We proposed rules to apply to certain issuers that file reports with us under Exchange Act Sections 13(a)28
Based on the Conflict Minerals Statutory Provision, we proposed a disclosure requirement for conflict minerals that would divide into threesteps. 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.
2815 U.S.C. 78m(a).
2915 U.S.C. 78o(d).
30Exchange Act Section 13(p)(2).
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.
31The 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).
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 theproposed 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.
Seeletters 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 Associationet al.”); Jewelers Vigilance Committee, American Gem Society, Manufacturing Jewelers & Suppliers of America, Jewelers of America, and Fashion Jewelry & Accessories Trade Association (Jan. 10, 2011) (“JVCet 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”).
33Conflict Minerals, Release No. 34-63793 (Jan. 28, 2011) [76 FR 6110].
See, e.g.,letter from United States Chamber of Commerce (Feb. 28, 2011) (“Chamber I”).
SeePress Release, Securities and Exchange Commission, SEC Announces Agenda and Panelists for Roundtable on Conflict Minerals (Oct. 14, 2011),available at
36Roundtable on Issues Relating to Conflict Minerals, Release No. 34-65508 (Oct. 7, 2011) [76 FR 63573].
37To facilitate public input on rulemaking required by the Act, the Commission provided a series of email links, organized by topic, on its Web site athttp://www.sec.gov/spotlight/regreformcomments.shtml. The comments relating to the Conflict Minerals Statutory Provision are located athttp://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 athttp://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.
Seeform 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”).
Seeform 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 ade minimiscategory 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”).
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
40Among the foreign officials to provide comment letters was the DRC's Minister of Mines.Seeletters 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”).
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”).
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”).
Seeletter from Chamber I.See alsoletters 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).
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 ade factoboycott or embargo on conflict minerals from the Covered Countries,44
other of these commentators suggested that theprovision 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
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,”), Fédération des Enterprises du Congo (Oct. 28, 2011) (“FEC II”), Générale des Coopératives Minières 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”), Société Minière du Maniema SPRL (Mar. 21, 2012) (“Somima”), Verizon Communications (Jun. 24, 2011) (“Verizon”), and WGC II.But seeletters 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‐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.”).
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”).
Seeletter from Rep. Lee (“Ultimately, these new regulations may cost U.S. jobs and send them overseas.”).
Seeletter from Green Research (Jan. 27, 2012) (“Green II”).See alsoletter 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”).
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.
49Exchange Act Section 13(p)(2).
SeeExchange 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.
51In 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, orin 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