SEC Issues Proposed Rules on Conflict Minerals and Disclosure of Payments to Governments

Yesterday, the Securities and Exchange Commission (“SEC”) posted proposed rules pursuant to Section 1502 (conflict minerals) and Section 1504 (disclosure of payments to governments) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The proposed rules are open for comment until January 31, 2011.  Final rules will be issued no later than April 15, 2011.

We will be providing further analysis of both of these proposed rules.  Based on an initial review, key points include:

Section 1502 (Conflict Minerals)

  • The proposed reporting requirements apply to all SEC issuers who file reports with the Commission, including foreign private issuers and smaller reporting companies, for which conflict minerals are "necessary to the functionality or production of a product manufactured" or contracted to be manufactured by such an issuer.  Conflict minerals consist of columbite-tantalite (tantalum), wolframite (tungsten), cassiterite (tin), and gold.  The rules apply even if only small amounts of such minerals are utilized. 
  • If an issuer determines through a "reasonable country of origin inquiry" process that the conflict minerals it uses did not originate in the Democratic Republic of the Congo or adjoining countries ("DRC countries"), it will be required to disclose this determination in its annual 10-K report.  The annual report must also state what "reasonable country of origin inquiry" process the issuer undertook.  The issuer would be required to maintain records demonstrating that its conflict minerals did not originate in the DRC countries.
  • If an issuer either determines that its conflict minerals originated in the DRC countries, or cannot conclude that they did not originate in the DRC countries, the issuer will be required to disclose this information in its annual report. The issuer must then furnish a Conflict Minerals Report as an exhibit to the annual report, and must disclose the Internet address at which this exhibit is available.
  • The Conflict Minerals Report must describe the due diligence that the issuer conducted on the source and chain of custody of its conflict minerals.  Issuers will be required to describe: products that are not "DRC conflict free"; the country of origin of those conflict minerals; the facilities used to process those minerals; and efforts taken to locate the mine or source of the minerals with the greatest possible specificity.
  • The Conflict Minerals Report must be audited by an independent private sector auditor. Issuers must identify the auditor and certify the audit. 
  • Issuers will be required to provide their first disclosures after their first full fiscal year following the promulgation of the final rules.

Section 1504 (Disclosure of Payments by Resource Extraction Issuers)

  • All U.S. and foreign companies engaged in the commercial development of oil, natural gas, or minerals that are required to file annual reports with the SEC are subject to the rule, regardless of size. Commercial development encompasses exploration, processing, export, and other “significant actions,” but does not include ancillary activities such as producing equipment utilized in commercial development or providing transport.
  • Covered companies must report on taxes, royalties, fees, production entitlements, bonuses, and other material benefits paid to foreign government and the Federal Government that are not de miminis. The SEC does not plan to define "de minimis." These benefits can be in cash or in kind.
  • Covered companies must report the type and total amount of payments made to a government for each project. The SEC does not propose to define the term "project."
  • Covered companies must report on such payments made by subsidiaries or entities under their control, where the definition of control is taken from existing securities law.
  • Covered companies must disclose a brief statement of this information in their annual 10-K reports, which refers investors to detailed information provided in two exhibits that would be furnished to the SEC as part of the 10-K. One of the two exhibits would include information in XBRL format, an interactive data format.
  • Disclosure will be required in annual reports relating to fiscal years ending on or after April 15, 2012.

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