In brief: SEC adopts rule for disclosing use of conflict minerals (No. 2012-38)

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On August 22, 2012, the SEC commissioners voted 3-2 to approve the final rule requiring companies to publicly disclose their use of conflict minerals and whether those minerals originated in the Democratic Republic of the Congo (DRC) or adjoining countries (“covered countries”). This In brief article provides an overview of the final rule.

What's new?

On August 22, 2012, the SEC commissioners voted 3-2 to approve the final rule requiring companies to publicly disclose their use of conflict minerals and whether those minerals originated in the Democratic Republic of the Congo (DRC) or adjoining countries (“covered countries”). The conflict minerals covered by this rule include tantalum, tin, gold, and tungsten. The rule describes the assessment and reporting requirements for all issuers¹ for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer.

The SEC was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to issue a rule on conflict minerals. Congress mandated the rule because of concerns that the exploitation and trade of conflict minerals is funding the armed groups responsible for extreme violence in the DRC region.

What are the key provisions?

The final rule is structured as a three-step process. First, issuers must determine whether any products they manufacture, or contract to be manufactured, contain conflict minerals that are necessary to the functionality or production of the product.

If an issuer determines that its products do not contain conflict minerals, no further action is necessary. However, if an issuer determines that its products contain conflict minerals that are necessary to the functionality or production of those products, the second step requires the issuer to conduct a reasonable “country of origin” inquiry to determine whether any of its conflict minerals originated in the covered countries or are from scrap or recycled sources. The issuer must disclose annually its determination, its inquiry process, and the results of its inquiry on a new form called Form SD filed with the SEC.

If an issuer determines based on its “country of origin” inquiry that the conflict minerals may have, or did in fact, originate in the covered countries, and may not be from scrap or recycled sources, then the issuer must proceed to the third step. This includes performing due diligence on the source and chain of custody of its conflict minerals using a nationally or internationally recognized due diligence framework. Based on the due diligence performed, the issuer must file a Conflict Minerals Report as an exhibit to Form SD that states whether its products are determined to be one of the following:

• "DRC Conflict Free" - minerals may originate from the covered countries, but did not finance or benefit armed groups
• "Not DRC Conflict Free"
• "DRC Conflict Undeterminable" - for a temporary two-year period (or four years for Smaller Reporting Companies), if the issuer is unable to determine whether the minerals originated in the covered countries, or whether they financed or benefited armed groups in those countries, then those products are considered DRC Conflict Undeterminable

The first two determinations above must be subjected to an independent audit, with a report included as part of the Conflict Minerals Report. If products are "Not DRC Conflict Free.

" additional details must be disclosed, such as the facilities used to process the minerals, mine locations, and the country of origin. For products that are "DRC Conflict Undeterminable.

" the same expanded disclosures must be included as well as a description of the steps the issuer has taken or will take, if any, to improve due diligence and mitigate the risk that its conflict minerals benefit armed groups. After the temporary period has ended, minerals that were "DRC Conflict Undeterminable" will be presumed to be "Not DRC Conflict Free" and will be subject to the audit requirement.

Who's affected?

The SEC estimates almost 6,000 issuers will fall within the scope of this rule. In addition, we expect non-public companies that are part of affected issuers' supply chains to feel the impact of this rule. Companies in the technology, telecommunications, aerospace, automotive, electronics, industrial products, and jewelry industries are among those most likely to be affected.

What's the effective date?

All disclosures required under the rule are based on a calendar year regardless of the issuer's fiscal year end. The rule is effective for the calendar year ending December 31, 2013, with a Form SD filing deadline of May 31, 2014.

What's next?

Once companies determine that they are within the scope of the rule (directly or indirectly), next steps include establishing a cross-functional team, understanding the breadth of the applicable supply chain, and designing a due diligence process. Due to its controversial nature, the rule could be legally challenged by the business community. Companies should monitor developments as they progress with their next steps.

A PwC webcast has been scheduled for September 11, 2012 to provide insights on the conflict minerals rule. You can access the registration site for the webcast via the CFOdirect Network beginning Wednesday, August 29.

Also coming soon is a PwC Dataline that will summarize the rule and our observations.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact Sara DeSmith (1-973-236-4084) or Diane Howell (1-973-236-5819) in the National Professional Services Group.

¹Includes issuers that file reports with the SEC under Section 13(a) or 15(d) of the Exchange Act.

Authored by:

Sara DeSmith
Partner
Phone: 1-973-236-4084
Email: sara.desmith@us.pwc.com

Kassie Bauman
Director
Phone: 1-267-330-2746
Email: kathleen.bauman@us.pwc.com

Pilar Garcia
Senior Manager
Phone: 1-973-236-4893
Email: pilar.garcia@us.pwc.com

In brief is designed to provide a timely, high-level overview of significant financial reporting developments. It is issued by the National Professional Services Group of PricewaterhouseCoopers LLP. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication.