Beveridge & Diamond
 

President Signs Into Law Conflict Minerals Legislation

Beveridge & Diamond, P.C., July 21, 2010

The President signed into law today H.R. 4173, the Wall Street Reform and Consumer Protection Act.  Apart from the financial market regulatory reforms that constitute the overwhelming focus of the new law, the law imposes on many manufacturers new requirements relating to “conflict minerals.”  Specifically, section 1502 will impose on many companies new SEC reporting requirements if their products contain metals derived from certain minerals defined as “conflict minerals.”  

These measures arise from heightened concerns in recent years regarding the role that revenues from the mining of certain minerals play in financing the ongoing conflict in the Democratic Republic of Congo (“DRC”).  The conflict has been marked by the extreme use of sexual- and gender-based violence, which has contributed to an emergency humanitarian situation in eastern DRC and neighboring regions.  The new law aims to use the market power of downstream manufacturers to begin to help address some of these longstanding issues.

Scope

The new requirements apply only to certain SEC-filing companies and only if “conflict minerals” are necessary for the functionality or production of their products.  “Conflict minerals” are defined to include columbite-tantalite (coltan), cassiterite, gold, wolframite, and other metals designated by the Secretary of State. 

Many products, including a number of electronic products, contain gold and metals derived from cassiterite (tin), coltan (tantalum) and wolframite (tungsten), and therefore many electronic manufacturers will be subject to the law’s requirements.  However, applicability is not limited to electronic manufacturers; any SEC-filing company using conflict minerals in its products is potentially subject to the law’s requirements.  There are a number of ambiguities regarding the specific scope of application of the law.

Key Elements

Companies that fall within scope are required to disclose annually whether their products were produced with conflict minerals that originated in the DRC or an adjoining country.  If they were, then companies are required to submit a report to the SEC containing:

  • a description of the measures the company took to exercise due diligence on the source and chain of custody of such minerals;
  • a description of any products that are not “DRC conflict free” (i.e., products that contain minerals that finance or benefit armed groups in the DRC or adjoining countries);
  • the identity of the facilities used to process the conflict minerals;
  • the country of origin of the conflict minerals; and
  • information on “efforts to determine” the mine or location of origin “with the greatest possible specificity.”

The report must also be audited by an independent private auditor.  Companies must certify that audit and also post a copy of the entire report on their website.  In addition, companies may label a product “DRC conflict free” if the product does not contain conflict minerals that directly or indirectly finance or benefit armed groups in the DRC or adjoining countries. 

In addition to the SEC’s implementing regulations, other U.S. government guidance will be developed that will affect companies’ implementation of these obligations:

  • The Secretary of State is required to develop a plan (within 6 months) that provides guidance to companies seeking to exercise due diligence on the origin and chain of custody of conflict minerals used in their products and by their suppliers.
  • The Secretary of State will also produce a map of mineral rich areas in the DRC and adjoining countries that will define “conflict zone mines” that are under the control of armed groups. 
  • The Comptroller General will develop standards for the third party audits, and will also report to Congress on the use of conflict minerals by companies whose products contain conflict minerals but are not required to file with the SEC.    

Next Steps

The SEC is required to promulgate regulations to implement the law no later than 270 days after enactment.  Disclosure, due diligence and reporting requirements will apply for the first full fiscal year for a company that begins after the promulgation of the regulations. 

The SEC rulemaking process could address a number of important issues regarding further elaboration of these obligations, including: (a) the due diligence standards that will apply; (b) reporting procedures; (c) the criteria to claim that a product is “DRC conflict free”; and (d) penalty provisions.  The rulemaking process will provide an opportunity for public comment.  Companies will also want to track the final publication of the regulations in order to determine when their disclosure and reporting requirements begin. 

Implications

Unlike other materials restriction regulations, the supply chain due-diligence and reporting approach that the new law will trigger focuses on the origin of certain common materials, rather than their content level or the presence of harmful materials.  Many companies have already begun to review their due diligence procedures in anticipation of the new disclosure requirements, which will present novel supply chain management requirements on top of those required by other recent measures such as the Lacey Act amendments.  B&D has extensive experience advising companies on compliance and implementation strategies for such measures.  Please contact us if you would like further information.

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For more information, please contact Russ LaMotte at (202) 789-6080 (rlamotte@bdlaw.com) or Paul Hagen at (202) 789-6022 (phagen@bdlaw.com).

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