• SEC Proposes Rules to Implement the Specialized Disclosure Requirements Relating to Conflict Minerals, Mine Safety and Payments by Resources Extraction Issuers Under the Dodd-Frank Act
  • December 23, 2010 | Authors: Andrew J. Brady; Marc S. Gerber; Richard J. Grossman
  • Law Firms: Skadden, Arps, Slate, Meagher & Flom LLP - Washington Office ; Skadden, Arps, Slate, Meagher & Flom LLP - New York Office
  • On December 15, 2010, the U.S. Securities and Exchange Commission issued three releases proposing rules to implement the provisions of Sections 1502, 1503 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These provisions require SEC reporting companies involved in the extraction or use of certain natural resources to satisfy additional disclosure requirements.

    Under Section 1502 of the Dodd-Frank Act (the “conflict minerals” provision), reporting companies that use certain minerals in their manufacturing process that originate in the Democratic Republic of the Congo or any adjoining country1 will be required to include certain disclosures in their annual reports and on their websites, and potentially to file a detailed report with the SEC describing, among other things, the sources and uses of the minerals. Under Section 1503 of the Dodd-Frank Act (the “mine safety” provision), reporting companies that are operators of coal or other mines are required to include in their periodic reports and current reports disclosure regarding certain safety violations, orders and regulatory actions. Under Section 1504 of the Dodd-Frank Act (the “payments by resource extraction issuers” provision), reporting companies that engage in the commercial development of oil, natural gas or minerals will be required to include in their annual reports disclosure regarding payments made to either the U.S. federal government or a foreign government for the purpose of such development. While these provisions of the Dodd-Frank Act and the SEC’s related proposed rules evidence the increasing use of disclosure requirements to implement social policy, these provisions will, in fact, significantly impact the disclosures required to be made by certain companies and should be considered carefully.

    The comment periods for the proposed rules expire on January 31, 2011. The disclosure requirements related to conflict minerals and payments by resource extraction issuers will not become effective until the SEC adopts final rules. Those final rules are required to be adopted by April 15, 2011, and will require disclosure for fiscal years commencing after the adoption of final rules. Although the general requirements of the mine safety provision went into effect 30 days after the Dodd-Frank Act was enacted (August 20, 2010), the more specific disclosure requirements proposed by the SEC to implement this provision will take effect only after final rules are adopted. The staff of the SEC expects to recommend that the three provisions be adopted within the same time frame. A description of the rule proposals follow.

    Conflict Minerals

    The conflict minerals provision (Section 1502) applies to those companies that are required to file periodic reports with the SEC and for which the following minerals or any derivatives of the following minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that company:

    • columbite-tantalite (coltan);

    • cassiterite;  

    • gold; or

    • wolframite.2  

    The SEC noted in the conflict minerals proposing release that it expects the rules to apply to “many companies and industries.” The list of potential products cited as using one or more of the conflict minerals includes jewelry, computers, mobile telephones, digital cameras, videogame consoles, and electronic and communications equipment. The proposed rules also do not provide an exemption for foreign private issuers or smaller reporting companies, although the SEC requested comment as to whether an exemption for these companies should be provided.

    There are a number of terms in the provision and the proposed rules that are not defined and may result in interpretive issues. For example, it is unclear what it means for a conflict mineral to be “necessary to the functionality or production of a product.” The SEC requested comment on whether and how this phrase should be defined.

    If a company determines that it is subject to the conflict minerals provision, then the company must disclose in its annual report on Form 10-K, 20-F or 40-F whether the conflict minerals originated in the Democratic Republic of the Congo or adjoining countries. The rules proposed by the SEC require companies to base this determination on a “reasonable country of origin inquiry.” If, after the inquiry, the company concludes that the minerals did not originate in the designated Congo-area countries, then the company would be required to disclose its conclusion and a description of the inquiry in its annual report and on its website. The SEC did not propose rules to define the steps required to satisfy the reasonable inquiry standard. It did note, however, that an inquiry would be based on the facts and circumstances of each company and that the standard does not require absolute certainty.

    If a company concludes that the minerals did originate in a designated Congo-area country, or cannot determine the origin of the minerals or obtains minerals from recycled or scrap sources, then the proposed rules would require the company to disclose its conclusion in its annual report and on its website and to furnish a report (referred to as the “Conflict Minerals Report”) to the SEC as an exhibit to its annual report. The proposed conflict mineral rules include specific disclosure requirements for the Conflict Minerals Report, including a description of the measures taken by the company 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 company’s report conducted in accordance with standards established by the comptroller general of the United States. Further, any company furnishing 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 report available to the public on its Internet website.

    Action Items

    Companies will need to comply with these requirements in their annual reports for fiscal years beginning after the rules are adopted. The proposing release notes that if the final rules are adopted as scheduled in April 2011, companies with a December 31 fiscal year-end would be required to comply with the conflict minerals provisions in their first annual reports filed after December 31, 2012. At this time, companies should consider taking the following steps:

    • Consider whether any conflict minerals are used in the production of any products manufactured, or contracted to be manufactured, by the company.

    • If the provision may apply to the company, identify the steps the company will take to support its reasonable country of origin inquiry.

    • If a preliminary assessment of country of origin indicates that the company may have to provide a Conflict Minerals Report, establish a due diligence process to determine the source and chain of custody of its conflict minerals and identify a third-party auditor to evaluate the process.  

    Mine Safety

    The mine safety provision (Section 1503) applies to companies that are required to file periodic reports with the SEC and are operators (or have subsidiaries that are operators) of a coal or other mine. If the company is subject to the provision, it must disclose additional information in both its periodic reports on Forms 10-Q, 10-K, 20-F and 40-F and current reports on Form 8-K. The disclosures required by the mine safety provision are currently in effect. The SEC’s proposed rule amendments, therefore, only address the scope and application of the provision and require certain additional disclosures not provided by the provision.

    The disclosure requirements of the mine safety provision are generally tied to the requirements of the Federal Mine Safety and Health Act of 1977 and the implementation of that act by the U.S. Labor Department’s Mine Safety and Health Administration. The mine safety provision also refers to that act for definitions of the terms “operator” and “coal or other mine” used in Section 1503. The mine safety provision does not provide an exemption for smaller reporting companies or foreign private issuers. As the Federal Mine Safety and Health Act applies only to mines located in the U.S., however, the proposed rules would not require disclosures about mines located outside the United States.

    The information required to be reported in periodic reports of mine operating companies includes, among other things:

    • specified health and safety violations;

    • details about orders and citations issued by the Mine Safety and Health Administration;

    • the dollar value of proposed assessments under the Federal Mine Safety and Health Act; and

    • the total number of mining-related fatalities.  

    A brief description of these disclosures would be included in periodic reports and a more detailed description of the information would be required to be filed as an exhibit to the report. Disclosures required under the provision to be filed on Form 8-K include information about imminent danger orders and written notices of a pattern of violations issued by the Mine Safety and Health Administration. The Forms 8-K are required to be filed within four business days of receipt of the orders and notices.

    Action Items

    At this time, mine safety companies should take the following steps:

    • Confirm that the company’s procedures for identifying and disclosing matters required to be reported on Form 8-K include the items listed in Section 1503.

    • Review the company’s procedures for tracking and maintaining records of violations, citations and other disciplinary actions covered by the Section 1503 reporting requirements.  

    Payments by Resource Extraction Issuers

    The payments by resource extraction issuers provision (Section 1504) applies to companies that are required to file annual reports with the SEC and engage in the commercial development of oil, natural gas or minerals. The SEC defines commercial development to include the exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals, or the acquisition of a license for any such activity. The provision applies to domestic and foreign issuers and to smaller reporting companies that meet the definition of a resource extraction issuer.

    If a company is subject to the provision, it must disclose in its annual report on Form 10-K, 20-F or 40-F information relating to payments (e.g., taxes, royalties, fees, production entitlements, bonuses) made by the company, a subsidiary of the company or an entity under the control of the company to a foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals. The content of the disclosure would include:

    • type and total amount of payments made for each project;

    • type and total amount of payments made to each government;

    • total amounts of the payments, by category;

    • currency used to make the payments;

    • financial period in which the payments were made;

    • business segment of the resource extraction issuer that made the payments;

    • the government that received the payments, and the country in which the government is located; and

    • the project of the resource extraction issuer to which the payments relate.  

    The disclosures required by the provision would include payments made to companies owned by a foreign government. The SEC’s proposed rules include an instruction defining those companies as “at least majority-owned by a foreign government.”

    The information required to be disclosed by this provision would be included in two exhibits furnished in connection with a company’s annual report: one in HTML or ASCII format and the other in XBRL format. In the annual report, resource extraction issuers would only be required to note that the information about the covered payments is included in the exhibits.

    Generally, the SEC has defined the terms included in the resource extraction issuers provision in a manner consistent with the definitions contained in the Dodd-Frank Act, including the terms “resource extraction issuer,” “payment” and “commercial development of oil, natural gas, or minerals.” The proposing release, however, highlights a number of areas that the SEC continues to evaluate as it considers the implementation of the rules. For example, the SEC noted that the definition of payment includes a reference to “other material benefits” and a “de minimis” exception that are not defined. The release requests comment on whether the definition of payment should be extended to specifically cover particular payments or whether additional guidance about the payments to be disclosed based on the proposed definition should be provided. The release does state that the de minimis exception should not be viewed as equating to a materiality standard.

    Action Items

    Any rules adopted by the SEC to implement the resource extraction issuers provision will not become effective until one year after the date the final rules are issued. Based on the proposed timing for adoption of the final rules, the SEC notes that the disclosures based on this provision will apply to annual reports relating to fiscal years ending on or after April 15, 2012. At this time, resource extraction issuers should consider taking the following steps:

    • Review contracts and arrangements relating to the commercial development of oil, natural gas or minerals with any foreign government, entity controlled by a foreign government or the U.S. federal government to identify any potential restrictions on disclosure.

    • Establish a record-keeping policy in preparation for disclosure under Section 1504.


    1 Countries that adjoin the Democratic Republic of the Congo include Angola, Burundi, the Central African Republic, the Republic of Congo (a separate country from the Democratic Republic of the Congo), Rwanda, Sudan, Tanzania, Uganda and Zambia.

    2 According to the SEC: “[c]assiterite is the metal ore that is most commonly used to produce tin;” “[c]olumbite-tantalite is the metal ore from which tantalum is extracted;” and “wolframite is the metal ore that is used to produce tungsten.” The Dodd-Frank Act and the SEC’s proposed rules provide that this list of conflict minerals may be amended to include any other mineral or its derivative as determined by the secretary of state to be financing conflict in the Democratic Republic of the Congo or an adjoining country.