[Federal Register Volume 75, Number 246 (Thursday, December 23, 2010)]
[Proposed Rules]
[Pages 80948-80975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-31940]
[[Page 80947]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 229 and 249
Conflict Minerals; Proposed Rule
Federal Register / Vol. 75 , No. 246 / Thursday, December 23, 2010 /
Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229 and 249
[Release No. 34-63547; File No. S7-40-10]
RIN 3235-AK84
Conflict Minerals
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing changes to the annual reporting requirements
of issuers that file reports pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934 to implement Section 1502 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. The proposed
rules would require any 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 in the
body of its annual report whether its conflict minerals originated in
the Democratic Republic of the Congo or an adjoining country. If so,
that issuer would be required to furnish a separate report as an
exhibit to its annual report that includes, 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.
These due diligence measures would include, but would not be limited
to, an independent private sector audit of the issuer's report
conducted in accordance with standards established by the Comptroller
General of the United States. Further, any issuer furnishing such a
report would be required, in that report, to certify that it obtained
an independent private sector audit of its report, provide the audit
report, and make its reports available to the public on its Internet
Web site.
DATES: Comments should be received on or before January 31, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an e-mail to [email protected]. Please include
File Number S7-40-10 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-40-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and copying in the Commission's
Public Reference Room 100 F Street, NE., Washington, DC 20549-1090, on
official business days between the hours of 10 a.m. and 3 p.m. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.
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: The Commission is proposing to add a new
Item 104 to Regulation S-K,\1\ revise Item 601 of Regulation S-K,\2\
and amend Form 20-F,\3\ Form 40-F,\4\ and Form 10-K \5\ under the
Securities Exchange Act of 1934 (the ``Exchange Act'').\6\
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\1\ 17 CFR 229.10 et seq.
\2\ 17 CFR 229.601.
\3\ 17 CFR 249.220f.
\4\ 17 CFR 249.240f.
\5\ 17 CFR 249.310.
\6\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Background and Summary
A. Statutory Requirements
B. Overview of Proposed Rules
II. Discussion
A. Conflict Minerals
B. Step One--Determining Issuers Covered by the Conflict
Minerals Provision
1. Issuers That File Reports Under the Exchange Act
2. ``Manufacture'' and ``Contract to Manufacture'' Products
3. Mining Issuers as ``Manufacturing'' Issuers
4. When Conflict Minerals are ``Necessary'' to a Product
C. Step Two--Determining Whether Conflict Minerals Originated in
the DRC Countries and the Resulting Disclosure
1. Location of Disclosure
2. Standard for Disclosure
D. Step Three--Conflict Minerals Report's Content and Supply
Chain Due Diligence
1. Content of Conflict Minerals Report
2. Location and Furnishing of Conflict Minerals Report
3. Due Diligence Standard in the Conflict Minerals Report
E. Time Periods
1. Furnishing of the Initial Disclosure and Conflict Minerals
Report
2. Time Period in Which Conflict Minerals Must be Disclosed or
Reported
F. Thresholds, Alternatives, Termination, Revisions, and Waivers
1. Materiality Threshold
2. Recycled and Scrap Minerals
3. Termination, Revisions, and Waivers
G. General Request for Comment
III. Paperwork Reduction Act
A. Background
B. Burden and Cost Estimates Related to the Proposed Amendments
1. Form 10-K
2. Regulation S-K
3. Form 20-F
4. Form 40-F
C. Summary of Proposed Changes to Annual Compliance Burden in
Collection of Information
D. Request for Comment
IV. Cost-Benefit Analysis
A. Benefits
B. Costs
V. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
VI. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Amendments
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Solicitation of Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority and Text of The Proposed Rule and Form
Amendments
I. Background and Summary
A. Statutory Requirements
Section 1502 (the ``Conflict Minerals Provision'') of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Act'') \7\
amends the Exchange Act by adding new Section 13(p).\8\ The Commission
is required pursuant to new Section 13(p) to issue final rules
implementing Section 13(p) no later than 270 days after the date of
enactment, or April 15, 2011.\9\ Section 13(p) requires the Commission
to promulgate disclosure and reporting regulations regarding the use of
conflict minerals from the Democratic Republic
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of the Congo (the ``DRC'') and adjoining countries (together the ``DRC
countries'').\10\ Section 1502(a) of the Conflict Minerals Provision,
which is titled ``Sense of the Congress on Exploitation and Trade of
Conflict Minerals Originating in the Democratic Republic of the
Congo,'' sets forth the background for this provision. In Section
1502(a), Congress provides that: ``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).'' \11\
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\7\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\8\ 15 U.S.C. 78m(p).
\9\ See Exchange Act Section 13(p)(1)(A).
\10\ 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.
\11\ Section 1502(a) of the Act.
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Section 13(p) mandates that the Commission promulgate regulations
requiring that a ``person described'' \12\ disclose annually whether
any ``conflict minerals'' \13\ that are ``necessary to the
functionality or production of a product manufactured by such person''
\14\ originated in the DRC countries,\15\ and make that disclosure
publicly available on the issuer's Internet Web site.\16\ If a person's
conflict minerals originated in the DRC countries, that person must
submit a report (the ``Conflict Minerals Report'') to the Commission
that includes a description of the measures taken by the person to
exercise due diligence on the minerals' source and chain of
custody.\17\ In general, undertaking due diligence involves performing
the investigative measures that a reasonably prudent person would
perform in the management of his or her own property. Under Section
13(p), the measures that must be 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 the
Commission's promulgated rules, in consultation with the Secretary of
State.\18\ The person submitting the Conflict Minerals Report must also
identify the independent private sector auditor \19\ and certify the
independent private sector audit.\20\
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\12\ The term ``person described'' is defined in Exchange Act
Section 13(p)(2) as one (1) who is required to file reports under
Sections 13(p)(1)(A), and (2) the conflict minerals are necessary to
the functionality or production of a product manufactured by such
person. Section 13(p)(1)(A) does not provide a definition but refers
back to Section 13(p)(2).
\13\ 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 DRC countries.
\14\ Exchange Act Section 13(p)(2)(B).
\15\ Exchange Act Section 13(p)(1)(A).
\16\ 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)).
\17\ See Exchange Act Section 13(p)(1)(A)(i).
\18\ 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 Provision assigns
certain responsibilities to other federal agencies. In developing
our proposed rules, our staff has consulted with the staff of these
other agencies, including the Government Accountability Office (the
``GAO''), which is headed by the Comptroller General, and the State
Department.
\19\ 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)'').
\20\ 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, the Conflict Minerals 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.'' \21\ The term ``DRC Conflict Free'' is defined
in Exchange Act Section 13(p)(1)(A)(ii) and Exchange Act Section
13(p)(1)(D) as products that do not contain conflict minerals that
``directly or indirectly finance or benefit armed groups'' in the DRC
countries.\22\ Each person must make their Conflict Minerals Report
available to the public on that person's Internet Web site.\23\
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\21\ See Exchange Act Section 13(p)(1)(A)(ii).
\22\ Id.; Exchange Act Section 13(p)(1)(D).
\23\ Exchange Act Section 13(p)(1)(E).
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B. Overview of Proposed Rules
Our proposed rules would apply to issuers who file reports with the
Commission under Exchange Act Sections 13(a) \24\ or 15(d) \25\ and for
which conflict minerals are ``necessary to the functionality or
production of a product manufactured'' or contracted to be manufactured
by such issuer.\26\ These issuers would be required to disclose, based
on their reasonable country of origin inquiry, in the body of their
annual reports whether their conflict minerals originated in the DRC
countries. If an issuer concludes that its conflict minerals did not
originate in the DRC countries, the issuer would disclose this
determination and the reasonable country of origin inquiry process it
used in reaching this determination in the body of its annual report.
Also, the issuer would be required to provide on its Internet Web site
its determination that its conflict minerals did not originate in the
DRC countries, disclose that this information is available on its Web
site and the Internet address of that site in the body of its annual
report, and maintain records demonstrating that its conflict minerals
did not originate in the DRC countries. If the issuer concludes that
its conflict minerals did originate in the DRC countries, or is unable
to conclude that its conflict minerals did not originate in the DRC
countries, the issuer would similarly disclose this conclusion, note
that the Conflict Minerals Report is 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 is posted on its Internet Web site, and
provide the Internet address of that site.
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\24\ 15 U.S.C. 78m(a).
\25\ 15 U.S.C. 78o(d).
\26\ Exchange Act Section 13(p)(2)(B).
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As required by Section 13(p), our proposed rules would require that
an issuer 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 to include
a certified independent private sector audit of the Conflict Minerals
Report that identifies the auditor and is furnished as part of the
Conflict Minerals Report. Further, the issuer would be required to
include in the Conflict Minerals Report a description of its products
manufactured or contracted to be manufactured containing conflict
minerals that are not ``DRC conflict free,'' \27\ 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
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possible specificity. The issuer would be required to exercise due
diligence in making these determinations in the Conflict Minerals
Report.
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\27\ The definition of the term ``DRC conflict free'' in our
proposed rules would be identical to the definition in Exchange Act
Sections 13(p)(1)(A)(ii) and 13(p)(1)(D).
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II. Discussion
The Conflict Minerals Provision establishes, and we are likewise
proposing, a disclosure requirement for conflict minerals that is
divided into three steps. The first step required by Section 1502 is
for the issuer to determine whether it is subject to the Conflict
Minerals Provision. An issuer is only subject to the Conflict Minerals
Provision if it is a ``person described,'' which the Conflict Minerals
Provision defines as one for whom ``conflict minerals are necessary to
the functionality or production of a product manufactured by such
person.'' \28\ If an issuer does not meet this definition, the issuer
would not be required to take any action, make any disclosures, or
submit any reports. If, however, an issuer meets this definition, that
issuer would move to the second step.
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\28\ Exchange Act Section 13(p)(2).
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The second step would require the issuer to determine after a
reasonable country of origin inquiry whether its conflict minerals
originated in the DRC countries. If the issuer determines that its
conflict minerals did not originate in the DRC countries, the issuer
would disclose this determination and the reasonable country of origin
inquiry it used in reaching this determination in the body of its
annual report.\29\ If, however, the issuer determines that its conflict
minerals did originate in the DRC countries, or if it is unable to
conclude that its conflict minerals did not originate in the DRC
countries, the issuer would disclose this conclusion in its annual
report and move to the third step.\30\
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\29\ The issuer also would be required to make available this
disclosure on its Internet Web site, disclose in its annual report
that the disclosure is posted on its Internet Web site, and disclose
the Internet address on which this disclosure is posted. Such an
issuer, however, would not have any further disclosure or reporting
obligations with regard to its conflict minerals.
\30\ The issuer also would be required make its Conflict
Minerals Report available to the public on its Internet Web site,
disclose in its annual report that the Conflict Minerals Report is
posted on its Internet Web site, and disclose the Internet address
on which the Conflict Minerals Report is posted.
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Finally, the third step under the Conflict Minerals Provision would
require an issuer with conflict minerals that originated in the DRC
countries, or an issuer that is unable to conclude that its conflict
minerals did not originate in the DRC countries, to furnish a Conflict
Minerals Report as described in greater detail below. As required by
Section 13(p)(1)(A)(ii), in the Conflict Minerals Report, the issuer
would be required to provide, among other information, a description of
any of its products that contain conflict minerals that it is unable to
determine did not ``directly or indirectly finance or benefit armed
groups'' in the DRC countries.\31\ The issuer would identify such
products by describing them as not ``DRC conflict free.'' If any of its
products contain conflict minerals that do not ``directly or indirectly
finance or benefit'' these armed groups, the issuer may describe such
products as ``DRC conflict free,'' whether or not the minerals
originated in the DRC countries.
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\31\ See Exchange Act Section 13(p)(1)(A)(ii).
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A. Conflict Minerals
The Conflict Minerals 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
DRC countries.\32\ 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.\33\ 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.\34\ Gold is used for making
jewelry and, due to its superior electric conductivity and corrosion
resistance, is also used in electronic, communications, and aerospace
equipment.\35\ Finally, wolframite is the metal ore that is used to
produce tungsten, which is used for metal wires, electrodes, and
contacts in lighting, electronic, electrical, heating, and welding
applications.\36\ Based on the many uses of these minerals, we expect
the Conflict Minerals Provision to apply to many companies and
industries.
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\32\ 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.
\33\ Tin Statistics and Information, U.S. Geological Survey.
available at, http://minerals.usgs.gov/minerals/pubs/commodity/tin/.
\34\ Niobium (Columbium) and Tantalum Statistics and
Information, U.S. Geological Survey, available at, http://minerals.usgs.gov/minerals/pubs/commodity/niobium.
\35\ Gold Statistics and Information, U.S. Geological Survey,
available at, http://minerals.usgs.gov/minerals/pubs/commodity/gold.
\36\ Tungsten Statistics and Information, U.S. Geological
Survey, available at, http://minerals.usgs.gov/minerals/pubs/commodity/tungsten.
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B. Step One--Determining Issuers Covered by the Conflict Mineral
Provision
1. Issuers That File Reports Under the Exchange Act
Our proposed rules would apply to any issuer that files reports
with the Commission under the Exchange Act, provided that the issuer is
a ``person described'' under the Conflict Minerals Provision. The
Conflict Minerals Provision defines a ``person described'' as one for
whom conflict minerals are ``necessary to the functionality or
production of a product manufactured by such person.'' \37\ We note
that the provision could be read to apply to any company, including
companies that are not subject to Commission reporting requirements, or
individuals, so long as conflict minerals are necessary to the
functionality or production of a product manufactured by that entity or
individual. Such a broad reading of the provision, however, does not
appear warranted given the provision's background and its location in
the section of the Exchange Act dealing with reporting issuers.\38\
Conversely, the Conflict Minerals Provision does not limit its
disclosure or reporting obligations to issuers of any particular size.
Again, the only limiting factor appears to be whether conflict minerals
are ``necessary to the functionality or production'' of an issuer's
products.\39\ Based on these considerations, we are not proposing to
include an exemption for smaller reporting companies, although we
request comment below on whether that would be appropriate.
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\37\ See supra note 12.
\38\ 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. S3978 (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 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'').
\39\ Exchange Act Section 13(p)(2)(B).
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We have received letters and other communications with a variety of
recommendations regarding the Conflict
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Minerals Provision and our rulemaking,\40\ including those that
discussed what the provision's definition of a ``person described''
should be construed to mean. Specifically, one industry group
representative stated that the term was intended to apply solely to
persons who file periodic reports under Section 13(a)(2) of the
Exchange Act, although that representative indicates that the provision
is unclear as written.\41\ A separate individual who submitted a letter
to us stated that the provision's definition of the term is broad and
appears to cover more than only reporting issuers.\42\ Finally, another
issuer that submitted a letter to us indicated our rules should define
a ``person described'' in the broadest possible sense so that it
includes non-reporting companies.\43\ This issuer stated that, because
the provision's intent is to limit the exploitation and trade of
conflict minerals so as to prevent human rights abuses, and the
provision is not necessarily intended to protect investors, the scope
of the provision should include more than just reporting issuers.
Further, the issuer stated that applying our proposed rules only to
reporting issuers would unfairly burden reporting issuers and damage
their competitive position.
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\40\ To facilitate public input on the Act, the Commission has
provided a series of e-mail links, organized by topic, on its Web
site at http://www.sec.gov/spotlight/regreformcomments.shtml. The
public comments we have received on the topic of the Conflict
Minerals Provision are available on our Web site at http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specializeddisclosures-8.pdf.
\41\ See letter from Jewelers Vigilance Committee.
\42\ See letter from Stuart P. Seidel, Esq. (stating that a
person described is ``not the usual SEC `issuer' requirement and
appears much broader'').
\43\ See letter from Tiffany & Co.
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We recognize there is some ambiguity as to whom the Conflict
Minerals Provision applies given that the Conflict Minerals Provision
states that the Commission shall promulgate regulations for any
``person described,'' \44\ and the provision states that a ``person is
described'' if ``conflict minerals are necessary to the functionality
or production of a product manufactured by such person.'' \45\
Therefore, the Conflict Minerals Provision could be interpreted to
apply to a wide range of private companies not previously subject to
our disclosure and reporting rules. However, given the provision's
legislative background, its statutory location, and the absence of
Congressional direction to apply these provisions to companies not
previously subject to those rules,\46\ we do not propose to extend the
rules beyond reporting companies. Also, even if we were to interpret
the provision in this manner, it is uncertain how the Commission could
administer such a program. Therefore, our proposed rules would apply
only to issuers that file reports with the Commission under Section
13(a) or Section 15(d) of the Exchange Act, although we request comment
on this question below.\47\ Consistent with the statutory language, our
rules would apply to domestic companies, foreign private issuers, and
smaller reporting companies. The statutory language does not suggest an
exemption for foreign private issuers or smaller reporting companies
and our proposal, therefore, would cover those issuers, although we
request comment on this question below.
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\44\ See Exchange Act Section 13(p)(1)(A).
\45\ See supra note 12.
\46\ 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.'')
\47\ Section 13(a) requires issuers with classes of securities
registered under Section 12 of the Exchange Act to file periodic and
other reports. 15 U.S.C. 78l. Section 15(d) requires issuers with
effective registration statements under the Securities Act of 1933
(the ``Securities Act'') to file reports similar to Section 13(a)
for the fiscal year within which such registration statement became
effective. 15 U.S.C. 77a et seq. Therefore, if our proposed rules
did not include issuers required to file reports under 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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Request for Comment
1. Should our reporting standards, as proposed, apply to all
conflict minerals equally? \48\
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\48\ See the petition attached to the memorandum of the November
18, 2010 meeting with Chairman Mary L. Schapiro and with John
Prendergast and Darren Fenwick of The Enough Project, Sasha Lezhnev
of Grassroots Reconciliation Group, and Deborah R. Meshulam of DLA
Piper (calling on the Commission to promulgate rules that would
require equal reporting standards for all the conflict minerals),
available at, http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specializeddisclosures-80.pdf.
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2. Should our rules, as proposed, apply to all issuers that file
reports under Sections 13(a) and 15(d) of the Exchange Act? If not, to
what issuers or other persons should our rules apply? Should we require
an issuer that has a class of securities exempt from Exchange Act
registration pursuant to Exchange Act Rule 12g3-2(b) \49\ to provide
the disclosure and reporting requirements in its home country annual
report or in a report on EDGAR? Would such an approach be consistent
with the Act? \50\
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\49\ 17 CFR 240.12g3-2(b). A foreign private issuer may claim
that exemption as long as it meets a foreign listing requirement,
publishes its material home country documents in English on its
Internet Web site or through another electronic information delivery
system that is generally available to the public in its primary
trading market, and otherwise is not required to file Exchange Act
reports. A foreign private issuer typically relies on the Rule 12g3-
2(b) exemption in order to establish an unlisted American Depositary
Receipt (``ADR'') facility for the issuance and trading of ADRs
through the over-the-counter market.
\50\ The Commission has not considered Rule 12g3-2(b)-exempt
companies to be subject to Exchange Act reporting and filing
requirements. Prior to the amendment to Rule 12g3-2(b) in 2008, we
required issuers claiming the Rule 12g3-2(b) exemption to furnish
paper copies of their material home country documents to the
Commission. The documents were deemed furnished and not filed under
the Exchange Act because they were subject to their home country,
and not Exchange Act, disclosure rules.
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3. Should we have an alternative interpretation of a ``person
described?''
4. Should our rules apply to foreign private issuers, as proposed?
Should we exempt such issuers and, if so, why and on what basis? Should
the rules otherwise be adjusted in some fashion for foreign private
issuers?
5. Would our proposed rules present undue costs to smaller
reporting companies? If so, how could we mitigate those costs? Also, if
our proposed rules present undue costs to smaller reporting companies,
do the benefits of making their conflict minerals information publicly
available justify these costs? Should our rules provide an exemption
for smaller reporting companies? Alternatively, should our rules
provide more limited disclosure and reporting obligations for smaller
reporting companies? If so, what should these limited requirements
entail? For example, should our rules require smaller reporting
companies to disclose, if true, that conflict minerals are necessary to
the functionality or production of their products but not require those
issuers to disclose whether those conflict minerals originated in the
DRC countries or to furnish a Conflict Minerals Report? Should our
rules provide for a delayed implementation date for smaller reporting
companies in order to provide them additional time to prepare for the
requirement and the benefit of observing how larger companies comply?
6. Should we require that all individuals and entities, regardless
of whether they are reporting issuers, private companies, or
individuals who manufacture products for which conflict minerals are
necessary to the functionality or production of the products, provide
the conflict minerals
[[Page 80952]]
disclosure and, if necessary, a Conflict Minerals Report? If so, how
would we oversee such a broad reporting system?
7. Would requiring compliance with our proposed rules only by
issuers filing reports under the Exchange Act unfairly burden those
issuers and place them at a significant competitive disadvantage
compared to companies that do not file reports with us? If so, how can
we lessen that impact?
8. General Instruction I to Form 10-K contains special provisions
for the omission of certain information by wholly-owned subsidiaries.
General Instruction J to Form 10-K contains special provisions for the
omission of certain information by asset-backed issuers. Should either
or both of these types of registrants be permitted to omit the proposed
conflict minerals disclosure in the annual reports on Form 10-K?
2. ``Manufacture'' and ``Contract To Manufacture'' Products
The Conflict Minerals Provision applies to any person for whom
conflict minerals are necessary to the functionality or production of a
product manufactured by that person.\51\ It appears, therefore, that
the Conflict Minerals Provision was not intended to apply to all
issuers, but was intended to apply only to issuers that manufacture
products. In this regard, our proposed rules would likewise apply to
reporting issuers that manufacture products.
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\51\ See Exchange Act Section 13(p)(2)(B).
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We do not propose to define the term ``manufacture'' in our rules,
since we believe it is generally understood.\52\ We note that some of
those submitting letters in advance of this rulemaking have suggested
our proposed rules should define the term ``manufacturing'' with
greater specificity and have provided their views on this matter. One
non-governmental organization (``NGO'') stated that the term
``manufactured'' should be defined as 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.'' \53\ An industry group indicated that the term
manufacture should exempt issuers involved in the ``mining, processing,
refining, alloying, fabricating, importing, exporting or sale'' of gold
and those engaged in ``jewelry repairs or refurbishment, * * * setting
or re-setting diamonds or gemstones into mountings or * * * [the]
manufactur[ing of] individual custom jewelry pieces.'' \54\ We are not
proposing to define the term, but we request comment on that point
below.
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\52\ 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).
\53\ See letter from The Enough Project.
\54\ See letter from Jewelers Vigilance Committee.
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One section of the Conflict Minerals 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,'' \55\ while another section of the provision requires issuers
to describe ``the products manufactured or contracted to be
manufactured that are not DRC conflict free'' [emphasis added] in their
Conflict Mineral Reports.\56\ The absence of the phrase ``contract to
manufacture'' from the ``person described'' definition raises 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, it appears 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. Our proposed rules, therefore, would
apply equally to issuers that manufacture products and to issuers that
``contract to manufacture'' their products. We believe that this
approach would allow the ``contracted to be manufactured'' language to
have effect in the Conflict Minerals Report.
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\55\ Exchange Act Section 13(p)(2)(B).
\56\ Exchange Act Section 13(p)(1)(A)(ii).
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With regard to what it means to ``contract to manufacture a
product,'' an industry group expressed concern that our rules could
include retailing issuers' private label goods.\57\ Two of the
Congressmen who sponsored Section 1502 have stated in a letter
submitted to us that rules implementing the provision should ``exempt
pure retailers'' from any reporting requirements.\58\ In this regard,
they suggested that the rules should clarify that retailers who sell
``pure `white label' products,'' products over which retailers have no
influence regarding their manufacture, would not be required to provide
information regarding any conflict minerals in those products. Also,
they indicated that the rules should include products that a retailer
``contracts to be manufactured or for which the retailer issues unique
product requirements.'' \59\
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\57\ See letter from National Retail Federation.
\58\ Letter from Senator Richard J. Durbin and Representative
Jim McDermott, United States Congress.
\59\ Id.
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We intend that our proposed rules would apply to issuers that
contract for the manufacturing of products over which they have any
influence regarding the manufacturing of those products. They also
would apply to issuers selling generic products under their own brand
name or a separate brand name that they have established, regardless of
whether those issuers have any influence over the manufacturing
specifications of those products, as long as an issuer has contracted
with another party to have the product manufactured specifically for
that issuer. We do not, however, propose that our rules would apply to
retail issuers that sell only the products of third parties if those
retailers have no contract or other involvement regarding the
manufacturing of those products, or if those retailers do not sell
those products under their brand name or a separate brand they have
established and do not have those products manufactured specifically
for them.
Request for Comment
9. Should we define the term ``manufacture?'' If so, how should we
define the term?
10. Should our rules, as proposed, apply both to issuers that
manufacture and issuers that contract to manufacture products in which
conflict minerals are necessary to the functionality or production of
those products?
11. Should we require a minimum level of influence, involvement, or
control over the manufacturing process before an issuer must comply
with our proposed rules? If so, how should we articulate the minimum
amount? Should we require issuers to have nominal, minimal,
substantial, total, or another level of control over the manufacturing
process before those issuers become subject to our rules? How would
those amounts be measured? Should we require that issuers must, at
minimum, mandate that the product be manufactured according to
particular specifications?
12. Is it appropriate to consider issuers who sell generic products
under their own labels or labels that they establish to be contracting
the manufacture of those products as long as those issuers have
contracted with other parties to have the products manufactured
specifically for them? If not, what would be a more appropriate
approach?
[[Page 80953]]
3. Mining Issuers as ``Manufacturing'' Issuers
As a separate but related issue, our proposed rules would consider
issuers that mine conflict minerals, including issuers that mine gold,
to be manufacturing those minerals, and issuers contracting for the
mining of conflict minerals to be contracting the manufacturing of
those minerals. In this regard, we have received input that our
proposed rules should not consider a gold mining issuer as
manufacturing or contracting to manufacture gold.\60\ Conversely,
another view expressed to us by an NGO was that our proposed rules
should consider mining commensurate with manufacturing or contracting
to manufacture.\61\ This NGO cited to and quoted from the United States
Controlled Substances Act,\62\ which includes mining under the
definition of manufacturing. We are proposing in an instruction to our
proposed rules \63\ that mining issuers should be considered to be
manufacturing conflict minerals when they extract those minerals.\64\
We do, however, request comment on this point below.
---------------------------------------------------------------------------
\60\ See letter from Jewelers Vigilance Committee (stating that
our proposed ``rules should make clear that the mining, processing,
refining, alloying, fabricating, importing, exporting or sale of
gold does not constitute `manufacture' '').
\61\ See letter from The Enough Project.
\62\ 21 U.S.C.A. 802(15), the United States Controlled
Substances Act, which defines the term ``manufacture'' as the
production, preparation, propagation, compounding, or processing of
a drug or other substance, either directly or indirectly or by
extraction from substances of natural origin'').
\63\ New Item 4(a) of Form 10-K (through new Instruction 1 to
Item 104 of Regulation S-K), new Instruction 2 to Item 16 of Form
20-F, and new Instruction 2 to General Instruction B(16) of Form 40-
F.
\64\ See Industry Guide 7 [17 CFR 229.802(g)] (implying that
companies may ``produce'' minerals from a mining reserve).
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Request for Comment
13. Is it appropriate for our rules, as proposed, to consider
reporting issuers that are mining companies as ``persons described''
under Section 1502? Does the extraction of conflict minerals from a
mine constitute ``manufacturing'' or ``contracting to manufacture'' a
``product'' such that mining issuers should be subject to our rules?
14. Alternatively, should a mining issuer not be viewed as
manufacturing a product under our rules unless it engages in additional
processes to refine and concentrate the extracted minerals into salable
commodities or otherwise changes the basic composition of the extracted
minerals?
15. If so, what transformative processes, if any, should mining
issuers be permitted to perform on conflict minerals before our
proposed rules should consider them to be manufacturing products to
which conflict minerals are necessary?
4. When Conflict Minerals are ``Necessary'' to a Product
The Conflict Minerals Provision requires the Commission to
promulgate regulations requiring that any ``person described'' disclose
annually whether conflict minerals that are ``necessary'' originated in
the DRC countries and, if so, submit to the Commission a Conflict
Minerals Report.\65\ 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.'' \66\ The
provision, however, provides no additional explanation or guidance as
to the meaning of this phrase. Likewise, we do not propose to define
when a conflict mineral is necessary to the functionality or production
of a product. We are, however, requesting comment on whether our rules
should define this phrase and, if so, how.
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\65\ Exchange Act Section 13(p)(1)(A).
\66\ Exchange Act Section 13(p)(2)(B).
---------------------------------------------------------------------------
We have received differing input as to when a conflict mineral
should be considered necessary to the functionality or production of a
product for purposes of the Conflict Minerals Provision. One NGO stated
that the term ``necessary'' should be interpreted broadly and, at a
minimum, include conflict minerals that are ``intentionally added,''
``closely related,'' or ``directly essential'' to the production of a
product.\67\ That NGO indicated also that a conflict mineral is
necessary when it is ``required for the financial success or
marketability of the product.'' \68\ Further, the NGO affirmed that it
believes that our proposed rules should exempt any product that
contains naturally occurring trace amount of conflict minerals.\69\ Two
of the Congressional sponsors of Section 1502 indicated that ``it is
the policy of Section 1502 to require transparency of all sourcing of
conflict minerals'' from the DRC countries, so they believe the
provision was intended ``to include all uses of conflict minerals
coming from DRC--except those that are `naturally occurring' or
`unintentionally included' in the product.'' \70\
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\67\ Letter from The Enough Project.
\68\ Id.
\69\ Id.
\70\ Letter from Senator Richard J. Durbin and Representative
Jim McDermott, United States Congress.
---------------------------------------------------------------------------
While we are not proposing to define ``necessary to the
functionality or production,'' we note that if a mineral is necessary,
the product is covered without regard to the amount of the mineral
involved.\71\ Further, we intend our proposed rules to include products
if the conflict mineral is intentionally included in a product's
production process and is necessary to that process, even if that
conflict mineral is not ultimately included anywhere in the final
product.\72\ On the other hand, conflict minerals 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 the product even if that tool or machine is necessary to producing
the product. For example, if an automobile containing no conflict
minerals is produced using a wrench that contains conflict minerals
necessary to the functionality or production of that wrench, we would
not consider the conflict minerals in that wrench necessary to the
production of the automobile.
---------------------------------------------------------------------------
\71\ See discussion infra Part II.F.1.
\72\ See letter from Senator Richard J. Durbin and
Representative Jim McDermott, United States Congress (``All users of
conflict minerals that originate from the Democratic Republic of the
Congo an adjoining countries that are not naturally occurring * * *
or are a purely unintentional byproduct * * * need to be subject to
reporting and transparency.'').
---------------------------------------------------------------------------
Request for Comment
16. Should our rules define the phrase ``necessary to the
functionality or production of a product,'' or is that phrase
sufficiently clear without a definition? If our rules should define the
phrase, how should it be defined?
17. If we were to define this phrase, should we delineate it to
mean that a conflict mineral would be necessary to a product's
functionality only if the conflict mineral is necessary to the
product's basic function? If so, should we define the term ``basic
function'' and, if so, how should we define that term? Should we define
the term to include components of a product if those components are
necessary to the product's basic function such that a conflict mineral
would be considered necessary to the functionality of a product if the
conflict mineral is necessary to the functionality of any of the
product's components that are required for that product's basic
function? For example, if the only conflict minerals in an automobile
are contained in the automobile's radio, should our proposed rules
consider those conflict minerals necessary to the automobile's
functionality even if the
[[Page 80954]]
automobile's basic function is for transportation? If that radio is
marketed and sold with the automobile, should our proposed rules
consider the conflict minerals that are isolated in the radio necessary
to the functionality of the automobile? Alternatively, should such a
definition consider only conflict minerals isolated in an automobile
component required specifically for the automobile's basic function as
necessary for the functionality of the automobile?
18. If we were to define the phrase ``necessary to the
functionality,'' should we delineate it to mean that a conflict mineral
would be necessary to a product's functionality if the conflict mineral
is included in a product for any reason because that conflict mineral
would be contributing to the product's economic utility? Does the fact
that, if a conflict mineral is not ``necessary'' it, axiomatically,
could be excluded from the product or the manufacturing process support
such a broad reading?
19. Should we define the phrase to indicate that, as one letter
suggested, a conflict mineral should be considered necessary when
``[t]he conflict mineral is intentionally added to the product; or
[t]he conflict mineral is used by the [issuer] for the production of a
product and such mineral is purchased in mineral form by the [issuer]
and used by the [issuer] in the production of the final product but
does not appear in the final product; and [t]he conflict mineral is
essential to the product's use or purpose; or [t]he conflict mineral is
required for the marketability of the product?'' \73\
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\73\ See letter submitted by Patricia Jurewicz on November 18,
2010 (the ``Multi-Stakeholder Group Letter'') (representing a
consortium of NGOs, large issuers, and socially responsible
institutional investors).
---------------------------------------------------------------------------
20. Should we delineate the phrase ``necessary to the production''
to mean that a conflict mineral would be necessary to a product's
production only if the conflict mineral is intentionally included in a
product's production process even if that conflict mineral is not
ultimately included in the final product because it was removed or
washed away prior to the completion of the production process? Should
we consider conflict minerals necessary to the production of a product
if they are not contained in the product but they are necessary to the
functionality or production of a physical tool or machine used to
produce a product? Should we consider such conflict minerals necessary
to the production of a product if the tool or machine used to produce
the product was manufactured for the purpose of producing the product?
Would such an approach cover too broad a group of tools or machines?
Should we limit such an approach to certain kinds of tools or machines,
and if so, which ones? Should we be more specific and provide, as a
letter recommended, that a conflict mineral is necessary to a product's
production only if it is ``used by [an issuer] for the production of a
product and such mineral is purchased in mineral form by the [issuer]
and used by the [issuer] in the production of the final product but
does not appear in the final product?'' \74\
---------------------------------------------------------------------------
\74\ See id.
---------------------------------------------------------------------------
21. Should we delineate the phrase ``necessary to the production''
so that our rules would not consider conflict minerals occurring
naturally in a product or conflict minerals that are purely an
unintentional byproduct of the product as necessary to the production
of that product?
C. Step Two--Determining Whether Conflict Minerals Originated in the
DRC Countries and the Resulting Disclosure
If conflict minerals are necessary to the functionality or
production of a product manufactured by that issuer, the Conflict
Minerals Provision requires an issuer to disclose whether those
conflict minerals originated in the DRC countries.\75\ If they did not
originate in the DRC countries, the statute requires the issuer to make
available that disclosure on its Internet Web site, but does not
require the issuer to submit anything further to the Commission. If,
however, any of the issuer's conflict minerals originated in the DRC
countries, the provision requires the issuer to submit to the
Commission a Conflict Minerals Report for the portion of its conflict
minerals that originated in the DRC countries, and make that report
available on its Internet Web site.
---------------------------------------------------------------------------
\75\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------
The rules we are proposing would require an issuer to disclose
whether its conflict minerals originated in the DRC countries. Under
our proposed rules, an issuer would be required to make a reasonable
country of origin inquiry as to whether its conflict minerals
originated in the DRC countries, but our proposed rules would not set
forth what constitutes a reasonable country of origin inquiry. If,
after a reasonable country of origin inquiry, an issuer concludes that
any of its conflict minerals did not originate in the DRC countries,
the issuer would be required to disclose this in the body of the annual
report and on its Internet Web site.\76\ Also, the issuer would be
required to disclose in the body of the annual report the Internet
address on which the disclosure is posted and retain the information on
the Web site at least until the issuer's subsequent annual report is
filed with the Commission. Further, the issuer would be required to
disclose in the body of its annual report the reasonable country of
origin inquiry it undertook to determine that its conflict minerals did
not originate in the DRC countries and maintain reviewable business
records to support its determination.\77\ The issuer, however, would
not be required to make any other disclosures with regard to its
conflict minerals that did not originate in the DRC countries.
---------------------------------------------------------------------------
\76\ 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 is subsequent annual report.
\77\ See Multi-Stakeholder Group Letter (suggesting that
entities subject to the Conflict Minerals Provision be required to
maintain reviewable business records to support a negative
determination).
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Under our proposed rules, if an issuer determines through its
reasonable country of origin inquiry that any of its conflict minerals
originated in the DRC countries, or if the issuer is unable to
determine after a reasonable country of origin inquiry that any such
conflict minerals did not originate in the DRC countries, our proposed
rules would require the issuer to disclose this in the body of the
annual report and disclose that the Conflict Minerals Report is
furnished as an exhibit to the annual report. Additionally, the issuer
would be required to make available its Conflict Minerals Report on its
Internet Web site, disclose in the body of its annual report that the
Conflict Minerals Report is posted online, and disclose in the body of
its annual report the Internet address on which the Conflict Minerals
Report is located.\78\ We note, however, that under our proposal such
an issuer would only have to post the Conflict Minerals Report on its
Internet Web site and would not have to post any of the disclosures it
provides in the body of its annual report.\79\
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\78\ See Exchange Act Section 13(p)(1)(E).
\79\ We recognize that there may be instances in which an issuer
determines that its products contain a mixed assortment of conflict
minerals, such that some did not originate in the DRC countries,
some originated in the DRC countries, some have minerals that the
issuer cannot determine did not originate in the DRC countries, or
any combination thereof. If an issuer can determine which conflict
minerals did not originate in the DRC countries, it would not have
to provide a Conflict Minerals Report regarding those minerals.
However, the issuer would still be required to file a Conflict
Minerals Report for the minerals that originated in the DRC
countries or that the issuer was unable to determine did not
originate in the DRC countries.
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[[Page 80955]]
1. Location of Disclosure
Our proposed rules would require disclosure about conflict minerals
in an issuer's annual report on Form 10-K for a domestic issuer, Form
20-F for a foreign private issuer, and Form 40-F for an eligible
Canadian issuer. 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
require this disclosure in the existing Form 10-K, Form 20-F, or Form
40-F annual report because issuers are already required to file these
reports so this approach should be less burdensome than requiring a
separate annual report to be filed. Further, 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 require issuers to
include brief conflict minerals disclosure under a separate heading
entitled, ``Conflict Minerals Disclosure,'' and the more extensive,
information in a separate exhibit to the annual report, if required.
To implement Section 1502 of the Act, we are proposing to add new
Item 4(a) of Form 10-K (which references new Item 104(a) of Regulation
S-K), new Item 16(a) of Form 20-F, and a new General Instruction
B(16)(a) of Form 40-F. These rules would 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 DRC countries, based on its
reasonable country of origin inquiry, and, for its conflict minerals
that do not originate in the DRC countries, a brief description of the
reasonable country of origin inquiry it conducted in making such a
determination. Our proposed rules would not require an issuer who
determines that its conflict minerals did not originate in the DRC
countries, based on its reasonable country of origin inquiry, to
provide any further disclosures.
We are also proposing that an issuer include brief additional
disclosure in the body of the annual report if the issuer's conflict
minerals originated in the DRC countries or if the issuer cannot
determine that its conflict minerals did not originate in the DRC
countries, based on its reasonable country of origin inquiry. We
propose to add new Item 4(a) of Form 10-K, new Item 104(b)(2) of
Regulation S-K, new Item 16(b)(2) of Form 20-F, and new General
Instruction B(16)(b)(2) and Form 40-F to implement this additional
disclosure. These proposed requirements would require an issuer to
disclose that its conflict minerals originated in the DRC countries, or
that it is unable to conclude that its conflict minerals did not
originate in the DRC countries, that its Conflict Minerals Report has
been furnished as an exhibit to the annual report, that the Conflict
Minerals Report, including the certified independent private sector
audit, is publicly available on the issuer's Internet Web site, and the
issuer's Internet address on which the Conflict Minerals Report and
audit report are located. As noted above, we are proposing this
approach to facilitate access to the conflict minerals information by
placing it outside the body of the annual report.
The Conflict Minerals Provision requires that each issuer make its
Conflict Minerals Report available to the public on the issuer's
Internet Web site.\80\ Consistent with the statute, we are proposing
that new Item 104(b)(3) of Regulation S-K, new Item 16(b)(3) of Form
20-F, and new General Instruction B(16)(b)(3) of Form 40-F 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. Our proposed rules would require that the text of
the Conflict Minerals Report remain on the issuer's Web site at least
until it files its subsequent annual report. Although we would require
an issuer that furnishes a Conflict Minerals Report to provide some
disclosures in the body of its annual report regarding that report, we
would not require that issuer to post this disclosure on its Web site.
We believe this is appropriate because any information disclosed in the
body of the annual report would also be included in the Conflict
Minerals Report, which would be required to be posted on the issuer's
Internet Web site.
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\80\ 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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Request for Comment
22. Should we require issuers to provide the conflict minerals
disclosure and reporting requirements mandated under Section 13(p) in
its Exchange Act annual report, as proposed? Should we require, or
permit, the conflict minerals disclosure to be included in a new,
separate form furnished annually on EDGAR, rather than adding it to
Form 10-K, Form 20-F, and Form 40-F? Would requiring issuers to
disclose the information in a separate annual report be consistent with
Section 13(p)? Should we develop a separate annual report to be filed
on EDGAR that includes all of the specialized disclosures mandated by
the Dodd-Frank Act? \81\ What would be the benefits or burdens of such
a form for investors or issuers with necessary conflict minerals?
---------------------------------------------------------------------------
\81\ Sections 1502, 1503, and 1504 of the Act.
---------------------------------------------------------------------------
23. Should we require some brief disclosure in the body of the
annual report, as proposed?
24. Should our rules provide that, rather than be included in the
body of the annual report, all required information would be set forth
in the Conflict Minerals Report that would be furnished as an exhibit
to the annual report?
25. Instead, should all required information, including the
Conflict Minerals Report, be included in the body of the annual report?
26. Should issuers with necessary conflict minerals that did not
originate in the DRC countries be required to disclose any information
other than as proposed? For example, should we require such an issuer
to disclose the countries from which its conflict minerals originated?
27. Should we, as proposed, require issuers to describe the
reasonable country of origin inquiry they used in making their
determination that their conflict minerals did not originate in the DRC
countries? Is a separately captioned section in the body of the annual
report the appropriate place for this disclosure?
28. Should we require, as proposed, that an issuer maintain
reviewable business records if it determines that its conflict minerals
did not originate in the DRC countries? Are there other means of
verifying an issuer's determination that its minerals did not originate
in the DRC countries? Should we specify for how long issuers would be
required to maintain these records? For example, should we require
issuers to maintain records for one year, five years, 10 years, or
another period of time?
29. Should we require the disclosure in an issuer's annual report
to be provided in an interactive data format? Why or why not? Would
investors find interactive data to be a useful tool to easily find the
information provided? If so, what format would be most appropriate for
providing standardized data disclosure? For example, should
[[Page 80956]]
the format be eXtensible Business Reporting Language (XBRL), as one
letter recommended,\82\ or should the format be eXtensible Markup
Language (XML)?
---------------------------------------------------------------------------
\82\ See letter from the Social Investment Forum.
---------------------------------------------------------------------------
30. Should we require issuers to briefly disclose in the body of
their annual reports the contents of the Conflict Minerals Report? If
so, how much of the information in the Conflict Minerals Report should
we require issuers to disclose?
31. Should we require an issuer to post its audit report on its
Internet Web site, as proposed?
32. Should we require, as proposed, that an issuer post its
Conflict Minerals Report and its audit report on its Internet Web site
at least until it files its subsequent annual report? If not, how long
should an issuer keep this information posted on its Internet Web site?
2. Standard for Disclosure
We are proposing rules that would require issuers to disclose,
based on their reasonable country of origin inquiry, whether their
necessary conflict minerals originated in the DRC countries or that
they are unable to determine, after such a reasonable country of origin
inquiry, that their conflict minerals did not originate in the DRC
countries. Our proposed rules would not specify what constitutes a
reasonable country of origin inquiry. Instead, the proposed rules would
require an issuer that determined its conflict minerals did not
originate in the DRC countries to disclose its reasonable country of
origin inquiry in making its determination.
Under our proposal, the reliability of any inquiry would be based
solely on whether the information used provides a reasonable basis for
an issuer to be able to trace the origin of any particular conflict
mineral it uses.\83\ For example, it would not satisfy our proposed
rules for an issuer to conclude that it is unreasonable for it to
attempt to determine the origin of its conflict minerals solely because
of the large amount of conflict minerals it uses in its products or the
large number of its products that include conflict minerals. Instead,
that issuer would be required to make a reasonable country of origin
inquiry as to the origin of all of its conflict minerals that are
necessary to the functionality or production of its products that it
manufactures or contracts to be manufactured to determine whether those
conflict minerals originated in the DRC countries.
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\83\ This determination would not be based on whether an issuer
considers it reasonable to undertake to determine the origin of all
its conflict minerals as a whole.
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A multi-stakeholder group suggested a similar approach. This group
recommended that our proposed rules require an issuer to make a
reasonable inquiry into whether its conflict minerals originated in the
DRC countries, provide a stated basis for any determination that the
source and origin of the conflict minerals was not in the DRC
countries, and maintain auditable business records to support a
negative determination.\84\ Similarly, in a separate submission, an NGO
stated that our proposed rules should require issuers to conduct ``a
sufficient inquiry to enable them to have a reasonable basis to state
whether necessary conflict minerals do or do not originate in the DRC
or an adjoining country.'' \85\ In this regard, that NGO also indicated
that our proposed rules should require that the issuer ``disclose the
basis for any determination that necessary conflict minerals did not
originate in the DRC or an adjoining country.'' \86\
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\84\ See Multi-Stakeholder Group Letter.
\85\ See letter from The Enough Project.
\86\ Id.
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Others who submitted letters, however, have suggested different
standards for determining whether an issuer's conflict minerals
originated in the DRC countries. A different NGO stated that our
proposed rules should require issuers to ``conduct sufficient due
diligence to enable them to determine accurately whether conflict
minerals do or do not originate from the DRC or an adjoining country.''
\87\ An industry group indicated that our proposed rules should require
issuers to use due diligence in determining whether their conflict
minerals originated in the DRC countries.\88\ The letter from that
industry group stated, however, that it is not possible for issuers in
every instance to determine definitively the origins of certain
conflict minerals,\89\ so it suggested that our proposed rules ``should
thus create a mechanism by which entities can make a disclosure stating
`no evidence of DRC or adjoining country origin.' '' \90\
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\87\ Letter from Global Witness.
\88\ Letter from Jewelers Vigilance Committee.
\89\ We note that the comments submitted by the Jewelers
Vigilance Committee refer only to gold.
\90\ Letter from Jewelers Vigilance Committee.
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We recognize the possibility that issuers who have conducted a
reasonable country of origin inquiry may nonetheless not be able to
determine with absolute accuracy the origins of their conflict
minerals. We do not believe, however, that it is appropriate for our
rules to permit issuers to satisfy their country of origin disclosure
requirement by concluding that there is ``no evidence'' that their
conflict minerals originated in the DRC countries and, thereby, not be
required to provide any further information regarding their conflict
minerals. Such an allowance might encourage issuers to conduct poorly
planned or executed inquiries. Therefore, under our proposed rules such
an issuer would still be required to file a Conflict Minerals Report
and, therefore, would be required to exercise a greater level of
investigation into the source and chain of custody of its conflict
minerals. As discussed in greater detail below, we would permit issuers
who cannot determine the origins of their conflict minerals, based on
their reasonable country of origin inquiry, to disclose that they are
unable to determine that their conflict minerals did not originate in
the DRC countries. This approach is similar to one recommended by a
multi-stakeholder group, which indicated that, if an issuer ``is unable
to determine the origin of the minerals specified in the statute after
making a reasonable country of origin inquiry, the [issuer] should be
required to submit'' a Conflict Minerals Report.\91\
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\91\ See Multi-Stakeholder Group Letter.
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We believe that conducting a reasonable country of origin inquiry
before disclosing whether an issuer's conflict minerals originated in
the DRC countries is appropriate. However, our proposed rules would not
state what that reasonable country of origin inquiry would entail
because we believe that necessarily would depend on the issuer's
particular facts and circumstances. In this regard, we note that the
reasonable country of origin inquiry requirement is not meant to
suggest that issuers would have to determine with absolute certainty
whether their conflict minerals originated in the DRC countries, as the
Commission has often stated that a reasonableness standard is not the
same as an absolute standard.\92\
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\92\ See Management's Report on Internal Control Over Financial
Reporting, Release No. 33-8762 (Dec. 20, 2006) [71 FR 77635]
(stating that the ``Commission has long held that `reasonableness'
is not an `absolute standard of exactitude for corporate records' ''
(citing to Foreign Corrupt Practices Act of 1977, Release No. 34-
17500 (Jan. 20, 1981) [46 FR 11544]) and that ``the terms
`reasonable,' `reasonably' and `reasonableness' in the context of
Section 404 [of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7262]
implementation do not imply a single conclusion or methodology, but
encompass the full range of appropriate potential conduct,
conclusions or methodologies upon which an issuer may reasonably
base its decisions''). This release also cites to the 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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[[Page 80957]]
We note that conducting the reasonable country of origin inquiry
could be less exhaustive than the due diligence discussed below. We
believe that this disparity in how the standards are characterized
reflects the language in the Conflict Minerals Provision. Initially,
the provision requires issuers to determine whether their conflict
minerals originated in the DRC countries. After making this
determination, only issuers with conflict minerals that originated in
the DRC countries or issuers that cannot determine their minerals did
not originate in the DRC countries must submit to the Commission the
Conflict Minerals Report, which describes, among other matters, the
issuer's due diligence exercised on the source and chain of custody of
its conflict minerals. It appears, therefore, that the provision was
not intended to require the same investigation for determining whether
conflict minerals originated in the DRC countries and for determining
the source and chain of custody of those conflict minerals that
originate in the DRC countries.
We believe that the steps necessary to constitute a reasonable
country of origin inquiry will depend on the available infrastructure
at a given point in time. Presently, we do not believe there is any
single or exclusive manner for issuers to conduct this inquiry.
However, one way we would view an issuer as satisfying the reasonable
country of origin inquiry standard is if it received reasonably
reliable representations from the facility at which its conflict
minerals were processed that those conflict minerals did or did not
originate in the DRC countries. These representations could come either
directly from that facility or indirectly through the issuer's
suppliers, but the issuer would have to reasonably believe these
representations to be true based upon the facts and circumstances. For
example, one way that an issuer could reasonably rely on a facility's
representations regarding the source of its conflict minerals is if the
smelter was identified as one that processes only ``DRC conflict free''
minerals under recognized national or international standards after
receiving an independent third party audit of the source and chain of
custody of the conflict minerals it processes. It is important to note,
however, that although reliance on smelter certifications and supplier
declarations may be sufficient now due to our understanding of the
current information systems in place to discover conflict minerals'
countries of origin, as these systems improve, the facts and
circumstances surrounding what would be considered a reasonable country
of origin inquiry may change. In other words, as systems improve,
smelter certifications and supplier declarations may not satisfy a
reasonable country of inquiry standard.
In this regard, we note a letter submitted to us by a multi-
stakeholder group that discussed a similar approach, which referred to
a ``compliant smelter.'' \93\ The multi-stakeholder group stated that
it would prefer a ``supplier declaration approach'' to sourcing
conflict minerals, which would ``consist of having direct and component
suppliers and others in the supply chain take reasonable means to
assure that all the tin, tantalum, tungsten, and/or gold in their
materials/products are sourced from a compliant smelter.'' The group
stated further that a smelter would be ``compliant'' if it meets the
requirements of an individual or industry wide audit process that
stipulates the collection, disclosure, and efforts made to obtain
certain information.\94\
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\93\ See Multi-Stakeholder Group Letter.
\94\ Id.
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Request for Comment
33. Is a reasonable country of origin inquiry standard an
appropriate standard for determining whether an issuer's conflict
minerals originated in the DRC countries for purposes of our rules
implementing the Conflict Minerals Provision? If not, what other
standard would be appropriate? Rather than requiring a reasonable
country of origin inquiry as proposed, should our rules mandate that
the standard for making the supply chain determinations, as set forth
in Exchange Act Sections 13(p)(1)(A)(i) and (ii) (and described below),
also applies to the determination as to whether an issuer's conflict
minerals originated in the DRC countries? Should we provide additional
guidance about what would constitute a reasonable country of origin
inquiry in determining whether conflict minerals originated in the DRC
countries?
34. Should we not require any type of inquiry? For example, would
it be appropriate and consistent with the Conflict Minerals Provision
to permit an issuer to make no inquiry, so long as it disclosed that
fact?
35. Should issuers be able to rely on reasonably reliable
representations from their processing facilities, either directly or
indirectly through their suppliers, to satisfy the reasonable country
of origin inquiry standard? If so, should we provide additional
guidance regarding what would constitute reasonably reliable
representations and what type of guidance should we provide? If not,
what would be a more appropriate requirement?
36. Should any qualifying or explanatory language be allowed in
addition to or instead of the reasonable country of origin inquiry
standard, as proposed, regarding whether issuers' conflict minerals
originated in the DRC countries? For example, should issuers be able to
state that none of their conflict minerals originated in the DRC
countries ``to the best of their knowledge'' or that ``they are not
aware'' that any conflict minerals originated in the DRC countries?
D. Step Three--Conflict Minerals Report's Content and Supply Chain Due
Diligence
The Conflict Minerals Provision requires any issuer determining
that its necessary conflict minerals originated in the DRC countries to
submit to the Commission a Conflict Minerals Report that includes,
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.\95\ In this
regard, the Conflict Minerals Provision states 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.'' \96\
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\95\ Exchange Act Section 13(p)(1)(A)(i).
\96\ Exchange Act Section 13(p)(1)(B).
---------------------------------------------------------------------------
In order to implement these requirements, our proposed rules would
require issuers that determined that their necessary conflict minerals
originated in the DRC countries and those that are unable to determine
that their conflict minerals did not originate in the DRC countries to
exercise due diligence on the source and chain of custody of their
conflict minerals and describe the due diligence they exercised. After
exercising due diligence to make their Conflict Minerals Report
determinations, issuers would be
[[Page 80958]]
required to describe their products that are not ``DRC conflict free,''
the country of origin of those conflict minerals, the facilities used
to process those conflict minerals, and the efforts to determine the
mine or location of origin with the greatest possible specificity.\97\
Additionally, our proposed rules would require all issuers furnishing a
Conflict Minerals Report to certify that they obtained an independent
private sector audit of the report and furnish as part of the Conflict
Minerals Report the audit report of the independent private sector
auditor.
---------------------------------------------------------------------------
\97\ In this release, we refer to the issuer determinations
required by Exchange Act Sections 13(p)(1)(A)(i) and (ii) regarding
the source and chain of custody of the issuer's conflict minerals,
its products manufactured or contracted to be manufactured that are
not DRC conflict free, its conflict minerals' country of origin, the
facilities used to process its conflict minerals, and the efforts to
determine the mine or location of origin with the greatest possible
specificity as the issuer's ``supply chain determinations.'' We
recognize, of course, that issuers that are unable to determine that
their conflict minerals did not originate in the DRC countries would
not know their minerals' country of origin and may not know their
minerals processing facility.
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1. Content of Conflict Minerals Report
As required by the Conflict Minerals Provision,\98\ our proposed
rules would require issuers to exercise due diligence on the source and
chain of custody of their conflict minerals and to describe those due
diligence measures in their Conflict Minerals Reports.\99\ Moreover,
consistent with the Conflict Minerals Provision,\100\ we are proposing
to require that the description of the measures taken by issuers to
exercise due diligence on the source and chain of custody of their
conflict minerals include a certified independent private sector audit
conducted in accordance with the standards established by the
Comptroller General of the United States.\101\ The proposed rules also
state that the audit would constitute a critical component of due
diligence.\102\ To implement the Conflict Minerals Provision's
requirement that issuers ``certify the audit,'' \103\ we are proposing
that issuers be required to certify that they obtained an independent
private sector audit of their Conflict Minerals Report,\104\ and we are
proposing that issuers provide this certification in that report.\105\
Further, as required by the Conflict Minerals Provision,\106\ we are
proposing that our rules require descriptions, in the Conflict Minerals
Report, of issuers' 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.\107\
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\98\ See Exchange Act Section 13(p)(1)(A)(i).
\99\ These rules would be included in proposed Item 104(b)(1)(i)
of Regulation S-K, proposed Item 16(b)(1)(i) of Form 20-F, and
proposed General Instruction B(16)(b)(1)(i) of Form 40-F.
\100\ See Exchange Act Sections 13(p)(1)(A)(i) and 13(p)(1)(B).
\101\ See Exchange Act Section 13(p)(1)(A). We note that, under
the Conflict Minerals Provision, the Comptroller General establishes
the appropriate standards for the independent private sector audit.
Staff of the GAO has informed our staff that they preliminarily
believe no new standards need to be promulgated, but rather auditing
standards that are part of the Government Auditing Standards, such
as the standards for Attestation Engagements or the standards for
Performance Audits will be applicable. See GAO-07-731G. The GAO
staff has not indicated whether and, if so, what evaluation criteria
are required for an Attestation Engagement.
\102\ See new Item 4(a) of Form 10-K (referring to new Item
104(b)(1)(i) of Regulation S-K), new Item 16(b)(1)(i) of Form 20-F,
and new General Instruction B(16)(b)(1)(i) of Form 40-F. Exchange
Act Section 13(p)(1)(A)(i) states that a Conflict Minerals Report
must include ``a description of the measures taken by the person to
exercise due diligence on the source and chain of custody of such
minerals, which measures shall include an independent private sector
audit of such report submitted through the Commission that is
conducted in accordance with standards established by the
Comptroller General of the United States, in accordance with the
rules promulgated by the Commission, in consultation with the
Secretary of State.'' Exchange Act Section 13(p)(1)(B) defines the
term ``Certification'' as follows: ``The person submitting a report
under subparagraph (A) shall certify the audit described in clause
(i) of such subparagraph that is included in such report. Such a
certified audit shall constitute a critical component of due
diligence in establishing the source and chain of custody of such
minerals.''
\103\ Exchange Act Section 13(p)(1)(B).
\104\ 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 are not proposing this approach since it
appears redundant.
\105\ These rules would be included under proposed Item
104(b)(1)(ii) of Regulation S-K, proposed Item 16(b)(1)(ii) of From
20-F, and proposed General Instruction B(16)(b)(1)(ii) of Form 40-F.
\106\ See Exchange Act Section 13(p)(1)(A)(ii), which states
that a Conflict Minerals Report must include, among other matters,
``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.''
\107\ These rules would be included under proposed Item
104(b)(1)(iii) of Regulation S-K, proposed Item 16(b)(1)(iii) of
Form 20-F, and proposed General Instruction B(16)(b)(1)(iii) of Form
40-F.
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An issuer that is required to furnish a Conflict Minerals Report
because it is unable to determine that its conflict minerals did not
originate in the DRC countries must also provide this information. We
recognize that such an issuer may not be able to determine with
certainty whether any of its products are or are not ``DRC conflict
free,'' insofar as their initial efforts to determine the origin of the
conflict minerals in those products under the reasonable country of
origin inquiry was inconclusive and their subsequent due diligence on
the source and chain of custody of such minerals was also inconclusive.
Consistent with Section 13(p)(1)(A)(ii), we would require such an
issuer to describe all of its products that contain such conflict
minerals and to identify these products as not ``DRC conflict free''
\108\ since the issuer would not be able to establish that the minerals
did not directly or indirectly finance or benefit armed groups in the
DRC countries. Also, such issuers would be 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.\109\ An
issuer may provide additional disclosure explaining, for example, that
although these products are labeled as not ``DRC conflict free'' in
compliance with our rules implementing the Conflict Minerals Provision,
the issuer has been unable to determine the source of the conflict
minerals, including whether the conflict minerals in these products
benefited or financed armed groups in the DRC countries.
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\108\ If any products contain conflict minerals that did not
originate in the DRC countries and conflict minerals that the issuer
is unable to determine did not originate in the DRC countries, the
issuer would be required to classify those products as not ``DRC
conflict free.'' Similarly, if any of an issuer's products contain
conflict minerals that did not originate in the DRC countries, that
the issuer is unable to determine did not originate in the DRC
countries, or that originated in the DRC countries but did not
directly or indirectly finance or benefit armed groups in the DRC
countries, and also contain conflict minerals that originated in the
DRC countries and that directly or indirectly financed or benefited
armed groups in the DRC countries, the issuer must classify those
products as not ``DRC conflict free.''
\109\ We recognize that such issuers would not be able to
provide the country of origin of those minerals.
---------------------------------------------------------------------------
An issuer's description of any of its products that are not ``DRC
conflict free'' should be based on its individual facts and
circumstances so that the description sufficiently identifies the
products or categories of products. For example, an issuer may disclose
each model of a product containing conflict minerals that are not ``DRC
conflict free,'' each category of a product containing conflict
minerals that are not ``DRC conflict free,'' the specific products
containing conflict minerals that are not ``DRC conflict free'' that
were produced during a specific time period, that all its products
contain conflict
[[Page 80959]]
minerals that are not ``DRC conflict free,'' or another such
description depending on the issuer's facts and circumstances.
The Conflict Minerals Provision uses the phrase ``facilities used
to process the conflict minerals,'' which would appear to refer to the
smelter or refinery through which the issuer's minerals passed. We note
also that the Conflict Minerals 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.\110\ 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,'' \111\ as it relates to the DRC
countries.\112\ Our proposed rule includes a cross reference to that
definition to provide guidance to issuers.
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\110\ See Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D).
\111\ 22 U.S.C. 2151n(d) and 2304(b).
\112\ Section 1502(e)(3) of the Act.
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Our proposed rules would require issuers to furnish, as part of
their Conflict Minerals Report, the audit report prepared by the
independent private sector auditor and to specifically identify that
auditor.\113\ 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 believe
that approach is not the better reading of the Conflict Minerals
Provision. As noted above, the Conflict Minerals Provision emphasizes
that the independent audit is a ``critical component of due
diligence.'' In light of the importance of this audit report to our new
reporting requirements and the statutory language, we are proposing to
require that the audit report be furnished with the Conflict Minerals
Report.
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\113\ These rules would be included in proposed Item 4(a) of
Form 10-K (through Item 104(b)(1)(iv) of Regulation S-K), proposed
Item 16(b)(1)(iv) of From 20-F, and proposed General Instruction
B(16)(b)(1)(iv) of Form 40-F. Having our proposed rules 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).''
---------------------------------------------------------------------------
Although we are proposing that the audit report be furnished with
the Conflict Minerals Report, new Item 4(a) of Form 10-K (referring to
new Instruction 2 to Item 104 of Regulation S-K), new Instruction 3 to
Item 16 of Form 20-F, and new Instruction 3 to General Instruction
B(16) of Form 40-F would state 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 incorporates it
by reference. For example, if an issuer incorporates by reference its
annual report into a Securities Act registration statement, that issuer
would not be automatically incorporating the Conflict Minerals Report
into the Securities Act document. Therefore, in such a situation, the
independent private sector auditor would not assume expert liability
and the issuer would not,\114\ therefore, have to file a consent from
that auditor unless the issuer specifically incorporates by reference
the Conflict Minerals Report into the Securities Act registration
statement.
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\114\ See Rule 436 of Regulation C [17 CFR 230.436].
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Request for Comment
37. Should our rules, as proposed, require issuers that are unable
to determine the origin of their conflict minerals to label their
products that contain such minerals as not ``DRC conflict free''? Is
this approach consistent with the Conflict Minerals Provision''? Would
it be more appropriate to allow such issuers to label such products
differently, such as ``May Not Be DRC Conflict Free''? Would having a
separate category for products that contain such unknown origin
minerals be consistent with the Conflict Minerals Provision? Would the
proposed approach be confusing for readers, or can issuers sufficiently
address any confusion by including supplemental disclosure for those
products that contain minerals of unknown origin?
38. Should our rules, as proposed, permit issuers to describe their
products that contain conflict minerals that do not qualify as being
DRC conflict free or that may not qualify as being DRC conflict free
based on their individual facts and circumstances? If not, how should
we require issuers to describe their products that contain conflict
minerals that do not qualify as being DRC conflict free? If an issuer
had hundreds or thousands of products that were not DRC conflict free,
would the report provide overwhelming information? Would it be unduly
expensive to produce?
39. Should our rules, as proposed, require issuers to disclose the
facilities, countries of origin, and efforts to find the mine or
location of origin only for its conflict minerals that do not qualify
as DRC conflict free, and not for all of its conflict minerals?
Alternatively, should we require issuers to disclose the facilities,
countries of origin, and efforts to find the mine or location of origin
for all of its conflict minerals regardless of whether those conflict
minerals do not qualify as DRC conflict free?
40. Should our rules require issuers to disclose the mine or
location of origin of their conflict minerals with the greatest
possible specificity in addition to requiring issuers, as proposed, to
describe the efforts to determine the mine or location of origin with
the greatest possible specificity? If so, how should we prescribe how
the location is described?
41. As suggested in a submission,\115\ should our rules require
issuers to include information on the capacity of each mine they source
from along with the weights and dates of individual mineral shipments?
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\115\ See the petition attached to the memorandum of the
November 18, 2010 meeting with Chairman Mary L. Schapiro and with
John Prendergast and Darren Fenwick of The Enough Project, Sasha
Lezhnev of Grassroots Reconciliation Group, and Deborah R. Meshulam
of DLA Piper, available at, http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specializeddisclosures-80.pdf.
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42. We are proposing that an issuer ``certify the audit'' by
certifying that it obtained such an audit. Should we further specify
the nature of the certification? We are not proposing that anyone sign
this certification. Should our rules require issuers to have the
audit's certification signed? If so, who should be required to sign the
certification? Also, if we revise our proposal to require an individual
to sign, should the individual who signs the certification sign it in
his or her capacity within the company or on behalf of the company?
What liability should our rules assign to the individual who signs the
certification?
43. Should our rules, as proposed, require an issuer to furnish its
independent private sector audit report as part of its Conflict
Minerals Report? Are there other ways to give effect to the Conflict
Minerals Provision's requirement of Section 13(p)(1)(B) that the issuer
``certify the audit * * * that is included in'' [emphasis added] the
Conflict Minerals Report? Would investors find the audit report useful?
How would the potential liability for a furnished audit report affect
the cost and availability of such audit services?
44. Should our rules provide that, as proposed, the independent
private sector audit report furnished as an
[[Page 80960]]
exhibit to an issuer's annual report 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 incorporates it
by reference? Is this audit report qualitatively different from other
experts' reports for which consent is required under our rules?
45. Are there other ways we should treat the audit report under our
rules to balance the interests of receiving a high quality audit and
not unnecessarily increasing potential liability and costs?
2. Location and Furnishing of Conflict Minerals Report
As noted above, we are proposing rules that require a Conflict
Minerals Report to be furnished as an exhibit to an issuer's annual
report on Form 10-K, Form 20-F, or Form 40-F, as applicable.\116\ By
requiring issuers to furnish their Conflict Minerals Report as an
exhibit to the annual report, our proposed rules would enable anyone
accessing the Commission's Electronic Data Gathering, Analysis, and
Retrieval system (the ``EDGAR'' system) \117\ to determine quickly
whether an issuer furnished a Conflict Minerals Report with its annual
report. Specifically, proposed Item 4(a) of Form 10-K (through Item 104
to Regulation S-K), Item 16 to Form 20-F, and General Instruction B(16)
to Form 40-F would require an issuer to furnish its Conflict Minerals
Report as an exhibit to its annual report. Also, our proposed rules
would further revise Regulation S-K and Form 20-F to include a new
Paragraph (96) of Item 601(b) and a new Paragraph 16 to the
``Instructions as to Exhibits'' section of Form 20-F to provide
additional instructions specifically for their exhibits under Item 601
and Paragraph 16, respectively. The text of Item 601(b)(96) and
Paragraph 16 would be substantially similar and only would reference
Item 104 and Item 16, respectively.\118\
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\116\ Our proposed rules would require that issuers furnish
their Conflict Minerals Report as Exhibit 96 to their annual
reports.
\117\ See the Securities and Exchange Commission's Internet Web
site, ``Researching Public Companies Through EDGAR: A Guide for
Investors,'' available at: http://www.sec.gov/investor/pubs/edgarguide.htm.
\118\ Item 601(96) of Regulation S-K would state, ``The report
required by Item 104(b) of Regulation S-K, if applicable.'' Also,
Paragraph 16 in the ``Instructions as to Exhibits'' section to Form
20-F would state, ``The Conflict Minerals Report required by Item 16
of this Form, if applicable.'' Further, our proposed rules would
revise the Exhibit Table in Item 601 of Regulation S-K.
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Under our proposed rules, an issuer's Conflict Minerals Report,
which would include the independent private sector audit report, would
not be ``filed'' for purposes of Section 18 of the Exchange Act and
would, thus, not be subject to the liability of that section of the
Exchange Act unless the issuer states explicitly that the Conflict
Minerals Report and the independent private sector audit report are
filed under the Exchange Act. Instead, these documents would only be
furnished to the Commission. These documents, therefore, would be
treated in the same manner as other furnished disclosures, such as the
certifications required to be submitted as exhibit 32 \119\ to Exchange
Act documents under Rule 13a-14(b) \120\ or Rule 15d-14(b) \121\ and
Section 1350 of Chapter 63 of Title 18 of the United States Code,\122\
the Audit Committee Report required by Item 407(d) of Regulation S-
K,\123\ and the Compensation Committee Report required by Item
407(e)(5) of Regulation S-K.\124\ Similarly, our proposed rules would
not consider the Conflict Minerals Report and the independent private
sector audit report incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the
issuer specifically incorporates them by reference into the documents.
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\119\ Item 601(32)(ii) of Regulation S-K [17 CFR
229.601(b)(32)].
\120\ 17 CFR 240.13a-14(b).
\121\ 17 CFR 240.15d-14(b).
\122\ 18 U.S.C. 1350.
\123\ 17 CFR 229.407(d).
\124\ 17 CFR 229.407(e)(5).
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We believe this approach is not inconsistent with the Conflict
Minerals Provision, which provides that an issuer must ``submit'' the
Conflict Minerals Report, and does not otherwise mandate that the
information be filed with the Commission.\125\ Further, we
preliminarily believe this approach is appropriate in light of the
nature and purpose of this disclosure as set forth in Section 1502(a)
of the Act.\126\ It appears that the nature and purpose of the Conflict
Minerals Provision is for the disclosure of certain information to help
end the emergency humanitarian situation in the eastern DRC that is
financed by the exploitation and trade of conflict minerals originating
in the DRC countries,\127\ which is qualitatively different from the
nature and purpose of the disclosure of information that has been
required under the periodic reporting provisions of the Exchange
Act.\128\ Finally, we note that we have received input indicating that
our proposed rules should allow issuers to furnish their conflict
minerals disclosures and Conflict Minerals Reports, as applicable.\129\
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\125\ See Exchange Act Section 13(p)(1)(A).
\126\ See supra note 11. A co-sponsor of the Conflict Minerals
Provision stated that the disclosure of an issuer's conflict
minerals information would help investors make a more informed
decision. See 156 Cong. Rec. S3865-66 (statement of Sen. Feingold)
(daily ed. May 18, 2010) (stating that ``[c]reating 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.'')
\127\ Id.
\128\ 15 U.S.C. 78b.
\129\ See letter from the American Bar Association.
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Although the Conflict Minerals Report would not be subject to
Section 18 liability,\130\ we note that under Exchange Act Section
13(p)(1)(C), failure to comply with the Conflict Minerals Provision
would deem the issuer's due diligence process ``unreliable'' and,
therefore, the Conflict Minerals Report ``shall not satisfy'' our
proposed rules.\131\ In this regard, issuers that fail to comply with
our proposed rules would be subject to liability for violations of
Exchange Act Sections 13(a) or 15(d), as applicable.\132\
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\130\ 15 U.S.C. 78r.
\131\ See Exchange Act Section 13(p)(1)(C).
\132\ 15 U.S.C. 78m(a) and 15 U.S.C. 78o(d).
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Request for Comment
46. Should we, as proposed, require the Conflict Minerals Report to
be furnished as an exhibit to the issuer's annual report? If not, how
should it be provided?
47. Should we require the Conflict Minerals Report to be filed as
an exhibit, rather than furnished, which would affect issuers'
liability under the Exchange Act or under the Securities Act (if any
such issuer incorporates by reference its annual report into a
Securities Act registration statement)?
48. Under Exchange Act Section 18, ``Any person who shall make or
cause to be made any statement in any application, report, or document
filed pursuant to [the Exchange Act] or any rule or regulation
thereunder or any undertaking contained in a registration statement as
provided in subsection (d) of section 15, 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
[[Page 80961]]
was false or misleading.'' \133\ Is it appropriate not to have the
Conflict Minerals Report subject to the Section 18 liability even if
the elements of Section 18 liability can be established? Should we
require the Conflict Minerals Report to be filed for purposes of
Exchange Act Section 18, but permit an issuer to elect not to
incorporate it into Securities Act filings?
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\133\ Exchange Act Section 18(a).
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49. Should the Conflict Minerals Report be furnished annually on
Form 8-K.\134\ Would that approach be consistent with Exchange Act
Section 13(p)(1)(A)? If so, should foreign private issuers, which do
not file Forms 8-K, be permitted to submit the Conflict Minerals Report
either in their Form 20-F or 40-F as applicable, or annually on Form 6-
K, at their election?
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\134\ See, e.g., letter from American Bar Association.
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3. Due Diligence Standard in the Conflict Minerals Report
Our proposed rules would require issuers to use due diligence
regarding the supply chain determinations in their Conflict Minerals
Report.\135\ Our proposed rules would not, however, dictate the
standard for, or otherwise provide guidance concerning, due diligence
that issuers must use in making their supply chain determinations.
Instead, our proposed rules would require issuers to disclose the due
diligence they used in making their determinations, such as whether
they used any nationally or internationally recognized standards or
guidance of supply chain due diligence.
---------------------------------------------------------------------------
\135\ See new Item 4(a) of Form 10-K (as through new Item
104(b)(1) of Regulation S-K), new Item 16(b)(1) of Form 20-F, and a
new General Instruction B(16)(b)(1) of Form 40-F.
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The Conflict Minerals Provision requires issuers to conduct due
diligence based on the provision's requirement that issuers describe
their due diligence on the source and chain of custody of their
conflict minerals.\136\ Also, the provision states that issuers shall
include an independent private sector audit of the Conflict Minerals
Report as a critical component of due diligence.\137\ Further, 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, under the terms of the Conflict
Minerals Provision, any Conflict Minerals Report that relies on such an
unreliable due diligence process would not satisfy our proposed
rules.\138\ In light of these statutory provisions, our proposed rules
provide that an issuer's Conflict Minerals Report must include reliable
due diligence processes, and that due diligence is required in making
the supply chain determinations in the Conflict Minerals Report.
---------------------------------------------------------------------------
\136\ Exchange Act Section 13(p)(1)(A)(i).
\137\ Exchange Act Section 13(p)(1)(B).
\138\ Exchange Act Section 13(p)(1)(C).
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We note that we have received suggestions that due diligence is
required in making the supply chain determinations. One letter received
stated that a due diligence obligation ``needs to be extended to the
supply chain.'' \139\ Two of the Congressional sponsors of Section 1502
of the Act have indicated their belief that the due diligence
requirement should not be limited to determining whether the smelter
uses due diligence.\140\ An NGO submitted to us a description of its
model supply chain due diligence processes, which would require issuers
to perform due diligence on all aspects of their supply chain,
including the supply chain determinations in their Conflict Minerals
Reports.\141\ In addition, an industry group from the precious metals
industry indicated that it would not be opposed to conducting due
diligence of its supply chains and, in fact, that due diligence is
already part of its current business practice.\142\ We note, however,
that another industry group submitted a letter to us expressing concern
about the feasibility of implementing a due diligence requirement,
particularly with regard to gold.\143\ This industry group pointed out
that applying due diligence requirements to the gold supply chain would
be especially challenging because the supply chain often begins with a
bullion produced by a refiner that incorporates both newly mined and
recycled gold.\144\
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\139\ Letter from Howland Greene Consultants LLC.
\140\ See letter from Senator Richard Durbin and Representative
Jim McDermott.
\141\ See attached materials to the memorandum of the September
15, 2010 meeting of the staff of Division of Corporation Finance met
with Corinna Gilfillan, Jonathan Grant, and Annie Dunnebacke of
Global Witness, available at, http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specializeddisclosures-18.pdf.
\142\ See letter from International Precious Metals Institute.
\143\ See letter from Tiffany & Co.
\144\ Letter from Jewelers Vigilance Committee.
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We believe that the statutory provision contemplates that issuers
must use due diligence in their supply chain determinations. We do not
believe, however, that it would be appropriate to prescribe any
particular guidance for conducting due diligence because the conduct
undertaken by a reasonably prudent person may vary and evolve over
time.\145\ Although we are not proposing to establish any particular
conduct requirements, we believe that due diligence must be performed
and information about what conduct an issuer performed in its due
diligence regarding its supply chain determinations is relevant. Our
proposed rules, therefore, would require issuers to describe the due
diligence used in making these determinations. In particular, we expect
that an issuer whose conduct conformed to a nationally or
internationally recognized set of standards of, or guidance for, due
diligence regarding conflict minerals supply chains \146\ would provide
evidence that the issuer used due diligence in making its supply chain
determinations.
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\145\ For instance, the Organisation for Economic Cooperation
and Development (the ``OECD'') is developing due diligence guidance
for conflict mineral supply chains. See Organisation for Economic
Cooperation and Development (the ``OECD''), Draft Due Diligence
Guidance for Responsible Supply Chains of Minerals from Conflict-
Affected and High-Risk Areas (2010), available at, http://www.oecd.org/dataoecd/13/18/46068574.pdf. Also, on November 30,
2009, the United Nations Security Council adopted Resolution 1896
that, among other matters, extended and expanded the mandate of the
United Nations Group of Experts for the Democratic Republic of the
Congo to create recommendations on due diligence guidelines for
minerals originating in the DRC. See United Nations Security Council
Resolution 1896 (2009) [S/RES/1896 (2009)].
\146\ See, e.g., OECD, Draft Due Diligence Guidance for
Responsible Supply Chains of Minerals from Conflict-Affected and
High-Risk Areas (2010), available at, http://www.oecd.org/dataoecd/13/18/46068574.pdf.
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If an issuer is unable to determine, after a reasonable country of
origin inquiry, that its conflict minerals did not originate in the DRC
countries, that issuer still would be required to submit a Conflict
Minerals Report and obtain an independent private sector audit of that
Conflict Minerals Report. We note that in such instances an issuer may
not be able to provide all the information required by the Conflict
Minerals Report, such as its conflict minerals' country of origin. We
would, however, expect such an issuer to provide as much of the
required information as possible, such as a description of the measures
it took to exercise due diligence on the source and chain of custody of
its conflict minerals.
In this regard, if an issuer is unable to determine after a
reasonable country of origin inquiry that its conflict minerals did not
originate in the DRC countries, the issuer would be required to
exercise due diligence in making its supply chain determinations.
Therefore, such an issuer would be required to describe its due
diligence efforts regarding the facilities used to process the conflict
[[Page 80962]]
minerals, the conflict minerals' country of origin, if it can be
determined, and the efforts to determine the mine or location of origin
with the greatest possible specificity.
Request for Comment
50. Should our rules, as proposed, require an issuer to use due
diligence in its supply chain determinations and the other information
required in a Conflict Minerals Report? If so, should those rules
prescribe the type of due diligence required and, if so, what due
diligence measures should our rules prescribe? Alternatively, should we
require only that persons describe whatever due diligence they used, if
any, in making their supply chain determinations and their other
conclusions in their Conflict Minerals Report?
51. Should different due diligence measures be prescribed for gold
because of any unique characteristics of the gold supply chain? If so,
what should those measures entail?
52. Should our rules state that an issuer is permitted to rely on
the reasonable representations of its smelters or any other actor in
the supply chain,\147\ provided there is a reasonable basis to believe
the representations of the smelters or other parties?
---------------------------------------------------------------------------
\147\ In the industry, tantalite-columbite, cassiterite, and
wolframite are ``smelted'' into their component metals whereas gold
is ``refined.'' Even so, both processes are substantially similar.
When we refer to ``smelting'' those references are intended to
include the ``refining'' of gold as well.
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53. Is our approach to issuers that are unable to determine that
their products did not originate in the DRC countries appropriate?
54. Should our rules prescribe any particular due diligence
standards or guidance?
55. Should our rules require that an issuer use specific national
or international due diligence standards or guidance, such as standards
developed by the OECD, the United Nations Group of Experts for the DRC,
or another such organization? If so, should our rules require the
issuer to disclose which due diligence standard or guidance it used?
Should we list acceptable national or international organizations that
have developed due diligence standards or guidance on which an issuer
may rely? Should our rules permit issuers to rely on standards from
federal agencies if any such agencies develop applicable rules?
E. Time Periods
1. Furnishing of the Initial Disclosure and Conflict Minerals Report
The Conflict Minerals Provision requires issuers to provide their
initial conflict minerals disclosure and, if necessary, their initial
Conflict Minerals Report after their first full fiscal year following
the promulgation of our final rules.\148\ Assuming we adopt rules in
April 2011, as required by the statutory provision, a December 31
fiscal year-end issuer would first have to provide conflict minerals
disclosure or a Conflict Minerals Report after the end of its December
31, 2012 fiscal year. An issuer with a May 31 fiscal year-end, however,
would have to provide the conflict minerals disclosure or a Conflict
Minerals Report in its annual report for the fiscal year that
encompasses the period from June 1, 2011 through May 31, 2012.
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\148\ 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'').
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Request for Comment
56. Should our rules, as proposed, require that a complete fiscal
year begin and end before issuers are required to provide their initial
disclosure or Conflict Minerals Report regarding their conflict
minerals?
57. If we require issuers to provide their disclosure or reporting
requirements in their Exchange Act annual reports, should we permit
them to file an amendment to the annual report within a specified
period of time subsequent to the due date of the annual report, similar
to Article 12 schedules or financial statements provided in accordance
with Regulation S-X Rule 3-09,\149\ to provide the conflict minerals
information? \150\ If so, why and for which issuers should our rules
permit such a delay? For example, should we allow this delay only for
smaller reporting companies?
---------------------------------------------------------------------------
\149\ 17 CFR 210.3-09.
\150\ See letter from the American Bar Association.
---------------------------------------------------------------------------
58. Should we phase in our rules and permit certain issuers, such
as smaller reporting companies, to delay compliance with the Conflict
Minerals Provision's disclosure and reporting obligations until a
period after that which is provided in the Exchange Act Section
13(p)(1)(A)?
2. Time Period in Which Conflict Minerals Must Be Disclosed or Reported
The Conflict Minerals Provision requires issuers to disclose
whether their necessary conflict minerals originated in the DRC
countries ``in the year for which such reporting is required.'' \151\
We believe the date that the issuer takes possession of a conflict
mineral would determine which reporting year an issuer would have to
provide the required disclosure or Conflict Minerals Report for its
conflict minerals. For example, if a December 31 fiscal year-end issuer
takes possession of the conflict minerals, or product containing the
conflict minerals, on December 31, the issuer would have to provide the
required disclosure or a Conflict Minerals Report for the current year.
However, if that same issuer did not take possession of the minerals
until January 1, the issuer would not have to provide the disclosure or
a report until the end of the year beginning that day and ending on the
subsequent December 31.
---------------------------------------------------------------------------
\151\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------
In an instance in which an issuer contracts the manufacturing of a
product in which a conflict mineral is necessary to the production of
that product, but the conflict mineral is not included in the product,
the issuer may use the date it takes possession of the product to
determine which reporting year the issuer would have to provide the
required disclosure or Conflict Minerals Report for the conflict
mineral used to produce the product. For example, if a December 31
fiscal year-end issuer takes possession on December 31 of the product
for which a conflict mineral was necessary to produce but that did not
end up in the product, the issuer would have to provide the required
disclosure or a Conflict Minerals Report for the year ended on that
December 31. However, if that same issuer did not take possession of
the product until the subsequent day, January 1, the issuer would not
have to provide the disclosure or a report until the end of the year
beginning that January 1 and ending on the subsequent December 31.
Request for Comment
59. Is ``possession'' the proper determining factor as to when
issuers should provide the required disclosure or a Conflict Minerals
Report regarding a necessary conflict mineral? If not, what would be a
more appropriate test and why?
60. Should our rules allow individual issuers to establish their
own criteria for determining which reporting period to include any
required conflict minerals disclosure or Conflict Minerals Report,
provided that the issuers are consistent and clear with their criteria
from year-to-year?
61. We note it is possible issuers may have stockpiles of existing
conflict minerals that they previously obtained. Do we adequately
address issuers' disclosure and reporting obligations regarding their
existing stockpiles of conflict minerals? If not, how can we address
existing stockpiles of conflict
[[Page 80963]]
minerals? Should our rules permit a transition period so that issuers
would not have to provide any conflict minerals disclosure or report
regarding any conflict mineral extracted before the date on which our
rules are adopted? Alternatively, would the reasonable country of
origin inquiry standard for determining the origin of the conflict
minerals and the due diligence standard or guidance for determining the
source and chain of custody of the conflict minerals that originated in
the DRC countries accomplish the same goal? For example, should issuers
be required to inquire about the origin of their conflict minerals
extracted before the date on which our rules are adopted? As another
example, should issuers file a Conflict Minerals Report regarding
conflict minerals that originated in the DRC countries before the date
on which our rules are adopted?
F. Thresholds, Alternatives, Termination, Revisions, and Waivers
1. Materiality Threshold
As discussed above, the Conflict Minerals Provision's only limiting
factor is that the conflict minerals must be ``necessary to the
functionality or production'' of an issuer's products.\152\ The
provision has no materiality thresholds for disclosure based on the
amount of conflict minerals an issuer uses in its production processes.
Therefore, we are not proposing to include a materiality threshold for
the disclosure or reporting requirements in our proposed rules.
---------------------------------------------------------------------------
\152\ Exchange Act Section 13(p)(2)(B).
---------------------------------------------------------------------------
Request for Comment
62. Should there be a de minimis threshold in our rules based on
the amount of conflict minerals used by issuers in a particular product
or in their overall enterprise? If so, what would be a proper threshold
amount? Would this be consistent with the Conflict Minerals Provision?
\153\
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\153\ See letter from Senator Richard J. Durbin and
Representative Jim McDermott, United States Congress (stating that a
de minimis rule would create an overly generous loop-hole because
the weight of essential conflict minerals in many products is very
small).
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2. Recycled and Scrap Minerals
Our proposed rules would allow for different treatment of conflict
minerals from recycled and scrap sources than from mined sources due to
the difficulty of looking through the recycling or scrap process to
determine the origin of the minerals. As suggested in a letter, we
would consider conflict minerals ``recycled'' that 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.\154\ Given the difficulty of looking
through the recycling or scrap process, we expect that issuers
generally will not know the origins of their recycled or scrap conflict
minerals, so we believe it would be appropriate for our proposed rules
to require that issuers using recycled or scrap conflict minerals
furnish a Conflict Minerals Report subject to special rules. Under our
proposed rules,\155\ if issuers obtain conflict minerals from a
recycled or scrap source, they may consider those conflict minerals to
be DRC conflict free.\156\ We believe that including this alternative
approach in our proposed rules is consistent with the Conflict Minerals
Provision because issuers purchasing conflict minerals from recycled or
scrap sources would not implicate the concerns of the provision.\157\
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\154\ See Multi-Stakeholder Group Letter.
\155\ See new Items 104(b)(2) and (c)(4) of Regulation S-K, new
Items 16(b)(2) and (c)(4) of Form 20-F, and new General Instructions
B(16)(b)(2) and (c)(4) of Form 40-F.
\156\ Because our proposed rules would automatically classify
recycled or scrap conflict minerals DRC conflict free, issuers with
products containing such minerals would not need 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 be required to describe their efforts to determine the
mine or location of origin with the greatest possible specificity.
\157\ See Section 1502(a) of the Act. See also, 156 Cong. Rec.
S3816-17 (daily ed. May 17, 2010) (statement of Sen. Durbin) (``We
can't begin to solve the problems of eastern Congo without
addressing where the armed groups are receiving their funding,
mainly from the mining of a number of key conflict minerals. We, as
a nation of consumers as well as industry, have a responsibility to
ensure that our economic activity does not support such violence.
That is why I join with Senators Brownback and Feingold to support
the Congo conflict minerals amendment, which is now pending on this
bill.''). One of the provision's sponsors, however, indicated that
the Conflict Minerals Provision was intended, in part, to allow
investors to make informed decisions. See 156 Cong. Rec. S3865-66
(statement of Sen. Feingold) (daily ed. May 18, 2010) (stating that
the provision would ``enhance transparency [and] 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'' [emphasis
added]).
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Issuers whose conflict minerals originated from recycled or scrap
sources would be required to disclose in their annual report, under the
``Conflict Minerals Disclosure'' heading, that their conflict minerals
were obtained from recycled or scrap sources and that they furnished a
Conflict Minerals Report regarding those recycled or scrap minerals.
Under our proposed rules, issuers would state in their Conflict
Minerals Report that their recycled or scrap minerals are considered
DRC conflict free. In addition, such issuers would describe the
measures taken to exercise due diligence in determining that their
conflict minerals were recycled or scrap. Again, however, our proposed
rules would not specify the due diligence required of such issuers.
Further, our proposed rules would not define when a conflict mineral is
recycled or scrap. Instead, any issuer seeking to use this alternative
approach would provide its reasons for believing that the conflict
mineral is from recycled or scrap sources in its Conflict Minerals
Report, which would include due diligence on the source of the mineral.
A number of those that have submitted letters indicated that our
rules should allow conflict minerals from recycled or scrap sources to
be considered as not originating in the DRC countries or as DRC
conflict free.\158\ A number of these letters primarily discussed
recycled gold.\159\ Other letters, however, stated that our proposed
rules should exempt all recycled or reclaimed conflict metals.\160\
Additionally, most of the letters that expressed a view on a recycled
and scrap alternative approach indicated that the approach should
include a certain level of due diligence in determining that the
conflict minerals were derived from recycled or scrap sources.\161\
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\158\ See, e.g. letters from Jewelers Vigilance Committee,
Howland Greene Consultants LLC, International Precious Metals
Institute, and the National Association of Manufacturers.
\159\ See letters from Jewelers Vigilance Committee (stating
that recycled gold would be impossible to trace, making an exemption
appropriate) and International Precious Metals Institute (stating
that ``[w]e also believe that recycled gold waste and scrap should
be deemed to be a conflict-free source'').
\160\ See letters from Howland Greene Consultants LLC (stating
that ``[r]ecycling should be encouraged and recognized as a
legitimate way to classify a listed metal as DRC Conflict Free'')
and the National Association of Manufacturers (stating that our
proposed rules should exempt recycled or scrap minerals because it
``is impossible to track'' the source of these minerals ``due to the
various forms of recycling and thousands of consolidators, reclaims,
and scrap dealers both domestic and foreign'' and because exempting
recycled or scrap minerals ``does not contradict the congressional
intent'' of the Conflict Minerals Provision).
\161\ See letters from Howland Greene Consultants LLC (stating
that recycled minerals should be classified as DRC Conflict Free
only ``if specific criteria are met'') and International Precious
Metals Institute (stating that recycled gold waste and scrap should
be deemed to be a conflict-free source only ``in the absence of
particular geographical risk or other red flags'').
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Our proposed rules regarding recycled and scrap conflict minerals
would apply to all conflict minerals. If recycled or scrap minerals are
mixed with new minerals, the recycled and scrap
[[Page 80964]]
alternative approach would apply only to the portion of the minerals
that are 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 DRC countries, that Conflict Minerals Report would contain only
information regarding the recycled or scrap minerals. If, however, the
new conflict minerals originated in the DRC countries, or the issuer
was unable to determine that its new conflict minerals did not
originate in the DRC countries, the Conflict Minerals Report would
include information regarding both the new conflict minerals and the
recycled or scrap conflict minerals.
Request for Comment
63. Should our rules, as proposed, include an alternative approach
for conflict minerals from recycled or scrap sources as proposed? If
so, should that approach permit issuers with necessary conflict
minerals to classify those minerals as DRC conflict free, as proposed?
Should we require, as proposed, issuers using conflict minerals from
recycled or scrap sources to furnish a Conflict Minerals Report,
including a certified independent private sector audit, disclosing that
their conflict minerals are from these sources? If not, why not?
64. Instead, should our rules require issuers with recycled or
scrapped conflict minerals to undertake reasonable inquiry to determine
they are recycled or scrapped and to disclose the basis for their
belief that their minerals are, in fact, from these sources?
65. Should our rules, as proposed, require that issuers use due
diligence in determining whether their conflict minerals are from
recycled or scrap sources as proposed and file a Conflict Minerals
Report including an independent private sector audit of that report? If
so, should our rules prescribe the due diligence required? If our rules
should not require due diligence, should our rules require any
alternative standard or guidance? If so, what standard or guidance?
Should our rules define what constitutes recycled or scrap conflict
minerals? If so, what would be an appropriate definition?
66. Should this treatment be limited to gold, or should it apply to
all conflict minerals, as proposed?
67. Is our alternative approach to recycled and scrap minerals
appropriate? Is there a significant risk that conflict minerals that
are not ``DRC conflict free'' may be inappropriately processed and
``recycled'' so as to take advantage of this alternate approach?
68. Should we allow exemptions to the information required by
smaller reporting companies regarding their use of recycled or scrap
minerals? For example, should we not require smaller reporting to
furnish a Conflict Minerals Report regarding their recycled or scrap
minerals? As another example, if we require smaller reporting companies
to furnish a Conflict Minerals Report with respect to recycled or scrap
minerals, should we not require those issuers to have such Conflict
Minerals Reports audited?
3. Termination, Revisions, and Waivers
The Conflict Minerals Provision states that the Commission shall
revise or temporarily waive its conflict minerals rules if the
President transmits to the Commission a determination that a revision
or waiver is in the national security interest of the United States and
the President provides reasons for this determination.\162\ However,
any exemption to the Conflict Minerals Provision may last no longer
than two years from the date of the exemption's initial
publication.\163\ Also, the Conflict Minerals Provision's disclosure
and reporting requirements shall terminate when 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.'' \164\ The
Conflict Minerals Provision may not, however, terminate earlier than
five years after the Act was enacted.\165\ We plan to act in accordance
with these provisions should any of the situations they describe occur.
Our proposed rules, however, would not include these sections of the
Conflict Minerals Provision because we do not believe that a rule to
implement this section is necessary at this time.
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\162\ See Exchange Act Section 13(p)(3).
\163\ Id.
\164\ Section 1502(e)(4) of the Act defines the term
``appropriate congressional committees'' as the Committee on
Appropriations, the Committee on Foreign Affairs, the Committee on
Ways and Means, and the Committee on Financial Services of the House
of Representatives and the Committee on Appropriations, the
Committee on Foreign Relations, the Committee on Finance, and the
Committee on Banking, Housing, and Urban Affairs of the Senate.
\165\ See Exchange Act Section 13(p)(4).
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Request for Comment
69. Should our rules address specifically the Conflict Minerals
Provision's revision, waiver, or termination requirements? If so, how
should our rules address this?
G. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the amendments, and any suggestions for additional changes. With
respect to any comments, we note that they are of greatest assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments and by alternatives
to our proposals where appropriate.
III. Paperwork Reduction Act
A. Background
The proposed amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(the ``PRA'').\166\ We are submitting the proposed amendments to the
Office of Management and Budget (the ``OMB'') for review in accordance
with the PRA.\167\ The title for the collection of information is:
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\166\ 44 U.S.C. 3501 et seq.
\167\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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(1) ``Regulation S-K'' (OMB Control No. 3235-0071); \168\
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\168\ The paperwork burden from Regulation S-K is imposed
through the forms that are subject to the disclosures in Regulation
S-K and is reflected in the analysis of those forms. To avoid a
Paperwork Reduction Act inventory reflecting duplicative burdens,
for administrative convenience we estimate the burdens imposed by
Regulation S-K to be a total of one hour.
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(2) ``Form 10-K'' (OMB Control No. 3235-0063);
(3) ``Form 20-F'' (OMB Control No. 3235-0288); and
(4) ``Form 40-F'' (OMB Control No. 3235-0381).
The regulation and forms were adopted under the Securities Act and
the Exchange Act. The regulation and forms set forth the disclosure
requirements for periodic reports and registration statements filed by
companies to help shareholders make informed investment and voting
decisions. The hours and costs associated with preparing and filing the
form constitute reporting and cost burdens imposed by each 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.
The proposed rules and form amendments would implement Section
13(p) of the Exchange Act, which was added by Section 1502 of the Act.
As discussed in detail above, the proposed rules and form amendments
would require an issuer to provide statutorily-
[[Page 80965]]
mandated information regarding conflict minerals that are necessary to
the functionality or production of a product manufactured or contracted
to be manufactured by such an issuer. In this regard, we are proposing
to add new disclosure and reporting requirements to the above forms,
which would be substantially the same in each form.\169\ The same
conflict minerals disclosure requirements would apply to U.S. and
foreign issuers.
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\169\ New Item 4(a) in the Form 10-K would require issuers to
furnish in the Form 10-K the information located in new Item 104 of
Regulation S-K, which would set forth the new disclosure and
reporting requirements to be included in the Form 10-K. For Forms
20-F and 40-F, the new disclosure and reporting requirements are
contained within the form itself.
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The proposed rules would require any issuer filing reports under
the Exchange Act to disclose in its annual reports whether conflict
minerals that are necessary to the functionality or production of a
product manufactured or contracted to be manufactured by the issuer
originated in the DRC countries. If so, the issuer would be required to
furnish as an exhibit to its annual report a Conflict Minerals Report
that includes a description of the measures taken by the issuer to
exercise due diligence on the source and chain of custody of those
minerals, which measures shall include an independent private sector
audit of the Conflict Minerals Report that is certified by the issuer.
Also, the Conflict Minerals Report would include a description of the
issuer's products manufactured or contracted to be manufactured that
are not DRC conflict free, the identity of the independent private
sector auditor, 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.
These proposed rules would increase the amount of information that
certain issuers must compile and disclose in their forms and would
increase the disclosure burden in annual reports for certain issuers.
Issuers filing reports under the Exchange Act that do not have conflict
minerals necessary to the functionality or production of a product
manufactured or contracted to be manufactured by those issuers would
have no disclosure or reporting requirements under the rules, but they
would have the burden of determining whether conflict minerals are
necessary to the functionality or production of products they
manufacture or contract to manufacture. Under our proposed rules
implementing the Conflict Minerals Provision, issuers that have
conflict minerals necessary to the functionality or production of a
product manufactured or contracted to be manufactured by those issuers
must determine whether those conflict minerals originated in the DRC
countries. Our proposed rules would require issuers to conduct a
reasonable country of origin inquiry in determining whether their
conflict minerals originated in the DRC countries. This reasonable
country of origin inquiry could vary among issuers, but we believe that
issuers would generally have to conduct a relatively thorough
investigation to meet this standard. Therefore, we believe that the
burden on issuers to determine the origin of their conflict minerals
could be significant. If an issuer determines, however, that its
conflict minerals did not originate in the DRC countries, its
subsequent disclosure burden would be relatively insignificant. Such an
issuer would be required to disclose in its annual report and on its
Web site only that its conflict minerals did not originate in the DRC
countries and disclose in its annual report the reasonable country of
origin inquiry it used to make this determination.
Issuers with conflict minerals that originated in the DRC
countries, or issuers that were unable to determine that their conflict
minerals did not originate in the DRC countries, would be required to
furnish a Conflict Minerals Report and would be required to use due
diligence in determining the information required in that Conflict
Minerals Report. Our proposed rules would require issuers to disclose,
in their Conflict Minerals Report, the measures they took to exercise
due diligence on the source and chain of custody of their conflict
minerals. Additionally, issuers would have to disclose, based on their
due diligence, whether any of the products they manufactured or
contracted to be manufactured are not DRC conflict free. Also, issuers
would be required to disclose the facilities used to process their
conflict minerals, the country from which their conflict minerals
originated, and the efforts to determine the mine or location of origin
with the greatest possible specificity. Further, issuers would have to
obtain an independent private sector audit of their Conflict Minerals
Report and include in the Conflict Minerals Report a certification that
they obtained such an audit, the identity of the auditor, and the audit
report. Finally, the issuer would be required to post the Conflict
Minerals Report, including the audit report, on its Internet Web site.
The type of reasonable country of origin inquiry and the due
diligence standard for determining this information could vary among
issuers. Regardless, we expect that all issuers with conflict minerals
that originated in the DRC countries, or issuers that were unable to
determine that their conflict minerals did not originate in the DRC
countries, would have to conduct a thorough investigation to meet the
reasonable country of origin inquiry and due diligence standards, which
could be another significant burden on these issuers. The burden would
be greater on issuers whose products contained conflict minerals that
were not ``DRC conflict free'' because these issuers would have to
determine which of their products contain conflict minerals that are
not ``DRC conflict free,'' whereas issuers with only ``DRC conflict
free'' minerals would not have make such a determination. Compliance
with the proposed amendments by affected issuers would be mandatory.
The disclosure and reports submitted by issuers would not be kept
confidential and there would be no mandatory retention period for the
information disclosed.
B. Burden and Cost Estimates Related to the Proposed Amendments
The proposed rules and form amendments would require, if adopted,
additional disclosure for an annual report filed on Form 10-K, Form 20-
F, or Form 40-F by an issuer with necessary conflict minerals, which
would increase the burden hour and cost estimates for each of those
forms. For purposes of the PRA, we estimate 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 of company personnel time and to be approximately $71,243,000
for the services of outside professionals. These estimates include the
time and cost of collecting the information, preparing and reviewing
disclosure, filing documents, and retaining records.
In deriving our estimates, 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 and 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 proposals and
[[Page 80966]]
some issuers may experience less than these average costs.\170\
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\170\ See letter from the National Association of Manufacturers
(suggesting that any change to an issuer's supply chain computer
systems ``is likely to range from $1 million to $25 million'' per
issuer ``depending on the size and complexity of the supply
chain''). We expect that the internal collection burden will vary
from company to company depending on each company's needs and
circumstances.
---------------------------------------------------------------------------
We have based our estimates of the effect that the adopted 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
primarily on information that we have obtained from various stakeholder
groups.
We do not expect all issuers' conflict minerals to have originated
in the DRC countries. The DRC accounts for approximately 15% to 20% of
the world's tantalum, and for considerably smaller percentage of the
other three conflict minerals.\171\ Therefore, for the purposes of the
PRA, we assume that only 20% of the 5,994 affected issuers \172\ will
have to furnish an audited Conflict Minerals Report, which would be
1,199 issuers.
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\171\ See Jessica Holzer, Retailers Fight to Excape `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
Jewelers Vigilance Committee (citing to GFMS Gold Survey 2010).
\172\ We estimate that approximately 5,551 Forms 10-K, 377 Forms
20-F, and 66 Forms 40-F will be affected by the proposed amendments.
---------------------------------------------------------------------------
Although no entity has yet conducted due diligence for its conflict
minerals supply chain or obtained an audit of this due diligence, we
obtained estimates from one entity that works with NGOs and one
industry group of possible costs associated with conducting the due
diligence and the audit based on the preliminary information they
currently have. The entity that works with NGOs has estimated that the
annual cost of conducting the due diligence for the four conflict
minerals ranges between $20 million and $25 million. An industry group
provided a much lower range of between $8 million and $10 million to
set up a mineral source validation scheme. Although our rules do not
require issuers to use an industry-wide due diligence process to comply
with their due diligence obligations, we expect that most affected
issuers will contribute to and rely on an industry wide due diligence
process as part of their overall compliance.\173\ Therefore, for
purposes of the PRA, we have averaged the highest and the lowest
estimates we received of the due diligence costs to obtain an aggregate
estimate of $16.5 million \174\ for the 1,199 issuers estimated to be
required to file Conflict Minerals Reports.
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\173\ See Multi-Stakeholder Group Letter (stating that, although
individual issuers are responsible for their own due diligence, an
issuer ``may rely on an industry wide process where applicable and
appropriate'').
\174\ ($25 million + $8 million)/2 = $16.5 million.
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Issuers that are required to file Conflict Minerals Reports must
also obtain and certify an audit of the Conflict Minerals Report. One
industry group indicated that it preliminarily estimates that each
independent private sector audit of the Conflict Minerals Report will
cost approximately $25,000 on average. We estimate that the 1,199
affected issuers' $25,000 cost would result in to an industry wide
audit of approximately $29,975,000. Therefore, based on these figures,
we estimate the PRA burden for the audit and due diligence requirements
to the industry would be approximately $46,475,000.\175\ We expect that
the rules' effect will be higher during the first year of their
effectiveness, due to the initial costs of creating minerals tracking
systems, and diminish in subsequent years.
---------------------------------------------------------------------------
\175\ $16,500,000 + $29,975,000 = $46,475,000.
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We have derived the burden hour and cost estimates for preparing
the required disclosure in the annual reports and for determining when
a registrant has conflict minerals necessary to the functionality or
production of a product manufactured or contracted to be manufactured
by the registrant by estimating the total amount of time it will take
the company to prepare the disclosure and make the determination. We
estimate that the disclosure preparation for all affected registrants
will take 36 hours per Form 10-K (27 hours in-house personnel time and
a cost of approximately $3,600 for professional services). We estimate
that for Forms 20-F and 40-F, the disclosure preparation will also take
36 hours (9 hours in-house personnel time and a cost of approximately
$10,800 for professional services).
We derived the above estimates by estimating the average number of
hours it would take an issuer to prepare and review the proposed
disclosure requirements. These estimates represent the average burden
for all companies, both large and small.
When determining these estimates, we have assumed that:
For Form 10-K, 75% of the burden of preparation is carried
by the company internally and that 25% of the burden of the preparation
is carried by outside professionals retained by the company at an
average cost of $400 per hour; and
For Forms 20-F and 40-F, 25% of the burden of preparation
is carried by the company internally and that 75% of the burden of
preparation is carried by outside professionals retained by the company
at an average cost of $400 per hour.
The portion of the burden carried by outside professionals is reflected
as a cost, while the portion of the burden carried by the company
internally is reflected in hours.
1. Form 10-K
For purposes of the PRA, we estimate that, of the 13,545 Form 10-Ks
filed annually, approximately 5,551 are filed by companies that would
be affected by the proposed rules and form amendments.\176\ We further
estimate that the annual incremental paperwork burden for the Forms 10-
K as a result of the proposed rule and form amendments would be 27
burden hours per affected form associated with the company's
preparation of the disclosure, and $19,983,600 \177\ associated with
the cost of hiring professionals to help prepare the disclosure. In
addition, we estimate for these purposes that those issuers required to
submit a Conflict Minerals Report would also expend a total of
$43,040,161 \178\ associated with the cost of hiring professionals to
conduct the due diligence and the independent private sector audit of
the Conflict Minerals Report.
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\176\ We arrived at this number by estimating the number of
issuers that fall under all the SIC codes that our staff believes
most likely to manufacture or contract to manufacture products with
conflict minerals necessary to the functionality or production of
products manufactured or contracted to be manufactured by those
issuers, and subtracted from that figure the number of issuers that
file reports on Form 20-F and Form 40-F.
\177\ $3,600 x 5,551 = $19,983,600.
\178\ $46,475,000 x (5551/5994) = $43,040,161.
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2. Regulation S-K
While the proposed rule and form amendments would make revisions to
Regulation S-K, the collection of information requirements for that
regulation are reflected in the burden hours estimated for Form 10-K.
The rules in Regulation S-K do not impose any separate burden.
Consistent with historical practice, we are proposing to retain an
estimate of one burden hour to Regulation S-K for administrative
convenience.
3. Form 20-F
For purposes of the PRA, we estimate that, of the 942 Form 20-F
annual reports, approximately 377 are filed
[[Page 80967]]
each year by companies that would be affected by the proposed rule and
form amendments.\179\ We estimate that the annual incremental paperwork
burden for the Forms 20-F as a result of the proposed rule and form
amendments would be nine burden hours per affected form associated with
the company's preparation of the disclosure, and $4,071,600 \180\
associated with the cost of hiring professionals to help prepare the
disclosure. In addition, we estimate for these purposes that those
issuers required to prepare a Conflict Minerals Reports would also
expend a total of $2,923,102 \181\ associated with the cost of hiring
professionals to conduct the due diligence and the independent private
sector audit.
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\179\ We arrived at this estimate by determining the number of
issuers that fall under all the SIC codes that our staff believes
are most likely to manufacture or contract to manufacture products
with conflict minerals necessary to the functionality or production
of products manufactured or contracted to be manufactured by those
issuers that file reports on Form 20-F.
\180\ $10,800 x 377 = $4,071,600.
\181\ $46,475,000 x (377/5994) = $2,923,102.
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4. Form 40-F
For purposes of the PRA, we estimate that, of the 205 Form 40-F
annual reports filed each year, approximately 66 are filed by companies
that would be affected by the proposed rule and form amendments.\182\
We estimate that the annual incremental paperwork burden for the Forms
40-F as a result of the proposed rule and form amendments would be nine
burden hours per affected form associated with the company's
preparation of the disclosure, and $712,800 \183\ associated with the
cost of hiring professionals to help prepare the disclosure. In
addition, we estimate for these purposes that those issuers required to
prepare a Conflict Minerals Report would also expend a total of
$511,737 \184\ associated with the cost of hiring professionals to
conduct the due diligence and the independent private sector audit.
---------------------------------------------------------------------------
\182\ We arrived at this estimate by determining the number of
issuers that fall under all the SIC codes that our staff believes
are most likely to manufacture or contract to manufacture products
with conflict minerals necessary to the functionality or production
of products manufactured or contracted to be manufactured by those
issuers that file reports on Form 40-F.
\183\ $10,800 x 66 = $712,800.
\184\ $46,475,000 x (66/5994) = $511,737.
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C. Summary of Proposed Changes to Annual Compliance Burden in
Collection of Information
The following table illustrates the estimated changes in annual
compliance burden in the collection of information in hours and costs
for Exchange Act annual reports as a result of the proposed rule and
form amendments.
Table 1
------------------------------------------------------------------------
Number of Incremental
Form responses Incremental professional
\185\ company cost
------------------------------------------------------------------------
10-K............................ 5,551 149,877 $63,023,761
20-F............................ 377 3,393 6,994,702
40-F............................ 66 594 1,224,537
------------------------------------------------------------------------
Table 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current annual Current Increase in Proposed
Form response \186\ Current Increase in Proposed professional professional professional
burden hours burden hours burden hours costs costs costs
.............. (A) (B) (C)=(A)+(B) (D) (E) (F)=(D)+(E)
---------------------------------------------------------------------------------------------------------------------
10-K.............................. 13,545 21,363,548 149,877 21,513,425 $2,848,473,000 $63,023,761 $2,911,496,761
20-F.............................. 942 622,907 3,393 626,300 743,089,980 6,994,702 750,084,682
40-F.............................. 205 21,884 594 22,478 26,260,500 1,224,537 27,485,037
--------------------------------------------------------------------------------------------------------------------------------------------------------
D. Request for Comment
We request comment on the accuracy of our estimates. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) Evaluate
whether the proposed collections of information are necessary for the
proper performance of the functions of the agency, including whether
the information will have practical utility; (ii) evaluate the accuracy
of the Commission's estimate of burden of the proposed collection of
information; (iii) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; (iv)
evaluate whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and (v) evaluate whether the proposed
amendments will have any effects on any other collections of
information not previously identified in this section.
---------------------------------------------------------------------------
\185\ This number corresponds to the estimated number of forms
expected to be affected by the proposed rules and form amendments.
\186\ The proposed rules and form amendments would not change
the number of annual responses.
---------------------------------------------------------------------------
In particular, we request comment and supporting empirical data for
purposes of the PRA on whether the proposed rule and form amendments:
Will affect the burden hours and costs required to produce
the annual reports on Forms 10-K, 20-F, and 40-F; and
If so, whether the resulting change in the burden hours
and costs required to produce those Exchange Act annual reports is the
same as or different than the estimated incremental burden hours and
costs proposed by the Commission.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs, Room
10102, New Executive Office Building, Washington, DC 20503, and should
send a copy to Elizabeth M. Murphy, Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090, with reference
to File No. S7-40-10. Requests for materials submitted to OMB by the
Commission with regard to these collections of information should be in
writing, refer to File No. S7-40-10, and be submitted to the Securities
and Exchange Commission, Office of Investor Education and Advocacy, 100
F Street NE., Washington, DC 20549-0213. OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication of this release. Consequently, a comment to OMB
is best assured of having its full effect if OMB receives it within 30
days of publication.
[[Page 80968]]
IV. Cost-Benefit Analysis
Section 1502 of the Act amends the Exchange Act by adding new
Section 13(p),\187\ which requires the Commission to promulgate
disclosure and reporting regulations regarding the use of conflict
minerals from the DRC countries. In response to the requirements of
Exchange Act Section 13(p) as set forth in Section 1502 of the Act, the
Commission is proposing new rules and form amendments that would
provide for the disclosure and reporting of the use of conflict
minerals from the DRC countries. The proposed rules and form amendments
implement the requirements in Section 1502 of the Act and, as necessary
or appropriate, require additional disclosure in a manner that we
believe is consistent with Congress's intent.
---------------------------------------------------------------------------
\187\ See Exchange Act Section 13(p).
---------------------------------------------------------------------------
First, Section 13(p)(1)(A) indicates that the Conflict Minerals
Provision applies to a ``person described,'' who is defined in Section
13(p)(2)(B) as one for whom conflict minerals are necessary to the
functionality or production of a product manufactured by that
person.\188\ This provision could be read quite broadly to apply to any
business, including individuals and companies that are not subject to
SEC reporting, so long as conflict minerals are necessary to the
functionality or production of a product manufactured by that entity or
individual. We believe that such a broad reading of the provision is
not warranted, however, given the provision's background and its
location in the section of the Exchange Act that pertains to reporting
issuers.\189\ As a result, our proposed rules would apply only to
issuers that file reports with the Commission under the Exchange Act,
provided that conflict minerals are necessary to the functionality or
production of a product manufactured by any such an issuer.
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\188\ See supra note 12.
\189\ See supra note 38.
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While our proposed amendments would not define specifically when a
conflict mineral is ``necessary to the functionality or production of a
product,'' we intend our proposed rules to provide that a conflict
mineral is ``necessary to the production of a product'' if a conflict
mineral is intentionally included in a product's production process and
the conflict mineral is necessary to that process, even if that
conflict mineral is not ultimately included anywhere in the final
product. Our proposed amendments would specify that, although a
conflict mineral is necessary to the functionality or production of a
product manufactured or contracted to be manufactured by the issuer, if
that conflict mineral was obtained from recycled or scrap minerals,
that mineral would be considered DRC conflict free. This approach for
recycled or scrap minerals is not included in the Conflict Minerals
Provision, but we believe it is appropriate because such conflict
minerals would not be implicating the concerns that prompted the
enactment of this statutory provision.\190\
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\190\ See supra note 157.
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Third, Section 13(p)(1)(A) indicates that issuers must disclose
whether their necessary conflict minerals originated in the DRC
countries.\191\ The Conflict Minerals Provision, however, is silent as
to how issuers would determine whether their conflict minerals
originated in the DRC countries. Our proposed amendments would indicate
that an issuer's determination of whether or not any of its necessary
conflict minerals originated in the DRC countries would be required to
be based on a reasonable country of origin inquiry into the minerals'
origins and, if the issuer determines its necessary conflict minerals
did not originate in the DRC countries, that the issuer would have to
disclose in the body of its annual report the reasonable country of
origin inquiry it undertook to make its determination and would have to
maintain reviewable business records to support this determination.
---------------------------------------------------------------------------
\191\ See Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------
Fourth, our proposed amendments would specify where the Conflict
Minerals report required by Section 13(p)(1)(A) of the Exchange Act
should be provided.\192\ The statutory provision does not indicate how
issuers should submit their Conflict Minerals Reports to the
Commission. Our proposed amendments would require issuers with
necessary conflict minerals that originated in the DRC countries to
furnish their Conflict Minerals Reports as an exhibit to their annual
report on Form 10-K, Form 20-F, or Form 40-F, as applicable. In
addition, although the Conflict Minerals Provision indicates that the
Conflict Minerals Report must include an independent private sector
audit of such report submitted through the Commission, it is unclear
what record of that independent private sector audit an issuer must
submit to the Commission and how it must do so, if at all. Our proposed
amendments would require issuers to furnish an audit report of the
independent private sector audit as part of and in the same exhibit to
the annual report as the issuer's Conflict Minerals Report. Our
proposed amendments also specify the required certification of the
independent private sector audit. Our proposed amendments would require
an issuer that furnishes a Conflict Minerals Report to include a
statement in the body of its annual report that the Conflict Minerals
Report is furnished as an exhibit to the annual report, that the
Conflict Minerals Report and the certified audit report are available
on its Internet Web site, and the Internet address of the Web site
where the Conflict Minerals Report and audit report are located. Our
proposed amendments would also require that the disclosure be posted on
the issuer's Internet Web site at least until the issuer files its
subsequent annual report.
---------------------------------------------------------------------------
\192\ Id.
---------------------------------------------------------------------------
Finally, our proposed amendments would require that the Conflict
Minerals Report be furnished with the Commission, rather than filed.
The Conflict Minerals Provision indicates that the report should be
``submitted'' to us,\193\ but it does not indicate whether the report
should be filed or furnished. Information that is furnished, rather
than filed, with us is not subject to liability under Section 18 of the
Exchange Act. By requiring the Conflict Minerals Report to be furnished
with us, we are subjecting such reports to less liability than would
exist if the reports were filed with us. However, under Exchange Act
Section 13(p)(1)(C), failure to comply with the Conflict Minerals
Provision would deem the issuer's due diligence process ``unreliable''
and, therefore, the Conflict Minerals Report ``shall not satisfy'' our
proposed rules.\194\ Also, issuers that fail to comply with our
proposed rules would be subject to liability for violations of Exchange
Act Sections 13(a) or 15(d), as applicable.\195\
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\193\ See Exchange Act Section 13(p)(1)(A).
\194\ See Exchange Act Section 13(p)(1)(C).
\195\ 15 U.S.C. 78m(a) and 15 U.S.C. 78o(d).
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The Commission is sensitive to the costs and benefits imposed by
the proposed rules and form amendments. The discussion below focuses on
the costs and benefits of the proposals made by the Commission to
implement the Act within its permitted discretion, rather than the
costs and benefits of the Act itself.
A. Benefits
Overall, we expect that our proposed rules will have the benefit of
furthering Congress's goal of deterring the financing of armed groups
in the DRC countries through commercial activity in conflict minerals.
The proposed rules, if adopted, would specify which companies are
covered by the disclosure and reporting requirements in Section
[[Page 80969]]
1502 of the Act and the alternative approach to disclosure for recycled
or scrap minerals. The proposed rules would also specify the
information that reporting companies with necessary conflict minerals
would be required to disclose. This specification would benefit
reporting companies by reducing uncertainty about their compliance with
Commission rules.
Our proposal specifies the location of the initial disclosure of
conflict minerals' origin and the location of the Conflict Minerals
Report and should make it easier for interested parties to locate this
information. In addition, our proposal to require reporting companies
to furnish the independent private sector audit report would make the
report easily accessible to interested parties. Thus, market
participants and observers may benefit from the increased disclosure
and improved reporting to the extent that they find information about
conflict mineral use relevant to their decision making.
Additionally, our decision to require issuers to furnish with the
Commission the independent private sector audit report instead of
filing it would free the independent private sector auditors preparing
these reports from assuming expert liability. Relative to the filing
option that we could have proposed, this should decrease the cost to
independent private sector auditors of providing such audits to
conflict minerals-reporting companies. Depending on the state of
competition in the market for independent private sector audits, the
lower costs due to auditors not being required to assume expert
liability could result in lower audit fees, which in turn should
decrease conflict minerals-reporting companies' cost of compliance with
the statute.
We are proposing that reporting companies covered by Section 1502
of the Act use a reasonable country of origin inquiry in determining
whether their conflict minerals originated in the DRC countries and use
due diligence in making their supply chain determinations. We have
chosen not to provide guidance on what would constitute a ``reasonable
country of origin inquiry.'' Similarly, we have chosen not to propose a
specific standard for due diligence. We believe that these decisions
should benefit reporting issuers by allowing them the flexibility to
use the reasonable country of origin inquiry and due diligence
standards that are best suited to their circumstances. We believe that
disclosure of the inquiry performed and the due diligence undertaken
may benefit market participants if they are interested in learning such
information.
In addition, our proposed rules and form amendments would provide
that conflict minerals obtained from recycled or scrap sources would be
considered DRC conflict free. This should benefit issuers by providing
an alternative approach for recycled or scrap minerals and reduce their
compliance costs with the disclosure requirements in Section 1502 of
the Act, particularly for recycled or scrap minerals, the origins of
which are difficult to trace.
B. Costs
We anticipate that reporting companies would incur costs in meeting
the additional disclosure required for their Exchange Act annual
reports under Section 13(p) and the proposed rules and form amendments.
The Commission's proposal to require an exhibit for the Conflict
Minerals Report and that reporting companies furnish with the
Commission the independent private sector audit report as an exhibit to
their annual reports will result in costs related to the preparation of
such exhibits. In addition, including manufacturing companies,
companies contracting to manufacture products, companies contracting
for the manufacture of products to sell under their own brand name or a
separately established brand name, and mining companies as ``persons
described'' would result in a larger number of companies incurring the
disclosure compliance costs, compared to an interpretation that
excluded some of these companies. Not requiring auditors to assume
expert liability could increase the costs to market participants and
other observers because auditors may not have as strong incentives to
ensure their determinations are correct. Also, the Commission's
proposal would require issuers that determine following a reasonable
country of origin inquiry that their conflict minerals did not
originate in the DRC countries must keep reviewable records, which will
result in costs related to obtaining and maintaining these records.
Further, such issuers would also incur costs in disclosing the
reasonable country of origin inquiry in their annual reports. However,
as described above, we believe these approaches are consistent with the
Conflict Minerals Provision.
If a reporting company chose to incorporate by reference its
independent private sector audit report into a Securities Act document,
the independent private sector auditor would assume expert liability,
if the auditor consented to the inclusion of its report. This would not
be required under our proposals but, if an issuer chose to do so, this
might increase the cost to independent private sector auditors of
providing such audits to issuers furnishing Conflict Minerals Reports.
Depending on the state of competition in the market for independent
private sector audits, the additional cost stemming from the assumption
of expert liability could be passed on to issuers furnishing Conflict
Minerals Reporting in the form of higher audit fees, which in turn
would increase these companies' cost of compliance with the statute,
although, as noted, issuers could avoid such costs by not incorporating
the audit report into their Securities Act filings. In any event, since
this audit market is still in its nascence, and issuers presumably
would not choose to incorporate the report by reference, the above
effects are difficult to assess but are likely insignificant.
C. Request for Comment
We request comment on the disclosures and accuracy of our estimates
in this section.
V. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine if an
action is necessary or appropriate in the public interest, also to
consider whether the action will promote efficiency, competition, and
capital formation.\196\ Section 23(a)(2) of the Exchange Act also
requires the Commission, when adopting rules under the Exchange Act, to
consider the impact that any new rule would have on competition.\197\
In addition, Section 23(a)(2) prohibits the Commission from adopting
any rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\198\
---------------------------------------------------------------------------
\196\ 15 U.S.C. 78c(f).
\197\ 15 U.S.C. 78w(a)(2).
\198\ Id.
---------------------------------------------------------------------------
The Commission is proposing the new rules and form amendments
discussed in this release to implement the requirements of Exchange Act
Section 13(p) as set forth in Section 1502 of the Act. We believe that
our proposed rulemaking would have a different impact on competition in
different industries. In industries where most or all companies are
subject to disclosure or reporting requirements under the statute, we
believe anti-competitive
[[Page 80970]]
effects to be unlikely. In industries where not all or only a few
companies are subject to the disclosure or reporting requirements,
issuers that must provide disclosure or furnish Conflict Mineral
Reports would incur competitive costs because of our disclosure and
reporting requirements and clarifications.
Although the costs to perform the investigative work required and,
if necessary, the independent private sector audit fees could increase
the disclosure and reporting compliance costs for issuers that provide
disclosure or furnish Conflict Minerals Reports versus companies who do
not provide disclosure or furnish such reports, the net effect on
competition would depend on how these costs compare to the benefits
that companies obtain by using conflict minerals from the DRC
countries, such as lower input costs.
Anti-competitive effects might be of larger magnitude in industries
where the proportion of companies not covered by the Exchange Act
Section 13(p) is larger. For instance, mining issuers might suffer a
competitive disadvantage with respect to mining companies that are not
required to provide disclosure or Conflict Minerals Reports but use DRC
minerals, such as U.S. private mining companies or foreign mining
companies, because the issuers would be required to incur
investigative, disclosure, and reporting costs as a result of the
statute and our rules.
We are proposing to require issuers to furnish the Conflict
Minerals Report with the Commission instead of filing it and have it
included in Exchange Act reports and Securities Act registration
statements. This requirement may limit the costs to, and the potential
negative impact on, capital formation. We are not currently aware of
any effects on efficiency or capital formation, but we seek comment on
whether there are any such effects.
Request for Comment
70. We request comment on whether the proposed rules, if adopted,
would promote efficiency, competition, and capital formation or have an
impact or burden on competition. Commentators are requested to provide
empirical data and other factual support for their view, if possible.
VI. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Act Analysis\199\ relates to
proposed rules and form amendments to implement Section 13(p) of the
Exchange Act, which concerns certain disclosure and reporting
obligations of issuers with conflict minerals necessary to the
functionality or production of any product manufactured or contracted
to be manufactured by those issuers. As set forth by Section 13(p), an
issuer with such necessary conflict minerals must disclose whether
those minerals originated in the DRC countries and, if so, must submit
to the Commission a Conflict Minerals Report.
---------------------------------------------------------------------------
\199\ This analysis has been prepared in accordance with 5
U.S.C. 603.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Proposed Action
The proposed rule and form amendments are designed to implement the
requirements of Section 1502 of the Act. Specifically, the proposed
rules and form amendments would require all issuers with necessary
conflict minerals to disclose in their annual reports whether those
conflict minerals originated in the DRC countries. Issuers with
necessary conflict minerals that originate in the DRC countries, or
that are unable to determine that their necessary conflict minerals did
not originate in the DRC countries, must provide the conflict minerals
disclosure specified by our rules in their Exchange Act annual reports.
Any issuer with necessary conflict minerals that did originate in
the DRC countries, or that is unable to determine that its necessary
conflict minerals did not originate in DRC countries, also must furnish
as an exhibit to its Exchange Act annual reports a Conflict Minerals
Report, which requires the issuer to describe the measures it has taken
to exercise due diligence on the source and chain of custody of such
minerals, which measures shall include an certified independent private
sector audit that shall constitute a critical component of due
diligence. The Conflict Minerals Report must include a description of
the products manufactured or contracted to be manufacture that are not
DRC conflict free, the identification of the independent private sector
auditor, and the disclosure of 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. Also, issuers shall make available to
the public on their Internet Web sites their Conflict Minerals Reports.
B. Legal Basis
We are proposing the rule and form amendments contained in this
document under the authority set forth in Sections 6, 7, 10, and 19(a)
of the Securities Act, and Sections 12, 13, 15, and 23(a) of the
Exchange Act.
C. Small Entities Subject to the Proposed Amendments
The proposals would affect small entities that file annual reports
with the Commission under the Exchange Act, and that have conflict
minerals necessary to the functionality or production of products they
manufacture or contract to manufacture. Exchange Act Rule 0-10(a) \200\
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 proposals would affect small entities with
necessary conflict minerals as defined under Section 13(p). We estimate
that there are approximately 793 companies to which conflict minerals
are necessary and that may be considered small entities.
---------------------------------------------------------------------------
\200\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed rule and form amendments would add to the annual
disclosure requirements of companies 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 Exchange Act annual reports.
Among other matters, that information must include, as applicable:
Disclosure as to whether conflict minerals necessary to
the functionality or production of a product manufactured or contracted
to be manufacture by an issuer did originate in the DRC countries; and,
if so,
A Conflict Minerals Report furnished as an exhibit to the
annual report, which includes a certified independent private sector
audit report.
Reviewable business records regarding any determination
that an issuer's conflict minerals did not originate in the DRC
countries.
The same disclosure and reporting requirements would apply to U.S.
and foreign issuers. We are proposing to amend Form 10-K and Regulation
S-K to require domestic issuers to provide the conflict minerals
information. Because Regulation S-K does not directly apply to Forms
20-F and 40-F,\201\ we propose to amend those forms to include the same
disclosure
[[Page 80971]]
requirements for issuers that are foreign private issuers.\202\
---------------------------------------------------------------------------
\201\ While Form 20-F may be used by any foreign private issuer,
Form 40-F is only available to a Canadian issuer that is eligible to
participate in the U.S.-Canadian Multijurisdictional Disclosure
System (``MJDS'').
\202\ Proposed Item 16 under Part II of Form 20-F and proposed
General Instruction B(16) of Form 40-F.
---------------------------------------------------------------------------
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe there are no federal rules that duplicate, overlap or
conflict with the proposed rules.
F. Significant Alternatives
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 proposals, we considered the following
alternatives:
(1) Establishing different compliance or reporting requirements
which take into account the resources available to smaller entities;
(2) Exempting smaller entities from coverage of the disclosure
requirements, or any part thereof;
(3) The clarification, consolidation, or simplification of
disclosure for small entities; and
(4) Use of performance standards rather than design standards.
We believe that separate disclosure requirements for small entities
that would differ from the proposed reporting requirements, or
exempting them from those requirements, would not achieve the
disclosure objectives of Section 13(p). The proposed rules are 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. However,
the reasonable country of origin inquiry standard for determining
whether conflict minerals originated in the DRC countries and the due
diligence standard necessary for making the supply chain determinations
in the Conflict Minerals Report are performance standards and would
vary based on the facts and circumstances of each individual issuer. We
have requested comment as to whether we should provide an exemption for
smaller reporting companies and whether doing so would be consistent
with the statute.
The proposed rules would require clear disclosure about the source
and chain of custody of an issuer's necessary conflict minerals, which
may result in increased transparency about the origin of those
minerals. The proposed requirement to disclose the information in the
body of and as an exhibit to an issuer's Exchange Act annual report may
simplify the process of submitting the proposed conflict minerals
disclosure and Conflict Minerals Reports. In addition, furnishing the
Conflict Minerals Reports and the audit reports as exhibits would
simplify the search and retrieval of this information regarding
issuers, including small entities, for investors and other interested
persons.
We have otherwise used design rather than performance standards in
connection with the proposed amendments because, based on our past
experience, we believe the proposed amendments would be more useful if
there were specific disclosure requirements. In addition, the specific
disclosure requirements in the proposed amendments would promote
consistent and comparable disclosure among all issuers with necessary
conflict minerals.
G. Solicitation of Comment
We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding:
How the proposed amendments can achieve their objective
while lowering the burden on small entities;
The number of small entity companies that may be affected
by the proposed amendments;
Whether small entity companies should be exempt from the
rule;
The existence or nature of the potential impact of the
proposed amendments on small entity companies discussed in the
analysis; and
How to quantify the impact of the proposed amendments.
Respondents are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed rule amendments are adopted, and
will be placed in the same public file as comments on the proposed
amendments themselves.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\203\ a rule is ``major'' if it has resulted,
or is likely to result in:
---------------------------------------------------------------------------
\203\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
Request for Comment
71. We request comment on whether our proposals would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
VIII. Statutory Authority and Text of The Proposed Amendments
The amendments described in this release are being proposed under
the authority set forth in Sections 6, 7 10, 19(a), and 28 of the
Securities Act, as amended, and Sections 12, 13, 15(d), 23(a), and 36
of the Exchange Act, as amended.
List of Subjects 17 CFR Parts 229 and 249
Reporting and recordkeeping requirements, Securities.
Text of The Proposed Amendments
For the reasons set out in the preamble, the Commission proposes to
amend title 17, chapter II, of the Code of Federal Regulations as
follows:
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
1. The authority citation for part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll,
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
2. Add Sec. 229.104 to read as follows:
Sec. 229.104 (Item 104) Conflict minerals disclosure.
(a) If any conflict minerals, as defined by paragraph (c)(3) of
this section, are necessary to the functionality or production of a
product manufactured or contracted to be manufactured by the registrant
in the year covered by the annual report, the registrant must disclose
in its annual report under a separate heading entitled ``Conflict
Minerals Disclosure'' whether any of
[[Page 80972]]
these conflict minerals originated in the Democratic Republic of the
Congo or an adjoining country, as defined by paragraph (c)(1) of this
section or that the registrant is not able to determine that its
conflict minerals did not originate in the Democratic Republic of the
Congo or an adjoining country. The registrant's determination of
whether or not any of these conflict minerals originated in the
Democratic Republic of the Congo or an adjoining country, or its
inability to determine that these conflict minerals did not originate
in the Democratic Republic of the Congo or an adjoining country, must
be based on its reasonable country of origin inquiry. If the registrant
determines that its conflict minerals necessary to the functionality or
production of a product manufactured or contracted to be manufactured
by it did not originate in the Democratic Republic of the Congo or an
adjoining country, the registrant must make that disclosure available
on its Internet Web site and must also disclose this determination in
its annual report under the separate ``Conflict Minerals Disclosure''
heading along with the reasonable country of origin inquiry it
undertook to make its determination, that its disclosure is located on
its Internet Web site, and the address of that Internet Web site. The
disclosure must remain on the registrant's Internet Web site at least
until the registrant files its subsequent annual report. Also, the
registrant must maintain reviewable business records to support any
such negative determination.
(b) If any conflict minerals necessary to the functionality or
production of a product manufactured or contracted to be manufactured
by the registrant originated in the Democratic Republic of the Congo or
an adjoining country, if the registrant is unable to determine that
such conflict minerals did not originate in the Democratic Republic of
the Congo or an adjoining country, or if such conflict minerals came
from recycled or scrap sources, the registrant must:
(1) Furnish a Conflict Minerals Report as an exhibit to its annual
report with the following information:
(i) A description of the measures taken by the registrant to
exercise due diligence on the source and chain of custody of the
conflict minerals or to exercise due diligence in determining that the
conflict minerals came from recycled or scrap sources, which shall
include but not be limited to a certified independent private sector
audit of the Conflict Minerals Report, conducted in accordance with
standards established by the Comptroller General of the United States,
that shall constitute a critical component of the registrant's due
diligence in establishing the source and chain of custody of the
conflict minerals or that the conflict minerals came from recycled or
scrap sources;
(ii) A certification by the registrant that it obtained such an
independent private sector audit;
(iii) A description of any of the registrant's products
manufactured or contracted to be manufactured containing conflict
minerals that are not ``DRC conflict free,'' as defined in paragraph
(c)(4) of this section, 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; and
(iv) The audit report prepared by the independent private sector
auditor, which identifies the entity that conducted the audit.
(2) In addition to the disclosures required by paragraph (a) of
this section, disclose under the separate ``Conflict Minerals
Disclosure'' heading in the annual report that the registrant has
furnished a Conflict Minerals Report as an exhibit to the annual
report; that the Conflict Minerals Report and the certified independent
private sector audit report are available on its Internet Web site; and
the Internet address of its Internet Web site where the Conflict
Minerals Report and audit report are located.
(3) Make the Conflict Minerals Report, including the certified
audit report, available to the public by posting the text of the report
on its Internet Web site. The text of the Conflict Minerals Report must
remain on the registrant's Internet Web site at least until the
registrant files its subsequent annual report.
(c) For the purposes of this section, 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 the most
recently issued 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 for the year the annual report is due.
(3) Conflict mineral. The term conflict mineral means:
(i) Columbite-tantalite (coltan), cassiterite, gold, wolframite, or
their derivatives; 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 that directly or indirectly
finance or benefit armed groups in the Democratic Republic of the Congo
or an adjoining country. Conflict minerals that a registrant is unable
to determine did not originate in the Democratic Republic of the Congo
or an adjoining country are not ``DRC conflict free.'' Conflict
minerals that a registrant obtains from recycled or scrap sources are
considered DRC conflict free.
Instructions to Item 104
(1) A 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, for whom conflict minerals are necessary to the
functionality or production of a product manufactured or contracted to
be manufactured by that registrant, shall provide the information
required by this item. A registrant that mines conflict minerals would
be considered to be manufacturing those minerals for the purpose of
this item.
(2) The information required by this Item shall not be deemed to be
``filed'' with the Commission or subject to the liabilities of section
18 of the Exchange Act (15 U.S.C. 78r), except to the extent that the
registrant specifically incorporates the information by reference into
a document filed under the Securities Act or the Exchange Act. The
disclosure required by this Item need not be provided in any filings
other than an annual report on Form 10-K (Sec. 249.310 of this
chapter). Such information will 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 registrant specifically incorporates it
by reference.
3. Amend Sec. 229.601 in the exhibit table to add entry (96) and
add paragraph (b)(96) to read as follows:
Sec. 229.601 (Item 601) Exhibits.
(a) * * *
Exhibit Table * * *
[[Page 80973]]
Exhibit Table
--------------------------------------------------------------------------------------------------------------------------------------------------------
Securities Act Forms Exchange Act Forms
--------------------------------------------------------------------------------------------------------------------
S-1 S-3 S-4 \3\ S-8 S-11 F-1 F-3 F-4 \3\ 10 8-K \5\ 10-D 10-Q 10-K
--------------------------------------------------------------------------------------------------------------------------------------------------------
* * * * * * *
(36) through (95) [Reserved]....... N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
(96) Conflict Minerals Report...... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... X
(97) [Reserved].................... N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
(98) [Reserved].................... N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
--------------------------------------------------------------------------------------------------------------------------------------------------------
* * * * *
(b) * * *
(96) Report on conflict minerals from the Democratic Republic of
the Congo or an Adjoining Country. The report required by Item
104(b)(1) of Regulation S-K, if applicable.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
4. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
* * * * *
5. Amend Form 20-F (referenced in Sec. 249.220f) by adding Item 16
and by adding paragraph 16 to the Instructions as to Exhibits.
The addition reads as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
* * * * *
PART II
* * * * *
Item 16. Conflict Minerals Disclosure
(a) If any conflict minerals, as defined by paragraph (c)(3) of
this Item, are necessary to the functionality or production of a
product manufactured or contracted to be manufactured by the registrant
in the year covered by the annual report, the registrant must disclose
in its annual report under a separate heading entitled ``Conflict
Minerals Disclosure'' whether any of these conflict minerals originated
in the Democratic Republic of the Congo or an adjoining country, as
defined by paragraph (c)(1) of this Item, or that the registrant is not
able to determine that its conflict minerals did not originate in the
Democratic Republic of the Congo or an adjoining country. The
registrant's determination of whether or not any of these conflict
minerals originated in the Democratic Republic of the Congo or an
adjoining country, or its inability to determine that these conflict
minerals did not originate in the Democratic Republic of the Congo or
an adjoining country, must be based on its reasonable country of origin
inquiry. If the registrant determines that its conflict minerals
necessary to the functionality or production of a product manufactured
or contracted to be manufactured by it did not originate in the
Democratic Republic of the Congo or an adjoining country, the
registrant must make that disclosure available on its Internet Web site
and must also disclose this determination in its annual report under
the separate ``Conflict Minerals Disclosure'' heading along with the
reasonable country of origin inquiry it undertook to make its
determination, that its disclosure is located on its Internet Web site,
and the address of that Internet Web site. The disclosure must remain
on the registrant's Internet Web site at least until the registrant
files its subsequent annual report. Also, the registrant must maintain
reviewable business records to support any such negative determination.
(b) If any conflict minerals necessary to the functionality or
production of a product manufactured or contracted to be manufactured
by the registrant originated in the Democratic Republic of the Congo or
an adjoining country, if the registrant is unable to determine that
such conflict minerals did not originate in the Democratic Republic of
the Congo or an adjoining country, or if such conflict minerals came
from recycled or scrap sources, the registrant must:
(1) Furnish a Conflict Minerals Report as an exhibit to its annual
report with the following information:
(i) A description of the measures taken by the registrant to
exercise due diligence on the source and chain of custody of the
conflict minerals or to exercise due diligence in determining that the
conflict minerals came from recycled or scrap sources, which shall
include but not be limited to a certified independent private sector
audit of the Conflict Minerals Report, conducted in accordance with
standards established by the Comptroller General of the United States,
that shall constitute a critical component of the registrant's due
diligence in establishing the source and chain of custody of the
conflict minerals or that the conflict minerals came from recycled or
scrap sources;
(ii) A certification by the registrant that it obtained such an
independent private sector audit;
(iii) A description of any of the registrant's products
manufactured or contracted to be manufactured containing conflict
minerals that are not ``DRC conflict free,'' as defined in paragraph
(c)(4) of this Item, 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; and
(iv) The audit report prepared by the independent private sector
auditor, which identifies the entity that conducted the audit.
(2) In addition to the disclosures required by paragraph (a) of
this Item, disclose under the separate ``Conflict Minerals Disclosure''
heading in the annual report that the registrant has furnished a
Conflict Minerals Report as an exhibit to the annual report; that the
Conflict Minerals Report and the certified independent private sector
audit report are available on its Internet Web site; and the Internet
address of its Internet Web site where the Conflict Minerals Report and
audit report are located.
(3) Make the Conflict Minerals Report, including the certified
audit report, available to the public by posting the text of the report
on its Internet Web site. The text of the Conflict Minerals Report must
remain on the registrant's Internet Web site at least until the
registrant files its subsequent annual report.
(c) For the purposes of this Item, the following definitions apply:
[[Page 80974]]
(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 the most
recently issued 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 for the year the annual report is due.
(3) Conflict mineral. The term conflict mineral means:
(i) columbite-tantalite (coltan), cassiterite, gold, wolframite, or
their derivatives; 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 that directly or indirectly
finance or benefit armed groups in the Democratic Republic of the Congo
or an adjoining country. Conflict minerals that a registrant is unable
to determine did not originate in the Democratic Republic of the Congo
or an adjoining country are not ``DRC conflict free.'' Conflict
minerals that a registrant obtains from recycled or scrap sources are
considered DRC conflict free.
Instructions to Item 16
(1) Item 16 applies only to annual reports, and does not apply to
registration statements on Form 20-F. A registrant must provide the
information required in Item 16 beginning with the annual report that
it files for its first full fiscal year beginning after [April 15,
2011].
(2) A 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, for whom conflict minerals are necessary to the
functionality or production of a product manufactured or contracted to
be manufactured by that registrant, shall provide the information
required by this item. A registrant that mines conflict minerals would
be considered to be manufacturing those minerals for the purpose of
this item.
(3) The information required by this Item shall not be deemed to be
``filed'' with the Commission or subject to the liabilities of section
18 of the Exchange Act (15 U.S.C. 78r), except to the extent that the
registrant specifically incorporates the information by reference into
a document filed under the Securities Act or the Exchange Act. The
disclosure required by this Item need not be provided in any filings
other than an annual report on Form 20-F (Sec. 249.220f of this
chapter). Such information will 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 registrant specifically incorporates it
by reference.
* * * * *
Instructions as to Exhibits
* * * * *
16. The Conflict Minerals Report required by Item 16 of this Form,
if applicable.
* * * * *
6. Amend Form 40-F (referenced in Sec. 249.240f) by adding
paragraph (16) to General Instruction B as follows:
Note: The text of Form 40-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 40-F
* * * * *
GENERAL INSTRUCTIONS
* * * * *
B. Information To Be Filed on This Form
* * * * *
(16) Conflict Minerals Disclosure
(a) If any conflict minerals, as defined by paragraph (c)(3) of
this Instruction, are necessary to the functionality or production of a
product manufactured or contracted to be manufactured by the registrant
in the year covered by the annual report, the registrant must disclose
in its annual report under a separate heading entitled ``Conflict
Minerals Disclosure'' whether any of these conflict minerals originated
in the Democratic Republic of the Congo or an adjoining country, as
defined by paragraph (c)(1) of this Instruction, or that the registrant
is not able to determine that its conflict minerals did not originate
in the Democratic Republic of the Congo or an adjoining country. The
registrant's determination of whether or not any of these conflict
minerals originated in the Democratic Republic of the Congo or an
adjoining country, or its inability to determine that these conflict
minerals did not originate in the Democratic Republic of the Congo or
an adjoining country, must be based on its reasonable country of origin
inquiry. If the registrant determines that its conflict minerals
necessary to the functionality or production of a product manufactured
or contracted to be manufactured by it did not originate in the
Democratic Republic of the Congo or an adjoining country, the
registrant must make that disclosure available on its Internet Web site
and must also disclose this determination in its annual report under
the separate ``Conflict Minerals Disclosure'' heading along with the
reasonable country of origin inquiry it undertook to make its
determination, that its disclosure is located on its Internet Web site,
and the address of that Internet Web site. The disclosure must remain
on the registrant's Internet Web site at least until the registrant
files its subsequent annual report. Also, the registrant must maintain
reviewable business records to support any such negative determination.
(b) If any conflict minerals necessary to the functionality or
production of a product manufactured or contracted to be manufactured
by the registrant originated in the Democratic Republic of the Congo or
an adjoining country, if the registrant is unable to determine that
such conflict minerals did not originate in the Democratic Republic of
the Congo or an adjoining country, or if such conflict minerals came
from recycled or scrap sources, the registrant must:
(1) Furnish a Conflict Minerals Report as an exhibit to its annual
report with the following information:
(i) a description of the measures taken by the registrant to
exercise due diligence on the source and chain of custody of the
conflict minerals or to exercise due diligence in determining that the
conflict minerals came from recycled or scrap sources, which shall
include but not be limited to a certified independent private sector
audit of the Conflict Minerals Report, conducted in accordance with
standards established by the Comptroller General of the United States,
that shall constitute a critical component of the registrant's due
diligence in establishing the source and chain of custody of the
conflict minerals or that the conflict minerals came from recycled or
scrap sources;
(ii) a certification by the registrant that it obtained such an
independent private sector audit;
(iii) a description of any of the registrant's products
manufactured or contracted to be manufactured containing conflict
minerals that are not ``DRC conflict free,'' as defined in paragraph
(c)(4) of this Instruction, the
[[Page 80975]]
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; and
(iv) the audit report prepared by the independent private sector
auditor, which identifies the entity that conducted the audit.
(2) In addition to the disclosures required by paragraph (a) of
this Instruction, disclose under the separate ``Conflict Minerals
Disclosure'' heading in the annual report that the registrant has
furnished a Conflict Minerals Report as an exhibit to the annual
report; that the Conflict Minerals Report and the certified independent
private sector audit report are available on its Internet Web site; and
the Internet address of its Internet Web site where the Conflict
Minerals Report and audit report are located.
(3) Make the Conflict Minerals Report, including the certified
audit report, available to the public by posting the text of the report
on its Internet Web site. The text of the Conflict Minerals Report must
remain on the registrant's Internet Web site at least until the
registrant files its subsequent annual report.
(c) For the purposes of this Instruction, 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 the most
recently issued 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 for the year the annual report is due.
(3) Conflict mineral. The term conflict mineral means:
(i) columbite-tantalite (coltan), cassiterite, gold, wolframite, or
their derivatives; 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 that directly or indirectly
finance or benefit armed groups in the Democratic Republic of the Congo
or an adjoining country. Conflict minerals that a registrant is unable
to determine did not originate in the Democratic Republic of the Congo
or an adjoining country are not ``DRC conflict free.'' Conflict
minerals that a registrant obtains from recycled or scrap sources are
considered DRC conflict free.
Notes to Paragraph (16) of General Instruction B
(1) Paragraph (16) of General Instruction B applies only to annual
reports, and does not apply to registration statements on Form 40-F. A
registrant must provide the information required in paragraph (16)
beginning with the annual report that it files for its first full
fiscal year beginning after [April 15, 2011].
(2) A 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, for whom conflict minerals are necessary to the
functionality or production of a product manufactured or contracted to
be manufactured by that registrant, shall provide the information
required by this Instruction. A registrant that mines conflict minerals
would be considered to be manufacturing those minerals for the purpose
of this Instruction.
(3) The information required by this Instruction shall not be
deemed to be ``filed'' with the Commission or subject to the
liabilities of section 18 of the Exchange Act (15 U.S.C. 78r), except
to the extent that the registrant specifically incorporates the
information by reference into a document filed under the Securities Act
or the Exchange Act. The disclosure required by this Instruction need
not be provided in any filings other than an annual report on Form 40-F
(Sec. 249.240f of this chapter). Such information will 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 registrant
specifically incorporates it by reference.
* * * * *
7. Amend Form 10-K (referenced in Sec. 249.310) by adding Item
4(a) as follows:
Note: The text of Form 10-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
* * * * *
PART I
* * * * *
Item 4. Specialized Disclosures
(a) Furnish the information required by Item 104 of Regulation S-K
(Sec. 229.104 of this chapter).
Instruction
A registrant must provide the information required in Item 4
beginning with the annual report that it files for its first full
fiscal year beginning after [April 15, 2011].
* * * * *
By the Commission.
Dated: December 15, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-31940 Filed 12-22-10; 8:45 am]
BILLING CODE 8011-01-P