conflict
minerals may have originated in the Covered Countries and may not have
come from recycled or scrap sources and the information they gathered
as a result of their subsequently required exercise of due diligence
failed to clarify the conflict minerals' country of origin, whether the
conflict minerals financed or benefited armed groups in those
countries, or whether the conflict minerals came from recycled or scrap
sources. These issuers will have already conducted a reasonable country
of origin inquiry, and their undeterminable status would be based on
the information they were able to gather from their exercise of due
diligence. However, if these products also contain conflict minerals
that the issuer knows directly or indirectly financed or benefited
armed groups in the Covered Countries, the issuer may not describe
those products as ``DRC conflict undeterminable.'' Also, during the
transition period, issuers with products that may be described as ``DRC
conflict undeterminable'' are not required to have their Conflict
Minerals Report audited. Such issuers, however, must still file a
Conflict Minerals Report describing their due diligence, and must
additionally describe the steps they have taken or will take, if any,
since the end of the period covered in their most recent prior Conflict
Minerals Report, to mitigate the risk that their necessary conflict
minerals benefit armed groups,
[[Page 56282]]
including any steps to improve their due diligence.
---------------------------------------------------------------------------
\57\ ``Smaller reporting company'' is defined in Rule 12b-2 [17
CFR 240.12b-2] under the Exchange Act.
---------------------------------------------------------------------------
This temporary provision will apply for the first two reporting
calendar years after effectiveness of the final rule for all issuers
that are not smaller reporting companies, and for the first four
reporting calendar years after effectiveness of the final rule for
smaller reporting companies. We believe it is appropriate to allow a
two-year temporary period, in recognition that, as commentators noted,
the processes for tracing conflict minerals through the supply chain
must develop further to make such determinations for the issuer
community at large. Also, we believe it is appropriate to allow an
additional two years to this temporary period for smaller reporting
companies because, as commentators noted, smaller companies may face
disproportionally higher burdens than larger companies and a longer
temporary period may help alleviate some of those burdens. After the
four-year period for smaller reporting companies and two-year period
for all other issuers, issuers that have proceeded to step three but
are unable to determine that their conflict minerals did not originate
in the Covered Countries or are unable to determine that their conflict
minerals that originated in the Covered Countries did not directly or
indirectly finance or benefit armed groups must describe their products
containing those conflict minerals as not having been found to be ``DRC
conflict free.''
Unlike the proposed rules, the final rule requires issuers with
necessary conflict minerals exercising due diligence regarding whether
their conflict minerals are from recycled or scrap sources to conform
the due diligence to a nationally or internationally recognized due
diligence framework, if one is available for a particular recycled or
scrap conflict mineral. A gold supplement to the OECD's due diligence
guidance has been approved by the OECD.\58\ This gold supplement is
presently the only nationally or internationally recognized due
diligence framework for any conflict mineral from recycled or scrap
sources of which we are aware. Therefore, we anticipate that issuers
will use the OECD gold supplement to conduct their due diligence for
recycled or scrap gold. We are not aware that the OECD or any other
body has a similar recycled or scrap due diligence framework for the
other conflict minerals. Issuers with conflict minerals without a
nationally or internationally recognized due diligence framework are
still required to exercise due diligence in determining that their
conflict minerals were from recycled or scrap sources. The due
diligence that must be exercised regarding such conflict minerals
focuses only on whether those conflict minerals are from recycled or
scrap sources. In such circumstances where a nationally or
internationally recognized due diligence framework becomes available
for any such conflict mineral, issuers will be required to utilize that
framework in exercising due diligence to determine that conflict
minerals are from recycled or scrap sources.
---------------------------------------------------------------------------
\58\ See OECD, Due Diligence Guidance for Responsible Supply
Chains of Minerals from Conflict-Affected and High-Risk Areas:
Supplement on Gold (2012), available at http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.
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E. Flowchart Summary of the Final Rule
BILLING CODE 8011-01-P
[[Page 56283]]
[GRAPHIC] [TIFF OMITTED] TR12SE12.000
BILLING CODE 8011-01-C
II. Discussion of the Final Rule
A. ``Conflict Minerals'' Definition
1. Proposed Rules
The Conflict Minerals Statutory Provision defines the term
``conflict mineral'' as cassiterite, columbite-tantalite, gold,
wolframite, or their derivatives, or any other minerals or their
derivatives determined by the Secretary of State to be financing
conflict in the Covered Countries.\59\ We used the same definition of
this term in the proposed rules. As we discussed in the Proposing
Release, cassiterite is the metal ore that is most commonly used to
produce tin, which is used in alloys, tin plating, and solders for
joining pipes and electronic circuits.\60\ Columbite-tantalite is the
metal ore from which tantalum is extracted. Tantalum is used in
electronic components, including mobile telephones, computers,
videogame consoles, and digital cameras, and as an alloy for making
carbide tools and jet engine components.\61\ Gold is used for making
jewelry and is used in electronic, communications, and aerospace
equipment.\62\ Finally, wolframite is the metal ore that is used to
produce
[[Page 56284]]
tungsten, which is used for metal wires, electrodes, and contacts in
lighting, electronic, electrical, heating, and welding
applications.\63\ Based on the many uses of these minerals, we expect
the Conflict Minerals Statutory Provision to apply to many companies
and industries and, thereby, the final rule to apply to many issuers.
---------------------------------------------------------------------------
\59\ Section 1502(e)(4) of the Act. Presently, the Secretary of
State has not designated any other mineral as a conflict mineral.
Therefore, the conflict minerals include only cassiterite,
columbite-tantalite, gold, wolframite, or their derivatives.
\60\ Tin Statistics and Information, U.S. Geological Survey,
available at http://minerals.usgs.gov/minerals/pubs/commodity/tin/.
\61\ Niobium (Columbium) and Tantalum Statistics and
Information, U.S. Geological Survey, available at http://minerals.usgs.gov/minerals/pubs/commodity/niobium.
\62\ Gold Statistics and Information, U.S. Geological Survey,
available at http://minerals.usgs.gov/minerals/pubs/commodity/gold.
\63\ Tungsten Statistics and Information, U.S. Geological
Survey, available at http://minerals.usgs.gov/minerals/pubs/commodity/tungsten.
---------------------------------------------------------------------------
2. Comments on the Proposed Rules
Several commentators requested that the final rule set forth the
specific conflict derivatives that would trigger the rule's disclosure
and reporting obligations.\64\ Many of these commentators recommended
that the final rule limit the derivatives of columbite-tantalite,
cassiterite, and wolframite to tantalum, tin, and tungsten,
respectively,\65\ unless the State Department determines subsequently
that additional specific minerals or their derivatives are financing or
benefitting armed groups.\66\ One of these commentators pointed out
that such a limit is appropriate because, although conflict minerals
have other derivatives, tantalum, tin, and tungsten are the only
economically significant derivatives of the conflict minerals.\67\ For
example, one commentator noted that oxygen and iron are derivatives of
wolframite that could be subject to the final rule, but wolframite is
not currently a significant commercial source for oxygen or iron.\68\
Another commentator noted that niobium is a derivative of columbite-
tantalite that, absent clarification to the contrary, could be subject
to the final rule as well.\69\ Some commentators, however, asserted
that the final rule should not solely be limited to tantalum, tin,
tungsten, or gold.\70\
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\64\ See, e.g., letters from American AAFA, Global Tungsten &
Powders Corp. (Mar. 1, 2011) (``Global Tungsten I''), Industry Group
Coalition I, IPC I, IPC--Association Connecting Electronics
Industries (Nov. 1, 2011) (``IPC II''), Materion Corporation (Nov.
1, 2011) (``Materion''), National Retail Federation (Nov. 1, 2011)
(``NRF II''), PCP, Robert W. Row (Jan. 18, 2011) (``Row''), SEMI,
and Society of the Plastics Industry Inc. (Nov. 9, 2011) (``SPI'').
\65\ Gold is produced in its metallic form and has no
derivatives.
\66\ See, e.g., letters from AAFA, IPC II, NRF II, PCP, and SPI.
\67\ See letters from IPC II and NRF II. See also Transcript of
SEC Roundtable, Section 0039 Lines 9-10 (``MR. MATHESON: The
economic interest is in the three Ts plus gold.'').
\68\ See letter from SEMI.
\69\ See letter from Row.
\70\ See, e.g., letters from BC Investment Management
Corporation (Mar. 28, 2011) (``BCIMC'') and Save the Congo (Nov. 1,
2011) (``Save'').
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One commentator recommended that the definition of ``conflict
mineral'' not include organic metal compounds formed from a conflict
mineral metal derivative, such as tin and tungsten, because these
substances are no longer metals or alloys and ``use of these chemical
compounds is too attenuated from the original source of the mineral.''
\71\ According to the commentator, these organometallic compounds,
which include catalysts, stabilizers, and polymerization aids, are
commodity chemicals used in the production of raw materials such as
silicones, polyurethanes, vinyls, and polyesters. For example, the
commentator noted that tin is used in a reaction with chlorine gas,
after which the intermediate tin tetrachloride compound undergoes
further chemical reactions with any number of organic substrates to
produce an organotin compound with the final compounds becoming
substances such as stannous octoate, monobutyl tin trichloride, and
dioctyltin dilaurate. These substances contain tin but have several
organic groups chemically bound to the tin nucleus and are compounds
that are materially and chemically distinct from metallic tin.
According to the commentator, the use of organotin in many
manufacturing sectors has not yet been recognized by manufacturers,
supply chains, or regulators, which may increase costs of the final
rule if organic tin compounds are included in the definition of
``conflict minerals.''
---------------------------------------------------------------------------
\71\ See letter from SPI.
---------------------------------------------------------------------------
In addition, a number of commentators recommended that the final
rule selectively use the term ``conflict mineral'' because not doing so
would unfairly stigmatize the four minerals and unjustifiably hurt some
companies' reputations.\72\ These commentators noted that the term
``conflict mineral'' in the proposed rules provides no clear
distinction between the four named minerals and their derivatives that
did not benefit or finance armed groups, and those that did finance or
benefit armed groups. Specifically, one of these commentators noted,
``refer[ring] to all cassiterite, wolframite, gold, and tantalum in the
world, regardless of its origin and relationship to conflict actors''
as ``conflict minerals,'' imposes ``a reputational taint on these
entire industries,'' and ``makes it highly challenging for companies in
these industries to communicate effectively with investors and the
public.'' \73\ Commentators suggested that we limit the final rule's
definition of ``conflict minerals'' only to minerals that financed or
benefited armed groups and that the final rule use another name to
describe minerals that did not finance or benefit armed groups, such as
``potential conflict minerals,'' ``suspect conflict minerals,''
``subject minerals,'' or ``covered minerals.'' \74\ Additionally, for
the same reasons, some commentators indicated that the final rule
should change the names of the required headings from ``Conflict
Minerals Disclosure'' to ``Country of Origin Disclosure'' and change
the name of the Conflict Minerals Report to ``Report on Minerals
Sourced from Central Africa.'' \75\
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\72\ See, e.g., letters from Advanced Medical Technology
Association (Feb. 28, 2011) (``AdvaMed I''), Barrick Gold
Corporation (Feb. 28, 2011) (``Barrick Gold''), Cleary Gottlieb
Steen & Hamilton LLP (Mar. 2, 2011) (``Cleary Gottlieb''), Global
Tungsten I, JVC et al. II, Malaysia Smelting Corporation (Jan. 26,
2011) (``MSC I''), National Association of Manufacturers (Nov. 1,
2011) (``NAM III''), Niotan Inc. (Jan. 30, 2011) (``Niotan I''),
Niotan Inc. (Mar. 21, 2011) (``Niotan II''), National Mining
Association (Mar. 2, 2011) (``NMA II''), SEMI, Tanzania I, TIC, and
WGC II. See also MJB Consulting (Apr. 28, 2011) (``MJB I'') (arguing
that the Conflict Minerals Statutory Provision is unclear as to
whether the definition of ``conflict minerals'' refers to columbite-
tantalite (coltan), cassiterite, gold, wolframite, or their
derivatives, per se, originating from the Covered Countries, or
columbite-tantalite (coltan), cassiterite, gold, wolframite, or
their derivatives originating from the Covered Countries and that do
not directly or indirectly finance or benefit armed groups in the
Covered Countries).
\73\ See letter from Niotan II.
\74\ See letters from Cleary Gottlieb, Niotan II, SEMI, and TIC.
\75\ See letters from Barrick Gold and Niotan I.
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3. Final Rule
After considering the comments, we are revising the proposal in the
final rule. We are clarifying our position as to which derivatives are
conflict minerals, which appears consistent with the views of various
stakeholders,\76\
[[Page 56285]]
including at least one co-sponsor of the legislation and other members
of Congress.\77\ As a commentator suggested, our failure in the
proposal to specify the 3T derivatives (tantalum, tin, and tungsten,
which are known as the ``3Ts'') would have introduced too much
ambiguity in our rule,\78\ which would have expanded the Conflict
Mineral Provision's reach, cost, and complexity without increasing its
effectiveness.\79\ The term ``conflict mineral'' in the final rule is
defined to include cassiterite, columbite-tantalite, gold, wolframite,
and their derivatives, which are limited to the 3Ts, unless the
Secretary of State determines that additional derivatives are financing
conflict in the Covered Countries, in which case they are also
considered ``conflict minerals;'' or any other minerals or their
derivatives determined by the Secretary of State to be financing
conflict in the Covered Countries.
---------------------------------------------------------------------------
\76\ See, e.g., letter from H.E. Ambassador Liberata Mulamula,
International Conference on the Great Lakes Region, Angel
Gurr[iacute]a, Secretary-General, Organisation for Economic Co-
operation and Development, and Fred Robarts, Coordinator, United
Nations Group of Experts on the Democratic Republic of the Congo
(Jul. 29, 2011) (``OECD I'') (``We consider that the OECD and UN GoE
due diligence recommendations, as integrated into the framework of
the ICGLR Regional Initiative against the Illegal Exploitation of
Natural Resources and the Regional Certification Mechanism, can be
used by persons subject to Section 1502 of the Dodd-Frank Act
(``issuers'') to reliably determine whether the tin, tantalum,
tungsten or gold in their products originate from the DRC or
adjoining countries, and if so, to determine the facilities used to
process those minerals, the country of origin, and the mine or
location of origin with the greatest possible specificity, and
describe the products manufactured or contracted to be manufactured
that are not DRC conflict free.''); OECD, Due Diligence Guidance for
Responsible Supply Chains of Minerals from Conflict-Affected and
High-Risk Areas, 12 (2011), available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf (discussing due diligence as a basis for responsible
global supply chain management of ``tin, tantalum, tungsten, their
ores and mineral derivates, and gold''); Final Report of the United
Nations Group of Experts on the Democratic Republic of the Congo,
Nov. 29, 2010 [S/2010/596] (stating that relevant individuals and
entities should establish effective systems of control and
transparency over the mineral supply chain, the nature of which will
vary according to the mineral being traded, with the gold supply
chain exhibiting characteristics different to those for tin,
tantalum, and tungsten, and according to the position of the
individual or entity in the supply chain); Enough Project, From Mine
to Mobile Phone: The Conflict Minerals Supply Chain (Nov. 10, 2009)
available at http://www.enoughproject.org/files/publications/minetomobile.pdf (indicating its desire to increase transparency in
the supply chains for tin, tantalum, and tungsten, or the 3Ts, as
well as gold, which are key elements of electronics products
including cell phones and personal computers and are the principal
source of revenue for armed groups and military units that prey on
civilians in eastern Congo, and the 3Ts are produced from mineral
ores, including tin from cassiterite, tungsten from wolframite, and
tantalum from columbite-tantalite, known throughout Congo as
coltan); and Global Witness, Do No Harm: Excluding conflict minerals
from the supply chain, 2 (July 2010), available at http://www.globalwitness.org/sites/default/files/pdfs/do_no_harm_global_witness.pdf (stating that ``the warring parties [in the DRC]
finance themselves via control of most of the mines in [eastern DRC]
that produce tin, tantalum and tungsten ores and gold''). See also
State Department, Statement Concerning Implementation of Section
1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due
Diligence, 1 (July 15, 2011), available at http://www.state.gov/documents/organization/168851.pdf (noting that the State Department
``is undertaking a number of actions to address the problem of
conflict minerals--or the exploitation and trade of gold, columbite-
tantalite (coltan), cassiterite (tin), wolframite (tungsten), or
their derivatives--sourced from the eastern'' DRC that have ``helped
to fuel the conflict in the eastern DRC'').
\77\ See letters from Representative Mark E. Amodei (Dec. 20,
2011) (``Rep. Amodei'') (referring to ``tungsten''); Representatives
Howard L. Berman, Donald M. Payne, and Christopher H. Smith (Nov. 8,
2010) (Pre-Proposing Release Web site) (``Rep. Berman et al. pre-
proposing'') (``Section 1502 was designed to limit the ability of
armed groups in the Democratic Republic of Congo (DRC) to profit
from the illicit mining of tin ore, coltan, gold, and other mineral
resources that eventually end up in computers, cell phones, and
other products.''); Representatives Howard L. Berman, Donald M.
Payne, Jim McDermott, Karen Bass, and Barney Frank (Sep. 23, 2011)
(``Rep. Berman et al.''); Representative Renee L. Ellmers (Dec. 13,
2011) (``Rep. Ellmers'') (referring to ``tungsten''); Rep. Lee
(referring to gold, tin, tantalum, and tungsten as ``conflict
minerals,'' by stating that ``[f]or years, minerals such as gold and
other raw materials commonly used to produce tin, tantalum, and
tungsten have been mined and sold illegally by rebel groups in parts
of the Democratic Republic of the Congo (DRC) and neighboring
countries,'' and that ``[t]hese `conflict minerals' have fueled
decades of fighting in central Africa.''); Representative Tim Murphy
(Dec. 29, 2011) (``Rep. Murphy'') (referring to ``tungsten''); and
Senator Barbara Boxer, Senator John Boozman, Senator Christopher A.
Coons, Senator Patrick J. Leahy, Senator Frank R. Lautenberg, and
Senator Jeff Merkley (Oct. 18, 201) (``Sen. Boxer et al. I'') (``The
purpose of Sec. 1502 is to create transparency and accountability in
the mineral supply chain in the DRC. Minerals from the DRC--which
include tin, tantalum, tungsten and gold--are commonly used in
products such as cellphones, laptops and jewelry.'').
\78\ See letter from SEMI.
\79\ See letters from IPC II and NRF II.
---------------------------------------------------------------------------
Additionally, despite the suggestion by certain commentators that
we limit the definition of the term ``conflict mineral'' to minerals
that financed or benefited armed groups, the final rule continues to
use the term ``conflict mineral'' to refer to columbite-tantalite,
cassiterite, gold, wolframite, and their derivatives, and any other
mineral or its derivatives determined by the Secretary of State to be
financing conflict in the Covered Countries whether or not they
actually financed or benefited armed groups. We believe this approach
is appropriate because it is consistent with the use of that term in
the Conflict Minerals Statutory Provision and to change the definition
of the term for the final rule could cause confusion among interested
parties between the use of the term in the statutory provision and the
use of the term in the final rule. However, issuers whose conflict
minerals did not finance or benefit armed groups may describe their
products containing those minerals as ``DRC conflict free'' in their
specialized disclosure report, provided that the issuer is able to
determine on the basis of due diligence conducted in accordance with a
nationally or internationally recognized due diligence framework that
such products are ``DRC conflict free'' as defined in the final rule.
B. Step One--Issuers Covered by the Conflict Mineral Provision
1. Issuers That File Reports Under the Exchange Act
a. Proposed Rules
As we discussed in the Proposing Release, we recognize there is
some ambiguity as to whom the Conflict Minerals Statutory Provision
applies given that the provision states that the Commission shall
promulgate regulations for any ``person described'' \80\ and that a
``person is described'' if ``conflict minerals are necessary to the
functionality or production of a product manufactured by such person.''
\81\ Therefore, the Conflict Minerals Statutory Provision could be
interpreted to apply to a wide range of private companies not
previously subject to our disclosure and reporting rules. Given the
provision's legislative background, its statutory location, and the
absence of Congressional direction to apply the provision to companies
not previously subject to those rules,\82\ however, we believe the more
appropriate interpretation is that the rules apply only to issuers that
file reports with the Commission under Section 13(a) or Section 15(d)
of the Exchange Act, and that is what we proposed.\83\ Also, consistent
with the statutory language, our proposed rules would have applied
equally to domestic companies, foreign private issuers, and smaller
reporting companies.
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\80\ See Exchange Act Section 13(p)(1)(A).
\81\ See Exchange Act Section 13(p)(2)(B).
\82\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of
the Committee of Conference, Title XV, ``Conflict Minerals,'' at 879
(Conf. Rep.) (June 29, 2010) (``The conference report requires
disclosure to the SEC by all persons otherwise required to file with
the SEC for whom minerals originating in the Democratic Republic of
Congo and adjoining countries are necessary to the functionality or
production of a product manufactured by such person.'').
\83\ Exchange Act Section 13(a) requires issuers with classes of
securities registered under Exchange Act Section 12 [15 U.S.C. 78l]
to file periodic and other reports. See 15 U.S.C. 78m. Exchange Act
Section 15(d) requires issuers with effective registration
statements under the Securities Act of 1933 (the ``Securities Act'')
to file reports similar to Exchange Act Section 13(a) for the fiscal
year within which such registration statement became effective. See
15 U.S.C. 78n. Therefore, if our proposed rules did not include
issuers required to file reports under Exchange Act Section 15(d),
some issuers who file annual reports may not otherwise be required
to comply with our proposed conflict minerals rules.
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[[Page 56286]]
b. Comments on the Proposed Rules
i. Issuers That File Reports Under Sections 13(a) and 15(d) of the
Exchange Act
Many commentators addressing the issue agreed with the proposal
that the final rule should apply to issuers that file reports under
Sections 13(a) and 15(d) of the Exchange Act and not to private
companies or individuals.\84\ Some of these and other commentators
acknowledged, however, that not including individuals and private
companies in the final rule could unfairly burden Sections 13(a) and
15(d) issuers and put them at a competitive disadvantage by increasing
their costs.\85\ On the other hand, some of these commentators noted
that not including private companies and individuals in the final rule
may not unduly burden Sections 13(a) and 15(d) issuers because the
commercial pressure on private companies by issuers that need this
information for their reports and by the public in general demanding
that issuers make this information available could be sufficient enough
for the private companies to provide voluntarily their conflict
minerals information as standard practice.\86\ Another commentator
argued that the effects of the final rule on competition ``are likely
to be benign.'' \87\ This commentator asserted that ``conflict minerals
disclosure costs will not increase the cost of being a publicly traded
company by a significant percentage'' and that being able to declare a
company's products as ``DRC conflict free'' could become a competitive
advantage.\88\ Further, in response to our request for comment in the
Proposing Release, all four commentators that discussed the issue
agreed that an issuer with a class of securities exempt from Exchange
Act registration pursuant to Exchange Act Rule 12g3-2(b) \89\ should
not be subject to the final rule.\90\ One commentator recommended
``that entities with Over-The-Counter American Depository Receipts (OTC
ADRS) that file an annual report with the SEC should also be required
to file a `Conflict Minerals Disclosure' report.'' \91\
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\84\ See, e.g., letters from AngloGold; Arkema, Inc. (Mar. 1,
2011) (``Arkema''); Calvert; Cleary Gottlieb; Communications and
Information Network Association of Japan, Japan Auto Parts
Industries Association, Japan Business Machine and Information
System Industries Association, Japan Electronics and Information
Technology Industries Association, The Japan Electrical
Manufacturers' Association, Japan Machinery Center for Trade and
Investment (Mar. 2, 2011) (``Japanese Trade Associations''); CRS I;
Earthworks; Howland; IPC I; JVC et al. II; KEMET Corporation (Nov.
1, 2011) (``Kemet''); PCP; Rockefeller Financial Asset Management
(Mar. 1, 2011) (``Rockefeller''); SIF I; State II; TIC; and TriQuint
I.
\85\ See, e.g., letters from Howland, IPC I, ITIC I, NMA II,
National Retail Federation (Mar. 2, 2011) (``NRF I''); TIC; and
TriQuint I.
\86\ Letter from Howland (noting that ``private companies (non
reporters) will likely need to provide the same [conflict minerals]
information to their customers who will need the information for
their reports,'' and that providing conflict minerals information is
``likely'' to ``become a de facto standard similar to RoHS (EU
Restriction of hazardous Substances) for electronics'') and TIC
(``Further, provided that the regulations apply to large and small
issuers, they will form a critical mass which will, in practice,
create sufficient commercial pressure on private companies and
individuals who manufacture products involving potential conflict
materials. Noncompliant companies will be unable to withstand the
political and consumer pressures. Accordingly, there is no need for
the SEC to seek to expand its jurisdiction.'').
\87\ See letter from Green II.
\88\ Id.
\89\ 17 CFR 240.12g3-2(b).
\90\ See Cleary Gottlieb, JVC et al. II, New York State Bar
Association (Mar. 1, 2011) (``NY State Bar''), and SIF I.
\91\ See letter from Calvert.
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Some commentators stated that the final rule should not necessarily
require private companies to submit to us their conflict minerals
information, but the final rule should provide mechanisms that allow
private companies to report voluntarily on their conflict minerals in a
manner similar to Sections 13(a) and 15(d) issuers,\92\ which could
include working with other agencies that regulate non-reporting
companies to have those agencies require their filers to provide
similar conflict minerals information.\93\ Moreover, the State
Department commented that it would encourage private companies not
subject to the final rule to disclose voluntarily conflict minerals
information.\94\ Other commentators disagreed with the proposed rules
and indicated that the final rule should apply to more than just
issuers that file reports under Sections 13(a) and 15(d) of the
Exchange Act.\95\ A comment letter submitted jointly by two of the co-
sponsors of the legislation stated that their ``intent was for the
requirements of Section 1502 to apply to all companies that fall under
the jurisdiction of the SEC, including those who issue classes of
securities otherwise exempt from reporting.'' \96\
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\92\ See letters from Earthworks and TriQuint I.
\93\ See letter from TriQuint I.
\94\ See letter from State II.
\95\ See, e.g., letters from Catholic Charities Diocese of
Houma-Thibodaux (Apr. 21, 2011) (``Catholic Charities''),
International Corporate Accountability Roundtable and Global Witness
(Nov. 1, 2011) (``ICAR et al. II''), ITIC I, NRF I, Sen. Durbin/Rep.
McDermott, Sisters of Good Shepherd (Apr. 8, 2011) (``Good
Shepherd''), TIC, and Tiffany.
\96\ See letter from Sen. Durbin/Rep. McDermott.
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ii. Smaller Reporting Companies
Many commentators agreed that the final rule, as we proposed,
should not exempt smaller reporting companies.\97\ In this regard, one
commentator noted that, although there would be additional costs for
smaller reporting companies to comply with the rules, the increased
costs will apply also to larger companies.\98\ Another commentator
asserted that compliance costs for small issuers ``will be relatively
modest'' due to their smaller scale and lower complexity of their
businesses.\99\ One commentator did not believe that the proposed rules
would impose higher costs on smaller companies significant enough to
justify an exemption because smaller reporting companies would have
fewer products to track than a larger company, which would decrease
their compliance costs.\100\ The commentator based its belief on the
fact that, although it was a small human rights group with a modest
budget, it regularly undertakes field investigations and supply chain
research that is very similar to the due diligence measures it
recommended the Commission adopt. According to this commentator, if it
is able to perform due diligence with a small staff, so too can a
smaller reporting company.
---------------------------------------------------------------------------
\97\ See, e.g., letters from BCIMC, Calvert, CRS I, Earthworks,
Global Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen.
Durbin/Rep. McDermott, SIF I, State II, TIAA-CREF, TIC, and TriQuint
I.
\98\ See letter from Howland.
\99\ See letter from Green II. See also letter from ICAR et al.
II (stating that ``because these issuers are smaller, it stands to
reason that they will have fewer products that contain conflict
minerals, thus reducing the amount of products that must undergo a
reasonable country of origin inquiry and supply chain due
diligence'').
\100\ See letter from Global Witness I.
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Some commentators noted that exempting smaller reporting companies
from the final rule could increase the burdens on larger reporting
companies because the larger reporting companies may be less able to
require their smaller reporting company suppliers to provide the
conflict minerals information needed by the larger reporting
companies.\101\ One of these commentators noted also that permitting
limited disclosure and reporting obligations for smaller companies is
unlikely to reduce significantly their burdens because larger companies
would likely impose contractual obligations on them to track and
provide their conflict minerals information for the larger
companies.\102\
---------------------------------------------------------------------------
\101\ See, e.g., letters from IPC I and TriQuint I.
\102\ See letters from IPC I.
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Other commentators supported exempting smaller reporting companies
because these companies would be less
[[Page 56287]]
able to compel their suppliers to provide conflict minerals information
due to their lack of leverage,\103\ and because it would be more
expensive for smaller reporting companies to comply with the rule
relative to their revenues than for other companies.\104\ However, one
commentator argued that, although such issuers may lack leverage, this
disadvantage may be reduced through the influence exerted over their
suppliers by larger issuers that use the same supplier base and that
have more leverage to request such information.\105\ Some commentators
argued that smaller reporting companies should be allowed to phase-in
the rules or that the implementation date of the final rule should be
deferred for them.\106\
---------------------------------------------------------------------------
\103\ See, e.g., letters from ABA, JVC et al. II, and Society of
Corporate Secretaries and Governance Professionals (Mar. 3, 2011)
(``Corporate Secretaries I'').
\104\ See letter from Corporate Secretaries I and Howland.
\105\ See letter from Green II.
\106\ See, e.g., letters from ABA, Howland, and JVC et al. II.
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iii. Foreign Private Issuers
A number of commentators believed that the final rule should not
exempt foreign private issuers.\107\ As one commentator noted,\108\
exempting foreign private issuers from the final rule could increase
domestic issuers' burdens by making it very difficult for them to
compel their foreign private issuer suppliers to provide conflict
minerals information. As another commentator noted,\109\ exempting
foreign private issuers from the final rule could also result in a
competitive disadvantage for domestic issuers because foreign private
issuers would not be subject to the final rule. Further, this
commentator indicated that not exempting foreign private issuers could
actually motivate foreign companies to advocate for similar conflict
minerals regulations in their home jurisdictions to reduce any
competitive disadvantages they may have with companies from their
jurisdictions that do not register with us. Finally, the commentator
suggested that exempting foreign private issuers may hurt conflict
minerals supply chain transparency, which would be contrary to the
intent of Congress.
---------------------------------------------------------------------------
\107\ See, e.g., letters from AngloGold, BCIMC, Calvert, CRS I,
Earthworks, Global Witness I, Howland, JVC et al. II, NEI
Investments (Mar. 2, 2011) (``NEI''), NY State Bar, SIF I, State II,
TIAA-CREF, TriQuint I, WGC II, and WLF.
\108\ See letter from TriQuint I.
\109\ See letter from NEI.
---------------------------------------------------------------------------
Only one commentator, a foreign private issuer, stated specifically
that foreign private issuers should be exempt from the final rule.\110\
This commentator argued that any Congressional intent to give laws
extraterritorial effect must be clearly expressed and stated, which the
Conflict Minerals Statutory Provision fails to do. Also, the
commentator noted that the proposed rules would violate international
principles of diplomatic comity and could put diplomats from countries
with foreign private issuers in jeopardy. Another commentator suggested
that, if the final rule would cause ``more than an insignificant number
of foreign private issuers to leave the U.S. markets or not to enter
the U.S. markets,'' we should consider exempting all or some foreign
private issuers from the final rule.\111\ A further commentator stated
that, although it recommended that the final rule not exempt foreign
private issuers, it expects that the final rule ``will represent just
one more strong disincentive for such issuers to access the U.S.
markets.'' \112\
---------------------------------------------------------------------------
\110\ See letter from Taiwan Semi.
\111\ See letter from ABA.
\112\ See letter from NY State Bar.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting the final rule as
proposed. Therefore, the final rule applies to any issuer that files
reports with the Commission under Section 13(a) or Section 15(d) of the
Exchange Act, including domestic companies, foreign private issuers,
and smaller reporting companies. We believe the statutory language is
clear on this point and believe that it only applies to issuers that
file reports with the Commission under Section 13(a) or Section 15(d)
of the Exchange Act. There is no clear indication that Congress
intended to cover issuers other than those that file such reports.
Although we appreciate the views expressed in the comment letter
submitted jointly by two of the co-sponsors of the legislation,\113\
the legislative history only refers to companies that file with or
report to the Commission or that are listed on a United States stock
exchange.\114\ The location of the statute adopted by Congress in the
section of the Exchange Act dealing with reporting issuers reflects a
more limited scope, as well.\115\
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\113\ See letter from Sen. Durbin/Rep. McDermott.
\114\ See H.R. Rep. No. 111-517, Joint Explanatory Statement of
the Committee of Conference, Title XV, ``Conflict Minerals,'' at 879
(Conf. Rep.) (June 29, 2010) (``The conference report requires
disclosure to the SEC by all persons otherwise required to file with
the SEC for whom minerals originating in the Democratic Republic of
Congo and adjoining countries are necessary to the functionality or
production of a product manufactured by such person.''); 156 Cong.
Rec. S3976 (daily ed. May 19, 2010) (statement of Sen. Feingold)
(stating that the ``Brownback amendment was narrowly crafted'' and,
in discussing the provision, referring only to ``companies on the
U.S. stock exchanges''); 156 Cong. Rec. S3865-66 (daily ed. May 18,
2010) (stating that the Conflict Minerals Statutory Provision ``is a
narrow SEC reporting requirement'' and referring only to ``SEC
reporting requirements'' in discussing the provision); and 156 Cong.
Rec. S3816-17 (daily ed. May 17, 2010) (statement of Sen. Durbin)
(stating that the provision ``would require companies listed on the
New York Stock Exchange to disclose in their SEC filings'').
\115\ See Exchange Act Section 13 entitled ``Periodical and
Other Reports.''
---------------------------------------------------------------------------
The statute is silent with respect to any distinction among issuers
based on the issuer's size or domesticity. Although not specifically in
the context of smaller reporting companies or foreign private issuers,
some commentators suggested that we use our general exemptive authority
under Exchange Act Section 36(a) \116\ to exempt certain classes of
companies from full and immediate compliance with the disclosures
required by the Conflict Minerals Statutory Provision.\117\ The only
limiting factor in the Conflict Minerals Statutory Provision itself as
to the type of issuer to which it applies is based on whether conflict
minerals are ``necessary to the functionality or production'' of
products manufactured or contracted by the issuer to be
manufactured.\118\ Moreover, Congress included a specific provision for
Commission revisions and waivers to the reporting obligation that
requires the President to determine such waiver or revision to be in
the national security interest and limits such a Commission exemption
to two years. In our view, the high standard set for this statutory
waiver, as well as its limited duration, evinces a congressional intent
for the Conflict Minerals Statutory Provision to apply broadly and
exempting large categories of issuers would be inconsistent with this
intent. We also recognize that section 1502 is not simply a disclosure
obligation for issuers, but a comprehensive legislative scheme that
contemplates coordinated
[[Page 56288]]
action by a number of federal agencies aimed at making public
information about conflict minerals from the Covered Countries.\119\ We
are concerned that any broad categories of exemptions would be
inconsistent with this scheme and the statutory objective of reducing
the use of conflict minerals from the Covered Countries that contribute
to conflict.\120\ Congress chose to pursue this goal through the
implementation of a comprehensive disclosure regime. In order to allow
the provision to have the effect we understand Congress intended, we
believe our rules must be consistent with the statutory language and
not exempt broad categories of issuers from its application. Thus, we
are not exempting smaller reporting companies or foreign private
issuers.
---------------------------------------------------------------------------
\116\ 15 U.S.C. 78mm(a) (``[T]he Commission, by rule,
regulation, or order, may conditionally or unconditionally exempt
any person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provision or
provisions of this chapter or of any rule or regulation thereunder,
to the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of
investors.'').
\117\ See, e.g., letters from Davis Polk & Wardwell LLP (Mar. 2,
2011) (``Davis Polk''); National Cable & Telecommunications
Association (Oct. 31, 2011) (``NCTA''); Representatives Spencer
Bachus, Gary G. Miller, Chairman, Robert J. Dold, and Steve Stivers
(Jul. 28, 2011) (``Rep. Bachus et al.'') Verizon; and Wilmer Cutler
Pickering Hale and Dorr LLP Hale on behalf of IPC (Jun. 2, 2011)
(``WilmerHale'').
\118\ Exchange Act Section 13(p)(2)(B).
\119\ Sections 1502(c) and (d) of the Act. We recognize that
Congress also required the Comptroller General to periodically
report on, among other things, publicly available information
regarding persons who are ``not required to file reports * * *
pursuant to Section 13(p)(1)(A)'' and who manufacture products for
which ``conflict minerals are necessary to the functionality or
production.'' Section 1502(d)(2)(C). We interpret this provision to
require reporting by the Comptroller General on persons--such as
private companies not subject to our disclosure and reporting
rules--who are not subject to the requirements of the Conflict
Minerals Statutory Provision even though conflict minerals may be
necessary to the functionality or production of their products. Any
issuers that receive waivers or revisions pursuant to Section
13(p)(3) would also be included.
\120\ See letters from Global Witness I and State II and
Transcript of SEC Roundtable on Conflict Minerals, Section 141 (Oct.
18, 2011) (Statement of Tim Mohin), available at http://www.sec.gov/spotlight/conflictminerals/conflictmineralsroundtable101811-transcript.txt (stating that although no single company working
alone can determine whether minerals in its products supported armed
groups, large and small companies working together can make such a
determination), id. at 22 (Statement of Bennett Freeman) (arguing
that all companies across the value and supply chain should be
covered by the rule because disclosures by all companies are
important to investors). See also id. at 62, 92, and 103 (Statements
of Andrew Matheson, Benedict S. Cohen, and Representative James
McDermott, respectively) (assuming that small issuers would be
covered by the rule).
---------------------------------------------------------------------------
Additionally, it is unclear whether exempting smaller reporting
companies in particular would significantly reduce their burdens
because smaller reporting companies could still be required to track
and provide their conflict minerals information for larger
issuers.\121\ Moreover, to the extent there are benefits to smaller
companies from an exemption, such an exemption could increase the
burden on larger companies that rely on smaller reporting company
suppliers to provide conflict minerals information needed by the larger
reporting companies.
---------------------------------------------------------------------------
\121\ See letters from IPC I.
---------------------------------------------------------------------------
Further, as discussed in greater detail below, the final rule
temporarily will permit all issuers that are unable to determine that
their conflict minerals did not originate in the Covered Countries or
that are unable to determine that their conflict minerals that
originated in the Covered Countries did not directly or indirectly
finance or benefit armed groups to describe their products as ``DRC
conflict undeterminable,'' and temporarily will not require such
issuers to obtain an independent private sector audit of their Conflict
Minerals Report with respect to those minerals. This temporary
accommodation will be available to all issuers for the first two years
of reporting under the final rule. The final rule extends that period
for smaller reporting companies for an additional two years, providing
a temporary four-year provision for smaller reporting companies. This
approach is consistent with some commentators' recommendations as to
the applicability of the reporting requirement to smaller reporting
companies.\122\
---------------------------------------------------------------------------
\122\ See letter from Howland (stating that, although ``[t]here
will be additional costs that may be proportionally higher for small
companies, but increased costs will also apply to large firms,'' a
way that the final rule can ``mitigate the cost is to phase in the
acceptable level of rigor for due diligence over several years and
based on company size''). See also letter from JVC et al. II
(stating that, ``[w]ith respect to smaller reporting companies, it
is reasonable to assume that the costs of compliance may
disproportionately harm them by comparison with any concomitant
benefit in achieving the statutory goals, since these companies lack
the leverage to pressure suppliers and smelters to certify regarding
the source of a particular conflict mineral,'' so ``we believe it
would be appropriate to allow smaller reporting companies even more
time in which to adapt the results of these broader global
initiatives to their individual facts and circumstances'').
---------------------------------------------------------------------------
Similarly, we are not exempting foreign private issuers because we
do not believe that it would give effect to Congressional intent of the
provision. As commentators noted, exempting foreign private issuers
could make it difficult for issuers to compel their foreign private
issuer suppliers to provide conflict minerals information, result in a
competitive disadvantage for domestic issuers, and hurt conflict
minerals supply chain transparency.\123\ Also, we note that including
foreign private issuers in the final rule does not give the Conflict
Minerals Statutory Provision an extraterritorial effect because it
applies only to foreign private issuers that enter the securities
markets of the United States.
---------------------------------------------------------------------------
\123\ See letters from NEI and TriQuint I.
---------------------------------------------------------------------------
2. ``Manufacture'' and ``Contract to Manufacture'' Products
a. Proposed Rules
The Conflict Minerals Statutory Provision applies to any person for
whom conflict minerals are necessary to the functionality or production
of a product manufactured by that person. The proposed rules would
likewise have applied to reporting persons for whom conflict minerals
are necessary to the functionality or production of products they
manufacture. We did not define the term ``manufacture'' in the proposed
rules, because we believed the term to be generally understood.\124\
---------------------------------------------------------------------------
\124\ For example, the Second Edition of the Random House
Webster's Dictionary defines the term to include the ``making goods
or wares by hand or machinery, esp. on a large scale.'' Random House
Webster's Dictionary 403 (2d ed. 1996).
---------------------------------------------------------------------------
In addition, based on the text of the Conflict Minerals Statutory
Provision as well as statutory intent, the proposed rules would also
have applied to issuers that contract to manufacture products. As
discussed in the Proposing Release, one section of the Conflict
Minerals Statutory Provision defines a ``person described'' as one for
which conflict minerals are ``necessary to the functionality or
production of a product manufactured by such a person,'' \125\ while
another section of the provision requires an issuer to describe ``the
products manufactured or contracted to be manufactured that are not DRC
conflict free'' [emphasis added] in its Conflict Mineral Report.\126\
The absence of the phrase ``contract to manufacture'' from the ``person
described'' definition raised some question as to whether the
requirements apply equally to those who manufacture products themselves
and those who contract to have their products manufactured by others.
Based on the totality of the provision, however, we expressed in the
Proposing Release our belief that the legislative intent was for the
provision to apply both to issuers that directly manufacture products
and to issuers that contract the manufacturing of their products for
which conflict minerals are necessary to the functionality or
production of those products. The proposed rules, therefore, would have
applied equally to issuers that manufacture products and to issuers
that ``contract to manufacture'' their products. We noted that this
approach would allow the ``contracted to be manufactured'' language to
have effect in the Conflict Minerals Report.
---------------------------------------------------------------------------
\125\ Exchange Act Section 13(p)(2)(B).
\126\ Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------
In the Proposing Release, we explained that the proposed rules
would apply to issuers that contract for the manufacturing of products
over which they had any influence regarding the manufacturing of those
products. As proposed, they also would have applied to issuers selling
generic products under their own brand name or a separate
[[Page 56289]]
brand name that they had established, regardless of whether those
issuers had any influence over the manufacturing specifications of
those products, as long as an issuer had contracted with another party
to have the product manufactured specifically for that issuer. We did
not, however, propose that the rules would apply to retail issuers that
sell only the products of third parties if those retailers had no
contract or other involvement regarding the manufacturing of those
products, or if those retailers did not sell those products under their
brand name or a separate brand they had established and did not have
those products manufactured specifically for them.
b. Comments on the Proposed Rules
i. ``Manufacture''
Many commentators agreed with the proposed rules that the final
rule should not define the term ``manufacture'' because that term is
generally understood.\127\ Many other commentators, however, believed
that the final rule should define the term,\128\ and most of these
commentators provided their recommendations for the definition. A
number of commentators indicated that the definition should mirror the
North American Industry Classification System (``NAICS''),\129\ which
classifies entities as manufacturers if they engage in the mechanical,
physical, or chemical transformation of materials, substances, or
components into new products from raw materials that are products of
agriculture, forestry, fishing, mining, or quarrying.
---------------------------------------------------------------------------
\127\ See, e.g., letters from ABA, Global Witness I, Howland,
NYCBar I, NYCBar II, State II, TIC, and United States Steel
Corporation (Mar. 4, 2011) (``US Steel'').
\128\ See, e.g., letters from American Association of Exporters
and Importers (Jan. 21, 2011) (``AAEI''); AngloGold; Columban Center
for Advocacy and Outreach, Leadership Conference of Women Religious,
Sisters of Mercy of the Americas--Institute Justice Team, Missionary
Oblates, and Maryknoll Office for Global Concerns (Mar. 2, 2011)
(``Columban Center et al.''); CTIA--The Wireless Association (Mar.
1, 2011) (``CTIA''); Earthworks; Enough Project I; International
Corporate Accountability Roundtable, Enough Project, and Global
Witness (Sep. 23, 2011) (``ICAR et al. I''); Metalsmiths; NAM I;
NEI; NMA II; RILA-CERC; SIF I; TriQuint I; and WGC II.
\129\ See letters from AAEI, AngloGold, BCE Inc. (Oct. 31, 2011)
(``BCE''), Canadian Wireless Telecommunications Association (Oct.
28, 2011) (``CWTA''), CTIA, NAM I, NCTA, NMA II, RILA-CERC, and WGC
II.
---------------------------------------------------------------------------
Some commentators stated that the final rule should define the term
inclusively or broadly so as to include all steps in the supply chain,
from mining to manufacturing the product, because otherwise it would
become exponentially more difficult for manufacturing issuers
downstream in the supply chain to comply with the final rule.\130\ One
commentator indicated that the term should include all steps from
mining, refining, and production to the importing, exporting, or sale
of ingredients, materials, and/or processes.\131\ A few commentators
indicated that the final rule should provide a definition consistent
with the U.S. Controlled Substances Act, which includes the production,
preparation, assembling, propagation, combination, compounding, or
processing of a drug or other substance, either directly or indirectly
or by extraction from substances of natural origin.\132\ One of these
commentators stated that such a consistent definition would include the
``production, preparation, assembling, combination, compounding, or
processing of ingredients, materials, and/or processes such that the
final product has a name, character, and use, distinct from the
original ingredients, materials, and/or processes.'' \133\ One
commentator asserted that the definition should include any entity
``involved in the process of changing a product * * * from one form to
another.'' \134\ One commentator suggested that the definition ``should
be tailored only to include OEM's and those who design and specify
bills of materials for products with control over the procurement or
fabrication of the same products' bill of materials and specification
of the constituent materials of the components.'' \135\ One commentator
urged us to provide clear guidance indicating that real estate
development does not constitute manufacturing.\136\
---------------------------------------------------------------------------
\130\ See letters from Columban Center et al., Metalsmiths, and
TriQuint I.
\131\ See letter from Earthworks.
\132\ See letters from Enough Project I and SIF I.
\133\ See letter from Enough Project I (citing to its earlier
letter submitted Sep. 24, 2010 on the Pre-Proposing Release Web
site).
\134\ See letter from Jeffrey Trott (Jan. 31, 2011) (``Trott'').
\135\ See letter from Retail Industry Leaders Association (Nov.
1, 2011) (``RILA'').
\136\ See letter from National Association of Real Estate
Investment Trusts (Nov. 23, 2011) (``NAREIT'').
---------------------------------------------------------------------------
ii. ``Contract to Manufacture''
Not all commentators agreed on whether the final rule should
include an issuer that contracts to manufacture a product. However,
many commentators that agreed that the final rule should include an
issuer that contracts to manufacture a product, or did not agree but
argued in the alternative, recommended that an issuer should be
required to have some amount of control or influence over the
manufacturing process before the final rule considers that issuer to be
contracting to manufacture a product.\137\ A number of commentators
suggested the level of control necessary to be considered contracting
to manufacture a product under the final rule. In this regard, some
commentators suggested that only an issuer with direct, close, active,
and/or substantial involvement or control in the sourcing of materials,
parts, ingredients, or components to be included in its products or in
the manufacturing of those products should meet the minimum control
threshold necessary to be considered contracting to manufacture a
product.\138\ One commentator recommended that an issuer should be
considered to be contracting to manufacture a product only if it
exercises ``a sufficient level of influence, involvement or control
over the process to be able to control, in a meaningful manner, the use
of conflict minerals, or to evaluate and influence the use of conflict
minerals.''\139\ Some commentators asserted that the minimum control
threshold should be met only if the issuer explicitly specifies the
inclusion of conflict minerals in the product.\140\ Another commentator
advised that the contracting activities that should trigger conflict
minerals reporting should include designing the product, controlling
the approved materials or vendor lists for the product, and including
the issuer's name on the product.\141\
---------------------------------------------------------------------------
\137\ See, e.g., letters from AdvaMed I, AT&T Inc. (Mar. 9,
2011) (``AT&T''), Chamber I, Cleary Gottlieb, Consumer Electronics
Retailers Coalition (Nov. 1, 2011) (``CERC''), Industry Group
Coalition I, IPC I, IPC II, JVC et al. II, NAM I, NCTA, Niotan I,
NMA II, NRF I, NRF II, PCP, RILA, Roundtable, SEMI, TIAA-CREF, and
TriQuint I.
\138\ See letters from AT&T, CERC, Corporate Secretaries I,
CTIA, JVC et al. II, NCTA, NRF I, RILA, and Verizon.
\139\ See letter from ABA.
\140\ See letters from NAM I and SEMI.
\141\ See letter from TriQuint I.
---------------------------------------------------------------------------
Some of these commentators, as well as others, asserted that an
issuer should not be considered to meet the control threshold to the
extent that the product is not manufactured to meet an issuer's custom
specifications, but rather is manufactured to meet industry-standard
specifications common to the issuer's competitors generally.\142\ For
example, a group of jewelry industry commentators argued in one letter
that a jewelry retail issuer ordering products from jewelry
manufacturers should not be considered contracting to manufacture for
those products if the retail issuer specifies only weight, karat, or
other indicators of
[[Page 56290]]
quality.\143\ As another example, a mobile phone service provider
asserted that it should not be considered contracting to manufacture
its mobile phones even though it specifies to its manufacturers that
the phones must be compatible with their networks and have certain
cosmetic design requirements.\144\
---------------------------------------------------------------------------
\142\ See letters from AngloGold, AT&T, BCE, JVC et al. II,
NCTA, and RILA-CERC.
\143\ See letter from JVC et al. II.
\144\ See letter from AT&T. See also letter from BCE (stating
that the commentator, a distributor of a wide range of
telecommunications and electronic products supplied by hundreds of
manufacturers, ``exerts no substantial control over the design or
the technical features of those products or any control, direct or
indirect, over the supply chains, which may be quite complex, of
such manufacturers,'' and its ``sole input into the manufacturing
process relates to providing brand name manufacturers with certain
technical specifications to ensure compliance with applicable
Canadian regulatory standards or to requesting special product
features, cosmetic in nature, to meet Canadian consumer market
demands'').
---------------------------------------------------------------------------
Some commentators suggested that the final rule should not consider
an issuer to be contracting to manufacture products if the issuer is
selling products under its own brands, labels, trademarks, or licenses
if it had little or no influence in manufacturing those products.\145\
Other commentators recommended that the final rule should consider such
issuers to be contracting to manufacture those products.\146\ One
commentator asserted that generic products should be held to the same
standard as branded products and that the final rule should avoid using
any definitions that create a perverse incentive for an issuer to work
with special purpose entities designed to follow the technical
requirements of the law but evade its intent.\147\ Another commentator
suggested that the final rule should apply to issuers selling generic
products under their own name or a separate brand name, but not to
retailers who do not do so and have no influence over the manufacturing
of products they sell.\148\
---------------------------------------------------------------------------
\145\ See letters from AT&T, BCE, Cleary Gottlieb, CTIA,
Industry Group Coalition I, JVC et al. II, NAM I, NCTA, and NRF I.
\146\ See letters from Enough Project I, Howland, NEI, SIF I,
State II, and TriQuint I.
\147\ See letter from AxamTrade (Feb. 10, 2011) (``Axam'').
\148\ See letter from NYCBar II.
---------------------------------------------------------------------------
Some commentators recommended that an issuer should be considered
to be contracting to manufacture a product only if the issuer has a
direct contractual relationship with the manufacturer of the product to
be sold by the issuer, the issuer has substantial control over the
manufacturer and the material specifications of the product and
specifies the conflict minerals to be used in the product, the product
will be manufactured exclusively for the issuer, and the product will
be sold by the issuer under its own brand name or a brand name owned by
the issuer or exclusively licensed to the issuer by the owner of the
brand.\149\ One of these commentators went on to assert that an issuer
should not be considered to be exerting ``substantial control'' over
manufacturing by ``merely attaching a brand label to a generic good,
contracting for the exclusive distribution of goods, or specifying the
form, fit or function of a product,'' and should not be considered to
be contracting to manufacture a product solely by ``attaching a brand
label to a generic good, contracting for the exclusive distribution of
goods, or specifying the form, fit or function of a product.'' \150\
---------------------------------------------------------------------------
\149\ See letters from CERC and RILA.
\150\ See letter from RILA.
---------------------------------------------------------------------------
Other commentators stressed that the final rule should not apply to
any issuer contracting to manufacture its products.\151\ These
commentators argued generally that the statute does not include an
issuer that contracts to manufacture its products because the phrase
does not appear in the subsection of the Conflict Minerals Statutory
Provision discussing a ``person described.'' Instead, the phrase
appears only in the subsection that describes the disclosures required
in a Conflict Minerals Report. Therefore, Congress's intent in
including the phrase was only to ensure that a manufacturer otherwise
subject to the Conflict Minerals Statutory Provision could not
intentionally evade its reporting obligation merely by distancing
itself, through contracting, from the manufacturing process.\152\
---------------------------------------------------------------------------
\151\ See, e.g., letters from BCE, CERC, CTIA, Davis Polk, NCTA,
RILA-CERC, TIC, and United States Telecom Association (Mar. 2, 2011)
(``US Telecom'').
\152\ See letters from AT&T, CTIA, and RILA-CERC.
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c. Final Rule
i. ``Manufacture''
After considering the comments, we are modifying the proposed
rules, in part. The final rule, as proposed, applies to any issuer for
which conflict minerals are necessary to the functionality or
production of a product manufactured or contracted by that issuer to be
manufactured. The final rule does not define the term ``manufacture''
because we continue to believe, as discussed in the Proposing Release,
that the term is generally understood. We note, however, that we do not
consider an issuer that only services, maintains, or repairs a product
containing conflict minerals to be ``manufacturing'' a product; \153\
this interpretation is not a change from the Proposing Release, but a
clarification in response to comments.\154\
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\153\ See letter from JVC et al. II (commenting that ``certain
assembly and repair functions commonly performed by jewelry
retailers'' should not be defined as manufacturing).
\154\ See, e.g., letter from ABA (commenting that the Commission
``should, either in the final rule or in the corresponding adopting
release, provide additional guidance as to activities that will not
be considered to be the manufacturing of a product for the purposes
of the rule'').
---------------------------------------------------------------------------
We believe narrowing or expanding the definition of ``manufacture''
as suggested by some commentators would be inconsistent with the
language and framework of Section 1502. For example, the NAICS
definition, which a number of commentators suggested, appears to
exclude any issuer that manufactures a product by assembling that
product out of materials, substances, or components that are not in raw
material form. Such a definition would exclude large categories of
issuers that manufacture products through assembly, such as certain
auto and electronics manufacturers, whom we believe are intended to be
covered by the Conflict Minerals Statutory Provision. As another
example, the manufacturing definition put forth by one commentator
appears to include ``importing, exporting, or sale of conflict
minerals,'' \155\ which would expand the definition to include issuers
that clearly do not manufacture products. Also, many of the other
suggested definitions simply expound upon the generally understood
meaning of the term, which we do not believe we need to define.
---------------------------------------------------------------------------
\155\ See letter from Earthworks.
---------------------------------------------------------------------------
ii. ``Contract to Manufacture''
Consistent with the proposal, the final rule applies to any issuer
for which conflict minerals are necessary to the functionality or
production of a product contracted by that issuer to be manufactured,
including conflict minerals in a component of a product. In general,
the question of whether an issuer contracts to manufacture a product
will depend on the degree of influence exercised by the issuer on the
manufacturing of the product based on the individual facts and
circumstances surrounding an issuer's business and industry. The final
rule does not define when an issuer contracts to manufacture a product
because, although we believe this concept is intuitive at a basic
level, after considering comments and attempting to develop a precise
definition, we concluded that, for ``contract to manufacture'' to cover
issuers operating in the wide variety of the impacted industries and
structured
[[Page 56291]]
in various manners, any definition of that term would be so complicated
as to be unworkable. We do, however, provide guidance below on some
general principles that we believe are relevant in determining whether
an issuer should be considered to be contracting to manufacture a
product.
As a threshold matter, consistent with the proposal, we believe the
statutory intent to include issuers that contract to manufacture their
products is clear based on the statutory obligation for issuers to
describe in their Conflict Minerals Reports products that are
manufactured and contracted to be manufactured that do not meet the
definition of ``DRC conflict free.'' \156\ We recognize that
commentators asserted that the statute does not include an issuer that
contracts to manufacture its products and that the sole intent behind
including the phrase in the provision was to keep manufacturers from
intentionally evading reporting requirements by contracting the
manufacturing of their products to third parties. Nonetheless, Exchange
Act Section 13(p)(1)(A)(ii) requires issuers that must file a Conflict
Minerals Report to describe their ``products manufactured or contracted
to be manufactured that are not DRC conflict free'' (emphasis added).
In our view, the inclusion of products that are ``contracted to be
manufactured'' in this requirement indicates that Congress intended the
Conflict Mineral Statutory Provision to apply to such products, and
including issuers who contract to manufacture their products in the
scope of the rule effectuates this intent. We believe our reading is
more consistent with the statute than the alternative reading--that
Congress required a description of products that were ``contracted to
be manufactured'' and were not ``DRC conflict free,'' but did not
require issuers that contracted to manufacture products to determine
whether a Conflict Minerals Report was required to be filed. This would
be internally inconsistent. It would significantly undermine the
purpose of the statutory provision to fail to apply it to issuers that
contract to manufacture their products.
---------------------------------------------------------------------------
\156\ See Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------
As another threshold matter, we believe the phrase ``contract to
manufacture'' captures manufacturers that contract the manufacturing of
components of their products. Generally, we believe that manufacturing
issuers that contract the manufacturing of certain components of their
products should, for purposes of the Conflict Minerals Statutory
Provision, be viewed as responsible for the conflict minerals in those
products to the same extent as if they manufactured the components
themselves. We believe it is inconsistent with the Conflict Minerals
Statutory Provision to allow these manufacturers to avoid the final
rule's requirements by contracting out the manufacture of components in
their products that contain conflict minerals. As two of the co-
sponsors of the Conflict Minerals Statutory Provision noted, ``[m]any
companies use component parts from any one of several suppliers when
assembling their products'' to ``help drive down the price for parts
through competition,'' but ``[i]t is of paramount importance that this
business model choice not be used as a rationale to avoid reporting and
transparency.'' \157\
---------------------------------------------------------------------------
\157\ See letter from Senator Richard J. Durbin and
Representative Jim McDermott (Oct. 4, 2010) (Pre-Proposing Release
Web site) (``Sen. Durbin/Rep. McDermott pre-proposing'').
---------------------------------------------------------------------------
In the proposal, we expressed our belief that an issuer that does
not manufacture a product itself but that has ``any'' influence over
the product's manufacturing should be considered to be contracting to
manufacture that product. Also, we expressed our belief that an issuer
that offers a generic product under its own brand name or a separate
brand name should be considered to be contracting to manufacture that
product so long as the issuer had contracted to have the product
manufactured specifically for itself. We had believed that these
issuers should have been considered to be contracting those products to
be manufactured because the issuers would implicitly influence the
manufacturing of the products. However, we are persuaded by
commentators that this level of control set forth in the Proposing
Release was ``overbroad'' and ``confusing'' and would impose on such an
issuer ``significant,'' ``unrealistic,'' and ``costly'' burdens.\158\
---------------------------------------------------------------------------
\158\ See, e.g., letters from ABA, AT&T, Corporate Secretaries
I, Davis Polk, and Verizon. See also letter from NRF I (stating that
our proposed approach would be ``draconian'').
---------------------------------------------------------------------------
Consistent with our approach in the Proposing Release, we believe
that ``contract to manufacture'' is intended to include issuers that
have some actual influence over the manufacturing of their products.
However, we have modified our view as to the circumstances under which
an issuer is considered to be contracting to manufacture a product. An
issuer is considered to be contracting to manufacture a product
depending on the degree of influence it exercises over the materials,
parts, ingredients, or components to be included in any product that
contains conflict minerals or their derivatives. The degree of
influence necessary for an issuer to be considered to be contracting to
manufacture a product is based on each issuer's individual facts and
circumstances. However, based on comments we received, we believe an
issuer should not be viewed for the purposes of the Conflict Minerals
Statutory Provision as contracting to manufacture a product if its
actions involve no more than:
(a) Specifying or negotiating contractual terms with a manufacturer
that do not directly relate to the manufacturing of the product, such
as training or technical support, price, insurance, indemnity,
intellectual property rights, dispute resolution, or other like terms
or conditions concerning the product, unless the issuer specifies or
negotiates taking these actions so as to exercise a degree of influence
over the manufacturing of the product that is practically equivalent to
contracting on terms that directly relate to the manufacturing of the
product; or
(b) Affixing its brand, marks, logo, or label to a generic product
manufactured by a third party; or
(c) Servicing, maintaining, or repairing a product manufactured by
a third party.
For example, we agree with commentators that an issuer that is a
service provider that specifies to a manufacturer that a cell phone it
will purchase from that manufacturer to sell at retail must be able to
function on a certain network does not in-and-of-itself exert
sufficient influence to ``contract to manufacture'' the phone for
purposes of the final rule. Under the proposed rules, however, such an
issuer may have reached the ``any'' influence threshold. Conversely, we
do not agree with commentators that an issuer must have ``substantial''
influence or control over the manufacturing of a product before the
issuer is considered to be contracting to manufacture that
product.\159\ Such a standard would significantly limit the coverage of
the Conflict Minerals Statutory Provision for issuers that contract to
manufacture products, and we do not believe that such a narrow scope is
consistent with the intent of the Conflict Minerals Statutory
Provision. For example, if there are specifications made by an issuer
to a manufacturer that it contracts with for the inclusion of a
particular conflict mineral in the product, the
[[Page 56292]]
issuer might not be viewed as exerting ``substantial'' influence on the
overall manufacturing of the product. However, we would view such an
issuer as covered under the final rule as contracting to manufacture
the product. In addition, we disagree with commentators that suggested
that the final rule should apply only to issuers that explicitly
specify that conflict minerals be included in their products.\160\ We
believe this is too narrow an interpretation of the statutory provision
and, read in this manner, the statute would be illogical. For example,
as commentators argued, Congress inserted ``contract to manufacture''
in the disclosure of products to prevent manufacturers from skirting
the disclosure requirements by contracting to manufacture certain
products. However, if ``contract to manufacture'' is not included in
the definition of ``person described,'' an issuer may evade the statute
by contracting its manufacturing to a third party. Therefore, an issuer
would never be required to disclose its minerals because the issuer
would not qualify for steps two and three.
---------------------------------------------------------------------------
\159\ See, e.g., letters from AT&T, Corporate Secretaries I,
CTIA, JVC et al. II, NRF I, and Verizon.
\160\ See, e.g., letters from NAM I and SEMI.
---------------------------------------------------------------------------
Moreover, in contrast to our approach in the Proposing Release, we
do not consider an issuer to be contracting to manufacture a product
for the purposes of our rule solely if it offers a generic product
under its own brand name or a separate brand name without additional
involvement by the issuer. We are persuaded by commentators that such
an issuer would not necessarily exert a sufficient degree of influence
on the manufacturer to be considered as contracting to manufacture the
product for purposes of the Conflict Minerals Statutory Provision. As
one commentator noted, it seems that such a relationship between an
issuer and manufacturer is better characterized as one in which the
manufacturer is using the issuer as a ``sales channel'' as opposed to
one in which the issuer is ``outsourcing manufacturing to'' the
manufacturer.\161\ Such a relationship limits the issuer's influence on
the product's manufacturing to the extent that it puts the issuer in a
similar position to that of a pure retailer. One commentator noted that
the purposes of the Conflict Minerals Statutory Provision are not
served by classifying such an issuer as contracting to manufacture a
product.\162\ We agree. However, an issuer with generic products that
include its brand name or a separate brand name and that has
involvement in the product's manufacturing beyond only including such
brand name would need to consider all of the facts and circumstances in
determining whether its influence reaches such a degree so as to be
considered contracting to manufacture that product.
---------------------------------------------------------------------------
\161\ See letter from AT&T.
\162\ See letter from Cleary Gottlieb.
---------------------------------------------------------------------------
3. Mining Issuers as ``Manufacturing'' Issuers
a. Proposed Rules
Under the proposed rules, we would have considered an issuer that
mines conflict minerals to be manufacturing those minerals and an
issuer contracting for the mining of conflict minerals to be
contracting for the manufacture of those minerals. In this regard, we
proposed in an instruction to the rules that mining issuers be
considered to be manufacturing conflict minerals when they extract
those minerals.\163\ We did, however, request comment on this point.
---------------------------------------------------------------------------
\163\ See Industry Guide 7 [17 CFR 229.802(g)] (implying that
companies may ``produce'' minerals from a mining reserve).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
A number of commentators stated specifically that the final rule
should consider any issuer that mines conflict minerals as
``manufacturing'' those conflict minerals as ``products.'' \164\ A few
commentators noted that mining issuers should be included as
manufacturers because they begin the conflict minerals supply chain and
other reporting issuers must rely on them for information.\165\ As
such, without the final rule including mining issuers, other issuers
would have a very difficult time complying with the rules, which would
eliminate transparency from the supply chain and undermine the
provision.\166\
---------------------------------------------------------------------------
\164\ See, e.g., letters from Bario-Neal Jewelry (Mar. 1, 2011)
(``Bario-Neal''); Brilliant Earth, Inc. (Feb. 28, 2011) (``Brilliant
Earth''); CRS I; Earthworks; Electronics TakeBack Coalition (Mar. 2,
2011) (``TakeBack''); Enough Project I; Enough Project (Nov. 2,
2011) (``Enough Project IV''); Global Tungsten I; Hacker Jewelers,
Designers & Goldsmiths, Inc. (Mar. 1, 2011) (``Hacker Jewelers'');
Hoover & Strong, Inc. (Mar. 1, 2011) (``Hoover & Strong''); ICAR et
al. I; NEI; Niotan I; NYCBar I; SIF I; State II; TIAA-CREF; TriQuint
I; and U.S. Steel.
\165\ See letters from Global Witness I and TriQuint I (noting
that mining companies do, in fact, engage in a transformative
process such that they transform natural resources into ores, which
should be considered ``manufacturing'').
\166\ See letter from Enough Project I.
---------------------------------------------------------------------------
Other commentators indicated that the final rule should not treat
mining issuers as manufacturers of the conflict minerals they
extract.\167\ Some of these commentators argued that the final rule
should incorporate the NAICS definition of ``manufacturing,'' which
they noted does not include mining as a type of manufacturing
activity.\168\ Certain commentators noted that mining of conflict
minerals, especially gold, shares no characteristics with the
manufacturing of products.\169\ Finally, some commentators asserted
that Congress did not intend to include mining issuers as manufacturers
based on previous versions of the Conflict Minerals Statutory
Provision, legislative statements, and a plain reading of the
statute.\170\ As some of these commentators noted, the Conflict
Minerals Statutory Provision was preceded by other legislative
proposals that were drafted to include mining issuers, but the Conflict
Minerals Statutory Provision was not drafted in such a manner.\171\ One
such commentator indicated that these previous bills ``explicitly
applied not only to companies using covered minerals in their
manufacturing processes, but also to persons engaged in `the commercial
exploration, extraction, importation, exportation, or sale' of the
covered minerals.''\172\ According to the commentator, the fact that
Congress chose not to include extraction activities in the Conflict
Minerals Statutory Provision demonstrates that Congress's intent was
not to have the Conflict Minerals Statutory Provision include mining as
manufacturing.
---------------------------------------------------------------------------
\167\ See, e.g., letters from ABA, AngloGold, Barrick Gold,
Cleary Gottlieb, ITRI Ltd. (Jan. 27, 2011) (``ITRI I''), NAM III,
NMA II, Vale S.A. (Mar. 3, 2011) (``Vale''), and WGC II.
\168\ See letters from AngloGold and WGC II.
\169\ See letters from AngloGold and Barrick Gold.
\170\ See letters from AngloGold, NMA II, National Mining
Association (Nov. 1, 2011) (``NMA III''), and Vale.
\171\ See, e.g., letters from AngloGold and NMA II.
\172\ Letter from NMA II (referring to S. 891 and S.A. 2707
(2009)).
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are modifying the proposal. We
do not consider an issuer that mines or contracts to mine conflict
minerals to be manufacturing or contracting to manufacture those
minerals unless the issuer also engages in manufacturing, whether
directly or indirectly through contract, in addition to mining. In this
regard, we do not believe that mining is ``manufacturing'' based on a
plain reading of the provision. We agree with the commentators
concerned that the statutory language does not explicitly include
mining anywhere in the Conflict Minerals Statutory Provision and
including mining would expand the statutory mandate. The Conflict
Minerals Statutory Provision does not specifically refer to mining and,
as one
[[Page 56293]]
commentator noted, ``[t]o extend the terms `manufacture' of a `product'
to include the mining of conflict minerals contorts the plain meaning
of those terms.'' \173\
---------------------------------------------------------------------------
\173\ See letter from AngloGold.
---------------------------------------------------------------------------
As discussed by commentators, legislative history demonstrates that
Congress did not intend to include issuers that solely mine conflict
minerals in the Conflict Minerals provision because it removed
references to such activities from prior versions of the provision. For
example, one commentator in two comment letters noted that prior
versions of the Conflict Minerals Statutory Provision explicitly
applied to anyone either using covered minerals in their manufacturing
processes or engaging in ``the commercial exploration, extraction,
importation, exportation or sale of the covered minerals.'' \174\
However, the final version of the Conflict Minerals Statutory Provision
omits any reference to extraction-related activities and refers solely
to manufacturing.\175\ As this commentator stated, Congress's omission
of mining activities evidences its intent ``to address the
manufacturing of goods which use or contain, as opposed to the
extracting and processing of, the covered minerals.'' \176\ Therefore,
based on both the plain reading of the provision and the legislative
history of the provision, we are persuaded that it would be
inconsistent with the language in the Conflict Minerals Statutory
Provision to include mining issuers as manufacturing issuers under the
final rule unless the mining issuer engages in manufacturing, either
directly or through contract, in addition to mining.
---------------------------------------------------------------------------
\174\ See letters from NMA II and NMA III. These letters discuss
two legislative proposals introduced in the Senate in 2009 that were
similar to the Conflict Minerals Statutory Provision. See Congo
Conflict Minerals Act of 2009, S. 891, 111th Cong. (2009) and S.A.
2707, 111th Cong. (2009). Both of these earlier conflict minerals
proposals explicitly applied to companies using conflict minerals in
their manufacturing processes and also to persons engaged in ``the
commercial exploration, extraction, importation, exportation, or
sale'' of conflict minerals.
\175\ See letters from NMA II.
\176\ Id.
---------------------------------------------------------------------------
4. When Conflict Minerals Are ``Necessary'' to a Product
The Conflict Minerals Statutory Provision requires us to promulgate
regulations requiring that any ``person described'' disclose annually
whether conflict minerals that are ``necessary'' originated in the
Covered Countries and, if so, submit to us a Conflict Minerals
Report.\177\ The provision further states that a ``person is
described'' if ``conflict minerals are necessary to the functionality
or production of a product manufactured by such person.'' \178\ The
provision, however, provides no additional explanation or guidance as
to the meaning of ``necessary to the functionality or production of a
product.'' Likewise, we did not propose to define when a conflict
mineral is necessary to the functionality or production of a product.
We did, however, request comment on whether and how our rules should
define this phrase and we provided some guidance as to the meaning of
``necessary to the production of a product.''
---------------------------------------------------------------------------
\177\ Exchange Act Section 13(p)(1)(A).
\178\ Exchange Act Section 13(p)(2)(B).
---------------------------------------------------------------------------
a. Proposed Rules
Although we did not propose to define ``necessary to the
functionality or production'' in the rules, we noted in the Proposing
Release that, if a mineral is necessary, the product was included
within the scope of the rules without regard to the amount of the
mineral involved. Further, we indicated in the Proposing Release that a
conflict mineral would be considered necessary to the production of a
product if the conflict mineral was intentionally included in a
product's production process and was necessary to that process, even if
that conflict mineral was not ultimately included anywhere in the
product. On the other hand, as proposed, a conflict mineral necessary
to the functionality or production of a physical tool or machine used
to produce a product would not be considered necessary to the
production of that product, even if that tool or machine was necessary
to producing the product. For example, if an automobile containing no
conflict minerals was produced using a wrench that contains or was
itself produced using conflict minerals necessary to the functionality
or production of that wrench, the proposed rules would not consider the
conflict minerals in that wrench necessary to the production of the
automobile.
That the conflict minerals must be ``necessary to the functionality
or production'' of an issuer's products is the only limiting factor in
the Conflict Minerals Statutory Provision.\179\ The provision has no
materiality thresholds for disclosure based on the amount of conflict
minerals an issuer uses in its manufacturing processes. Therefore, we
did not propose to include a materiality threshold for the disclosure
or reporting requirements in the proposed rules. We did, however,
request comment in the Proposing Release as to whether there should be
a de minimis threshold in our rules based on the amount of conflict
minerals used by an issuer in a particular product or in its overall
enterprise and, if so, whether such a threshold would be consistent
with the Conflict Minerals Statutory Provision.
---------------------------------------------------------------------------
\179\ Exchange Act Section 13(p)(2)(B).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Many commentators suggested that the final rule explicitly define
the phrase, ``necessary to the functionality or production of a
product,'' \180\ while other commentators indicated that the final rule
should not define the phrase.\181\ Several commentators suggested
possible definitions.\182\ One commentator noted that manufacturers
make certain deliberate choices about products, such as how they look,
function, perform, cost, or are supplied, so when there has been a
choice to incorporate conflict minerals into a product, the final rule
should consider the conflict minerals ``necessary'' to the product
because the designer has deemed them to be so.\183\ Another commentator
was concerned that the proposed rules did not provide any guidance as
to either the phrase ``necessary to the functionality or production''
or the term ``product.'' \184\ As such, this commentator noted that the
proposed rules could apply to financial products that are backed by
gold or other mineral commodities, such as futures contracts for gold
bullion, shares in mutual funds that invest in gold mining stocks, or
gold bullion storage agreements with vault services providers.
---------------------------------------------------------------------------
\180\ See, e.g., letters from CRS I, Davis Polk, Earthworks,
Enough Project I, FRS, Howland, ICAR et al. I, MSG I, NRF I, PCP,
Give Peace A Deadline (Jan. 21, 2011) (``Peace''), SEMI, SIF I, TIC,
Tiffany, TriQuint I, and US Steel.
\181\ See, e.g., letters from Cleary Gottlieb, Global Witness I,
ITIC I, State II, and WGC II.
\182\ See, e.g., letters from AAEI, AAFA, Bario-Neal, Brilliant
Earth, CRS I, Davis Polk, Earthworks, Enough Project I, Hacker
Jewelers, Hoover & Strong, Howland, MSG I, NAM I, Niotan I, NMA II,
NRF I, PCP, Peace, SEMI, Sen. Durbin/Rep. McDermott, SIF I, TIAA-
CREF, TIC, TriQuint I, and US Steel.
\183\ See letter from Matheson II.
\184\ See letter from Tiffany.
---------------------------------------------------------------------------
i. ``Necessary to the Functionality''
A number of different commentators indicated that a conflict
mineral should be considered ``necessary to the functionality'' of a
product if that conflict mineral is intentionally added to the
product.\185\ Of these commentators, however, many were open to other
potential requirements. For example, many commentators
[[Page 56294]]
suggested further requirements in addition to, or instead of, being
intentionally added before a conflict mineral should be considered
``necessary to the functionality'' of a product. Many of these
commentators indicated that a conflict mineral must be intentionally
added and/or necessary either for the product's use, purpose, or
marketability, financial success, or some combination thereof.\186\ A
few commentators asserted that a conflict mineral must be intentionally
added and essential to the product's function.\187\ One commentator
stated that a conflict mineral must be intentionally added and have a
concentration in the product that exceeds 1,000 ppm per homogeneous
material.\188\
---------------------------------------------------------------------------
\185\ See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth,
Hacker Jewelers, Hoover & Strong, Howland, ITIC I, NRF I, NYCBar II,
SEMI, Sen. Durbin/Rep. McDermott, TIAA-CREF, and WGC II.
\186\ See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth,
Earthworks, Enough Project I, Hacker Jewelers, Hoover & Strong, MSG
I, Peace, and SIF I, and TIAA-CREF.
\187\ See, e.g., letters from Howland, NAM I, and NRF I.
\188\ See letter from TriQuint I.
---------------------------------------------------------------------------
Only a few commentators proposed guidance as to when a conflict
mineral would be considered ``intentionally added'' to a product, and
they differed on when a conflict mineral should be considered
``intentionally added.'' One commentator stated that a conflict mineral
should not be considered intentionally added if it was unilaterally
included in a sub-component acquired by the issuer from a sub-
contractor.\189\ Two of the co-sponsors of the Conflict Minerals
Statutory Provision, however, took the opposite position and stated
that a conflict mineral should be considered intentionally added if it
is intentionally added in sub-components that an issuer contracts to
manufacture through third parties or subsidiaries.\190\ Several
commentators agreed that a conflict mineral occurring naturally in a
product should not be considered intentionally added to that
product.\191\
---------------------------------------------------------------------------
\189\ See letter from SEMI.
\190\ See letter from Sen. Durbin/Rep. McDermott.
\191\ See letters from ITIC I, PCP, and Sen. Durbin/Rep.
McDermott.
---------------------------------------------------------------------------
Instead of being intentionally added to a product, some
commentators provided other bases for concluding that a conflict
mineral is ``necessary to the functionality'' of a product. Some
commentators indicated that a conflict mineral should be considered
``necessary to the functionality'' of a product if that conflict
mineral is necessary for the product's basic function.\192\ Other
commentators stated that the basic function test would be unworkable
because there is no meaningful distinction between a product's basic
and auxiliary functions.\193\ Some commentators stated that a conflict
mineral should be considered ``necessary to the functionality'' of a
product if that conflict mineral is required either for the financial
success or marketability of the product.\194\ One commentator noted
that ``necessary to the functionality'' should be defined broadly
enough that it encompasses uses necessary to the product's economic
utility,\195\ while others disagreed due to the subjective nature of
what provides economic utility to a product.\196\ In this regard, one
commentator asserted that a conflict mineral should be considered
``necessary to the functionality'' of a product if the issuer ``uses''
conflict minerals in any manner in a product, regardless of how those
conflict minerals relate to the product's function, because any other
test would be too subjective.\197\
---------------------------------------------------------------------------
\192\ See letters from AAFA, NYCBar I, and WGC II. See also
letter from NYCBar II (stating that a ``component in a product
necessary to its functionality if it is needed for either its basic
function or another commercially valuable function of that
product,'' and stating that it does not ``believe that `basic
function' in this regard needs to be defined since it will differ
for each product'').
\193\ See letters from NEI, SEMI, and TIC.
\194\ See, e.g., letters from Enough Project I, MSG I, Peace,
and TIAA-CREF.
\195\ See letter from CRS I (suggesting ``that `necessary to the
functionality or production of a product' be defined broadly enough
that it encompasses uses necessary to the economic utility and/or
marketability of that product'').
\196\ See, e.g., letters from NRF I and SEMI.
\197\ See letter from Kemet.
---------------------------------------------------------------------------
ii. ``Necessary to the Production''
Many commentators agreed that a conflict mineral should be
considered ``necessary to the production'' of a product if it is
intentionally added to the production process, and should not be
considered ``necessary to the production'' of a product if it is
unintentionally added to a product or naturally occurring in a
product.\198\ Some commentators agreed with the proposal to consider
such conflict minerals ``necessary to the production'' of a product
even if the minerals are washed away or consumed in the production
process and do not end up in the product, such as with a catalyst.\199\
As one of these commentators suggested as an example, a ``catalyst used
to make a substance or a die containing [conflict mineral] metals used
to make a part'' should be considered ``necessary to the production''
of the product using that part because the ``part is made with direct
involvements of the [conflict mineral] metal and then the part/material
is used in the product,'' even if the conflict mineral does not end up
in the product.\200\ Other commentators, however, did not believe that
conflict minerals used in the production of a product should be
considered necessary to that production process if they are washed away
or consumed in the process.\201\ As one of these commentators pointed
out, it would be ``impossible for a retailer to know whether his
supplier's supplier's supplier used and washed away a conflict
mineral'' because ``there is no meaningful measurement capability or
audit trail, especially as a product moves through dozens of suppliers
in a supply chain.'' \202\
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\198\ See, e.g., letters from ITIC I, Global Witness I, Japanese
Trade Associations, NYCBar I, PCP, SEMI, Sen. Durbin/Rep. McDermott,
and TIC.
\199\ See, e.g., letters from Howland, MSG I, Niotan I, PCP,
SEMI, and TriQuint I.
\200\ See letter from Howland.
\201\ See, e.g., letters from Industry Group Coalition I, IPC
II, NAM I, Griffin Teggeman (Dec. 16, 2010) (``Teggeman''), and WGC
II.
\202\ See letter from Teggeman.
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A number of commentators addressed whether a conflict mineral
necessary to the production of the tools, machines, or similar
equipment that are used to produce an issuer's product should be
considered ``necessary to the production'' of the issuer's
product.\203\ The large majority of these commentators, including those
from industry associations,\204\ a multi-stakeholder group representing
both human rights organizations and industry,\205\ and institutional
investors,\206\ agreed with the proposed rules that such tools,
machines, and other production equipment should not be considered
necessary to the production of the issuer's products.\207\ A small
number of commentators disagreed and stated that such tools, machines,
or similar equipment should be considered necessary to the production
of an issuer's product.\208\ One of these commentators specified
[[Page 56295]]
that tools, machines, or similar equipment purchased going forward
should be considered necessary to the production of the issuer's
product, although an issuer's existing production equipment should not
be deemed necessary to production.\209\ Another commentator stated that
production equipment should not be considered necessary to the
production of an issuer's products unless the issuer intentionally and
explicitly required the producer of the tools, machines, or other
production equipment to include conflict minerals.\210\
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\203\ See, e.g., letters from AAFA, Industry Group Coalition I,
IPC I, ITIC I, Japanese Trade Associations, NAM I, NEI, Niotan I,
Refractory Metals Association (Feb. 28, 2011) (``RMA''), SEMI, SIF
I, TIAA-CREF, TIC, and TriQuint I.
\204\ See, e.g., letters from AAFA, Industry Group Coalition I,
IPC I, ITIC I, Japanese Trade Associations, NAM I, RMA, SEMI, and
TIC.
\205\ See letter from MSG I (stating that ``when conflict
minerals are present in tooling or other production machinery, they
should not be considered to be necessary to production of the
product''). The letter from MSG was signed by a number of human
rights groups, including Enough Project, Free the Slaves, and
Friends of the Congo, among others.
\206\ See, e.g., letters from NEI, SIF I, and TIAA-CREF.
\207\ See, e.g., letters from AAFA, Industry Group Coalition I,
IPC I, ITIC I, Japanese Trade Associations, NAM I, NEI, RMA, SEMI,
SIF I, TIAA-CREF, and TIC.
\208\ See letters from Niotan I and TriQuint I.
\209\ See letter from TriQuint I.
\210\ See letter from SEMI.
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In this regard, one commentator stated that the final rule should
not consider any indirect equipment, such as computers or power lines,
as necessary to production.\211\ Another commentator indicated that
conflict minerals used in products that are ``not intended to be sold
into commerce,'' such as those utilized solely for research and
development purposes, components provided at cost on a business-to-
business basis, or products or components used only for engineering or
testing purposes, should not be considered necessary to the production
of the product that is ultimately placed in the stream of
commerce.\212\
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\211\ See letter from Howland.
\212\ See letter from ITIC I. See also letter from TechAmerica
(Nov. 1, 2011) (``Industry Group Coalition II'') (suggesting that
the final rule should exclude ``research and development equipment
made available on a business-to-business basis from the scope of the
rule'').
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iii. De Minimis Threshold
We received mixed comments regarding whether the final rule should
have a de minimis threshold exception, with some commentators opposed
to a de minimis exception,\213\ and other commentators supporting
it.\214\ Some commentators provided a legal basis for including a de
minimis exception despite the lack of a de minimis exception in the
Conflict Minerals Statutory Provision.\215\ Generally, these
commentators asserted that, as long as legislation does not forbid
establishing a de minimis threshold, an agency's regulations may allow
for one. Also, one commentator noted that we have ``inherent authority
to employ de minimis exceptions to avoid unreasonable and absurd
results in crafting [the] final rule,'' which is ``inherent and clearly
established by precedent.'' \216\
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\213\ See, e.g., letters from Calvert, Earthworks, Episcopal
Conference of Catholic Bishops of the DRC (Nov. 8, 2011) (``CENCO
II''), Global Witness I, Howland, Matheson II, NEI, NYCBar I, NYCBar
II, Rep. Berman et al., SIF I, State II, and Trott.
\214\ See, e.g., letters from AAFA, AdvaMed I, AngloGold,
Chamber I, Davis Polk, IPC I, IPC II, IPMI I, NAM I, NRF I, PCP,
Rep. Bachus et al., Roundtable, SEMI, Teggeman, TIC, and WGC II.
\215\ See letters from Materion, NAM I, and NRF I.
\216\ See letter from Materion.
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Some commentators provided recommendations on possible de minimis
thresholds. Two commentators suggested that there should be a de
minimis exception if the cost of the conflict minerals in an issuer's
products make up less than 1% of the issuer's consolidated total
production costs.\217\ Other commentators recommended a de minimis
exception for trace, nominal, or insignificant amounts of conflict
minerals in an issuer's products.\218\ One commentator suggested a de
minimis exception when the end product derived from conflict minerals
reflects less than a certain percentage of the value of the product,
such as if the value was 5% or less of the total manufacturing
costs.\219\ Another commentator recommended a de minimis exception
relating to the inability of an issuer to determine the origin of its
minerals, such as allowing that issuer's product to be considered ``DRC
conflict free'' where the issuer is unable to determine the origin of
only 5% of the product's minerals.\220\ One commentator noted that the
final rule should permit a de minimis exception, but indicated that the
value used for the de minimis exception should be based on how the
phrase ``necessary to the functionality or production'' of a product is
to be defined in the final rule.\221\ Another commentator recommended
that the final rule permit a de minimis exception for products
containing less that 0.1% by weight of a conflict mineral.\222\ One
commentator provided three possible de minimis scenarios in which an
issuer would be excepted from reporting, specifically: If an issuer's
conflict minerals comprised less than 0.1% of a component or product,
if an issuer's global usage of conflict minerals comprised less than
0.01% of its materials, or if an issuer comprised the bottom 20% of its
industry's conflict minerals use.\223\
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\217\ See letters from AngloGold and WGC II.
\218\ See letters from Davis Polk, NRF I, and Roundtable.
\219\ See letter from TIC.
\220\ See letter from IPMI I.
\221\ See letter from SEMI (stating that, if the phrase was
limited to materials explicitly or intentionally added to a product
or caused to be added to a product, the de minimis threshold should
be one gram per year of necessary minerals, but if the final rule
included a ``more conservative'' meaning of the phrase, a higher de
minimis should be used, such as 0.1% of the weight of any particular
component acquired as a whole by the issuer).
\222\ See letter from IPC I.
\223\ See letter from NAM I.
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c. Final Rule
After considering the comments, we are adopting a final rule that,
like the proposed rules, does not define when a conflict mineral is
``necessary to the functionality'' of a product or when it is
``necessary to the production'' of a product.\224\ However, as we did
in the Proposing Release, we are providing guidance regarding the
interpretation of these phrases. The guidance is modified to a degree
from the guidance in the Proposing Release based on comments we
received. Whether a conflict mineral is deemed ``necessary to the
functionality'' of a product or ``necessary to the production'' of
product depends on the issuer's particular facts and circumstances, but
there are certain factors we believe issuers should consider in making
their determinations.
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\224\ As a threshold matter, we believe that the Conflict
Minerals Statutory Provision requires separate consideration as to
whether a conflict mineral is ``necessary to the production'' of a
product from whether a conflict mineral is ``necessary to the
functionality'' of the product, because the Conflict Minerals
Statutory Provision includes both phrases. See infra Part
II.B.4.c.iii. See also Exchange Act Sections 13(p)(1)(A) and
13(p)(2).
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As described below, in determining whether its conflict minerals
are ``necessary to the functionality'' of a product, an issuer should
consider: (a) Whether a conflict mineral is contained in and
intentionally added to the product or any component of the product and
is not a naturally-occurring by-product; (b) whether a conflict mineral
is necessary to the product's generally expected function, use, or
purpose; or (c) if a conflict mineral is incorporated for purposes of
ornamentation, decoration or embellishment, whether the primary purpose
of the product is ornamentation or decoration. Based on the applicable
facts and circumstances, any of these factors, either individually or
in the aggregate, may be determinative as to whether conflict minerals
are ``necessary to the functionality'' of a given product. In
determining whether its conflict minerals are ``necessary to the
production'' of a product, an issuer should consider whether a conflict
mineral is contained in the product and intentionally added in the
product's production process, including the production process of any
component of the product; and whether the conflict mineral is necessary
to produce the product. We describe changes to our guidance regarding
``necessary to the functionality'' and ``necessary to the production''
below.
[[Page 56296]]
i. Contained in the Product
After considering the comments and reviewing the Conflict Minerals
Statutory Provision, as described below, we are persuaded that only a
conflict mineral that is contained in the product should be considered
``necessary to the functionality or production'' of that product. We
believe this approach is appropriate in light of the Conflict Minerals
Statutory Provision's statutory construction. As discussed above, the
Conflict Minerals Statutory Provision requires issuers with conflict
minerals ``necessary to the functionality or production'' of a product
manufactured or contracted by the issuer to be manufactured that
originated in the Covered Countries to provide a Conflict Minerals
Report.\225\ The provision includes two distinct subsections, Exchange
Act Section 13(p)(1)(A)(i) and Exchange Act Section 13(p)(1)(A)(ii),
regarding the information required in that Conflict Minerals Report.
Generally, Exchange Act Section 13(p)(1)(A)(i) deals with an issuer's
description of its due diligence measures on the source and chain of
custody of its conflict minerals, including the independent private
sector audit, and Exchange Act Section 13(p)(1)(A)(ii) requires the
issuer's description of its products that have not been found to be
``DRC conflict free.'' The Conflict Minerals Statutory Provision
defines ``DRC conflict free'' to mean ``products that do not contain
minerals that directly or indirectly finance or benefit armed groups''
in the Covered Countries.\226\ The use of the term ``contain''
indicates that the disclosures required under Exchange Act Section
13(p)(1)(A)(ii) are limited to issuers with conflict minerals actually
contained in their products.\227\ We believe it is appropriate to
include this limitation in interpreting when a conflict mineral is
necessary to the functionality or production of a product.
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\225\ See Exchange Act Section 13(p)(1)(A).
\226\ Id. (emphasis added). See also Section 1502(e)(4) of the
Act (defining the phrase in the same manner as Exchange Act Section
13(p)(1)(A)(ii), except that Section 1502(e)(4) of the Act refers to
``conflict minerals'' instead of just ``minerals'').
\227\ We note that the Second Edition of the Random House
Webster's Dictionary defines ``contain'' to include the ``to hold
within a volume or area.'' Random House Webster's Dictionary, 142
(2d ed. 1996).
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We note that Exchange Act Section 13(p)(1)(A)(i) does not include a
similar limitation that the product must ``contain'' the necessary
conflict minerals. As a result, it is possible to interpret the
Conflict Minerals Statutory Provision such that the term ``contain'' in
Exchange Act Section 13(p)(1)(A)(ii) does not mean that a conflict
mineral must be included in the product for it to be ``necessary to the
functionality or production'' of the product. However, we do not
believe that such an interpretation would be the proper construction.
Following that approach, the provision could be interpreted to require
issuers with conflict minerals that are ``necessary to the
functionality or production'' of a product but are not included in that
product to submit an audited Conflict Minerals Report describing their
due diligence, as required under Exchange Act Section 13(p)(1)(A)(i),
but not describing any products produced using those minerals that
directly or indirectly financed or benefited armed groups in the
Covered Countries as having not been found to be ``DRC conflict free''
because the conflict minerals are not ``contained'' in the product.
We do not believe, however, that such an interpretation is the
better construction. It would mean that the Conflict Minerals Statutory
Provision envisions a situation in which an issuer with a conflict
mineral that is ``necessary to the functionality or production'' of its
product originated in the Covered Countries and benefited armed groups
in those countries would be required to submit a Conflict Minerals
Report describing its due diligence on the source and chain of custody
of that mineral but would not have to describe its products as having
not been found to be ``DRC conflict free.'' We believe the better
interpretation that gives meaning to the term ``contain'' is that only
conflict minerals contained in the product would be considered
``necessary'' to that product, so only those minerals trigger the
requirement to conduct a reasonable country of origin inquiry.
Additionally, we do not believe the final rule should include
conflict minerals ``necessary to the functionality or production'' of a
product that are not contained in the product because we appreciate
commentators' concerns that the application of the provision to
minerals that do not end up in the product is especially challenging.
As noted above, commentators were mixed in their views regarding how
the rule should treat catalysts and other conflict minerals necessary
to the production of a product that do not appear in the product.
However, we note that there are products where a catalyst is used and
is not completely washed away.\228\ In those situations, the product
contains a necessary conflict mineral that is necessary to its
production and is subject to the final rule.
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\228\ See letters from Industry Group Coalition I and NAM I
(referring specifically to situations in which catalysts are used to
chemically react with and produce products, and trace levels of the
catalyst are found in the reacted manufactured product, but the
catalysts do not contribute to the performance of the product).
---------------------------------------------------------------------------
ii. Intentionally Added
Although commentators did not agree on an exact definition, most
commentators from across the spectrum agreed that a conflict mineral
should be considered ``necessary to the functionality or production''
of a product for the purposes of the Conflict Minerals Statutory
Provision if, at a minimum, it was intentionally added to the product
or production process.\229\ While we are not defining the phrase, we
agree that being intentionally added, rather than being a naturally-
occurring by-product, is a significant factor in determining whether a
conflict mineral is ``necessary to the functionality or production'' of
a product. This is true regardless of who intentionally added the
conflict mineral to the product so long as it is contained in the
product.
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\229\ See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth,
Earthworks, Enough Project I, Global Witness I, Hacker Jewelers,
Hoover & Strong, Howland, ITIC I, Japanese Trade Associations, MSG
I, Niotan I, NRF I, Peace, PCP, SEMI, Sen. Durbin/Rep. McDermott,
SIF I, TIAA-CREF, TriQuint I, and WGC II.
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In this regard, we note that one commentator asserted that a
conflict mineral should not be considered ``intentionally added'' by an
issuer ``if it is present in a sub-component acquired by the issuer
based on a unilateral decision of the supplier or a sub-contractor, or
a party further upstream in the supply chain.'' \230\ We disagree. As
two of the co-sponsors of the provision asserted, determining whether a
conflict mineral is considered ``necessary'' to a product should not
depend on whether the conflict mineral is added directly to the product
by the issuer or whether it is added to a component of the product that
the issuer receives from a third party. Instead, the issuer should
``report on the totality of the product and work with suppliers to
comply with the requirements.'' \231\ Therefore, in determining whether
a conflict mineral is ``necessary'' to a product, an issuer must
consider any conflict mineral contained in its product, even if that
conflict mineral is only in the product because it was included as part
of a component of the product that was
[[Page 56297]]
manufactured originally by a third party.
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\230\ See letter from SEMI.
\231\ See letter from Sen. Durbin/Rep. McDermott (indicating
that a car manufacturer must report on any conflict minerals in the
car's radio, even if there are no conflict minerals elsewhere in the
car).
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iii. ``Necessary to the Functionality''
In addition to being contained in the product and intentionally
added, another factor in determining whether its conflict minerals are
``necessary to the functionality'' of a product is whether the conflict
mineral is necessary to the product's generally expected function, use,
or purpose. Some commentators suggested that we limit an issuer's
consideration of whether its conflict minerals are ``necessary to the
functionality'' of a product to the ``basic function'' or ``economic
utility'' tests. However, we believe limiting a determination to those
tests would not provide greater certainty or clarity to issuers
required to make such determinations. As one commentator noted, ``the
distinction between a `basic function' and an ancillary function is
murky and undefinable.'' \232\ Similarly, as another commentator noted,
``[e]conomic utility is very subjective and it can be the unforeseen
consequence of a derivative buried deep within a sub-component.'' \233\
Therefore, we believe these tests are so subjective as to be mostly
unworkable. We believe it is more appropriate instead to focus on a
product's generally expected function, use, or purpose, recognizing
that there are situations in which a product has multiple generally
expected functions, uses, and purposes. In such situations, a conflict
mineral need only be necessary for one such function, use, or purpose
to be necessary to the product as a whole. For example, a smart phone
has multiple generally expected functions, uses, and purposes, such as
making and receiving phone calls, accessing the internet, and listening
to stored music. If a conflict mineral is necessary to the function,
use, or purpose of any one of these, it is necessary to the
functionality of the phone.
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\232\ See letter from TIC.
\233\ See letter from SEMI.
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Another factor in determining whether its conflict minerals are
``necessary to the functionality'' of a product is whether the conflict
mineral is incorporated for purposes of ornamentation, decoration, or
embellishment. If a primary purpose of the product is mainly
ornamentation or decoration, it is more likely that a conflict mineral
added for purposes of ornamentation, decoration or embellishment is
``necessary to the functionality'' of the product. For example, the
gold in a gold pendant hanging on a necklace is necessary to the
functionality of the pendant because it is incorporated for purposes of
ornamentation, decoration, or embellishment, and a primary purpose of
the pendant is ornamentation or decoration. Conversely, if a conflict
mineral is incorporated into a product for purposes of ornamentation,
decoration, or embellishment, and the primary purpose of the product is
not ornamentation or decoration, it is less likely to be ``necessary to
the functionality'' of the product. As one commentator noted, ``if, for
example, gold is used in an article as an ancillary feature [of a
product] strictly for purposes of ornamentation, then it is unrelated
to the functionality of the product and would be exempt from the
reporting requirements of the statute.'' \234\ We would agree that
these facts would tend to indicate that the conflict mineral is not
necessary to the functionality of the product, provided that the
primary purpose of the product is not for ornamentation or decoration.
Even so, this would only be one factor among all the facts and
circumstances in the issuer's overall determination as to whether the
conflict mineral is necessary to the functionality of the product.
---------------------------------------------------------------------------
\234\ See letter from NRF I.
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iv. ``Necessary to the Production''
As with determining whether a conflict mineral is ``necessary to
the functionality'' of a product, determining whether a conflict
mineral is ``necessary to the production'' of a product involves
consideration of an issuer's particular facts and circumstances. As
noted above, the conflict mineral must be contained in the product to
trigger the determination of whether the conflict mineral is
``necessary to the production'' of the product. Consistent with this
approach, we do not consider a conflict mineral used as a catalyst or
in another manner in the production process of a product to be
``necessary to the production'' of the product if that conflict mineral
is not contained in the product, even though, based on the facts and
circumstances, the conflict mineral would have otherwise been
considered ``necessary to the production'' of the product had the
conflict mineral been included in the product. As one commentator noted
for gold, and we believe this is applicable for the other conflict
minerals as well, the ``use of gold as a catalyst in producing products
which do not in themselves contain gold will broaden the reach of the
regulations beyond what Section 1502 envisaged.'' \235\ We do, however,
consider a conflict mineral used as a catalyst or in another manner in
the production process of a product to be ``necessary to the
production'' of the product if that conflict mineral otherwise is
necessary to the production of the product and is contained in any
amount, including trace amounts, in the product.\236\
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\235\ See WGC II.
\236\ We note that this interpretation continues to bring
catalysts within the scope of the reporting requirements when they
are necessary to the production of the product. We understand that
not all catalysts are washed away in the production process, and the
remaining minerals may not be ``necessary to the functionality'' of
the product. See letters from Industry Group Coalition I and NAM I
(referring specifically to situations in which catalysts are used to
chemically react with and produce products, and trace levels of the
catalyst are found in the reacted manufactured product, but the
catalysts do not contribute to the performance of the product).
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As we indicated in the Proposing Release, we continue to believe
that a conflict mineral in a physical tool or machine used to produce a
product does not fall under the ``necessary to the production''
language in the Conflict Minerals Statutory Provision.\237\ One
commentator asserted that the language in the Conflict Minerals
Statutory Provision is intended to cover conflict minerals in tools or
machines that are necessary for the production of a product and, ``[i]n
the absence of such specificity, the rule will fail to ensure reporting
on the use of such tools or catalysts, thus leaving out a significant
market for the minerals and undermining the purpose of the law.'' \238\
We do not believe that a conflict mineral in a tool or machine is
captured by the Conflict Minerals Statutory Provision because, although
the conflict mineral may be included in the tool or machine, it is the
tool or machine and not the conflict mineral that is necessary to the
production.\239\ Additionally, the tool or machine is
[[Page 56298]]
unlikely to be contained in the final product.
---------------------------------------------------------------------------
\237\ However, the issuer that manufactures or contracts to
manufacture the tool or machine would likely come within the
``necessary to the production'' or ``necessary to functionality''
language.
\238\ See letter from Niotan I.
\239\ As described above, we consider a conflict mineral that is
``necessary to the functionality'' of a component product also to be
``necessary to the functionality'' of any subsequent product that
incorporates the component product. We recognize that this could be
seen as a two-step analysis, and thus it could be asserted that the
conflict mineral in the component product is not necessary to the
functionality of the subsequent product. We disagree with this view,
however, because a component added to a subsequent product becomes
part of that subsequent product, which removes any segregation from
the component and the subsequent product and makes the conflict
mineral directly necessary to the functionality of the subsequent
product.
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Like tools and machines, indirect equipment used to produce a
product, such as computers and power lines, does not bring the product
that is produced with the equipment into the ``necessary to the
production'' language.\240\ We do not consider a conflict mineral
necessary to the functionality or production of such indirect equipment
to be necessary to the production of the product because that conflict
mineral is only tangentially necessary for production of the product.
Similarly, we do not require issuers to report on the conflict minerals
in materials, prototypes, and other demonstration devices containing or
produced using conflict minerals that are necessary to the
functionality or production of those items because we do not consider
those items to be products. Once an issuer enters those items in the
stream of commerce by offering them to third parties for consideration,
the issuer will be required to report on any conflict minerals
necessary to the functionality or production of those products.
---------------------------------------------------------------------------
\240\ However, the issuer that manufactures or contracts to
manufacture the indirect equipment would likely come within the
definition of either ``necessary to the functionality'' or
``necessary to the production'' for the indirect equipment.
---------------------------------------------------------------------------
v. De Minimis Threshold
Finally, after considering the comments, the final rule does not
include a de minimis exception. The statute itself does not contain a
de minimis exception, and for several reasons we believe it would be
contrary to the Conflict Minerals Statutory Provision and Congressional
purpose to include one in the final rule. First, we note that the
Conflict Minerals Statutory Provision does include an express limiting
factor--namely that a conflict mineral must be ``necessary to the
functionality or production'' of an issuer's product to trigger any
disclosure regarding those conflict minerals.\241\ As discussed above,
this standard focuses on whether the conflict mineral is ``necessary''
to a product's functionality or production; it does not focus on the
amount of a conflict mineral contained in the product. We believe that
Congress understood, in selecting the standard it did, that a conflict
mineral used in even a very small amount could be ``necessary'' to the
product's functionality or production. If it had intended that the
provision be limited further, so as not to apply to a de minimis use of
conflict minerals, we think Congress would have done so explicitly. In
this regard, we note that in Section 1504 of the Act, which adds
Exchange Act Section 13(q) as part of the same title (Title XV) of the
Act (``Miscellaneous Provisions''), Congress did explicitly include a
de minimis threshold for the requirement to disclose certain payments
by resource extraction issuers.\242\
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\241\ See Exchange Act Sections 13(p)(1)(A) and 13(p)(2)(B).
\242\ See Section 1504 of the Act and Exchange Act Section
13(q). Exchange Act Section 13(q)(1)(C) states that ``the term
`payment,' means a payment that is made to further the commercial
development of oil, natural gas, or minerals; and not de minimis.''
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In addition, we believe that the purpose of the Conflict Minerals
Statutory Provision would not be properly implemented if we included a
de minimis exception in our final rule. As the State Department noted
in its comment letter, ``[i]n light of the nature'' of the conflict
minerals, they are often used in products ``in very limited
quantities,'' so including a de minimis threshold ``could have a
significant impact on'' the final rule.\243\ Consistent with the views
of the State Department, we believe Congress intended the disclosure
provisions to apply to the use of even small amounts of conflict
minerals originating in the Covered Countries.
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\243\ See State II (``In light of the nature in which the
covered minerals are often used in products, i.e. often in very
limited quantities, such a change could have a significant impact on
the proposed regulations. A de minimis threshold should not be
considered under current circumstances.'').
---------------------------------------------------------------------------
We are cognizant of the fact that, by not including a de minimis
exception, even minute or trace amounts of a conflict mineral could
trigger disclosure obligations.\244\ However, a de minimis amount of
conflict minerals triggers disclosure obligations only if those
conflict minerals are necessary for the functionality or production of
a product, and we understand that there are instances in which only a
minute amount of conflict minerals is necessary for the functionality
or production of a product. Therefore, consistent with the proposal,
our final rule applies to issuers for which any conflict minerals are
necessary to the functionality or production of a product manufactured
or contracted by the issuer to be manufactured regardless of the amount
of the conflict mineral.
---------------------------------------------------------------------------
\244\ See letters from Chamber I and NRF I.
---------------------------------------------------------------------------
We recognize that not including a de minimis exception in the final
rule will be more costly for issuers than if we included one. As
described above, however, we are of the view that Congress intended not
to provide for a de minimis exception, and including one in the final
rule would therefore thwart, rather than advance, the provision's
purpose. Further, we believe focusing on whether the mineral was
intentionally added addresses some of the concerns regarding de minimis
amounts of minerals. For example, according to one commentator, a
number of metal alloys, including the high volume materials of cold
rolled steel, hot rolled steel, and stainless steel, contain tin only
as a contaminant, such that it is not part of the specification of
these alloys.\245\ Therefore, the tin in these alloys is not
intentionally added, and we do not consider the tin ``necessary to the
functionality or production'' of any product containing those alloys.
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\245\ See letter from Claigan Environmental Inc. (Dec. 16, 2011)
(``Claigan III'').
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C. Location, Status, and Timing of Conflict Minerals Information
Once it is determined that conflict minerals are necessary to the
functionality or production of a product manufactured or contracted by
the issuer to be manufactured, the issuer will have to submit conflict
minerals information in accordance with the final rule.
1. Location of Conflict Minerals Information
a. Proposed Rules
Our proposed rules would have required issuers to provide their
disclosure about conflict minerals in their annual reports on Form 10-K
for a domestic issuer,\246\ Form 20-F for a foreign private
issuer,\247\ and Form 40-F for a Canadian issuer that files under the
Multijurisdictional Disclosure System,\248\ with their Conflict
Minerals Reports as an exhibit to their annual report.\249\ Section
1502 requires issuers to disclose information about their conflict
minerals annually, but does not otherwise specify where this disclosure
must be located, either in terms of which form or in terms of where
within a particular form. Our proposed rules would have required this
disclosure in the existing Form 10-K, Form 20-F, or Form 40-F annual
report because issuers were already required to file these reports so
we believed this approach would be less burdensome than requiring a
separate annual report.
[[Page 56299]]
To facilitate locating the conflict minerals disclosure within the
annual report without over-burdening investors with extensive
information about conflict minerals in the body of the report, our
proposed rules would have required issuers to include brief conflict
minerals disclosure under a separate heading entitled ``Conflict
Minerals Disclosure'' and more extensive information in a separate
exhibit to the annual report.
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\246\ 17 CFR 249.310.
\247\ 17 CFR 249.220f.
\248\ 17 CFR 249.240f.
\249\ In the Proposing Release, we indicated that, by requiring
an issuer to provide its Conflict Minerals Report as an exhibit to
its annual report, the proposed rules would enable anyone accessing
the Commission's Electronic Data Gathering, Analysis, and Retrieval
system (the ``EDGAR'' system) to determine quickly whether an issuer
furnished a Conflict Minerals Report with its annual report.
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We proposed to require that an issuer disclose in its annual report
under a separate heading, entitled ``Conflict Minerals Disclosure,''
its determination as to whether any of its conflict minerals originated
in the Covered Countries, based on its reasonable country of origin
inquiry, and, for its conflict minerals that did not originate in the
Covered Countries, a brief description of the reasonable country of
origin inquiry it conducted in making such a determination. The
proposed rules would not have required an issuer that determined that
its conflict minerals did not originate in the Covered Countries, based
on its reasonable country of origin inquiry, to provide any further
disclosures. We also proposed that an issuer include brief additional
disclosure in the body of the annual report if the issuer's conflict
minerals originated in the Covered Countries or if the issuer could not
determine that its conflict minerals did not originate in the Covered
Countries, based on its reasonable country of origin inquiry. As
proposed, these rules would have required an issuer to disclose that
its conflict minerals originated in the Covered Countries, or that it
was unable to conclude that its conflict minerals did not originate in
the Covered Countries, that its Conflict Minerals Report had been
furnished as an exhibit to the annual report, that the Conflict
Minerals Report, including the certified independent private sector
audit, was publicly available on the issuer's Internet Web site, and
the issuer's Internet address on which the Conflict Minerals Report and
audit report were located.
The Conflict Minerals Statutory Provision requires that each issuer
make its Conflict Minerals Report available to the public on the
issuer's Internet Web site.\250\ Consistent with the statute, we
proposed rules to require an issuer to make such a report, including
the certified audit report, available to the public by posting the text
of the report on its Internet Web site. As proposed, the rules would
require that the text of the Conflict Minerals Report remain on the
issuer's Web site at least until it filed its subsequent annual report.
Although the proposed rules would have required an issuer that
furnished a Conflict Minerals Report to provide some disclosures in the
body of its annual report regarding that report, we would not have
required that an issuer post this disclosure on its Web site. We
believed this was appropriate because any information disclosed in the
body of the annual report would also be included in the Conflict
Minerals Report, which would have been required to be posted on the
issuer's Internet Web site.
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\250\ See Exchange Act Section 13(p)(1)(E), which is entitled
``Information Available to the Public'' and states that ``[e]ach
person described under paragraph (2) shall make available to the
public on the Internet Web site of such person the information
disclosed by such person under subparagraph (A).''
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b. Comments on the Proposed Rules
We received mixed comments on the proposal. While many commentators
believed that the final rule should not require an issuer's conflict
minerals information to be provided in that issuer's annual
report,\251\ other commentators believed that an issuer's conflict
minerals information should be provided in that issuer's annual report,
as proposed.\252\ Commentators that did not want the conflict minerals
information included in the annual report generally agreed that the
information should be provided either in a newly created report or
form, or in a current report on Form 8-K \253\ or Form 6-K,\254\
instead.\255\ A small number of commentators stated that an issuer's
conflict minerals information should be provided solely on its Internet
Web site.\256\ Some commentators suggested that the final rule should
allow issuers to submit their conflict minerals information on a
separate form or in a current report, noting that the Conflict Minerals
Statutory Provision does not require explicitly that the information be
submitted in a Form 10-K, Form 20-F, or Form 40-F annual report.\257\
As one commentator noted, this requirement contrasts with the one in
Section 1503 of the Act,\258\ which states that mine safety disclosure
be provided in ``each periodic report filed with the Commission under
the securities laws.'' \259\ Therefore, these commentators reasoned
that if Congress intended the Conflict Minerals Statutory Provision to
require an issuer to provide the conflict minerals information in the
annual report on Forms 10-K, 20-F, or 40-F, Congress would have used
language similar to that in Section 1503.
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\251\ See, e.g., letters from AdvaMed I, AngloGold, Barrick
Gold, Cleary Gottlieb, Corporate Secretaries I, CTIA, Davis Polk,
Ford Motor Company (Mar. 2, 2011) (``Ford''), Industry Group
Coalition I, ITIC I, Japanese Trade Associations, JVC et al. II, NAM
I, NAM III, NCTA, NMA II, NY State Bar, Roundtable, SEMI, Taiwan
Semi, and Tiffany.
\252\ See, e.g., letters from Earthworks, Enough Project I,
Global Witness I, Methodist Pension, Peace, and TIAA-CREF.
\253\ 17 CFR 249.308.
\254\ 17 CFR 249.306.
\255\ See, e.g., letters from AdvaMed I, AngloGold, Barrick
Gold, Cleary Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. II, NAM
I, NMA II, NY State Bar, and Taiwan Semi.
\256\ See letters from Corporate Secretaries I, CTIA, NCTA, and
Tiffany.
\257\ See, e.g., letters from AngloGold, ITIC I, JVC et al. II,
and NAM I. Exchange Act Section 13(p)(1)(A) requires only that
issuers ``disclose annually'' their conflict minerals information.
\258\ Section 1503 of the Act.
\259\ See letter from AngloGold.
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Certain commentators asserted that the subject matter underlying
the conflict minerals information is both very specialized and
substantively different from the financial and business information in
the annual report on Forms 10-K, 20-F, or 40-F.\260\ Some of these
commentators stated that the existing Exchange Act reporting system is
designed to provide investors with material information from a
financial perspective, whereas the Conflict Minerals Statutory
Provision uses the securities disclosure laws to provide conflict
mineral supply chain information for the purpose of stopping the
humanitarian crisis in the Covered Countries.\261\ Commentators
suggested that the processes with which to obtain and provide conflict
minerals information should be different from those processes developed
for current year-end reporting.\262\
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\260\ See, e.g., letters from Barrick Gold, CEI I, Cleary
Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. II, NAM I, NMA II, NY
State Bar, PCP, Taiwan Semi, and SEMI.
\261\ See, e.g., letters from CEI I, NY State Bar, and Taiwan
Semi.
\262\ See letters from Davis Polk and NAM I.
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Other commentators argued that the disclosures required by the
final rule should be treated no differently than other disclosures
required by the Exchange Act.\263\ In this regard, one such commentator
agreed that the final rule should require that an issuer's conflict
minerals information be included in the issuer's annual report because
such a requirement is inherent in the policy goals underlying the
Conflict Minerals Statutory Provision and would foster consistency in
the form, location, and timing of the information.\264\ Similarly,
another such commentator stated that not requiring
[[Page 56300]]
conflict minerals information in the annual report on Forms 10-K, 20-F,
or 40-F would inhibit the public's ability to monitor an issuer's use
of conflict minerals and allow issuers to hide their conflict minerals
information.\265\ In this regard, a number of commentators believed
that there is little or no difference in the purposes of the Conflict
Minerals Statutory Provision and the rest of the Exchange Act, in that
both require the disclosure of meaningful supply chain and reputational
information about an issuer for the benefit of investors.\266\ For
example, the co-sponsors of the legislation stated explicitly that the
purposes of the Conflict Minerals Statutory Provision and the rest of
the Exchange Act are ``very much the same'' because they both ```assure
a stream of current information about an issuer for the benefit of
purchasers * * * and for the public.''' \267\ As another example, a
commentator asserted that ``conflict minerals disclosures are material
to investors and will inform and improve an investor's ability to
assess social (i.e., human rights) and reputational risks in an
issuer's supply chain.'' \268\
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\263\ See letters from CRS I, Global Witness I, Methodist
Pension, Sen. Durbin/Rep. McDermott, and SIF I.
\264\ See letter from Global Witness I.
\265\ See letter from Peace.
\266\ See, e.g., letters from CRS I, FRS, Global Witness I,
Methodist Pension, Sen. Durbin/Rep. McDermott, Sen. Leahy et al.,
SIF I, and SIF II.
\267\ See letter from Sen. Durbin/Rep. McDermott.
\268\ See letter from SIF I.
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Some commentators were concerned about providing conflict minerals
information in the annual report on Forms 10-K, 20-F, or 40-F due to
the timing of filing an annual report.\269\ These commentators noted
that the increased burden on issuers in collecting and reporting
conflict minerals information could cause those issuers to be unable to
file their annual reports in a timely manner. Some commentators offered
an alternative scheme in which an issuer would be permitted to provide
its conflict mineral information on either a new report or form, an
amended annual report, or a current report on Form 8-K or Form 6-K
within a certain number of days following the end of the issuer's
fiscal year.\270\ A few of these commentators \271\ pointed out that
the Commission permits delays in providing certain information on an
annual report, such as with prospective incorporation by reference of
information from an issuer's proxy statement under General Instruction
G.(3) of Form 10-K \272\ and prospective incorporation by reference of
separate financial statements of unconsolidated entities under Item 3-
09 of Regulation S-X.\273\ Commentators proposed a variety of time
periods, including 120, 150, and 180 days after an issuer's fiscal
year-end, in which an issuer could be required to provide its conflict
minerals information as part of its annual report.\274\ Similarly, as
discussed in greater detail below, some commentators suggested that the
final rule should consider a single start and end date for the
reporting period for all companies, regardless of their particular
fiscal year,\275\ and one of these commentators recommended that this
one year period coincide with the calendar year.\276\
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\269\ See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA,
Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI.
\270\ See letters from AngloGold, Cleary Gottlieb, CTIA, IPC I,
ITIC I, JVC et al. II, NAM I, NY State Bar, Roundtable, and SEMI.
\271\ See letters from Cleary Gottlieb and NY State Bar.
\272\ General Instruction G.(3) of Form 10-K [17 CFR 249.310].
\273\ Item 3-09 of Regulation S-X [17 CFR 210.3-09].
\274\ See letters from AngloGold, CTIA, ITIC I, NAM I,
Roundtable, and SEMI.
\275\ See letters from Advanced Micro Devices, Inc., Africa
Faith and Justice Network, Boston Common Asset Management, LLC,
Calvert Asset Management Co., Inc., Congo Global Action, Enough
Project, Falling Whistles, Free the Slaves, Future 500, General
Electric Company, Global Witness, Hewlett-Packard Company,
Interfaith Center on Corporate Responsibility, Jantzi-
Sustainalytics, Jesuit Conference, Jewish World Watch, Mercy
Investment Services, Inc., Microsoft Corporation, Royal Philips
Electronics, Trillium Asset Management, Unity Minerals, US SIF: The
Forum for Sustainable and Responsible Investment (Aug. 22, 2011)
(``MSG II'') and State II.
\276\ See letter from MSG II (``We respectfully request that the
SEC rule synchronize the timing for the information contained in the
Conflict Minerals Reports from all issuers on a calendar year basis.
The MSG recommends that all issuers begin exercising and reporting
due diligence on the source and chain of custody for the subject
minerals used in their products on a common calendar date.'').
---------------------------------------------------------------------------
Additionally, some commentators were concerned about the liability
of the principal executive offers, principal financial officers, and
auditors who must certify an annual report under Sections 302 \277\ and
906 \278\ of the Sarbanes-Oxley Act if the rule requires that an issuer
provide its conflict minerals information in its filed annual
report.\279\ In this regard, one commentator stated that, if the final
rule requires an issuer to provide conflict minerals information in its
annual report, the Commission should amend rules 13a-14(a) and (b)
\280\ and 15d-14(a) and (b) \281\ under the Exchange Act to acknowledge
that the various officer certifications required by those rules do not
extend to any conflict minerals information provided either in or as an
exhibit to the annual report.\282\ Another commentator stated that, if
we required conflict minerals disclosure in the existing annual
reports, we should include ``a clear statement in the rules or the
adopting release that the officer certifications required to be
included as exhibits to the existing annual reports would not apply to
the conflict minerals disclosure.'' \283\ Also, some commentators were
concerned about the negative effects that providing the information in
the annual report on Forms 10-K, 20-F, or 40-F would have on form or
other eligibility, incorporation by reference into Securities Act
filings, and home country reporting in the case of foreign private
issuers.\284\
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\277\ Public Law 107-204, 116 Stat. 745, Sec. 302 (2002).
\278\ Public Law 107-204, 116 Stat. 745, Sec. 906 (2002).
\279\ See, e.g., letters from ITIC I, NMA II, and Taiwan Semi.
\280\ Rule 13a-14(a) [17 CFR 240.13a-14(a)] and Rule 13a-14(b)
[17 CFR 240.13a-14(b)].
\281\ Rule 15d-14(a) [17 CFR 240.15d-14(a)] and Rule 15d-14(b)
[17 CFR 240.15d-14(b)].
\282\ See letter from NY State Bar.
\283\ See letter from Cleary Gottlieb.
\284\ See, e.g., letters from Barrick Gold, Cleary Gottlieb,
Corporate Secretaries I, Davis Polk, ITIC I, NMA II, NY State Bar,
and WGC II. But see letter from Global Witness I (stating that
conflict minerals information should be incorporated by reference
into Securities Act filings).
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Some commentators indicated that, regardless of where the
information was provided, they wanted the conflict minerals information
in a location that was easily available to the public,\285\ or on the
Web sites of both the issuer and the Commission.\286\ In this regard,
certain commentators recommended that the final rule require an issuer
to post its Conflict Minerals Reports and/or its audit reports on its
Internet Web site, as we proposed.\287\ However, some of these
commentators suggested that the final rule should require an issuer to
keep that information on its Internet Web site longer than until the
issuer filed its subsequent annual report.\288\ Other commentators
noted that the final rule should not require an issuer to post its
audit report online \289\ because, as one of the commentators
noted,\290\ such
[[Page 56301]]
a requirement would increase costs without increasing benefits.
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\285\ See, e.g., letters from Episcopal Conference of Catholic
Bishops of the DRC (Apr. 5, 2011) (``CENCO I'') and Good Shepherd.
\286\ See, e.g., letter from Catholic Charities.
\287\ See letters from CRS I, Douglas Hileman Consulting LLC
(Oct. 31, 2011) (``Hileman Consulting''), Howland, NEI, SEMI, SIF I,
and TriQuint I.
\288\ See letters from Hileman Consulting (suggesting ``more
than the proposed one year''), NEI (suggesting ``issuers to post
several years worth of reports on their Web sites''), SIF I
(suggesting that an ``issuer should be required to keep posted its
Conflict Minerals Report and audit reports on its Internet Web site
for five years''), and TriQuint I (suggesting that an issuer's
Conflict Minerals Reports should be posted on its Web site ``for 10
years after the issuer's products were last sold on the open
market'').
\289\ See letters from AngloGold and NMA II.
\290\ See letter from AngloGold.
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Finally, some commentators suggested that the final rule should
address how an issuer must handle a situation in which it acquires or
otherwise obtains control over a company that manufactures or contracts
to manufacture products with conflict minerals necessary to the
functionality or production of products that previously had not been
obligated to provide conflict minerals information to us.\291\ These
commentators noted that the acquired company may not have any processes
in place to determine the origin of conflict minerals in its products
and, therefore, the acquiring issuer would most likely need a
``reasonable amount of time'' \292\ to establish those processes before
it could provide an accurate specialized disclosure report that
included the acquired company's supply chain. Some commentators
recommended that the issuer not be required to report on the products
manufactured by the acquired company until the end of the first
reporting period that begins no sooner than eight months after the
effective date of the acquisition.\293\ One commentator suggested that
the issuer not be required to report on the products manufactured by
the acquired company until the end of the first reporting period that
begins no sooner than 18 months from the date of the acquisition.\294\
Another commentator recommended that the issuer not be obligated to
report with respect to the products manufactured by or for the acquired
entity ``until the first fiscal year beginning after the fiscal year in
which the acquisition is consummated.''\295\
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\291\ See, e.g., letters from ABA, Industry Group Coalition I,
Industry Group Coalition II, NAM I, and Semiconductor.
\292\ Letter from Semiconductor.
\293\ See letters from Industry Group Coalition I (suggesting an
eight month lead-in period because it is similar to the time that
will elapse between the adoption of final rules implementing the Act
and the commencement of the reporting period applicable to calendar-
year filers, and that time period is necessary to allow sufficient
time for the acquiring issuer to implement its conflict minerals
reasonable inquiry and due diligence processes throughout the supply
chain of the acquired firm), NAM I (same), and Semiconductor (same).
\294\ See letter from Industry Group Coalition II. See also
letters from Industry Group Coalition I, NAM I, and Semiconductor.
\295\ See letter from ABA.
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c. Final Rule
After considering the comments, we are revising the proposed rules
to require that an issuer provide its conflict minerals information in
a new report on a new Exchange Act form. As proposed, however, the
final rule requires an issuer to provide its Conflict Minerals Report
as an exhibit, and not in the body of the new report. In this regard,
we continue to believe that providing the Conflict Minerals Report as
an exhibit to the specialized disclosure report will enable anyone
accessing the EDGAR system to determine quickly whether an issuer
provided a Conflict Minerals Report with its specialized disclosure
report.
We proposed requiring disclosure regarding conflict minerals in an
issuer's annual report because we believed that this approach would be
less burdensome than requiring that an issuer provide a separate
report. Based on the comments we received, however, it appears that
issuers will find it less burdensome to provide their conflict minerals
information on a new report that is separate from the annual report and
due later than the annual report. For example, one commentator
explained that ``between an issuer's fiscal year end and the date the
issuer is required to file its audited annual financial statements, the
issuer's accounting and financial reporting teams focus their resources
on preparing the issuer's annual report,'' so ``[r]equiring the
conflict minerals disclosure to be furnished at the same time as the
issuer's Exchange Act annual report would put further strain on these
resources at a time when they are likely already to be operating near
full capacity.'' \296\ Another commentator noted that issuers are going
to be required to utilize ``significantly different processes to comply
with the new reporting requirement that are outside the scope of
processes developed for regular year-end reporting, and it may be a
burden to complete the necessary inquiry and due diligence pertaining
to conflict minerals on the same timetable as'' an annual report.\297\
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\296\ Letter from AngloGold.
\297\ Letter from NAM I.
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We considered commentators' arguments that it would be easier for
investors to locate the information in Forms 10-K, 20-F, and 40-F. We
believe, however, that new Form SD should provide ready access to the
information. Indeed, it may be easier for investors to find the
information when it is included in the new Form SD, rather than as one
of potentially dozens of exhibits in a voluminous Form 10-K, Form 20-F,
or Form 40-K.\298\ Therefore, the final rule requires an issuer with
conflict minerals necessary to the functionality or production of a
product it manufactures or contracts to be manufactured to provide us a
specialized disclosure report on Form SD by May 31 of each year,
reporting on the preceding calendar year. The specialized disclosure
report is due later than when an annual report is due for calendar year
end issuers so as not to interfere with such issuer's preparation of
its Exchange Act annual report, as requested by a number of
commentators.\299\ Also, as discussed in greater detail below, the
final rule requires each issuer to provide its conflict minerals
information for each calendar year, rather than its fiscal year.
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\298\ Under the proposed rules, an issuer would have been
required to furnish its conflict minerals information in its annual
report on Form 10-K, Form 20-F or Form 40-F. As such, investment
companies that are registered under the Investment Company Act of
1940 [15 U.S.C. 80a et seq.] (``registered investment companies'')
would not have been subject to the disclosure requirement because
those companies are not required to file Form 10-K, Form 20-F or
Form 40-F. Our decision to require this disclosure in a new form is
not intended to change the scope of companies subject to the
disclosure requirement. Therefore, consistent with the proposal,
registered investment companies that are required to file reports on
Form N-CSR or Form N-SAR pursuant to Rule 30d-1 under the Investment
Company Act (17 CFR 270.30d-1) will not be subject to the final
rule.
\299\ See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA,
Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI.
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We agree with the comments we received that a reasonable amount of
additional time to submit the conflict minerals information is
appropriate where an issuer acquires or otherwise obtains control over
a company that manufactures or contracts to manufacture products with
conflict minerals necessary to the functionality or production of those
products that previously had not been obligated to provide conflict
minerals information to us. We have added an instruction to the final
rule to reflect this delay. Therefore, the final rule allows an issuer
to delay the initial reporting period on the products manufactured by
the acquired company until the first calendar year beginning no sooner
than eight months after the effective date of the acquisition. This
option appears to be a reasonable approach based on some of the
comments we received.\300\ We note that a shorter period, such as
requiring an issuer to report with respect to the products manufactured
by or for the acquired entity during the first fiscal year beginning
after the fiscal year in which the acquisition is consummated, may
leave an issuer that acquires a company late in the year with an
insufficient amount of time to establish
[[Page 56302]]
systems to gather and report on the conflict minerals information.
---------------------------------------------------------------------------
\300\ See, e.g., letters from Industry Group Coalition I,
Industry Group Coalition II, NAM I, and Semiconductor.
---------------------------------------------------------------------------
Additionally, we are modifying the proposed rules regarding how
long an issuer must keep its conflict minerals disclosure or its
Conflict Minerals Report available on the issuer's Internet Web site to
reflect that the information is not to be included in an issuer's
annual report on Form 10-K, Form 20-F, or Form 40-K. The proposed rules
would have required an issuer to keep its conflict minerals information
on its Internet Web site until its subsequent annual report was filed.
We intended this period to last only one year because, whether or not
the issuer had any conflict minerals information to provide in its
subsequent annual report, the issuer had to file the subsequent annual
report one year after its prior annual report or cease to be a
reporting issuer. However, with the final rule requiring an issuer to
provide its conflict minerals information in a specialized disclosure
report on Form SD, the period between specialized disclosure reports
may be more than one year if an issuer has no reportable conflict
minerals in its subsequent calendar year. If we did not modify the
proposed rules, such an issuer may have been required to keep its
conflict minerals information on its Internet Web site for more than
one year, possibly indefinitely. Therefore, the final rule specifies
that an issuer must make its conflict minerals disclosure or its
Conflict Minerals Report available on the issuer's Internet Web site
for one year. In response to concerns expressed by commentators that
the information should be required to be mandated longer, we note that
the issuer's Form SD with the Conflict Minerals Report will be
available on EDGAR indefinitely, so the information will continue to be
widely available.
In another release we are issuing today, we are requiring issuers
to disclose certain resource extraction payment information on Form
SD.\301\ Because of the order of the releases, we are adopting the form
in this release and amending it in the resource extraction release. We
intend, however, for the form to be used equally for these two separate
disclosure requirements.
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\301\ Disclosure of Payments by Resource Extraction Issuers,
Release No. 34-67717 (Aug. 22, 2012).
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2. ``Filing'' of Conflict Minerals Information
a. Proposed Rules
The proposed rules would have required an issuer's conflict
minerals information to be provided in the issuer's annual report on
Form 10-K, Form 20-F, or Form 40-F, as applicable, and the Conflict
Minerals Report to be included as an exhibit to the issuer's annual
report. Certain proposed item requirements would have instructed an
issuer to furnish its Conflict Minerals Report as an exhibit to its
annual report. Additionally, as proposed, an issuer's Conflict Minerals
Report, which would have included the independent private sector audit
report, would not be ``filed'' for purposes of Section 18 of the
Exchange Act and thus would not be subject to potential liability of
that section of the Exchange Act, unless the issuer stated explicitly
that the Conflict Minerals Report and the independent private sector
audit report were filed under the Exchange Act. Instead, these
documents would only have been furnished to the Commission. Similarly,
as proposed, the rules would not have considered the Conflict Minerals
Report and the independent private sector audit report to be
incorporated by reference into any filing under the Securities Act or
the Exchange Act, except to the extent that the issuer specifically
incorporated them by reference into the documents. As noted above and
in the Proposing Release, furnishing the Conflict Minerals Report would
not have subjected the issuer to Section 18 liability,\302\ but the
issuer would still have had liability for its conflict minerals
information. Under Exchange Act Section 13(p)(1)(C), a failure to
comply with the Conflict Minerals Statutory Provision would have
rendered the issuer's due diligence process ``unreliable,'' and,
therefore, the Conflict Minerals Report would ``not satisfy'' the
proposed rules.\303\ In this regard, as proposed, an issuer that failed
to comply with the proposed rules would have been subject to liability
for violations of Exchange Act Sections 13(a) or 15(d), as
applicable.\304\
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\302\ 15 U.S.C. 78r.
\303\ See Exchange Act Section 13(p)(1)(C).
\304\ 15 U.S.C. 78m(a) and 15 U.S.C. 78o(d).
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b. Comments on the Proposed Rules
A number of commentators stated specifically that the final rule
should, as proposed, require an issuer to ``furnish'' rather than
``file'' its conflict minerals information.\305\ Many of these
commentators believed that the nature and purpose of the conflict
minerals disclosure is qualitatively different from the other
disclosure required under Exchange Act Section 13 and the conflict
minerals information is not material to investors.\306\ As one
commentator explained, ``[n]othing in the statute itself suggests that
the `reasonable' investor would find this information to be important
in deciding whether to buy or sell'' an issuer's securities, which is
``the touchstone of materiality under the federal securities laws.''
\307\ However, this commentator acknowledged that ``socially conscious
investors might well factor this information into an investment
decision.'' \308\ Some commentators asserted that the conflict minerals
information is different from other information in required filings, so
the conflict minerals information should be ``furnished.'' \309\ Other
commentators noted that, if the conflict minerals information is
material to a reasonable person's investment decision, it would have to
be disclosed in an issuer's filings even without the Conflict Minerals
Statutory Provision, so any other information regarding conflict
minerals should be ``furnished.'' \310\ Another commentator recommended
that the conflict minerals information should be ``furnished'' because,
whereas the data used to generate the financial statements in issuers'
``filed'' periodic reports are generally within their control and
subject to internal controls, issuers would be required to rely on
third parties (suppliers, smelters, etc.) for their conflict minerals
data that are mostly beyond the issuer's control.\311\
---------------------------------------------------------------------------
\305\ See, e.g., letters from AngloGold, Barrick Gold, Cleary
Gottlieb, Corporate Secretaries I, Deloitte & Touche LLP (Mar. 2,
2011) (``Deloitte''), Ford, ITIC I, JVC et al. II, NAM III, NMA II,
NY State Bar, Taiwan Semi, and WGC II.
\306\ See, e.g., letters from AngloGold, Barrick Gold, Cleary
Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and
Taiwan Semi.
\307\ See letter from JVC et al. II.
\308\ See id.
\309\ See, e.g., letters from AngloGold, Barrick Gold, Cleary
Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and
Taiwan Semi.
\310\ See letter from AngloGold and NMA II.
\311\ See letter from Ford.
---------------------------------------------------------------------------
Some commentators argued that the conflict minerals information
should be ``furnished'' so that Exchange Act Section 18 liability would
not attach to the conflict minerals information.\312\ One of these
commentators asserted that Section 18 liability should not be available
because there is no indication that Congress intended for an issuer's
conflict minerals information to be subject to such liability.\313\ In
this regard, some commentators contended that, if ``furnished,''
issuers' conflict minerals information would still receive significant
attention and scrutiny, and the issuers' disclosures regarding this
information will still be subject to liability sufficient enough to
deter
[[Page 56303]]
abuse.\314\ The commentators pointed out that issuers would still be
liable for any materially false or misleading statements under the
antifraud provisions of the federal securities laws, including, Section
10(b) of the Exchange Act and Rule 10b-5 there under.\315\ They
indicated further that failure to comply with the Conflict Minerals
Statutory Provision would render the issuer's due diligence
``unreliable'' and, therefore, the Conflict Minerals Report would not
satisfy the final rule, which would subject the issuer to liability for
violations of Exchange Act Sections 13(a) or 15(d), as applicable.\316\
---------------------------------------------------------------------------
\312\ See letters from Barrick Gold, Cleary Gottlieb, NMA II,
Society of Corporate Secretaries and Governance Professionals (Aug.
16, 2011) (``Corporate Secretaries III''), and WGC II.
\313\ See letter from the WGC II.
\314\ See letters from Barrick Gold, Ford, and JVC et al. II.
\315\ See letters from Barrick Gold and JVC et al. II.
\316\ See letters from Ford and JVC et al. II.
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Conversely, other commentators indicated that the final rule should
require an issuer to ``file'' its conflict minerals information.\317\
Two of the co-sponsors of the statutory provision noted that Congress
intended for an issuer's conflict minerals information, particularly
the Conflict Minerals Report, to be ``filed'' rather than ``furnished''
so that the information would be subject to the liability provisions in
Section 18 of the Exchange Act and, thereby, allow for private sector
remedies for false and misleading statements.\318\ These co-sponsors
asserted that, in the Proposing Release, we incorrectly reasoned that
the Conflict Minerals Statutory Provision's requirement that an issuer
``submit'' its Conflict Minerals Report means that Congress intended
that the information be ``furnished'' instead of ``filed.'' They noted
that the term ``furnish'' is included throughout the Act 41 times, but
that term is ``expressly not used in Section 1502,'' which demonstrates
that ``Congress intended for the word `submit' to be synonymous with
`filed,' not `furnished.''' \319\
---------------------------------------------------------------------------
\317\ See, e.g., letters from Bario-Neal, Brilliant Earth,
Columban Center et al., Earthworks, Enough Project I, Global Witness
I, Hacker Jewelers, Hoover & Strong, Metalsmiths, Sen. Durbin/Rep.
McDermott, SIF II, TakeBack, TIAA-CREF, and World Vision US and
World Vision DRC (Feb. 21, 2012) (``World Vision II'').
\318\ See letter from Sen. Durbin/Rep. McDermott.
\319\ See id.
---------------------------------------------------------------------------
Similarly, another comment letter written by other members of
Congress also emphasized that it was Congress's legislative intent to
the Conflict Minerals Report be ``filed'' not ``furnished.'' \320\ The
letter stated that it was made clear ``during the legislative process,
meetings with the SEC, and in written comments to the Commission that
Section 1502 was designed as a transparency measure to provide
investors and the public the information needed to make informed
choices.'' \321\ Therefore, according to the letter, ``[p]rotecting
investor interests by making companies liable for fraudulent or false
reporting of conflict minerals is critical--so the reports must be
`filed,' not `furnished.''' \322\
---------------------------------------------------------------------------
\320\ See letter from Sen. Leahy et al.
\321\ Id.
\322\ Id.
---------------------------------------------------------------------------
Further commentators asserted that a plain reading of the Conflict
Minerals Statutory Provision demonstrates that Congress intended that
the term ``submit'' to mean ``file.'' \323\ The commentators argued
that ``submit'' means ``file'' in the provision because new Exchange
Act Section 13(p)(2)(A) states that conflict minerals disclosure is
required if conflict minerals are necessary to the functionality or
production of a product manufactured by a person described and the
person described is required to ``file'' reports with us pursuant to
the Conflict Minerals Statutory Provision. Also, one of the
commentators noted that the term ``furnish'' is not in the text of the
provision.\324\
---------------------------------------------------------------------------
\323\ See letters from Global Witness I and Enough Project I.
\324\ See letter from Global Witness I.
---------------------------------------------------------------------------
Additionally, some commentators asserted that requiring the
conflict minerals information be ``filed'' would benefit investors by
making an issuer's conflict minerals information more transparent,
accessible, accurate, and complete. In this regard, one of these
commentators suggested that requiring the conflict minerals information
to be ``filed'' would allow for private rights of action, which would
permit investors to seek remedies for material misstatements regarding
conflict minerals disclosures, and provide an incentive for issuers and
others to conduct an appropriate due diligence.\325\ Another
commentator noted that requiring issuers to ``file'' their conflict
minerals information ``promotes greater transparency, makes Section
1502 more effective,'' and helps ``facilitate access to this
information.''\326\ In a further comment letter, a group of investors
indicated that requiring issuers to ``file'' their conflict minerals
information would ``allow investors greater assurance that conflict
minerals disclosure is as comprehensive, transparent and accurate as
possible.''\327\
---------------------------------------------------------------------------
\325\ See id.
\326\ See letter from Enough Project I.
\327\ See letter from SIF II.
---------------------------------------------------------------------------
Finally, some commentators argued that the conflict minerals
information is material and, therefore, should be ``filed.'' \328\ A
group of investors in one comment letter noted that the conflict
minerals information is material to an investor in evaluating its
investment decision, so the information should be ``filed.'' \329\
Specifically, the letter stated that ``[g]iven the materiality of the
data in evaluating a company's risk, we urge the Commission to require
all information outlined in the proposed rule to be filed in the body
of the annual report rather than furnished as an exhibit.'' \330\ Also,
in another comment letter, an institutional investor indicated that the
conflict minerals information is material to an investment decision
and, therefore, ``as material information[,] this report should be
filed, not furnished as proposed by the Commission.'' \331\ Moreover,
one commentator argued that allowing the conflict minerals information
to be ``furnished'' instead of ``filed'' would ``send a regrettable
signal that the Commission believes these disclosures to be of lesser
importance at the very moment that issuers, regulators, investors, and
governments around the world are looking to the Commission to help
establish the way forward,'' which would ``scale back the vigor of
issuer compliance and undermine the entire purpose of the statute'' and
``undermine the goals of ending the resource-related violence in the
DRC and providing meaningful and reliable disclosures to the American
consumer and investor.'' \332\
---------------------------------------------------------------------------
\328\ See letters from Global Witness I, SIF II, and TIAA-CREFF.
\329\ See letter from SIF II.
\330\ Id.
\331\ See letter from TIAA-CREF.
\332\ See letter from Global Witness I.
---------------------------------------------------------------------------
c. Final Rule
Although the proposal would have required the conflict minerals
information to be ``furnished,'' after considering the comments, the
final rule we are adopting requires issuers with necessary conflict
minerals to ``file'' the conflict minerals information provided in
their specialized disclosure reports, including any Conflict Minerals
Reports and independent private sector audit reports.\333\ As discussed
above, commentators disagreed as to whether the required information
should be ``furnished'' or ``filed,'' \334\ and in our
[[Page 56304]]
view the Conflict Minerals Provision is ambiguous on this question. In
reaching our conclusion that the information should be ``filed''
instead of ``furnished,'' we note particularly that although Section
13(p)(1)(a) states that a Conflict Minerals Report should be
``submitted'' to the Commission, the definition of a ``person
described,'' who is required to submit a report, uses the term
``file.'' This reference in the statute indicates that the reports
should be filed.
---------------------------------------------------------------------------
\333\ 15 U.S.C. 78r.
\334\ Compare letters from AngloGold, Barrick Gold, Cleary
Gottlieb, Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et
al. II, NAM III, NMA II, NY State Bar, Taiwan Semi, and WGC II
(supporting a requirement to ``furnish'' the disclose), with letters
from Bario-Neal, Brilliant Earth, Columban Center et al.,
Earthworks, Enough Project I, Global Witness I, Hacker Jewelers,
Hoover & Strong, Metalsmiths, Sen. Durbin/Rep. McDermott, SIF II,
TakeBack, TIAA-CREF, and World Vision II (supporting a requirement
to ``file'' the disclosure).
---------------------------------------------------------------------------
Additionally, commentators asserted that allowing the information
to be ``furnished'' would diminish the importance of the
information,\335\ and that requiring the information to be ``filed''
would enhance the quality of the disclosures.\336\ Some commentators
argued that the conflict minerals information should not be treated as
of lesser importance than other required disclosures,\337\ and another
commentator indicated specifically that the conflict minerals
information is qualitatively similar to disclosures that are required
to be ``filed.'' \338\
---------------------------------------------------------------------------
\335\ See letter from Global Witness I.
\336\ See letters from Enough Project I and SIF II.
\337\ See letter from Global Witness I.
\338\ See Sen. Durbin/Rep. McDermott.
---------------------------------------------------------------------------
Other commentators supporting the proposal that the disclosure be
``furnished'' argued that the information is not material to
investors,\339\ while some argued that it was.\340\ Given the
disagreement, and that materiality is a fact-specific inquiry, we are
not persuaded that this is a reason to provide that the information
should be ``furnished.'' Additionally, we appreciate the comments that
the conflict minerals information should be ``furnished'' because
issuers should not be held liable for the information when they are
required to rely on third parties for their conflict minerals data and
direct knowledge of relevant facts may not be available to them.\341\
We note, however, that section 18 does not create strict liability for
filed information. Rather, it states that a person shall not be liable
for misleading statements in a filed document if it can establish that
it acted in good faith and had no knowledge that the statement was
false or misleading.\342\
---------------------------------------------------------------------------
\339\ See letters from AngloGold, Barrick Gold, Cleary Gottlieb,
Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM
III, NMA II, NY State Bar, Taiwan Semi, and WGC II.
\340\ See letters from Sen. Leahy et al., SIF I, SIF II, and
TIAA-CREF.
\341\ See letter from Ford.
\342\ Exchange Act Section 18(a) provides: ``Any person who
shall make or cause to be made any statement in any application,
report, or document filed pursuant to this title or any rule or
regulation thereunder or any undertaking contained in a registration
statement as provided in subsection (d) of section 15 of this title,
which statement was at the time and in the light of the
circumstances under which it was made false or misleading with
respect to any material fact, shall be liable to any person (not
knowing that such statement was false or misleading) who, in
reliance upon such statement shall have purchased or sold a security
at a price which was affected by such statement, for damages caused
by such reliance, unless the person sued shall prove that he acted
in good faith and had no knowledge that such statement was false or
misleading. A person seeking to enforce such liability may sue at
law or in equity in any court of competent jurisdiction. In any such
suit the court may, in its discretion, require an undertaking for
the payment of the costs of such suit, and assess reasonable costs,
including reasonable attorneys' fees, against either party
litigant.'' A plaintiff asserting a claim under Section 18 would
need to meet the elements of the statute to establish a claim,
including reliance and damages. In addition, we note that issuers
that fail to comply with the final rule could also be violating
Exchange Act Sections 13(a) and (p) and 15(d), as applicable.
Issuers would also be subject to potential liability under Exchange
Act Section 10(b) [15 U.S.C. 78j] and Rule 10b-5 [17 CFR 240.10b-5],
promulgated thereunder, for any false or misleading material
statements in the information disclosed pursuant to the rule.
---------------------------------------------------------------------------
Moreover, as discussed below, the final rule will include a
transition period in which issuers that are required to perform due
diligence and are unable to determine that their conflict minerals did
not originate in the Covered Countries or unable to determine that
their conflict minerals that originated in the Covered Countries did
not directly or indirectly finance or benefit armed groups in the
Covered Countries may describe their products with such conflict
minerals as ``DRC conflict undeterminable.'' We believe this period
will allow issuers sufficient time to obtain more data on, and control
over, their supply chain through revised contracts with suppliers and
smelter verification confirmations, thereby mitigating this liability
concern.\343\
---------------------------------------------------------------------------
\343\ As discussed above, requiring the disclosure in a new
form, rather than in issuers' Exchange Act annual reports, should
alleviate some commentators' concerns about the disclosure being
subject to the officer certifications required by Rules 13a-14 and
15d-14 under the Exchange Act.
---------------------------------------------------------------------------
3. Uniform Reporting Period
a. Proposed Rules
The Conflict Minerals Statutory Provision requires, and we proposed
to require, that issuers provide their initial conflict minerals
disclosure and, if necessary, their initial Conflict Minerals Report
after their first full fiscal year following the adoption of our final
rule.\344\ The report would be required to cover that first full fiscal
year.
---------------------------------------------------------------------------
\344\ See Exchange Act Section 13(p)(1)(A) (stating that an
issuer must ``disclose annually, beginning with the [issuer's] first
full fiscal year that begins after the date of promulgation of [our]
regulations'').
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
We included a request for comment asking whether our rules should
allow individual issuers to establish their own criteria for
determining which reporting period to cover in any required conflict
minerals disclosure or Conflict Minerals Report, provided that the
issuers are consistent and clear with their criteria from year-to-year.
Some commentators agreed that the final rule should allow individual
issuers flexibility in choosing the appropriate criteria for
determining the reporting period in which conflict minerals disclosures
are made, provided that the issuer's methodology is clear.\345\ Other
commentators, however, asserted that the final rule should require that
the conflict minerals reporting period correspond to the issuer's
fiscal year in its annual report.\346\
---------------------------------------------------------------------------
\345\ See letters from Howland, IPC I, and NMA II.
\346\ See letters from AngloGold and TIC.
---------------------------------------------------------------------------
We did not request comment specifically on whether an issuer's
conflict minerals reporting period should correspond to an issuer's
fiscal year. Even so, some commentators indicated that an issuer's
annual reporting period for conflict minerals disclosure should not be
based on its fiscal year but, instead, should be based on a one-year
period that is the same for all issuers.\347\ One of these commentators
recognized that ``synchronizing the timing for the information* * *from
all issuers on a calendar year basis* * *would offer integrity and
consistency throughout the various supply chains'' and because
``component manufacturers and others through the supply chain provide
products for many customers who have different fiscal years, it would
be more efficient and more accurate if the whole supply chain worked
towards a common deadline.'' \348\ Another commentator noted that a
uniform calendar year reporting period ``would clarify the reporting
obligations, level the playing field among the various companies, and
provide a clearer date of implementation for due diligence and related
initiatives in the region.'' \349\ A further commentator asserted that
a ``single reporting date will allow for
[[Page 56305]]
increased efficiency and thus lower costs, without reducing the
effectiveness of the regulations.'' \350\
---------------------------------------------------------------------------
\347\ See letters from IPC II; Matheson II; MSG II; Multi-
Stakeholder Group comprised of 29 issuers, non-governmental
organizations, and investors (Nov. 10, 2011) (``MSG III''); and
State II.
\348\ Letter from MSG II. See also letter from MSG III.
\349\ Letter from State II.
\350\ Letter from IPC II.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, the final rule will require each
issuer to provide its conflict minerals information on a calendar year
basis regardless of any particular issuer's fiscal year end.\351\ The
final rule requires an issuer to provide its annual conflict minerals
information in its specialized disclosure report on Form SD for every
calendar year from January 1 to December 31 and the specialized
disclosure report will be due to the Commission on May 31 of the
following year. In this regard, the first reporting period for all
issuers will be from January 1, 2013 to December 31, 2013, and the
first specialized disclosure report must be filed on or before May 31,
2014.
---------------------------------------------------------------------------
\351\ We are aware that Exchange Act Section 13(p)(1)(A)
requires that we promulgate regulations requiring any ``person
described'' to disclose annually its conflict minerals information,
``beginning with the person's first full fiscal year that begins
after the date of promulgation of such regulations.'' The Conflict
Minerals Statutory Provision does not tie any required conflict
minerals information to an issuer's annual report or its audited
financial statements. Therefore, although the provision requires an
issuer to begin reporting after an issuer's full fiscal year has
cycled through, there is no requirement for the final rule's
reporting period to correspond to an issuer's fiscal year.
---------------------------------------------------------------------------
We agree with the commentators that explained that burdens on
participants in the supply chain could be reduced if our final rule
adopted a uniform reporting period. This requirement allows component
suppliers that are part of a manufacturer's supply chain to provide
reports to their upstream purchasers regarding the conflict minerals in
their components only once a year. Otherwise, if the due date of the
Conflict Minerals Report was tied to an issuer's fiscal year end, as
proposed, component suppliers could have to provide reports regarding
the conflict minerals in their components on a continuous basis
throughout the year because their customers may have different fiscal
year ends. If a component supplier has numerous purchasers, it might
have to provide separate reports regarding the conflict minerals in its
components every month, or even more often, which could be very
burdensome and costly.\352\
---------------------------------------------------------------------------
\352\ See letter from MSG II.
---------------------------------------------------------------------------
Additionally, requiring a uniform May 31 due date for the
specialized disclosure report responds to concerns raised by certain
industry commentators that there would not be sufficient time in the
period between the end of an issuer's fiscal year until its annual
report is due to gather, report on, and have audited their conflict
minerals information, as discussed above.\353\ The specialized
disclosure report will be due later than an Exchange Act annual report
is due for calendar year end issuers so as not to interfere with an
issuer's preparation of its Exchange Act annual report, as requested by
commentators. Also, the final rule will require each issuer to provide
its conflict minerals information for each calendar year, rather than
its fiscal year. The May 31 due date is approximately 150 days after
the calendar year end, which is consistent with a commentator's
suggested due date for an issuer to provide us with its conflict
minerals information.\354\
---------------------------------------------------------------------------
\353\ See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA,
Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI.
\354\ See letter from AngloGold (suggesting that an issuer be
required to provide its conflict minerals information on a Form 8-K
or Form 6-K ``within 150 calendar days after the issuer's fiscal
year-end'').
---------------------------------------------------------------------------
4. Time Period for Providing Conflict Minerals Information
a. Proposed Rules
The Conflict Minerals Statutory Provision requires issuers to
provide the specified disclosure with respect to necessary conflict
minerals ``in the year for which such reporting is required.'' \355\ We
proposed that the date an issuer takes possession of a conflict mineral
would determine which reporting year that issuer would have to provide
its required conflict minerals information. Also, if an issuer
contracted the manufacturing of a product in which a conflict mineral
is necessary to the production of that product, but the conflict
mineral would not be included in the product, the issuer would, under
the proposal, have used the date it takes possession of the product to
determine which reporting year the issuer would have to provide the
required conflict minerals information.
---------------------------------------------------------------------------
\355\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Some commentators suggested that, as proposed, an issuer should be
required to provide its conflict minerals information in the reporting
period during which the issuer took possession of its conflict
minerals.\356\ Other commentators recommended, however, that the final
rule should use some other determining factor.\357\ Some commentators
did not provide alternative factors to consider in determining for
which annual reporting period an issuer must report its conflict
minerals information, but stated only that an issuer should be allowed
the flexibility to establish its own criteria for determining when an
issuer would be required to provide information on the conflict
minerals it obtained.\358\ Other commentators provided alternative
factors, such as the year in which the mineral is purchased, the year
the issuer takes possession and ownership of the mineral, the year the
mineral is processed, or the year the product containing conflict
minerals is produced or placed on the market.\359\
---------------------------------------------------------------------------
\356\ See, e.g., letters from Cleary Gottlieb, ITIC I, and WGC
II.
\357\ See, e.g., letters from AngloGold, NAM I, RJC, and TIC.
\358\ See, e.g., letters from Howland, IPC I, and NMA II.
\359\ See, e.g., letters from AngloGold, NAM I, RJC, and TIC.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, the final rule is revised from the
proposal such that possession is not the determining factor for
deciding for which reporting year an issuer has to provide its required
conflict minerals information. We are making this revision because we
agree, as one commentator noted, that the ``statutory requirement to
report is triggered not by acquisition or possession of conflict
minerals.'' \360\ Instead, the final rule provides that an issuer must
provide its required conflict minerals information for the calendar
year in which the manufacture of a product that contains any conflict
minerals is completed, irrespective of whether the issuer manufactures
the product or contracts to have the product manufactured.\361\ We
believe this approach is appropriate because it should be relatively
easy for an issuer to identify when the manufacture of a product is
completed, as the issuer has a certain amount of control over this
decision. Thus, this approach also allows issuers some flexibility in
determining the reporting period. For example, if an issuer completes
the manufacture of a product with conflict minerals necessary to the
functionality or production of that product on December 30, 2018, the
issuer must provide a specialized disclosure report regarding the
conflict minerals in that product for the 2018 calendar year. However,
if that issuer completes the manufacture of that same product on
January 2, 2019, the issuer must provide a specialized disclosure
[[Page 56306]]
report regarding the conflict minerals in that product for the 2019
calendar year.
---------------------------------------------------------------------------
\360\ See letter from NAM I.
\361\ See id. (recommending that, ``[i]f the rule specifies a
reporting trigger, it should be producing or placing on the market a
product containing conflict minerals'').
---------------------------------------------------------------------------
This timeframe is the same for an issuer that contracts the
manufacturing of its products. An issuer that contracts the
manufacturing of a product must provide its required conflict minerals
information for the calendar year in which the issuer's contract
manufacturer completes the manufacturing of product. For example, if an
issuer's contractor completes the manufacturing of the product with
conflict minerals necessary to the functionality or production of that
product on December 30, 2018, the issuer must provide a specialized
disclosure report regarding the conflict minerals in that product for
the 2018 calendar year, even if the issuer does not receive the product
until January 2, 2019. However, if that issuer's contractor completes
the manufacturing of that same product on January 2, 2019, the issuer
must provide a specialized disclosure report regarding the conflict
minerals in that product for the 2019 calendar year.
This outcome is the same for an issuer that manufactures the
product using a component product with conflict minerals necessary to
the functionality of the product that is manufactured by an independent
third party. If the manufacturer of the product completes the product
that incorporates the component product with necessary conflict
minerals on December 30, 2018, the issuer that manufactured the product
must provide a specialized disclosure report regarding the conflict
minerals in that product for the 2018 calendar year. However, the
reporting period of the independent third party manufacturer of the
component product, if it is a reporting issuer, is not determined by
when the manufacturing of the subsequent product containing its
component product is completed. Instead, the reporting period for that
component product manufacturing issuer is determined by when it
completes the manufacturing of the component product. Therefore, an
issuer that completes the manufacture of a component product on
December 30, 2018, must provide a specialized disclosure report
regarding the conflict minerals in that completed component product for
the 2018 calendar year.
5. Conflict Minerals Already in the Supply Chain
a. Proposed Rules
The proposed rules did not discuss specifically how an issuer would
handle any conflict minerals already in the supply chain at the time
our final rule takes effect, including existing stockpiles of conflict
minerals. The Proposing Release, however, requested comment on this
point.
b. Comments on the Proposed Rules
Almost all commentators that discussed the topic recommended that
an issuer's existing stockpile of conflict minerals should be exempt
from the final rule.\362\ One commentator explained, that
``[c]ategorizing existing stock as `conflict' simply because the
mineral was mined before SEC rules have been agreed and published
serves no purpose in furthering the aims of the legislation and would
cause serious financial loss to the holders of that stock[pile].''
\363\ In this regard, one commentator asserted that ``[s]tockpiled
minerals may have originated in mines that support the conflict;
however, it would be impractical to ask companies to trace the origin
of these minerals.'' \364\ Another commentator argued specifically
that, if the final rule causes owners to dispose of their existing
conflict minerals inventory because they are unable to determine that
they are ``DCR conflict free,'' the cost of the rule would increase
``dramatically.'' \365\
---------------------------------------------------------------------------
\362\ See, e.g., letters from AAEI; AngloGold; ArcelorMittal;
Arkema; Cleary Gottlieb; CTIA; Davis Polk; Earthworks; Enough
Project I; Enough Project IV; Global Tungsten I; Global Tungsten &
Powders Corp. (Oct. 13, 2011) (``Global Tungsten II''); Howland;
Industry Group Coalition I; ICAR et al. II; IPC I; IPMI I; ITIC I;
ITRI I; ITRI Ltd. (Oct. 19, 2011) (``ITRI III''); ITRI Ltd. (Oct.
31, 2011) (``ITRI IV''); Japanese Trade Associations; Jean
Goldschmidt International SA (Feb. 14, 2011) (``JGI''); JVC et al.
II; Jewelers Vigilance Committee, American Gem Society,
Manufacturing Jewelers & Suppliers of America, Jewelers of America,
and Fashion Jewelry & Accessories Trade Association (Nov. 1, 2011)
(``JVC et al. III''); Kemet; Kuala Lumpur Tin Market (Jan. 17, 2011)
(``Kuala Tin''); LBMA I; Metal Solutions Corporation (Dec. 28, 2010)
(``Solutions''); MSG III; NAM I; NEI; NMA II; NMA III; Pact II; PCP;
Responsible Jewellery Council (Feb. 25, 2011) (``RJC I''); RMA;
SEMI; Signet Jewelers Ltd. (Nov. 1, 2011) (``Signet''); Somima;
TIAA-CREF; SIF I; and WGC II.
\363\ Letter from ITRI I.
\364\ Letter from Enough Project I.
\365\ See letter from Claigan Environmental Inc. (Oct. 28, 2011)
(``Claigan I'').
---------------------------------------------------------------------------
Panelists discussed this issue further at the SEC Roundtable. Some
panelists explained that there are stocks of metals and other materials
stored throughout the world in warehouses and vaults by many
individuals and institutions that are already past the point in the
supply chain at which they could contribute to conflict.\366\ One
panelist representing a human rights group appeared to acknowledge that
stockpiled conflict minerals stored outside the Covered Countries would
not contribute to conflict in the Covered Countries.\367\ Another
panelist asserted that a stockpile ``exemption is essential for both
existing unsmelted mineral and refined metal stocks held by industry,
metal warehouses, investors and even in US Government stockpile,''
because the ``value of current tin stocks is probably around
US$7billion, generally with non-specific mine origin,'' so not
exempting such minerals would lead to ``market disruption and financial
losses on this potentially unsaleable material.'' \368\
---------------------------------------------------------------------------
\366\ See Transcript of SEC Roundtable on Conflict Minerals,
Sections 0171-0174 (Oct. 18, 2011), available athttp://www.sec.gov/spotlight/conflictminerals/conflictmineralsroundtable101811-transcript.txt.
\367\ See id. at Section 0172 lines 19-23 (stating that
``there's a truth to the fact that if something is stockpiled out of
the region, and it's being held somewhere else, does it really get
at what the intent of the law is'').
\368\ See id. at Section 0118 lines 8-15. See also letter from
ITRI III.
---------------------------------------------------------------------------
Many commentators suggested different requirements for when a
conflict mineral should be considered stockpiled and, therefore,
excluded from the final rule. A number of commentators recommended that
the final rule should exempt any conflict minerals mined prior to the
adoption of the final rule.\369\ One commentator noted, however, that
``the date of extraction is not generally recorded or known for
minerals purchased from artisanal miners.'' \370\ Some commentators
asserted that the final rule should exempt any conflict minerals
smelted or refined by a certain date \371\ because, as one of these
commentators indicated, ``[e]ach metal batch produced by a smelter will
possess a dated certificate of analysis which may be considered as the
production date.''\372\ Similarly, another commentator recommended that
stockpiled gold that ``has been fully refined before the effective
date'' of the final rule be exempted.\373\ In this regard, one
commentator suggested that the final rule exclude ``inventory produced
before the date on which Dodd-Frank 1502 will first apply to the
issuer.'' \374\ Another commentator ``proposed that the effective date
of disclosure requirement on metal should be for ingot produced [one]
year after the effective date'' of the final rule.\375\
---------------------------------------------------------------------------
\369\ See, e.g., letters from AAEI, Davis Polk, ITIC I, Kemet,
MSG III, RJC I, RMA, and WGC II.
\370\ See letter from ITRI I.
\371\ See letters from ITRI I, LBMA I, and Signet.
\372\ See letter from ITRI I.
\373\ See letter from LBMA I.
\374\ See letter from ArcelorMittal.
\375\ See letter from ITRI III.
---------------------------------------------------------------------------
A few commentators urged that the final rule exempt any conflict
minerals outside the Covered Countries by July 15, 2010.\376\ One
commentator suggested
[[Page 56307]]
that conflict minerals should be exempt if, by January 1, 2013, those
minerals are included in components or products already incorporated in
finished goods in a supplier's inventory or are included in parts or
components included in the repair or maintenance of products.\377\ One
commentator recommended that the final rule should exempt gold in the
issuer's possession by, or extracted before, the effective date of the
final rule.\378\ Another commentator asserted that the final rule
should exempt any conflict mineral that an issuer took possession of
before the first full fiscal year following the adoption of the final
rule.\379\ This commentator suggested also that the final rule should
not require reporting on conflict minerals in an issuer's supply chain
that have been manufactured prior to the beginning of the issuer's
first reporting year. One commentator asserted that the final rule
should exclude, as of the date of the effectiveness of the final rule,
``gold bars in storage at the central banks,'' ``bars marked with the
London Bullion Marketers Association (LBMA) stamp,'' and ``gold coins
issued by governments or other entities.'' \380\ One commentator
recommended that the final rule include a 24-month ``grace period''
that would permit the ``sale of existing stockpiles of minerals that
have already been mined and have been sitting in warehouses'' in the
DRC.\381\
---------------------------------------------------------------------------
\376\ See letters from Earthworks and SIF I.
\377\ See letter from NAM I.
\378\ See letter from AngloGold.
\379\ See letter from SEMI.
\380\ See letter from NMA III.
\381\ See letter from Charles F. Blakeman (Mar. 15, 2012)
(``Blakeman III'') (arguing overall that no final rule should be
adopted, but seeking a 24-month grace period for the sale of
existing stockpiles of conflict minerals, in the alternative, should
the Commission adopt a final rule). See also letter from Charles
Blakeman (Nov. 17, 2011) (``Blakeman II'') (recommending a grace
period for conflict minerals already, but not specifying a length of
time for the grace period).
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, the final rule excludes any
conflict minerals that are ``outside the supply chain'' prior to
January 31, 2013. The final rule considers conflict minerals to be
``outside the supply chain'' only in the following instances: After any
columbite-tantalite, cassiterite, and wolframite minerals have been
smelted; after gold has been fully refined; or after any conflict
mineral, or its derivatives, that have not been smelted or fully
refined are located outside of the Covered Countries.
We are aware that these existing stockpiles could have financed or
benefited armed groups in the Covered Countries. However, once those
minerals are smelted, refined, or outside of the Covered Countries, it
appears unlikely that they could further finance or benefit armed
groups. Therefore, applying the final rule to these already-stockpiled
minerals would not further the purpose of the Conflict Minerals
Statutory Provision because those minerals would not contribute to
further conflict. Similarly, requiring issuers to determine the origin
and chain of custody of these minerals that may have been extracted
prior to the passage of the Conflict Minerals Statutory Provision,
could result in undue costs if the minerals could not be sold, as
suggested by one commentator.\382\
---------------------------------------------------------------------------
\382\ See letter from Claigan I.
---------------------------------------------------------------------------
We considered exempting stockpiled conflict minerals that were
extracted before a date certain, as one commentator recommended.\383\
We decided not to do so, however, because, as another commentator
noted, the date of extraction is not generally recorded or known for
minerals from artisanal miners.\384\ Further, if the final rule exempts
conflict minerals extracted at a date certain, the rule would not
necessarily account for payments illegally demanded by armed groups of
those that transport conflict minerals through remote areas of the DRC.
Instead, we believe that the proper point to use for ensuring that a
conflict mineral is truly stockpiled is the smelting or primary
refining date because the dates of these actions are more likely to be
reliably recorded.\385\ Similarly, as is true with smelted or refined
conflict minerals, conflict minerals stockpiled outside the Covered
Countries would not contribute to conflict in the Covered
Countries.\386\ Therefore, the final rule exempts any conflict minerals
outside the Covered Countries as well.
---------------------------------------------------------------------------
\383\ See letter from ITIC I.
\384\ See letter from ITRI I.
\385\ Id.
\386\ See Transcript of SEC Roundtable on Conflict Minerals, at
Section 0172 lines 19-23.
---------------------------------------------------------------------------
We recognize that there may be situations in which conflict
minerals are past the point in the supply chain where they are able to
be used to finance or benefit armed groups, but these minerals have yet
to be stored outside the Covered Countries,\387\ smelted, or refined.
Even so, we believe that smelting, refining, or being outside the
Covered Countries marks the first opportunity in the supply chain that
offers reliable proof that the conflict minerals will no longer benefit
or finance armed groups. We note, however, that market participants may
need additional time to move their stockpiles outside the Covered
Countries or have those stockpiles smelted or refined. Therefore, to
accommodate this timing constraint, the final rule provides transition
relief to permit market participants sometime after the final rule
becomes effective to move, smelt, or refine any existing stocks of
conflict minerals without having to comply with the rule's
requirements.
---------------------------------------------------------------------------
\387\ For example, a stockpile of conflict minerals could be
stored in a warehouse in a DRC country that is insulated from and is
beyond the reach of any armed group, so these conflict minerals
would not contribute to conflict.
---------------------------------------------------------------------------
6. Timing of Implementation
a. Proposed Rules
The Conflict Minerals Statutory Provision states that issuers must
disclose their conflict minerals information annually beginning with
the issuer's first full fiscal year that begins after the date of
promulgation of our final rule.\388\ Therefore, the proposed rules
would have included neither a transition period for issuers unable to
determine that their conflict minerals did not originate in the Covered
Countries or unable to determine that their conflict minerals that
originated in the Covered Countries did not directly or indirectly
finance or benefit armed groups, nor a general delay of the rules. We
requested comment, however, regarding whether we should provide a
transition period or a delay.
---------------------------------------------------------------------------
\388\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
In response to our request for comment, a number of commentators
stated that the final rule should not permit any general delay or
specific phase-in period for issuers to provide their conflict minerals
information.\389\ A number of other commentators, however, indicated
that the final rule should allow for some type of delay or
[[Page 56308]]
phase-in period.\390\ Some of the commentators specified that there
should be a phase-in for only certain categories of issuers, such as
foreign private issuers, accelerated filers, and smaller reporting
companies.\391\ Other commentators recommended that the final rule
should include a phase-in period but did not provide any details for
implementing such a mechanism.\392\
---------------------------------------------------------------------------
\389\ See, e.g., letters from Catholic Charities; Earthworks;
Global Witness I; Good Shepherd; ICAR et al. II; Larry Cox of
Amnesty International, Lisa Shannon of A Thousand Sisters, John
Bradshaw of Enough Project, Karen Stauss of Free the Slaves, Corinna
Gilfillan of Global Witness, Arvind Ganesan of Human Rights Watch,
Tzivia Schwartz Getzug of Jewish World Watch, Morton Halperin of
Open Society Policy Center, Rabbi David Saperstein of Religious
Action Center of Reform Judaism, Kent Hill of World Vision (Mar. 1,
2011) (``Amnesty et al.''); Rep. Berman et al.; Sen. Boxer et al. I;
Senators Barbara Boxer, Frank R. Lautenberg, Barbara A. Mikulski,
Sheldon Whitehouse and Ron Wyden (Feb. 16, 2012) (``Sen. Boxer et
al. II''); Sen. Durbin/Rep. McDermott; Delly Mawazo Sesete (Dec. 19,
2011) (``Sesete''); State II; Synergie des Femmes Pour les Victimes
des Violences Sexuelles (Mar. 7, 2011) (``Synergie''); World Vision
US (Jul. 8, 2011) (``World Vision I''); and World Vision II.
\390\ See, e.g., letters from AAEI; AAFA; AdvaMed I; AngloGold;
Arkema; Barrick Gold; BEST II; Boeing Company (Oct. 18, 2011)
(``Boeing''); Bureau d'Etudes Scientifiques et Techiques (Mar. 10,
2011) (``BEST I''); Chamber I; Corporate Secretaries I; CTIA; Davis
Polk; F[eacute]d[eacute]ration des Enterprises du Congo (Feb. 25,
2011) (``FEC I''); Howland; Industry Group Coalition I; IPC I; ITIC
I; ITRI I; ITRI II; ITRI IV; JGI; JVC et al. II; JVC et al. III;
Medtronic, Inc. (Mar. 2, 2011) (``Medtronic''); Malaysia Smelting
Corporation (Oct. 25, 2011) (``MSC II''); NAM I; National
Association of Manufacturers (Jul. 26, 2011) (``NAM II''); NEI; NRF
I; Pact I; PCP; Plexus (Feb. 25, 2011) (``Plexus''); Representative
Mark S. Critz (Feb. 29, 2012) (``Rep. Critz''); RILA; RMA;
Roundtable; Solutions; Somima; Taiwan Semi; TechAmerica,
Professional Services Council, National Defense Industrial
Association, American Council of Engineering Companies, Aerospace
Industries Association, and U.S. Chamber of Commerce (Nov. 28, 2011)
(``CODSIA''); TIC; TriQuint I; TriQuint Semiconductor Manufacturing
Company, Ltd. (Mar. 2. 2011) (``TriQuint II''); and WGC II.
\391\ See letters from AngloGold, Howland, and Taiwan Semi.
\392\ See, e.g., letters from AAEI, AAFA, Arkema, BEST I,
Chamber I, Davis Polk, FEC I, ITRI I, JGI, Medtronic, Solutions, MSC
I, NEI, Pact I, Rep. Critz, and RMA.
---------------------------------------------------------------------------
Some commentators asserted that the effectiveness of the final rule
should be delayed for all issuers until either the Comptroller General
has established auditing standards and/or the State Department has
developed its conflict minerals map and its strategy to address
linkages between human rights abuses and conflict minerals.\393\ Other
commentators stated that the final rule's effectiveness for all issuers
should be delayed for two to five years after promulgation for issuers
to set up traceability systems in the Covered Countries and clear
mineral stockpiles from the supply chain.\394\ One commentator stated
that we should establish a general reporting delay for one year
following promulgation of the final rule to allow issuers the
opportunity to eliminate conflict minerals from their products and,
during this time, issuers would not be required to provide conflict
minerals information.\395\ Another commentator recommended a one-year
general phase-in of the final rule ``so that a thorough and reliable
traceability process can be instituted.'' \396\ In this regard, one
commentator indicated that the ``private sector is moving forward on
this issue,'' and that one company ``aims to have built the first
verifiably conflict free microprocessor'' by 2013.\397\ Another
commentator suggested that the final rule ``set clear and specific
dates for when company reporting will take effect,'' because ``using
benchmarks or trigger points will prolong the uncertainty that is
causing so much trouble and suffering.'' \398\
---------------------------------------------------------------------------
\393\ See letters from Barrick Gold, Corporate Secretaries I,
NRF I, Roundtable, and WGC II.
\394\ See, e.g., letters from AdvaMed I, Arkema, BEST II, FEC I,
IPC I, ITRI I, ITRI II, ITRI IV, JVC et al. II, NAM I, Plexus, and
TriQuint II.
\395\ See letter from PCP.
\396\ See also letter from Somima.
\397\ See letter from Senator Jeff Merkley and Representatives
Peter DeFazio, Earl Blumenauer, Kurt Schrader, and Suzanne Bonamici
(May 17, 2012) (``Sen. Merkley et al.''). See also letter from
Enough Project (Aug. 10, 2011) (``Enough Project III'') (providing a
link to an article that ``details current efforts on the ground in
response to Section 1502'').
\398\ See letter from BEST II.
---------------------------------------------------------------------------
A number of commentators recommended and described specific phase-
in periods that focused on issuers unable to determine the origins of
their conflict minerals.\399\ Although each of these approaches varied
to some degree, they all provided that, for a certain number of years
after adoption of the final rule, an issuer unable to determine its
conflict minerals' origins must disclose this fact, but would not be
required to describe the products containing these conflict minerals as
not ``DRC conflict free.'' Some of these commentators recommended that
we require an issuer, during a phase-in period, to describe its
conflict minerals policy, its reasonable country of origin inquiry, the
conflict minerals in its supply chains, and/or certain other
information.\400\ A few commentators indicated that we should phase-in
the final rule for particular issuers based on the issuer's position in
supply chain, so that an issuer closer in position to the mine or
smelter would have to disclose more information regarding its conflict
minerals.\401\ One commentator recommended that the final rule permit a
three-year phase-in period in which all issuers would be required only
to receive certifications from their first-tier suppliers during the
first year after promulgation, identify the smelters used to process
their conflict minerals in the second year, and fully implement the
rules in the third year.\402\
---------------------------------------------------------------------------
\399\ See, e.g., letters from AdvaMed I, CTIA, Industry Group
Coalition I, IPC I, ITIC I, JVC et al. II, and NAM I.
\400\ See letters from AdvaMed I, Industry Group Coalition I,
and NAM I.
\401\ See letters from NRF I and Teggeman.
\402\ See letter from TriQuint II.
---------------------------------------------------------------------------
Many commentators, including industry associations, corporations,
human rights groups, institutional investors, members of Congress, and
individuals, agreed that all conflict minerals should be treated
equally, as proposed.\403\ Some commentators asserted that gold should
be treated differently than the other three conflict minerals because
of its unique qualities, and the OECD had not approved the supplement
to its due diligence guidance specifically for gold,\404\ which at the
time of the Proposing Release was scheduled to be published by the end
of 2011. Subsequent commentators noted that the OECD's gold supplement
would not be finalized until sometime in 2012,\405\ and some
commentators suggested that the final rule's application to gold be
delayed until the OECD has adopted its gold supplement.\406\ At
present, the final gold supplement has been approved by the OECD.\407\
One of the commentators suggested that the final rule be delayed for
gold until the beginning of an issuer's first full fiscal year
following adoption and issuance of the OECD's gold supplement.\408\
Another one of the commentators argued that any ``effort to establish
credible and effective due diligence systems in the absence of OECD
guidance will be stymied by the lack of a widely accepted base for
responsible sourcing.''\409\ One commentator, however, asserted that
the final rule should not be delayed for gold regardless of whether the
OECD's gold supplement has been completed.\410\ This commentator argued
that, even if the OECD's gold supplement has not been completed when an
issuer's reporting period begins, the issuer
[[Page 56309]]
would still be able to apply the OECD's core due diligence framework to
gold.
---------------------------------------------------------------------------
\403\ See, e.g., letters from Bario-Neal, Brilliant Earth,
Calvert, Catholic Charities, CRS I, Earthworks, Enough Project I,
Metalsmiths, Good Shepherd, Hacker Jewelers, Hoover & Strong,
Howland, IPC I, ITRI I, NAM I, Niotan I, Peace, Rep. Berman et al.,
Sen. Durbin/Rep. McDermott, SIF I, State II, TakeBack, and TIAA-
CREF.
\404\ See, e.g., letters from AngloGold, IPMI I, JVC et al. II,
LBMA II, NMA II, Tiffany, TriQuint I, and WGC II.
\405\ See letters from Government of Canada, Foreign Affairs and
International Trade (Dec. 23, 2011) (``Canada''); JVC et al. III;
Signet; World Gold Council, London Bullion Market Association, and
Responsible Jewellery Council (Oct. 28, 2011) (``WGC et al. I'');
and World Gold Council, London Bullion Market Association, and
Responsible Jewellery Council (Dec. 9, 2011) (``WGC et al. II'').
\406\ See, e.g., letters from Boeing, JVC et al. III, Signet,
World Gold Council (Jun. 20, 2011) (``WGC III''), WGC et al. I, and
WGC et al. II.
\407\ See OECD, Due Diligence Guidance for Responsible Supply
Chains of Minerals from Conflict-Affected and High-Risk Areas:
Supplement on Gold (2012), available at http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.
\408\ See letter from WGC et al. II.
\409\ See letter from JVC et al. III.
\410\ See letter from ICAR et al. II.
---------------------------------------------------------------------------
The commentators that advocated treating gold differently from the
other conflict minerals comprise mostly gold, mining, and jewelry
companies or associations. Of these commentators, only one indicated
that the final rule should initially be more stringent with issuers
using gold because 80% of the funds generated by conflict minerals for
armed groups come from gold.\411\ The other commentators indicated that
the final rule should be more lenient for gold and that we should defer
full incorporation of gold into the final rule because such a large
percentage of gold coming from the DRC is illegally exported that it
will require greater time and effort to make the gold supply chain
transparent than it will for the other conflict minerals.\412\ One
commentator was concerned that, until a more transparent supply chain
is developed, the final rule would stigmatize gold and thereby harm
that mineral's ability to be used as a hedge and damage the global
financial economy because so many companies would not be able to
determine the origin of their gold.\413\ Finally, a few commentators
stated that the final rule should permit issuers to exclude certain
information from public dissemination regarding the storage and
transportation routes of gold for security reasons.\414\
---------------------------------------------------------------------------
\411\ See letter from TriQuint I.
\412\ See letters from AngloGold, IPMI I, JVC et al. II, NMA II,
and WGC II.
\413\ See letter from WGC II.
\414\ See letters from NMA II, NAM III, and WGC II.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, the final rule will not provide a
general delay of effectiveness, nor will the proposal be withdrawn and
re-proposed. Although many commentators advocated that the final rule
include an extended general delay of the rule's effectiveness, we do
not believe this approach would appropriately implement Congress's
directive in the Conflict Minerals Statutory Provision. The provision
states when an issuer must begin to report on its conflict minerals.
Congress directed us to promulgate regulations requiring any ``person
described'' to disclose annually ``beginning with the person's first
full fiscal year that begins after the date of promulgation of such
regulations.'' \415\ Additionally, it is not clear that a general delay
of the final rule is necessary or appropriate. As noted by two of the
co-sponsors of the statutory provision, conflict minerals legislation
was first considered in 2008, the Conflict Minerals Statutory Provision
was over a year old at the time of the letter, and many issuers have
been working with various groups in developing supply chain tracing for
years.\416\ Therefore, under the final rule, most issuers with
necessary conflict minerals will be required to file a specialized
disclosure report on or before May 31, 2014 containing conflict
minerals disclosure for the initial reporting period that will extend
from January 1, 2013 to December 31, 2013.
---------------------------------------------------------------------------
\415\ See Exchange Act Section 13(p)(1)(A).
\416\ See letter from Sen. Durbin/Rep. McDermott.
---------------------------------------------------------------------------
Since Congress adopted the Conflict Minerals Statutory Provision in
July 2010, we have sought comment on our implementation of the
provision, including our proposal, and have provided opportunities for
commentators to provide their input, both before and after the rules
were proposed. As noted above, we extended the comment period for the
rule proposal and convened an October 2011 roundtable at the request of
commentators. We have continued to receive comment letters through
August 2012, all of which we have considered. Some commentators have
provided responses to other commentators, particularly on the Economic
Analysis. This robust, public, and interactive debate has allowed us to
more fully consider how to develop our final rule. Additionally, as
discussed further in the Economic Analysis section, below, we have
considered and analyzed the numerous comments received regarding the
costs and complexities of the statute and proposed rule, and have taken
them into account in the final rule. Overall, we believe interested
parties have had sufficent opportunity to review the proposed rules, as
well as the comment letters, and to provide views on the proposal,
other comment letters, including data to inform our consideration of
the final rule. Accordingly, we do not believe that withdrawal of the
proposed rule and re-proposal is necessary.
While the final rule does not include a general delay for the
reasons noted, we acknowledge that there are legitimate concerns about
the feasibility of preparing the required disclosure in the near term
because of the stage of development of the supply chain tracing
mechanisms. In order to address these concerns, rather than providing
an extended general delay of effectiveness, the final rule includes a
targeted and temporary provision intended to help issuers address some
of the burdens and costs of compliance with the final rule. For all
issuers, this period will last two years, including issuers' 2013 and
2014 reporting periods, but will not be permitted for the reporting
period beginning January 1, 2015. For smaller reporting companies, this
period will last four years, including issuers' 2013 through 2016
reporting periods, but will not be permitted for the reporting period
beginning January 1, 2017. We note that, although some commentators
recommended that there be no such transition period and other
commentators recommended that such a transition period be permitted for
either a shorter or longer amount of time, a number of commentators
appeared to suggest that a transition period through 2014 would be
appropriate to allow the necessary traceability systems in the Covered
Countries to be established.\417\ Issuers taking advantage of this
temporary category are still be required to conduct due diligence and
prepare and file a Conflict Minerals Report, and are required to
disclose in their Conflict Mineral Report all steps taken by such
issuer, if any, since the issuer's last such report to mitigate the
risk that its necessary conflict minerals benefit armed groups,
including any steps to improve its due diligence.
---------------------------------------------------------------------------
\417\ See, e.g., letters from AdvaMed I (recommending an
``unknown determination'' transition period at least through 2014),
FEC I (``Disclosure of minerals mined could be mainly conflict free
for 2014 and finally the companies could successfully report to the
Securities and Exchange Commission in 2015.''), JVC et al. II
(urging ``the Commission to adopt a calibrated `phase-in' disclosure
approach spanning the period from April 15, 2011 (the statutorily-
prescribed effective date of the Commission's implementing rules)
through at least early 2014, to afford all affected issuers a
minimum two-year transition period before becoming obligated to
furnish an audited CMR''), Plexus (suggesting that a ``phase in
compliance schedule of at least 2 years is needed in order to
provide time for the due diligence systems to be set-up, most
importantly on the ground in the DRC,'' but even ``this would be a
significant challenge''), Verizon (recommending ``delaying the full
applicability of the due diligence requirements of the Conflict
Minerals Report until after fiscal 2014, to allow the DRC Zone
countries to develop the traceability protocols and related
infrastructure required in order to supply Conflict Free
Smelters''), and WilmerHale (``After fiscal year 2014, when
sufficient infrastructure is expected to have been developed to
permit companies to determine the source of all their conflict
minerals, the `indeterminate source' category would no longer be
available.'').
---------------------------------------------------------------------------
As discussed in greater detail below, the final rule provides a
temporary ``DRC conflict undeterminable'' category for a two-year
period for all issuers and a four-year period for smaller reporting
companies. This category is available for issuers that proceed to step
three but are unable to determine, after exercising their required due
diligence,\418\ whether
[[Page 56310]]
their conflict minerals originated in the Covered Countries or whether
their conflict minerals that originated in the Covered Countries
directly or indirectly finance or benefit armed groups in the Covered
Countries.
---------------------------------------------------------------------------
\418\ As discussed in greater detail below, issuers are required
to exercise due diligence on the source and chain of custody of
their conflict minerals and potentially provide a Conflict Minerals
Report if, following their reasonable country of origin inquiry,
they know they have conflict minerals from the Covered Countries and
not from recycled or scrap sources, or they have reason to believe
that their conflict minerals may have originated in the Covered
Countries and may not have come from recycled or scrap sources. Only
after these issuers have exercised their required due diligence may
they use the ``DRC conflict undeterminable'' alternative if they are
still unable to determine that their conflict minerals originated in
the Covered Countries or, if they determine that their minerals did
originate in the Covered Countries, but they are unable to determine
that their conflict minerals directly or indirectly financed or
benefited armed groups in the Covered Countries.
---------------------------------------------------------------------------
The final rule permits any such issuer for purposes of the conflict
minerals disclosure to describe its products with such conflict
minerals as ``DRC conflict undeterminable,'' unless those products also
include other conflict minerals that directly or indirectly financed or
benefited armed groups in the Covered Countries. Further, although
issuers with ``DRC conflict undeterminable'' products are required to
provide a Conflict Minerals Report that describes, among other matters,
the measures taken by the issuer to exercise due diligence on the
source and chain of custody of the conflict minerals, during the
temporary period they will not have to provide an independent private
sector audit of that report. We believe that not requiring an
independent private sector audit of the Conflict Minerals Report during
the temporary period is appropriate because an audit of the design of
an issuer's due diligence that results in an undeterminable conclusion
would not appear to have a meaningful incremental benefit.
D. Step Two--Determining Whether Conflict Minerals Originated in the
Democratic Republic of the Congo or Adjoining Countries and the
Resulting Disclosure
Once an issuer determines that conflict minerals are necessary to
the functionality or production of a product manufactured or contracted
to be manufactured by the issuer, the Conflict Minerals Statutory
Provision requires the issuer to determine whether those conflict
minerals originated in the Covered Countries.\419\ If so, the issuer
must submit a Conflict Minerals Report concerning those conflict
minerals that originated in the Covered Countries,\420\ and make that
report available on its Internet Web site.\421\ To determine whether
their conflict minerals originated in the Covered Countries, so as to
determine whether they must exercise due diligence on the source and
chain of custody of those minerals and provide a Conflict Minerals
Report, the final rule requires issuers with necessary conflict
minerals to conduct a reasonable country of origin inquiry.
---------------------------------------------------------------------------
\419\ See Exchange Act Section 13(p)(1)(A).
\420\ See id.
\421\ See Exchange Act Section 13(p)(1)(D).
---------------------------------------------------------------------------
1. Reasonable Country of Origin Inquiry
a. Proposed Rules
We proposed that an issuer would be required to disclose whether it
has necessary conflict minerals that originated in the Covered
Countries based on its ``reasonable country of origin inquiry.'' Our
proposed rules did not specify, however, what constituted a reasonable
country of origin inquiry. Rather than describing what a reasonable
country of origin inquiry would entail, we indicated that such a
determination would depend on each issuer's particular facts and
circumstances. In this regard, we noted that the reasonable country of
origin inquiry requirement was not meant to suggest that issuers would
have to determine with absolute certainty whether their conflict
minerals originated in the Covered Countries as we have often stated
that a reasonableness standard is not the same as an absolute
standard.\422\
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\422\ Cf. Foreign Corrupt Practices Act (the ``FCPA''), 15
U.S.C. 78m(b)(7) and Exchange Act Section 13(b)(7), which states
that ``the terms `reasonable assurances' and `reasonable detail'
mean such level of detail and degree of assurance as would satisfy
prudent officials in the conduct of their own affairs.'' The release
further cites to the conference committee report on amendments to
the FCPA, Cong. Rec. H2116 (daily ed. Apr. 20, 1988), which states
the reasonableness ``standard `does not connote an unrealistic
degree of exactitude or precision,' '' but instead `` `contemplates
the weighing of a number of relevant factors, including the cost of
compliance.' ''
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b. Comments on the Proposed Rules
One commentator indicated that the final rule should not include a
reasonable country of origin inquiry for determining whether an
issuer's conflict minerals originated in the Covered Countries.\423\
This commentator objected to the use of a reasonable country of origin
inquiry because it believed that the origin of a product should be
determined based on where the product is produced rather than where the
minerals in the product were mined. Another commentator recommended
that the final rule not require issuers to make any reasonable country
of origin inquiry at all if they determine, based on whatever means
they believe appropriate, that their conflict minerals did not
originate in the Covered Countries, provided they disclose this
fact.\424\ Many other commentators on this subject agreed that the
proposed rules' reasonable country of origin inquiry approach is
appropriate.\425\ Some of these commentators disagreed, however, on the
meaning and application of the standard. Some such commentators
asserted that a reasonable country of origin standard should be
equivalent to the due diligence standard required for the Conflict
Minerals Report.\426\ Others suggested that the reasonable country of
origin standard should conform, at least in part, to international
standards,\427\ such as the ``preliminary review'' in the OECD
guidance.\428\
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\423\ See letter from Teggeman.
\424\ See letter from Roundtable (stating that the ``Conflict
Minerals Statutory Provision requires issuers to disclose `whether'
their conflict minerals originated in the Covered Countries, and, in
the case of a positive determination, to provide a Conflict Minerals
Report,'' and it ``does not impose any obligation on an issuer who
determines that the conflict minerals did not originate in the
Covered Countries to make any disclosure beyond that fact, nor does
it specify how the issuer is to determine that the conflict minerals
did not originate in the Covered Countries'').
\425\ See, e.g., letters from AAFA, AngloGold, ArcelorMittal,
Barrick Gold, Boeing, Chamber I, Cleary Gottlieb, CRS I, Enough
Project I, Evangelical Alliance, Evangelicals, Global Witness I,
Howland, ICGLR, Industry Group Coalition I, IPC I, IPMI I, ITIC I,
JVC et al. II, LBMA I, Metalsmiths, Methodist Board, MSG I, NAM I,
NEI, NMA II, NYCBar I, NYCBar II, RILA-CERC, SEMI, Semiconductor,
SIF I, SIF II, PCP, Presbyterian Church II, Sen. Durbin/Rep.
McDermott, State II, TIAA-CREF, TIC, TriQuint I, and WGC II.
\426\ See letters from Metalsmiths and Sen. Durbin/Rep.
McDermott.
\427\ See letters from CRS I and IPMI I.
\428\ See letter from IPMI I (stating that ``the OECD advocates
an initial determination of origin inquiry''). See also OECD, OECD
Due Diligence Guidance for Responsible Supply Chains of Minerals
from Conflict-Affected and High-Risk Areas, 33 (2011), available at
http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf. (``This Guidance
applies to actors operating in a conflict-affected and high-risk
area, or potentially supplying or using tin (cassiterite), tantalum
(tantalite) or tungsten (wolframite), or their smelted derivates,
from a conflict-affected and high-risk area. Companies should
preliminarily review their mineral or metal sourcing practices to
determine if the Guidance applies to them.'').
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Many commentators agreed that the final rule should not define the
reasonable country of origin standard, or should provide only general
guidance regarding the standard, so that the rules would allow for
greater flexibility to evolve as processes improved.\429\ Some of these
commentators provided examples of the general guidance that
[[Page 56311]]
the final rule could include while still allowing flexibility.\430\ For
example, some commentators suggested that we indicate that the
reasonable country of origin inquiry could differ among issuers based
on their size, products, and relationships with suppliers.\431\ In
addition, one commentator recommended that the final rule should
clarify that a ``reasonable person'' standard applies to the reasonable
country of origin standard.\432\ As a further example, some
commentators sought flexibility for the reasonable country of origin
standard that permits some combination of reasonable supplier
declarations, contractual obligations, risk-based follow-up, and/or
smelter validations.\433\ One commentator asserted that an issuer's
reasonable country of origin inquiry should be conducted under a
reasonable care standard that requires ``more than a passive acceptance
by the filer of information provided by their suppliers,'' which does
not ``mandate that an issuer always reach the legally correct
conclusion, but does require sufficient investigation by an issuer to
support reasonable cause to believe in the conclusion.'' \434\
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\429\ See, e.g., letters from AAFA, AngloGold, ArcelorMittal,
Industry Group Coalition I, IPC I, IPMI I, ITIC I, JVC et al. II,
NAM I, RILA-CERC, Semiconductor, SIF I, TriQuint I, and WGC II.
\430\ See, e.g., letters from Industry Group Coalition I, IPC I,
ITIC I, NAM I, RILA-CERC, and SIF I.
\431\ See letters from IPC I and ITIC I.
\432\ See letter from RILA-CERC.
\433\ See, e.g., letters from Industry Group Coalition I and NAM
I.
\434\ See letter from Enough Project IV.
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Some commentators asserted that the final rule should define or
provide specific guidance on what constitutes a ``reasonable country of
origin inquiry,'' although many of these commentators did not provide
suggested definitions or guidance.\435\ A few commentators argued,
however, that any definition or guidance in the final rule should make
clear that a reasonable country of origin standard should not be an
absolute standard.\436\ One commentator suggested that the reasonable
country of origin inquiry standard should require an issuer to take
``sufficient steps to accurately determine and disclose whether its
conflict minerals originate from the DRC,'' and the commentator,
therefore, recommended that an issuer should disclose the steps it
undertook to complete its inquiry.\437\
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\435\ See, e.g., letters from CRS I, Earthworks, Enough Project
I, Evangelical Alliance, Evangelicals, Global Witness I, Howland,
ICGLR, IPC I, IPMI I, Metalsmiths, Methodist Board, MSG I, NYCBar I,
NYCBar II, PCP, Presbyterian Church II, Roundtable, SEMI, Sen.
Durbin/Rep. McDermott, State II, and TIC.
\436\ See letters from Chamber I, Cleary Gottlieb, and NAM I.
\437\ See letter from SIF II.
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A large number of commentators suggested that, as part of a
reasonable country of origin standard, the final rule should permit an
issuer to rely on reasonable representations from suppliers and/or
smelters.\438\ Other commentators recommended, however, that written
representations could provide only some evidence in making a reasonable
country of origin inquiry but should not, by themselves, satisfy the
reasonable country of origin inquiry standard.\439\ Some of these
commentators provided examples of other evidence an issuer could use in
addition to written representations in satisfying a reasonable country
of origin standard, including contractually obligating suppliers to
source only from conflict-free smelters, conducting spot checks of
suppliers and smelters to verify they are obtaining conflict minerals
from only conflict-free sources, disclosing publicly the smelters used
and the processes undertaken to ensure that only conflict-free minerals
are used, and/or determining that there is no contrary evidence or
``red flags'' that would cast doubt on the minerals' origins.\440\ Some
commentators suggested that an issuer should be able to rely on
representations from smelters only if the smelter was designated
``compliant'' by nationally or internationally recognized
standards.\441\ A few commentators, however, asserted that smelters and
refiners are unable to verify the country of origin of the minerals
they process at the present time.\442\ One commentator argued that an
issuer should be able to rely on reasonable representations ``one or
two steps up the supply chain,'' but that these representations should
be made public.\443\
---------------------------------------------------------------------------
\438\ See, e.g., letters from AngloGold, Arkema, Cleary
Gottlieb, Global Tungsten I, Global Tungsten II, Howland, ICGLR, IPC
I, IPC II, NAM I, NEI, NMA II, PCP, RILA, Roundtable, SEMI, Taiwan
Semi, TIAA-CREF, TIC, TriQuint I, US Telecom, and WGC II.
\439\ See, e.g., letters from CTIA, Enough Project I, Global
Witness I, Howland, IPMI I, ITIC I, MSG I, NYCBar II, Sen. Durbin/
Rep. McDermott, SIF I, and TIC.
\440\ See, e.g., letters from Enough Project I, Global Witness
I, IPMI I, and MSG I.
\441\ See letters from Howland, Enough Project I, ITIC I, MJB
Consulting (May 30, 2011) (``MJB III''), MSG III, NYCBar II, SIF I,
and TIC.
\442\ See letters from Nordic Sun Worldwide Ltd. (Mar. 17, 2012)
(``Nordic Sun'') (stating that, before smelter verification schemes
can be relied upon, ``a more scientific component must be added,''
and that only ``the addition of a low acquisition cost mineral
analyzer with a reasonably detailed geologic mineralization
fingerprinting capability that include GPS location data and
certification tag data in a tamper-proof format will add the
necessary missing step to all the 3T minerals and smelter
certification systems'') and Southern Africa Resource Watch (Apr. 4,
2012) (``SARW'') (stating that any scheme that ``essentially depends
on assurances from refining and smelting facilities will not be
helpful''). But see letter from iTSCi Programme Governance Committee
(Apr. 14, 2012) (``iTSCi'') (refuting the letter from Nordic Sun).
\443\ See letter from Hileman Consulting.
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Commentators were almost evenly split about whether the final rule
should allow an issuer to use qualifying or explanatory language in
concluding whether its conflict minerals originated in the Covered
Countries.\444\ Some of the commentators that believed the final rule
should permit some qualification or explanation, however, qualified
their recommendations.\445\
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\444\ Some commentators asserted that such language should be
permitted. See letters from AngloGold, Cleary Gottlieb, Howland, NAM
I, NMA II, and WGC II. Others took the opposite view. See letters
from CRS I, Earthworks, Global Witness I, NEI, and State II.
\445\ See letters from Howland (stating that an issuer should be
able to use qualifying language only if it knows that 80% or more of
its conflict minerals did not originate from the Covered Countries),
MSG I (stating that qualifying language is not relevant as long as
an issuer discloses the manner in which it determined its reasonable
country of origin inquiry), NAM I (stating that qualifying language
should be permitted only when there is appropriate information to
support the conclusion), NMA II (same), and TriQuint I (stating that
the final rule should allow qualifying language when an issuer
concludes that its conflict minerals are not ``DRC conflict free,''
but should not allow such a qualification if it states that its
conflict minerals are, in fact, ``DRC conflict free'').
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c. Final Rule
After considering the comments, we are adopting the final rule
regarding the reasonable country of origin inquiry substantially as
proposed, but with some modification. The final rule does not specify
what steps and outcomes are necessary to satisfy the reasonable country
of origin inquiry requirement because, as stated in the Proposing
Release, such a determination depends on each issuer's particular facts
and circumstances. A reasonable country of origin inquiry can differ
among issuers based on the issuer's size, products, relationships with
suppliers, or other factors.\446\ Further, as we stated in the
Proposing Release, we continue to believe that the steps necessary to
constitute a reasonable country of origin inquiry depend on the
available infrastructure at a given time. As commentators noted, such
an approach
[[Page 56312]]
allows the final rule to be flexible and evolve with available tracing
processes.
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\446\ As we indicated in the Proposing Release, although a
reasonable country of origin inquiry may be based on a particular
issuer's size, products, relationships with suppliers, or another
factor, an issuer may not conclude that, because of the large (or
small) amount of conflict minerals it uses in its products or the
large (or small) number of products that include conflict minerals,
it is unreasonable for that issuer to conduct any inquiry into the
origin of its conflict minerals. Instead, that issuer must make some
inquiry into the origin of its conflict minerals.
---------------------------------------------------------------------------
Even though the final rule does not specify the steps necessary to
satisfy the reasonable country of origin inquiry requirement, the final
rule includes general standards governing the inquiry and the steps
required as a result of the inquiry. First, the final rule provides
that, to satisfy the reasonable country of origin inquiry requirement,
an issuer's reasonable country of origin inquiry must be reasonably
designed to determine whether the issuer's conflict minerals did
originate in the Covered Countries, or did come from recycled or scrap
sources, and it must be performed in good faith. The proposed rules did
not discuss the design of an issuer's reasonable country of origin
inquiry or an issuer's performance in carrying out its reasonable
country of origin inquiry. We believe providing these standards in the
rule will facilitate compliance with the rule by providing guidance to
issuers about what is required to satisfy the reasonable country of
origin inquiry. In this regard, we note that one commentator stated
that ``[i]t is essential, in order to make the implementation of 1502
practical and cost effective, that the concept of reasonableness, and
good faith efforts'' be recognized in the final rule.\447\ Further, we
believe the notion of good faith performance is important so that an
issuer will not be able to establish a reasonably designed inquiry but
subsequently fail to undertake the steps necessary to carry out the
actual inquiry.
---------------------------------------------------------------------------
\447\ See letter from ITRI IV (emphasis in original).
---------------------------------------------------------------------------
Although we do not prescribe the steps constituting a reasonable
country of origin inquiry, we do view an issuer as satisfying the
reasonable country of origin inquiry standard if it seeks and obtains
reasonably reliable representations indicating the facility at which
its conflict minerals were processed and demonstrating that those
conflict minerals did not originate in the Covered Countries or came
from recycled or scrap sources. These representations could come either
directly from that facility or indirectly through the issuer's
immediate suppliers, but the issuer must have a reason to believe these
representations are true given the facts and circumstances surrounding
those representations. An issuer must also take into account any
applicable warning signs or other circumstances indicating that its
conflict minerals may have originated in the Covered Countries or did
not come from recycled or scrap sources.\448\ An issuer would have
reason to believe representations were true if a processing facility
received a ``conflict-free'' designation by a recognized industry group
that requires an independent private sector audit of the smelter, or an
individual processing facility, while it may not be part of the
industry group's ``conflict-free'' designation process, obtained an
independent private sector audit that is made publicly available. An
issuer's policies with respect to the sourcing of conflict minerals
will generally form a part of the issuer's reasonable country of origin
inquiry, and therefore would generally be required to be disclosed in
the issuer's Form SD.
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\448\ As discussed below, this approach is consistent with the
OECD's due diligence guidance, which states that issuers should
preliminarily review their sourcing practices to determine if their
due diligence guidance applies, and provides non-exclusive examples
of situations that it states should trigger the guidance. See OECD,
OECD Due Diligence Guidance for Responsible Supply Chains of
Minerals from Conflict-Affected and High-Risk Areas (2011),
available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf. See also OECD,
Due Diligence Guidance for Responsible Supply Chains of Minerals
from Conflict-Affected and High-Risk Areas: Supplement on Gold
(2012), available at http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.
---------------------------------------------------------------------------
Moreover, the issuer is not required to receive representations
from all of its suppliers. The standard focuses on reasonable design
and good faith inquiry. Therefore, if an issuer reasonably designs an
inquiry and performs the inquiry in good faith, and in doing so
receives representations indicating that its conflict minerals did not
originate in the Covered Countries, the issuer may conclude that its
conflict minerals did not originate in the Covered Countries, even
though it does not hear from all of its suppliers, as long as it does
not ignore warning signs or other circumstances indicating that the
remaining amount of its conflict minerals originated or may have
originated in the Covered Countries. For example, we would agree that,
``if reasonable inquiry has been made, and if no evidence of [Covered
Country] origin has arisen, and if the origin of only a small amount of
gold were still unknown, a manufacturer should be allowed to declare
that its gold is not from the [Covered Countries] and is DRC conflict
free.'' \449\
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\449\ See letter from IPMI I. Commentators opining on whether
the statutory language requiring due diligence and a Conflict
Minerals Report applies only to issuers that know that their
conflict minerals originated in the Covered Countries or whether
that statutory language applies also to issuers that are unable to
determine that their conflict minerals did not originate in the
Covered Countries did not necessarily discuss this topic in relation
to conflict minerals from recycled or scrap sources.
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The reasonable country of origin inquiry is consistent with the
supplier engagement approach in the OECD guidance where issuers use a
range of tools and methods to engage with their suppliers.\450\ The
results of the inquiry may or may not trigger due diligence. This is
the first step issuers take under the OECD guidance to determine if the
further work outlined in the OECD guidance--due diligence--is
necessary. The Conflict Minerals Statutory Provision specifically
contemplates due diligence, which goes beyond inquiry and involves
further steps to establish the truth or accuracy of relevant
information, by requiring a description of the measures the issuer took
to exercise due diligence on the source and chain of custody of the
minerals. The Conflict Minerals Statutory Provision specifically notes
that due diligence includes the audit discussed below.
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\450\ In June 2012, the OECD issued a report regarding
implementation of the OECD guidance. See OECD, Downstream
Implementation of the OECD Due Diligence Guidance for Responsible
Supply Chains of Minerals from Conflict-Affected and High-Risk
Areas, Cycle 2 Interim Progress Report on the Supplement on Tin,
Tantalum, and Tungsten Final Draft (June 2012), available at http://www.oecd.org/investment/guidelinesformultinationalenterprises/Downstream%20cycle%202%20report%20-%20Edited%20Final%20-%201%20June.pdf. This additional guidance includes sample letters to
suppliers and customers regarding the use of conflict minerals.
---------------------------------------------------------------------------
Second, the final rule establishes a different standard from that
included in the proposal for determining whether due diligence on the
conflict minerals' source and chain of custody and a Conflict Minerals
Report is required after the reasonable country of origin inquiry. The
proposed rules would have required an issuer to conduct due diligence
and provide a Conflict Minerals Report if, based on its reasonable
country of origin inquiry, the issuer determined that its conflict
minerals originated in the Covered Countries, the issuer was unable to
determine that its conflict minerals did not originate in the Covered
Countries, or the issuer determined that its conflict minerals came
from recycled or scrap sources. Under the proposal, issuers could only
avoid providing a Conflict Minerals Report if they could prove a
negative--that their conflict minerals did not originate in the Covered
Countries. This approach would arguably be more burdensome than
necessary to accomplish the purpose of the statutory provision. The
reasonable country of origin inquiry standard does not require an
issuer to determine to a
[[Page 56313]]
certainty that all its conflict minerals did not originate in the
Covered Countries because the standard required is a reasonable
inquiry, and requiring a certainty in this setting would not be
reasonable and may impose undue costs.\451\
---------------------------------------------------------------------------
\451\ As discussed below, certainty also is not required for the
due diligence inquiry.
---------------------------------------------------------------------------
Under the final rule, if (i) an issuer determines that, based on
its reasonable country of origin inquiry, its necessary conflict
minerals did not originate in the Covered Countries or did come from
recycled or scrap sources, or (ii) based on its reasonable country of
origin inquiry, the issuer has no reason to believe that its conflict
minerals may have originated in the Covered Countries or the issuer
reasonably believes that its conflict minerals are from recycled or
scrap sources, the issuer is not required to exercise due diligence on
its conflict minerals' source or chain of custody or file a Conflict
Minerals Report with respect to such conflict minerals. Instead, the
issuer only is required, in the body of its specialized disclosure
report, to disclose its determination and briefly describe the
reasonable country of origin inquiry it undertook in making its
determination and the results of the inquiry it performed.
Conversely, an issuer must exercise due diligence on its conflict
minerals' source and chain of custody and provide a Conflict Minerals
Report if the issuer knows that it has necessary conflict minerals that
originated in the Covered Countries and did not come from recycled or
scrap sources. In addition, if, based on its reasonable country of
origin inquiry, the issuer has reason to believe that its necessary
conflict minerals may have originated in the Covered Countries (and may
not have come from recycled or scrap sources), the issuer must also
exercise due diligence on the source and chain of custody of its
conflict minerals. If, however, as a result of that due diligence, such
an issuer determines that its conflict minerals did not originate in
the Covered Countries or that its conflict minerals did come from
recycled or scrap sources, no Conflict Minerals Report is required, but
the issuer is required, in the body of its specialized disclosure
report, to disclose its determination and briefly describe its due
diligence and the results of the due diligence. If, based on its due
diligence, the issuer determines that its conflict minerals did
originate in the Covered Countries, and did not come from recycled or
scrap sources, the issuer is required to submit a Conflict Minerals
Report. If, based on its due diligence, the issue cannot determine the
source of its conflict minerals, it is also required to submit a
Conflict Minerals Report.
This revised approach does not require an issuer to prove a
negative to avoid moving to step three, but it also does not allow an
issuer to ignore or be willfully blind to warning signs or other
circumstances indicating that its conflict minerals may have originated
in the Covered Countries. This approach appears consistent with the
``reason-to-believe approach'' provided by one commentator.\452\ Also,
as some commentators noted,\453\ this approach is consistent with the
OECD's due diligence guidance, which states that issuers ``should
preliminarily review their mineral or metal sourcing practices to
determine if the [due diligence] Guidance applies to them.'' \454\ In
its due diligence guidance, the OECD provides non-exclusive examples of
circumstances, or red flags, that it states should trigger its
guidance.\455\ One example of a circumstance that, absent other
information, should provide an issuer with reason to believe that its
conflict minerals may have originated in the Covered Countries is if an
issuer becomes aware that some of its conflict minerals were processed
by smelters that sourced from many countries, including the Covered
Countries, but the issuer is unable to determine whether the particular
minerals it received from such a ``mixed smelter'' were from the
Covered Countries.\456\
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\452\ See letter from Tiffany (``A better way to address this
issue would be to impose the obligation to submit a conflict
minerals report on only those companies that actually have a reason
to believe that they use gold (or some other `conflict mineral')
that does, in fact, originate in the DRC or surrounding countries
(the `reason-to-believe approach').'').
\453\ See letters from Enough Project I (stating that, through
its reasonable country of origin inquiry, ``an issuer should
identify red flags that would alert it to the possibility that the
minerals in its products support conflict in the DRC and adjoining
countries,'' and citing to the OECD's due diligence guidance),
Global Witness I (stating that an issuer should ``[r]eview for and
consider `red flags' indicating possible sourcing from Covered
Countries,'' and citing to the OECD's due diligence guidance), and
IPMI I (``The OECD's new international standard for an initial
inquiry is a specific point where harmonization will be particularly
advantageous, while conforming well to the direction of Congress for
a reasonable country of origin inquiry. Like Congress, the OECD
advocates an initial determination of origin inquiry: `Companies
should preliminarily review their mineral or metal sourcing
practices to determine if the Guidance applies to them.''').
\454\ See OECD, OECD Due Diligence Guidance for Responsible
Supply Chains of Minerals from Conflict-Affected and High-Risk
Areas, 33 (2011), available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
\455\ See id. (providing a number of examples, including whether
conflict minerals are claimed to originate from a country that has
limited known reserves of the conflict mineral in question) and
OECD, Due Diligence Guidance for Responsible Supply Chains of
Minerals from Conflict-Affected and High-Risk Areas: Supplement on
Gold (2012), available at http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf. The gold supplement also
addresses circumstances triggering due diligence for gold claimed to
have come from recycled or scrap sources.
\456\ This scenario is consistent with the OECD due diligence
framework's statement that ``tracing minerals in a company's
possession are generally unfeasible after smelting, with refined
metals entering the consumer market as small parts of various
components in end products.'' See OECD, OECD Due Diligence Guidance
for Responsible Supply Chains of Minerals from Conflict-Affected and
High-Risk Areas, 33 (2011), available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
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We appreciate that commentators differ in their views as to when
due diligence and, potentially, a Conflict Minerals Report is required
under the language of the Conflict Minerals Statutory Provision. The
provision requires issuers to provide a Conflict Minerals Report if
their conflict minerals ``did originate'' in the Covered Countries but
does not address how to determine whether the minerals ``did
originate'' in those countries.\457\ The final rule adopts the
reasonable country of origin inquiry as the procedure for making this
determination. Some commentators argued that the statutory language
should be read to require that only an issuer that knows, after
conducting its reasonable country of origin inquiry, that its conflict
minerals originated in the Covered Countries must perform due diligence
and provide a Conflict Minerals Report.\458\ Alternatively, other
commentators argued that the provision should be read to require
issuers that are unable to determine that their conflict minerals did
not originate in the Covered Countries to perform due diligence and
potentially submit a Conflict Minerals Report.\459\ We believe the
approach that is most consistent with the statutory language and its
purposes, however, is to require any issuer that, after the reasonable
country of origin inquiry, knows that its minerals originated in the
Covered Countries and did not come from recycled or scrap sources to
perform due diligence regarding those
[[Page 56314]]
minerals and submit a Conflict Minerals Report. In addition, any issuer
that, after conducting its reasonable country of origin inquiry, has
reason to believe that its minerals may have originated in the Covered
Countries, and may not have come from recycled or scrap sources must
perform due diligence. If, as a result of that due diligence, such an
issuer determines that its conflict minerals did not originate in the
Covered Countries or did come from recycled or scrap sources, no
Conflict Minerals Report is required (although, as discussed below,
such due diligence, and the results thereof, must be disclosed in the
body of such issuer's specialized disclosure report, together with the
description of such issuer's reasonable country of origin inquiry).
Otherwise, such an issuer must submit a Conflict Minerals Report. We
are adopting this approach in the final rule.
---------------------------------------------------------------------------
\457\ See Exchange Act Section 13(p)(1)(A) (stating that ``in
cases in which such conflict minerals did originate in the'' Covered
Countries (emphasis added), the issuer must ``submit to the
Commission'' a Conflict Minerals Report).
\458\ See, e.g., letters from AngloGold, Clearly Gottlieb, NAM
I, and Tiffany.
\459\ See, e.g., letters from NEI, NYCBar I, and NYCBar II.
---------------------------------------------------------------------------
Interpreting the Conflict Minerals Statutory Provision to require
due diligence only if an issuer has affirmatively determined that its
conflict minerals originated in the Covered Countries and does not come
from recycled or scrap sources would undermine the goals of the
statute. For instance, if we allowed an issuer to stop its inquiry
after learning that its necessary conflict minerals came from a smelter
that includes minerals from the Covered Countries and other sources
without knowing if its particular minerals came from the Covered
Countries, there would be an incentive for issuers to avoid learning
the ultimate source of the minerals. Thus, although we realize our
approach will be more costly than only requiring due diligence and,
potentially, a Conflict Minerals Report if the issuer has affirmative
knowledge that its minerals came from the Covered Countries, in our
view, requiring further steps by issuers that have reason to believe
that they have necessary conflict minerals that may have originated in
the Covered Countries is necessary to carry out the requirements
contemplated by the statute. Moreover, this approach strikes a more
appropriate balance than requiring an issuer to prove a negative--that
their necessary conflict minerals did not originate in the Covered
Countries--which would be even more costly.
Alternatively, the Conflict Minerals Statutory Provision could be
interpreted to require all issuers to determine whether their conflict
minerals originated in the Covered Countries through the exercise of
due diligence. This inquiry could be quite costly, especially in a
situation in which an issuer is unable to determine that a very small
amount of its overall conflict minerals did not originate in the
Covered Countries or come from recycled or scrap sources. While such an
interpretation of the provision is plausible and, in fact, was
suggested by two of the co-sponsors of the provision as the accurate
interpretation of the Conflict Minerals Statutory Provision,\460\ we do
not believe that approach is necessary to achieve Congress's goal.
Instead, we believe the reasonable country of origin inquiry standard
provides a clearer way for issuers to make the necessary determination
and does so in a manner that significantly reduces burdens and is more
cost-effective. Although the reasonable country of origin inquiry will
impose costs on issuers, we believe the costs are lower than those that
would be incurred if issuers were always required to perform due
diligence.
---------------------------------------------------------------------------
\460\ See letter from Sen. Durbin/Rep. McDermott (``The proposed
rule differentiates between the country of origin inquiry and the
due diligence involved in determining the source and chain of
custody of conflict minerals, indicating that the former could be
`less exhaustive.' This is a misreading of our intent--we see no
difference in the effort that should be exercised in each case.'').
---------------------------------------------------------------------------
Finally, we note that an issuer conducting an appropriate
reasonable country of origin inquiry may not be able to determine to a
certainty the origin of all its conflict minerals or whether they came
from recycled or scrap sources. A certainty is not required to satisfy
the reasonable country of origin inquiry standard. Disclosure
indicating that the determination is uncertain is unnecessary.
Consistent with this approach, issuers may explicitly state that, if
true, their reasonable country of origin inquiry was reasonably
designed to determine whether the conflict minerals did originate in
the Covered Countries or did not come from recycled or scrap sources
and was performed in good faith, and the issuer's conclusion that the
conflict minerals did not originate in the Covered Countries or came
from recycled or scrap sources was made at that reasonableness level.
2. Disclosures in the Body of the Specialized Disclosure Report
a. Proposed Rules
Under the proposed rules, an issuer would have been required to
make a reasonable country of origin inquiry as to whether its conflict
minerals originated in the Covered Countries. After the reasonable
country of origin inquiry, if an issuer concluded that its conflict
minerals did not originate in the Covered Countries, the issuer would
have been required to disclose its conclusion in the body of its annual
report and on its Internet Web site.\461\ Also, the proposed rules
would have required that such an issuer disclose in the body of its
annual report and on its Internet Web site the reasonable country of
origin inquiry it used in making that determination. The proposed rules
would not, however, have required an issuer that, after its reasonable
country of origin inquiry, determined that its conflict minerals did
not originate in the Covered Countries to disclose the actual countries
from which the conflict minerals originated. The issuer would have been
required to provide in the body of the annual report the Internet
address on which the disclosure was posted and retain the information
on the Web site at least until the issuer's subsequent annual report
was filed. Finally, the issuer would have been required to maintain
reviewable business records in support of its negative determination.
The issuer, however, would not have been required to make any other
disclosures with regard to the conflict minerals that did not originate
in the Covered Countries.
---------------------------------------------------------------------------
\461\ See Exchange Act Section 13(p)(1)(E). The issuer would be
required to keep this information on its Internet Web site until it
filed its subsequent annual report.
---------------------------------------------------------------------------
Alternatively, if an issuer determined through its reasonable
country of origin inquiry that any of its conflict minerals originated
in the Covered Countries, or if the issuer was unable to determine
after a reasonable country of origin inquiry that its conflict minerals
did not originate in the Covered Countries, the proposed rules would
have required the issuer to disclose this result in the body of its
annual report and disclose that the Conflict Minerals Report was
furnished as an exhibit to its annual report. Additionally, the issuer
would have been required to make available its Conflict Minerals Report
on its Internet Web site until its subsequent annual report was filed,
disclose in the body of its annual report that the Conflict Minerals
Report was posted on its Internet Web site, and provide the Internet
address on which the Conflict Minerals Report was located.\462\ Under
the proposed rules, such an issuer would have been required to post the
Conflict Minerals Report on its Internet Web site, but the issuer would
not have had to post any of the disclosures it provided in the body of
its annual report on its Web site.
---------------------------------------------------------------------------
\462\ See Exchange Act Section 13(p)(1)(E).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Almost all of those that commented on this point believed that the
final rule should require some very brief
[[Page 56315]]
discussion of the conflict minerals information in the body of the
annual report.\463\ Some commentators indicated, however, that an
issuer should not have to provide any disclosure in the body of the
annual report,\464\ and one commentator stated that an issuer should
not have to describe the findings of its Conflict Minerals Report in
the body of the annual report.\465\ Other commentators remarked that
the full text of the Conflict Minerals Report could be provided as an
exhibit to an issuer's annual report.\466\ In contrast, a few
commentators asserted that an issuer should be required to include its
full country of origin disclosure and the full text of its Conflict
Minerals Report in the body of the annual report.\467\
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\463\ See, e.g., letters from AngloGold, Howland, NEI, NY State
Bar, SEMI, SIF I, and TriQuint I.
\464\ See letters from ITIC I and WGC II.
\465\ See letter from NY State Bar.
\466\ See letters from Ford, NEI, and WGC II.
\467\ See letters from CRS I and Earthworks.
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A number of commentators agreed that, as proposed, an issuer with
conflict minerals that did not originate in the Covered Countries
should be required to disclose its reasonable country of inquiry
because not requiring such disclosure would undercut the essential
purpose of the Conflict Minerals Statutory Provision.\468\ A number of
other commentators, however, disagreed,\469\ and some of these
commentators justified their position by noting that the Conflict
Minerals Statutory Provision does not require such disclosure and
asserted that such disclosure would not serve any constructive
purpose.\470\ Also, of the many commentators that discussed this
topic,\471\ one asserted that an issuer with no conflict minerals from
the Covered Countries should be required to disclose the name of the
country from which its conflict minerals' originated so that investors
could determine the veracity of the conclusion.\472\
---------------------------------------------------------------------------
\468\ See, e.g., letters from CRS I, Earthworks, Hileman
Consulting, Methodist Pension, MSG I, NEI, TIC, Tiffany, and
TriQuint I.
\469\ See, e.g., letters from AngloGold, Cleary Gottlieb,
Howland, NMA II, NY State Bar, SEMI, and WGC II.
\470\ See letters from Cleary Gottlieb, NY State Bar, and SEMI.
\471\ See, e.g., letters from AngloGold, Global Tungsten I,
Howland, IPC I, ITRI I, JVC et al. II, NAM I, NEI, NMA II, RMA,
SEMI, State II, TIC, TriQuint I, and WGC II.
\472\ See letter from SIF I. See also letter from State II
(noting that such a requirement would encourage issuers to establish
due diligence procedures across their conflict mineral supply chains
regardless of the minerals' country of origin).
---------------------------------------------------------------------------
Most of the commentators that discussed the topic agreed that, as
proposed, an issuer should be required to maintain reviewable business
records when it determines that its conflict minerals did not originate
in the Covered Countries.\473\ These commentators disagreed, however,
about the length of time that the final rule should require the records
be kept. The suggested durations ranged from one year to a period
covering the duration of the law.\474\ In addition, some commentators
recommended that the final rule clarify the meaning of ``reviewable
business records.'' \475\ There were a few commentators, however, that
did not believe that the final rule should require an issuer to retain
reviewable business records at all because such a requirement is not in
the Conflict Minerals Statutory Provision, an issuer should be
permitted to create its own records as it does for the financial and
other information in its annual reports, and such a rule would provide
an independent books and records requirement that goes beyond the
Conflict Minerals Statutory Provision.\476\
---------------------------------------------------------------------------
\473\ See, e.g., letters from AngloGold, Columban Center et al.,
CRS I, Hileman Consulting, Earthworks, Global Witness I, Howland,
ICGLR, JVC et al. II, Kemet, MSG I, NEI, NMA II, Sen. Durbin/Rep.
McDermott, SIF I, State II, TIAA-CREF, TIC, TriQuint I, and WGC II.
\474\ Suggested durations included, ``multiple years,'' ``a
sufficiently long period of time,'' ``as long as their home
jurisdictions (of foreign private issuers) require,'' ``for the
duration of the law,'' one year, two years, three years, five years,
seven years, and 10 years. See, e.g., letters from AngloGold,
Columban Center et al., CRS I, Earthworks, Global Witness I, Hileman
Consulting, Howland, ICGLR, Kemet, MSG I, NEI, NMA II, Sen. Durbin/
Rep. McDermott, SIF I, State II, TIC, TriQuint I, Trott, and WGC II.
\475\ See letters from JVC et al. II and TIC.
\476\ See letters from Cleary Gottlieb, NAM I, SEMI, and
Tiffany.
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c. Final Rule
After considering the comments, we are modifying the proposal
regarding the substantive disclosures in the body of the specialized
disclosure report, in part. An issuer that determines that, following
its reasonable country of origin inquiry, its conflict minerals did not
originate in the Covered Countries or came from recycled or scrap
sources or has no reason to believe that its necessary conflict
minerals may have originated in the Covered Countries or may not be
from recycled or scrap sources, is required to make certain disclosures
in the body of its specialized disclosure report on Form SD,\477\ under
the ``Conflict Minerals Disclosure'' heading. This requirement is
generally consistent with the proposal, except that the proposal
required due diligence regarding conflict minerals from recycled or
scrap sources. An issuer determining that its conflict minerals that
did not originate in the Covered Countries or that came from recycled
or scrap sources or that has no reason to believe that its necessary
conflict minerals may have originated in the Covered Countries or may
not be from recycled or scrap sources must disclose its determination
and results and provide a brief description of the inquiry it undertook
and the results and provide a link to its Internet Web site where the
disclosure is publicly available. However, in a change from the
proposal, the final rule requires such an issuer to provide a brief
description of the results of the inquiry it performed to demonstrate
the basis for concluding that it is not required to submit a Conflict
Minerals Report.
---------------------------------------------------------------------------
\477\ As discussed above, the final rule will require that all
disclosure be in the body of the issuer's specialized disclosure
report on new Form SD instead of its annual report.
---------------------------------------------------------------------------
As discussed above, we note that there may be instances in which an
issuer determines, based on its reasonable country of origin inquiry,
that it has reason to believe it has conflict minerals that may have
originated in the Covered Countries and may not be from recycled or
scrap sources and, therefore, must exercise due diligence on the source
and chain of custody of the conflict minerals. If, at any point during
the exercise of that due diligence, the issuer determines that its
conflict minerals did not originate in the Covered Countries or came
from recycled or scrap sources, the issuer is not required to submit a
Conflict Minerals Report. The issuer, however, is still required to
submit a specialized disclosure report disclosing its determination and
briefly describing the reasonable country of origin inquiry and the due
diligence efforts it exercised and the results of the inquiry and due
diligence efforts to demonstrate why the issuer believes that the
conflict minerals did not originate in the Covered Countries or came
from recycled or scrap sources.
We note the views of some commentators that requiring issuers to
describe their reasonable country of origin inquiry would impose costs
neither justified nor required by the provision. Also, we note that the
Conflict Minerals Statutory Provision requires only that a ``person
described'' disclose annually ``whether conflict minerals that are
necessary * * * did originate in the Democratic Republic of the Congo
or an adjoining country and, in cases in which such conflict minerals
did originate in any such country,
[[Page 56316]]
submit to the Commission a report.'' \478\ Therefore, the Conflict
Minerals Statutory Provision only explicitly requires an issuer to
provide additional disclosure if the issuer determines that its
conflict minerals did originate in the Covered Countries.\479\
---------------------------------------------------------------------------
\478\ See Exchange Act Section 13(p)(1)(A).
\479\ See, e.g., letter from Cleary Gottlieb. This commentator
argued ``an issuer that concludes it has necessary conflict minerals
that did not (emphasis in original) originate in the Covered
Countries must only disclose that conclusion--there is no
requirement in the Dodd-Frank Act for disclosure of the inquiry
process the issuer undertook in coming to that conclusion,'' because
the provision ``only provides for increased disclosure requirements
* * * once an issuer has affirmatively determined that its necessary
conflict minerals originated in a DRC country.'' Id.
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We believe, however, that requiring an issuer to provide a brief
description of the reasonable country of origin inquiry it undertook is
appropriate despite the additional costs associated with providing such
a description. As discussed above, the reasonable country of origin
inquiry is not a prescriptive standard and does not require certainty.
As a result, there will likely be variation in the approaches taken by
issuers. Consequently, we believe it is appropriate to require
disclosure regarding the reasonable country of origin inquiry so that
interested parties can evaluate ``the degree of care'' the issuer used
in making its negative determination,\480\ and it will ``help ensure
credibility of issuer disclosure.'' \481\ Also, although the Conflict
Minerals Statutory Provision does not explicitly require an issuer to
provide further disclosure if the issuer determines that its conflict
minerals did not originate in the Covered Countries, the provision does
not provide that such disclosures cannot be required. Therefore, we
believe that requiring this disclosure is permitted as well as
appropriate.
---------------------------------------------------------------------------
\480\ See letter from MSG I.
\481\ See letter from NEI.
---------------------------------------------------------------------------
As described above, the final rule does not prescribe particular
steps or require an issuer to establish to a certainty that its
minerals did not originate in the Covered Countries or come from
recycled or scrap sources. Instead, the final rule relies on a
reasonable design and good faith execution approach. Requiring an
issuer to briefly describe the results of the inquiry it performed is
intended to enable stakeholders to assess the issuer's reasonable
country of origin design and its efforts in carrying out that design.
Also, this disclosure is intended to allow stakeholders to form their
own views on the reasonableness of the issuer's efforts. Based on this
information, stakeholders could advocate for different processes for
individual issuers if they believe it is necessary.\482\ In addition,
it is expected that reasonable country of origin inquiry processes will
change over time based both on improved supply chain visibility and the
results of an issuer's prior year inquiry. Requiring an issuer to
provide a brief description of the results of its inquiry, therefore,
will allow stakeholders to track that progress and advocate for
different procedures if they think it is necessary.
---------------------------------------------------------------------------
\482\ In this regard, an issuer's description of the results of
the reasonable country of origin inquiry should make clear why it
determined that its conflict minerals did not originate in the
Covered Countries. This is also the case for issuers that must
disclose their reasonable country of origin inquiry and due
diligence efforts if they determine, following their due diligence,
that their conflict minerals did not originate in the Covered
Countries or did come from recycled or scrap sources.
---------------------------------------------------------------------------
We have decided, however, not to adopt the proposed requirement for
an issuer to maintain reviewable business records supporting its
conclusion that its conflict minerals did not originate in the Covered
Countries based on its reasonable country of origin. The Conflict
Minerals Statutory Provision does not require an issuer to maintain
reviewable business records to support its determination of the source
of its conflict minerals. In addition, there does not appear to be a
need for the rule to require that an issuer maintain such records. As
one commentator noted, issuers ``provide vast amounts of material
information in, for example, Management's Discussion and Analysis in
periodic reports, for which the SEC does not impose specific record
retention requirements for maintaining the source materials used to
generate the disclosures.'' \483\ Therefore, we believe that it is
unnecessary for us to require an issuer to maintain reviewable business
records, although maintenance of appropriate records may be useful in
demonstrating compliance with the final rule, and may be required by
any nationally or internationally recognized due diligence framework
applied by an issuer.
---------------------------------------------------------------------------
\483\ See letter from NAM I.
---------------------------------------------------------------------------
Also, in contrast to the proposal, we are not requiring an issuer
to disclose in either its specialized disclosure report or its annual
report, under a separate heading entitled ``Conflict Minerals
Disclosure,'' whether any of its necessary conflict minerals originated
in the Covered Countries or did not come from recycled or scrap sources
or that the issuer was unable to determine that its conflict minerals
did not originate in the Covered Countries or come from recycled or
scrap sources. Under the proposal, an issuer required to provide a
Conflict Minerals Report, including an issuer required to provide a
Conflict Minerals Report because its conflict minerals came from the
recycled or scrap sources, would have been required to disclose in the
body of its annual report that it furnished a Conflict Minerals Report
as an exhibit to its annual report, that the Conflict Minerals Report
and certified independent private sector audit report were available on
its Internet Web site, and the Internet address where the Conflict
Minerals Report and audit report were located. Instead, to reduce some
costs and burdens to issuers, the final rule only requires an issuer
required to provide a Conflict Minerals Report to disclose in its
specialized disclosure report, under a separate heading entitled
``Conflict Minerals Disclosure,'' that a Conflict Minerals Report is
provided as an exhibit to its specialized disclosure report and to
disclose a link to its Internet Web site where the Conflict Minerals
Report is publicly available.
The final rule does not require an issuer to disclose in the body
of its specialized disclosure report the reason that the issuer is
providing a Conflict Minerals Report because that information will be
disclosed by the issuer in the Conflict Minerals Report. Requiring that
information also in the body of the specialized disclosure report would
be redundant and unnecessary. Similarly, the final rule does not
require an issuer to disclose in its specialized disclosure report that
it has provided an audit report or a certification of the audit, if
applicable, because the audit report and certification would be part of
the Conflict Minerals Report already, so specifically mentioning the
audit report or certification here is not necessary and may be
confusing.
E. Step Three--Conflict Minerals Report's Content and Supply Chain Due
Diligence
The Conflict Minerals Statutory Provision requires an issuer that
determines that its necessary conflict minerals originated in the
Covered Countries to submit a Conflict Minerals Report.\484\ The
Conflict Minerals Report must include, among other matters, a
description of the measures taken by the issuer to exercise due
diligence on the source and chain of custody of its conflict minerals,
which measures ``shall include an independent private sector audit'' of
the Conflict Minerals Report.\485\ In this regard, the Conflict
Minerals Statutory Provision states also
[[Page 56317]]
that the issuer submitting the Conflict Minerals Report ``shall certify
the audit * * * that is included in such report'' and such a certified
audit ``shall constitute a critical component of due diligence in
establishing the source and chain of custody of such minerals.'' \486\
Also, the Conflict Minerals Statutory Provision requires that the
Conflict Minerals Report must provide a description of the products
``manufactured or contracted to be manufactured that are not `DRC
conflict free,' '' the entity that conducted the independent private
sector audit, 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.\487\
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\484\ See Exchange Act Section 13(p)(1)(A).
\485\ See Exchange Act Section 13(p)(1)(A)(i).
\486\ See Exchange Act Section 13(p)(1)(B).
\487\ See Exchange Act Section 13(p)(1)(A)(ii).
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1. Content of the Conflict Minerals Report
a. Proposed Rules
The proposed rules would have required an issuer to exercise due
diligence on the source and chain of custody of its conflict minerals
that it was unable to determine, based on its reasonable country of
origin inquiry, did not originate in the Covered Countries and to
describe those due diligence measures in its Conflict Minerals Report.
Consistent with the Conflict Minerals Statutory Provision,\488\ we
proposed to require that the description of the measures taken by an
issuer to exercise due diligence on the source and chain of custody of
its conflict minerals would include a certified independent private
sector audit conducted in accordance with the standards established by
the Comptroller General of the United States.\489\ The proposed rules
also stated that the audit would constitute a critical component of due
diligence.\490\ To implement the Conflict Minerals Statutory
Provision's requirement that an issuer ``certify the audit,'' \491\ we
proposed that an issuer would be required to certify that it obtained
an independent private sector audit of its Conflict Minerals
Report,\492\ and we proposed that an issuer would provide this
certification in that report. Further, as required by the Conflict
Minerals Statutory Provision,\493\ we proposed that the rules would
require descriptions, in the Conflict Minerals Report, of an issuer's
products that are not ``DRC conflict free,'' the facilities used to
process those conflict minerals, the country of origin of those
conflict minerals, and the efforts to determine the mine or location of
origin with the greatest possible specificity.
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\488\ See Exchange Act Sections 13(p)(1)(A)(i) and 13(p)(1)(B).
\489\ See Exchange Act Section 13(p)(1)(A).
\490\ See Exchange Act Section 13(p)(1)(B).
\491\ See id.
\492\ As discussed in the Proposing Release, alternatively, one
could interpret this language to mean that an issuer must ensure
that the audit it obtained is accurate, but such an interpretation
would appear to mean that an issuer must review the audit of its
Conflict Minerals Report, which the issuer created originally. We
did not propose this approach.
\493\ See Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------
The Conflict Minerals Statutory Provision uses the phrase
``facilities used to process the conflict minerals,'' which we noted in
the Proposing Release would appear to refer to the smelter or refinery
through which the issuer's minerals passed. We noted also that the
Conflict Minerals Statutory Provision states that products are ``DRC
conflict free'' when those products do not contain conflict minerals
that directly or indirectly finance or benefit armed groups.\494\ The
Proposing Release also noted that Section 1502(e)(3) of the Act defines
the term ``armed group'' as ``an armed group that is identified as
perpetrators of serious human rights abuses in the annual Country
Reports on Human Rights Practices under sections 116(d) and 502B(b) of
the Foreign Assistance Act of 1961,'' \495\ as they relate to the
Covered Countries (``Country Reports'').\496\ Our proposed rules
included a cross reference to that definition to provide guidance.
---------------------------------------------------------------------------
\494\ See Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D).
\495\ 22 U.S.C. 2151n(d) and 2304(b).
\496\ Section 1502(e)(3) of the Act.
---------------------------------------------------------------------------
Under the proposed rules, an issuer that was unable to determine
that its conflict minerals did not originate in the Covered Countries
would have been required to furnish a Conflict Minerals Report to the
same extent as an issuer with conflict minerals that originated in the
Covered Countries. We recognized that an issuer unable to determine
that its conflict minerals did not originate in the Covered Countries
may not be able to determine to a certainty whether any of its products
are or are not ``DRC conflict free,'' insofar as its initial effort to
determine the origin of the conflict minerals in those products under
the reasonable country of origin inquiry was inconclusive and its
subsequent due diligence on the source and chain of custody of such
minerals was also inconclusive. Consistent with Exchange Act Section
13(p)(1)(A)(ii), we proposed that an issuer unable to determine that
its conflict minerals did not originate in the Covered Countries would
be required to describe all of its products that contain such conflict
minerals and identify these products as ``not DRC conflict free'' \497\
because the issuer would not have determined that the products
satisfied the statutory definition of ``DRC conflict free''--that the
products do ``not contain conflict minerals that directly or indirectly
finance or benefit armed groups in the'' Covered Countries. The
proposed rules would have allowed an issuer to provide additional
disclosure explaining, for example, that although these products were
categorized as not ``DRC conflict free'' in compliance with the
proposed rules implementing the Conflict Minerals Statutory Provision
and the statutory definition of ``DRC conflict free,'' the issuer had
been unable to determine the source of the conflict minerals, including
whether the conflict minerals in these products actually benefited or
financed armed groups in the Covered Countries. Also, such an issuer
would have been required to 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.\498\
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\497\ If any products contained both conflict minerals that did
not originate in the Covered Countries and conflict minerals that
the issuer was unable to determine did not originate in the Covered
Countries, the issuer, under the proposal, would be required to
classify those products as not ``DRC conflict free.'' Similarly, if
any of an issuer's products contained conflict minerals that did not
originate in the Covered Countries, that the issuer was unable to
determine did not originate in the Covered Countries, or that
originated in the Covered Countries but did not directly or
indirectly finance or benefit armed groups in the Covered Countries,
and also contained conflict minerals that originated in the Covered
Countries and that directly or indirectly financed or benefited
armed groups in the Covered Countries, the issuer would be required
to classify those products as not ``DRC conflict free.''
\498\ We recognized that such an issuer would not be able to
provide the country of origin of those minerals, so the proposed
rules would not require this information.
---------------------------------------------------------------------------
Any issuer with products considered not ``DRC conflict free'' would
have been required to provide a description of those products in its
Conflict Minerals Report. That description would have been based on the
issuer's individual facts and circumstances so that the description
sufficiently identified the products or categories of products. For
example, an issuer could disclose each model of a product containing
conflict minerals that directly or indirectly financed or benefited
armed groups in the Covered Countries, each category of a product
containing such conflict minerals, the specific products containing
such conflict minerals that were produced during a specific time
period, that all its
[[Page 56318]]
products contain such conflict minerals, or another such description
depending on the issuer's facts and circumstances.
As proposed, our rules would have required an issuer to furnish, as
part of its Conflict Minerals Report, the audit report prepared by the
independent private sector auditor and the identity of the
auditor.\499\ We noted that, while one might read the statutory
language to suggest that only the issuer's certification of the audit,
and not the audit report itself, is required to be submitted, we
preliminarily believed that approach was not the better reading of the
Conflict Minerals Statutory Provision. As noted above, the Conflict
Minerals Statutory Provision emphasizes that the independent audit is a
``critical component of due diligence.'' In light of the importance of
this audit report to the proposed reporting requirements and the
statutory language, we proposed to require that the audit report be
furnished with the Conflict Minerals Report.
---------------------------------------------------------------------------
\499\ Our proposal to require the issuer to identify the
certified independent private sector auditor would satisfy Exchange
Act Section 13(p)(1)(A)(ii), which states that the issuer must
provide a description of ``the entity that conducted the independent
private sector audit in accordance with clause (i).''
---------------------------------------------------------------------------
Proposed Item 4(a) of Form 10-K (referring to proposed Instruction
2 to Item 104 of Regulation S-K), proposed Instruction 3 to Item 16 of
Form 20-F, and proposed Instruction 3 to General Instruction B(16) of
Form 40-F would have provided that the Conflict Minerals Report, which
would include the audit report, would not be deemed to be incorporated
by reference into any filing under the Securities Act or the Exchange
Act, except to the extent that the issuer specifically incorporated it
by reference. For example, if an issuer incorporated by reference its
annual report into a Securities Act registration statement, that issuer
would not also automatically incorporate the Conflict Minerals Report
into that Securities Act document. Also, in such a situation, the
independent private sector auditor would not have assumed expert
liability and the issuer would not,\500\ therefore, have been required
to file a consent from that auditor unless the issuer specifically
incorporated by reference the Conflict Minerals Report into the
Securities Act registration statement.
---------------------------------------------------------------------------
\500\ See Rule 436 of Regulation C [17 CFR 230.436].
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
A number of commentators agreed with the proposed rules'
requirement that an issuer unable to determine that its conflict
minerals did not originate in the Covered Countries be required to
describe its products as not ``DRC conflict free'' in its Conflict
Minerals Report.\501\ In one comment letter, five senators stated that
Congress did not intend for the Conflict Minerals Statutory Provision
to allow issuers to report that the origins of their conflict minerals
was undeterminable.\502\ Instead, the letter argued that Congress
``intended and directed'' the final rule to require that, if an issuer
``cannot affirm that the minerals are `conflict-free,' the only other
conclusion that could be reported would be that the product may contain
materials that directly or indirectly finance armed groups in the
DRC.'' \503\ In another comment letter, members of Congress asserted
that conflict minerals information that does ``not clearly list a
company's activities and rules allowing a category of `indeterminate'
would undermine congressional intent.'' \504\
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\501\ See, e.g., letters from CRS I, Earthworks, Evangelical
Alliance, Evangelicals, Howland, Methodist Board, NEI, Presbyterian
Church II, Rep. Berman et al., Sen. Boxer et al. II, Sen. Durbin/
Rep. McDermott, State II, and World Vision II.
\502\ See letter from Sen. Boxer et al. II.
\503\ Id.
\504\ See letter from Sen. Leahy et al.
---------------------------------------------------------------------------
Other commentators indicated, however, that the final rule should
not require an issuer unable to determine that its conflict minerals
did not originate in the Covered Countries to state that its conflict
minerals are not ``DRC conflict free'' either on a temporary or
permanent basis.\505\ Some commentators who are members of Congress
requested that we consider, as an alternative to the proposed rules,
``phasing-in implementation to allow for materials of indeterminate
origin currently in the supply chain to be properly classified.'' \506\
In another letter, members of Congress suggested that the final rule
create a temporary classification for minerals of an indeterminate
origin that would exempt companies with such minerals from the
requirement to provide a Conflict Minerals Report.\507\ Some
commentators suggested that such issuers should be required to state
that its products with such conflict minerals are not ``DRC conflict
free'' after a certain number of years.\508\ Some commentators asserted
that the proposed rules would violate the First Amendment because,
among other reasons, the rules would compel speech that is not of a
commercial nature, which is different from other corporate disclosures,
and would require some issuers, such as those unable to determine that
their conflict minerals did not originate in the Covered Countries, to
provide false, stigmatizing information.\509\
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\505\ See, e.g., letters from AdvaMed I, Cleary Gottlieb, IPC I,
ITRI I, JVC et al. II, NAM I, NAM III, Rep. Bachus et al., Rep.
Critz, Rep. Ellmers, Rep. Murphy, TIAA-CREF, Tiffany, TriQuint I,
and WGC II.
\506\ See letters from Rep. Critz, Rep. Ellmers, and Rep.
Murphy.
\507\ See letter from Rep. Bachus et al.
\508\ See letters from IPC I, SIF I, TIAA-CREF, and TriQuint I.
\509\ See letters from Taiwan Semi, Tiffany, and WLF.
---------------------------------------------------------------------------
Some commentators urged that an issuer unable to determine that its
conflict minerals did not originate in the Covered Countries should not
be required to submit a Conflict Minerals Report that is audited by an
independent private sector auditor.\510\ As one commentator asserted,
the provision ``does not require an issuer that has been unable to
determine (after proper inquiry) the source of its conflict minerals *
* * to provide a Conflict Minerals Report,'' because the ``statute uses
the phrase `in cases in which such conflict minerals did originate in
[a DRC country],' as the trigger for providing a Conflict Minerals
Report'' (emphasis and bracket in original).\511\
---------------------------------------------------------------------------
\510\ See, e.g., letters from AngloGold, Cleary Gottlieb, NAM I,
and Tiffany.
\511\ See letter from Cleary Gottlieb.
---------------------------------------------------------------------------
One commentator, in two separate letters, disagreed with this
position, however, and stated that any issuer that is unable to
determine that its conflict minerals did not originate in the Covered
Countries must be required to submit an audited Conflict Minerals
Report to support its conclusion.\512\ Another commentator recommended
that the final rule allow issuers to provide annual, unaudited conflict
minerals disclosure that would identify the issuer's products that the
issuer ``reasonably believes may contain `conflict minerals;' ''
indicate that the origin of these minerals is indeterminate and explain
why the minerals origin is indeterminate; identify and disclose the
issuer's involvement in any governmental, semi-governmental, and
private sector diligence initiatives; and describe the measures the
issuer has undertaken to develop a management
[[Page 56319]]
due diligence system covering its supply chain for each conflict
mineral.\513\ One commentator asserted that investors would have
``insufficient material information to evaluate a company's supply
chain risk'' if the final rule allowed issuers to declare their
conflict minerals from an indeterminate origin ``without describing the
steps they have taken to make their determination,'' and recommended
that the final rule ``require reporting to be sufficiently detailed to
inform investors of the steps an issuer has taken to determine whether
the minerals the issuer purchases come from the DRC or an adjoining
country.'' \514\
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\512\ See letters from NYCBar I (``We also believe the rules
should require reporting firms that cannot, after due diligence,
determine the origin of the materials used in their products to
submit a Conflict Minerals Report and an independent audit of such
report to ensure such issuers cannot easily avoid their obligations
and disclosure requirements prescribed by these rules.'') and NYCBar
II (``The rules should require reporting firms that cannot, after
due diligence, determine the origin of the materials used in their
products to submit a Conflict Minerals Report and an independent
audit of such report to ensure such issuers cannot easily avoid
their obligations and disclosure requirements prescribed by the
rules.'').
\513\ See letter from Signet.
\514\ See letter from SIF II.
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Although we did not propose to require any type of physical label
on a product, one commentator stated that it is essential for the final
rule to mandate that an issuer with products containing conflict
minerals that did not finance or benefit an armed group label those
products as ``DRC conflict free.'' \515\ Many commentators, however,
remarked that an issuer should not be required to physically label its
products.\516\ Some commentators asserted that an issuer should be
permitted to describe its products as ``DRC conflict free'' only if the
issuer sources its conflict minerals in those products from the Covered
Countries and those conflict minerals did not finance or benefit armed
groups.\517\ Another commentator added specifically that products
should be labeled as ``DRC conflict free'' only if either they are not
from the Covered Countries or do not directly or indirectly support
armed groups in the Covered Countries.\518\ Also, all commentators that
discussed the subject agreed that the final rule should, as proposed,
allow issuers to provide additional disclosure in describing any of
their products that have not been found to be ``DRC conflict free''
\519\
---------------------------------------------------------------------------
\515\ See, e.g., letter from Catholic Relief Services of St.
Cloud, Minnesota (Apr. 14, 2011) (``CRS I--St. Cloud'').
\516\ See, e.g., letters from Columban Center et al., Howland,
Industry Group Coalition I, ITIC I, Japanese Trade Associations, MSG
I, NAM I, and SIF I.
\517\ See letters from ITRI III, MSG I, and SIF I.
\518\ See letter from State II.
\519\ See letters from Howland, IPC I, NMA II, SEMI, TriQuint I,
and WGC II.
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A number of commentators mentioned that the final rule should, as
proposed, require an issuer to disclose the facilities, countries of
origin, and efforts to determine the mine or location of origin only
for its conflict minerals that directly or indirectly financed or
benefited armed groups in the Covered Countries.\520\ A few
commentators suggested that all issuers with conflict minerals
originating in the Covered Countries, including issuers with conflict
minerals that did not directly or indirectly finance or benefit armed
groups in the Covered Countries and issuers with conflict minerals that
did directly or indirectly finance or benefit armed groups in the
Covered Countries, should be required to disclose the facilities,
countries of origin, and efforts to determine the mine or location of
origin of those conflict minerals.\521\ Two commentators further
recommended that all issuers with conflict minerals, regardless of
whether the minerals originated within or without of the Covered
Countries, should be required to disclose the facilities, countries of
origin, and efforts to determine the mine or location of origin of
those conflict minerals.\522\
---------------------------------------------------------------------------
\520\ See, e.g., letter from AngloGold, Barrick Gold, Cleary
Gottlieb, Howland, IPC I, JVC et al. II, NAM I, NMA II, and WGC II.
\521\ See letters from MSG I, NEI, SIF I, and TriQuint I.
\522\ See letters from Earthworks and Trott.
---------------------------------------------------------------------------
Some commentators agreed that the final rule should, as proposed,
require an issuer to disclose only the efforts to determine the
conflict minerals' mine or location of origin with the greatest
possible specificity.\523\ Other commentators suggested going further
and requiring an issuer to disclose the actual mine or location of
origin with the greatest possible specificity.\524\ Still other
commentators argued that the final rule should not require issuers to
include specific supply chain information, such as conflict mineral
sources, quantities, transit routes, or store houses because such
disclosures could hurt an issuer's competitive advantage or subject the
issuer or its employees to violence.\525\ Alternatively, these
commentators recommended that the rule allow for generic descriptions
or approximate geographic locations or permit an issuer to redact
sensitive or secure information.\526\
---------------------------------------------------------------------------
\523\ See, e.g., letters from AngloGold, Barrick Gold, JVC et
al. II, NAM I, TriQuint I, and WGC II.
\524\ See, e.g., letters from CRS I, Howland, ICGLR, NEI, State
II (acknowledging that, as a best practices approach, an issuer
should make every effort to include specific information regarding
the mine), TakeBack, and Trott (stating that the final rule should
require an issuer to provide as much information as possible
regarding its conflict minerals' mine or location of origin).
\525\ See letters from Barrick Gold, Global Tungsten II, IPMI I,
NMA II, NMA III, and TIC.
\526\ See letters from Barrick Gold, NMA II, and TIC.
---------------------------------------------------------------------------
A number of commentators indicated that an issuer should, as
proposed, ``certify the audit'' by certifying that it obtained an
independent private sector audit.\527\ Many of these commentators, plus
some others, remarked that these certifications should either not be
signed or, if they are required to be signed, be signed by the issuer
or by an individual on behalf of the issuer and not in any individual
capacity.\528\ In contrast, one commentator recommended that an
issuer's senior management or executive officers in some manner certify
the independent private sector audit,\529\ another commentator asserted
that it is ``essential that there be CEO level involvement in the
filing of the disclosures in order to make sure that companies do not
simply `game the system,' '' \530\ and a further commentator argued
that the ``certification of an audit will make little sense unless the
signatories verify on a quarterly basis that certain minimal standards
have been maintained by the auditors.'' \531\ One commentator asserted
that certifying the audit is unnecessary because the audit report will
be submitted to the Commission in the Conflict Minerals Report.\532\
This commentator and another stated that requiring an issuer to certify
the audit would prevent an issuer from stating that its products are
``DRC conflict free'' because no issuer could be so certain of that
conclusion that its officers would certify the audit.\533\ One
commentator suggested that no liability should be assigned to
individuals that may sign the certifications ``unless the situation
involves a knowing and willful intent to mislead.'' \534\
---------------------------------------------------------------------------
\527\ See, e.g., letters from Barrick Gold, Cleary Gottlieb,
Ford, ICGLR, ITIC I, NAM I, NY State Bar, and WGC II.
\528\ See, e.g., letters from AngloGold, Barrick Gold, Cleary
Gottlieb, Ford, Howland, JVC et al. II, NAM I, NEI, and WGC II.
\529\ See letter from Grant Thornton LLP (Mar. 2, 2011) (``Grant
Thornton'').
\530\ See letter from TakeBack.
\531\ See letter from SARW.
\532\ See letter from TIC.
\533\ See letters from Teggeman and TIC.
\534\ See letters from Cleary Gottlieb and NMA II.
---------------------------------------------------------------------------
Some commentators agreed that the audit report should, as proposed,
be included as part of the Conflict Minerals Report.\535\ Other
commentators recommended that an issuer's audit report should not be
submitted as part of the Conflict Minerals Report because such a
requirement would increase audit costs without providing comparable
benefits.\536\ Certain commentators opposed having to make the audit
report public and suggested instead that issuers provide the audit
[[Page 56320]]
report to the Commission confidentially, allow for sensitive portions
to be redacted, or provide it to the Commission with the Commission
making it available to the public only in hardcopy form at the
Commission's headquarters.\537\ Similarly, one commentator objected to
requiring an issuer to post the audit report on the issuer's Internet
Web site as long as the Conflict Minerals Report describes the audit
report,\538\ whereas another commentator argued that the final rule
should require an issuer to post the audit report on an issuer's Web
site.\539\
---------------------------------------------------------------------------
\535\ See, e.g., letters from Howland, NEI, and Sen. Durbin/Rep.
McDermott.
\536\ See letters from AngloGold and WGC II.
\537\ See, e.g., letters from Barrick Gold, Materials Management
Corporation (Jan. 13, 2011) (``Materials I''), NAM I, and NMA II.
\538\ See letter from ITIC I.
\539\ See letter from Columban Center et al.
---------------------------------------------------------------------------
Some commentators indicated that, as proposed, an audit report
should not be deemed incorporated by reference into any filing under
the Securities Act or Exchange Act unless the issuer specifically
incorporates the audit into such a filing.\540\ A few commentators
further suggested that an auditor should not be considered an
``expert'' under Rule 436 of the Securities Act and recommended that
audit reports submitted in subsequent years be able to build off prior
audit reports to eliminate duplicative work and, thereby, reduce
costs.\541\ One commentator went further and suggested that any issuer
with a recognized supply chain tracking process should not be required
to obtain an audit of its Conflict Minerals Report.\542\
---------------------------------------------------------------------------
\540\ See, e.g., letters from Barrick Gold, Cleary Gottlieb,
Corporate Secretaries I, NY State Bar, and WGC II.
\541\ See letters from NY State Bar and WGC II.
\542\ See letter from TIC.
---------------------------------------------------------------------------
Some commentators requested that the final rule define how an
issuer would ``directly or indirectly finance or benefit an armed
group.'' \543\ Some of these commentators and others recommended that
the Country Reports not be the basis for the Commission's final rule
because those reports are not sufficiently specific with respect to
which groups it labels as ``armed groups'' such that it is unclear
whether the DRC army would be considered an ``armed group.'' \544\ For
example, one commentator submitted an article arguing that the Conflict
Minerals Statutory Provision ``targets units of the Congolese army as
much as it does militias precisely because the army is comprised
largely of ex-rebels, is the major player in the conflict minerals
trade and regularly commits appalling crimes against the civilian
population.'' \545\ Another commentator, however, stated that if the
final rule defined ``armed group'' using the Country Reports, it would
exclude the ex-militia groups that joined the DRC armed forces but
continue to contribute to conflict and commit human rights
violations.\546\ One commentator recommended that the final rule define
``armed group'' using the OECD's definition for that term.\547\ Another
commentator suggested that the final rule apply only to issuers that
are ``directly funding the conflict (or who knowingly indirectly fund
the conflict).'' \548\ One commentator recommended that the final rule
define ``indirect financing'' of an armed group to include ``[a]ny way
in which an illegitimate armed group profits from the mining, sale,
transportation or taxation of minerals or mineral derivatives.'' \549\
Some commentators asserted that the final rule should clarify the
definition of an ``armed group'' or disclose the steps issuers must
take to verify whether their conflict minerals benefited armed
groups.\550\ Other commentators suggested that the definition of
``armed group'' in the final rule should not refer to the ``most
recently issued'' version of the Country Reports ``for the year the
annual report is due'' because the most recently issued version of the
Country Reports may not be published for the year the annual report is
due.\551\
---------------------------------------------------------------------------
\543\ See, e.g., letters from NMA II, Peace, and WGC II.
\544\ See letters from ITRI I, NMA II, NYCBar I, and Peace. See
also letter from NYCBar II (stating specifically that the final rule
should include ``the Congolese military (FARDC) in its definition of
`armed group''').
\545\ See letter from ICAR II.
\546\ See letter from Save.
\547\ See letter from Pact II.
\548\ See letter from CEI I.
\549\ See letter from Peace.
\550\ See, e.g., letters from CRS I--St. Cloud, ITRI I, NMA II,
NYCBar I, Peace, and TIC.
\551\ See, e.g., letters from ITRI I and TIC.
---------------------------------------------------------------------------
c. Final Rule
The final rule requires any issuer that, after its reasonable
country of origin inquiry, knows that its conflict minerals originated
in the Covered Countries and did not come from recycled or scrap
sources to provide a Conflict Minerals Report that includes a
description of the measures the issuer has taken to exercise due
diligence on the source and chain of custody of those conflict
minerals. It also requires an issuer that, after its reasonable country
of origin inquiry, had reason to believe that its minerals may have
originated in the Covered Countries and may not have come from recycled
or scrap sources and, after the exercise of due diligence, still has
reason to believe that its minerals may have originated in the Covered
Countries and may not have come from recycled or scrap sources, to
provide a Conflict Minerals Report that includes a description of the
measures the issuer has taken to exercise due diligence on the source
and chain of custody of those conflict minerals.
Additionally, in circumstances in which an independent private
sector audit is required, the final rule requires, as proposed, that an
issuer include a certified independent private sector audit conducted
in accordance with the standards established by the Comptroller General
of the United States as part of its due diligence on the source and
chain of custody of its conflict minerals. Further, the final rule
states that, as proposed, the audit constitutes a critical component of
due diligence. To implement the Conflict Minerals Statutory Provision's
requirement that issuers ``certify the audit,'' \552\ as proposed, an
issuer must certify that it obtained an independent private sector
audit of its Conflict Minerals Report and include that certification in
the Conflict Minerals Report.\553\ While we did not specify this in the
Proposing Release or proposed rules, in response to commentators'
concerns, the final rule clarifies that the issuer's audit
certification need not be signed by an officer. Instead, the
certification takes the form of a statement in the Conflict Minerals
Report that the issuer obtained an independent private sector audit.
---------------------------------------------------------------------------
\552\ Exchange Act Section 13(p)(1)(B).
\553\ We are not adopting the alternative interpretation of the
Conflict Minerals Statutory Provision that an issuer must ensure
that the audit it obtained is accurate. The Conflict Minerals Report
contains management's assertions related to compliance with this
rule; the third-party audit is designed to attest to certain of
those assertions. Given this relationship, there does not appear to
be a need to have management assert to the accuracy of the audit.
---------------------------------------------------------------------------
The final rule also requires, unless an issuer's products are ``DRC
conflict free,'' the Conflict Minerals Report to include a description
of the facilities used to process those conflict minerals, the country
of origin of those conflict minerals, and the efforts to determine the
mine or location of origin with the greatest possible specificity. As
noted in the Proposing Release, we believe that the phrase in the
Conflict Minerals Statutory Provision, ``facilities used to process the
conflict minerals,'' refers to the smelter or refinery through which
the issuer's minerals pass. One commentator pointed out that smelting
and refining processes are not similar.\554\ Smelting refers to the
[[Page 56321]]
conversion of the mineral ore into its metal form, but the metal still
contains many impurities that must be removed by refining the metal.
Columbite-tantalite, cassiterite, and wolframite are mined only as ores
and are smelted into their metal derivatives. Gold, however, is mined
in its metallic form because it is found that way naturally. Therefore,
gold does not have to be smelted into a metal, but does have to be
refined to remove any impurities. In both instances, however, we
recognize that as a practical matter it is very difficult, if not
impossible, to trace conflict minerals to their mine or other location
of origin after columbite-tantalite, cassiterite, and wolframite have
been smelted initially and after gold has been refined initially other
than through the smelter or refinery.
---------------------------------------------------------------------------
\554\ Letter from ITRI I. In the Proposing Release, we stated
that columbite-tantalite, cassiterite, and wolframite are smelted
into their component metals whereas gold is refined, and we
indicated that both processes are substantially similar such that,
when we would refer to smelting a conflict mineral, those references
were intended to include the refining of gold.
---------------------------------------------------------------------------
Exchange Act Section 13(p)(1)(A)(ii) also requires an issuer with
conflict minerals originating in the Covered Countries to submit a
Conflict Minerals Report that includes a description of the issuer's
products ``that are not DRC conflict free.'' \555\ The Conflict
Minerals Statutory Provision does not define ``not DRC conflict free,''
but instead defines ``DRC conflict free.'' \556\ Products are
considered ``DRC conflict free'' under Exchange Act Section
13(p)(1)(A)(ii) if they ``do not contain minerals that directly or
indirectly finance or benefit armed groups in the'' Covered Countries.
(Emphasis added).\557\ As discussed above, under the proposed rules'
approach, an issuer with a product containing conflict minerals of an
undeterminable origin cannot know that its product is ``DRC conflict
free;'' that is, the issuer cannot know that its product ``do[es] not
contain conflict minerals that directly or indirectly finance or
benefit armed groups in the'' Covered Countries, so the issuer would
have to describe the product as ``not `DRC conflict free.' ''
---------------------------------------------------------------------------
\555\ See Exchange Act Section 13(p)(1)(A)(ii).
\556\ See id. and Exchange Act Section 13(p)(1)(D).
\557\ Exchange Act Section 13(p)(1)(A)(ii). Also, although
similar, the definition of ``DRC conflict free'' under Exchange Act
Section 13(p)(1)(D) is slightly different than the definition under
Exchange Act Section 13(p)(1)(A)(ii). Exchange Act Section
13(p)(1)(D) states that ``a product may be labeled as `DRC conflict
free' if the product does not contain minerals that directly or
indirectly finance or benefit armed groups in the'' Covered
Countries.
---------------------------------------------------------------------------
A commentator raised concerns that this approach could lead to
incorrect and misleading disclosures and could unfairly punish
companies that lack complete visibility into their supply chains.\558\
The commentator noted that it could turn out that, upon further
investigation of the minerals' origins, the minerals were not from the
Covered Countries or did not finance or benefit armed groups, in which
case the products made with solely those minerals would be ``DRC
conflict free.'' Of course, we are concerned that any disclosure
requirement results in accurate disclosure. At the same time, we are
cognizant of our responsibility to fulfill Congress's directive in
Section 1502 and to remain faithful to the language of the statute, and
promulgating rules that provide an incentive for issuers to avoid
determining the origins of the conflict minerals that they use could
undermine the reporting system that Congress has established in Section
13(p) of the Exchange Act. Accordingly, we have modified the final rule
to address the commentator's concerns while remaining faithful to the
language and intent of the statute.
---------------------------------------------------------------------------
\558\ See letter from Tiffany.
---------------------------------------------------------------------------
As described above, during a temporary period, instead of requiring
issuers that have proceeded to step three that are unable to determine
that their conflict minerals did not originate in the Covered
Countries, that their conflict minerals that originated in the Covered
Countries did not directly or indirectly finance or benefit armed
groups, or that their conflict minerals came from recycled or scrap
sources to describe their products as ``not `DRC conflict free,' '' the
final rule permits such issuers to describe products containing those
conflict minerals as ``DRC conflict undeterminable.'' An issuer with
products that are ``DRC conflict undeterminable'' is required to
exercise due diligence on the source and chain of custody of its
conflict minerals and submit a Conflict Minerals Report describing its
due diligence; the steps it has taken or will take, if any, since the
end of the period covered in its most recent prior Conflict Minerals
Report to mitigate the risk that its necessary conflict minerals
benefit armed groups, including any steps to improve its due diligence;
the country of origin of the conflict minerals, if known; the
facilities used to process the conflict minerals, if known; and the
efforts to determine the mine or location of origin with the greatest
possible specificity, if applicable.\559\ Such an issuer is not,
however, required to obtain an independent private sector audit of that
Conflict Minerals Report. We are permitting this temporary category to
address concerns of many industry commentators that supply chain due
diligence mechanisms have not yet been established; \560\ and,
therefore, many issuers will not be able to readily determine whether
their conflict minerals did not originate in the Covered Countries, did
not finance or benefit armed groups, or did come from recycled or scrap
sources. This temporary category should allow issuers time to establish
supply chain due diligence mechanisms to determine whether their
minerals originated in the Covered Countries, directly or indirectly
financed or benefited armed groups in the Covered Countries, or came
from recycled or scrap sources.
---------------------------------------------------------------------------
\559\ We recognize that an issuer that is unable to determine
the origin of its conflict minerals, or unable to determine whether
its conflict minerals came from recycled or scrap sources, may not
also be able to determine the processing facility of those conflict
minerals and will not be able to determine the minerals' country of
origin. Therefore, these issuers only have to describe the
processing facilities if they are known to the issuer and do not
have to disclose the country of origin. Also, an issuer that is
unable to determine whether its conflict minerals came from recycled
or scrap sources does not have to describe its efforts to determine
the mine or location of origin with the greatest possible
specificity because issuers with conflict minerals from recycled or
scrap sources are not required to determine the mine or location of
origin.
\560\ See, e.g., letters from CTIA, FEC I, JVC et al. II, NAM
III, NRF I, Roundtable, and WilmerHale.
---------------------------------------------------------------------------
This additional time should also decrease the possibility that
issuers that might ultimately be able to determine that their necessary
minerals did not originate in the Covered Countries, did not finance or
benefit armed groups, or came from recycled or scrap sources would
initially be required to report that their products have not been found
to be ``DRC conflict free'' simply because they had not yet been able
to determine the minerals' origins or whether they were from recycled
or scrap sources. By decreasing this possibility, the temporary
category will lead to more accurate disclosure. We believe this
approach will allow the final rule to more appropriately target the
population of issuers from which Congress intended to require this
disclosure and will allow time for processes to be put in place so that
issuers may be able to determine the origin of their conflict minerals.
The ``undeterminable'' reporting alternative, however, is only
permitted temporarily. For all issuers, this alternative will be
permitted during the first two reporting cycles following the
effectiveness of the final rule, which includes the specialized
disclosure reports for 2013 through 2014. For smaller reporting
companies, this alternative will be permitted during the first four
reporting cycles following the
[[Page 56322]]
effectiveness of the final rule, which includes the specialized
disclosure reports for 2013 through 2016. Beginning with the third
reporting period, from January 1, 2015 to December 31, 2015, for all
issuers and the fifth reporting period, from January 1, 2017 to
December 31, 2017, for smaller reporting companies, every such issuer
will have to describe products in its Conflict Minerals Report as
having ``not been found to be `DRC conflict free.''' Also, issuers will
be required to make such a disclosure even if they proceed to step
three and are unable to determine that their conflict minerals did not
originate in the Covered Countries, that their conflict minerals that
originated in the Covered Countries did not directly or indirectly
finance or benefit armed groups, or that their conflict minerals came
from recycled or scrap sources. These issuers will also be required to
provide an independent private sector audit of their Conflict Minerals
Report.\561\
---------------------------------------------------------------------------
\561\ As noted below, an issuer exercising due diligence to
determine whether a conflict mineral is from a recycled or scrap
source is not required to obtain an independent private sector audit
of its Conflict Minerals Report, regarding that conflict mineral, if
there is no nationally or internationally recognized due diligence
framework for that recycled or scrap conflict mineral.
---------------------------------------------------------------------------
While this disclosure is required after the temporary period, even
when issuers are unable to determine the origin of their conflict
minerals, we have changed the language of the disclosure from the
proposal to address concerns raised about the accuracy of the
disclosure required in these circumstances. In our view, it is accurate
to describe such products as having ``not been found to be `DRC
conflict free.' '' ``DRC conflict free'' is a defined term in the
statute, meaning that the product ``do[es] not contain conflict
minerals that directly or indirectly finance or benefit armed groups in
the'' Covered Countries. An issuer that does not know that its conflict
minerals did not originate in the Covered Countries, that its conflict
minerals that originated in the Covered Countries did not finance or
benefit armed groups, or that the minerals came from recycled or scrap
sources cannot accurately state that its conflict minerals have been
found to meet this definition; therefore, its products have not been
found to be ``DRC conflict free'' as defined in the statute.
Additionally, under the final rule, as proposed, issuers can add
disclosure or clarification. This allows issuers to include the
statutory definition of ``DRC conflict free'' in the disclosure to make
clear that ``DRC conflict free'' has a very specific meaning, or to
otherwise address their particular situation.\562\ We also believe that
the revised disclosure that the products ``have not been found to be
`DRC conflict free' '' mitigates concerns expressed by some
commentators that the Proposing Release's specific required language,
``are not `DRC conflict free,' '' would impose an unfair stigma,
particularly on issuers that did not know whether their minerals
directly or indirectly financed or benefited armed groups in the
Covered Countries.
---------------------------------------------------------------------------
\562\ For example, in addition to the disclosure in the Conflict
Minerals Report, the issuer could state: ``The following is a
description of our products that have not been found to be ``DRC
conflict free'' (where `DRC conflict free' is defined under the
federal securities laws to mean that a product does not contain
conflict minerals necessary to the functionality or production of
that product that directly or indirectly finance or benefit armed
groups in the Democratic Republic of the Congo or an adjoining
country).'' Alternatively, an issuer that is still unable to
determine the origin of some of its conflict minerals after the two-
year or four-year period, might state: ``We have been unable to
determine the origins of some of our conflict minerals. Because we
cannot determine the origins of the minerals, we are not able to
state that products containing such minerals do not contain conflict
minerals that directly or indirectly finance or benefit armed groups
in the Democratic Republic of the Congo or an adjoining country.
Therefore, under the federal securities laws we must describe the
products containing such minerals as having not been found to be
`DRC conflict free.' Those products are listed below.''
---------------------------------------------------------------------------
Although it does not appear that any individual commentator
suggested the exact approach we are adopting, this approach
incorporates suggestions from various commentators. One commentator
recommended that we adopt a ``phase-in or transitional approach in
order to address the substantial practical difficulties issuers
currently face in seeking to trace the origins of conflict minerals
included in their products and to determine if these minerals are or
are not `DRC conflict free.' '' \563\ This commentator's recommendation
was for the final rule to include a phase-in period through 2014 in
which any issuer with conflict minerals for which the issuer was unable
to determine their origin would describe the conflict minerals as from
an ``indeterminate source'' and would be permitted, instead of
providing a Conflict Minerals Report, to disclose its conflict minerals
policy and provide a statement that, due to the lack of current
infrastructure, it is not possible to determine the origin of its
conflict minerals. The commentator recommended that the ``indeterminate
source'' category would be available only through 2014. Another
commentator recommended that the final rule allow a similar phase-in
period through 2014 in which issuers would be permitted to use an
``unknown determination'' category in which such issuers would be
required only to disclose their conflict minerals policy, reasonable
country of origin inquiry, and the conflict minerals used in their
supply chain.\564\
---------------------------------------------------------------------------
\563\ See letter from WilmerHale.
\564\ See letter from AdvaMed I.
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Other commentators recommended similar temporary approaches for
conflict minerals when an issuer could not determine the origin of its
conflict minerals.\565\ In this regard, one commentator noted that,
``requiring issuers that are unable to determine that the conflict
mineral in their products did not originate in the Covered Countries to
submit a Conflict Minerals Report providing the required information
that is available to them, is reasonable.'' \566\ Also, one commentator
recognized that, during the initial period after the rule is finalized,
it expected that some conflict minerals would be of unknown origin, and
issuers with those conflict minerals should, among other information,
disclose ``any progress made in the reporting year toward determination
of origin.'' \567\ Finally, some commentators suggested that smaller
reporting companies should be allowed to phase-in or that the
implementation of the final rule should be deferred for them.\568\
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\565\ See, e.g., letters from TIAA-CREF (``Where the source of
minerals cannot be confirmed, we believe it would be most accurate
to allow companies to use indeterminate language such as `may not be
DRC conflict free,' but not language that would suggest a
presumption that minerals would be conflict free absent specific
evidence to the contrary. Moreover, over time the information
systems necessary to trace these minerals will likely improve. We
suggest that, after a reasonable time interval, the SEC consider
reviewing whether a higher standard might be warranted.'') and
TriQuint I (recommending that the final rule ``allow companies to
label their products as `May Not Be DRC Conflict Free' until such a
time when it is expected that companies will be able to purchase
processed conflict minerals from smelters that have been validated
as `DRC conflict free' '').
\566\ See letter from ABA.
\567\ See letter from SIF I.
\568\ See, e.g., letters from Howland and JVC et al. II.
---------------------------------------------------------------------------
Based on the comments we have received, we believe that permitting
all issuers to describe their products as ``DRC conflict
undeterminable'' for a two-year period is appropriate to allow viable
tracking systems to be put in place in the Covered Countries and
throughout supply chains and avoid a de-facto embargo on conflict
minerals from the Covered Countries. We also believe that allowing this
category for a two-year period will avoid a situation in which
virtually all issuers would describe their products as having not
[[Page 56323]]
been found to be ``DRC conflict free,'' simply because they could not
determine the origin of their conflict minerals, which would render
that disclosure less meaningful.\569\ Similarly, we believe that
allowing smaller reporting companies four years to describe their
products as ``DRC conflict undeterminable'' is appropriate because
these issuers may lack the leverage to obtain detailed information
regarding the source of a particular conflict mineral.\570\
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\569\ See, e.g., letters from AdvaMed I, ITIC I, and ITRI II.
\570\ See letters from ABA, Corporate Secretaries I, and JVC et
al. II. But see letter from Green II (arguing that, although smaller
reporting companies may lack leverage, this disadvantage may be
reduced through the influence exerted over their suppliers by larger
issuers that use the same supplier base and that have more leverage
to request such information.).
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We do not, however, believe that a permanent ``DRC conflict
undeterminable'' category would be consistent with the language in the
statute, and we believe it would undermine the overall goals of Section
1502. Such an approach might create incentives for issuers not to
exercise care in identifying the origins of their necessary conflict
minerals. Also, we do not believe that, after the temporary reporting
period, the number of issuers that would describe their products as
having not been found to be ``DRC conflict free'' would be so
substantial as to render the disclosure meaningless because, based on
our review of the comments, it appears that there should be systems in
place at that time on which issuers could rely to determine whether
their conflict minerals originated in the Covered Countries and, if so,
whether they contributed to conflict. Overall, we believe that the
change from ``not `DRC conflict free' '' to having ``not been found to
be `DRC conflict free,' '' the ability to add additional explanation
and disclosure, and the periods for the ``DRC conflict undeterminable''
category will provide issuers who are initially unable to determine
that their conflict minerals did not originate in the Covered Countries
or unable to determine that their conflict minerals that originated in
the Covered Countries did not directly or indirectly finance or benefit
armed groups in the Covered Countries means to make their disclosure
while still accomplishing the goals that Congress intended when it
required the disclosure of products that are not ``DRC conflict free.''
We believe that this approach also responds to the First Amendment
concerns raised by the commentators. As to the concern that the rule
impermissibly compels speech that is not of a commercial nature, we
presume that Congress acted constitutionally when it passed the
statute.\571\ And, as discussed above, we believe that the changes made
in the final rule mitigate the concern that the rule compels speech
that may be false or unfairly stigmatizing for some issuers. The
requirement that issuers that know or have reason to believe that their
conflict minerals may have originated in the Covered Countries but that
cannot determine the origin or cannot determine whether they financed
or benefited armed groups state that their products have not been found
to be ``DRC conflict free'' compels an accurate disclosure in light of
the statutory definition of ``DRC conflict free.'' Moreover, the use of
this revised language, the ability of issuers to add additional
explanation and disclosure, and the provision of a temporary
``undeterminable'' period all represent accommodations to ensure that
the rule is appropriately tailored to lessen the impact on First
Amendment interests while still accomplishing Congress's objective.
---------------------------------------------------------------------------
\571\ See Nebraska v. EPA, 331 F.3d 995, 997 (DC Cir. 2003)
(``Agencies do not ordinarily have jurisdiction to pass on the
constitutionality of federal statutes.'') (citing Thunder Basin Coal
Co. v. Reich, 510 U.S. 200, 215 (1994)); Todd v. SEC, 137 F.2d 475,
478 (6th Cir. 1943) (same); William J. Haberman, 53 SE.C. 1024, 1029
n.14 (1998) (``[W]e have no power to invalidate the very statutes
that Congress has directed us to enforce.'') (citing Milton J.
Wallace, 45 SE.C. 694, 697 (1975); Walston & Co., 5 SE.C. 112, 113
(1939)).
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We note that many commentators appeared to believe that the
proposed rules would require that an issuer physically label its
products as ``DRC conflict free'' or not ``DRC conflict free.'' \572\
Although we used the term ``label'' in the Proposing Release, we did so
in the context of the disclosure required in the annual report. The
final rule does not require a physical label on any product. Instead,
the final rule requires that an issuer describe in its Conflict
Minerals Reports any products that have not been found to be ``DRC
conflict free,'' as defined in the final rule. Also, consistent with
the proposal, the final rule permits issuers the flexibility to
describe their products based on each issuer's individual facts and
circumstances. We believe this flexibility is important because, as one
commentator noted, an issuer is in the best position to know its
products and to describe them in terms commonly understood within its
industry.\573\ Also, to remedy any confusion in the Proposing Release,
an issuer with products that are ``DRC conflict free'' does not have to
describe those products in the Conflict Minerals Report in any manner.
An issuer with such products may describe them in its specialized
disclosure report as ``DRC conflict free'' if it chooses to do so,
provided, the products do not contain any conflict minerals that
directly or indirectly financed or benefited armed groups in the
Covered Countries.
---------------------------------------------------------------------------
\572\ See, e.g., letters from Howland, Industry Group Coalition
I, Japanese Trade Associations, MSG I, NAM I, and SIF I.
\573\ See letter from WGC II.
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The Conflict Minerals Statutory Provision requires the State
Department to ``produce a map of mineral-rich zones, trade routes, and
areas under the control of armed groups'' in the Covered
Countries.\574\ Also, the Conflict Minerals Statutory Provision
requires the State Department to submit to Congress a strategy to
address the linkages between human rights abuses, armed groups, mining
of conflict minerals, and commercial products that contains a ``plan to
provide guidance to commercial entities seeking to exercise due
diligence on and formalize the origin and chain of custody of conflict
minerals used in their products and on their suppliers to ensure that
conflict minerals used in the products of such suppliers do not
directly or indirectly finance armed conflict or result in labor or
human rights violations.'' \575\ Some commentators have suggested that
we delay the implementation of the final rule until the State
Department's map and/or strategy have been published,\576\ or that we
should allow an issuer to rely on the State Department's map for its
conflict minerals information.\577\
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\574\ Section 1502(c)(2) of the Act.
\575\ Section 1502(c)(1) of the Act.
\576\ See, e.g., letters from Barrick Gold, Corporate
Secretaries I, NRF I, and WGC II.
\577\ See, e.g., letters from AngloGold and NRF I.
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The State Department has published a conflict minerals map
already.\578\ Also, we understand that the State Department has
developed guidance for commercial entities seeking to exercise due
diligence on and formalize the origin and chain of custody of conflict
minerals used in their products and on their suppliers.\579\ Even so,
it does not
[[Page 56324]]
appear that either the State Department's map or guidance is necessary
for complying with the final rule. First, it does not appear that
Congress intended that they be necessary to comply with our rule. The
map and guidance requirements are located in a part of Section 1502
that is not incorporated into the Exchange Act and that part of Section
1502 is directed solely to agencies other than the Commission.\580\
Therefore, although they may be related to our final rule, it does not
appear that the map and guidance were intended to have direct impact on
the rule.
---------------------------------------------------------------------------
\578\ See State Department, Humanitarian Information Unit,
Democratic Republic of the Congo Mineral Exploitation by Armed
Groups Map (Jun. 14, 2011), available at https://hiu.state.gov/Products/DRC_MineralExploitation_2010Jun28_HIU_U182.pdf.
\579\ See State Department, Bureau of Economic, Energy, and
Business Affairs, Statement Concerning Implementation of Section
1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due
Diligence (July 15, 2011), available at http://www.state.gov/e/eb/diamonds/docs/168632.htm.
\580\ The map and guidance requirements are in Section 1502(c)
of the Act, but only Section 1502(b) of the Act actually amends the
Exchange Act and directs the Commission to promulgate rules.
---------------------------------------------------------------------------
Also, we do not believe that an issuer must rely solely on the
State Department's map or guidance for determining whether its conflict
minerals contributed to conflict in the Covered Countries because other
resources are available. For example, as discussed above, the OECD has
developed an internationally recognized system of due diligence that an
issuer can use as guidance in exercising its due diligence. The OECD's
due diligence guidance does not rely on or incorporate the State
Department map and guidance referenced in the Conflict Minerals
Statutory Provision in determining the steps an issuer must take to
exercise due diligence. However, as discussed above, due to the stage
of development of the supply chain tracing mechanisms, we recognize
that there are concerns about obtaining this information reliably in
the near term. Therefore, we are providing this targeted and temporary
period in the final rule.
The final rule requires, as proposed, an issuer with conflict
minerals that originated in the Covered Countries to determine whether
those minerals directly or indirectly financed or benefited armed
groups in the Covered Countries. The Conflict Minerals Statutory
Provision states that products are ``DRC conflict free'' when those
products do not contain conflict minerals that ``directly or indirectly
finance or benefit armed groups'' in the Covered Countries.\581\
Section 1502(e)(3) of the Act defines the term ``armed group'' as ``an
armed group that is identified as perpetrators of serious human rights
abuses in the annual Country Reports on Human Rights Practices under
sections 116(d) and 502B(b) of the Foreign Assistance Act of 1961,''
\582\ as they relate to the Covered Countries.\583\ The final rule
includes, as proposed, a cross reference to that definition to provide
guidance to issuers. This cross reference, however, removes the phrases
``most recently issued'' and ``for the year the annual report is due''
to address the concerns of commentators.\584\ The final rule mirrors
the Conflict Minerals Statutory Provision in its definition of ``armed
group'' and does not include any extraneous phrases that were included
in the proposal.
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\581\ See Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D).
\582\ 22 U.S.C. 2151n(d) and 2304(b).
\583\ Section 1502(e)(3) of the Act.
\584\ See, e.g., letters from ITRI I and TIC.
---------------------------------------------------------------------------
The Conflict Minerals Statutory Provision assigns to the State
Department the authority to identify perpetrators of serious human
rights abuses in that agency's annual Country Reports, and we lack the
authority and expertise to provide further guidance or qualify the
State Department's conclusions in this area. We note that some
commentators indicated that we should consider products containing
conflict minerals obtained from mines not controlled by armed groups
when purchased to be considered ``DRC conflict free'' even if those
mines subsequently come under the control of armed groups.\585\ We
agree and consider products ``DRC conflict free'' if, when the conflict
minerals contained in those products are purchased and transported
through the supply chain from the mine to the issuer, those conflict
minerals do not directly or indirectly finance or benefit armed groups
in the Covered Countries, even if some point in that supply chain
subsequently becomes controlled by an armed group. For example, if an
issuer's conflict minerals are purchased from a mine that does not
directly or indirectly finance or benefit armed groups in the Covered
Countries when they are purchased, but the next day that mine is taken
over by an armed group and the armed group takes the money previously
provided to the miner from the issuer to purchase the conflict minerals
that already left the mine, the products containing those conflict
minerals may be considered ``DRC conflict free,'' even though the money
used to purchase the conflict minerals does, in fact, benefit that
armed group subsequently.
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\585\ See, e.g., letters from AAEI, IPC I, and NRF I.
---------------------------------------------------------------------------
2. Due Diligence Standard in the Conflict Minerals Report
We have interpreted the Conflict Minerals Statutory Provision as
requiring an issuer to exercise due diligence based on the provision's
requirement that an issuer describe the due diligence it exercised on
the source and chain of custody of its conflict minerals.\586\ In
addition, the provision requires that an issuer include an independent
private sector audit of the Conflict Minerals Report as a ``critical
component of due diligence.'' \587\ Under Exchange Act Section
13(p)(1)(C), the Commission may determine an issuer's independent
private sector audit or other due diligence processes to be unreliable
and any Conflict Minerals Report that relies on such unreliable due
diligence process would not satisfy the statute's reporting
requirement.\588\
---------------------------------------------------------------------------
\586\ Exchange Act Section 13(p)(1)(A)(i).
\587\ Exchange Act Section 13(p)(1)(B).
\588\ Exchange Act Section 13(p)(1)(C).
---------------------------------------------------------------------------
a. Proposed Rules
The proposed rules would have required an issuer to use due
diligence regarding the supply chain determinations \589\ in its
Conflict Minerals Report. Other than requiring that the due diligence
be reliable, the proposed rules would not have dictated the standard
for, or otherwise provided guidance concerning, the due diligence that
an issuer would be required to use in making such determinations.
Instead, the proposed rules would have required an issuer to disclose
the due diligence it used in making its determinations, such as whether
it used any nationally or internationally recognized standards or
guidance for supply chain due diligence.
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\589\ We refer to the ``supply chain determinations'' as an
issuer's determinations regarding the source and chain of custody of
its conflict minerals, the facilities used to process those
minerals, the country of origin of those minerals, and the efforts
to determine the mine or location of origin with the greatest
possible specificity.
---------------------------------------------------------------------------
In the Proposing Release, we noted our belief that the statutory
provision contemplates that an issuer must use due diligence in its
supply chain determinations. Although we did not propose to establish
any particular conduct requirements, we believed that due diligence
would be required to be exercised and information about what conduct
the issuer exercised in its due diligence regarding its supply chain
determinations was relevant to determine the extent of the issuer's due
diligence. As proposed, the rules, therefore, would require issuers to
describe the due diligence used in making these determinations. In
particular, we noted that we would have expected that an issuer whose
conduct conformed to a nationally or internationally recognized set of
standards of, or guidance for, due diligence regarding its conflict
minerals supply chain determinations would provide evidence that it
used due
[[Page 56325]]
diligence in making those determinations.
b. Comments on the Proposed Rules
Some commentators believed that the Conflict Minerals Statutory
Provision expressly requires an issuer to exercise due diligence on the
source and chain of custody of its conflict minerals.\590\ One
commentator noted that nothing in the statute gives us explicit
authority to develop due diligence guidance.\591\ Another commentator
asserted that Congress intended the Conflict Minerals Statutory
Provision to require due diligence only on the source and chain of
custody of conflict minerals mined in the DRC and on the transportation
routes through which such minerals pass in countries adjoining the
DRC.\592\ This commentator claimed that Congress did not intend for the
Conflict Minerals Statutory Provision to require due diligence on the
source and chain of custody of minerals mined in the adjoining
countries and recommended that the final rule not require such due
diligence.
---------------------------------------------------------------------------
\590\ See, e.g., letters from NEI (``We agree that issuers
should be required to use due diligence, as proposed.''),
Presbyterian Church USA (Feb. 15, 2012) (``Presbyterian Church I'')
(stating that the Conflict Minerals Statutory Provision ``requires
due diligence''), Sen. Durbin/Rep. McDermott (stating that ``Section
1502 requires companies to exercise strict due diligence to
determine the source of conflict minerals in their products''), and
State II (``It is unclear how a reasonable conflict minerals
determination can be made without due diligence given the complexity
of the region and the risk of fraud.'').
\591\ See letter from TriQuint I. This commentator suggested
that the Commission work with other government agencies to establish
rules that govern what due diligence processes are reliable.
\592\ See letter from Minister of Energy and Minerals of the
United Republic of Tanzania (May 23, 2011) (``Tanzania II'').
---------------------------------------------------------------------------
Many commentators supported our proposal to not prescribe any
specific due diligence requirements and allow an issuer to have
flexibility in developing its due diligence measures based on the
issuer's own facts and circumstances.\593\ A number of these
commentators, however, suggested that the final rule provide guidance
as to what would be considered acceptable due diligence.\594\ Many
other commentators recommended that the final rule provide a definition
of or prescribe specific guidance for any required due diligence.\595\
Some of these commentators reasoned that the final rule should
prescribe a specific due diligence standard so that an issuer will be
unable to ``engage in a type of `forum shopping''' for the least
burdensome standard and so that each issuer's due diligence measures
will be consistent, accurate, and reliable.\596\ Other commentators
suggested that the final rule should prescribe a safe harbor for an
issuer's conduct allowing an issuer to avoid any undue or impractical
requirements set forth by independent private sector auditors.\597\
While we did not propose to require satisfaction of a particular set of
standards, we requested comment on whether we should.
---------------------------------------------------------------------------
\593\ See, e.g., letters from AAEI, AngloGold, Cleary Gottlieb,
Industry Group Coalition Group I, IPC I, ITIC I, ITRI I, Japanese
Trade Associations, NAM I, NEI, Niotan II, NMA II, NRF I, RILA,
RILA-CERC, RMA, Roundtable, Sen. Durbin/Rep. McDermott, TriQuint I,
and WGC II.
\594\ See, e.g., letters from AAEI, Cleary Gottlieb, Earthworks,
Howland, IPC I, ITIC I, ITRI I, NAM I, NEI, NMA II, NRF I, RILA,
Sen. Durbin/Rep. McDermott, and WGC II.
\595\ See, e.g., letters from Arkema, Earthworks, Enough Project
I, CENCO I, CODSIA, Global Witness I, Howland, ICAR et al. II,
Materials I, Andrew Matheson (Mar. 2, 2011) (``Matheson I''), MSG I,
NYCBar I, Rep. Berman et al., SEMI, SIF I, State I, State II, and
WGC et al. I.
\596\ See letters from Global Witness I and ICAR et al. II.
\597\ See, e.g., letters from ArcelorMittal, Chamber I, ITIC I,
Materials I, NAM I, NRF I, and RILA.
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A number of commentators suggested that the final rule should refer
to, incorporate, or require the use of national or international
standards or guidance in some manner, such as accepting an issuer's due
diligence as reliable if that issuer used a national or international
standard or guidance, considering national or international due
diligence standards or guidance when developing the final rule, or
requiring an issuer to use a national or international due diligence
framework for that due diligence to be considered reliable.\598\ Some
commentators did not believe the final rule should require that an
issuer use any particular national or international due diligence
standard.\599\ Other commentators recommended against incorporating
voluntary international standards, such as the OECD due diligence
framework, into the final rule or suggested that we identify and assess
the potential latent risks and/or impacts to industry and auditors
related to codifying voluntary industry standards, such as the OECD due
diligence framework, into the final rule.\600\ Some commentators
specifically referenced the due diligence framework developed by the
OECD in discussing what they believed the final rule should consider as
acceptable due diligence.\601\ One commentator recommended that the
final rule not only refer to the OECD due diligence framework, but also
should require issuers to disclose the steps that they took to complete
the OECD due diligence.\602\
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\598\ See, e.g., letters from Arkema, CODSIA, Earthworks, Enough
Project I, Global Witness I, Howland, ICAR et al. II, IPC I, ITIC I,
ITRI I, Matheson I, MSG I, NEI, NYCBar I, Rep. Berman et al., SEMI,
Sen. Durbin/Rep. McDermott, SIF I, State I, State II, WGC II, and
WGC et al. I.
\599\ See, e.g., letters from Cleary Gottlieb, NAM I, NMA II,
and WGC II.
\600\ See letters from Auditing Roundtable, Inc. (Oct. 31, 2011)
(``ARI'') and Board of Environmental, Health & Safety Auditor
Certifications (Oct. 31, 2011) (``BEAC'').
\601\ See, e.g., letters from Arkema, Boeing, CODSIA,
Earthworks, Enough Project I, Evangelical Alliance, Evangelicals,
Global Witness I, ICAR et al. II, ITRI I, ITRI IV, Matheson I,
Methodist Board, MSG I, NEI, NYCBar I, NYCBar II, Presbyterian
Church II, Rep. Berman et al., Sen. Durbin/Rep. McDermott, SEMI, SIF
I, SIF II, State I, State II, and WGC II, and WGC et al. I.
\602\ See letter from SIF II.
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Some commentators recommended that a due diligence standard should
not require an absolute standard of care.\603\ Instead, these
commentators suggested either a ``reasonable care'' or a ``commercially
practicable efforts'' standard that would encompass contractual
obligations, risk-based programs, and industry-wide processes, but not
necessarily include the identification of all the parties in the supply
chain or the determination of every mineral used for manufactured
items. Some commentators recommended that an issuer's due diligence
should be presumed reliable if the issuer performs some or all of the
following steps: uses information from an industry-wide process,
creates a conflict minerals policy that requires conflict-mineral free
provisions in all contracts, conducts supply chain risk assessments,
requires suppliers to push policies upstream and transmit information
downstream, establishes policies and procedures to remediate instances
of non-conformity of policy, obtains independent third party audits,
and publishes its supply chain findings.\604\ Similarly, other
commentators indicated that due diligence should be presumed reliable
if these conditions are met, but only if the issuer requires upstream
and downstream due diligence and describes that due diligence.\605\
Other commentators suggested that the due diligence standard in the
final rule should be commensurate with the issuer's position in the
supply chain such that the due diligence requirement for an issuer
would be less rigorous the
[[Page 56326]]
farther that issuer's position in the supply chain is from the mine or
other location of origin.\606\
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\603\ See, e.g., letters from AAEI, Chamber I, CRS I, Industry
Group Coalition I, ITIC I, and NAM I.
\604\ See, e.g., letters from AAEI, Global Witness I, Industry
Coalition Group II, NAM I, and NRF I. These steps are similar to the
steps in the Annex I of the OECD's due diligence guidance.
\605\ See, e.g., letters from Earthworks, Enough Project I, MSG
I, and SIF I. The upstream and downstream due diligence that would
be required by these commentators is similar to the upstream and
downstream due diligence described in the Supplement on Tin,
Tantalum, and Tungsten to the OECD's due diligence guidance.
\606\ See letters from CERC, Chamber I, ITIC I, NRF I, and RILA.
---------------------------------------------------------------------------
In the Proposing Release, we requested comment as to whether the
final rule should prescribe different due diligence measures for gold
because of any unique characteristics of the gold supply chain. In
response, most commentators that discussed this point agreed that the
due diligence required for gold should be the same as the due diligence
required for the other three conflict minerals.\607\ Two commentators,
however, stated that gold is unique among the four conflict minerals so
the due diligence requirements for it should be different than for the
other minerals.\608\ As discussed above, a few commentators further
recommended that the final rule permit issuers to exclude certain
information from public dissemination regarding the storage and
transportation routes of gold for security reasons.\609\
---------------------------------------------------------------------------
\607\ See, e.g., letters from Earthworks, Global Witness I, ITRI
I, SIF I, and State II.
\608\ See letters from AngloGold and WGC II.
\609\ See letters from NMA II, NAM III, and WGC II.
---------------------------------------------------------------------------
In the Proposing Release, we also requested comment as to whether
the final rule should state that an issuer is permitted to rely on the
reasonable representations of its smelters or any other actor in the
supply chain, provided there is a reasonable basis to believe the
representations of the smelters or other parities. A number of
commentators suggested, in response, that the final rule should allow
an issuer to rely on reasonable representations from suppliers and/or
smelters in satisfying their due diligence requirement.\610\ Some of
these commentators, however, explained that such written
representations must be accompanied by additional processes, such as
industry-wide smelter verification programs, before they could be
relied upon.\611\ One commentator recommended that the final rule
should allow due diligence to be satisfied if an issuer includes
obligations in its supply contracts and receives reasonable
representations from its suppliers regarding the conflict-free nature
of the minerals.\612\
---------------------------------------------------------------------------
\610\ See, e.g., letters from AngloGold, Global Witness I,
Howland, IPC I, ITIC I, Japanese Trade Associations, JVC et al. II,
Kemet, NEI, NMA II, RILA-CERC, RMA, Roundtable, SEMI, Sen. Durbin/
Rep. McDermott, State II, Taiwan Semi, and WGC II.
\611\ See letters from Global Witness I, Howland, ITIC I, JVC et
al. II (stating that written representations would not have to be
accompanied by additional processes ``until such time as reliable
smelter/refiner certification and due diligence systems can be
implemented''), Kemet, NMA II, RMA, Sen. Durbin/Rep. McDermott, and
State II.
\612\ See letter from Roundtable.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are revising the final rule. The
final rule requires that an issuer describe the due diligence it
exercised in determining the source and chain of custody of its
conflict minerals. The final rule requires that an issuer's due
diligence follow a nationally or internationally recognized due
diligence framework. We are persuaded by commentators that requiring an
issuer to use a nationally or internationally recognized due diligence
framework that is relevant to the audit objectives and permits
consistent assessment of the subject matter will provide an independent
private sector auditor with a structure by which to assess an issuer's
due diligence, which we believe should make the rule more workable and
less costly than if no framework was specified. We are also persuaded
by commentators that requiring the use of nationally or internationally
recognized due diligence framework will enhance the quality of an
issuer's due diligence and will promote comparability of the Conflict
Minerals Reports of different issuers. Also, we believe that requiring
such due diligence will provide issuers with a degree of certainty and,
as one commentator noted, ``ameliorate the risk that a due diligence
process will later be judged to be unreliable.'' \613\
---------------------------------------------------------------------------
\613\ See letter from NAM I.
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The OECD's ``Due Diligence Guidance for Responsible Supply Chains
of Minerals from Conflict-Affected and High-Risk Areas'' \614\
satisfies our criteria and may be used as a framework for purposes of
satisfying the final rule's requirement that an issuer exercise due
diligence in determining the source and chain of custody of its
conflict minerals. As one commentator noted, the OECD is an
international organization with 34 member countries, including the
United States, that works internationally with governments and
businesses and approved its due diligence guidance as the ``the result
of a collaborative initiative among governments, international
organizations, civil society organizations, and industry participants
to promote accountability and transparency in the supply chain of
minerals from conflict-affected and high-risk areas.'' \615\ A comment
letter submitted by the OECD in conjunction with the United Nations
Group of Experts on the Democratic Republic of the Congo (``Group of
Experts'') and the International Conference on the Great Lakes Region
(``ICGLR'') indicated that the OECD due diligence guidance was
``adopted as an OECD Recommendation by forty one OECD and non-OECD
countries meeting at ministerial level on 25 May 2011 under the
chairmanship of U.S. Secretary of State Hillary Rodham Clinton.'' \616\
The final rule does not mandate that an issuer use any particular
nationally or internationally recognized due diligence framework, such
as the OECD's due diligence guidance, in recognition of the fact that
other evaluation standards may develop that satisfy the intent of the
Conflict Minerals Statutory Provision. However, to satisfy the
requirements of the final rule, the nationally or internationally
recognized due diligence framework used by the issuer must have been
established by a body or group that has followed due-process
procedures, including the broad distribution of the framework for
public comment, and be consistent with the criteria standards in GAGAS
established by the GAO.
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\614\ OECD, Due Diligence Guidance for Responsible Supply Chains
of Minerals from Conflict-Affected and High-Risk Areas (2011),
available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
\615\ See letter from Global Witness I.
\616\ See letter from OECD I.
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As a related matter, one commentator stated that the final rule
should clarify whether an issuer has to describe generally its due
diligence processes or whether issuers have to describe specifically
purchase contracts associated with particular conflict minerals in
their products.\617\ We believe an issuer's description of its due
diligence should be based on the individual issuer's facts and
circumstances. In this regard, if an issuer's due diligence process is
relatively consistent throughout its supply chain, the issuer could
satisfy the requirements by generally describing its due diligence. We
recognize, however, that an issuer may use different due diligence
processes for different aspects of its supply chain. For example, an
issuer using the OECD due diligence guidance may use different due
diligence processes for tin, tantalum, and tungsten as compared with
that for gold. If an issuer exercises significantly different due
diligence processes for different aspects of its supply chain, such as
with separate conflict minerals or products, that issuer should
describe how they are different.
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\617\ See letter from ITIC I.
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As we note above, a number of commentators recommended that the
final rule allow an issuer to rely on
[[Page 56327]]
reasonable representations from suppliers and/or smelters in satisfying
their due diligence requirement,\618\ whereas other commentators argued
that written representations should not be able to satisfy due
diligence by themselves.\619\ The final rule requires that an issuer's
due diligence follow a nationally or internationally recognized due
diligence framework. Therefore, whether an issuer may rely on
reasonable representations from suppliers and/or smelters in satisfying
its due diligence requirement will be dependent on the nationally or
internationally recognized due diligence framework.
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\618\ See, e.g., letters from AngloGold, Global Witness I,
Howland, IPC I, ITIC I, Japanese Trade Associations, JVC et al. II,
NEI, NMA II, RILA-CERC, RMA, SEMI, State II, Taiwan Semi, and WGC
II.
\619\ See letters from Global Witness I, Howland, ITIC I, and
RMA.
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3. Independent Private Sector Audit Requirements
a. Proposed Rules
Consistent with the Conflict Minerals Statutory Provision, we
proposed that the description of the measures taken by an issuer to
exercise due diligence on the source and chain of custody of its
conflict minerals include a certified independent private sector audit
conducted in accordance with the standards established by the
Comptroller General of the United States.\620\ Under the Conflict
Minerals Statutory Provision, the GAO is to establish the appropriate
standards for the independent private sector audit. Therefore, we did
not include any auditing standards in the proposed rules or discuss
such standards in the Proposing Release.
---------------------------------------------------------------------------
\620\ See Exchange Act Section 13(p)(1)(A)(i).
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b. Comments on the Proposed Rules
A number of commentators indicated that the final rule must clarify
the independent private sector audit's criteria, objectives, and
standards.\621\ One commentator was concerned that, if neither the
Comptroller General nor the Commission required uniform objectives and
standards, the audits would not be useful because they would lack any
comparability.\622\ Some commentators remarked that the Comptroller
General or the Commission must delineate suitable criteria for the
measurement and presentation of the information in the Conflict
Minerals Report, including the elements of the Conflict Minerals Report
subject to the audit, so as to provide an audit framework that would
aid both issuers and auditors.\623\ Such criteria would provide the
basis for the auditor to measure the information provided by the
issuer, and this criteria should be objective, measurable, complete,
and relevant.\624\ Commentators noted, however, that the criteria would
differ based on the objective of the audit. For example, the criteria
for evaluating whether an issuer is correct in concluding that its
products are ``DRC conflict free'' are different from the criteria for
determining whether the issuer's process for determining whether its
products are ``DRC conflict free'' is sufficient.\625\
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\621\ See, e.g., letters from American Institute of Certified
Public Accountants (Mar. 1, 2011) (``AICPA I''), American Institute
of Certified Public Accountants (Nov. 17, 2011) (``AICPA II''),
Barrick Gold, BEAC, Calvert, Deloitte, The Elm Consulting Group
International LLC (Mar. 1, 2011) (``Elm''), Ernst & Young LLP (Mar.
2, 2011) (``E&Y''), Grant Thornton (recommending that the Commission
establish a ``working group to support the Comptroller General in
the development of the appropriate form of engagement, including the
criteria to be used to evaluate the subject matter and the opinion
(or conclusion) to be expressed thereon''), Hileman Consulting,
ICGLR, IPC II, KPMG LLP (Mar. 2, 2011) (``KPMG''), MSG III, NEI,
NYCBar I, WGC II.
\622\ See letter from WGC II.
\623\ See, e.g., letters from Deloitte and KPMG.
\624\ See letters from Deloitte and Grant Thornton.
\625\ See letters from AICPA I and Grant Thornton.
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Commentators from the accounting profession and others recommended
that the final rule clearly state the objective of the audit and the
subject matter to be audited.\626\ Some of these commentators
identified possible audit objectives, including: whether management's
description of the procedures and controls performed in an issuer's due
diligence process are fairly described in the Conflict Minerals Report;
\627\ whether the design of an issuer's due diligence process described
in the Conflict Minerals Report conforms to a recognized standard of
due diligence; \628\ whether management's description of an issuer's
due diligence process in its Conflict Minerals Report is accurate, the
results of that process are fairly stated, and the issuer has
evaluated/identified the upstream and downstream due diligence
processes; \629\ whether the design of the due diligence process
described in the Conflict Minerals Report conforms to a recognized a
standard and whether the process was sufficiently effective; \630\
whether the issuer's conclusion regarding the source and chain of
custody of its conflict minerals is accurate; \631\ and whether the
issuer appropriately included in the report all its products described
as not ``DRC conflict free.'' \632\ Generally, commentators recommended
that the final rule not require an audit objective to include a
determination as to whether an issuer's due diligence process was
effective or that any conclusion based on that due diligence process
was accurate, because that would be very challenging and expensive to
undertake.\633\
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\626\ See letters from AICPA I, AICPA II, Barrick Gold, Grant
Thornton, IPC II, KPMG, MSG III, and SIF II.
\627\ See letters from AICPA I, AICPA II, Grant Thornton, and
KPMG.
\628\ See letters from AICPA I, AICPA II, IPC II, and KPMG.
Commentators also observed that this second objective would require
the final rule to provide a clear due diligence standard against
which an auditor could compare the issuer's due diligence process.
\629\ See letter from MSG III (noting, however, that the audit
scope should not include verification of the ultimate conclusions of
the Conflict Minerals Report, only that the process was applied as
described). See also letter from SIF II (stating that the audit of
the Conflict Minerals Report should include a ``review of management
systems and processes, and of conclusions reached'').
\630\ See letter from AICPA I.
\631\ See letters from AICPA I and KPMG.
\632\ See id.
\633\ See, e.g., letters from AICPA I, AICPA II, Deloitte, ITIC
I, KPMG, MSG III, and Roundtable.
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Additionally, some commentators indicated that the Comptroller
General or the Commission must identify the acceptable auditing
standards for firms to use when auditing an issuer's Conflict Minerals
Report.\634\ In this regard, as some commentators noted,\635\ the
Proposing Release stated that the staff of the GAO informed our staff
of its preliminary view that no new audit standards need to be
promulgated. Therefore, the audit of the Conflict Minerals Report would
be performed under GAGAS, and auditors could use either the provisions
for Attestation Engagements or Performance Audits in GAGAS.\636\
However, as commentators noted, in addition to certain substantive
differences between the two standards in GAGAS, only a licensed
certified public accountant or person working with a certified public
accounting firm or governmental auditing organization may perform an
Attestation Engagement.\637\ Similarly, commentators noted that
Performance Audits are not required to be conducted by certified public
accountants, but auditors using the Performance Audit standard would
still need to satisfy certain qualification requirements under GAGAS,
such as continuing professional education requirements, quality control
measures, and
[[Page 56328]]
independent peer reviews.\638\ In this regard, to increase the pool of
auditors and thereby reduce costs, some commentators recommended that
the final rule allow auditors to use the Performance Audit standard
under GAGAS.\639\ Some of these commentators recommended that auditors
that are not certified public accountants could satisfy GAGAS's
Performance Audit qualification requirements by receiving a
professional certification relating to environmental, health, and
safety auditing from organizations that certify auditors by requiring
that an auditor meet certain standards, such as having a code of
conduct, committing to a code of ethics and rigorous practices,
engaging in continuing professional development and education, being
subjected to review, and other provisions to maintain a high caliber of
expertise.\640\ One commentator suggested that the final rule should
allow any auditor to perform the audit as long as it was knowledgeable
and able to meet the requirements of the OECD's criteria for the
competence of auditors.\641\ Other commentators noted, however, that
the OECD's criteria for the competence of auditors are inadequate
because they fail to provide any guidance as to how this would be
assured.\642\ Another commentator recommended that the final rule
should delineate specific requirements for the accreditation and
selection of auditors but did not provide any suggested
requirements.\643\
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\634\ See letters from AICPA I, Deloitte, E&Y, Elm, and KPMG.
\635\ See, e.g., letters from Barrick Gold and E&Y.
\636\ See letters from AICPA I, AICPA II, BEAC, Deloitte, E&Y,
Elm, Grant Thornton, and MSG III.
\637\ See, e.g., letters from AICPA I and BEAC.
\638\ See letter from Deloitte and BEAC.
\639\ See, e.g., letters from ArcelorMittal, ARI, BEAC, Hileman
Consulting, IPC II, and MSG III.
\640\ See letters from BEAC and Hileman Consulting.
\641\ See letter from NYCBar I.
\642\ See letter from ARI and BEAC.
\643\ See letter from ICGLR.
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Several commentators asserted that the final rule should clarify
the independence standards for auditors.\644\ Some of these
commentators \645\ recommended that the final rule state that
performing the independent private sector audit of the Conflict
Minerals Report is not inconsistent with the Commission's auditor
independence requirements in Rule 2-01 of Regulation S-X.\646\ One
commentator noted, however, that the OECD's independence requirements
prohibit a Conflict Minerals Report auditor from having provided any
other service for the issuer within a 24-month period.\647\ Similarly,
two other commentators asserted that the statement in the proposed
rules and the Conflict Minerals Statutory Provision that the
independent private sector audit would be considered a ``critical
component of due diligence'' could create confusion regarding the
application of our auditor independence requirements in Rule 2-01 of
Regulation S-X.\648\
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\644\ See, e.g., letters from AICPA I, Deloitte, E&Y, Grant
Thornton, Hileman Consulting, and KPMG.
\645\ See letters from AICPA I, Deloitte, and E&Y.
\646\ 17 CFR 210.2-01.
\647\ See letter from KPMG.
\648\ See letters from E&Y and Grant Thornton.
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c. Final Rule
i. Auditing Standards
As noted above, the GAO staff has indicated to our staff that the
GAO does not intend to develop new standards for the independent
private sector audit of the Conflict Minerals Report. As we noted in
the Proposing Release, GAO staff informed our staff that existing GAGAS
standards,\649\ such as the standards for Attestation Engagements or
the standards for Performance Audits will be applicable.\650\ The GAO
staff has also indicated to our staff that the GAGAS Performance
Standards could be used by the auditor to express a conclusion as to
whether the design of the issuer's due diligence measures are in
conformity with the criteria set forth in a nationally or
internationally recognized due diligence framework used by the issuer,
such as the OECD's ``Due Diligence Guidance for Responsible Supply
Chains of Minerals from Conflict-Affected and High-Risk Areas,'' and
whether the issuer's description of the due diligence measures it
performed, as set forth in the Conflict Minerals Report, with respect
to the period covered by the report, is consistent with the due
diligence process that the issuer undertook. Therefore, unless the GAO
makes some formal pronouncement, it appears that any auditor of the
Conflict Minerals Report will need to conduct the audit using the
standards set forth in GAGAS. Because the Conflict Minerals Statutory
Provision provides that the audit standards are to be established by
the GAO, the GAO is responsible for matters pertaining to the audit
standards, including questions or concerns about the application of
such standards.
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\649\ See U.S. Gov't Accountability Office, GAO-12-331G,
Government Auditing Standards 2011 Revision (Dec. 2011), available
at http://www.gao.gov/assets/590/587281.pdf.
\650\ The GAGAS Attestation Engagement standards, in Chapter
3.75, require that auditors be ``licensed certified public
accountants, persons working for a licensed certified public
accounting firm or for a government auditing organization, or
licensed accountants in states that have multi-class licensing
systems that recognize licensed accountants other than certified
public accountants.'' Unlike the GAGAS Attestation Engagement
standards, the GAGAS Performance Audit standards allow auditors
other than certified public accountants to perform a Performance
Audit.
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ii. Auditor Independence
Similarly, entities performing an independent private sector audit
of the Conflict Minerals Report must comply with any independence
standards established by the GAO, and any questions regarding
applicability of GAGAS on this point should be directed to the GAO. We
are not adopting any additional independence requirements. Also, the
independence required for the independent private sector audit of the
Conflict Minerals Report is not the same as the OECD's independence
requirement for auditors conducting audits of conflict mineral
smelters.
We acknowledge commentators' requests to clarify how our own
independence requirements would apply to an accountant that performed
both the independent private sector audit of the Conflict Minerals
Report and an engagement (e.g., the audit of the financial statements
of an issuer) subject to the independence requirements in Rule 2-01 of
Regulation S-X.\651\ The independent private sector audit of the
Conflict Minerals Report is specifically described in the Act as
constituting a ``critical component'' of the registrant's due diligence
process,\652\ which commentators were concerned may suggest the auditor
would perform work that would impair independence. Despite this
language, the Conflict Minerals Statutory Provision only requires an
audit and no other functions that may imperil independence, such as
``management functions'' described in Rule 2-01(c)(4)(vi) of Regulation
S-X. Therefore, we do not believe that it would be inconsistent with
the independence requirements in Rule 2-01 of Regulation S-X if the
independent public accountant also performs the independent private
sector audit of the Conflict Minerals Report. The engagement to perform
the independent private sector audit of the Conflict Minerals Report
would nevertheless be considered a ``non-audit service'' subject to the
pre-approval requirements
[[Page 56329]]
of Rule 2-01(c)(7) of Regulation S-X. In addition, the fees related to
the independent private sector audit of the Conflict Minerals Report
would need to be included in the ``All Other Fees'' category of the
principal accountant fee disclosures.\653\ If the accountant were to
provide services that extended beyond the scope of the independent
private sector audit of the Conflict Minerals Report, the accountant
would need to consider whether those services were inconsistent with
Rule 2-01 of Regulation S-X.
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\651\ Rule 2-01 of Regulation S-X [17 CFR 210.2-01].
\652\ Exchange Act Section 13(p)(1)(A)(i), as added by Section
1502 of the Act, states that the independent private sector audit of
the conflict minerals report is included in the ``measures taken by
the [issuer] to exercise due diligence on the source and chain of
custody of such minerals.'' Exchange Act Section 13(p)(1)(B) further
provides that the audit must be certified by the issuer and states
that the certified audit ``is a critical component of due diligence
in establishing the source and chain of custody of such minerals.''
These provisions make clear that the independent private sector
audit is one step in management's due diligence process.
\653\ See Item 9(e)(4) of Schedule 14A [17 CFR 240.14a-101].
Registrants also are required to describe the nature of the services
comprising the fees disclosed under the ``All Other Fees'' category.
As such, the independent private sector audit of the Conflict
Mineral Report should be included in that description.
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iii. Audit Objective
We agree with commentators that the final rule should clearly state
the objective of the Conflict Minerals Statutory Provision's
independent private sector audit and the subject matter to be audited
to provide a basis for the auditor to measure the information provided
by the issuer. Therefore, the final rule specifies an audit objective.
The final rule states that the audit's objective is to express an
opinion or conclusion as to whether the design of the issuer's due
diligence framework as set forth in the Conflict Minerals Report, with
respect to the period covered by the report, is in conformity with, in
all material respects, the criteria set forth in the nationally or
internationally recognized due diligence framework used by the issuer,
and whether the issuer's description of the due diligence measures it
performed as set forth in the Conflict Minerals Report, with respect to
the period covered by the report, is consistent with the due diligence
process that the issuer undertook.
The Conflict Minerals Statutory Provision requires an issuer to
submit a Conflict Mineral Report that includes ``a description of the
measures taken by the [issuer] to exercise due diligence on the source
and chain of custody of its conflict minerals, which measurers shall
include an independent private sector audit of such report,'' \654\ and
``a description of the products manufactured or contracted to be
manufactured that are not DRC conflict free.'' \655\ We recognize that
the final rule does not require an audit of the entire Conflict
Minerals Report. We believe, however, that it is appropriate for the
final rule to limit the audit only to the sections of the Conflict
Minerals Report that discuss the design of the issuer's due diligence
framework and the due diligence measures the issuer performed because
the provision's requirement for an issuer to obtain an independent
private sector audit is located in the provision's subsection relating
to due diligence.\656\
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\654\ Exchange Act Section 13(p)(1)(A)(i).
\655\ Exchange Act Section 13(p)(1)(A)(ii).
\656\ See Exchange Act Section 13(p)(1)(A)(i).
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The audit requirement is not discussed in the subsequent subsection
that requires a description in the Conflict Minerals Report of the
issuer's products manufactured or contracted to be manufactured that
are ``not DRC conflict free,'' \657\ and the final rule does not
require an audit of that information. We note that the objective we are
adopting differs significantly from the objectives of other audits
required by our rules.\658\ Nonetheless, in light of the statutory
structure, as well as concerns about the costs that could arise from a
requirement to audit the conclusion about the conflict minerals' status
or take other approaches,\659\ we have concluded that the audit
objective should be limited in this manner. We recognize that an audit
objective requiring an auditor to express an opinion or conclusion as
to whether the design of the issuer's due diligence measures as set
forth in the Conflict Minerals Report, with respect to the period
covered by the report, is in conformity with, in all material respects,
the criteria set forth in the nationally or internationally recognized
due diligence framework used by the issuer, and whether the issuer's
description of the due diligence measures it performed as set forth in
the Conflict Minerals Report, with respect to the period covered by the
report, is consistent with the due diligence process that the issuer
undertook, is not as comprehensive as an audit objective requiring an
auditor to express an opinion or conclusion as to whether the due
diligence measures were effective, or to express an opinion or
conclusion as to whether or not the issuer's necessary conflict
minerals are ``DRC conflict free,'' which are more similar to audit
objectives in our other rules. However, we believe that the audit is
still meaningful because investors and other users will have some
assurance from an independent third party that the issuer's due
diligence framework, as set forth in the Conflict Minerals Report, is
designed in conformity with the relevant nationally or internationally
recognized due diligence framework. Further, we believe it is necessary
and appropriate to require the audit to address whether the issuer
actually performed the due diligence measures that it represents that
it performed in the Conflict Minerals Report, so that the audit also
addresses, in a cost efficient manner, the actual performance of the
due diligence and not just the design, as well as provides independent
third party confirmation that the work described was performed.
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\657\ See Exchange Act Section 13(p)(1)(A)(ii).
\658\ The objective of the ordinary audit of financial
statements by the independent auditor is the expression of an
opinion on the fairness with which they present, in all material
respects, financial position, results of operations, and its cash
flows in conformity with generally accepted accounting principles.
See paragraph .01 of AU sec. 110, Responsibilities and Functions of
the Independent Auditor. The auditor's objective in an audit of
internal control over financial reporting is to express an opinion
on the effectiveness of the company's internal control over
financial reporting, as a part of which the auditor should test the
design effectiveness of controls, as well as the operating
effectiveness of controls. See paragraphs 3, 42, and 44 of Auditing
Standard No. 5, An Audit of Internal Control over Financial
Reporting That Is Integrated With An Audit of Financial Statements.
\659\ See, e.g., letters from AICPA I, Deloitte, and KPMG.
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4. Recycled and Scrap Minerals
a. Proposed Rules
As proposed, the rules would allow for different treatment of
conflict minerals from recycled and scrap sources than from original
sources due to the difficulty of looking through the recycling or scrap
process to determine the mine or other location of origin of the
minerals. Given this difficulty, we expected that an issuer generally
would not know the origins of its recycled or scrap conflict minerals,
so we believed it would be appropriate for the proposed rules to
require that an issuer using recycled or scrap conflict minerals
furnish a Conflict Minerals Report subject to special rules. Under the
proposed rules, if an issuer obtained conflict minerals from a recycled
or scrap source, it would have been required to consider the products
containing or produced with those conflict minerals to be ``DRC
conflict free.'' \660\
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\660\ Because the proposed rules would have automatically
classified recycled or scrap conflict minerals as ``DRC conflict
free,'' issuers with products containing such minerals would not
have needed to provide in the Conflict Minerals Report a description
of the recycled or scrap conflict minerals' processing facilities or
country of origin, nor would they have been required to describe
their efforts to determine the mine or location of origin with the
greatest possible specificity.
---------------------------------------------------------------------------
As proposed, an issuer with conflict minerals that originated from
recycled or scrap sources would have been required to disclose in its
annual report, under the ``Conflict Minerals Disclosure'' heading, that
its conflict minerals were obtained from recycled or
[[Page 56330]]
scrap sources and that it furnished a Conflict Minerals Report
regarding those recycled or scrap minerals. Also, under the proposed
rules, an issuer would have been required to state that its products
containing or produced with recycled or scrap minerals in the Conflict
Minerals Report were considered ``DRC conflict free.'' In addition,
such an issuer would have described the measures taken to exercise due
diligence in determining that its conflict minerals were recycled or
scrap and obtain an independent private sector audit of that report.
We did not propose to define when a conflict mineral is from
recycled or scrap sources. Instead, any issuer seeking to use this
alternative approach would describe the measures it took to exercise
due diligence in determining that the conflict minerals came from
recycled or scrap sources. The Proposing Release stated, however, that
we would consider conflict minerals to be ``recycled'' if they are
reclaimed end-user or post-consumer products, but we would not consider
those minerals ``recycled'' if they are partially processed,
unprocessed, or a byproduct from another ore.\661\
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\661\ As we noted in the Proposing Release, the proposed rules
regarding recycled and scrap conflict minerals would apply to all
conflict minerals equally. If recycled or scrap minerals were mixed
with new minerals, the recycled and scrap alternative approach would
apply to only the portion of the minerals that were recycled or
scrap and the issuer would be required to furnish a Conflict
Minerals Report regarding at least the recycled or scrap minerals.
If the issuer's new conflict minerals did not originate in the
Covered Countries, that Conflict Minerals Report would contain only
information regarding the recycled or scrap minerals. If, however,
the new conflict minerals originated in the Covered Countries, or
the issuer was unable to determine that its new conflict minerals
did not originate in the Covered Countries, the Conflict Minerals
Report would include information regarding both the new conflict
minerals and the recycled or scrap conflict minerals.
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b. Comments on the Proposed Rules
Commentators offered a wide variety of views on the appropriate
approach to conflict minerals from recycled or scrap sources. A number
of commentators stated that they either agreed with the recycled and
scrap alternative reporting requirements, as proposed, or agreed with
some type of recycled and scrap alternative reporting requirements or
exemption, although some of these commentators did not necessarily
discuss the mechanics of such reporting alternatives.\662\ Some
commentators indicated that they supported, as proposed, alternative
recycled or scrap reporting that requires an issuer to perform due
diligence in determining that the conflict minerals were, in fact, from
recycled and scrap sources and to submit a Conflict Minerals Report
describing the due diligence exercised that includes an audit of the
report.\663\ A number of commentators believed that the final rule
should require that an issuer only conduct the equivalent of a
reasonable country of origin inquiry, instead of due diligence, to
determine whether its conflict minerals were from recycled or scrap
sources.\664\ Also, some of these and other commentators stated
explicitly that an issuer should not be required to submit a Conflict
Minerals Report and/or an audit of its recycled or scrap conflict
minerals.\665\ Other commentators, including a number of members of
Congress, recommended that the final rule exempt conflict minerals from
recycled or scrap sources.\666\
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\662\ See, e.g., letters from AAEI, AAFA, CRS I, Global Tungsten
I, Global Witness I, Japanese Trade Associations, MSC I, NRF I, Ohio
Precious Metals (Mar. 2, 2011) (``OPM''), PCP, Representative Jason
Altmire (Mar. 23, 2012) (``Rep. Altmire''), Rep. Amodei, Rep. Bachus
et al., Rep. Critz, Rep. Ellmers, Representative Steven LaTourette
(Jun. 13, 2012) (``Rep. LaTourette''), Representative Robert E.
Latta (May 16, 2012) (``Rep. Latta''), Rep. Murphy, Representatives
Tim Murphy and Peter J. Visclosky (Aug. 2, 2012) (``Reps. Murphy and
Visclosky''), Representative James B. Renacci (Mar. 6, 2012) (``Rep.
Renacci''), Representative Bill Shuster (Mar. 12, 2012) (``Rep.
Shuster''), Representative Patrick J. Toomey (Apr. 12, 2012) (``Rep.
Toomey''), Representative Stephen A. Womack (Dec. 23, 2011) (``Rep.
Womack''), RMA, SEMI, Senator Mark Pryor (Mar. 19, 2012) (``Sen.
Pryor''), and US Steel.
\663\ See, e.g., letters from Bario-Neal, Brilliant Earth,
Earthworks, Enough Project I, Enough Project IV, Hacker Jewelers,
ICAR et al. II, Howland, SIF I, and TIAA-CREF.
\664\ See, e.g., letters from AdvaMed I, Advanced Medical
Technology Association (Nov. 1, 2011) (``AdvaMed II''), AngloGold,
Global Tungsten II, Industry Group Coalition I, ITIC I, ITRI I, ITRI
IV, JVC et al. II, LBMA I, Metalor Technologies USA (Feb. 25, 2011)
(``Metalor''), NMA I, RJC I, United States Chamber of Commerce (Nov.
29, 2011) (``Chamber III''), and WGC II.
\665\ See, e.g., letters from AdvaMed I, AdvaMed II,
ArcelorMittal, Copper & Brass Fabricators Council, Inc. (Mar. 2,
2011) (``Copper & Brass''), Global Tungsten II, IPC I, IPC II, ITIC
I, ITRI I, ITRI III, ITRI IV, JVC et al. II, JVC et al. III,
Materials I, NAM I, Rep. Altmire, Rep. Amodei, Rep. Bachus et al.,
Rep. Ellmers, Rep. Murphy, Rep. Shuster, Sen. Pryor, Specialty Steel
Industry of North America (Mar. 2, 2011) (``SSINA''), Tiffany, and
WGC II. See also letter from Rep. Critz (stating that we should
consider ``reconfiguring the auditing requirement as it relates to
recycled scrap materials'').
\666\ See, e.g., letters from Rep. Altmire, Rep. Murphy, Reps.
Murphy and Visclosky (recommending exempting recycled or scrap steel
that contains conflict minerals), Rep. Renacci, Rep. Shuster, Rep.
Toomey, Rep. Womack, and Sen. Pryor.
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Other commentators stated that the final rule should require due
diligence but not a Conflict Minerals Report, not require a Conflict
Minerals Report but require an audit of the inquiry into whether the
conflict minerals are from recycled or scrap sources, require a
``reliable process'' to determine whether the conflict minerals are
from recycled or scrap sources, or not require that an issuer provide
any information other than a statement that the conflict minerals are
from recycled or scrap sources.\667\ Some commentators agreed that
products with conflict minerals from recycled and scrap sources should
be considered ``DRC conflict free,'' as proposed.\668\ Other
commentators indicated that the final rule should require an issuer
with products containing conflict minerals from recycled or scrap
sources to label those products with a name other than ``DRC conflict
free,'' such as ``recycled'' or ``scrap'' products.\669\
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\667\ See, e.g., letters from Cleary Gottlieb, JVC et al. II,
MSG I, and NEI.
\668\ See, e.g., letters from Copper & Brass, JVC et al. II, MSG
I, NEI, NMA II, SIF I, SSINA, TIAA-CREF, and WGC II.
\669\ See, e.g., letters from CRS I, Global Witness I, and State
II.
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Some commentators stated that the more the alternative reporting
approach for conflict minerals from recycled or scrap sources resembles
our approach for newly mined conflict minerals the greater the risk of
creating a disincentive for a manufacturers to use conflict minerals
from recycled or scrap sources.\670\ As one of these commentators
asserted, without certain alternative reporting requirements for
issuers with conflict minerals from recycled or scrap sources, such
minerals ``would be doomed for burial in a land fill until mined anew
under a different authority having jurisdiction,'' which would be a
``clear waste'' of conflict minerals that ``cannot contribute to new
suffering in the DRC even though its disposition regarding past
suffering may not be clear.'' \671\ According to this commentator, ``it
is possible that dishonest people may find a way to pass new material
off as recycled,'' but this possibility ``does not outweigh the very
obvious benefit of using recycled products and materials.'' \672\ In
this regard, other commentators argued that requiring issuers to
provide the reason they determined that their conflict minerals came
from recycled or scrap sources, including the due diligence processes
they used in making their determination, would offset the reduced
burden provided by the exemption.\673\
---------------------------------------------------------------------------
\670\ See, e.g., letters from Copper & Bass, Global Tungsten I,
RMA, SEMI, and SSINA.
\671\ See letter from SEMI.
\672\ See id.
\673\ See letters from Rep. LaTourette and Rep. Latta.
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One commentator suggested that an issuer should be able to describe
a product as using recycled or scrap minerals if a majority of the
minerals used in the product are from recycled or
[[Page 56331]]
scrap sources or a combination of recycled, scrap, and newly mined
conflict minerals because it would be impossible to determine whether
all the minerals in a product were from recycled or scrap sources.\674\
Another commentator recommended that the final rule should allow an
issuer to describe its products as ``DRC conflict free'' if a majority
of the conflict minerals in those products are from recycled or scrap
sources.\675\ One commentator asserted that tolled material (scrap,
second life-cycle materials, or ores processed into raw materials
suitable for use in the manufacture of products) received from
processing facilities or suppliers should be treated as conflict free
if the original material supplied was conflict free.\676\ A number of
other commentators suggested that the final rule allow an issuer to
designate the origin of any recycled or scrap conflict minerals as the
country in which those minerals were generated and collected or
otherwise initially submitted into the recycling or scrap supply chain,
which is consistent with the United States customs law.\677\ Also,
commentators agreed that the alternative reporting requirements for
recycled and scrap minerals should apply to all conflict minerals and
issuers equally.\678\
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\674\ See letter from AngloGold.
\675\ See letter from WGC II.
\676\ See letter from Global Tungsten II.
\677\ See, e.g., letters from IPMI I, LBMA I, Metalor, NMA II,
and RJC I.
\678\ See, e.g., letters from Howland, IPC I, ITRI I, and NEI.
---------------------------------------------------------------------------
Many commentators discussed the Proposing Release's statement that
we would consider conflict minerals to be from a recycled or scrap
sources if those minerals are reclaimed end-user or post-consumer
products but would not consider those minerals ``recycled'' if they are
partially processed, unprocessed, or a byproduct from another ore. Some
of these commentators recommended that the final rule expand this
statement to match the OECD's definition of recycled and scrap minerals
or explicitly adopt the OECD's definition in the final rule.\679\
Likewise, certain commentators recommended that the final rule clarify
that we would consider conflict minerals from recycled or scrap sources
to include scrap processed metals created during product manufacturing,
which is part of the OECD definition.\680\ These commentators, however,
were concerned that the Proposing Release did not consider partially
processed materials as being recycled, because they believed that such
a definition would exclude industrial scrap, sometimes referred to as
``new'' scrap, generated by downstream manufacturers from the treatment
given to recycled minerals.\681\
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\679\ See, e.g., letters from Global Witness I, MSG I, and SIF
I.
\680\ See, e.g., letters from Copper & Brass and SSINA.
\681\ Id.
---------------------------------------------------------------------------
Some commentators provided alternative definitions for recycled and
scrap minerals. One commentator stated that the final rule should
define a recycled or scrap conflict mineral as ``a conflict mineral or
a conflict mineral derivative that is within, or has been reclaimed
from, a used product that was collected directly from the last product
end user, or that was collected from a municipal waste stream.'' \682\
Other commentators indicated that conflict minerals should be
considered recycled or scrap only if they have been through a cycle of
production and application.\683\ A further commentator suggested that
the final rule adopt, in substantial part, the Environmental Protection
Agency's definition of solid waste for our definition of conflict
minerals from recycled or scrap sources, with the related exclusions
and definitions of various scrap materials.\684\ One commentator
recommended that we incorporate the Electronic Industry Citizenship
Coalition's (``EICC'') definition of ``scrap'' for tantalum as the
definition for scrap in the final rule.\685\ Certain commentators
sought to limit the definition of recycled and scrap minerals to 100%
post-consumer metals.\686\ Some commentators suggested a definition
that would include reclaimed materials from the manufacture of
downstream products that incorporate those metals, processes utilizing
those metals, or end-user or post-consumer products, which would not
include minerals partially processed, materials from the partially
processed minerals, or materials from intermediate stages of the
smelting and refining process.\687\ One commentator recommended that
the final rule consider as conflict minerals from recycled or scrap
sources, ``not only * * * post-consumer scrap, but also * * * scrap
that is the result of an industrial process.'' \688\
---------------------------------------------------------------------------
\682\ See letter from SEMI (defining a ``used product'' as ``a
product that, prior to recycling or disposal, is commercially sold
or otherwise distributed to a buyer not in the commercial chain of
distribution and used for some period of time'').
\683\ See letters from Global Tungsten I and RMA.
\684\ See letter from Elm.
\685\ See letter from H.C. Starck GmbH (Jul. 27, 2011)
(``Starck'').
\686\ See, e.g., letters from Bario-Neal, Brilliant Earth,
Earthworks, Metalsmiths, Hacker Jewelers, and TakeBack.
\687\ See letters from ITRI I, JGI, and Solutions.
\688\ See letter from ArcelorMittal.
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Additionally, some commentators provided recommendations
specifically for treating conflict minerals in jewelry, coins, and bars
as recycled or scrap. One such commentator stated that conflict
minerals from discarded consumer jewelry should be considered recycled
or scrap.\689\ Another commentator argued that any definition of
recycled and scrap gold should grandfather gold bars and gold coins
produced before the effective date of the final rule and exclude
sludges, slimes, flue dust, carbon fines, slag, and other by-products
from consideration as conflict minerals.\690\ Conversely, other
commentators stated that the definition of conflict minerals from
recycled or scrap sources should include only those conflict minerals
from post-consumer products and not include any jewelry unsold or not
previously owned as end-use products by consumers.\691\ Also, some of
these commentators indicated that gold coins and bars should not be
classified as recycled or scrap \692\ because, as some of these
commentators stated, they do not represent a clear consumer end-of-life
product and are less identifiable as not newly-mined gold.\693\
---------------------------------------------------------------------------
\689\ See letter from JVC et al. II.
\690\ See letter from NMA II.
\691\ See, e.g., letters from Brilliant Earth, Bario-Neal,
Earthworks, Enough Project I, Hacker Jewelers, ICAR et al. II, and
TakeBack
\692\ See, e.g., letters from Brilliant Earth, Bario-Neal,
Enough Project I, Hacker Jewelers, ICAR et al. II, and TakeBack.
\693\ See letter from Enough Project I and ICAR et al. II.
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c. Final Rule
We are revising the proposal's treatment of conflict minerals from
recycled and scrap sources in the final rule. We agree with
commentators that it is appropriate to provide alternative treatment
for such conflict minerals so that the final rule does not provide a
disincentive for using conflict minerals from recycled and scrap
sources. However, we also want to include safeguards to prevent issuers
from claiming to use conflict minerals from recycled and scrap sources
when that is not the case. We believe, as certain commentators
noted,\694\ requiring an issuer with necessary conflict minerals to
conduct an inquiry similar to the reasonable country of origin inquiry
to determine whether its minerals are from
[[Page 56332]]
recycled or scrap sources is an appropriate way to balance these
concerns.\695\ Under the final rule, if an issuer has reason to
believe, as a result of its reasonable country of origin inquiry, that
its conflict minerals may not have been from recycled or scrap sources,
it must exercise due diligence. The issuer would then be required to
provide a Conflict Minerals Report if it is unable to determine that
the conflict minerals came from recycled or scrap sources.
---------------------------------------------------------------------------
\694\ See, e.g., letters from AdvaMed I, AdvaMed II, AngloGold,
Global Tungsten II, Industry Group Coalition I, ITIC I, ITRI I, ITRI
IV, JVC et al. II, LBMA I, Metalor, NMA I, RJC I, Chamber III, and
WGC II.
\695\ Because we envision these inquiries to be similar, we use
the term ``reasonable country of origin inquiry'' to refer to an
issuer's inquiry into both the conflict minerals' country of origin
and whether the minerals are from recycled or scrap sources.
---------------------------------------------------------------------------
We believe this approach for any issuer with conflict minerals from
recycled or scrap sources is consistent with the Conflict Minerals
Statutory Provision. The provision was intended to affect the
``exploitation and trade of conflict minerals originating in the
Democratic Republic of the Congo [that] is helping to finance conflict
characterized by extreme levels of violence in the eastern Democratic
Republic of the Congo.'' \696\ As noted by some commentators, however,
armed groups in the Covered Countries are financed and benefit from the
extraction and illegal taxation of newly mined conflict minerals and
their transport, not the use of recycled or scrap conflict
minerals.\697\ No further revenue or other benefit will be provided to
the armed groups from any transaction involving the conflict minerals
from recycled or scrap sources because the armed groups ``have already
extracted their revenue and do not stand to gain with [their] use or
sale.'' \698\
---------------------------------------------------------------------------
\696\ See Section 1502(a) of the Act.
\697\ See letters from AAEI and Global Tungsten I.
\698\ See letter from AAEI. See also OECD, OECD Due Diligence
Guidance for Responsible Supply Chains of Minerals from Conflict-
Affected and High-Risk Areas, 7 n.2 (2011), available at http://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf (stating that
metals ``reasonably assumed to be recycled are excluded from the
scope of this'' guidance) and OECD, Due Diligence Guidance for
Responsible Supply Chains of Minerals from Conflict-Affected and
High-Risk Areas: Supplement on Gold, 28 n.34 (2012), available at
http://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf (stating that ``[r]ecycled
material is not itself a concern for contributing to conflict,
however, recycled material is a potential means of laundering gold
that has been mined in conflict-affected and high-risk areas in
order to hide its origin'').
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In this regard, we believe it is appropriate, as proposed, to allow
an issuer, if it wishes, to describe its products containing conflict
minerals from recycled or scrap sources as ``DRC conflict free.'' As
one commentator explained, the ``intent of the statute is to provide
investors with information about whether minerals used in manufacturing
processes may contribute to the ongoing conflict in the DRC,'' \699\
and it is ``comfortable that legitimate recycled post-consumer or scrap
minerals do not contribute to the crisis and can be therefore
identified as `DRC conflict free.' '' \700\ We are aware that the
underlying conflict minerals that were recycled or from scrap sources
may have once directly or indirectly financed or benefited armed groups
in the Covered Countries. However, because the purpose of the provision
is to provide information about whether minerals used in manufacturing
directly or indirectly financed or benefited armed groups in the
Covered Countries, and conflict minerals from recycled or scrap sources
no longer do so, we believe it is appropriate to deem all products with
conflict minerals from recycled or scrap source as ``DRC conflict
free.'' \701\ This prevents the final rule from providing a
disincentive to use conflict minerals from recycled or scrap sources.
---------------------------------------------------------------------------
\699\ See letter from TIAA-CREF.
\700\ See id.
\701\ We also note that, going forward, newly mined minerals,
even if they are eventually recycled, will be covered under the
final rule when they are first used.
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i. Definition of ``Recycled and Scrap Sources''
We are revising the proposed rules to adopt a definition of
conflict minerals from recycled or scrap sources, which mirrors the
OECD definition of recycled metals.\702\ We are persuaded by
commentators that argued that it is important for us to prescribe clear
definitions regarding conflict minerals from recycled or scrap sources
so that an issuer does not use this alternative reporting scheme as a
means to avoid the requirement to exercise due diligence on the source
and chain of custody of its conflict minerals in order to describe its
products as ``DRC conflict free.'' \703\ Also, we agree with one of
these commentators that the definition should be included in the body
of the final rule and not just included as guidance in the
release.\704\
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\702\ See OECD, Due Diligence Guidance for Responsible Supply
Chains of Minerals from Conflict-Affected and High-Risk Areas, 12
n.2 (2011), available at http://www.oecd.org/dataoecd/62/30/46740847.pdf. (``Recycled metals are reclaimed end-user or post-
consumer products, or scrap processed metals created during product
manufacturing. Recycled metal includes excess, obsolete, defective,
and scrap metal materials which contain refined or processed metals
that are appropriate to recycle in the production of tin, tantalum,
tungsten and/or gold. Minerals partially processed, unprocessed or a
bi-product from another ore are not recycled metals.'').
\703\ See, e.g., letters from Global Witness I, MSG I, and SIF
I.
\704\ See letter from Global Witness I.
---------------------------------------------------------------------------
Further, we are persuaded by commentators that we should use the
OECD definition to provide certainty and prevent an issuer from using
an alternative definition that would allow the issuer to classify it
minerals as recycled or scrap when they were not.\705\ Therefore, the
final rule states that conflict minerals are considered to be from
recycled or scrap sources if they are from recycled metals, which are
reclaimed end-user or post-consumer products, or scrap processed metals
created during product manufacturing. Also, based on the OECD
definition, the final rule states that recycled metal includes excess,
obsolete, defective, and scrap metal materials that contain refined or
processed metals that are appropriate to recycle in the production of
tin, tantalum, tungsten and/or gold. The final rule states further,
however, that minerals partially processed, unprocessed, or a byproduct
from another ore will not be included in the definition of recycled
metal.
---------------------------------------------------------------------------
\705\ See, e.g., letters from Global Witness I, MSG I, and SIF
I.
---------------------------------------------------------------------------
The definition included in the final rule should alleviate certain
commentators' concern that the Proposing Release would limit the
definition of conflict minerals from recycled or scrap sources to only
end-user or post-consumer scrap and not include scrap processed metals
created during product manufacturing.\706\ The final rule's definition,
which is consistent with the OECD definition, includes scrap processed
metals created during product manufacturing.
---------------------------------------------------------------------------
\706\ See letters from Copper & Brass and SSINA.
---------------------------------------------------------------------------
ii. Due Diligence for Conflict Minerals That May Not Be From ``Recycled
and Scrap Sources''
In a change from the proposal, the final rule only requires an
issuer with conflict minerals from recycled or scrap sources to
exercise due diligence if it has reason to believe, following its
reasonable country of origin inquiry, that its conflict minerals that
it thought were from recycled or scrap sources may not be from such
sources. If so, as is true for issuers with conflict minerals from
newly mined sources, the issuer must exercise due diligence that
conforms to a nationally or internationally recognized due diligence
framework, if such a framework is available. The proposed rules would
have required issuers with conflict minerals from recycled or scrap
sources to exercise due diligence in determining
[[Page 56333]]
that their conflict minerals were from recycled or scrap sources
without requiring adherence to any due diligence framework. Presently,
it appears that the OECD's supplement for gold is the only nationally
or internationally recognized due diligence framework for any conflict
mineral from recycled or scrap sources. Therefore, we anticipate that
issuers would use the gold supplement to conduct their due diligence
for gold that issuer has reason to believe may not come from recycled
or scrap sources.
However, neither the OECD nor any other body has a similar due
diligence framework for cassiterite, columbite-tantalite, or
wolframite. Therefore, until such a framework is developed, the
required due diligence for issuers who may have those recycled or scrap
conflict minerals is the same as proposed. Those issuers are required
to exercise due diligence in determining that their conflict minerals
were from recycled or scrap sources without the benefit of a due
diligence framework. If, however, a nationally or internationally
recognized due diligence framework becomes available for any of the
remaining conflict minerals, issuers will be required to utilize that
framework for that mineral. Specifically, if due diligence guidance for
a particular conflict mineral under a nationally or internationally
recognized due diligence framework becomes available prior to June 30
of a calendar year, the first reporting period in which issuers must
use the framework for that conflict mineral will be the subsequent
calendar year. However, if the due diligence guidance is not approved
until after June 30 of a calendar year, issuers are not required to use
that framework for that conflict mineral until the second calendar year
after approval to provide a full year before implementation.
For example, if the OECD or another body adopts a nationally or
internationally recognized due diligence framework for cassiterite,
columbite-tantalite, or wolframite from recycled or scrap sources prior
to June 30, 2013, the initial reporting period in which issuers with
those conflict minerals from recycled or scrap sources must use the due
diligence framework will begin on January 1, 2014 and their specialized
disclosure reports that discuss their exercise of such due diligence
will be due on May 31, 2015. If, however, the OECD or another body
adopts such a due diligence framework on or after July 1, 2013, but
before June 30, 2014, the initial reporting period for issuers with
those conflict minerals to use the framework will begin on January 1,
2015 and their specialized disclosure reports with respect to those
minerals will be due on May 31, 2016. Issuers with gold from recycled
or scrap sources, however, are required to submit a specialized
disclosure report for that mineral using the OECD's due diligence for
recycled or scrap gold for the reporting period beginning January 1,
2013, which will be due on May 31, 2014.
Further, consistent with the proposal, because our final rule
considers products with conflict minerals from recycled or scrap
sources to be ``DRC conflict free,'' the final rule does not require a
discussion of processing facilities, countries of origin, or efforts to
determine the mine or location of origin with the greatest possible
specificity. Therefore, we believe that our approach is consistent with
comments that indicated that the final rule should not require an
issuer with conflict minerals from recycled or scrap sources to provide
a Conflict Minerals Report, but should require such issuers to
``disclose how they have determined that sources are genuine scrap
recycled.'' \707\ Without this disclosure, such issuers ``might
otherwise be encouraged to `launder' new DRC conflict minerals through
their operations--misleading consumers and other stakeholders, and
undermining the value of the disclosure exercise.'' \708\
---------------------------------------------------------------------------
\707\ See letter from NEI.
\708\ See id. (recommending also that ``[i]ssuers should use due
diligence in determining whether conflict minerals are from scrap/
recycled sources'').
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F. Other Matters
If any provision of this rule, or the application thereof to any
person or circumstance, is held to be invalid, such invalidity shall
not affect other provisions or application of such provisions to other
persons or circumstances that can be given effect without the invalid
provision or application. Moreover, if any portion of Form SD not
related to conflict minerals disclosure is held to be invalid, such
invalidity shall not affect the use of the form for purposes of
disclosure pursuant to Exchange Act Section 13(p).
III. Economic Analysis
A. Introduction
As discussed in greater detail above,\709\ Section 1502 amended the
Exchange Act by adding new Section 13(p), which requires us to
promulgate disclosure and reporting regulations regarding the use of
conflict minerals from the Covered Countries. Section 13(p) mandates
that the Commission promulgate regulations requiring that a person
described disclose annually whether any conflict minerals that are
necessary to the functionality or production of a product manufactured
by such person originated in the Covered Countries, and make that
disclosure publicly available on the issuer's Internet Web site. If a
person concludes that the person's conflict minerals originated in the
Covered Countries, that person must submit a Conflict Minerals Report,
which must be posted on the person's Internet Web site, that includes a
description of the measures taken by the person to exercise due
diligence on the minerals' source and chain of custody, which must
include an independent private sector audit of the Conflict Minerals
Report that is conducted according to standards established by the GAO.
The person submitting the Conflict Minerals Report must also identify
the independent private sector auditor and certify the independent
private sector audit. Further, 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.
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\709\ We are incorporating Sections I and II of this release,
which fully describe the statutory requirements of Section 1502 of
the Act and the final rule in detail, into Section III of the
release and providing only a short summary of the statutory
requirements and final rule in this section.
---------------------------------------------------------------------------
We are adopting amendments to our rules to implement the Conflict
Minerals Statutory Provision. The final rule requires any reporting
issuer for which conflict minerals are necessary to the functionality
or production of a product manufactured or contracted to be
manufactured by that issuer to disclose annually in a separate
specialized disclosure report on a new form the results of its
reasonable inquiry into whether its conflict minerals originated in the
Covered Countries or came from recycled or scrap sources. Under the
final rule, following its reasonable country of origin inquiry, if (a)
The issuer knows that its conflict minerals did not originate in the
Covered Countries or knows that they came from recycled or scrap
sources, or (b) the issuer has no reason to believe its conflict
minerals may have originated in the Covered Countries, or (c) the
issuer reasonably believes its conflict minerals came from recycled or
scrap sources, then in all such cases the issuer must, in the body of
Form SD, disclose its determination and describe briefly the reasonable
country of origin
[[Page 56334]]
inquiry it undertook and the results of the inquiry. On the other hand,
following its reasonable country of origin inquiry, if (a) the issuer
knows that its conflict minerals originated in the Covered Countries
and knows that they did not come from recycled or scrap sources, or the
issuer has reason to believe that its conflict minerals may have
originated in the Covered Countries, and (b) the issuer knows that its
conflict minerals did not come from recycled or scrap sources or has
reason to believe that its conflict minerals may not have come from
recycled or scrap sources, then the issuer must exercise due diligence
on the source and chain of custody of its conflict minerals that
conforms to a nationally or internationally recognized due diligence
framework, if one is available. Following that due diligence, unless
the issuer determines, based on that due diligence, that its conflict
minerals did not originate in the Covered Countries or that its
conflict minerals did come from recycled or scrap sources, the issuer
must file a Conflict Minerals Report.
In most circumstances, the issuer must obtain an independent
private sector audit of its Conflict Minerals Report. The issuer must
also describe in its Conflict Minerals Report, among other information,
its products manufactured or contracted to be manufactured that have
not been found to be ``DRC conflict free.'' For a temporary two-year
period for all issuers, and for a temporary four-year period for
smaller reporting issuers, an issuer that must perform due diligence
and is unable to determine that the conflict minerals in its products
originated in the Covered Countries or came from recycled or scrap
sources, or unable to determine that the conflict minerals in those
products that originated in the Covered Countries financed or benefited
armed groups, may consider those products ``DRC conflict
undeterminable.'' In that case, the issuer must describe, among other
information, its products manufactured or contracted to be manufactured
that are ``DRC conflict undeterminable'' and the steps it has taken or
will take, if any, since the end of the period covered in its most
recent prior Conflict Minerals Report to mitigate the risk that its
necessary conflict minerals benefit armed groups, including any steps
to improve its due diligence. An issuer with products that are ``DRC
conflict undeterminable'' is not required to obtain an independent
private sector audit of the Conflict Minerals Report regarding the
conflict minerals in those products.
Finally, after its reasonable country of origin inquiry, an issuer
that determines that its conflict minerals it thought were from
recycled or scrap sources might instead be from newly mined sources
must exercise due diligence that conforms to a nationally or
internationally recognized due diligence framework developed
specifically for conflict minerals from recycled sources to determine
that its conflict minerals are from recycled or scrap sources. The
issuer must also describe its due diligence in its Conflict Minerals
Report. Currently, gold is the only conflict mineral with a nationally
or internationally recognized due diligence framework for recycled or
scrap conflict minerals. If no nationally or internationally recognized
due diligence framework for a particular recycled or scrap conflict
mineral is available, which is the case for the other three minerals,
until such a framework is developed, the issuer must exercise due
diligence in determining that its conflict minerals are from recycled
or scrap sources and describe the due diligence measures it exercised
in its Conflict Minerals Report.
As we considered how to implement the requirements of Section 1502,
we considered the costs and benefits imposed by the new rule and form
we are adopting, as well as their effects on efficiency, competition,
and capital formation. Many of the economic effects of the rule stem
from the statutory mandate, and the discussion below addresses the
costs and benefits resulting from both the statute and from our
exercise of discretion, and the comments we received about these
matters.
The Proposing Release cited some pre-proposal letters we received
from commentators indicating the potential impact of the proposed rules
on competition and capital formation. In addition to requesting comment
throughout the release on the proposal and on potential alternatives to
the proposal, we also solicited comment in the Proposing Release on
whether the proposal, if adopted, would promote efficiency,
competition, or capital formation, or have an impact or burden on
competition. We also requested comment on the potential effect on
efficiency, competition, or capital formation should we not adopt
certain exceptions or accommodations. As discussed throughout this
release, we received many comments addressing the potential economic
and competitive impact of the proposed rules.
We note, however, that one commentator recommended that the
proposed rules be withdrawn because the commentator did not believe we
fully analyzed the potential costs, supply chain complexities, and
other practical obstacles to implementing the final rule.\710\ We
disagree. As discussed above, members of the public interested in
making their views known were invited to submit comment letters in
advance of the official comment period for the proposed rules. In
addition, in response to the suggestion by some commentators that we
extend the comment period to allow the public additional time to
thoroughly consider the matters addressed in the Proposing Release and
to submit comprehensive responses, we extended the comment period for
an additional 30 days and have continued to receive comment letters
through August 2012, which we have considered. In addition, we convened
an October 2011 roundtable at the request of commentators. Some
commentators have provided responses to other commentators,
particularly on the Economic Analysis. This robust, public, and
interactive debate has allowed us to more fully consider how to develop
our final rules. Additionally, as discussed further in the Economic
Analysis section, below, we have considered and analyzed the numerous
comments received regarding the costs and complexities of the statute
and proposed rule, and have taken them into account in the final rule.
Overall, we believe interested parties have had sufficient opportunity
to review the proposed rules, as well as the comment letters, and to
provide views on the proposals and on the other comment letters and
data to inform our consideration of the final rules. Accordingly, we do
not believe that withdrawal of the proposed rule and re-proposal is
necessary.
---------------------------------------------------------------------------
\710\ See letter from Chamber I.
---------------------------------------------------------------------------
After analyzing the comments and taking into account additional
data and information, we believe it is likely that the initial cost of
compliance is approximately $3 billion to $4 billion, while the annual
cost of ongoing compliance will be between $207 million and $609
million. As discussed in detail below, we reach this estimate by taking
into account the many comments we received on potential costs, relying
particularly on those comment letters that provided quantification and
were transparent about their methodologies. As will be discussed in
more detail below, after thoroughly considering each comment letter, we
determined that it was
[[Page 56335]]
appropriate to modify and/or expand upon some of the submitted
estimates and methodologies to reflect data and information submitted
by other commentators, as well as our own judgment and experience. Our
considered estimate of the total costs thus reflects these synthesized
data and analyses. We consider the full range of these costs in the
following sections, although where it is possible to discuss separately
the costs and benefits related to our discretionary choices in the
rule, we attempt to do so.\711\
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\711\ As discussed above, our discretionary choices are informed
by the statutory mandate and thus, discussion of the benefits and
costs of those choices will necessarily involve the benefits and
costs of the underlying statute.
---------------------------------------------------------------------------
Exchange Act Section 23(a)(2) \712\ also requires us, when adopting
rules under the Exchange Act, to consider the impact that any new rule
would have on competition, and Exchange Act Section 23(a)(2) prohibits
us from adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. In addition, Exchange Act Section 3(f) \713\ requires us, when
engaging in rulemaking where we are required to consider or determine
whether an action is necessary or appropriate in the public interest,
to also consider whether the action will promote efficiency,
competition, and capital formation. Accordingly, as we considered how
to implement the requirements of Section 1502, we considered the impact
on the economy, burden on competition, and promotion of efficiency,
competition, and capital formation.
---------------------------------------------------------------------------
\712\ 15 U.S.C. 78w(a)(2).
\713\ 15 U.S.C. 78c(f).
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Given the specific language of the statute and our understanding of
Congress's objectives, we believe it is appropriate for the final rule
generally to track the statutory provision. Our discretionary authority
to implement Section 13(p) is limited, and we are committed to
executing the Congressional mandate. Throughout this release, and in
the following Economic Analysis, we discuss the benefits and costs
arising from the new mandatory reporting requirement, those choices in
which we have exercised our discretion, and the comments we received
about these matters. Sections III.B and III.C below provide a narrative
discussion of the costs and benefits resulting from the mandatory
reporting requirement and our exercise of discretion, respectively. In
Section III.D below, based on commentators' estimates and our
estimates, we provide a quantitative discussion of the costs associated
with the final rule as adopted.\714\
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\714\ As noted below, Congress's goals of reducing violence and
promoting peace and security in the Covered Countries, as well as
enhanced transparency through Section 13(p) and this rulemaking is
intended to result in benefits that cannot be readily quantified
with any precision, and therefore, our quantitative analysis focuses
on the costs.
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B. Benefits and Costs Resulting From the Mandatory Reporting
Requirement
1. Benefits
Congress intended for the rule issued pursuant to Section 1502 to
decrease the conflict and violence in the DRC, particularly sexual- and
gender-based violence.\715\ We note also that the Congressional object
is to promote peace and security in the Covered Countries.\716\ As a
means to address the humanitarian situation in the DRC, new Section
13(p) requires issuers to understand and report on their use and source
of certain minerals from the Covered Countries. By mandating the
additional disclosure requirements of Exchange Act Section 13(p), we
understand that Congress likely sought to reduce the amount of money
provided to armed groups engaged in conflict in the DRC,\717\ thereby
achieving the stated objective of the statute.\718\ Some commentators
have argued that the Conflict Minerals Statutory Provision has already
made progress in this area.\719\ For example, some commentators have
argued that the Conflict Minerals Statutory Provision has already
pressured DRC authorities to begin to demilitarize some mining areas
and to increase mining oversight.\720\ Congress provided that the
disclosure requirements of Exchange Act Section 13(p) shall remain in
effect until the President determines and certifies that ``no armed
groups continue to be directly involved in and benefitting from
commercial activity involving conflict minerals.'' \721\
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\715\ Section 1502(a) of the Act (``It is the sense of the
Congress that the exploitation and trade of conflict minerals
originating in the Democratic Republic of the Congo is helping to
finance conflict characterized by extreme levels of violence in the
eastern Democratic Republic of the Congo, particularly sexual- and
gender-based violence, and contributing to an emergency humanitarian
situation therein, warranting the provisions of section 13(p) of the
Securities Exchange Act of 1934, as added by subsection (b).'').
\716\ See Exchange Act Section 1502(c)(1)(B)(i) (stating that
the Secretary of State, in consultation with the Administrator of
the United States Agency for International Development, shall submit
to Congress a plan to ``promote peace and security'' in the Covered
Countries). See also Section 1502(d)(2)(A) of the Act (directing the
GAO to assess the effectiveness of Exchange Act Section 13(p) in
promoting peace and security in the Covered Countries).
\717\ Cf. Exchange Act Section 1502(c)(1) requiring the
Secretary of State in consultation with the Administrator of the
United States Agency for International Development to submit a
report to Congress discussing a strategy to address the linkages
between human rights abuses, armed groups, mining of conflict
minerals, and commercial products that includes a plan to promote
peace, a plan to provide guidance to commercial entities seeking to
exercise due diligence, and a description of possible punitive
measures.
\718\ As discussed above, some commentators, including co-
sponsors of the legislation and other members of Congress, indicated
that the Conflict Minerals Statutory Provision also materially
informs an investor's understanding of the risks in an issuer's
reputation and supply chain. See, e.g., letters from CRS I, FRS,
Global Witness I, Methodist Pension, Sen. Durbin/Rep. McDermott,
Sen. Leahy et al., SIF I, and SIF II.
\719\ See, e.g., letters from International Corporate
Accountability Roundtable (Jul. 29, 2011) (``ICAR I''), Sen. Boxer
et al. I, Sen. Leahy et al., and United Nations Group of Experts on
the Democratic Republic of Congo (Oct. 21, 2011) (``UN Group of
Experts''). Other commentators, however, have argued that the
Conflict Minerals Statutory Provision has hurt the general economy
and population of the DRC. See, e.g., letters from BEST II (``Though
[the Conflict Minerals Statutory Provision] seeks to provide a
mechanism for combating the corruption and violence crippling the
DRC, its impact on the upstream mining industry has been devastating
to the mining communities and the broader economy of Eastern
DRC.''), CEI II (``There are already indications that Dodd-Frank has
had damaging consequences for the artisanal miners. In a recently
published New York Times op-ed, freelance reporter David Aronson
observed that the law is harming the very people it is aimed at
protecting, and that the sole beneficiaries are those perpetrating
the violence.''), and FEC II (stating that, ``we can confirm today
that as expected there is more smuggling activities, very big
decrease in revenue of the Government of DRC, huge impact on the
live hoods of thousands of Congolese, there is no more formal
business in the Kivus due to this interpretation of consumers which
is far more than the requirements of the law and does not give
chance for the improvements that had already begun to work'').
\720\ See, e.g., Sen. Boxer et al. I, Sen. Leahy et al., and
United Nations Group of Experts on the Democratic Republic of Congo
(Oct. 21, 2011) (``UN Group of Experts''). Other commentators,
however, have argued that the Conflict Minerals Statutory Provision
has hurt the general economy and population of the DRC. See, e.g.,
letters from BEST II, CEI II, and FEC II.
\721\ Exchange Act Section 13(p)(4).
---------------------------------------------------------------------------
The statute therefore aims to achieve compelling social benefits,
which we are unable to readily quantify with any precision, both
because we do not have the data to quantify the benefits and because we
are not able to assess how effective Section 1502 will be in achieving
those benefits. Additionally, the social benefits are quite different
from the economic or investor protection benefits that our rules
ordinarily strive to achieve.
We also note that these objectives of Section 1502 do not appear to
be those that will necessarily generate measurable, direct economic
benefits to investors or issuers. Some commentators urged, however,
that conflict minerals information is material
[[Page 56336]]
to an investment decision and, therefore, similar to other disclosures
required to be filed by issuers.\722\ For example, one commentator
noted that, ``[a]s a sustainable and responsible investor,'' this
commentator ``values companies' prudent management of risk in their
global supply chains and has been particularly concerned in recent
years by the use of certain minerals to fund the continuing bloody
conflict in the'' DRC.\723\ As another example, a different commentator
stated that, ``[a]s sustainable and responsible investors, we carefully
assess the prudent management of risk in companies' global supply
chains and we have been particularly concerned in recent years by the
use of certain minerals, namely tin, tantalum, tungsten and gold, to
fund the continuing bloody conflict in the'' DRC.\724\
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\722\ See letters from Calvert, Global Witness I, Sen. Durbin/
Rep. McDermott Sen. Leahy et al., SIF I, SIF II, and TIAA-CREFF. But
see letters from AngloGold, Barrick Gold, Cleary Gottlieb, Corporate
Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM III, NMA
II, NY State Bar, Taiwan Semi, and WGC II.
\723\ See letter from Calvert.
\724\ See letter from SIF II.
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2. Cost Estimates in the Comment Letters
In the Proposing Release, we included our estimates of the costs of
the disclosure requirements.\725\ A number of commentators indicated
that we underestimated the costs.\726\ One commentator, however,
asserted that Economic Analysis was both ``thorough and accurate.''
\727\ In this regard, another commentator stated that the cost
estimates in comment letters from industry ``seem[ed] significantly
inflated.'' \728\ Some commentators discussed the costs in a more
specific manner. In the Specific Comments section below, we discuss the
comments we consider to be the most useful regarding the costs of the
disclosure requirements. In both the general and specific comments,
commentators did not typically distinguish between the costs and
benefits of the statutory mandate and the costs and benefits of the
specific aspects of the rule for which we exercised discretion. The
overall specific cost range provided by commentators, as discussed in
greater detail below, was between $387,650,000 \729\ and $16
billion.\730\ In analyzing the comments, we believe it is more likely
that the initial cost of complying with the statutory requirement is
approximately $3 billion to $4 billion. We explain why as we consider
and describe the full range of these costs below, although where it is
possible to discuss separately the costs and benefits related to our
discretionary choices in the rule, we attempt to do so.
---------------------------------------------------------------------------
\725\ In the Proposing Release, we estimated solely for the
purposes of the Paperwork Reduction Act the total annual increase in
the paperwork burden for all affected companies to comply with our
proposed collection of information requirements to be approximately
153,864 hours of company personnel time and to be approximately
$71,243,000 for the services of outside professionals. Also, we
estimated that the PRA burden for the audit and due diligence
requirements to the industry would be approximately $46,475,000.
These cost estimates were calculated based on the effect that the
proposed rules and form amendments, if adopted, would have on those
collections of information as a result of the required due diligence
process and independent private sector audit of the Conflict
Minerals Report.
\726\ See, e.g., letters from Barrick Gold, CEI II, Chamber I,
Ford, Howland, IPC I, ITRI I, ITRI II, NAM I, NRF I, PCP, Rep. Lee,
RILA, TriQuint I, Tulane University Payson Center for International
Development (Oct. 25, 2011) (``Tulane''), and WGC II.
\727\ See letter from ICAR et al. I.
\728\ See letter from Enough Project IV.
\729\ See letter from Claigan III.
\730\ See letter from NAM I.
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a. General Comments
Most commentators stated that they fully support the humanitarian
goals of the Conflict Minerals Statutory Provision of reducing the
levels of violence in the DRC,\731\ but some commentators argued that
the Proposing Release did not adequately demonstrate any benefits to
investors.\732\ As noted above, the purpose of Section 1502 is
furthering the humanitarian goals of reducing violence and advancing
peace and security in the DRC and the benefits Congress intended are
derived directly from the statute. Other commentators, including two of
the co-sponsors of the provision and other members of Congress, have
indicated in comment letters that the provision also serves important
investor protection objectives, such as additional disclosure on a
company's supply chain,\733\ although the legislative history and
statutory language do not generally reference investor protection.
Therefore, we have designed a final rule to help achieve the intended
humanitarian benefits in the way that Congress directed, even though we
recognize that the final rule will impose significant compliance costs
on companies who use or supply conflict minerals. Although, as one
commentator noted, it would be difficult to determine a realistic cost
approximation,\734\ most of these commentators believed that compliance
costs would be high.
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\731\ See, e.g., letters from ABA, Chamber I, Industry Group
Coalition I, NAM I, and WGC II.
\732\ See, e.g., letters from Chamber I and PCP. These
commentators stated also that the Proposing Release did not
demonstrate adequately the proposed rules' efficiencies for the
market place or any promotion of capital formation, as discussed
below.
\733\ See, e.g., letter from Senator Leahy et al. (``[I]t seems
abundantly clear that when a publicly traded company relies on an
unstable black market for inputs essential to manufacturing its
products it is of deep material interest to investors.'').
\734\ See letter from Howland.
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b. Specific Comments
Four commentators in particular attempted to catalogue the expense
of complying with the new reporting requirements. The commentators
generally focused on three categories of costs as the most significant:
Due diligence for both suppliers and issuers, information technology
(``IT'') costs, and audit costs. Although there is a general consensus
among these four commentators as to the broadest categories of
significant costs, in several cases they provided divergent cost
estimates as well as supplying differing levels of detail as to how
they developed these estimates. The following section is intended to
lay out the cost estimates as submitted by the commentators.
i. Manufacturing Industry Association Comments
In its comment letter, a manufacturing industry association \735\
stated that, based on its research, of the 5,994 issuers that the
Proposing Release stated could be affected by the final rule, the
average issuer would have between 2,000 and 10,000 first-tier
suppliers, which would result in the total initial costs to issuers of
complying with the final rule being anywhere from approximately $8
billion to $16 billion.\736\
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\735\ See letter from NAM I. The manufacturing industry
association indicated that, in developing its cost estimates, it
consulted with its manufacturing members and relied on research by
The Global Research Center for Strategic Supply Management at the
W.P. Carey School of Business at Arizona State University.
\736\ But see letter from the Fafo Institute for Applied
International Studies (Oct. 17, 2011) (``Fafo''). This commentator
asserted that the manufacturing industry association's cost estimate
was too high because of some incorrect assumptions regarding an
issuer's costs of changing legal obligations, obtaining an
independent private sector audit, monitoring of the supply chain,
administering procurement and contracts, implementing remediation
recommendations, conducting internal audits of its due diligence
system, and reporting to the Commission.
---------------------------------------------------------------------------
The industry association noted that ``a large portion of America's
278 thousand small and medium-sized manufacturers could be affected by
the requirement to provide information on the origin of the minerals in
the parts and components they supply to companies subject to the SEC.''
It estimated, however, that ``only one in five smaller companies would
be in one or more issuer's supply
[[Page 56337]]
chains,'' \737\ and these smaller companies' only costs regarding the
proposed rules would be a $25,000 audit cost. Therefore, the proposed
rules would cost smaller companies, which are not required to report
with us under Exchange Act Sections 13(a) or 15(d), approximately $1.4
billion.\738\
---------------------------------------------------------------------------
\737\ 278,000 x .20 = 55,600.
\738\ 278,000 x .20 x $25,000 = $1,390,000,000.
---------------------------------------------------------------------------
Further, the commentator remarked that our $25,000 estimate \739\
of the cost of the independent private sector audit ``would only cover
the initiation of an audit for a small company with a simple supply
chain,'' and argued that, at a minimum, an independent private sector
audit of a company with a more complex supply chain would cost at least
$100,000.\740\ Additionally, the manufacturing industry association
``conservatively estimate[d]'' that approximately 75% of the issuers
that would be required to provide conflict minerals information also
would be required to provide a Conflict Minerals Report and an audit
rather than the 20% that we estimated in the Proposing Release, which
would equate to approximately 4,500 issuers out of the 5,994 issuers we
estimated would be affect by the final rule.\741\ Taking into
consideration the higher estimated number of affected issuers, the
industry association estimated that the total cost to all affected
issuers to obtain an independent private sector audit of their Conflict
Minerals Report would be $450 million.
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\739\ As discussed in the Proposing Release, we indicated that
each independent private sector audit of the Conflict Minerals
Report would cost approximately $25,000 on average based on the
preliminarily estimates of one industry group.
\740\ See letter from NAM I.
\741\ See id. The manufacturing industry association commentator
estimated that 75% of affected issuers would be required to submit a
Conflict Minerals Report because, according to the commentator, the
majority of issuers would not be able to determine the origin of
their conflict minerals.
---------------------------------------------------------------------------
In addition, the commentator estimated that, to implement their new
due diligence policies, it would cost $1.2 billion for the 5,994
affected issuers to change their legal obligations with each issuer's
estimated 2,000 first-tier suppliers, and an additional $300 million
for issuers to implement risk-based programs that use control processes
to verify that suppliers are providing them with credible information
and pushing legal obligations upstream. Also, the commentator estimated
that affected issuers would need to expend a collective total of $6
billion to develop new information technology systems to collect
information on each issuer's first-tier suppliers.\742\ Therefore, the
sum of the costs to affected issuers would total approximately $8
billion. Below is a summary of the manufacturing industry association's
cost estimates in tabular form:
---------------------------------------------------------------------------
\742\ See letter from NAM I.
\743\ The manufacturing industry association commentator refers
to this as ``changes to corporate compliance policies.''
\744\ The manufacturing industry association commentator refers
to this as IT system development or revision.
\745\ We are using the rounded estimate (4,500) that was used by
the university group and manufacturing industry association
commentators in their calculations even though a more exact number
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note
869.
\746\ The manufacturing industry association commentator refers
to this as the cost of ``provid[ing] proper information regarding
the source of minerals.''
\747\ Supplier compliance cost in the manufacturing industry
association commentator's proposal is considered an audit cost and
is not limited to smaller suppliers that are issuers.
----------------------------------------------------------------------------------------------------------------
Calculation
----------------------------------------------------------------------------------------------------------------
Manufacturing Industry Association Commentator Estimate
Issuers affected..................................... 5,994
Average Number of 1st tier suppliers................. 2,000
Issuer Due Diligence Reform \743\
Number of compliance hours per issuer................ 2
Cost per hour........................................ $50
------------------------------------------------------
Total compliance cost............................ $1,198,800,000 5,994*2000*2*$50
------------------------------------------------------
IT Systems Modification \744\
Cost per issuer...................................... $1,000,000
------------------------------------------------------
Total cost....................................... $5,994,000,000 5,994*$1,000,000
------------------------------------------------------
Conflict Minerals Report Audits
Issuers affected \745\............................... 4,500 5,994*75%
Audit cost........................................... $100,000
------------------------------------------------------
Total cost....................................... $450,000,000 4,500*100,000
------------------------------------------------------
Issuer Verification of Supplier Information
Number of hours...................................... 0.5
Cost per hour........................................ $50
------------------------------------------------------
Total cost....................................... $299,700,000 5,994*2000*0.5*$50
------------------------------------------------------
Smaller Supplier Due Diligence \746\
Suppliers affected (only 20% to conduct) \747\....... 55,600 278,000 * .2
Due diligence cost................................... $25,000
------------------------------------------------------
Total cost....................................... $1,390,000,000 278,000*.2*$25,000
------------------------------------------------------
Total........................................ $9,332,500,000
------------------------------------------------------
Total for affected issuers................... $7,942,500,000 $9,332,500,000 - $1,390,000,000
----------------------------------------------------------------------------------------------------------------
[[Page 56338]]
Additionally, this commentator calculated that the costs of the
final rule could be ``as high as $16 billion'' by ``extrapolating from
the recent experience of company costs in complying with the European
Union's hazardous waste directive (``RoHS''), and estimated on that
basis the economic impact of the SEC's proposed regulations.'' \748\ In
fact, this commentator postulated that ``Section 1502 may be broader in
scope because'' it ``covers more products and sectors than RoHS,'' it
``discriminates against origin,'' and it ``does not include a de
minimis or weight-based exception.'' \749\ The commentator stated that,
according to Technology Forecasters, Inc., the RoHS directive cost the
electronics industry $2,640,000 per company to achieve initial RoHS
compliance and another $482,000 annually to maintain compliance.
Therefore, based on these per company figures, the commentator
calculated that initial compliance of all 5,994 issuers would be
approximately $16 billion.
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\748\ See letter from NAM I. This commentator estimated that
each issuer affected by RoHS had an initial compliance cost of
$2,640,000. For the 5,994 issuers that we estimate may be affected
by the final rule, the estimated total cost to comply with RoHS
would be $15,824,160,000 ($2,640,000 x 5,994 = $15,824,160,000).
\749\ See id.
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ii. Electronic Interconnect Industry Association Comments
Another commentator, an electronic interconnect industry
association,\750\ estimated that the electronic interconnection
industry suppliers would incur compliance costs of approximately $279
million in the first year and approximately $165 million in ongoing
annual costs.\751\ Additionally, this commentator stated that there
could be additional hidden costs for companies that varied widely from
no additional costs to more than $2 million in such costs.\752\ This
commentator did not provide an estimate of the costs to all potentially
affected issuers, but focused on the electronic interconnect industry.
---------------------------------------------------------------------------
\750\ See letter from IPC I.
\751\ See id. The letter includes an Appendix A, which consists
of a published survey produced by Market Research Service of the
electronic interconnect industry association commentator entitled,
``Results of an IPC Survey on the Impact of U.S. Conflict Minerals
Reporting Requirements'' (Feb. 2011) (``electronic interconnect
industry group survey''). Much of the information cited from this
commentator is located in the published survey. For the survey, the
commentator surveyed 3,839 of its members in the electronic
interconnection industry with a total of 60 separate companies
actually participating in the survey. Of these 60 companies, 30%
were public issuers while the remaining 70% were private companies.
Despite acknowledging that the survey was not intended ``to produce
statistical significant data,'' the commentator argued that the
survey respondents do ``make up a representative sample of the U.S.
electronic interconnect supply chain.'' See id.
\752\ See id.
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The electronic interconnect industry association also argued that
more than 20% of the 5,994 affected issuers would have to provide an
independent private sector audit.\753\ The commentator noted that,
although the Covered Countries may, at most, supply 20% of the world's
supply of conflict minerals, this 20% could be distributed to 100% of
the issuers. Therefore, all issuers could be required to file a
Conflict Minerals Report and obtain an independent private sector
audit, and the electronic interconnect industry group ``expected that
nearly 100% of affected issuers will need to complete a [Conflict
Minerals Report], especially in the initial years of the regulation.''
\754\ In this regard, the commentator noted that respondents to its
survey stated that ``[s]upplier verification and auditing was a
frequently cited anticipated cost,'' and the respondents ``estimated
direct costs of [$]10,000 to [$]100,000 for the third party due
diligence audits.'' \755\ The commentator also indicated that the
average number of suppliers in the supply chain for those companies
responding to their survey was 163.
---------------------------------------------------------------------------
\753\ Id.
\754\ See id. This commentator noted as well that ``the vast
majority of users will be unable to identify the origin of their
conflict minerals * * * and therefore will need to complete'' a
Conflict Minerals Report.
\755\ See id.
---------------------------------------------------------------------------
iii. University Group Comments
Another commentator, a university group, provided its own cost
figures regarding the proposed rules in its comment letter.\756\ The
university group contended that our model underestimated the costs of
the proposed rules due to, among other reasons, our failure to consider
the costs incurred by all actors, especially first-tier private company
suppliers, that are required to modify their management systems to
provide critical information to its customers that are the issuers. In
contrast, the university group found that the manufacturing industry
group's economic model overstated the costs by overestimating the
number of suppliers and failing to account for cost efficiencies.
---------------------------------------------------------------------------
\756\ See letter from Tulane. The staff of Senator Richard J.
Durbin, one of the co-sponsors of the Conflict Minerals Statutory
Provision, contacted this commentator ``with a specific request for
help in providing a detailed estimate of what it would cost
companies to implement the Congo Conflict Mineral Act.'' Id.
---------------------------------------------------------------------------
The university group contended that all affected companies, both
issuers and private companies, would need to carry out three principal
actions to implement Section 1502. These actions consisted of
strengthening internal management systems in view of performing due
diligence, instituting necessary information technology systems, and
obtaining independent private sector audits. The university group's
model indicated that the largest driving cost factor was strengthening
companies' management systems, which would total approximately $5.17
billion for both issuers and private companies, with issuers' costs
being approximately $26 million and private companies' costs being
approximately $5.14 billion. The other costs would be borne only by
issuers. These other costs included instituting the necessary
information technology systems, which would cost approximately $2.56
billion, and obtaining an independent private sector audit, which would
cost companies approximately $207 million. Ultimately, according to the
university group, the proposed rules would cost all affected companies,
both issuers and private companies involved in the conflict minerals
supply chain, approximately $7.93 billion initially and approximately
$207 million annually thereafter.
As noted, the university group commentator estimated the due
diligence costs to both issuers and their private company suppliers.
The total initial labor costs, including both laborers and consultants,
to all 5,994 issuers would be approximately $26 million. For the costs
to private company suppliers, the university group estimated the total
number of small private company suppliers to be 148,459, and the number
of large private company suppliers to be 711,607.\757\ The total
initial labor costs, including both laborers and consultants, to all
860,066 private company suppliers would be approximately $5.14 billion.
In sum, the total initial labor costs for due diligence to both the
5,994 issuers and the 860,066 private company suppliers would be
approximately $5.17 billion.
---------------------------------------------------------------------------
\757\ The university group commentator developed these estimates
by multiplying the number of issuers by the company size factor
(large or small) and multiplying the number of relevant first tier
supplier contracts by an overlap factor of 0.40. This factor
attempts to differentiate and correct for the number of estimated
material supply contracts versus the number of unique businesses
impacted. Tulane estimated a 60% overlap factor meaning that only
40% (100% - 60% = 40%) of the supply contracts corresponded to non-
overlapping suppliers. See letter from Tulane.
---------------------------------------------------------------------------
Also, the university group disagreed with the manufacturing
industry group's estimate that the costs for modifying
[[Page 56339]]
each issuer's information technology systems would be $1 million. The
university group agreed that these costs would be borne solely by
issuers because they would be responsible for creating tracking systems
for the supplier-furnished supply chain information, and that large
issuers that use complex information technology systems to manage their
supply chains would have costs of $1 million per company. However, the
university group argued that the unit costs for small companies, based
on the data from the 2011 electronic interconnect industry association
commentator survey, would be $205,000 per company. The university group
estimated that the information technology costs for the affected small
issuers would be approximately $885 million, and the cost for the
affected large issuers would be approximately $1.68 billion. Therefore,
the total costs to the 5,994 affected issuers of changing information
technology systems would be approximately $2.56 billion.
Finally, the university group discussed the costs associated with
the independent private sector audit. The university group disagreed
with the manufacturing industry group's assertion that private company
suppliers would be required to obtain a private sector audit to
demonstrate to their issuer customers that they performed sufficient
due diligence. The university group noted that there is no requirement
that private company suppliers obtain such an audit, so the burden and
cost for a private company supplier to obtain an audit is voluntary in
the context of the proposed rules. Further, the university group noted
that the impetus for issuers to demand such audits would be reduced if
issuers are allowed to use ``reasonably reliable representations'' from
suppliers. For these reasons, the university group excluded any costs
for independent private sector audits for private company suppliers
from their cost estimates. The university group, however, agreed with
the manufacturing industry group's cost estimates and indicated that
the cost for an audit of a small issuer would be $25,000 and the cost
to a large issuer would be $100,000. Based on these assumptions, the
university group estimated that the audit costs for small issuers would
be $81 million,\758\ and those costs for large issuers would be
approximately $126 million.\759\ Therefore, the total audit cost for
all issuers would be approximately $207 million per year.\760\ Below is
a summary of the university group commentator's estimates in tabular
form:
---------------------------------------------------------------------------
\758\ 5,994 issuers x 75% of issuers requiring an audit x 72%
for number of small issuers x $25,000 per audit = $80,919,000.
\759\ 5,994 issuers x 75% of issuers requiring an audit x 28%
for number of large issuers x $100,000 per audit = $125,874,000.
\760\ $80,919,000 + $125,874,000 = $206,793,000.
------------------------------------------------------------------------
Calculation
------------------------------------------------------------------------
University Group Commentator
Estimate:
Issuers affected........ 5,994
Large issuer (28% of 1,678 5,994*0.28
issuers)...............
Small issuer (72% of 4,316 5,994*0.72
issuers)...............
Average number of 1st 1,060 2,000*0.53
tier suppliers (53% of
manufacturing industry
association
commentator)...........
Issuer Due Diligence Reform:
Number of compliance 100
hours for large issuer.
Number of compliance 40
hours for small issuer.
Internal cost per hour.. $50
Internal costs for large $7,551,000 1,678*0.9*100*$50
issuer (90% of total
work load).............
Internal costs for small $6,473,520 4,316*0.75*40*$50
issuer (75% of total
work load).............
Consulting cost per hour $200
Consulting costs for $3,356,000 1,678*0.1*100*$200
large issuer (10% of
total work load).......
Consulting costs for $8,632,000 4,316*0.25*40*$200
small issuer (25% of
total work load).......
-------------------------------------------
Total cost.......... $26,013,000
-------------------------------------------
IT Systems Modification:
Cost per large issuer... $1,000,000 .......................
Cost per small issuer... $205,000 .......................
Total large issuer cost. $1,678,000,000 1,678*$1,000,000
Total small issuer cost. $884,780,000 4,316*$205,000
-------------------------------------------
Total costs......... $2,562,780,000
-------------------------------------------
Conflict Minerals Report
Audits:
Issuers affected \761\.. 4,500
Number of large issuers. 1,260 4,500*0.72
Number of small issuers. 3,240 4,500*0.28
Large issuer cost....... $100,000 .......................
Small issuer cost....... $25,000 .......................
Total costs for large $126,000,000 1,260*$100,000
issuers................
Total costs for small $81,000,000 3,240*$25,000
issuers................
-------------------------------------------
Total costs......... $207,000,000 .......................
-------------------------------------------
Supplier Due Diligence
Reform:
Average number of 1st 1,060
tier supply contracts
per large issuer.......
Average number of 1st 86
tier supply contracts
per small issuer.......
Overlap factor (percent 0.4 .......................
of suppliers affected).
Total large suppliers... 711,472 1,678*1,060*0.4
Total small suppliers... 148,470 4,316*86*0.4
Number of compliance 100 .......................
hours for large
supplier...............
[[Page 56340]]
Number of compliance 40 .......................
hours for small
supplier...............
Internal cost per hour.. $50 .......................
Internal costs for large $3,201,624,000 711,472*100*0.9*$50
supplier (90% of total
work load).............
Internal costs for small $222,705,000 148,470*40*0.75*$50
supplier (75% of total
work load).............
Consulting cost per hour $200 .......................
Consulting costs for $1,422,944,000 711,472*100*0.1*$200
large supplier (10% of
total work load).......
Consulting costs for $296,940,000 148,470*40*0.25*$200
small supplier (25% of
total work load).......
------------------------------------------------------------------------
Total cost.......... $5,144,213,000
------------------------------------------------------------------------
Total........... $7,940,006,000
------------------------------------------------------------------------
iv. Environmental Consultancy Company Comments
An additional commentator, an environmental consultancy company,
provided cost figures regarding the proposed rules.\762\ The
environmental consultancy company asserted that the models provided by
the manufacturing industry group and the university group significantly
overestimated the costs of the proposed rules, whereas our PRA section
underestimated the paperwork costs. Specifically, the commentator
stated that the manufacturing industry association group's and the
university group's ``estimates provide cost projections that do not
reflect current industry practice in compliance programs by the vast
majority of affected issuers,'' so it ``would be inadvisable to use''
their ``data as the basis for an accurate cost estimate for
implementation of Section 1502.'' \763\
---------------------------------------------------------------------------
\761\ We are using the rounded estimate (4,500) that was used by
the university group and manufacturing industry association
commentators in their calculations even though a more exact number
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note
869.
\762\ See letter from Claigan I. In this letter, the commentator
stated that it submitted its letter because it was asked ``by
Congress and others'' to comment on the potential costs of
implementing the final rule.
\763\ See letter from Claigan Environmental Inc. (Jan. 17, 2012)
(``Claigan IV''). But see letters from IPC--Association Connecting
Electronics Industries (Feb. 14, 2012) (``IPC III'') and National
Association of Manufacturers (Feb. 10, 2012) (``NAM IV'')
(challenging certain of the assumptions made by the environmental
consultancy company in its comment letters).
---------------------------------------------------------------------------
Also, the environmental consultancy company argued that we
underestimated the costs of the proposed rules primarily because we
overestimated issuers' knowledge of the origin of materials in their
products. According to the commentator, most of the compliance costs
for the proposed rules would be derived from identifying where an
issuer's materials are sourced. Further, the commentator suggested that
our estimate of the percentage of affected issuers was too low, we did
not recognize that issuers needed to expend greater internal efforts in
communicating requirements throughout their companies, we failed to
account for the costs of issuers' software changes, and we did not
acknowledge that ``many companies'' may work to a higher standard than
the rules would require due to public sensitivity of this issue.
Conversely, the commentator asserted that the manufacturing
industry group's $8 billion and the university group's $7.93 billion
cost estimates were too high. The environmental consultancy company
argued that the manufacturing industry group's estimate regarding the
cost for issuers to modify legal responsibilities should be only $300
million, instead of the manufacturing industry group's estimated $1.2
billion.\764\ Similarly, the environmental consultancy company
maintained that the university group's $5.17 billion estimate to
strengthen internal management systems was too high because of
incorrect assumptions, and that the actual cost should be only $600
million.\765\
---------------------------------------------------------------------------
\764\ According to the environmental consultancy company, the
manufacturing industry group's assumption that every issuer would
have to amend every legal obligation with its suppliers was
incorrect because ``[a]ll standard contracts with suppliers of
public companies contain standard provisions requiring suppliers to
comply with relevant laws.'' Letter from Claigan I. As a result, it
would be unlikely that many contracts would need to be modified to
enable compliance. Also, the environmental consultancy company
asserted that the manufacturing industry group overestimated the
cost of modifying legal responsibilities because the manufacturing
industry group assumed that every supplier supplies components or
products containing conflict minerals to an issuer, which the
environmental consultancy company claimed was ``very unlikely.''
Instead, a more reasonable estimate of the numbers of suppliers
affected that would require a modification to its legal obligations
``would be closer to 50% of suppliers.'' This commentator asserted
that number, however, should be further reduced by an additional 50%
due to duplicative and overlapping relationships within and among
suppliers.
\765\ The environmental consultancy company commentator noted
that the university group commentator estimated that there were
860,066 first tier suppliers. However, a 2008 study by the Consumer
Electronics Association (``CEA'') on RoHS that identified only
90,000 total electronic suppliers. In this regard, the environmental
consultancy company noted that, although conflict minerals
disclosure is required by more than just electronics industry
issuers, ``the total number of affected first-tier suppliers being
over 100,000 seems unrealistic based on this more substantiated
information.'' Also, the environmental consultancy company noted
that, in many cases, first-tier suppliers may not be supplying
products or components containing conflict minerals, or these
products or components will represent only a small fraction of their
business.
---------------------------------------------------------------------------
Further, the environmental consultancy company suggested that the
manufacturing industry group's cost estimate regarding issuers'
information technology systems should be adjusted from $6 billion to
$350 million and that the university group's estimate should be
adjusted from $2.56 billion to $360 million.\766\ Additionally, the
environmental consultancy company asserted that the $100,000 per
company audit costs provided by both the manufacturing industry group
and the university group were too high because companies' financial
statement audits represent only 0.2 to 0.25% of a company's annual
revenue, which would mean that a $100,000 cost for a Conflict Minerals
Report audit would represent 5% of the total audit costs for a company
with a $1 billion per year revenue. Instead, the commentator argued
that it would be more accurate to assume that the Conflict Minerals
Report audit would represent 1% to 2% of the total audit costs for such
a company.\767\ Also, the environmental consultancy company contended
that only 50% of all reporting issuers would be required to provide a
Conflict Minerals Report because the ``majority of Energy sector,
finance and utilities
[[Page 56341]]
will not have to create'' a Conflict Minerals Report, and ``[n]o more
than half of the consumer discretionary, consumer staples, and
materials sectors is expected'' to provide a Conflict Minerals
Report.\768\
---------------------------------------------------------------------------
\766\ The environmental consultancy company commentator noted
that the CEA study found that the average cost for information
technology systems changes for RoHS was $120,000 per company, and it
discovered that the most expensive conflict minerals software was
$40,000 by conferring with a provider of conflict minerals
compliance software to confirm that their most expensive software
for conflict minerals compliance was $40,000 for the first year.
\767\ In its second letter, however, the environmental
consultancy company commentator acknowledged that it had limited
expertise regarding estimates of the cost of third party audits. See
letter from Claigan Environmental Inc. (Dec. 1, 2011) (``Claigan
II'').
\768\ See letter from Claigan I.
---------------------------------------------------------------------------
Finally, the environmental consultancy company developed its own
cost model,\769\ which was based on current service quotations in the
industry and past costs for RoHS compliance based on the 2008 CEA
study. In this regard, the commentator provided its estimate of the
typical initial costs for affected issuers with revenue of $1 billion
per year. Initially, in its first comment letter, the environmental
consultancy company concluded that the proposal's compliance cost for a
typical affected issuer with $1 billion of revenue would be
approximately $315,000 per year.\770\
---------------------------------------------------------------------------
\769\ Id.
\770\ The environmental consultancy company commentator noted
that the $315,000 per year cost would equate to approximately 0.03%
of an issuer's revenue, but argued that, based on certain
variations, the cost range could be anywhere between 0.02% and 0.05%
of revenue. Id. The commentator stated further that the average cost
of initial compliance with RoHS for a company with annual revenue of
$1 billion was close to 0.8% of revenue. However, the commentator
indicated that the data gathering and the software costs for RoHS
was approximately 0.08% of the initial RoHS compliance costs, which
the commentator argued was ``the same order of magnitude'' of its
0.03% calculation. This commentator suggested that its ``slightly
lower'' cost projections were due to less expensive conflict
minerals software packages, as compared to RoHS, and the large data
gathering cost for RoHS, the need to gather data for every part and
create new part numbers for compliant parts, are not required for
conflict minerals. The commentator noted also that, if the final
rule would cause issuers to dispose of their current conflict
mineral inventories because the conflict minerals were of
indeterminate origin or our rule would not exempt conflict minerals
from recycled or scrap sources, the expected costs of compliance
would be closer to 0.5% of revenue.1 Finally, the commentator
claimed that this initial cost of compliance is expected to increase
by a factor of 2.5 for an issuer having ten times the annual revenue
($10 billion) and decrease by a factor of 2.5 for an issuer with 10%
of revenue ($100 million). Id.
---------------------------------------------------------------------------
In a subsequent letter to us, the environmental consultancy company
lowered its cost estimate.\771\ Instead of the $315,000 per issuer
estimate in its initial letter, the environmental consultancy company
argued that the cost per issuer for compliance would be closer to
$213,000 per issuer because of ``more recent information on corporate
budgeting and expenditures'' that ``better reflect current corporate
implementation strategies.'' \772\ Further, in another letter, the
environmental consultancy company lowered its cost estimate again to
approximately $64,673 per issuer.\773\
---------------------------------------------------------------------------
\771\ See letter from Claigan II.
\772\ Id.
\773\ See letter from Claigan III. In this letter, the
environmental consultancy group commentator broke down the number of
affected issuers by size and cost per issuer based on that size. The
commentator determined that the total cost to 6,000 affected issuers
would be $387,650,000, which would be $64,608 per issuer. However,
because we estimated that there would be 5,994 affected issuers, we
divided the $387,650,000 by 5,994 issuer to come up with $64,673 per
issuer. See also letter from Assent Compliance (Dec. 19, 2011)
(``Assent'') (discussing the software costs to issuers for
implementing Section 1502, which apparently was included as part of
the overall cost calculation in the letter from Claigan III).
Further, the environmental consultancy company commentator provided
an additional comment letter that did not revise its cost estimate,
but expanded upon differences between costing estimates it submitted
and previous costing estimates submitted by the manufacturing
industry association and university group commentators. See letter
from Claigan IV.
---------------------------------------------------------------------------
v. Other Specific Comments
One commentator, an environmental research company, discussed some
of the specific cost estimates above and discussed some cost estimates
it gathered through interviews with potentially affected issuers.\774\
This commentator conducted a study, sponsored by Global Witness, based
on interviews with executives at more than 20 global companies that
ranged in size from $500 million per year in revenue to over $120
billion in annual revenue, including companies engaged in electronic
components, computers, consumer health care, automotive, and retail.
Also, the commentator spoke with industry associations, consulting
firms, and software providers.
---------------------------------------------------------------------------
\774\ See letter from Green II. At the end of the letter, the
commentator describes itself as a ``research, advisory and
consulting firm focusing on clean tech, alternative energy and
corporate sustainability.''
---------------------------------------------------------------------------
Generally, the commentator found that, based on its interviews,
costs for complying with the provision ``will vary widely with the size
and complexity of companies' supply chains but seem to be manageable
for all company sizes.'' \775\ In this regard, the commentator also
found that the better informed executives were regarding the Conflict
Minerals Statutory Provision and its impacts on their company, the more
likely they thought the costs of compliance would be manageable. The
commentator stated that the largest companies with annual revenues over
$50 billion would have one-time costs ranging from $500,000 to $2
million, but the companies with well-developed responsible sourcing
systems may only need to spend half as much. Also, the commentator
found that many smaller companies ``should be able to meet their
obligations for less than the cost of a full-time employee in the first
year with costs declining over time.'' \776\
---------------------------------------------------------------------------
\775\ See id.
\776\ See id.
---------------------------------------------------------------------------
Regarding the above cost estimates by other commentators, the
commentator argued that the manufacturing industry association
commentator's cost estimate ``significantly overstates the costs most
companies will incur, especially those of updating IT systems.'' \777\
Also, the commentator noted that the electronic interconnect industry
commentator's cost estimate was overstated because the estimate
included electronics manufacturing services companies, and that
industry is ``dominated by very large companies,'' which ``probably
account[ed] for the higher median cost estimates.'' \778\ Further, the
commentator noted of the environmental consultancy company
commentator's letter that the ``relative magnitude of the costs shown
by the [environmental consultancy company commentator] estimate are
aligned with what [environmental research company commentator] found in
[its] interviews: that the effort to gather reliable data from supply
chain partners is likely to be more costly initially than any systems
changes required.'' \779\
---------------------------------------------------------------------------
\777\ See id.
\778\ See id.
\779\ See id.
---------------------------------------------------------------------------
Another commentator that is attempting to establish a due diligence
``bag-and-tag'' monitoring system in the Covered Countries asserted
that the total costs incurred by local governments and industry as a
whole just for the on-the-ground set-up and implementation of this
system in the Covered Countries would be $52 million for the first
year.\780\ This commentator noted that this $52 million estimate is
much higher than our $8 to $10 million estimated cost for setting up a
mineral source validation scheme in the Proposing Release. Similarly,
another commentator provided the February 2011 five-year plan of the
organization that administers the bag-and-tag scheme.\781\ The
commentator noted that, according to the five-year plan, ``the cost of
cleanly bagged-and-tagged minerals, including taxes, will remain below
the world market price.'' \782\ Also, according to the document
provided, it appears that the funding requirements for the bag-and-tag
scheme, including a 10% contingency, in Eastern DRC and
[[Page 56342]]
Rwanda will be approximately $38,971,000 from 2011 through 2015.
---------------------------------------------------------------------------
\780\ See letter from ITRI II.
\781\ Representative Jim McDermott (Oct. 12, 2011) (``Rep.
McDermott'') (providing the five-year plan authored by iTSCi, the
International Tin Research Institute's Tin Supply Chain Initiative,
in February 2011).
\782\ Id.
---------------------------------------------------------------------------
Also, this commentator stated that trading companies, transporters,
and concentrate treatment facilities that continue to trade with the
Covered Countries would incur additional costs in relation to the
greatly increased levels of administration and auditing that ``may
amount to an additional man year,'' which is ``approximately US$100,000
per year'' per trading company, transporter, and concentrate treatment
facility going forward.\783\ The costs to trading companies,
transporters, and concentrate treatment facilities that stop treating
minerals from the Covered Countries would be less ``but still of
significance.'' The commentator estimated that these companies' costs
could ``perhaps be an additional half a man year,'' which would be
approximately $50,000 per year per company. Further, this commentator
indicated that smelters and processing facilities may be requested to
perform an independent audit every six months or every year, which
would cost these smelters and processing facilities approximately
$60,000 per audit. Finally, the commentator argued that the ``sum cost
of new auditing requirements and increasing burden of documentation in
the international supply chain may amount to a total of US$7 million
per year.''
---------------------------------------------------------------------------
\783\ See letter from ITRI II.
---------------------------------------------------------------------------
A few commentators provided other, less specific cost estimates.
One commentator indicated that it would require 1,400 hours in the
first year working with its suppliers to implement the proposed rules
and an additional 700 hours in each subsequent year to comply with the
proposed rules.\784\ The commentator calculated this figure by using
the 450 different materials the commentator would have to research, and
estimated that it would require three hours per material, which would
equate to approximately 1,400 hours.\785\ The commentator stated that
this estimate did ``not take into account the days and weeks that will
be required to write any required reports and work with auditors.''
Although the commentator provided an estimate of the number of hours
required to comply with the rules, it did not disclose the costs
associated with its number of estimated hours. The commentator noted,
however, that it is ``a relatively small company, [and] these costs
will be multiplied many times throughout the entire economy.''
---------------------------------------------------------------------------
\784\ See letter from TriQuint I.
\785\ Id. The commentator did not provide a similar breakdown of
its calculation regarding its 700 hour per subsequent year estimate.
---------------------------------------------------------------------------
Another commentator indicated that ``the initial cost for
establishing record keeping processes, staffing, and identifying the
contacts throughout the supply chain will run approximately [four
times] the on-going annual staffing [and] cost for certification.''
\786\ In addition, this commentator asserted that the ``software to
track and retain these records for [five to ten] years could add
another [two times] the annual cost for certification.'' \787\
Ultimately, although the commentator did not disclose the actual costs
associated with its estimates, it concluded that complying with the
proposed rules would be ``very expensive'' for even one year.
---------------------------------------------------------------------------
\786\ See letter from Teggeman.
\787\ See id.
---------------------------------------------------------------------------
Another commentator argued that the costs of the proposed rules to
implement the statute would be expensive even for an issuer with
existing systems in place to track inputs in the supply chain because
such an issuer would still have to add capability to its existing
systems, provide additional supplier training, and revise its existing
information technology systems.\788\ A few commentators noted Apple
Inc.'s Supplier Responsibility 2011 Progress Report.\789\ As one of
these commentators noted, Apple investigated the use of extractives at
all levels of its supply base and mapped its supply chain to the
smelter level to know which of its suppliers are using tantalum, tin,
tungsten, or gold and from where they are receiving the metal.\790\
Accordingly, Apple determined that it has a total of 142 suppliers of
conflict minerals.\791\ Some commentators asserted that the costs of
the proposed rules could be disproportionally higher to smaller
issuers.\792\ Other commentators asserted that the Proposing Release
failed to account for the costs to non-issuers, which would be
significant.\793\
---------------------------------------------------------------------------
\788\ See letter from Ford.
\789\ See, e.g., letters from Enough Project I (citing to Apple
Inc.'s Supplier Responsibility 2011 Progress Report at http://images.apple.com/supplierresponsibility/pdf/Apple_SR_2011_Progress_Report.pdf), Enough Project IV, and Fafo (citing to http://images.apple.com/supplierresponsibility/pdf/Apple_SR_2011_Progress_Report.pdf).
\790\ See letter from Enough Project I.
\791\ See letters from Enough Project IV and Fafo.
\792\ See letter from Howland.
\793\ See letters from NAM I and WGC II.
---------------------------------------------------------------------------
Other commentators asserted also that the $25,000 estimated audit
cost is not the correct cost for the type of audit that would be
required.\794\ One such commentator noted that the ``cost of an
independent audit [sic] of $25,000 is also not specifically for the
type of audits that would be required either on the upstream supply
chain, or at the smelters.'' \795\ Another commentator stated that we
``did not specify the scope of the independent private sector audit of
the Conflict Minerals Report'' in the Proposing Release, and our
$25,000 estimate would correspond only to an audit of whether the
issuer's Conflict Minerals Report accurately describes the due
diligence the issuer exercised.\796\ According to this commentator,
this cost estimate, however, could be far higher depending on the audit
scope to be outlined in the final rule. A further commentator indicated
that our assumptions about the scope and objective of the audit in the
Proposing Release were not clear, but it appeared that the estimate
``may depend on a company relying on an industry-wide due diligence
process and that company being able to conclude that its conflict
minerals did not originate in a DRC country.'' \797\ This commentator
stated that it was not aware of any such industry-wide due diligence
process in place.
---------------------------------------------------------------------------
\794\ See letters from CTIA, ITRI I, and KPMG.
\795\ See letter from ITRI I.
\796\ See letter from CTIA.
\797\ See letter from KPMG.
---------------------------------------------------------------------------
C. Benefits and Costs Resulting From Commission's Exercise of
Discretion
As discussed in detail in Section II, we have revised the rules
from the Proposing Release to address comments we received while
remaining faithful to the language and intent of the statute as adopted
by Congress. In addition to the statutory benefits and costs noted
above, we believe that the use of our discretion in implementing the
statutory requirements will result in a number of benefits and costs to
issuers and users of the conflict minerals information. Below, we
discuss the most significant choices we made in implementing the
statute and the associated benefits and costs. We are unable to
quantify the impact of each of the decisions we discuss below with any
precision because reliable, empirical evidence regarding the effects is
not readily available to the Commission, and commentators did not
provide sufficient information to allow us to do so. Thus, in this
section, our discussion on the costs and benefits of our individual
discretionary choices is qualitative. Later in the release, we present
a quantified analysis on the overall costs and benefits of the final
rule that includes all aspects of the implementation of the statute.
[[Page 56343]]
1. Reasonable Country of Origin Inquiry
The Conflict Minerals Statutory Provision requires any issuer with
necessary conflict minerals that ``did originate'' in the Covered
Countries to provide a Conflict Minerals Report.\798\ The provision,
however, does not specify how an issuer is to determine whether its
conflict minerals originated in the Covered Countries. The provision
states only that any issuer with such conflict minerals must submit a
report to us that describes, among other matters, the measures taken by
the issuer to determine the source and chain of custody of those
conflict minerals.
---------------------------------------------------------------------------
\798\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------
We used our discretion in the final rule to require that issuers
covered by Section 1502 of the Act conduct a good faith ``reasonable
country of origin inquiry'' that is reasonably designed to determine
whether their conflict minerals originated in the Covered Countries or
are from recycled or scrap sources. We do not specify what would
constitute a ``reasonable country of origin inquiry.'' We believe that
this decision to employ a performance standard rather than a design
standard should benefit issuers by allowing them the flexibility to use
the reasonable country of origin inquiry standard that is best suited
to their circumstances.
Although the final rule does not specify what would constitute a
reasonable country of origin inquiry, it requires that the issuer
conduct in good faith an inquiry that is reasonably designed to
determine whether any of its conflict minerals originated in the
Covered Countries or came from recycled or scrap sources. Although the
proposal did not state explicitly that an issuer must reasonably design
its inquiry and conduct it in good faith, we believe that this is not a
change from the proposal, but a clarification of the proposal's intent.
We believe providing this clarification will facilitate compliance with
the rule by providing further guidance to issuers about what is
required to satisfy the reasonable country of origin inquiry. Other
than being reasonably designed and performed in good faith, however,
the final rule does not require issuers to conduct an exhaustive
inquiry to establish to a certainty whether their conflict minerals
originated in Covered Countries or came from recycled or scrap sources.
We believe this is appropriate because, under the Conflict Minerals
Statutory Provision, issuers are required to ascertain whether their
conflict minerals did originate in the Covered Countries to know
whether they must submit a Conflict Minerals Report. Therefore, some
inquiry is necessary.
We could have required an issuer to exercise due diligence in
determining whether its conflict minerals originated in the Covered
Countries or came from recycled or scrap sources. We also could have
required an exhaustive inquiry in which an issuer would be required to
determine to a certainty whether each mineral originated in the Covered
Countries. However, while these would be plausible alternatives, such
inquiries likely would be more costly, and we do not believe those
approaches are necessary. Instead, we believe the reasonable country of
origin inquiry standard provides a clear way for issuers to make the
necessary determination and does so in a more cost-effective manner.
The reasonable country of origin inquiry is consistent with the
supplier engagement approach in the OECD guidance where issuers use a
range of tools and methods to engage with their suppliers.\799\ The
results of the inquiry may or may not trigger due diligence. This is
the first step issuers take under the OECD guidance to determine if the
further work outlined in the OECD guidance--due diligence--is
necessary. The Conflict Minerals Statutory Provision specifically
contemplates due diligence, which goes beyond inquiry and involves
further steps to establish the truth or accuracy of relevant
information, by requiring a description of the measures the issuer took
to exercise due diligence on the source and chain of custody of the
minerals. The Conflict Minerals Statutory Provision specifically notes
that due diligence includes the audit discussed below.
---------------------------------------------------------------------------
\799\ In June 2012, the OECD issued a report regarding
implementation of the OECD guidance. See OECD, Downstream
Implementation of the OECD Due Diligence Guidance for Responsible
Supply Chains of Minerals from Conflict-Affected and High-Risk
Areas, Cycle 2 Interim Progress Report on the Supplement on Tin,
Tantalum, and Tungsten Final Draft (June 2012), available at http://www.oecd.org/investment/guidelinesformultinationalenterprises/Downstream%20cycle%202%20report%20-%20Edited%20Final%20-%201%20June.pdf. This additional guidance includes sample letters to
suppliers and customers regarding the use of conflict minerals.
---------------------------------------------------------------------------
We recognize that our reasonable country of origin approach is
broad enough that some issuers might perform an insufficiently rigorous
inquiry and some issuers might perform an overly rigorous inquiry. An
insufficiently rigorous inquiry could result in an erroneous
determination that the issuer is not required to submit a Conflict
Minerals Report, thus reducing the utility of the disclosure with
respect to the issuer's use of conflict minerals. An overly rigorous
inquiry, on the other hand, could cause issuers to incur greater costs
than they would otherwise. We believe, however, that the requirement
that issuers make certain disclosures about the particular reasonable
country of origin inquiry they undertook mitigates concerns about an
insufficiently rigorous inquiry. Similarly, we believe our guidance
that issuers need only conduct an inquiry reasonably designed to
determine whether conflict minerals originated in the Covered Countries
mitigates concerns about an overly rigorous inquiry. Overall, we
believe that the benefit of mitigating issuer compliance costs
justifies the ``reasonable country of origin'' approach we have chosen.
Also, in a change from the proposal, the final rule establishes a
different standard for the issuer in determining, based on its
reasonable country of origin inquiry, whether due diligence on the
conflict minerals' source and chain of custody and a Conflict Minerals
Report is required. The proposed rules would have required an issuer to
conduct due diligence and provide a Conflict Minerals Report, based on
its reasonable country of origin inquiry, if, among other conclusions,
the issuer was unable to determine that its conflict minerals did not
originate in the Covered Countries or came from recycled or scrap
sources. Under the proposal, issuers could only avoid providing a
Conflict Minerals Report if they could prove a negative--that their
conflict minerals did not originate in the Covered Countries. That
approach would arguably have been more burdensome than necessary to
accomplish the purpose of the statutory provision.
Under the final rule, however, an issuer must exercise due
diligence on its conflict minerals' source and chain of custody and
potentially provide a Conflict Minerals Report if the issuer knows that
its necessary conflict minerals originated in the Covered Countries and
did not come from recycled or scrap sources, or has reason to believe
that its necessary conflict minerals may have originated in the Covered
Countries and may not have come from recycled or scrap sources. This
new approach does not require an issuer to prove a negative to avoid
performing due diligence, but it also does not allow an issuer to
ignore warning signs or circumstances reasonably indicating that its
conflict minerals may have originated in the Covered Countries or may
not have been from recycled or scrap sources. This approach should
reduce the total costs
[[Page 56344]]
of the final rule, by enabling an issuer that, following a reasonable
country of origin inquiry, is unable to determine that its conflict
minerals did not originate in the Covered Countries or come from
recycled or scrap sources, but has no reason to believe that its
necessary conflict minerals may have originated in the Covered
Countries or do not come from recycled or scrap sources, to fully
comply with the rule without conducting due diligence, obtaining an
audit, or preparing and filing a Conflicts Mineral Report.
We realize that requiring a Conflict Minerals Report if, after
exercising a reasonable country of origin inquiry, the issuer has
reason to believe that it has necessary conflict minerals that may have
originated in the Covered Countries and may not have come from recycled
or scrap sources will be more costly than only requiring a report if
the issuer has affirmatively determined that its minerals did come from
the Covered Countries. However, as already discussed, we believe that
such an approach is required to achieve the benefits intended by the
statute. Moreover, this approach provides an appropriate balance
compared to the more costly possible approach of requiring an issuer to
submit a Conflict Minerals Report unless it determines to a certainty
that its necessary conflict minerals did not originate in the Covered
Countries.
This approach regarding when an issuer must exercise due diligence
as to the source and chain of custody of its conflict minerals and
provide a Conflict Minerals Report could increase costs of the final
rule. Some issuers may expend more resources than necessary to satisfy
the standard in order to assure themselves that their minerals did not
originate in the Covered Countries. On the other hand, other issuers
may expend insufficient resources which could lead to inadequate
inquiries. However, we anticipate that overall this approach will
result in fewer issuers engaging in due diligence and providing a
Conflict Minerals Report because, although an issuer may not be able to
determine to a certainty, even after a reasonable country of origin
inquiry, that its conflict minerals did not originate in the Covered
Countries or are from recycled and scrap sources, that issuer may have
no reason to believe that its necessary conflict minerals may have
originated in the Covered Countries and not come from recycled or scrap
sources. This situation will reduce costs to such issuers because those
issuers are not required to exercise due diligence and provide a
Conflict Minerals Report.
In a further change from the proposal, the final rule requires an
issuer that determines that, following its reasonable country of origin
inquiry, its conflict minerals did not originate in the Covered
Countries or come from recycled or scrap sources or has no reason to
believe that its necessary conflict minerals may have originated in the
Covered Countries or did not come from recycled or scrap sources to
provide a brief description of the results of that inquiry. The
proposal required issuers to disclose their reasonable country of
origin inquiry and their determination based on that inquiry. Compared
to an alternative that does not require such description, this
requirement will increase the disclosure costs to issuers. However, the
disclosure will enable users of the information to assess more
thoroughly the issuer's reasonable country of origin design and its
efforts in carrying out that design. This information will allow
stakeholders to form their own views on the reasonableness of the
issuer's efforts and track those efforts over a number of years. Based
on this information, stakeholders could advocate for different
processes for individual issuers if they believe it is necessary,
thereby maximizing the potential benefits of the performance-based
approach we are adopting.
Additionally, we revised the final rule from the proposal so that,
following its reasonable country of origin inquiry, an issuer that
determines its conflict mineral did not originate in the Covered
Countries is not required to keep reviewable records for five years. We
believe this decision should benefit issuers by allowing them greater
flexibility and by reducing their compliance costs because they no
longer have a record retention cost, which should reduce the overall
costs involved as compared to the other possible methods of
implementing the statute.
2. Information in the Specialized Disclosure Report
We revised the final rule from the proposal so that an issuer that
must file a Conflict Minerals Report is not required to disclose, in
its specialized disclosure report under a separate ``Conflict Minerals
Disclosure'' heading, the reason it is filing its Conflict Minerals
Report. Similarly, the final rule does not require an issuer to
disclose in its specialized disclosure report that it has provided an
audit report or a certification of the audit because the audit report
and certification are part of the Conflict Minerals Report already, so
specifically mentioning the audit report or certification here is not
necessary and may be confusing. Instead, the issuer must only disclose
that a Conflict Minerals Report is provided as an exhibit to its
specialized disclosure report and a link to its Internet Web site where
the Conflict Minerals Report is publicly available. We believe these
decisions should benefit issuers by not requiring them to provide as
much disclosure in the specialized disclosure report, which should
reduce the costs involved as compared to the other possible methods of
implementing the statute. However, we do not believe that such
decisions will reduce the benefits to be achieved by the final rule,
because the information that the proposal required to be disclosed in
the specialized disclosure report is already provided in the Conflict
Minerals Report, which is required to be filed as an exhibit to Form
SD.
3. ``DRC Conflict Undeterminable'' Determination
The final rule temporarily permits issuers to describe their
products as ``DRC conflict undeterminable'' if they are required to
file a Conflict Minerals Report and are either unable to determine that
their conflict minerals did not originate in the Covered Countries or
are unable to determine that their conflict minerals that originated or
may have originated in the Covered Countries did not directly or
indirectly benefit or finance armed groups in the Covered Countries. An
issuer with products that are ``DRC conflict undeterminable'' is
required to exercise due diligence on the source and chain of custody
of its conflict minerals and submit a Conflict Minerals Report
describing the due diligence, the country of origin of the conflict
minerals, if known, the facilities used to process the conflict
minerals, if known, and the efforts to determine the mine or location
of origin with the greatest possible specificity. Also, such an issuer
is required to describe its products containing these conflict minerals
as ``DRC conflict undeterminable,'' rather than stating that they have
not been found to be ``DRC conflict free.'' An issuer with such
conflict minerals, however, is not required to obtain an independent
private sector audit of that Conflict Minerals Report. This reporting
alternative is temporary and will be available only during the first
two reporting cycles following the effectiveness of the final rule for
all issuers, which includes the specialized disclosure reports for 2013
and 2014, and the first four reporting cycles following the
effectiveness of the final rule for smaller reporting companies,
[[Page 56345]]
which includes the specialized disclosure reports for 2013 through
2016. After these times, an issuer unable to determine that its
conflict minerals did not originate in the Covered Countries or unable
to determine that its conflict minerals that originated or may have
originated in the Covered Countries did not directly or indirectly
finance or benefit armed groups in the Covered Countries must describe
its products containing those minerals as having not been found to be
``DRC conflict free'' and provide an independent private sector audit
of its Conflict Minerals Report.
This temporary provision will have the benefit of lowering the
initial costs of the rule both because an audit will not be required
and because, to the extent issuers suffer negative consequences from
disclosure that their products have not been found to be ``DRC conflict
free,'' those consequences would likely not be as significant for an
issuer that is able to disclose that it has conducted due diligence on
its conflict minerals and not found a connection to armed groups. We
believe that not requiring an independent private sector audit of the
Conflict Minerals Report during this temporary period is appropriate
because an audit of the design of an issuer's due diligence that
results in an undeterminable conclusion would not appear to have a
meaningful incremental benefit. Also, we recognize the concerns about
the feasibility of preparing the required disclosure in the near term
because of the stage of development of the supply chain tracing
mechanisms. We adopted this temporary provision to allow sufficient
time for more comprehensive tracking systems to be developed by
industry and trade groups. The development and use of such
comprehensive tracking systems should improve due diligence performance
and lower the cost of compliance with the statute by reducing
duplication and taking advantage of economies of scale. We believe that
a two-year period for issuers with an indeterminate conclusion is
appropriate because this appeared to be the approximate amount of time
that many commentators stated would be necessary to establish
traceability systems in the Covered Countries.\800\ Also, we believe
that a four-year period for smaller reporting companies with an
indeterminate conclusion is appropriate because they may have fewer
resources to implement the final rule and may lack the leverage to
obtain detailed information regarding the source of a particular
conflict mineral.\801\
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\800\ See, e.g., letters from AdvaMed I, FEC I, JVC et al. II,
Plexus, Verizon, and WilmerHale.
\801\ Using the cost of audit estimates provided by the
university group and the manufacturing industry group commentators,
which we also use below, we estimate that this exercise of
discretion by the Commission would reduce the initial compliance
cost of a small issuer by approximately $25,000 and the initial
compliance cost of a large issuer by approximately $100,000 per year
for each year of the applicable temporary period based upon the
analysis of the university group commentator.
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Issuers that are unable to determine, following their exercise of
due diligence, that their conflict minerals did not originate in the
Covered Countries; that their conflict minerals that originated in the
Covered Countries did not directly or indirectly finance or benefit
armed groups in the Covered Countries; or, after their exercise of due
diligence, are unable to determine that their conflict minerals came
from recycled or scrap sources are required to file a Conflicts
Minerals Report describing, among other matters, the due diligence they
exercised and the steps they have taken or will take, if any, since the
end of the period covered in their most recent prior Conflict Minerals
Report to mitigate the risk that their necessary conflict minerals
benefit armed groups, including any steps to improve their due
diligence. After the transition period, such issuers will be required
to include an independent private sector audit of their Conflict
Minerals Reports with respect to those minerals, which is likely to
increase costs for those issuers. One commentator argued that ``Section
1502 does not require an issuer that has been unable to determine
(after a proper inquiry) the source of its conflict minerals * * * to
provide a Conflict Minerals Report.'' \802\ As discussed above, we
believe the process that better reflects the statutory intent is as
follows:
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\802\ See letter from Cleary Gottlieb.
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An issuer that, following a reasonable country of origin
inquiry, has reason to believe that its necessary conflict minerals may
have originated in the Covered Countries, and may not be from recycled
or scrap sources, must conduct due diligence on the source and custody
of such conflict minerals, in accordance with a nationally or
internationally recognized due diligence framework, and
If, following such due diligence, such issuer is unable to
determine that such conflict minerals did not originate in the Covered
Countries (and is unable to determine that such conflict minerals are
from recycled or scrap sources), then such issuer is required to submit
a Conflict Minerals Report.
While this approach may add to the overall costs of compliance, we
do not believe the alternative reading suggested by commentators is
consistent with the purposes of the statute. The final rule's temporary
provision for ``DRC conflict undeterminable'' products, however, is
designed to reduce compliance costs during the transition period.
4. ``Contract To Manufacture''
As discussed above, the final rule applies to issuers that contract
to manufacture products. This requirement is based on our
interpretation of the statute in light of our understanding of the
statutory intent and a reading of the statute's text. We recognize that
this approach affects the overall compliance costs and burdens, in
particular, on the subset of issuers that contract to manufacture
products. However, we have sought to mitigate these costs by not
defining the term ``contract to manufacture'' in the final rule, and
instead letting issuers determine based on their own facts and
circumstances which of their products have conflict minerals that may
trigger a reporting obligation.
Compared to the alternative approach of defining this term, our
decision not to define the term provides issuers with significant
flexibility to use a definition that applies best to their particular
circumstances. Such flexibility may lower issuers' compliance costs to
the extent any definition could have been overbroad. But, we also
recognize that our decision not to define this phrase could increase
uncertainty for issuers on how the phrase should be implemented and may
result in additional costs to some issuers. For example, the
uncertainty associated with leaving the phrase undefined could lead
some issuers to interpret the definitions in a manner that is more
expansive than if the phrase was defined, thus incurring a higher
compliance cost than is necessary. In this regard, some issuers may
decide to use more internal or external resources than if this phrase
was defined to make sure they are compliant with the rule, which would
also increase compliance costs. The lack of a clear definition could
also result in a diminishment of the benefit if some issuers are less
rigorous in determining and reporting on their products that have
conflict minerals, which would reduce the utility of their disclosure.
Overall, however, we believe the potential benefit of flexibility
outweighs the potential increases in costs.
In the proposal, we expressed our view that an issuer that does not
manufacture a product itself but that has ``any'' influence over the
product's manufacturing should be considered to be contracting to
manufacture that
[[Page 56346]]
product. Also, we expressed our view that an issuer that offers a
generic product under its own brand name or a separate brand name
should be considered to be contracting to manufacture that product so
long as the issuer had contracted to have the product manufactured
specifically for itself. As noted in the Proposing Release, we had
believed that these issuers should have been considered to be
contracting those products to be manufactured because the issuers would
implicitly influence the manufacturing of the products. However, we are
persuaded by commentators that this level of control set forth in the
Proposing Release was ``overbroad'' and ``confusing'' and would impose
on such an issuer ``significant,'' ``unrealistic,'' and ``costly''
burdens.\803\ Therefore, we provide guidance indicating that an issuer
is considered to be contracting to manufacture a product depending on
the degree of influence it exercises over the materials, parts,
ingredients, or components to be included in any product as well as
examples. We believe that this guidance may decrease issuers'
flexibility for some issuers, but it will provide more certainty for
others.
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\803\ See, e.g., letters from ABA, AT&T, Corporate Secretaries
I, Davis Polk, and Verizon. See also letter from NRF I (stating that
our proposed approach would be ``draconian'').
---------------------------------------------------------------------------
5. Nationally or Internationally Recognized Due Diligence Framework
(Including Gold)
Although Exchange Act Section 13(p)(1)(A)(i) requires issuers to
describe the measures taken to exercise due diligence, the provision
does not indicate the due diligence required. The final rule's
requirement that issuers use a nationally or internationally recognized
due diligence framework in their Conflict Minerals Reports may result
in a certain degree of standardization in the preparation of the
disclosure and may reduce audit costs by focusing the audit. To the
extent issuers tend to use the same due diligence framework, this
standardization will benefit users of the information by making the
Conflict Minerals Reports easier to compare, thus reducing costs for
users of comparing information across issuers.
Also, requiring a nationally or internationally recognized due
diligence framework allows us to provide a clear audit objective that
includes whether the design of an issuer's due diligence measures is in
conformity with the criteria set forth in the nationally or
internationally recognized due diligence framework and whether an
issuer's description of the due diligence measures it performed is
consistent with the due diligence process it undertook. As discussed
below, having a clear audit objective based on the design of an
issuer's due diligence framework lowers audit costs compared with a
rule that does not require a specified framework because it focuses the
scope of the audit that must be performed and, therefore, makes the
audit less time-consuming and less costly.
Further, the final rule requires that an issuer's due diligence
follow a nationally or internationally recognized due diligence
framework that is established by a body or group that has followed due-
process procedures, including the broad distribution of the framework
for public comment, and is consistent with the criteria standards in
GAGAS established by the GAO. This requirement improves the credibility
and usefulness of the reports. Also, requiring adherence to a
nationally or internationally recognized due diligence framework will
provide issuers with a degree of certainty that their due diligence
process is reliable and will pass a regulatory review. However, this
requirement also will limit the issuer's flexibility in determining the
source of origin and chain of custody of their conflict minerals. If
the established requirement is more burdensome than what the issuer
might have otherwise considered sufficient due diligence, it might make
it more costly for issuers compared to using a due diligence process
based on their own facts and circumstances.
6. Liability for the Audit and Audit Certifications
Exchange Act Section 13(p)(1)(A)(i) requires the independent
private sector audit to be conducted in accordance with the standards
established by the GAO. Exchange Act Section 13(p)(1)(B) states that
the issuer must certify the audit and that certified audit constitutes
a critical component of due diligence.\804\ Under the final rule, an
issuer's audit certification is in the form of a statement in the
Conflict Minerals Report that the issuer obtained an independent
private sector audit. This should benefit issuers by not subjecting
individuals employed by the issuer to liability for the information in
the Conflict Minerals Report or the audit. Additionally, the final rule
does not require an auditor to assume expert liability regarding the
audit because the audit report would not be incorporated by reference
or otherwise included in Securities Act filings. Therefore, depending
on the state of competition in the market for independent private
sector audits, not requiring the assumption of such liability may
result in lower audit fees, which in turn should decrease conflict
minerals-reporting companies' cost of compliance with the statute.
However, not requiring the certification to be signed by an officer and
not requiring an auditor to assume expert liability could decrease the
benefits of the rule if it results in issuers taking less care in their
certifications and auditors conducting less thorough audits.
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\804\ As noted elsewhere in this release, the staff of the GAO
has indicated to our staff that the GAO does not intend to publish
standards for the independent private sector audit and that GAGAS'
Performance Audit or Attestation Engagement standards can be used
for these audits. See U.S. Gov't Accountability Office, GAO-12-331G,
Government Auditing Standards 2011 Revision (Dec. 2011), available
at http://www.gao.gov/assets/590/587281.pdf. Therefore, to conduct
an independent private sector audit, an auditor must comply with
certain quality control procedures and peer reviews, which are
required under the GAGAS Performance Audit and Attestation
Engagement standards. The GAGAS Attestation Engagement standards, in
Chapter 3.75, require that auditors be ``licensed certified public
accountants, persons working for a licensed certified public
accounting firm or for a government auditing organization, or
licensed accountants in states that have multi-class licensing
systems that recognize licensed accountants other than certified
public accountants.'' Unlike the GAGAS Attestation Engagement
standard, the GAGAS Performance Audit standard allows auditors other
than certified public accountants to perform a Performance Audit,
provided the auditor complies with the applicable qualification
requirements under GAGAS, which will increase the number of firms
eligible to conduct the private sector audits. Increasing the number
of firms that are eligible to conduct the independent private sector
audits should increase competition, which should make it less costly
for an issuer to obtain such an audit.
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7. Audit Objective
The final rule provides a clear audit objective. We believe that
the audit is meaningful because investors and other users will have
some assurance from an independent third party that the issuer's due
diligence framework, as set forth in the Conflict Minerals Report, is
designed in conformity with the relevant nationally or internationally
recognized due diligence framework, and that the issuer actually
performed the due diligence measures that it represents that it
performed in the Conflict Minerals Report. We recognize that an audit
objective requiring an auditor to express an opinion or conclusion as
to the design and description of an issuer's due diligence measures is
not as comprehensive as an audit objective requiring an auditor to
express an opinion or conclusion as to the effectiveness of due
diligence measures or the accuracy of conclusions in the Conflict
Minerals Report. However, we believe that the audit will
[[Page 56347]]
still be meaningful because it will provide some assurance from an
independent third party that the issuer's due diligence framework is
designed in conformity with the relevant nationally or internationally
recognized due diligence framework and that the issuer actually
performed the due diligence measures as they were described.
With respect to what audit objective is appropriate, we considered
the following possible audit objective alternatives from commentators:
whether management's description of procedures and controls performed
in their due diligence process are fairly described in the report;
whether an issuer's design of its due diligence process described in
the report conformed to a recognized standard of due diligence; whether
management's description of an issuer's due diligence process in its
report is accurate, the results of that process are fairly stated, and
the issuer has evaluated/identified the upstream and downstream due
diligence processes; whether the design of the due diligence process
described in the report conformed to a recognized standard and whether
the process was effective; whether the issuer's conclusion regarding
the source and chain of custody of its conflict minerals is accurate;
and whether the issuer appropriately included in the report all its
products described as having not been found to be ``DRC conflict
free.'' We used our discretion to make the audit objective in the final
rule similar to the first and second alternatives with some
modification. The final rule states that the objective of the
independent private sector audit is for the auditor to express an
opinion or conclusion as to whether the design of the issuer's due
diligence measures as set forth in the Conflict Minerals Report, with
respect to the period covered by the report, is in conformity with, in
all material respects, the criteria set forth in the nationally or
internationally recognized due diligence framework used by the issuer,
and whether the issuer's description of the due diligence measures it
performed as set forth in the Conflict Minerals Report, with respect to
the period covered by the report, is consistent with the due diligence
process that the issuer undertook.
We believe that our choice of audit objective in the final rule
will reduce the costs and burdens more than certain other alternatives.
However, we recognize that the audit objective will not reduce the
costs and burdens as much as if the audit objective required only an
opinion or conclusion as to whether the design of the issuer's due
diligence measures is in conformity with the criteria set forth in the
nationally or internationally recognized due diligence framework. We
believe an audit related to whether the issuer actually performed the
due diligence measures that it represents that it performed in the
Conflict Minerals Report is necessary and appropriate so that the audit
also addresses, in a cost effective manner, the actual performance of
the due diligence and not just the design as well as provide
independent third party confirmation that the work described was
performed. Based on the comments we received, however, an audit
objective based on any of the alternatives other than just the design
of the issuer's due diligence measures and the issuer's description of
the due diligence measures it performed would be very costly and
burdensome to undertake due to the breadth of those alternatives and
the fact that most of the evidence required for those alternatives
would be held by third party suppliers and smelters.
8. Conflict Minerals From Recycled or Scrap Sources
The Conflict Minerals Statutory Provision is silent as to the
treatment of conflict minerals from recycled or scrap sources. In the
final rule, however, we provided for alternative treatment for conflict
minerals from recycled or scrap sources. The alternative reporting
requirements for conflict minerals from recycled or scrap sources
should benefit issuers by reducing issuers' compliance costs with the
disclosure requirements in Section 1502 because those issuers will
conduct a reasonable inquiry regarding whether those minerals are from
recycled or scrap sources instead of having to exercise due diligence
and provide a Conflict Minerals Report in all cases. Also, issuers
that, following a reasonable inquiry conducted in good faith,
reasonably believe their minerals are from recycled or scrap sources
will not have to obtain an independent private sector audit. A
reduction in costs of not having to exercise due to diligence or obtain
an independent private sector audit is likely to be significant for
those industries that use a high concentration of conflict minerals
that are from recycled or scrap sources.\805\
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\805\ We are unable to estimate the total magnitude of these
cost savings because we do not have empirical evidence regarding the
scope of the use of conflict minerals that are from recycled or
scrap sources. See below Section D for a further analysis of the
potential costs of this provision.
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The final rule requires issuers with conflict minerals that have
reason to believe their conflict minerals may not come from recycled or
scrap sources to exercise due diligence in determining whether the
minerals are, in fact, from recycled or scrap sources. That due
diligence must follow a nationally or internationally recognized due
diligence framework, if such framework is available. While providing a
higher degree of certainty that those conflict minerals came from
recycled or scrap sources, the requirement will also increase the costs
to issuers, compared to an alternative that would allow issuers to rely
on their own due diligence approach to verify that these minerals are
from recycled or scrap sources. Eliminating the requirement of an
independent private sector audit of their Conflict Minerals Report,
however, could potentially decrease costs to issuers.
We believe that the magnitude of the cost savings for issuers with
conflict minerals from recycle or scrap sources will be greatest for
companies that use exclusively scrap and recycled materials. Although
we did not receive any information from commentators as to the number
of companies that may fall into this category, a number of commentators
stated that the use of conflict minerals from recycled or scrap sources
is significant. For example, some commentators noted that China
controls approximately 85% of the world's tungsten supply, but China is
cutting back on tungsten exports, which is causing the price of
tungsten to increase by 130%.\806\ According to these commentators,
this development has caused American manufactures to move to recycled
tungsten, which represented approximately 55% of apparent consumption
of tungsten in all forms. Also, as another example, one commentator
noted that up to 40% of the world's gold supply is from recycled or
scrap sources.\807\ Even so, issuers that use both conflict minerals
from recycled or scrap sources and newly mined minerals may still need
to exercise due diligence and obtain an audit regarding the conflict
minerals that are not from recycled or scrap sources and thus, may not
have significant additional cost savings. Overall, however, even with
these requirements, we believe that providing an alternative treatment
for conflict minerals from recycled or scrap sources should benefit
issuers by reducing their compliance costs for those minerals as
compared with the costs applicable to newly mined conflict minerals.
Moreover, an indirect consequence of our differential
[[Page 56348]]
treatment of scrap and recycling materials may be to increase the
extent to which these materials are recycled. Finally, the reasonable
country of origin inquiry requirements are likely to improve the
disclosures regarding conflict materials from recycled or scrap
sources.
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\806\ See, e.g., letters from Rep. Altmire, Rep. Murphy, Rep.
Renacci, Rep. Shuster, Rep. Toomey, Rep. Womack, and Sen. Pryor.
\807\ See letter from WGC II.
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9. Conflict Minerals ``Outside the Supply Chain''
Like conflict minerals from recycled and scrap sources, the
Conflict Minerals Statutory Provision is silent as to the treatment of
conflict minerals ``outside the supply chain'' at the time our final
rule takes effect, including existing stockpiles of conflict minerals.
However, in the final rule we have determined to exclude any conflict
minerals that are ``outside the supply chain'' prior to January 31,
2013. The final rule considers conflict minerals to be ``outside the
supply chain'' after such conflict minerals have been smelted (in the
case of tantalum, tin, or tungsten) or refined (in the case of gold),
or, if not smelted or refined, are physically located outside of the
Covered Countries.
We are aware of the concern that these existing stockpiles could
have come from activities that financed or benefited armed groups in
the Covered Countries. However, once those minerals have been smelted,
refined, or transported out of the Covered Countries, it seems unlikely
that they could further finance or benefit armed groups. Therefore, we
believe excluding these stockpiled minerals would be consistent with
the statutory intent of the Conflict Minerals Statutory Provision and
does not significantly impair the benefits sought by the statute.
Moreover, the approach we have chosen may substantially reduce
compliance costs for some issuers by not requiring them to determine
the origin and chain of custody of these stockpiled minerals. An
alternative approach that requires issuers to determine the origin and
chain of custody of their stockpiled minerals would greatly increase
costs, particularly for conflict minerals that were extracted prior to
the contemplation of the Conflict Minerals Statutory Provision because
issuers would not have known they were expected to determine the origin
of those minerals at the time of their extraction. Further, if
stockpiled minerals were not excluded, issuers might not be able to
sell those minerals and could be forced to dispose of their existing
conflict minerals inventory at below market prices, or at a loss. If
such a situation occurred, as one commentator noted, the cost of the
final rule would increase ``dramatically.'' \808\
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\808\ See letter from Claigan I.
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10. Conflict Mineral Derivatives
The Conflict Minerals Statutory Provision defines the term
``conflict mineral'' as cassiterite, columbite-tantalite, gold,
wolframite, or their derivatives, or any other minerals or their
derivatives determined by the Secretary of State to be financing
conflict in the Covered Countries.\809\ The Proposing Release provided
the same definition of the term ``conflict mineral'' as well. In the
final rule, however, we used our discretion to limit the term
``conflict mineral'' to include only cassiterite, columbite-tantalite,
gold, wolframite, and their derivatives, which are limited to only the
3Ts, unless the Secretary of State determines that additional
derivatives are financing conflict in the Covered Countries, in which
case they are also considered ``conflict minerals.'' By using our
discretion to limit the covered mineral derivatives, we could be
limiting the usefulness of the information of the conflict minerals
disclosure. This potential disadvantage is mitigated, however, by the
fact that tantalum, tin, and tungsten are by far the most common
derivatives of these minerals.\810\ A different approach would increase
costs to issuers by increasing the number of derivatives that they
would have to determine are in their products.
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\809\ Section 1502(e)(4) of the Act. Presently, the Secretary of
State has not designated any other mineral as a conflict mineral.
Therefore, the conflict minerals include only cassiterite,
columbite-tantalite, gold, wolframite, or their derivatives.
\810\ See letters from AAFA, ITIC I, and PCP.
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11. Method and Timing of Disclosure on Form SD
Exchange Act Section 13(p)(1)(A) requires issuers to ``disclose
annually'' their conflict minerals information, but does not specify
how issuers should disclose this information or at what time during the
year the disclosure must be provided. The final rule requires issuers
to provide this information annually in a new specialized disclosure
report on new Form SD that covers a calendar year, regardless of the
issuer's fiscal year end, and is due on May 31 of the subsequent year.
Our decision to provide through rulemaking that issuers use the new
form for the disclosure of conflict minerals' origin and the Conflict
Minerals Report makes it easier for those interested in the disclosed
information to locate the form. In addition, the final rule requires
that issuers present the information in a standardized manner. Users
that find the information about an issuer's conflict minerals relevant
to their decision making will benefit from the standardization and
simplification of the disclosure.
Further, requiring issuers to use a new form with a uniform filing
date rather than submitting conflict minerals information in their
annual reports would benefit most issuers by allowing them to have
sufficient time to prepare and file their conflict minerals information
independent from the due dates for annual reports.\811\ Moreover, we
believe that this staggered filing date will benefit issuers because
they could, if they choose to do so, use the same personnel to handle
this filing as their annual reports. Another benefit for issuers of
requiring issuers to provide their conflict minerals information on a
new form, instead of an annual report on Form 10-K, Form 20-F, or Form
40-F, is to remove the conflict minerals information from the
disclosure that principal executive and financial officers must certify
under Sections 302 and 906 of Sarbanes-Oxley, which could reduce costs
to issuers. Also, requiring a uniform reporting period for all issuers
will benefit companies that supply products or components with conflict
minerals by allowing them to provide reports once per year for all
their customers, rather than having to prepare reports throughout the
year for customers with different reporting periods, which will reduce
such companies' costs.
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\811\ We estimate that almost 58% of total number of affected
issuers uses December 31 as a fiscal year end.
---------------------------------------------------------------------------
Our decision to require a new form will result in costs related to
the preparation of this form, as we discuss below in the Paperwork
Reduction Act section. Also, our decision to require an issuer to
provide its Conflict Minerals Report and its independent private sector
audit report as an exhibit to its specialized disclosure report on Form
SD will result in costs related to the preparation of such an exhibit.
Requiring covered issuers to file, instead of furnish, their
Conflict Minerals Reports gives investors the ability to bring suit if
issuers fail to comply with the new disclosure requirements, for
instance under Exchange Act Section 18. This may, therefore,
potentially improve the avenues of redress available to investors.
This, in turn, may provide benefits to investors to the extent they
rely on the information to make investment decisions. Because this
could improve investors' ability to seek
[[Page 56349]]
redress, it is possible that covered issuers could be found liable for
the disclosure. Our decision to require issuers to ``file,'' rather
than ``furnish,'' the information will potentially subject issuers to
litigation under Section 18 and may ``incentivize issuers (and auditors
and underwriters) to conduct an appropriate level of diligence'' in
preparing the disclosures,\812\ thereby increasing issuers' cost of
complying with the final rule.\813\ In addition, our decision to
require a uniform reporting period could further increase costs to
issuers that do not have calendar year fiscal years by requiring
separate reporting outside of the issuer's normal reporting period.
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\812\ See letter from Global Witness I.
\813\ While the increased potential for litigation may increase
costs, we note that Section 18 claims have not been prevalent in
recent years and a plaintiff asserting a claim under Section 18
would need to meet the elements of the statute, including
materiality, reliance, and damages. See Louis Loss and Joel
Seligman, Ch. 11 ``Civil Liability,'' Subsect. c ``False Filings
[Sec. 18],'' Fundamentals of Securities Regulation (3rd Ed. 2005).
We are unable to estimate the magnitude of this potential cost
increase because we cannot predict at this time whether Section 18
claims will increase (and if so, by how much) and how costly it may
be to ultimately prove the required elements or defend such a case.
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12. ``Necessary to the Functionality or Production''
Exchange Act Section 13(p)(2)(B) defines a ``person described'' as
one for which conflict minerals are ``necessary to the functionality or
production of a product manufactured by such a person.'' The Conflict
Minerals Statutory Provision, however, provides no additional
explanation or guidance as to the meaning of ``necessary to the
functionality or production of a product.'' We use our discretion not
to define this phrase in the final rule.
Compared to an alternative of the rule, which would define this
phrase, our decision not to provide a definition gives issuers
significant flexibility to use a definition that applies best to their
particular circumstances. Such flexibility generally lowers issuers'
compliance costs as issuers can determine whether the phrase is
applicable based upon their specific facts and circumstances. But we
also recognize that our decision not to define this phrase could
increase uncertainty for issuers on how the phrase should be
implemented and may therefore result in additional costs to some
issuers. For example, the uncertainty associated with leaving the
phrase undefined could lead some issuers to interpret the definitions
in a manner that is more expansive than if these terms were defined,
thus incurring a higher compliance cost than is necessary. In this
regard, some issuers may decide to use more internal or external
resources than if this phrase was defined to make sure they are
compliant with the rule, which would also increase compliance costs.
The lack of a clear definition could also result in a diminishment of
the benefit of the rule if some issuers are less rigorous in
determining and reporting on their products that have conflict
minerals, which would reduce the informativeness of their disclosure.
We have attempted to mitigate the potential cost of leaving the
phrase undefined by the guidance we provide in the release. Our
guidance provides issuers with contributing factors that they should
use in their determination of ``necessary to the functionality or
production,'' which will reduce the possibility that some issuers may
interpret the phrase in either an over or underinclusive manner. Also,
we noted concerns that there is ambiguity in the application of the
provision to conflict minerals that do not end up in the product, and,
as noted above, commentators were mixed in their views regarding how
the rule should treat catalysts and other conflict minerals necessary
to the production of a product that do not appear in the product. After
considering the comments, we agree that it would be very difficult for
any manufacturer of products that do not themselves contain conflict
minerals to know every conflict mineral used in the production process.
Therefore, we used our discretion to decide that, for a conflict
mineral to be considered ``necessary to the production'' of the
product, the conflict mineral must be contained in the product--and be
necessary to the product's production. Therefore, although this
requirement may decrease the number of issuers that are covered under
the final rule, we believe this is a reasonable approach that reduces
costs to issuers by eliminating an especially challenging aspect from
the proposal.
13. Categories of Issuers
We do not read the statute as making any distinction among issuers
based on the issuer's size or domesticity. As discussed above, although
not specifically in the context of smaller reporting companies or
foreign private issuers, some commentators suggested that we exempt
certain classes of companies from full and immediate compliance with
the disclosures required by the Conflict Minerals Statutory
Provision.\814\ We are concerned that any broad categories of
exemptions would undermine the statutory objectives discussed above.
For the provision to have the effect we understand Congress intended,
we are not exempting any class of issuer from its application. We
recognize that this imposes a cost burden on those issuers who are not
exempted, but conclude that this burden is required by the statute.
---------------------------------------------------------------------------
\814\ See, e.g., letters from Davis Polk, NCTA, Verizon, and
WilmerHale.
---------------------------------------------------------------------------
Additionally, as one commentator noted, it is unclear whether
exempting smaller reporting companies would significantly reduce their
burdens because smaller reporting companies could still be required to
track and provide their conflict minerals information for larger
issuers.\815\ Moreover, as other commentators noted, to the extent
there are benefits to smaller companies from an exemption, such an
exemption could increase the burden on larger companies that rely on
smaller reporting company suppliers to provide conflict minerals
information needed by the larger reporting companies.\816\ Further, the
temporary availability of the ``DRC conflict undeterminable'' category
is likely to reduce the compliance burden for all companies, including
smaller reporting companies. In this regard, not including private
companies and individuals in the final rule may not unduly burden
reporting issuers because the commercial pressure on private companies
from issuers that need this information for their reports and from the
public in general demanding that issuers make this information
available could be sufficient for the private companies to provide
voluntarily their conflict minerals information as standard
practice.\817\ Further, the extension of the availability of the ``DRC
conflict undeterminable'' category for an additional two years is
likely to reduce the compliance burden even more for some smaller
reporting companies.
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\815\ See letters from IPC I.
\816\ See, e.g., letters from IPC I and TriQuint I.
\817\ See letter from Howland and TIC.
---------------------------------------------------------------------------
Similarly, exempting foreign private issuers from the final rule
could increase domestic issuers' burdens by making it very difficult
for them to compel their foreign private issuer suppliers to provide
conflict minerals information. In addition, exempting foreign private
issuers from the final rule could result in a competitive disadvantage
for domestic issuers because foreign private issuers would not be
subject to the final rule.\818\ Overall, we are not exempting foreign
[[Page 56350]]
private issuers because we believe that doing so would not give effect
to Congressional intent.
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\818\ See letter from CEI II, Rep. Amodei, Rep. Ellmers, Rep.
Murphy, and TriQuint I.
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14. Not Including Mining Issuers as Manufacturing Issuers
The Conflict Minerals Statutory Provision does not state whether
issuers that mine conflict minerals should be considered to be
manufacturing those minerals and be included under the provision. We do
not consider an issuer that mines or contracts to mine conflict
minerals to be manufacturing or contracting to manufacture those
minerals unless the issuer also engages in manufacturing, whether
directly or through contract, in addition to mining. In this regard, we
do not believe that mining is ``manufacturing'' based on a plain
reading of the provision. Excluding such mining issuers from the
universe of covered companies could create a competitive advantage for
those companies over covered companies to the extent that they are
competitors, but this advantage should be diminished for mining
companies that are suppliers of conflict minerals to covered companies
because the covered companies would require the conflict minerals
information from the mining company. Also, excluding such mining
issuers from the final rule could increase costs to other issuers along
the supply chain because, without being covered, such mining issuers
may not have the incentive to share origin and chain of custody
information about the conflict minerals they mined. However, not
including such mining issuers may decrease certain costs for mining
issuers, since such issuers will not have to comply with the Conflict
Minerals Statutory Provision with respect to conflict minerals mined by
such issuers (unless necessary to the production or functionality of a
product manufactured, or contracted to be manufactured, by such
issuer). However, we expect that such mining issuers will incur costs
to provide information on the source and custody of conflict minerals
mined by such issuers to their customers, and other participants in
their supply chain, who are subject to the Conflict Minerals Statutory
Provision.
D. Quantified Assessment of Overall Economic Effects
As noted above, Congress intended for the rule issued pursuant to
Section 1502 to decrease the conflict and violence in the DRC,
particularly sexual and gender based violence.\819\ A related goal of
the statute is the promotion of peace and security in the Congo.\820\
These are compelling social benefits, which we are unable to readily
quantify with any precision, both because we do not have the data to
quantify the benefits and because we are not able to assess how
effective Section 1502 will be in achieving those benefits.\821\ We
also note that these objectives of Section 1502 appear to be directed
at achieving overall social benefits and are not necessarily intended
to generate measurable, direct economic benefits to investors or
issuers specifically. Additionally, the social benefits are quite
different from the economic or investor protection benefits that our
rules ordinarily strive to achieve. We therefore have not attempted to
quantify the benefits of the final rule.
---------------------------------------------------------------------------
\819\ Section 1502(a) of the Act (``It is the sense of the
Congress that the exploitation and trade of conflict minerals
originating in the Democratic Republic of the Congo is helping to
finance conflict characterized by extreme levels of violence in the
eastern Democratic Republic of the Congo, particularly sexual- and
gender-based violence, and contributing to an emergency humanitarian
situation therein, warranting the provisions of section 13(p) of the
Securities Exchange Act of 1934, as added by subsection (b).'').
\820\ See Section 1502(d)(2)(A) of the Act (directing the GAO to
assess the effectiveness of Exchange Act Section 13(p) in promoting
peace and security in the Covered Countries).
\821\ Some commentators argued, however, that the Conflict
Minerals Statutory Provision has already pressured DRC authorities
to begin to demilitarize some mining areas and to increase mining
oversight. See, e.g., letters from International Corporate
Accountability Roundtable (Jul. 29, 2011) (``ICAR I''), Sen. Boxer
et al. I, Sen. Leahy et al., and United Nations Group of Experts on
the Democratic Republic of Congo (Oct. 21, 2011) (``UN Group of
Experts'').
---------------------------------------------------------------------------
Based on comments and our analysis, we do expect that the statute
will result in significant economic effects. We have noted the views of
commentators on direct compliance costs, and we acknowledge that these
costs are substantial. In addition, issuers with a reporting obligation
under the Conflict Minerals Statutory Provision could be put at a
competitive disadvantage with respect to private companies that do not
have such an obligation.\822\ We note, however, that non-reporting
companies are part of the supply chain of reporting issuers and will
bear many of the compliance costs of determining whether their minerals
are conflict-free.\823\ We also expect that the implementation of the
statute may provide significant advantage to foreign companies that are
not reporting in the United States--and thus need not comply--but do
compete directly with reporting issuers in the United States. In
requiring the Commission to promulgate this rule, however, Congress
determined that its costs were necessary and appropriate in furthering
the goals of helping end the conflict in the DRC and promoting peace
and security in the DRC. To the extent the final rule implementing the
statute imposes a burden on competition in the industries of affected
issuers, therefore, we believe the burden is necessary and appropriate
in furtherance of the purposes of Section 13(p). Also, if foreign
jurisdictions implement similar laws or regulations similar to Section
1502 or the final rule,\824\ any advantages available to foreign
companies listed in such jurisdictions but not listed in the United
States may be diminished.
---------------------------------------------------------------------------
\822\ In our Economic Analysis, we use the term ``competition''
to mean competition in the industries of the affected issuers, not
competition in all of the markets that the Commission is charged
with regulating, which are the United States securities markets. We
do not expect any effects of the rule on the competition in the
United States securities markets.
\823\ See, e.g., letters from Japanese Trade Associations and
NAM I.
\824\ See cf. letters from Member of the European Parliament
(Nov. 17, 2011) (``European Parliament'') (stating that in ``2010
the European Parliament adopted a resolution welcoming the adoption
of the new US `Conflict Minerals' Law and asked the Commission and
the Council to examine a legislative initiative along these lines'')
and NEI (stating that ``[s]imilar action can be expected in other
countries in response to the SEC's leadership, and as global
awareness of the conflict minerals issue increases,'' that
``conflict minerals legislation [in Canada] has already been
tabled,'' and ``the Canadian Securities Administrators (CSA) pay[s]
close attention to SEC rule-making developments'').
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As we have observed, unlike in most of the securities laws,
Congress intended the Conflicts Mineral Provision to serve a
humanitarian purpose, which is to prevent armed groups from benefiting
from the trade of conflict minerals. There may also be a benefit to
investors given the view expressed by some commentators that the
provision also protects investors by requiring disclosure of
information that may be material to their understanding of the risks of
investing in an issuer or its supply chain. To the extent that the
required disclosure will help investors in pricing the securities of
the issuers subject to the Conflict Minerals Statutory Provision, the
rule could improve informational efficiency. Because, however, the cost
of compliance for this provision will be borne by the shareholders of
the company, which could potentially divert capital away from other
productive opportunities, the rule may result in a loss of allocative
efficiency. The reduction in allocative efficiency could be offset,
somewhat, by increased demand for the firm's products and/or shares by
socially conscious consumers and investors. We do not expect that the
rule would negatively impact prospects of the affected industries to an
extent
[[Page 56351]]
that would result in withdrawal of capital from these industries. Thus,
we do not expect the rule to have a significant impact on capital
formation.
There may, however, be several indirect economic effects that could
be significant. The high cost of compliance provides an incentive for
issuers to choose only suppliers that obtain their minerals exclusively
from outside the Covered Countries, thereby avoiding the need to
prepare a Conflict Minerals Report. To the extent that Covered
Countries are the lowest cost suppliers of the minerals affected by the
statute, issuers preferring to find substitutes or other suppliers of
non-DRC minerals would have to increase the costs of their products to
recoup the higher costs. Reducing the viable supply of such minerals
may have the indirect effect of increasing the cost of acquiring these
minerals.
As mentioned above, the overall specific range of costs for
compliance with the rule provided by commentators was between
$387,650,000 and $16 billion. The wide divergence of the cost estimates
among the four separate analyses submitted by a manufacturing industry
association,\825\ an electronic interconnect industry association,\826\
a university group,\827\ and an environmental consultancy company \828\
illustrates to us the difficulty of ascertaining the estimated costs of
implementing the statute and our discretionary choices. We have
reviewed the proposal and the comments received and have used the
information provided by commentators to inform our Economic Analysis of
the final rule. In the remaining part of this section we attempt to
quantify, to the extent possible, the compliance costs resulting from
the final rule by relying on and critically evaluating the estimates
and the analyses that commentators provided. Rather than using a single
analysis, a combination of the analyses can provide a useful framework
for understanding various cost components of our implementing the rule.
Our approach strives to achieve a balanced and reasonable analysis
based on the data and assumptions provided by all commentators, as well
as our own analysis and assumptions. When it is deemed prudent, we have
chosen to make conservative assumptions that may, in some cases, lead
to an overestimation of the costs. Overall, after performing our
analysis we conclude that the costs of the statute will be substantial.
Thus, we have revised our own prior estimate of the cost of complying
with the rule. Based on our analysis of the data, we provide a range of
the costs of both initial compliance and the annual cost of ongoing
compliance. In our view, because of the potential variations in the
manner in which issuers will undertake compliance, providing such a
range is more appropriate than providing a precise cost estimate. Our
revised estimate is that the initial cost of compliance is between
approximately $3 billion to $4 billion, while the annual cost of
ongoing compliance will be between $207 million and $609 million.
---------------------------------------------------------------------------
\825\ See Section III.B.2.b.i.
\826\ See Section III.B.2.b.ii.
\827\ See Section III.B.2.b.iii.
\828\ See Section III.B.2.b.iv.
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We start our analysis of the cost of compliance by incorporating
all of the comments that provide quantified data on the aggregate
potential costs of the proposed rule. So, while our overarching
consideration of the costs of the rule we are adopting today takes into
account the information provided by a broad range of commentators, the
most useful frameworks for considering costs were provided by the
manufacturing industry association and university group commentators.
Other comments, while also providing certain valuable insights into how
our rules would be implemented, were either not as transparent in their
analytical frameworks or not easily generalizable in terms of
aggregating the costs across multiple industries.\829\
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\829\ As shown below, while we draw on the quantified analyses
supplied by the electronic interconnect industry association and the
environmental consultancy company commentators, these letters did
not provide as broad a range of quantified cost estimates as those
provided by the manufacturing industry association and university
group commentators.
---------------------------------------------------------------------------
We also found it significant that the two analyses by the
manufacturing industry association and university group commentators
take into account the categories of costs most often identified as
significant by commentators and that we agree are likely to be deemed
as such. Moreover, we did not find the assumptions underlying their
frameworks to be qualitatively different from the discussions of costs
provided by other commentators.
At the same time, in our view, even these two studies did not
provide sufficiently documented evidence to support all of their
assumptions and assertions and consequently, commentators differed on
the quantification of these costs. We have therefore taken into account
the views expressed in other comment letters, and made modifications to
the analyses provided by the manufacturing industry association and
university group commentators accordingly. What follows is a modified
analysis of the manufacturing industry association and university group
commentators' estimates that we believe better synthesizes the
information provided to us in the comment process.
First, in both of these estimates, an important consideration is
the cost of upgrading or implementing changes to IT systems. Based on
the letters submitted as well as estimates from other commentators, we
believe the manufacturing industry association and university group
commentators may have been over-inclusive in their estimates. For
example, the environmental consultancy company commentator estimates a
much smaller number of $25,000 for the IT system and $10,000 for IT
support.\830\ The commentator then states that, ``a cost of $6B is 10
times the total annual sales for all restricted materials software (of
which conflict minerals is a small part) and does not seem realistic *
* * [p]articularly since conflict minerals software for small companies
can be downloaded for free.'' The environmental consultancy company
commentator further states that ``[t]he systems quoted by [the
manufacturing industry association and university group commentators]
are the most expensive systems on the market,'' and that ``[m]ost
companies we interviewed said they would not need to invest in new
software solely for conflict minerals * * * .'' \831\
---------------------------------------------------------------------------
\830\ See letter from Claigan III. See also letter from Assent
(critiquing the cost estimates of both the manufacturing industry
association commentator and the university group commentator).
\831\ Letter from Claigan III.
---------------------------------------------------------------------------
While we are persuaded by the argument that an average issuer
should not expect to spend $1,000,000 to invest in a new IT system, we
do not accept the environmental consultancy company commentator's own
estimate of $35,000 because it does not provide a factual basis for the
assertion. In modifying the estimates of the manufacturing industry
association and university group commentators, we do not intend to
replace the manufacturing industry association and university group
commentators' cost estimates with the smaller estimate provided;
rather, for purposes of our cost estimate, the appropriate estimate
lies somewhere in between those two estimates.
Based on the university group commentator's analysis, we assumed
$205,000 for small company computer costs rather than $1,000,000.
Further, we assumed that the computer costs for
[[Page 56352]]
large issuers would be twice those for smaller issuers, or $410,000,
and not four times those for a smaller issuer as assumed by the
university group commentator.\832\ In order to make the IT cost
analysis consistent between the university group and the manufacturing
group's revised analysis, we averaged the total IT cost per company in
the university analysis and divided it by the total number of issuers
for an average IT cost for all companies (irrespective of size) of
approximately $250,000 and apply it to the manufacturing group's
analysis.\833\ This respectively changes the manufacturing industry
association and university group commentators' estimates of the total
IT cost from $5.9 billion and $2.6 billion, respectively, to
approximately $1.5 billion.
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\832\ The environmental consultancy company commentator
estimates the IT costs for a company with $1 billion in revenue to
be $35,000. Our estimate of IT costs attempts to incorporate these
two widely varying viewpoints. See letter from Claigan III.
\833\ Approximately $1.5 billion/5,994 issuers.
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Second, another important cost assumption is that the manufacturing
industry association commentator assumes that each issuer has an
average of 2000 first-tier suppliers. They arrive at this number based
on their ``consultations with a number of large manufacturers, and
based on research by'' others. This estimate of the average number of
first-tier suppliers is, however, not supported by other estimates, and
is in fact difficult to reconcile with figures reported by other
commentators. For example, the average number of suppliers per company
in the electronic interconnect industry association commentator study
is only 163.\834\ The environmental consultancy company commentator
also believes the supply chain would be much simpler than the
manufacturing industry association commentator predicts, based on the
EICC/GeSI process. The manufacturing industry association commentator
maintains, however, that many of its members have well over 2,000
suppliers. We do think a prudent reduction in the manufacturing
industry association commentator's estimate is warranted, but here
again, we do not know that 163 is any more representative of an average
company's experience. Thus, we use the university group commentator's
estimate of 1,060 suppliers while employing the manufacturing industry
association commentator's analysis. Revising the manufacturing industry
association commentator's number of suppliers in the supply chain
lowers their estimate of compliance costs from $1.2 billion to $635
million.
---------------------------------------------------------------------------
\834\ See letter from IPC I.
---------------------------------------------------------------------------
In addition, we are not convinced that the estimate of cost to
suppliers is appropriately generated by a top-down approach (number of
supplier relationships). Indeed, we think a top-down approach may not
reflect how our rule may be implemented because it is not clear how the
market may react in placing the various burdens of traces on the
countless entities in the supply chains. In this top-down approach
(which is the approach used by many commentators) each firm using these
minerals will need to track backwards through each supplier. If many
firms share the same supplier, the underlying assumption is there are
few economies of scale in determining whether the minerals are
conflict-free. Under this approach, each firm pays an independent cost
of finding out from each of their suppliers where the minerals
originate.\835\
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\835\ The university group commentator states that there are
``overlap'' or ``mutuality'' cost efficiencies that will emerge on
the supplier side, as the same supplier may have supply contracts
with more than one issuer thus allowing them to use any management
systems changes to meet the needs of multiple issuers. This
commentator estimates that supplier efforts will be reduced by 60%
because of this supplier-issuer overlap and modifies the number of
suppliers accordingly. See letter from Tulane.
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We believe, however, that due diligence on the part of suppliers
likely will be a bottom-up approach in which materials are tagged at
the mine and certified at the smelter and then are introduced into the
supply chain. Given this bottom-up approach, each supplier will then
track whether the mineral is conflict-free and to whom it will be sold.
While the system for tracking the sales of these minerals may increase
in magnitude with the number of companies the supplier supplies, we
believe the better approach to estimating costs of the supply chain
would be to estimate the total number of affected suppliers (bottom-up)
rather than the total number of supplier relations (top-down).
A bottom-up approach places more emphasis on the number of
suppliers and assumes that there are economies of scale in the cost
because suppliers need only determine the source of their minerals once
and then spread the cost of determining the source across many issuing
firms. For example, if issuers have many suppliers to choose from, they
may find it easier to deal with--and hence more valuable to employ--
only those suppliers who can fully attest that they are conflict-free.
Therefore, if all first-tier suppliers bear the burden of certifying
and providing conflict reports, then the relative burden on the issuers
will be very small. All of this will, however, depend in turn on the
comparative bargaining power between the issuers and the suppliers at
every level. Ultimately, none of the studies have provided compelling
explanations for the precise dynamics that will govern the issuer-
supplier or first-tier supplier-second-tier supplier relationships. On
the whole, we think it would be much more reasonable to believe that
suppliers at all levels will expend some effort individually in
providing information to some of their customers regarding the source
of their minerals, but each supplier's effort in turn will most likely
reduce the cost of its customers to comply with our rules.
Few commentators provided an estimate of the total number of
suppliers affected. In the university group commentator's estimate,
even after adjusting for potential overlap, the total number of
suppliers to be affected totals over 860,000, which is based on the
total supply chain. Using the total supply chain to estimate the
affected suppliers will create redundancies because a supplier may be
in more than one supply chain and therefore, be counted multiple times.
Thus, we believe the total number of suppliers affected in the
university group commentator's analysis is likely to be too high. The
manufacturing industry association commentator, on the other hand,
estimated the total number of small and medium-sized manufacturing
businesses to be affected at 278,000 and states that many of these
small businesses are likely to be suppliers. The 2009 Statistics of
U.S. Businesses from the U.S. Census estimates the total number of
manufacturing businesses at 266,175, and the number of small
manufacturing businesses (those with fewer than 500 employees) at
262,524.\836\ Both of these numbers are
[[Page 56353]]
similar to the number provided by the manufacturing industry
association commentator. We therefore have revised the university group
commentator's analysis on the number of affected suppliers to be
consistent with the manufacturing industry association commentator at
278,000 to reflect this judgment. In addition, consistent with the
university group commentator framework, we assumed that the same
percentage of suppliers as issuers would be considered large (28%) and
small (72%). Thus, in our revised university group commentator's
analysis, the total number of large suppliers is 77,840 while the total
number of small suppliers is 200,160. This changes the total compliance
cost for suppliers from $5.1 billion in the university group
commentator's analysis to $1.2 billion in our revised analysis.
---------------------------------------------------------------------------
\836\ See U.S. Census Bureau, Statistics of U.S. Business
(2009), available at http://www.census.gov/econ/susb/. We recognize
that the U.S. Census Bureau uses the NAICS definitions, including
the definition of ``manufacturing.'' As discussed above, we did not
adopt that definition for the final rule because it appears to
exclude any issuer that manufactures a product by assembling that
product out of materials, substances, or components that are not in
raw material form, which would exclude large categories of issuers
that manufacture products through assembly. However, we believe it
is not inappropriate to use the Census Bureau's data regarding the
total number of manufacturing businesses and the number of small
manufacturing businesses in determining whether to use the number of
suppliers provided by the university group commentator or the number
provided by the manufacturing industry association commentator.
Because we only have two real choices in the number of suppliers to
use for our calculations, we need some way to determine which figure
is a more viable estimate. Despite the fact that the Census Bureau
uses the NAICS definition of ``manufacturing,'' which may exclude
certain manufacturers, it would need to exclude almost 600,000
manufacturers for the university group commentator's figure to be
more accurate than the manufacturing industry association
commentator's figure. This appears to be too high. Therefore,
because the manufacturing industry association commentator's figure
is so much closer to the Census Bureau's figures, we decided it
would not be inappropriate to use the manufacturing industry
association commentator's figure even though our reasoning was based
on the NAICS definition of ``manufacturing.''
---------------------------------------------------------------------------
The overall impact of these changes to the analysis, a reduction in
IT costs (to both the manufacturing industry association and university
group commentators), a modification in the number of suppliers in the
supply chain (to the manufacturing industry association commentator)
and a decrease in the number of suppliers affected (to the university
group commentator) changes the total estimated cost of compliance
substantially. The manufacturing industry association commentator's
estimate declines from $9.3 billion to $4.1 billion while the
university group commentator's estimate drops from $7.94 billion to
$3.0 billion.
The combination of these modifications in the two analyses leads us
to estimate that initial compliance costs could be between $3.0 and
$4.0 billion for all companies to comply with the statutory
requirements. Below are the two revised analyses in tabular form with
the revised estimates highlighted in bold:
---------------------------------------------------------------------------
\837\ The manufacturing industry association commentator refers
to this as ``changes to their corporate compliance policies.'' See
letter from NAM I.
\838\ The manufacturing industry association commentator refers
to this as IT system development or revision. See id.
\839\ We are using the rounded estimate (4,500) that was used by
the university group and manufacturing industry association
commentators in their calculations even though a more exact number
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note
869.
\840\ The manufacturing industry association commentator refers
to this as the cost of providing ``proper information regarding the
source of minerals.'' Id.
------------------------------------------------------------------------
Revised Calculation
------------------------------------------------------------------------
Manufacturing Industry
Association Commentator
Estimate:
Issuers affected........ 5,994 .......................
Average number of 1st 1,060 2000*.53
tier suppliers.........
Issuer Due Diligence Reform:
\837\
Number of compliance 2 .......................
hours per supplier.....
Cost per hour........... $50 .......................
-------------------------------------------
Total compliance $635,364,000 5,994*1,060*2*$50
cost...............
-------------------------------------------
IT Systems Modification:
\838\
Cost per issuer......... $250,000 .......................
Total cost.......... $1,498,500,000 5,994*$250,000
-------------------------------------------
Conflict Minerals Report
Audits:
Issuers to do audit 4,500 5,994*75%
\839\..................
Audit cost for issuers.. $100,000 .......................
-------------------------------------------
Total cost.......... $450,000,000 4,500*100,000
-------------------------------------------
Issuer Verification of
Supplier Information:
Number of hours......... 0.5 .......................
Cost per hour........... $50 .......................
-------------------------------------------
Total cost.......... $158,841,000 5,994*1,060*0.5*$50
-------------------------------------------
Smaller Supplier Due
Diligence: \840\
Suppliers affected (only 55,600 278,000*.2
20% to conduct)........
Due diligence cost...... $25,000 .......................
-------------------------------------------
Total cost.......... $1,390,000,000 278,000*.2*$25,000
-------------------------------------------
Total........... $4,132,705,000 .......................
------------------------------------------------------------------------
------------------------------------------------------------------------
Revised Calculation
------------------------------------------------------------------------
University Group Commentator
Estimate:
Issuers affected........ 5,994 .......................
Large issuer (28% of 1,678 5,994*0.28
issuers)...............
Small issuer (72% of 4,316 5,994*0.72
issuers)...............
Number of 1st tier 1,060 2,000*0.53
suppliers (53% of NAM).
Issuer Due Diligence Reform: ................. .......................
Number of compliance 100 .......................
hours for large issuer.
Number of compliance 40 .......................
hours for small issuer.
Internal cost per hour.. $50 .......................
[[Page 56354]]
Internal costs for large $7,551,000 1,678*0.9*100*$50
issuer (90% of total
work load).............
Internal costs for small $6,474,000 4,316*0.75*40*$50
issuer (75% of total
work load).............
Consulting cost per hour $200 .......................
Consulting costs for $3,356,000 1,678*0.1*100*$200
large issuer (10% of
total work load).......
Consulting costs for $8,632,000 4,316*0.25*40*$200
small issuer (25% of
total work load).......
-------------------------------------------
Total cost.......... $26,013,000 .......................
-------------------------------------------
IT Systems Modification:
Cost per large issuer... $410,000 .......................
Cost per small issuer... $205,000 .......................
Total large issuer cost. $687,980,000 1,678*$410,000
Total small issuer cost. $884,780,000 4,316*$205,000
-------------------------------------------
Total costs......... $1,572,760,000 .......................
-------------------------------------------
Conflict Minerals Report
Audits:
Issuers affected \841\.. 4,500 .......................
Number of large issuers. 1,260 4,500*0.72
Number of small issuers. 3,240 4,500*0.28
Large issuer cost....... $100,000 .......................
Small issuer cost....... $25,000 .......................
Total costs for large $126,000,000 1,260*$100,000
issuers................
Total costs for small $81,000,000 3,240*$25,000
issuers................
-------------------------------------------
Total costs......... $207,000,000 .......................
-------------------------------------------
Supplier Due Diligence
Reform:
Total large suppliers... 77,840 278,000*.28
Total small suppliers... 200,160 278,000*.72
Number of compliance 100 .......................
hours for large
supplier...............
Number of compliance 40 .......................
hours for small
supplier...............
Internal cost per hour.. $50 .......................
Internal costs for large $350,280,000 77,840*100*0.9*$50
supplier (90% of total
work load).............
Internal costs for small $300,240,000 200,160*40*0.75*$50
supplier (75% of total
work load).............
Consulting cost per hour $200 .......................
Consulting costs for $155,680,000 77,840*100*0.1*$200
large supplier (10% of
total work load).......
Consulting costs for $400,320,000 200,160*40*0.25*$200
small supplier (25% of
total work load).......
-------------------------------------------
Total cost.......... $1,206,520,000 .......................
-------------------------------------------
Total........... $3,012,293,000 .......................
------------------------------------------------------------------------
The manufacturing industry association and the university group
commentators also provided estimates of ongoing compliance costs. As
discussed above, we consider the framework provided by these
commentators to be the most useful for estimating costs. The only other
commentator to provide an estimate of ongoing costs was the electronic
interconnect industry association commentator, but its analysis only
included companies in that industry. The analyses provided by the
manufacturing industry association and university group commentators
yield costs estimates across multiple industries. The manufacturing
industry association group commentator estimated an ongoing audit cost
of $450 million and an ongoing cost estimate of approximately $300
million for issuer verification of supplier information.\842\ In our
table above, however, we revised the estimate for issuer verification
of supplier information to approximately $159 million.\843\ We did not
modify the approximately $450 million cost estimate of the audit, which
was based on its estimate that the cost of such an audit for these
issuers would be $100,000 per issuer, and not the $25,000 we estimated
it to be in the Proposing Release. The total estimate of ongoing
compliance costs based on our revisions to the manufacturing industry
association commentator's analysis is therefore approximately $609
million.\844\ We believe that the university group commentator's only
significant recurring costs are the approximately $207 million audit
costs.\845\ As with the manufacturing industry association commentator,
we did not modify the approximately $207 million cost estimate of the
audit. Therefore, we believe that the ongoing compliance cost estimate
is likely to be in the range of $207 million to $609 million.\846\
---------------------------------------------------------------------------
\841\ We are using the rounded estimate (4,500) that was used by
the university group and manufacturing industry association
commentators in their calculations even though a more exact number
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note
869.
\842\ See letter from NAM I.
\843\ 5,994*1,060 *0.5 *$50 = $158,841,000
\844\ $450,000,000 + $158,841,000 = $608,841,000
\845\ The university group commentator noted that ``there would
be some internal operations costs associated with performing ongoing
due diligence and maintaining the necessary [information technology]
systems on a company-to-company basis over the years,'' but that the
``recurring costs of operating same is very low compared with the
initial implementation.'' See letter from Tulane.
\846\ The manufacturing industry association commentator also
quotes compliance costs by Technology Forecasters, Inc on the RoHS
directive. Using the RoHS directive, they estimate total compliance
costs of $32 billion and $3 billion annually for maintenance. See
letter from NAM I. One potential method to estimate ongoing costs is
to apply the ratio of initial compliance costs to ongoing compliance
costs (9.375%) in the submitted RoHS analysis ($3 billion/$32
billion or 9.375%) and apply it to our revised estimates of the
analyses of the manufacturing industry association and university
group commentators. This results in total ongoing estimated
compliance costs of $400 million ($4.1 billion * 9.375%) and $281
million ($3.0 billion * 9.375%), respectively. However, because the
manufacturing industry association commentator does not specify the
composition of these maintenance costs (e.g., it is not stated
whether this includes audit costs), nor does it provide the
underlying RoHS study for verification, we are unable to confirm the
accuracy of this ratio.
---------------------------------------------------------------------------
[[Page 56355]]
IV. Paperwork Reduction Act
A. Background
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (the ``PRA'').\847\ We published a notice
requesting comment on the collection of information requirements in the
Proposing Release for the proposed rules and amendments. The proposed
rules and amendments would have amended one regulation and three forms.
In response to comments received from the public, the Commission has
decided to adopt a new disclosure form, rather than amend existing
rules and forms. We have submitted the new collection of information
requirements to the Office of Management and Budget (the ``OMB'') for
review in accordance with the PRA.\848\
---------------------------------------------------------------------------
\847\ 44 U.S.C. 3501 et seq.
\848\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
The title for the collection of information is: ``Form SD'' (a new
collection of information).
The form is adopted under the Exchange Act and sets forth the
disclosure requirements for reports filed by certain issuers regarding
their use of conflict minerals from the Covered Countries. The hours
and costs associated with preparing and submitting the form constitute
the reporting and cost burdens imposed by the collection of
information. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number. Compliance with the rule is
mandatory. Responses to the information collection will not be kept
confidential and there is no mandatory retention period for the
information disclosed.
B. Summary of the Comment Letters
In the Proposing Release, we requested comment on the PRA analysis.
We received only one comment letter that addressed the PRA
explicitly,\849\ but we received a number of other comment letters and
submissions that discussed the costs and burdens to issuers generally
that would have an effect on the PRA analysis.\850\ A detailed
discussion of these comments is included in the section III above
regarding the Economic Analysis of the statute. In the Proposing
Release, we estimated that approximately 5,994 of the approximately
14,600 annual reports are filed by issuers that would be affected by
the proposed rules and form amendments.
---------------------------------------------------------------------------
\849\ See letter from NAM I.
\850\ See, e.g., letters from Assent, Barrick Gold, CEI I, CEI
II, Chamber I, Chamber III, Claigan I, Claigan II, Claigan III,
CTIA, Ford, Howland, IPC I, ITRI I, ITRI II, ITRI III, Japanese
Trade Associations, NAM I, NRF I, PCP, Rep. Lee, Roundtable, Society
of Corporate Secretaries and Governance Professionals (Jun. 21,
2011) (``Corporate Secretaries II''), TriQuint I, Tulane, United
States Chamber of Commerce (Jul. 18, 2011) (``Chamber II''), and WGC
I.
---------------------------------------------------------------------------
The letter discussing the PRA specifically was from the
manufacturing industry association commentator.\851\ The commentator
concluded that, of the 5,994 issuers that the Proposing Release stated
could be affected by the final rule, the average issuer would have
between 2,000 to 10,000 first-tier suppliers. The commentator agreed,
therefore, with our statement in the Proposing Release that the
paperwork costs could be significant because the disclosure requirement
in the proposed rules ``drastically increases the amount of paperwork
issuers will have to collect and provide to the SEC to make the
required disclosures.'' \852\ The amount calculated by the commentator
was $9.4 billion, which included approximately ``$8 billion for issuers
and $1.4 billion from smaller companies that are not issuers.'' \853\
---------------------------------------------------------------------------
\851\ See letter from NAM I.
\852\ Id.
\853\ See id. In response to our estimate in the Proposing
Release, of 793 reporting companies that would qualify as ``small
entities'' for purposes of the Initial Regulatory Flexibility Act
and that have conflict minerals necessary to the functionality or
production of products they manufacture or contract to manufacture,
the manufacturing industry association commentator noted that ``a
large portion of America's 278 thousand small and medium-sized
manufacturers could be affected by the requirement to provide
information on the origin of the minerals in the parts and
components they supply to companies subject to the SEC.'' Id. The
commentator estimated, however, that ``only one in five smaller
companies would be in one or more issuer's supply chains,'' and
these smaller companies' only costs regarding the proposed rules
would be a $25,000 audit cost. Id. Therefore, the proposed rules
would cost smaller companies that are not required to report with us
under Exchange Act Sections 13(a) or 15(d) approximately $1.4
billion. Id.
---------------------------------------------------------------------------
Our PRA analysis pertains solely to the paperwork burdens of
issuers that file reports with us, although we discuss the burdens and
costs of the final rule to both reporting issuers and non-reporting
companies in our Economic Analysis section above. Therefore, for the
purpose of the PRA analysis, we do not take into account the
commentator's $1.4 billion figure because it relates solely to non-
reporting companies. As a result, the commentator's paperwork burden
estimate appears to be approximately $8 billion, which is much higher
than our estimate of $46,475,000 in the Proposing Release. Also, as we
note above, other commentators provided costs estimates. These
commentators did not specifically discuss the costs of the statute or
the rule as they relate to the PRA. However, as discussed in greater
detail below, we have attempted to extrapolate the paperwork costs from
the overall cost estimates of these commentators.\854\
---------------------------------------------------------------------------
\854\ See letters from Claigan I, Claigan II, Claigan III,
Claigan IV, IPC I, and Tulane.
---------------------------------------------------------------------------
C. Revisions to PRA Reporting and Cost Burden Estimates
For purposes of the PRA, in the Proposing Release, we estimated
that the total annual increase in the paperwork burden for all
companies to prepare the disclosure that would be required under the
proposed rules would be approximately 153,864 hours of company
personnel time and a cost of approximately $71,243,000 for the services
of outside professionals. These figures reflected our estimated costs
for issuers to satisfy the due diligence and audit requirements of the
proposed rules, which we estimated would be $46,475,000. As discussed
in more detail below, we are revising our PRA burden and cost estimates
in light of the comments we received.
For purposes of the PRA for the final rule, we estimate the total
annual increase in the paperwork burden for all affected companies to
comply with the collection of information requirements in our final
rule is approximately 2,225,273 hours of company personnel time and
approximately $1,178,378,167 for the services of outside
professionals.\855\ These estimates include the time and cost of
collecting the information, preparing and reviewing disclosure, and
submitting documents. In this regard, we include due diligence, which
includes updating information technology systems and obtaining an
independent private sector audit, as part of collecting information. We
estimate that the total cost for issuers to satisfy their due diligence
is $1,030,026,667. We added this estimate to our estimate of the cost
to issuers to hire outside professionals to prepare and review
disclosure, submit
[[Page 56356]]
documents, and retain records, which is $148,351,500.\856\
---------------------------------------------------------------------------
\855\ $1,030,026,667 + $148,351,500 = $1,178,378,167.
\856\ We note that commentators rounded many of the calculations
they made and used. However, for clarity in the body of the release,
we refer to many rounded figures, but we have included the more
exact figures and our calculations in the footnotes. Regardless, it
does not appear that the rounded numbers vary significantly from the
more exact calculations to make them meaningfully different.
---------------------------------------------------------------------------
Consistent with our methodology in the Proposing Release, in
deriving our estimates for the final rule, we recognize that the
burdens will likely vary among individual companies based on a number
of factors, including the size and complexity of their operations, the
number of products they manufacture or contract to manufacture, and the
number of those products that contain conflict minerals. We believe
that some issuers will experience costs in excess of this average in
the first year of compliance with the final rule and some issuers may
experience less than these average costs. We base our revised estimates
of the effect that the final rule will have on the collection of
information as a result of the required reasonable country of origin
inquiry, due diligence process, and independent private sector audit of
the Conflict Minerals Report primarily on information that we have
obtained from comment letters.
In the Proposing Release, we noted that the DRC accounts for
approximately 15% to 20% of the world's tantalum, and accounts for a
considerably smaller percentage of the other three conflict
minerals.\857\ Therefore, for the purposes of the PRA, we assumed in
the Proposing Release that only 20% of the 5,994 affected issuers would
have to provide an audited Conflict Minerals Report, which would have
been 1,199 issuers. Both the manufacturing industry association
commentator and the university group commentator, however, estimated in
their comment letters that 75% of issuers would have to submit a
Conflict Minerals Report.\858\ Also, the electronic interconnect
industry association commentator indicated that it expected ``nearly
100% of affected issuers will need to complete'' a Conflict Minerals
Report because ``the vast majority of [issuers] will be unable to
identify the origin of their conflict minerals.'' \859\ However,
because of the reasonable country of origin inquiry requirement, the
fact that only issuers who know or have reason to believe that their
conflict minerals may have originated in the Covered Countries and may
not have come from recycled or scrap sources are required to proceed to
step three, and the ``DRC conflict undeterminable'' temporary
provision, we believe it is appropriate to estimate that some
percentage of issuers will not be required to submit a Conflict
Minerals Report, an independent private sector audit, or both.
Therefore, for the final rule, we estimate that 75% of all the 5,994
issuers, which is approximately 4,496 issuers,\860\ will have to submit
a Conflict Minerals Report and provide an independent private sector
audit of that report for the first two years after implementation. We
note that, under the final rule, issuers that proceed to step three but
are unable to determine whether their conflict minerals originated in
the Covered Countries, came from recycled or scrap sources, or financed
or benefited armed groups in those countries are required to provide a
Conflict Minerals Report, but that report does not have to be audited
for the first two years following the rule's adoption for all issuers
and the first four years for smaller reporting issuers. This change
from the proposal could cause the actual costs to issuers for the first
two years after implementation, for all issuers and four years after
implementation for smaller issuers, to be lower than the commentators'
cost estimates. We believe, however, that our assumption that 75% of
affected issuers will have to submit a Conflict Minerals Report and
provide an independent private sector audit of that report will balance
some of the cost estimate discrepancies because 75% was lower than the
100% estimate of the number of affected issuers.\861\
---------------------------------------------------------------------------
\857\ See Proposing Release. See also Jessica Holzer, Retailers
Fight to Escape `Conflict Minerals' Law, The Wall Street Journal,
Dec. 2, 2010, at B1. The DRC also accounts for approximately 4% of
the world's tin, see id., and approximately 0.3% of global gold mine
production, see letter from JVC et al. II (citing to GFMS Gold
Survey 2010).
\858\ See letters from NAM I and Tulane.
\859\ See letter from IPC I.
\860\ 5,994 issuers x 75% = 4,495.5.
\861\ See letters from IPC I (stating that nearly 100% of
affected issuers would have to complete a Conflict Minerals Report)
and NAM I (stating that it ``conservatively'' estimated that 75% of
affected issuers would have to provide an audited Conflict Minerals
Report).
---------------------------------------------------------------------------
1. Estimate of Conducting Due Diligence, Including the Audit
We received a number of comments regarding the estimated costs of
the proposed rules, particularly setting up the overall supply chain
tracking systems and conducting an audit. The cost estimates provided
by the manufacturing industry association commentator and the
university group commentator were the most comprehensive because they
discussed the costs to all companies, including issuers and private
company suppliers.\862\ We note that the electronic interconnect
industry association commentator provided an extensive discussion of
the costs of the proposed rules.\863\ Its discussion and cost
estimates, however, were limited to the electronic interconnect
industry, which is only one segment of affected issuers. Also, although
the tin industry association commentator's estimates were useful, they
were limited to the costs of its bag-and-tag system, which covers only
the costs of due diligence for the portion of the supply chain from the
mine to the smelter.\864\ For the PRA estimate of the due diligence
costs, we relied primarily on the cost estimates from the manufacturing
industry association and the university group commentators and, to a
lesser extent, we also relied on the electronic interconnect industry
association commentator's estimates.\865\
---------------------------------------------------------------------------
\862\ See letters from NAM I and Tulane.
\863\ See letter from IPC I.
\864\ See letter from ITRI II.
\865\ We note that in the Economic Analysis above, we provided a
range to estimate the ongoing compliance costs. For purposes of the
PRA, however, which calls for a specific estimate of the total
annual paperwork burden imposed by the rule, we are using two of the
data points within that range based on the more comprehensive
comment letters we received and are then averaging the results to
yield a final PRA estimate.
---------------------------------------------------------------------------
The manufacturing industry association commentator estimated that
the initial costs to affected issuers would be approximately $8
billion.\866\ This commentator's only two recurring costs in its $8
billion estimate were the approximately $300 million cost for risk-
based programs needed to verify the credibility of suppliers'
information, which the commentator indicated would be incurred ``on an
annual basis,'' \867\ and the approximately $450 million cost for the
annual audit of the Conflict Minerals Report, which together total $750
million.\868\
---------------------------------------------------------------------------
\866\ We calculate the exact amount, based on the commentator's
estimates and assumptions, to be $7,941,250,000. The commentator
stated that this cost would include changing legal obligations,
changing IT systems, obtaining an independent private sector audit,
and implementing risk-based programs. Changing legal obligations
would entail 2 hours for each affected issuer's 2,000 suppliers at
$50 per hour [2 x $50 x 2,000 x 5,994 = $1,198,800,000.]. Changing
IT systems would entail a cost of $1 million per affected issuer [$1
million x 5,994 = $5,994,000,000]. Obtaining an audit would entail a
cost of $100,000 for 75% of all affected issuers [$100,000 x 75% x
5,994 = $449,550,000]. Implementing risk-based programs would entail
1,000 hours at a cost of $50 per hour for all affected issuers
[1,000 x $50 x 5,994 = $299,700,000].
\867\ See letter from NAM I.
\868\ The actual cost would be $749,250,000 [$449,550,000 +
$299,700,000 = $749,250,000].
---------------------------------------------------------------------------
The university group commentator estimated that the initial costs
to affected issuers would be approximately
[[Page 56357]]
$2.8 billion,\869\ and the cost to affected issuers in subsequent years
would consist primarily of the approximately $207 million portion of
that amount that would be used for the annual audit of the Conflict
Minerals Report.\870\
---------------------------------------------------------------------------
\869\ The actual estimated cost was $2,795,793,000. This cost
estimate included a $2,562,780,000 cost for instituting the
necessary IT systems [$1,678,000,000 for large issuers plus
$884,780,000 for small issuers], a $26,013,000 cost for
strengthening internal management systems in view of performing due
diligence, and a $207,000,000 cost for the independent private
sector audit. The university group commentator estimated the audit
cost to be exactly $207 million by using the manufacturing industry
association commentator's estimate that 4,500 of the 5,994 affected
issuers (75%) would be required to obtain an audit of their Conflict
Minerals Report. The 4,500 figure, however, is rounded up from a
more exact calculation of 75% of 5,994. The more exact calculation
for 75% of 5,994 is 4,496 [5,994 x .75 = 4,459.5], and not 4,500,
but both the university group commentator and the manufacturing
industry association commentator rounded to 4,500. Using the
electronic interconnect industry association commentator's estimates
that 72% of all affected issuers are small and medium-sized issuers
(under $99 million in annual sales) and 28% are large issuers, the
university group estimated that, of the 4,500 affected issuers,
3,240 were small and medium-sized issuers and 1,260 were large
issuers. The university group commentator assumed that, based on the
manufacturing industry association commentator's estimates, an audit
for small and medium-sized issuers would cost $25,000 per audit and
an audit for large issuers would cost $100,000 per audit. Using
these estimates, the university group determined that the total
audit cost amount for affected issuers would be $207 million
exactly.
\870\ See letter from Tulane.
---------------------------------------------------------------------------
As discussed above in section III, however, we adjusted the cost
estimates provided to us by the manufacturing industry association and
the university group commentators. Therefore, our overall estimate
regarding the costs of conducting due diligence, including the audit,
is based on the modified cost figures. Although the manufacturing
industry association commentator estimated that the initial costs to
affected issuers would be approximately $8 billion, we modified that
figure to be approximately $2.7 billion for affected issuers.\871\ In
this regard, we modified that commentator's approximately $300 million
cost estimate for risk-based programs to be approximately $159
million.\872\ We did not, however, modify the commentator's
approximately $450 million cost estimate of the independent private
sector audit for affected issuers, which was based on its estimate that
the cost of such an audit for these issuers would be $100,000 per
issuer, and not the $25,000 we estimated it to be in the Proposing
Release.\873\ We note that the electronic interconnect industry
association commentator agreed that the costs for an independent
private sector audit could be as much as $100,000.\874\ The
manufacturing industry association commentator noted, however, that
$25,000 would cover the audit for a small company with a simple supply
chain.\875\
---------------------------------------------------------------------------
\871\ Our estimate of the cost is $2,742,705,000. This cost
estimate included a $635,364,000 cost for issuer due diligence
reform, a $1,498,500,000 cost for IT system modifications, a
$450,000,000 cost for the independent private sector audit, and a
$158,841,000 cost of risk-based programs needed to verify the
credibility of suppliers' information.
\872\ Our estimate of the cost is $158,841,000.
\873\ See letter from NAM I.
\874\ See letter from IPC I.
\875\ See letter from NAM I. We note that the manufacturing
industry association commentator separately indicated that costs of
the final rule could be $16 billion or more by extrapolating from
the costs of compliance with the RoHS. We did not use this estimate
in our analysis because, despite the fact that this commentator
claimed that both directives require companies to trace materials
used in their products, the commentator did not discuss how RoHS
compares to the requirements in the final rule.
---------------------------------------------------------------------------
From the approximately $159 million cost estimate for the risk-
based programs needed to verify the credibility of suppliers'
information, based on our revised calculations of the manufacturing
industry association commentator's figures, and that commentator's
approximately $450 million cost estimate for the audit, we derive an
approximate estimate of $609 million for annual recurring costs.\876\
We note that the initial approximately $2.7 billion burden is much
greater than the subsequent approximately $609 million annual burden,
and we averaged the burdens over the first three years. Over a three-
year period, the average annual cost to affected issuers would be
approximately $1.32 billion using the manufacturing industry
association commentator's figures.\877\
---------------------------------------------------------------------------
\876\ $450,000,000 + $158,841,000 = $608,841,000.
\877\ ($2,742,705,000 + $608,841,000 + $608,841,000)/3 =
$1,320,129,000.
---------------------------------------------------------------------------
Additionally, although the university group commentator estimated
that the initial costs to affected issuers would be approximately $2.8
billion, we modify that figure to be approximately $1.8 billion.\878\
We did not, however, modify the university group commentator's
approximately $207 million cost estimate of the independent private
sector audit for affected issuers. Therefore, we do not modify the
estimate of the cost to affected issuers in subsequent years, which
would still be approximately $207 million. Again, the initial
approximately $1.8 billion burden is much greater than the subsequent
approximately $207 million annual burden, and we also averaged the
burdens over the first three years. Over a three-year period, the
average annual cost to affected issuers would be approximately $740
million using the university group commentator's figures.\879\
---------------------------------------------------------------------------
\878\ The estimated cost was $1,805,773,000. This cost estimate
for issuers included the modified $1,572,760,000 cost for
instituting the necessary IT systems, the $207,000,000 cost for the
independent private sector audit, and the $26,013,000 cost for
strengthening internal management systems in view of performing due
diligence.
\879\ ($1,805,773,000 + $207,000,000 + $207,000,000)/3 =
$739,924,333.
---------------------------------------------------------------------------
To estimate the overall costs of conducting due diligence,
including the audit, we averaged the modified estimates from the
manufacturing industry association and the university group
commentators discussed above. The average of these two costs is
approximately $1.03 billion.\880\
---------------------------------------------------------------------------
\880\ ($1,320,129,000 + $739,924,333)/2 = $1,030,026,667.
---------------------------------------------------------------------------
2. Estimate of Preparing the Disclosure
The few estimates that we received from commentators regarding the
number of hours it would take issuers to prepare and review the
proposed disclosure requirements varied widely. One commentator, a
semiconductor company, asserted that it would require 1,400 hours
initially to implement the proposed rules and 700 hours in subsequent
years.\881\ The university group commentator suggested that a small
issuer would require 40 man-hours to comply with the proposed rules and
a large issuer would require 100 man-hours,\882\ and it appears that
these costs would be recurring.\883\ The manufacturing industry
association commentator concluded that changing legal obligations to
reflect a company's new due diligence would require ``at a minimum''
two hours of employee time,
[[Page 56358]]
``and considerably more than two hours is a distinct possibility.''
\884\
---------------------------------------------------------------------------
\881\ See letter from TriQuint I.
\882\ See letter from Tulane. This commentator stated that an
issuer's compliance could be ``facilitated'' by using third parties.
The commentator assumed that large issuers would use third parties
for 10% of their compliance needs and small companies would use
third parties for 25% of their compliance needs. In our calculations
for the number of hours issuers would require in complying with our
proposed rules, we did not include third parties because it appears
that the use of third parties would not affect the number of hours
required for compliance, but would only affect the cost.
\883\ Id. This commentator stated that the 100 hours or 40 hours
needed to comply with the proposed rules would involve multiple
tasks, including: Initial reviews of the issuer's policies,
procedures, and controls; developing a gap analysis and compliance
plan, and modifying that plan as needed; developing draft revised
policies, procedures, and controls; conducting initial testing on
those revised policies, procedures, and controls; and implementing
the revised policies, procedures, and controls, training personnel
on them, and communicating them to suppliers. Although many of these
are described as ``initial'' actions, issuers will need to review
and modify many of them as well. For example, it is likely that each
year issuers may need to review and test their policies, procedures,
and controls, modify them as needed, and implement any new further
revised policies, procedures, and controls.
\884\ See letter from NAM I.
---------------------------------------------------------------------------
In calculating the number of hours necessary to prepare and review
the disclosure required by the final rule, we derived an average based
on the estimates provided by the semiconductor company and university
group commentators.\885\ For the semiconductor company commentator
estimate, we multiplied its initial 1,400 hour estimate by the 5,994
affected issuers, so the first year's burden for all affected issuers
would be approximately 8.4 million hours,\886\ and the 700 hour
subsequent year estimate also by the 5,994 affected issuers, which
resulted in approximately 4.2 million hours for each subsequent
year.\887\ Averaging the burden hours over the first three years
resulted in an average burden hour estimate of approximately 5.6
million hours per year.\888\ To determine the estimated number of hours
per year per issuer, we divided the 5.6 million hours by 5,994 affected
issuers, which resulted in 933 hours per year per affected issuer to
comply with the proposed rules.\889\
---------------------------------------------------------------------------
\885\ We did not include the two-hour figure from the
manufacturing industry association commentator in our estimate
because it was so much lower than the other two estimates and did
not appear to include all the necessary steps to comply with the
proposed rules. Instead, this estimate was based only on the time
required to make changes to an issuer's corporate compliance
policies and supply chain operating procedures. Also, the university
group commentator specifically disagreed with this estimate and the
manufacturing industry association commentator acknowledged that
these actions may take ``considerably more than two hours.''
\886\ 1,400 hours x 5,994 affected issuers = 8,391,600 hours.
\887\ 700 hours x 5,994 affected issuers = 4,195,800 hours.
\888\ [8,391,600 hours + (4,195,800 hours x 2)]/3 = 5,594,400
hours average per year.
\889\ 5,594,400 hours/5,994 affected issuers = 933 hours.
---------------------------------------------------------------------------
The university group commentator separated its estimated hours
between small and large issuers using the estimated breakdown between
the number of affected large and small companies provided by the
electronic interconnect industry association in its comment
letter.\890\ Because we recognized that companies of varying sizes may
incur different burdens, we also differentiated between large and small
companies in our estimate of burden hours. Therefore, we multiplied the
university group commentator's 100 hour estimate for large issuers by
the electronic interconnect industry association commentator's
estimated 28% for large affected issuers, so the burden for large
affected issuers would be 167,832 hours,\891\ and multiplied the 40
hour estimate for small issuers by the electronic interconnect industry
association commentator's 72% for small affected issuers, which
resulted in 172,627 hours for small affected issuers.\892\ To determine
the estimated number of hours per year per issuer, we added the
estimated hours for the small and large companies, which would be
340,459 hours,\893\ and divided that number by all the 5,994 affected
issuers. Therefore, the average amount of hours per year for each
issuer, both large and small, to prepare and review the disclosure
required by our rule would be approximately 57 hours.\894\ Although not
explicit in its comment letter, it appears that the burden hours for
the university group commentator's estimates would be incurred
annually, so we did not average these hours over the first three years
as we did for the semiconductor company commentator's estimate.
---------------------------------------------------------------------------
\890\ See letter from Tulane.
\891\ 100 hours x 5,994 affected issuers x 28% large affected
issuers = 167,832 hours.
\892\ 40 hours x 5,994 affected issuers x 72% small affected
issuers = 172,627 hours.
\893\ 167,832 hours + 172,627 hours = 340,459 hours.
\894\ 340,459 hours/5,994 affected issuers = 56.80 hours.
---------------------------------------------------------------------------
Next, we averaged the two burden hour estimates by adding the 933
hour estimate to the 57 hour estimate (and by dividing by two) and
determined that each affected issuer, on average, would spend 495
burden hours preparing and reviewing the disclosure.\895\ We assumed
that 75% of the burden of preparation would have been carried by the
company internally and that 25% of the burden of the preparation would
have been carried by outside professionals retained by the company at
an average cost of $200 per hour.\896\ The portion of the burden
carried by outside professionals would have been reflected as a cost,
while the portion of the burden carried by the company internally would
have been reflected in hours. Therefore, the total number of internal
preparation hours for affected issuers would be 2,225,273 hours.\897\
Similarly, the total cost for external preparation for affected issuers
would be $148,351,500.\898\
---------------------------------------------------------------------------
\895\ 933 hours + 57 hours/2 = 495 hours.
\896\ The university group commentator estimated that outside
professionals would cost $200 per hour because it believed that ``a
substantial portion'' of required consulting work will be done by
``lower cost environmental and sustainability consulting firms''
instead of large accounting firms that would be more expensive. We
frequently use a $400 per hour estimate in our PRA analysis on the
assumption that attorneys will be involved in the preparation of the
securities law disclosures required by our rules. The disclosure
required by the final rule may likely involve work by other types of
professionals, so that the $200 per hour estimate may be more
appropriate in this circumstance.
\897\ 495 hours x 75% internal preparation x 5,994 affected
issuers = 2,225,272.50 hours.
\898\ 495 hours x 25% external preparation x $200 per hour for
outside consultants x 5,994 affected issuers = $148,351,500.
---------------------------------------------------------------------------
3. Revised PRA Estimate
The following table illustrates the estimated changes in annual
compliance burden in the collection of information in hours and costs
for the new Exchange Act specialized disclosure report that will result
from the final rule. The burden hours figure is the 2,225,273 internal
burden hours estimate for preparing the disclosure. We are adding the
$148,351,500 estimate of external professional costs for preparing the
disclosure to the $1,030,026,667 estimate of conducting due diligence,
including the audit, to determine the $1,178,378,167 professional costs
in the below table.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Final
Current Final Current Increase in Final burden Current Increase in professional
Form annual annual burden burden hours hours (C) = (A) professional professional costs (F) = (D) +
responses responses hours (A) (B) + (B) costs (D) costs (E) (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-D............................................................. ........... 5,994 ........... 2,225,273 2,225,273 ............... $1,178,378,167 $1,178,378,167
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
V. Final Regulatory Flexibility Act Analysis
This Final Regulatory Flexibility Act Analysis (``FRFA'') \899\
relates to new rule 13p-1 and new Form SD, which implement Section
13(p) of the Exchange Act. Section 13(p) concerns certain disclosure
and reporting obligations of issuers with conflict minerals necessary
to the functionality or production of any product manufactured or
contracted by those
[[Page 56359]]
issuers to be manufactured. An Initial Regulatory Flexibility Act
Analysis was prepared in accordance with the Regulatory Flexibility Act
and included in the Proposing Release.
---------------------------------------------------------------------------
\899\ This analysis has been prepared in accordance with 5
U.S.C. 601.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Final Action
The final rule is designed to implement the requirements of Section
1502 of the Act. Specifically, we are adopting amendments to our rules
to implement the Conflict Minerals Statutory Provision. The final rule
requires any reporting issuer for which conflict minerals are necessary
to the functionality or production of a product manufactured or
contracted to be manufactured by that issuer to disclose annually in a
separate specialized disclosure report on a new form the results of its
reasonable country of origin inquiry into whether its conflict minerals
originated in the Covered Countries or came from recycled or scrap
sources. Under the final rule, following its reasonable country of
origin inquiry, if (a) The issuer knows that its conflict minerals did
not originate in the Covered Countries or knows that they came from
recycled or scrap sources, or (b) the issuer has no reason to believe
its conflict minerals may have originated in the Covered Countries, or
(c) the issuer reasonably believes its conflict minerals came from
recycled or scrap sources, then in all such cases the issuer must
disclose its determination and describe briefly in the body of Form SD,
the reasonable country of origin inquiry it undertook and the results
of the inquiry. On the other hand, following its reasonable country of
origin inquiry, if (a) the issuer knows that its conflict minerals
originated in the Covered Countries and knows that they did not come
from recycled or scrap sources, or the issuer has reason to believe
that its conflict minerals may have originated in the Covered
Countries, and (b) the issuer knows that its conflict minerals did not
come from recycled or scrap sources or has reason to believe that its
conflict minerals may not have come from recycled or scrap sources,
then the issuer must exercise due diligence on the source and chain of
custody of its conflict minerals that conforms to a nationally or
internationally recognized due diligence framework, if one is
available. If one is not available, the issuer must exercise due
diligence without the benefit of such a framework. Following its due
diligence, unless the issuer determines, based on that due diligence,
that its conflict minerals did not originate in the Covered Countries
or that its conflict minerals did come from recycled or scrap sources,
the issuer must file a Conflict Minerals Report.
In most circumstances, the issuer must obtain an independent
private sector audit of its Conflict Minerals Report. The issuer must
also describe in its Conflict Minerals Report, among other information,
its products manufactured or contracted to be manufactured that have
not been found to be ``DRC conflict free.'' For a temporary two-year
period for all issuers, and for a temporary four-year period for
smaller reporting issuers, an issuer that must perform due diligence
and is unable to determine that the conflict minerals in its products
originated in the Covered Countries or came from recycled or scrap
sources, or unable to determine that the conflict minerals in those
products that originated in the Covered Countries financed or benefited
armed groups in those countries, may consider those products ``DRC
conflict undeterminable.'' In that case, the issuer must describe,
among other information, its products manufactured or contracted to be
manufactured that are ``DRC conflict undeterminable'' and the steps it
has taken or will take, if any, since the end of the period covered in
its most recent prior Conflict Minerals Report to mitigate the risk
that its necessary conflict minerals benefit armed groups, including
any steps to improve its due diligence. An issuer with products that
are ``DRC conflict undeterminable'' is not required to obtain an
independent private sector audit of the Conflict Minerals Report
regarding the conflict minerals in those products.
Finally, after its reasonable country of origin inquiry, an issuer
that has reason to believe that its conflict minerals may not have been
from recycled or scrap sources must exercise due diligence that
conforms to a nationally or internationally recognized due diligence
framework developed specifically for conflict minerals from recycled
sources to determine that its conflict minerals are from recycled or
scrap sources. The issuer must also describe its due diligence in its
Conflict Minerals Report. Currently, gold is the only conflict mineral
with a nationally or internationally recognized due diligence framework
for recycled or scrap conflict minerals. If no nationally or
internationally recognized due diligence framework for a particular
recycled or scrap conflict mineral is available, which is the case for
the other three minerals, until such a framework is developed, the
issuer must exercise due diligence in determining that its conflict
minerals are from recycled or scrap sources and describe the due
diligence measures it exercised in its Conflict Minerals Report.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on any aspect of the
IRFA, including the number of small entities that would be affected by
the proposed rules, the nature of the impact, how to quantify the
number of small entities that would be affected, and how to quantify
the impact of the proposed rules. We received some comments that
specifically referenced the Regulatory Flexibility Analysis
(``RFA'').\900\ Some of these commentators claimed that we
underestimated the number of small entities that would be impacted by
the proposal because our estimate did not account for the number of
small businesses that do not report with us but participate in a
reporting issuer's supply chain.\901\ In this regard, the SBA
recommended that we publish an amended IFRA for the proposed rules to
``more accurately reflect the costs of the proposed rule and the number
of small businesses that it will affect.'' \902\ Another commentator
noted specifically that we must look beyond the 793 reporting issuers
that are also small entities because, when an issuer seeks to establish
whether its supply chain is free of conflict minerals, it will have to
turn to its first-tier suppliers and require due diligence.\903\ This
commentator indicated, therefore, that ``a large portion of America's
278 thousand small and medium-sized manufacturers could be affected
by'' the final rule. Moreover, for purposes of determining the cost of
the independent private sector audit on smaller companies, the
commentator estimated that one in five smaller companies would be in an
issuer's supply chain. As discussed in the Economic Analysis section
above, we acknowledge that the statute and the final rule will affect
many companies, including both companies that are directly subject to
the rule's requirements and those that are not reporting companies but
are part of a reporting issuer's supply chain.\904\ For
[[Page 56360]]
purposes of the RFA, however, the focus is the impact on entities on
which our rules impose direct requirements.\905\ Therefore, although we
do acknowledge the rule's impact on non-reporting small entities, they
were not included in our RFA estimate of the 793 small entities that
would be directly subject to the final rule.
---------------------------------------------------------------------------
\900\ See, e.g., letters from Industry Group Coalition II; IPC
I; NAM I; Senator Olympia J. Snowe, Representative Sam Graves,
Senator Scott P. Brown, Representative Roscoe Barlett,
Representative Scott Tipton, and Representative Joe Walsh (Nov. 17,
2011) (``Sen. Snowe et al.''); and the Small Business
Administration's Office of Advocacy (Oct. 25, 2011) (``SBA'').
\901\ See, e.g., letters from NAM I, SBA, Sen. Snowe et al., and
WGC II.
\902\ See letter from SBA.
\903\ See letter from NAM I.
\904\ Id.
\905\ See, e.g., Mid-Tex Electric Cooperative v. FERC, 773 F.2d
327 (D.C. Cir. 1985) and White Eagle Cooperative Ass'n v. Conner,
553 F.3d 467 (7th Cir. 2009). See also Small Bus. Admin., Office of
Advocacy, A Guide for Government Agencies: How to Comply with the
Regulatory Flexibility Act (June 2010) (``SBA Guidance''), available
at http://archive.sba.gov/advo/laws/rfaguide.pdf.
---------------------------------------------------------------------------
Additionally, several commentators addressed aspects of the
proposed rules that could potentially affect smaller reporting
companies or small companies generally.\906\ These commentators did not
clarify whether they were referring to ``small entities'' as that term
is defined under Exchange Act Rule 0-10(a).\907\ In particular, certain
commentators argued that the costs of the rules could be
disproportionally higher to smaller issuers.\908\ One commentator
suggested that the Conflict Minerals Statutory Provision ``does create
a burden on small businesses, but not as high or disproportionate to
revenue as has been reported'' by other commentators.\909\ Also, as
discussed above, one commentator argued that the final rule should
exempt smaller reporting companies.\910\ Many other commentators
argued, however, that final rule should not exempt smaller reporting
companies.\911\ Many commentators indicated that exempting smaller
reporting companies would not reduce significantly their burdens \912\
because, among other reasons, many of these smaller companies are part
of larger companies' supply chains and these larger companies would
require the smaller companies to provide conflict minerals information
so that the larger companies could meet their obligations under the
rule.\913\ Two commentators agreed that smaller reporting companies
should not be exempt from the rule, but stated that they should be
allowed to phase-in the rules to mitigate their costs and not drain
their resources.\914\
---------------------------------------------------------------------------
\906\ See, e.g., letters from BCIMC, Corporate Secretaries I,
CRS I, Earthworks, Global Witness I, Howland, IPC I, JVC et al. II,
NAM I, Rep. Bachus et al., Rockefeller, Sen. Durbin/Rep. McDermott,
SIF I, State II, TIAA-CREF, TIC, TriQuint I, and WGC II.
\907\ 17 CFR 240.0-10(a) (defining an issuer to be a ``small
business'' or ``small organization'' for purposes of the Regulatory
Flexibility Act if it had total assets of $5 million or less on the
last day of its most recent fiscal year).
\908\ See, e.g., letters from Howland, NAM I, and WGC II.
\909\ See letter from Claigan IV.
\910\ See letter from Corporate Secretaries I.
\911\ See, e.g., letters from BCIMC, CRS I, Earthworks, Global
Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen. Durbin/
Rep. McDermott, SIF I, State II, TIAA-CREF, TIC, and TriQuint I.
\912\ See, e.g., letters from IPC I and TriQuint I.
\913\ See letter from IPC I.
\914\ See letters from Howland and JVC et al. II.
---------------------------------------------------------------------------
C. Small Entities Subject to the Final Rule
The final rule will affect some reporting issuers that are small
entities. Exchange Act Rule 0-10(a) \915\ defines an issuer to be a
``small business'' or ``small organization'' for purposes of the
Regulatory Flexibility Act if it had total assets of $5 million or less
on the last day of its most recent fiscal year. We believe that the
final rule would affect small entities with necessary conflict minerals
as defined under Exchange Act Section 13(p). In the Proposing Release,
we estimated that there were approximately 793 issuers to which
conflict minerals are necessary and that may be considered small
entities. As discussed above some commentators indicated that we
underestimated the number of small entities that would be impacted by
the rule, but that was based on the assertion that we consider small
entities that are not directly subject to the requirements of the final
rule.\916\ We note that no commentator provided any other number of
small entities or disagreed that 793 is the number that will be
directly subject to the final rule. We continue to believe that there
are 793 small entities that file reports with us under Exchange Act
Sections 13(a) and 15(d) and that will be directly subject to the final
rule because they likely have conflict minerals necessary to the
functionality or production of products they manufacture or contract to
manufacture.
---------------------------------------------------------------------------
\915\ 17 CFR 240.0-10(a).
\916\ See, e.g., letters from NAM I, SBA, and WGC II.
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
The final rule will add to the annual disclosure requirements of
issuers with necessary conflict minerals, including small entities, by
requiring them to comply with the disclosure and reporting obligations
under Section 13(p) and provide certain additional disclosure in their
new specialized disclosure reports on Form SD that certain issuers will
be required to file annually. Among other matters, that information
must include, as applicable:
Disclosure in the body of the specialized disclosure
report as to whether such issuer knows or has reason to believe that
conflict minerals necessary to the functionality or production of a
product manufactured or contracted by an issuer to be manufactured
originated in the Covered Countries or may have originated in the
Covered Countries and may not have come from recycled or scrap sources;
If not, or if the issuer knows or has reason to believe
that its necessary conflict minerals came from recycled or scrap
sources, disclosure in the body of the specialized disclosure report
and on the issuer's Internet Web site of that determination and a brief
description of the reasonable country of origin inquiry used in making
that determination and the results of the inquiry it performed, and
disclosure in the body of the specialized disclosure report of the
address of the issuer's Internet Web site where that information is
publicly available;
If so, and the issuer is able to determine whether its
conflict minerals directly or indirectly financed or benefited armed
groups in the Covered Countries,
[cir] A Conflict Minerals Report filed as an exhibit to the
specialized disclosure report, which includes a certified independent
private sector audit report, a description of the nationally or
internationally recognized due diligence framework the issuer used to
determine the source and chain of custody of its conflict minerals, a
description of the issuer's products that have not been found to be
``DRC conflict free,'' and a description of the facilities used to
process the necessary conflict minerals in those products, the country
of origin of the necessary conflict minerals in those products, and the
efforts to determine the mine or location of origin with the greatest
possible specificity;
[cir] Disclosure in the body of the specialized disclosure report
that a Conflict Minerals Report is filed as an exhibit to the
specialized disclosure report and is publicly available on the issuer's
Internet Web site, and disclosure within the body of the specialized
disclosure report of the address of the issuer's Internet Web site on
which the Conflict Minerals Report is publicly available;
[cir] Posting of the Conflict Minerals Report on the issuer's
publicly available Internet Web site.
If so, but the issuer is unable to determine that its
conflict minerals did not directly or indirectly finance or benefit
armed groups in the Covered Countries, if the issuer has reason to
believe that its conflict minerals may have originated in the Covered
Countries but is unable to determine the origin,
[[Page 56361]]
[cir] A Conflict Minerals Report filed as an exhibit to the
specialized disclosure report that includes a description of the
nationally or internationally recognized due diligence framework the
issuer used to determine the source and chain of custody of its
conflict minerals, a description of the facilities used to process the
necessary conflict minerals in those products, if known, the country of
origin of the necessary conflict minerals in those products, if known,
and the efforts to determine the mine or location of origin with the
greatest possible specificity, and, for a temporary period, a
description of the issuer's products that are ``DRC conflict
undeterminable'' (for the temporary period, such issuers are not
required to have their Conflict Minerals Report audited regarding such
minerals);
[cir] Disclosure in the body of the specialized disclosure report
that a Conflict Minerals Report is filed as an exhibit to the
specialized disclosure report and is publicly available on the issuer's
Internet Web site and the address of the issuer's Internet Web site on
which the Conflict Minerals Report is publicly available;
[cir] Posting of the Conflict Minerals Report on the issuer's
publicly available Internet Web site.
If there is reason to believe that the conflict minerals
may not be from recycled or scrap sources and there is a nationally or
internationally recognized due diligence framework for those particular
conflict minerals,
[cir] A Conflict Minerals Report filed as an exhibit to the
specialized disclosure report, which includes a description of the
nationally or internationally recognized due diligence framework the
issuer used to determine that those conflict minerals were or has
reason to believe may have been from recycled or scrap sources, which
includes a certified independent private sector audit report regarding
those minerals;
[cir] Disclosure in the body of the specialized disclosure report
that a Conflict Minerals Report is filed as an exhibit to the
specialized disclosure report and is publicly available on the issuer's
Internet Web site and the address of the issuer's Internet Web site on
which the Conflict Minerals Report is publicly available.
If there is reason to believe that the conflict minerals
may not be from recycled or scrap sources but there is no nationally or
internationally recognized due diligence framework for those particular
conflict minerals,
[cir] A Conflict Minerals Report filed as an exhibit to the
specialized disclosure report, which includes a description of the due
diligence the issuer used to determine that those conflict minerals
were or has reason to believe may have been from recycled or scrap
(until a nationally or internationally recognized due diligence
framework is available for those conflict minerals from recycled or
scrap sources, such issuers are not required to have their Conflict
Minerals Report audited regarding such minerals);
[cir] Disclosure in the body of the specialized disclosure report
that a Conflict Minerals Report is filed as an exhibit to the
specialized disclosure report and is publicly available on the issuer's
Internet Web site and the address of the issuer's Internet Web site on
which the Conflict Minerals Report is publicly available.
The same disclosure and reporting requirements apply to U.S. and
foreign issuers. However, under the final rule, issuers that proceed to
step three but are unable to identify the origin of their conflict
minerals or whether their conflict minerals came from recycled or scrap
sources are required to provide a Conflict Minerals Report, but that
report does not have to be audited for the first four years following
the rule's adoption for smaller reporting companies. We are creating
new Form SD that requires every issuer to file its conflict minerals
information for each applicable calendar year on May 31 of the
following year.
E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives, while
minimizing any significant adverse impact on small entities. In
connection with the final rule, we considered the following
alternatives:
(1) Establishing different compliance or reporting requirements
which take into account the resources available to small entities;
(2) Exempting small entities from coverage of the disclosure
requirements, or any part thereof;
(3) Clarification, consolidation, or simplification of the rules
compliance and reporting requirements for small entities; and
(4) Use of performance standards rather than design standards.
We considered but did not establish different compliance
requirements for small entities. As discussed above in response to
commentators' suggestions that we exempt smaller reporting companies,
we similarly believe that separate disclosure requirements for small
entities that would differ from the final reporting requirements for
other issuers, or exempting them from those requirements, would not
achieve Congress's objectives of Section 13(p). The final rule is
designed to implement the conflict minerals disclosure and reporting
requirements of Section 13(p). That statutory section applies to all
issuers with necessary conflict minerals, regardless of size. In any
case, as several commentators noted, many smaller companies are part of
larger companies' supply chains and would need to provide conflict
minerals information so that the larger companies could meet their
obligations under the rule.\917\ However, under the final rule, issuers
that proceed to step three but are unable to determine their conflict
minerals originated in the Covered Countries or came from recycled or
scrap sources, or unable to determine that the conflict minerals that
originated in the Covered Countries financed or benefited armed groups
in those countries are required to provide a Conflict Minerals Report,
but that report does not have to be audited for the first four years
following the rule's adoption for smaller reporting companies and the
issuers may describe the product with known origin as ``DRC conflict
undeterminable.''
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\917\ See, e.g., letters from NAM I, SBA, Sen. Snowe et al., and
WGC II.
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We clarified and simplified aspects of the final rule for all
issuers, including small entities. For example, the final rule
specifies and clarifies the objective for the audit of a Conflict
Minerals Report for newly-mined conflict minerals. The final rule also
requires an issuer to disclose the information in the body of and as an
exhibit to its specialized disclosure report, which may simplify the
process of submitting the conflict minerals disclosure and Conflict
Minerals Report as compared with requiring disclosure in an issuer's
annual report on Form 10-K, Form 20-F, or Form 40-F.
We have generally used design rather than performance standards in
connection with the final rule because we believe design standards will
better accomplish Congress's objectives. The reasonable country of
origin inquiry is the performance standard. In addition, the specific
disclosure requirements in the final rule will promote consistent and
comparable disclosure among all issuers with necessary conflict
minerals. However, we are providing guidance regarding ``contract to
manufacture,'' and ``necessary to the functionality and production,''
which we believe will allow issuers to comply with the statutory
requirements in a manner more tailored to their individual
circumstances.
[[Page 56362]]
VI. Statutory Authority and Text of the Final Rule
We are adopting the rule amendments contained in this document
under the authority set forth in Sections 3(b), 12, 13, 15(d), 23(a),
and 36 of the Exchange Act, as amended.
List of Subjects in 17 CFR Parts 240 and 249b
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, we are amending Title 17, Chapter
II of the Code of Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 is amended by adding an
authority for Sec. 240.13p-1 in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77jjj, 77kkk, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-8, 78p, 78q, 78s, 78u-5, 78w, 78x, 78dd(b), 78dd(c), 78 ll,
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et
seq., and 8302; 18 U.S.C. 1350; 12 U.S.C. 5221(e)(3), and Pub. L.
111-203, Sec. 712, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
Section 240.13p-1 is also issued under sec. 1502, Pub. L. 111-
203, 124 Stat. 1376.
* * * * *
0
2. Add Sec. 240. 13p-1 to read as follows:
Sec. 240.13p-1 Requirement of report regarding disclosure of
registrant's supply chain information regarding conflict minerals.
Every registrant that files reports with the Commission under
Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 U.S.C. 78o(d)) of the
Exchange Act, having conflict minerals that are necessary to the
functionality or production of a product manufactured or contracted by
that registrant to be manufactured, shall file a report on Form SD
within the period specified in that Form disclosing the information
required by the applicable items of Form SD as specified in that Form
(17 CFR 249b.400).
PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934
0
3. The authority citation for part 249b is amended by adding an
authority for Sec. 249b.400 to read as follows:
Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
* * * * *
Section 249b.400 is also issued under secs. 1502, Pub. L. 111-
203, 124 Stat. 2213.
0
4. Add Sec. 249b.400 to read as follows:
Sec. 249b.400 Form SD, specialized disclosure report.
This Form shall be filed pursuant to Sec. 240.13p-1 of this
chapter by registrants that file reports with the Commission pursuant
to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 and
are required to disclose the information required by Section 13(p)
under the Securities Exchange Act of 1934 and Rule 13p-1 (Sec.
240.13p-1) of this chapter.
0
5. Add Form SD (referenced in Sec. 249b.400) to read as follows:
Note: The text of Form SD does not appear in the Code of Federal
Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SD
Specialized Disclosure report
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(Exact name of the registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
-----------------------------------------------------------------------
(Commission File Number)
-----------------------------------------------------------------------
(IRS Employer Identification No.)
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(Address of principal executive offices) (Zip code)
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(Name and telephone number, including area code, of the person to
contact in connection with this report.)
Check the appropriate box to indicate the rule pursuant to which this
form is being filed, and provide the period to which the information in
this form applies:
---- Rule 13p-1 under the Securities Exchange Act (17 CFR 240.13p-1)
for the reporting period from January 1 to December 31, --------.
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GENERAL INSTRUCTIONS
A. Rule as to Use of Form SD.
This form shall be used for a report pursuant to Rule 13p-1 (17 CFR
240.13p-1) under the Exchange Act.
B. Information to be Reported and Time for Filing of Reports.
1. Form filed under Rule 13p-1. A report on this Form shall be
filed on EDGAR no later than May 31 after the end of the issuer's most
recent calendar year.
2. If the deadline for filing this form occurs on a Saturday,
Sunday or holiday on which the Commission is not open for business,
then the deadline shall be the next business day.
C. Inapplicability to Registered Investment Companies.
The disclosures required in Form SD shall not apply to investment
companies required to file reports pursuant to Rule 30d-1 (17 CFR
270.30d-1) under the Investment Company Act of 1940.
D. Preparation of Report.
This form is not to be used as a blank form to be filled in, but
only as a guide in the preparation of the report meeting the
requirements of Rule 12b-12 (17 CFR 240.12b-12). The report shall
contain the number and caption of the applicable item, but the text of
such item may be omitted, provided the answers thereto are prepared in
the manner specified in Rule 12b-13 (17 CFR 240.12b-13). All items that
are not required to be answered in a particular report may be omitted
and no reference thereto need be made in the report. All instructions
should also be omitted.
E. Application of General Rules and Regulations.
The General Rules and Regulations under the Act (17 CFR Part 240)
contain certain general requirements which are applicable to reports on
any form. These general requirements should be carefully read and
observed in the preparation and filing of reports on this form.
F. Signature and Filing of Report.
The report must be signed by the registrant on behalf of the
registrant by an executive officer.
INFORMATION TO BE INCLUDED IN THE REPORT
Section 1--Conflict Minerals Disclosure
Item 1.01 Conflict Minerals Disclosure and Report
(a) If any conflict minerals, as defined by paragraph (d)(3) of
this item, are necessary to the functionality or production of a
product manufactured by the registrant or contracted by the registrant
to be manufactured and are required to be reported in the calendar year
covered by the specialized disclosure report, the registrant must
conduct in good faith a reasonable country of origin inquiry regarding
those conflict minerals that is reasonably designed to determine
whether any of the conflict minerals originated in the Democratic
Republic of the Congo or an adjoining country, as
[[Page 56363]]
defined by paragraph (d)(1) of this item, or are from recycled or scrap
sources, as defined by paragraph (d)(6) of this item.
(b) Based on its reasonable country of origin inquiry, if the
registrant determines that its necessary conflict minerals did not
originate in the Democratic Republic of the Congo or an adjoining
country or did come from recycled or scrap sources, or if it has no
reason to believe that its necessary conflict minerals may have
originated in the Democratic Republic of the Congo or an adjoining
country, or if based on its reasonable country of origin inquiry the
registrant reasonably believes that its necessary conflict minerals did
come from recycled or scrap sources, the registrant must, in the body
of its specialized disclosure report under a separate heading entitled
``Conflict Minerals Disclosure,'' disclose its determination and
briefly describe the reasonable country of origin inquiry it undertook
in making its determination and the results of the inquiry it
performed. Also, the registrant must disclose this information on its
publicly available Internet Web site and, under a separate heading in
its specialized disclosure report entitled ``Conflict Minerals
Disclosure,'' provide a link to that Web site.
(c) Alternatively, based on its reasonable country of origin
inquiry, if the registrant knows that any of its necessary conflict
minerals originated in the Democratic Republic of the Congo or an
adjoining country and are not from recycled or scrap sources, or has
reason to believe that its necessary conflict minerals may have
originated in the Democratic Republic of the Congo or an adjoining
country and has reason to believe that they may not be from recycled or
scrap sources, the registrant must exercise due diligence on the source
and chain of custody of its conflict mineral, as discussed in paragraph
(c)(1) of this item, that conforms to a nationally or internationally
recognized due diligence framework, if such a framework is available
for the conflict mineral. If, as a result of that due diligence, the
registrant determines that its conflict minerals did not originate in
the Democratic Republic of the Congo or an adjoining country or the
registrant determines that its conflict minerals did come from recycled
or scrap sources, a Conflict Minerals Report is not required, but the
registrant must disclose its determination and briefly describe, in the
body of its specialized disclosure report under a separate heading
entitled ``Conflict Minerals Disclosure,'' the reasonable country of
origin inquiry and the due diligence efforts it undertook in making its
determination and the results of the inquiry and due diligence efforts
it performed. Also, the registrant must disclose this information on
its publicly available Internet Web site and, under a separate heading
in its specialized disclosure report entitled ``Conflict Minerals
Disclosure,'' provide a link to that Web site. Otherwise, the
registrant must file a Conflict Minerals Report as an exhibit to its
specialized disclosure report and provide that report on its publicly
available Internet Web site. Under a separate heading in its
specialized disclosure report entitled ``Conflict Minerals
Disclosure,'' the registrant must disclose that it has filed a Conflict
Minerals Report and provide the link to its Internet Web site where the
Conflict Minerals Report is publicly available.
The Conflict Minerals Report must include the following
information:
(1) Due Diligence: A description of the measures the registrant has
taken to exercise due diligence on the source and chain of custody of
those conflict minerals;
(i) The registrant's due diligence must conform to a nationally or
internationally recognized due diligence framework, if such a framework
is available for the conflict mineral;
(ii) Except as provided in paragraphs (c)(1)(iv), (c)(1)(v), and
(c)(1)(vi) of this item, the due diligence measures shall include but
not be limited to an independent private sector audit of the Conflict
Minerals Report that is conducted in accordance with standards
established by the Comptroller General of the United States and
certified pursuant to paragraph (c)(1)(ii)(B) of this item, which shall
constitute a critical component of the registrant's due diligence in
establishing the source and chain of custody of the necessary conflict
minerals.
(A) The objective of the audit of the Conflict Minerals Report is
to express an opinion or conclusion as to whether the design of the
registrant's due diligence measures as set forth in, and with respect
to the period covered by, the registrant's Conflict Minerals Report, is
in conformity with, in all material respects, the criteria set forth in
the nationally or internationally recognized due diligence framework
used by the registrant, and whether the registrant's description of the
due diligence measures it performed as set forth in the Conflict
Minerals Report, with respect to the period covered by the report, is
consistent with the due diligence process that the registrant
undertook.
(B) The registrant's Conflict Minerals Report must include a
statement that the registrant has obtained an independent private
sector audit of the Conflict Minerals Report, which shall constitute an
audit certification;
(C) As part of the Conflict Minerals Report, the registrant must
identify the independent private sector auditor of the report, if the
auditor is not identified in the audit report, and provide the audit
report prepared by the auditor in accordance with standards established
by the Comptroller General of the United States;
(iii) Any registrant that manufactures products or contracts for
products to be manufactured that are ``DRC conflict undeterminable,''
as defined in paragraph (d)(5) of this item, must disclose the steps it
has taken or will take, if any, since the end of the period covered in
its most recent prior Conflict Minerals Report to mitigate the risk
that its necessary conflict minerals benefit armed groups, including
any steps to improve its due diligence.
(iv) For the temporary period specified in Instruction 2 to Item
1.01, following its exercise of appropriate due diligence, a registrant
with products that are ``DRC conflict undeterminable'' is not required
to obtain an independent private sector audit of its Conflict Minerals
Report regarding the conflict minerals that the registrant is unable to
determine did not originate in the Democratic Republic of the Congo or
an adjoining country, or that the registrant is unable to determine did
not directly or indirectly finance or benefit armed groups in the
Democratic Republic of the Congo or an adjoining country.
(v) If a nationally or internationally recognized due diligence
framework does not exist for a necessary conflict mineral, until such a
framework is developed, the registrant is required to exercise
appropriate due diligence in determining the source and chain of
custody of the necessary conflict mineral, including whether the
conflict mineral is from recycled or scrap sources, without the benefit
of a due diligence framework. If a nationally or internationally
recognized due diligence framework becomes available for the necessary
conflict mineral prior to June 30 of a calendar year, the registrant
must use that framework in the subsequent calendar year. If the due
diligence guidance does not become available until after June 30 of a
calendar year, the registrant is not required to use that framework
until the second calendar year after the framework becomes available to
provide a full calendar year before implementation. If no nationally or
internationally recognized due diligence framework is available for a
particular conflict mineral from recycled or scrap sources, the due
[[Page 56364]]
diligence inquiry regarding the conflict mineral focuses on whether the
conflict mineral is from recycled or scrap sources. In addition, an
independent private sector audit will not be required for the section
of the Conflict Minerals Report pertaining to the registrant's due
diligence on that recycled or scrap conflict mineral.
(vi) If the registrant performs due diligence because it has a
reason to believe that its conflict minerals originated in the
Democratic Republic of the Congo or an adjoining country, and as a
result of that due diligence it determines that its conflict minerals
did not originate in the Democratic Republic of the Congo or an
adjoining country (or it determines as a result of that due diligence
that its necessary conflict minerals did come from recycled or scrap
sources), a Conflict Minerals Report and an audit is not required.
(2) Product Description: Any registrant that manufactures products
or contracts for products to be manufactured that have not been found
to be ``DRC conflict free,'' as defined in paragraph (d)(4) of this
item, must provide a description of those products, the facilities used
to process the necessary conflict minerals in those products, the
country of origin of the necessary conflict minerals in those products,
and the efforts to determine the mine or location of origin with the
greatest possible specificity.
(i) For the temporary period specified in Instruction 2 to Item
1.01, following its exercise of appropriate due diligence, any
registrant that manufactures products or contracts for products to be
manufactured that are ``DRC conflict undeterminable'' must provide a
description of those products, the facilities used to process the
necessary conflict minerals in those products, if known, the country of
origin of the necessary conflict minerals in those products, if known,
and the efforts to determine the mine or location of origin with the
greatest possible specificity;
(ii) A registrant is not required to provide the information in
paragraph (c)(2) of this item if the necessary conflict minerals in its
product are solely from recycled or scrap sources because those
products are considered ``DRC conflict free.''
(d) For the purposes of this item, the following definitions apply:
(1) Adjoining country. The term adjoining country means a country
that shares an internationally recognized border with the Democratic
Republic of the Congo.
(2) Armed group. The term armed group means an armed group that is
identified as a perpetrator of serious human rights abuses in annual
Country Reports on Human Rights Practices under sections 116(d) and
502B(b) of the Foreign Assistance Act of 1961 (22 U.S.C. 2151n(d) and
2304(b)) relating to the Democratic Republic of the Congo or an
adjoining country.
(3) Conflict mineral. The term conflict mineral means:
(i) Columbite-tantalite (coltan), cassiterite, gold, wolframite, or
their derivatives, which are limited to tantalum, tin, and tungsten,
unless the Secretary of State determines that additional derivatives
are financing conflict in the Democratic Republic of the Congo or an
adjoining country; or
(ii) Any other mineral or its derivatives determined by the
Secretary of State to be financing conflict in the Democratic Republic
of the Congo or an adjoining country.
(4) DRC conflict free. The term DRC conflict free means that a
product does not contain conflict minerals necessary to the
functionality or production of that product that directly or indirectly
finance or benefit armed groups, as defined in paragraph (d)(2) of this
item, in the Democratic Republic of the Congo or an adjoining country.
Conflict minerals that a registrant obtains from recycled or scrap
sources, as defined in paragraph (d)(6) of this item, are considered
DRC conflict free.
(5) DRC conflict undeterminable. The term DRC conflict
undeterminable means, with respect to any product manufactured or
contracted to be manufactured by a registrant, that the registrant is
unable to determine, after exercising due diligence as required by
paragraph (c)(1) of this item, whether or not such product qualifies as
DRC conflict free.
(6) Conflict Minerals from Recycled or Scrap Sources. Conflict
minerals are considered to be from recycled or scrap sources if they
are from recycled metals, which are reclaimed end-user or post-consumer
products, or scrap processed metals created during product
manufacturing. Recycled metal includes excess, obsolete, defective, and
scrap metal materials that contain refined or processed metals that are
appropriate to recycle in the production of tin, tantalum, tungsten
and/or gold. Minerals partially processed, unprocessed, or a bi-product
from another ore will not be included in the definition of recycled
metal.
(7) Outside the Supply Chain. A conflict mineral is considered
outside the supply chain after any columbite-tantalite, cassiterite,
and wolframite minerals, or their derivatives, have been smelted; any
gold has been fully refined; or any conflict mineral, or its
derivatives, that have not been smelted or fully refined are located
outside of the Democratic Republic of the Congo or an adjoining
country.
(8) Nationally or internationally recognized due diligence
framework. The term ``nationally or internationally recognized due
diligence framework'' means a nationally or internationally recognized
due diligence framework established following due-process procedures,
including the broad distribution of the framework for public comment,
and is consistent with the criteria standards in the Government
Auditing Standards established by the Comptroller General of the United
States.
Item 1.02 Exhibit
Registrants shall file, as an exhibit to this Form SD, the Conflict
Minerals Report required by Item 1.01.
Instructions to Item 1.01
(1) A registrant that mines conflict minerals would not be
considered to be manufacturing those minerals for the purpose of this
item. The specialized disclosure report on Form SD shall cover a
calendar year, regardless of the registrant's fiscal year, and be due
annually on May 31 for the prior calendar year.
(2) During the first two calendar years following November 13, 2012
for all registrants and the first four calendar years for any smaller
reporting company, a registrant will not be required to submit an audit
report of its Conflict Minerals Report prepared by an independent
private sector auditor with respect to the conflict minerals in any of
its products that are ``DRC conflict undeterminable.'' Beginning with
the third or fifth reporting calendar year, as applicable, a registrant
with products manufactured or contracted to be manufactured that are
``DRC conflict undeterminable,'' must describe those products as having
not been found to be ``DRC conflict free'' and must provide the
information required in paragraph (c) of this item including the audit
report.
(3) A registrant that acquires or otherwise obtains control over a
company that manufactures or contracts to manufacture products with
conflict minerals necessary to the functionality or production of those
products that previously had not been obligated to provide a
specialized disclosure report with respect to its conflict minerals
will be permitted to delay reporting on the products manufactured by
the acquired company until the end of the first reporting calendar year
that begins no
[[Page 56365]]
sooner than eight months after the effective date of the acquisition.
(4) A registrant is not required to provide any information
regarding its conflict minerals that, prior to January 31, 2013, are
located outside of the supply chain, as defined by paragraph (d)(7) of
this item.
(5) A registrant must provide its required conflict minerals
information for the calendar year in which the manufacture of a product
that contains any conflict minerals necessary to the functionality or
production of that product is completed, irrespective of whether the
registrant manufactures the product or contracts to have the product
manufactured.
Section 2--Exhibits
Item 2.01 Exhibits
List below the following exhibit filed as part of this report.
Exhibit 1.01--Conflict Minerals Report as required by Items 1.01 and
1.02 of this Form.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the duly authorized undersigned.
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(Registrant)
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By (Signature and Title)*
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(Date)
* Print name and title of the registrant's signing executive officer
under his or her signature.
* * * * *
Dated: August 22, 2012.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-21153 Filed 9-11-12; 8:45 am]
BILLING CODE 8011-01-P