Conflict Minerals, 56273-56365 [2012-21153]

Download as PDF Vol. 77 Wednesday, No. 177 September 12, 2012 Part II Securities and Exchange Commission sroberts on DSK5SPTVN1PROD with RULES 17 CFR Parts 240, 249, and 249b Conflict Minerals; Disclosure of Payments by Resource Extraction Issuers; Final Rules VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\12SER2.SGM 12SER2 56274 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 17 CFR Parts 240 and 249b [Release No. 34–67716; File No. S7–40–10] Table of Contents RIN 3235–AK84 Conflict Minerals Securities and Exchange Commission. ACTION: Final rule. AGENCY: We are adopting a new form and rule pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the use of conflict minerals. Section 1502 added Section 13(p) to the Securities Exchange Act of 1934, which requires the Commission to promulgate rules requiring issuers with conflict minerals that are necessary to the functionality or production of a product manufactured by such person to disclose annually whether any of those minerals originated in the Democratic Republic of the Congo or an adjoining country. If an issuer’s conflict minerals originated in those countries, Section 13(p) requires the issuer to submit a report to the Commission that includes a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody. The measures taken to exercise due diligence must include an independent private sector audit of the report that is conducted in accordance with standards established by the Comptroller General of the United States. Section 13(p) also requires the issuer submitting the report to identify the auditor and to certify the audit. In addition, Section 13(p) requires the report to 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. Section 13(p) requires the information disclosed by the issuer to be available to the public on its Internet Web site. DATES: Effective Date: November 13, 2012. Compliance Date: Issuers must comply with the final rule for the calendar year beginning January 1, 2013 with the first reports due May 31, 2014. 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. sroberts on DSK5SPTVN1PROD with RULES SUMMARY: VerDate Mar<15>2010 21:18 Sep 11, 2012 We are adopting new Rule 13p–1 1 and new Form SD 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’).3 SUPPLEMENTARY INFORMATION: SECURITIES AND EXCHANGE COMMISSION Jkt 226001 I. Background and Summary A. Statutory Provision B. Summary of the Proposed Rules C. Summary of Comments on the Proposed Rules D. Summary of Changes to the Final Rule E. Flowchart Summary of the Final Rule II. Discussion of the Final Rule A. ‘‘Conflict Minerals’’ Definition 1. Proposed Rules 2. Comments on the Proposed Rules 3. Final Rule B. Step One—Issuers Covered by the Conflict Mineral Provision 1. Issuers That File Reports Under the Exchange Act a. Proposed Rules b. Comments on the Proposed Rules i. Issuers that File Reports Under Sections 13(a) and 15(d) of the Exchange Act ii. Smaller Reporting Companies iii. Foreign Private Issuers c. Final Rule 2. ‘‘Manufacture’’ and ‘‘Contract To Manufacture’’ Products a. Proposed Rules b. Comments on the Proposed Rules i. ‘‘Manufacture’’ ii. ‘‘Contract To Manufacture’’ c. Final Rule i. ‘‘Manufacture’’ ii. ‘‘Contract To Manufacture’’ 3. Mining Issuers as ‘‘Manufacturing’’ Issuers a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 4. When Conflict Minerals Are ‘‘Necessary’’ to a Product a. Proposed Rules b. Comments on the Proposed Rules i. ‘‘Necessary to the Functionality’’ ii. ‘‘Necessary to the Production’’ iii. De Minimis Threshold c. Final Rule i. Contained in the Product ii. Intentionally Added iii. ‘‘Necessary to the Functionality’’ iv. ‘‘Necessary to the Production’’ v. De Minimis Threshold C. Location, Status, and Timing of Conflict Minerals Information 1. Location of Conflict Minerals Information a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 2. ‘‘Filing’’ of Conflict Minerals Information a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 3. Uniform Reporting Period a. Proposed Rules 1 17 CFR 240.13p–1. CFR 249.448. 3 15 U.S.C. 78a et seq. 2 17 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 b. Comments on the Proposed Rules c. Final Rule 4. Time Period for Providing Conflict Minerals Information a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 5. Conflict Minerals Already in the Supply Chain a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 6. Timing of Implementation a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule D. Step Two—Determining Whether Conflict Minerals Originated in the Democratic Republic of the Congo or Adjoining Countries and the Resulting Disclosure 1. Reasonable Country of Origin Inquiry a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 2. Disclosures in the Body of the Specialized Disclosure Report a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule E. Step Three—Conflict Minerals Report’s Content and Supply Chain Due Diligence 1. Content of the Conflict Minerals Report a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 2. Due Diligence Standard in the Conflict Minerals Report a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule 3. Independent Private Sector Audit Requirements a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule i. Auditing Standards ii. Auditor Independence iii. Audit Objective 4. Recycled and Scrap Minerals a. Proposed Rules b. Comments on the Proposed Rules c. Final Rule i. Definition of ‘‘Recycled and Scrap Sources’’ ii. Due Diligence for Conflict Minerals From ‘‘Recycled and Scrap Sources’’ F. Other Matters III. Economic Analysis A. Introduction B. Benefits and Costs Resulting From the Mandatory Reporting Requirement 1. Benefits 2. Cost Estimates in the Comment Letters a. General Comments b. Specific Comments i. Manufacturing Industry Association Comments ii. Electronic Interconnect Industry Association Comments iii. University Group Comments iv. Environmental Consultancy Company Comments v. Other Specific Comments C. Benefits and Costs Resulting From Commission’s Exercise of Discretion E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 1. Reasonable Country of Origin Inquiry 2. Information in the Specialized Disclosure Report 3. ‘‘DRC Conflict Undeterminable’’ 4. ‘‘Contract To Manufacture’’ 5. Nationally or Internationally Recognized Due Diligence Framework (Including Gold) 6. Liability for the Audit and Audit Certifications 7. Audit Objective 8. Conflict Minerals From Recycled and Scrap Sources 9. Conflict Minerals ‘‘Outside the Supply Chain’’ 10. Conflict Mineral Derivatives 11. Method and Timing of Disclosure on Form SD 12. ‘‘Necessary to the Functionality or Production’’ 13. Categories of Issuers 14. Not Including Mining Issuers as Manufacturing Issuers D. Quantified Assessment of Overall Economic Effects IV. Paperwork Reduction Act A. Background B. Summary of the Comment Letters C. Revisions to PRA Reporting and Cost Burden Estimates 1. Estimate of Conducting Due Diligence, Including the Audit 2. Estimate of Preparing the Disclosure 3. Revised PRA Estimate V. Final Regulatory Flexibility Act Analysis A. Reasons for, and Objectives of, the Final Action B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Final Rule D. Reporting, Recordkeeping, and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities VI. Statutory Authority and Text of the Final Rule I. Background and Summary sroberts on DSK5SPTVN1PROD with RULES A. Statutory Provision On December 15, 2010, we proposed a number of amendments to our rules 4 to implement the requirements of Section 1502 (‘‘Conflict Minerals Statutory Provision’’) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Act’’),5 relating to new disclosure and reporting obligations by issuers concerning ‘‘conflict minerals’’ 6 that originated in the Democratic Republic of the Congo (‘‘DRC’’) or an 4 Conflict Minerals, Release No. 34–63547 (Dec. 15, 2010) [75 FR 80948] (the ‘‘Proposing Release’’). 5 Public Law 111–203, 124 Stat. 1376 (July 21, 2010). 6 The term ‘‘conflict mineral’’ is defined in Section 1502(e)(4) of the Act as (A) columbitetantalite, 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 Democratic Republic of the Congo or an adjoining country. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 adjoining country 7 (together with the DRC, the ‘‘Covered Countries’’).8 Section 1502 amended the Exchange Act by adding new Section 13(p).9 New Exchange Act Section 13(p) requires us to promulgate disclosure and reporting regulations regarding the use of conflict minerals from the Covered Countries.10 As reflected in the title of Section 1502(a), which states the ‘‘Sense of the Congress on Exploitation and Trade of Conflict Minerals Originating in the Democratic Republic of the Congo,’’ in enacting the Conflict Minerals Statutory Provision, Congress intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC. This section explains that the exploitation and trade of conflict minerals by armed groups is helping to finance the conflict and that the emergency humanitarian crisis in the region warrants the disclosure requirements established by Exchange Act Section 13(p).11 Similarly, the legislative history surrounding the Conflict Minerals Statutory Provision, and earlier legislation addressing the trade in conflict minerals, reflects Congress’s motivation to help end the human rights abuses in the DRC caused by the conflict.12 Other parts of the Conflict 7 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, which presently includes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. 8 In the Proposing Release, we referred to the DRC and its adjoining countries as the ‘‘DRC Countries.’’ In this release, we use the term ‘‘Covered Countries’’ instead. Both terms have the same meaning. For consistency within this release, there are instances when we refer to the text of the Proposing Release and use the term ‘‘Covered Countries’’ instead of ‘‘DRC Countries,’’ which was used in the Proposing Release. 9 15 U.S.C. 78m(p). 10 See Exchange Act Section 13(p)(1)(A). This Exchange Act Section requires that the Commission promulgate rules no later than 270 days after the date of enactment. 11 See Section 1502(a) of the Act (‘‘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).’’). 12 The Congo conflict has been an issue raised in the United States Congress for a number of years. For example, in the 109th Congress, then-Senator Sam Brownback, along with Senator Richard J. Durbin and then-Senator Barack Obama, among others, co-sponsored S. 2125, the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006. See Public Law 109–456 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 56275 Minerals Statutory Provision also point to the fact that Congress intended to promote peace and security.13 For example, the Conflict Minerals Statutory Provision states that once armed groups no longer continue to be directly involved and benefiting from commercial activity involving conflict minerals, the President may take action to terminate the provision.14 To accomplish the goal of helping end the human rights abuses in the DRC caused by the conflict, Congress chose to use the securities laws disclosure requirements to bring greater public awareness of the source of issuers’ conflict minerals and to promote the exercise of due diligence on conflict mineral supply chains. By doing so, we (Dec. 22, 2006) (stating that the National Security Strategy of the United States, dated September 17, 2002, concludes that disease, war, and desperate poverty in Africa threatens the United States’ core value of preserving human dignity and threatens the United States’ strategic priority of combating global terror). The legislation committed the United States to work toward peace, prosperity, and good governance in the Congo. As another example, in the 110th Congress, then-Senator Brownback and Senator Durbin introduced S. 3058, the Conflict Coltan and Cassiterite Act, which would have prohibited the importation of certain products containing columbite-tantalite or cassiterite that was mined or extracted in the DRC by groups that committed serious human rights and other violations. See S. 3058, 110th Cong. (2008). As a further example, in the 111th Congress, thenSenator Brownback introduced S. 891, the Congo Conflict Minerals Act of 2009. See S. 891, 111th Cong. (2009). This bill would have required U.S.registered companies selling products using conflict minerals to disclose annually to the Commission the country of origin of these minerals and, if the country of origin was one of the Covered Countries, to disclose the mine of origin. Additionally, later in the 111th Congress, then-Senator Brownback sponsored S.A. 2707, which was similar to S. 891. See S.A. 2707, 111th Cong. (2009). We note also that the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006 states that the National Security Strategy of the United States, dated September 17, 2002, concludes that disease, war, and desperate poverty in Africa threatens the United States’ core value of preserving human dignity and threatens the United States’ strategic priority of combating global terror. See Pub. L. 109–456 (Dec. 22, 2006). See also U.S. Gov’t Accountability Office, GAO–12–763, Conflict Minerals Disclosure rule: SEC’s Actions and Stakeholder-Developed Initiatives (Jul. 2012) (discussing the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006), available at https://www.gao.gov/products/ GAO–12–763. 13 See Section 1502(d)(2)(A) of the Act (stating that two years after enactment of the Act and annually thereafter, ‘‘the Comptroller General of the United States shall submit to the appropriate congressional committees a report that includes’’ an ‘‘assessment of the effectiveness’’ of the Conflict Minerals Statutory Provision ‘‘in promoting peace and security’’ in the Covered Countries). 14 See Exchange Act Section 13(p)(4) (stating that the provision ‘‘shall terminate on the date on which 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’’). E:\FR\FM\12SER2.SGM 12SER2 56276 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations understand Congress’s main purpose to have been to attempt to inhibit the ability of armed groups in the Covered Countries to fund their activities by exploiting the trade in conflict minerals. Reducing the use of such conflict minerals is intended to help reduce funding for the armed groups contributing to the conflict and thereby put pressure on such groups to end the conflict. The Congressional object is to promote peace and security in the Covered Countries.15 Congress chose to use the securities laws disclosure requirements to accomplish its goals. In addition, one of the co-sponsors of the provision noted in a floor statement that the provision will ‘‘enhance transparency’’ and ‘‘also help American consumers and investors make more informed decisions.’’ 16 Also, as discussed throughout the release, a number of commentators on our rule proposal, including co-sponsors of the legislation and other members of Congress, have indicated that the Conflict Minerals Statutory Provision will provide information that is material to an investor’s understanding of the risks in an issuer’s reputation and supply chain.17 sroberts on DSK5SPTVN1PROD with RULES 15 See Exchange Act Section 1502(c)(1)(B)(i) (stating that the Secretary of State, in consultation with the Administrator of the United States Agency for International Development, shall submit to Congress a plan to ‘‘promote peace and security’’ in the Covered Countries). 16 See 156 Cong. Rec. S3976 (daily ed. May 19, 2010) (statement of Sen. Feingold) (‘‘Mr. President, I am pleased to be an original cosponsor of two amendments to the Restoring American Financial Stability Act that seek to ensure there is greater transparency around how international companies are addressing issues of foreign corruption and violent conflict that relate to their business. Creating 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.’’). 17 See, e.g., letters from Aditi Mohapatra of Calvert Asset Management Company, Inc. on behalf of 49 investors, including the Social Investment Forum and Interfaith Center of Corporate Responsibility (Mar. 2, 2011) (‘‘SIF I’’); Boston Common Asset Management, LLC, Calvert Asset Management Co., Inc., Interfaith Center on Corporate Responsibility, Jesuit Conference of the United States, Marianist Province of the US, Mercy Investment Services, Inc., Missionary Oblates of Mary Immaculate, Responsible Sourcing Network, Sustainalytics, Trillium Asset Management, and Tri-State Coalition for Responsible Investment (Feb. 1, 2012) (‘‘SIF II’’); Calvert Investments (Oct. 18, 2011) (‘‘Calvert’’); General Board of Pension and Health Benefits of The United Methodist Church (Mar. 7, 2011) (‘‘Methodist Pension’’); State Board of Administration of Florida (Feb. 3, 2011) (‘‘FRS’’); and Teachers Insurance and Annuity Association and College Retirement Equities Fund (Mar. 2, 2011) (‘‘TIAA–CREF’’). See also letters from Catholic Relief Services (Feb. 8, 2011) (‘‘CRS I’’) (‘‘We submit these comments with the hope the SEC will consider the need of investors to access information to make sound business decisions that VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Exchange Act Section 13(p) mandates that we promulgate regulations requiring that a ‘‘person described’’ 18 disclose annually whether any ‘‘conflict minerals’’ that are ‘‘necessary to the functionality or production of a product manufactured by such person’’ 19 originated in the Covered Countries, and make that disclosure publicly available on the issuer’s Internet Web site.20 If such a person’s conflict minerals originated in the Covered Countries, that person must submit a report (‘‘Conflict Minerals Report’’) to us that includes a description of the measures taken by the person to exercise due diligence on the minerals’ source and chain of custody.21 Under Exchange Act Section 13(p), the measures 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 our promulgated rules, in consultation with the Secretary of State.22 The person reflect both their social and their financial concerns.’’); Enough Project (Mar. 31, 2011) (‘‘Enough Project II’’) (stating that advancing the ‘‘goal of resolving a humanitarian crisis that continues to cause countless deaths and unimaginable suffering’’ is ‘‘of great interest to many, including investors’’); Senator Richard J. Durbin and Representative Jim McDermott (Feb. 28, 2011) (‘‘Sen. Durbin/Rep. McDermott’’) (suggesting that the provision’s purposes were both to end conflict in the DRC and to provide current information for investors, and the latter purpose is identical to the purpose of requiring the disclosure of other information in an issuer’s the periodic reports) and Senator Patrick Leahy, Senator Christopher Coons, Congressman Howard Berman, Congressman Jim McDermott, Congressman Donald Payne, Congressman Gregory Meeks, and Congressmember Karen Bass (Feb. 16, 2012) (‘‘Sen. Leahy et al.’’) (asserting that an issuer’s conflict minerals information is ‘‘critical to both investors and to capital formation’’ because ‘‘when a publicly traded company relies on an unstable black market for inputs essential to manufacturing its products it is of deep material interest to investors’’). 18 The term ‘‘person described’’ is defined in Exchange Act Section 13(p)(2) as one who is required to file reports under Exchange Act Section 13(p)(1)(A), and for whom the conflict minerals are necessary to the functionality or production of a product manufactured by such person. Exchange Act Section 13(p)(1)(A) does not provide a definition but refers back to Exchange Act Section 13(p)(2). 19 Exchange Act Section 13(p)(2)(B). 20 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)). 21 See Exchange Act Section 13(p)(1)(A)(i). 22 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 Statutory Provision assigns certain responsibilities to other federal agencies. In developing our proposed rules, our staff has consulted with the PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 submitting the Conflict Minerals Report must also identify the independent private sector auditor 23 and certify the independent private sector audit.24 Further, according to Exchange Act Section 13(p), the Conflict Minerals Report must include ‘‘a description of the products manufactured or contracted to be manufactured that are not DRC conflict free,’’ 25 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.’’ 26 Also, Exchange Act Section 13(p) dictates that each person described ‘‘shall make available to the public on the Internet Web site of such person’’ the conflict minerals information required by Exchange Act Section 13(p)(1)(A).27 B. Summary of the Proposed Rules We proposed rules to apply to certain issuers that file reports with us under Exchange Act Sections 13(a) 28 or 15(d).29 Based on the Conflict Minerals Statutory Provision, we proposed a disclosure requirement for conflict minerals that would divide into three staff of these other agencies in developing our proposed rules. These agencies include, including the Government Accountability Office (the ‘‘GAO’’), which is headed by the Comptroller General of the United States, and the United States Department of State. 23 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)’’). 24 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.’’ 25 The term ‘‘DRC conflict free’’ is defined in Exchange Act Section 13(p)(1)(A)(ii) and Exchange Act Section 13(p)(1)(D). Exchange Act Section 13(p)(1)(A)(ii) defines ‘‘DRC conflict free’’ as ‘‘the products that do not contain minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries. Similarly, Exchange Act Section 13(p)(1)(D) defines ‘‘DRC conflict free’’ as products that do ‘‘not contain conflict minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries. We note that the definitions in the two sections are slightly different in that Exchange Act Section 13(p)(1)(A)(ii) refers to ‘‘minerals’’ without any limitation, whereas Exchange Act Section 13(p)(1)(D) refers specifically to ‘‘conflict minerals.’’ We believe, based on the totality of the Conflict Minerals Statutory Provision, that ‘‘DRC conflict free’’ is meant to refer only to ‘‘conflict minerals,’’ as that term is defined in Section 1502(e)(4) of the Act, that directly or indirectly finance or benefit armed groups in the Covered Countries, and not to all minerals that directly or indirectly finance or benefit armed groups in the Covered Countries. 26 See Exchange Act Section 13(p)(1)(A)(ii). 27 See Exchange Act Section 13(p)(1)(E). 28 15 U.S.C. 78m(a). 29 15 U.S.C. 78o(d). E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations steps. The first step would have required an issuer to determine whether it was subject to the Conflict Minerals Statutory Provision. An issuer would have only been subject to the Conflict Minerals Statutory Provision if it was a reporting issuer for which conflict minerals were ‘‘necessary to the functionality or production of a product manufactured’’ 30 or contracted to be manufactured by such person. If an issuer did not meet that definition, the issuer was not required to take any action, make any disclosures, or submit any reports. If, however, an issuer met this definition, that issuer would move to the second step. The second step would have required the issuer to determine after a reasonable country of origin inquiry whether its conflict minerals originated in the Covered Countries. If the issuer determined that its conflict minerals did not originate in the Covered Countries, the issuer was to disclose this determination and the reasonable country of origin inquiry it used in reaching this determination in the body of its annual report. The issuer also would have been required to provide on its Internet Web site its determination that its conflict minerals did not originate in the Covered Countries, disclose in its annual report that the disclosure was posted on its Internet Web site, and disclose the Internet address on which this disclosure was posted. It would further have been required to maintain records demonstrating that its conflict minerals did not originate in the Covered Countries. Such an issuer would not have any further disclosure or reporting obligations with regard to its conflict minerals. If, however, the issuer determined that its conflict minerals did originate in the Covered Countries, if it was unable to conclude that its conflict minerals did not originate in the Covered Countries, or if it determined that its conflict minerals were from recycled or scrap sources, the issuer would have been required to disclose this conclusion in its annual report. Also, the issuer would have been required to note that the Conflict Minerals Report, which included the certified independent private sector audit report, was furnished as an exhibit to the annual report; furnish the Conflict Minerals Report; make available the Conflict Minerals Report on its Internet Web site; disclose that the Conflict Minerals Report was posted on its Internet Web site; and provide the Internet address of that site. This issuer 30 Exchange Act Section 13(p)(2). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 would then have moved to the third step. Finally, the third step would have required an issuer with conflict minerals that originated in the Covered Countries, or an issuer that was unable to conclude that its conflict minerals did not originate in the Covered Countries, to furnish a Conflict Minerals Report. The proposed rules would have required an issuer to provide, in its Conflict Minerals Report, a description of the measures it had taken to exercise due diligence on the source and chain of custody of its conflict minerals, which would have included a certified independent private sector audit of the Conflict Minerals Report that identified the auditor and was furnished as part of the Conflict Minerals Report. Further, the issuer would have been required to include in the Conflict Minerals Report a description of its products manufactured or contracted to be manufactured containing conflict minerals that it was unable to determine did not ‘‘directly or indirectly finance or benefit armed groups’’ in the Covered Countries. The issuer would identify such products by describing them in the Conflict Mineral Report as not ‘‘DRC conflict free.’’ 31 If any of its products contained conflict minerals that did not ‘‘directly or indirectly finance or benefit’’ these armed groups, the issuer would be permitted to describe such products in the Conflict Mineral Report as ‘‘DRC conflict free’’ whether or not the minerals originated in the Covered Countries. In addition, the issuer would have been required to disclose in the Conflict Minerals Report the facilities used to process those conflict minerals, those conflict minerals’ country of origin, and the efforts to determine the mine or location of origin with the greatest possible specificity. The proposed rules would have allowed for different treatment of conflict minerals from recycled and scrap sources. An issuer with such conflict minerals would have been required to furnish a Conflict Minerals Report that described the measures taken to exercise due diligence in determining that its conflict minerals were from recycled or scrap sources and to provide the reasons for believing, based on its due diligence, that its conflict minerals were from recycled or scrap sources. Such an issuer would also have been required to obtain a certified independent private sector audit of the Conflict Minerals Report. 31 The definition of the term ‘‘DRC conflict free’’ in our proposed rules would be identical to the definition in Exchange Act Section 13(p)(1)(D). PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 56277 C. Summary of Comments on the Proposed Rules The Proposing Release requested comment on a variety of significant aspects of the proposed rules. The original comment period in the Proposing Release was to end on January 31, 2011. Prior to that date, however, we received requests for an extension of time for public comment on the proposal to allow for, among other matters, the collection of information and to improve the quality of responses.32 On January 28, 2011, we extended the comment period for the proposal from January 31, 2011 to March 2, 2011.33 Additionally, in response to suggestions from commentators,34 we held a public roundtable on October 18, 2011 (‘‘SEC Roundtable’’) at which invited participants, including investors, affected issuers, human rights organizations, and other stakeholders, discussed their views and provided input on issues related to our required rulemaking.35 In conjunction with the SEC Roundtable, we requested further comment.36 We received approximately 420 individual comment letters in response to the proposed rules, with approximately 145 of those letters being received after the SEC Roundtable, and over 40 letters regarding the Conflict Minerals Statutory Provision prior to the 32 See letters from Advanced Medical Technology Association, Aerospace Industries Association, American Association of Exporters and Importers, American Automotive Policy Council, Business Alliance for Customs Modernization, IPC— Association Connecting Electronics Industries Joint Industry Group, National Association of Manufacturers, National Electrical Manufacturers Association, National Foreign Trade Council, National Retail Federation, Retail Industry Leaders Association, Semiconductor Equipment and Materials International, TechAmerica, USA*ENGAGE, and U.S. Chamber of Commerce (Dec. 16, 2010) (‘‘Advanced Medical Technology Association et al.’’); Jewelers Vigilance Committee, American Gem Society, Manufacturing Jewelers & Suppliers of America, Jewelers of America, and Fashion Jewelry & Accessories Trade Association (Jan. 10, 2011) (‘‘JVC et al. I’’); National Mining Association (Jan. 3, 2011) (‘‘NMA I’’); National Stone, Sand Gravel Association (Jan. 13, 2011) (‘‘NSSGA’’); Representative Spencer Bachus (Jan. 25, 2011) (‘‘Rep. Bachus’’); Robert D. Hormats, Under Secretary of State for Economic, Energy, and Agricultural Affairs, and Maria Otero, Democracy and Global Affairs (Jan. 25, 2011) (‘‘State I’’); and World Gold Council (Jan. 7, 2011) (‘‘WGC I’’). 33 Conflict Minerals, Release No. 34–63793 (Jan. 28, 2011) [76 FR 6110]. 34 See, e.g., letter from United States Chamber of Commerce (Feb. 28, 2011) (‘‘Chamber I’’). 35 See Press Release, Securities and Exchange Commission, SEC Announces Agenda and Panelists for Roundtable on Conflict Minerals (Oct. 14, 2011), available at https://www.sec.gov/news/press/2011/ 2011-210.htm. 36 Roundtable on Issues Relating to Conflict Minerals, Release No. 34–65508 (Oct. 7, 2011) [76 FR 63573]. E:\FR\FM\12SER2.SGM 12SER2 56278 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES proposed rules.37 We also received approximately 13,400 form letters from those supporting ‘‘promptly’’ implementing a ‘‘strong’’ final rule regarding the Conflict Minerals Statutory Provision,38 with approximately 9,700 of those letters requesting some specific requirements in the final rule,39 and two petitions supporting the proposed amendments with an aggregate of over 25,000 signatures. The comment letters came from corporations, professional associations, human rights and public policy groups, bar associations, auditors, institutional investors, investment firms, United States and foreign government 37 To facilitate public input on rulemaking required by the Act, the Commission provided a series of email links, organized by topic, on its Web site at https://www.sec.gov/spotlight/ regreformcomments.shtml. The comments relating to the Conflict Minerals Statutory Provision are located at https://www.sec.gov/comments/df-title-xv/ specialized-disclosures/specializeddisclosures.shtml (‘‘Pre-Proposing Release Web site’’). These comments were received before we made public the Proposing Release or proposed rules and are separate from the comments we received after we published the Proposing Release and proposed rules, which are located at https:// www.sec.gov/comments/s7-40-10/s74010.shtml (‘‘Post-Proposing Release Web site’’). Many commentators provided comments on both the preand post-Proposing Release Web sites. Generally, our references to comment letters refer to the comments on the post-Proposing Release Web site. When we refer to a comment letter from the PreProposing Release Web site, however, we make that clear in the footnote. 38 See form letters A (urging us to institute ‘‘strong rules’’), B (urging that the final rule not allow the legislation’s intent to be compromised and to keep the ‘‘LEGISLATION STRONG’’ (emphasis in original)), E (indicating ‘‘deep disappointment and concern’’ that the final rule had not been adopted, and urging us to ‘‘release a strong, final rule’’), F (urging us to ‘‘promptly issue strong final regulations’’), G (stating that delays in adopting a final rule will ‘‘significantly hinder progress toward a legitimate mining sector in eastern’’ DRC, and urging us to ‘‘urgently release final regulations on conflict minerals’’), H (calling on us to ‘‘release a strong, final rule as soon as possible’’), and I (urging us to ‘‘issue strong final rules as soon as possible’’). 39 See form letters A (stating that the final rule should, among other requirements, include gold and metals mining companies, apply to all possible companies, require that conflict minerals disclosures be filed, include strong and defined due diligence, and define recycled metals as 100% postconsumer metals), G (stating that the final rule should ‘‘incorporate the UN Group of Experts and OECD due diligence guidelines’ concept of mitigation’’), H (stating that the final rule should, among other requirements, reject any delays or phased-in implementation, adopt the ‘‘OECD due diligence standard,’’ have equal reporting for all conflict minerals, include all companies regardless of size, define terms narrowly, define the reasonable country of origin inquiry, have issuers file reports, and not include a de minimis category for conflict minerals), and I (stating that the final rule must, among other requirements, reject an indeterminate origin category, define the reasonable country of origin standard, and adopt the ‘‘OECD Due Diligence standard’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 officials,40 and other interested parties and stakeholders. In general, most commentators supported the human rights objectives of the Conflict Minerals Statutory Provision and the proposed rules.41 As discussed in greater detail throughout this release, however, many of these commentators provided recommendations for revising the proposed rules and suggested modifications or alternatives to the proposal. Only a few commentators generally opposed the Conflict Minerals Statutory Provision and/or our adoption of any rule based on the provision.42 One commentator recommended that the proposed rules be withdrawn entirely ‘‘and that the potential costs, supply chain complexities, and other practical obstacles to implementation be more fully analyzed before new rules are proposed.’’ 43 40 Among the foreign officials to provide comment letters was the DRC’s Minister of Mines. See letters from Martin Kabwelulu, Minister of Mines, Democratic Republic of the Congo (July 15, 2011) (‘‘DRC Ministry of Mines I’’); Martin Kabwelulu, Minister of Mines, Democratic Republic of the Congo (Oct. 15, 2011) (‘‘DRC Ministry of Mines II’’); and Martin Kabwelulu, Minister of Mines, Democratic Republic of the Congo (Nov. 8, 2011) (‘‘DRC Ministry of Mines III’’). 41 See, e.g., letters from Advanced Medical Technology Association, American Apparel & Footwear Association, American Association of Exporters and Importers, Consumer Electronics Association, Consumer Electronics Retailers Coalition, Emergency Committee for American Trade, IPC-Association Connecting Electronics Industries, Joint Industry Group, National Association of Manufacturers, National Foreign Trade Council, National Retail Federation, Retail Industry Leaders Association, TechAmerica, and USA Engage (Mar. 2, 2011) (‘‘Industry Group Coalition I’’) (stating its ‘‘support [for] the underlying goal of Sec. 1502 to prevent the atrocities occurring’’ in the Covered Countries); American Bar Association (Jun. 20, 2011) (‘‘ABA’’) (stating that it ‘‘supports and endorses the humanitarian efforts to end the armed conflict in the eastern Democratic Republic of the Congo’’); Chamber I (stating that it ‘‘supports the fundamental goal, as embodied in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank Act’), of preventing the exploitation of conflict minerals for the purpose of financing human rights violations within the Democratic Republic of Congo’’); National Association of Manufacturers (Mar. 2, 2011) (‘‘NAM I’’) (stating its ‘‘support the underlying goal of Sec. 1502 to address the atrocities occurring in the’’ Covered Countries); and World Gold Council (Feb. 28, 2011) (‘‘WGC II’’) (stating that it ‘‘believes it is important to state [its] support for the humanitarian goals of Section 1502’’). 42 See, e.g., letters from Michael Beggs (Jan. 12, 2012) (‘‘Beggs’’), Charles Blakeman (Oct. 9, 2011) (‘‘Blakeman I’’), Gary P. Bradley (Sept. 19, 2011) (‘‘Bradley’’), Joseph Cummins (Dec. 20, 2011) (‘‘Cummins’’), Walter Grail (Oct. 1, 2011) (‘‘Grail’’), Kirtland C. Griffin (Jun. 16, 2011) (‘‘Griffin’’), Clark Grey Howell (Sep. 20, 2011) (‘‘Howell’’), Edward Lynch (Dec. 16, 2011) (‘‘Lynch’’), and Melanie Matthews (Sep. 19, 2011) (‘‘Matthews’’). 43 See letter from Chamber I. See also letters from Chamber II (reiterating the withdrawal request from its initial comment letter and requesting we open a second comment period regarding the proposed PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 Also, although they may have offered their support of the human rights concerns underlying the Conflict Minerals Statutory Provision and the proposed rules, some commentators were concerned about potentially negative effects of the Conflict Minerals Statutory Provision and the resulting rule. In this regard, some of those commentators argued that the provision and/or rule could lead to a de facto boycott or embargo on conflict minerals from the Covered Countries,44 other of these commentators suggested that the rules), Chamber III (requesting that we allow companies additional time for commenting on the proposed rules), and United States Chamber of Commerce (Jul. 11, 2012) (‘‘Chamber IV’’) (requesting that we re-propose the rule and re-open the comment period). 44 See, e.g., letters from AngloGold Ashanti Limited (Jan. 31, 2011) (‘‘AngloGold’’), Bureau d’Etudes Scientifiques et Techiques (Dec. 26, 2011) (‘‘BEST II’’), Competitive Enterprise Institute (Mar. 2, 2011) (‘‘CEI I’’), Competitive Enterprise Institute ´ ´ (Aug. 22, 2011) (‘‘CEI II,’’), Federation des Enterprises du Congo (Oct. 28, 2011) (‘‘FEC II’’), ´ ´ ´ ` Generale des Cooperatives Minieres du Sud Kivu (Apr. 8, 2011) (‘‘Gecomiski’’), IPC—Association Connecting Electronics Industries (Mar. 2, 2011) (‘‘IPC I’’), ITRI Ltd. (Feb. 25, 2011) (‘‘ITRI II’’), London Bullion Market Association (Mar. 2, 2011) (‘‘LBMA I’’), London Bullion Market Association (Aug. 5, 2011) (‘‘LBMA II’’), Minister of Energy and Minerals of the United Republic of Tanzania (May 23, 2011) (‘‘Tanzania I’’), Ministry of Mines and Energy of the Republic of Burundi (May 12, 2011) (‘‘Burundi’’), North Kivu Artisanal Mining Cooperatives Representative (Mar. 1, 2011) (‘‘Comimpa’’), Pact Inc. (Mar. 2, 2011) (‘‘Pact I’’), Pact Inc. (Oct. 13, 2011) (‘‘Pact II’’), Representative Christopher J. Lee (Feb. 3, 2011) (‘‘Rep. Lee’’), ´ ´ ` Societe Miniere du Maniema SPRL (Mar. 21, 2012) (‘‘Somima’’), Verizon Communications (Jun. 24, 2011) (‘‘Verizon’’), and WGC II. But see letters from Enough Project (Mar. 2, 2011) (‘‘Enough Project I’’) (‘‘Enough notes that critics of the legislation are quick to predict that private sector investors and companies may walk away from the Congo if faced with meaningful due diligence and reporting requirements. On the contrary, Congo’s mineral reserves are too great for world markets to ignore.’’), International Corporate Accountability Roundtable (Aug. 24, 2011) (‘‘ICAR II’’) (recognizing that ‘‘[c]ritics of the law are arguing that whatever its intentions, it will in practice end the trade in minerals mined in the east of Congo,’’ and that, although ‘‘mineral exports from the region have dropped significantly in recent months, and that this has forced many artisanal miners to seek alternative livelihoods,’’ which ‘‘has serious implications for miners and their families,’’ the ‘‘downturn stems from a six month suspension of mining and trading activities imposed by the Congolese government and an overly restrictive interpretation of Dodd Frank by industry associations’’ and the ‘‘idea that the current hiatus is a permanent shut-down of the trade is misplaced, however.’’), Andrew Matheson (Oct. 26, 2011) (‘‘Matheson II’’) (‘‘No such embargo exists, nor is an embargo contemplated by the multi-stakeholder group, the EICC/GeSI initiative, or ITRI. Import statistics show that minerals continue to be sourced in substantial volumes from the DRC, for example tantalum ores going into China.’’), and Sen. Durbin/ Rep. McDermott (‘‘NGO experts in Congo note that only approximately one percent of the Congolese workforce depends on mining, so even if a de facto ban came to pass—which we doubt—the economic impact would not be as great as commonly assumed.’’). E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations provision and/or rule could compel speech in a manner that violates the First Amendment,45 and at least one such commentator indicated that the final rule would adversely affect employment in the United States.46 One commentator, however, suggested that there could be some ‘‘business benefits’’ from complying with the final rule beyond the humanitarian benefits discussed by Congress.47 This commentator argued that such benefits could include eliminating any competitive disadvantage to companies already engaged in ensuring their conflict mineral purchases do not fund conflict in the DRC, providing an opportunity to improve a company’s existing risk management and supply chain management, stimulating innovation, supporting companies’ requests for conflict minerals information from suppliers through legal mandate, and preparing companies to meet a new generation of expectations for greater supply chain transparency and accountability.48 We have reviewed and considered all of the comments that we received relating to the rulemaking. The final rule reflects changes from the proposed rules made in response to many of these comments. As discussed throughout this release, we are adopting final rules designed to provide flexibility to issuers to reduce their compliance costs. At the same time, our final rules retain the requirements from our proposed rules that create the disclosure regime mandated by Congress by means of Exchange Act reporting requirements. We discuss our revisions with respect to each proposed rule amendment in more detail throughout this release. sroberts on DSK5SPTVN1PROD with RULES D. Summary of Changes to the Final Rule We are adopting a three-step process, as proposed, but some of the mechanisms within the three steps have been modified in response to comments. We recognize that the final rule will impose significant compliance costs on companies who use or supply conflict minerals, and in modifying the rule we 45 See, e.g., letters from Taiwan Semiconductor Manufacturing Company Ltd. (Jan. 27, 2011) (‘‘Taiwan Semi’’), Tiffany & Co. (Feb. 22, 2011) (‘‘Tiffany’’), and Washington Legal Fund (Mar. 30, 2011) (‘‘WLF’’). 46 See letter from Rep. Lee (‘‘Ultimately, these new regulations may cost U.S. jobs and send them overseas.’’). 47 See letter from Green Research (Jan. 27, 2012) (‘‘Green II’’). See also letter from Green Research (Oct. 29, 2011) (‘‘Green I’’) (stating that, although ‘‘[i]t seems clear that, by most accounting, there are costs of compliance’’ of the Conflict Minerals Statutory Provision, ‘‘there are benefits as well’’). 48 See id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 tried to reduce the burden of compliance in areas in which we have discretion while remaining faithful to the language and intent of the Conflict Minerals Statutory Provision that Congress adopted. A flowchart presenting a general overview of the conflict minerals rule that we are adopting is included following the end of this section. The chart is intended merely as a guide, however, and issuers should refer to the rule text and the preamble’s more complete narrative description for the requirements of the rule. The first step continues to be for an issuer to determine whether it is subject to the requirements of the Conflict Minerals Statutory Provision. Pursuant to the Conflict Minerals Statutory Provision, the Commission is required to promulgate regulations requiring certain conflict minerals disclosures by any ‘‘person described,’’ which, under the Conflict Minerals Statutory Provision, includes one for whom ‘‘conflict minerals are necessary to the functionality or production of a product manufactured by such person’’.49 As in our proposal, under the final rule this includes issuers whose conflict minerals are necessary to the functionality or production of a product manufactured or contracted by that issuer to be manufactured.50 If an issuer does not meet this definition, the issuer is not required to take any action, make any disclosures, or submit any reports under the final rule. If, however, an issuer meets this definition, that issuer moves to the second step. In the final rule, some aspects of the first step differ from the proposed rules based on comments we received. Consistent with the proposal, the final rule does not define the phrases ‘‘contract to manufacture,’’ ‘‘necessary to the functionality’’ of a product, and ‘‘necessary to the production’’ of a product. In response to comments, however, we provide additional guidance for issuers to consider regarding whether those phrases apply to them.51 The guidance states that whether an issuer will be considered to ‘‘contract to manufacture’’ a product depends on the degree of influence it exercises over the materials, parts, ingredients, or components to be 49 Exchange Act Section 13(p)(2). Exchange Act Section 13(p)(1)(ii) (requiring a person described to include a description of certain of the person’s products that were manufactured by the person, or were contracted by the person to be manufactured). 51 In the Proposing Release, although we did not provide guidance for the other phrases, we provided some guidance for the phrase ‘‘necessary to the production’’ of a product. As discussed below, we are revising the guidance for this phrase. 50 See PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 56279 included in any product that contains conflict minerals or their derivatives. An issuer will not be considered to ‘‘contract to manufacture’’ a product if it does no more than take the following actions: (1) The issuer specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product (unless it specifies or negotiates taking these actions so as to exercise a degree of influence over the manufacturing of the product that is practically equivalent to contracting on terms that directly relate to the manufacturing of the product); (2) the issuer affixes its brand, marks, logo, or label to a generic product manufactured by a third party; or (3) the issuer services, maintains, or repairs a product manufactured by a third party. Similarly, the determination of whether a conflict mineral is deemed ‘‘necessary to the functionality’’ or ‘‘necessary to the production’’ of a product depends on the issuer’s particular facts and circumstances, as discussed in more detail below. But to assist issuers in making their determination, we provide guidance for issuers. In determining whether a conflict mineral is ‘‘necessary to the functionality’’ of a product, an issuer should consider: (1) Whether the conflict mineral is intentionally added to the product or any component of the product and is not a naturally-occurring by-product; (2) whether the conflict mineral is necessary to the product’s generally expected function, use, or purpose; and (3) if conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration. In determining whether a conflict mineral is ‘‘necessary to the production’’ of a product, an issuer should consider: (1) Whether the conflict mineral is intentionally included in the product’s production process, other than if it is included in a tool, machine, or equipment used to produce the product (such as computers or power lines); (2) whether the conflict mineral is included in the product; and (3) whether the conflict mineral is necessary to produce the product. In this regard, we are modifying our guidance from the proposal such that, for a conflict mineral to be considered ‘‘necessary to the production’’ of a product, the mineral must be both contained in the product and necessary to the product’s production. We do not consider a conflict mineral ‘‘necessary to the production’’ of a product if the conflict mineral is used as a catalyst, or E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56280 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations in a similar manner in another process, that is necessary to produce the product but is not contained in that product. Further, in a change from the proposal and in response to comments suggesting that including mining would expand the statutory mandate, the final rule does not treat an issuer that mines conflict minerals as manufacturing those minerals unless the issuer also engages in manufacturing. Additionally, the final rule exempts any conflict minerals that are ‘‘outside the supply chain’’ prior to January 31, 2013. Under the final rule, conflict minerals are ‘‘outside the supply chain’’ if they have been smelted or fully refined or, if they have not been smelted or fully refined, they are outside the Covered Countries. In response to comments, the final rule allows issuers that obtain control over a company that manufactures or contracts for the manufacturing of products with necessary conflict minerals that previously had not been obligated to provide a specialized disclosure report for those minerals to delay reporting on the acquired company’s products until the end of the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition. As suggested by commentators, the final rule modifies the proposal as to the location, timing, and status of any conflict minerals disclosures and any Conflict Minerals Report. The final rule requires an issuer to provide the conflict minerals disclosures that would have been in the body of the annual report in the body of a new specialized disclosure report on a new form, Form SD. An issuer required to provide a Conflict Minerals Report will provide that report as an exhibit to the specialized disclosure report. Additionally, based on comments that it will reduce the burdens on supply chain participants, the final rule requires that the conflict minerals information in the specialized disclosure report and/or in the Conflict Minerals Report cover the calendar year from January 1 to December 31 regardless of the issuer’s fiscal year end, and the specialized disclosure report covering the prior year must be provided each year by May 31. Further, in a change from the proposal, urged by multiple commentators, the final rule requires Form SD, including the conflict minerals information therein and any Conflict Minerals Report submitted as an exhibit to the form, to be ‘‘filed’’ under the Exchange Act and thereby subject to potential Exchange Act Section 18 liability. The proposal would have required the information to be ‘‘furnished.’’ VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 The second step continues to require an issuer to conduct a reasonable country of origin inquiry regarding the origin of its conflict minerals. Consistent with the proposal, and the position of certain commentators,52 the final rule does not prescribe the actions for a reasonable country of origin inquiry that are required, as the required inquiry depends on each issuer’s facts and circumstances. However, in a change from the proposed rules, to clarify the scope of the required inquiry as requested by certain other commentators,53 the final rule provides general standards applicable to the inquiry. Specifically, the final rule provides that, to satisfy the reasonable country of origin inquiry requirement, an issuer must conduct an inquiry regarding the origin of its conflict minerals that is reasonably designed to determine whether any of its conflict minerals originated in the Covered Countries or are from recycled or scrap sources, and must perform the inquiry in good faith. The final rule requires an issuer that determines that its conflict 52 Some commentators agreed that, to allow for greater flexibility, the reasonable country of origin inquiry standard should either not be defined or that only general guidance should be provided. See, e.g., letters from Apparel & Footwear Association (Mar. 2, 2011) (‘‘AAFA’’); AngloGold; ArcelorMittal (Oct. 31, 2011) (‘‘ArcelorMittal’’); Industry Group Coalition I; IPC I; Information Technology Industry Council (Feb. 24, 2011) (‘‘ITIC I’’); International Precious Metals Institute (Jan. 19, 2011) (‘‘IPMI I’’); Jewelers Vigilance Committee, American Gem Society, Manufacturing Jewelers & Suppliers of America, Jewelers of America, and Fashion Jewelry & Accessories Trade Association (Mar. 2, 2011) (‘‘JVC et al. II’’); NAM I, Retail Industry Leaders Association and Consumer Electronics Retailers Coalition (Mar. 2, 2011) (‘‘RILA–CERC’’); Semiconductor Industry Association (Mar. 2, 2011) (‘‘Semiconductor’’); SIF I; TriQuint Semiconductor, Inc. (Jan. 26, 2011) (‘‘TriQuint I’’); and WGC II. 53 Some commentators argued that either the reasonable country of origin inquiry standard should be defined or that there should specific guidance regarding the standard. See, e.g., letters from Business Roundtable (Mar. 2, 2011) (‘‘Roundtable’’), CRS I, Department of State (Mar. 24, 2011) (‘‘State II’’), EARTHWORKS’ No Dirty Gold Campaign (Mar. 2, 2011) (‘‘Earthworks’’), Enough Project I, Ethical Metalsmiths (Feb. 28, 2011) (‘‘Metalsmiths’’), General Board of Church and Society of the United Methodist Church (Apr. 19, 2012) (‘‘Methodist Board’’), Global Witness (Feb. 28, 2011) (‘‘Global Witness I’’), Howland Greene Consultants LLC (Jan. 28, 2011) (‘‘Howland’’), International Conference of the Great Lakes Region (Jan. 31, 2011) (‘‘ICGLR’’), National Association of Evangelicals (Feb. 17, 2012) (‘‘Evangelicals’’), New York City Bar Association (Jan. 31, 2011) (‘‘NYCBar I’’), New York City Bar Association (Feb. 8, 2012) (‘‘NYCBar II’’), Personal Care Products Council (Mar. 1, 2011) (‘‘PCP’’), Presbyterian Church USA (Feb. 23, 2012) (‘‘Presbyterian Church II’’), Semiconductor Equipment and Materials International (Feb. 15, 2011) (‘‘SEMI’’), Sen. Durbin/ Rep. McDermott, Tantalum-Niobium International Study Center (Jan. 27, 2011) (‘‘TIC’’), Twenty-four organizations of the Multi-Stakeholder Group (Mar. 2, 2011) (‘‘MSG I’’), and World Evangelical Alliance (Feb. 17, 2012) (‘‘Evangelical Alliance’’). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 minerals did not originate in the Covered Countries or did come from recycled or scrap sources to disclose in its specialized disclosure report its determination and in its specialized disclosure report briefly describe the reasonable country of origin inquiry it used in reaching the determination and the results of the inquiry. The requirement for an issuer to briefly describe its inquiry and the results of the inquiry is a change from the disclosure required in the proposed rules. Also, in a change from the proposal, the final rule modifies the trigger for determining whether or not an issuer is required to proceed to step three under the rule. The proposed rules would have required an issuer to conduct due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report if, based on its reasonable country of origin inquiry, it determined that its conflict minerals originated in the Covered Countries or was unable to determine that its conflict minerals did not originate in the Covered Countries, or if its conflict minerals came from recycled or scrap sources. Under the final rule, an issuer must exercise due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report if, based on its reasonable country of origin inquiry, the issuer knows that it has necessary conflict minerals that originated in the Covered Countries and did not come from recycled or scrap sources, or if the issuer has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources. As an exception to this requirement, however, an issuer that must conduct due diligence because, based on its reasonable country of origin inquiry, it has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources is not required to submit a Conflict Minerals Report if, during the exercise of its due diligence, it determines that its conflict minerals did not, in fact, originate in the Covered Countries, or it determines that its conflict minerals did, in fact, come from recycled or scrap sources. Such an issuer is still required to submit a specialized disclosure report disclosing its determination and briefly describing its inquiry and its due diligence efforts and the results of that inquiry and due diligence efforts, which should demonstrate why the issuer believes that the conflict minerals did not originate in the Covered Countries E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations or that they did come from recycled or scrap sources. On the other hand, if, based on its reasonable country of origin inquiry, an issuer has no reason to believe that its conflict minerals may have originated in the Covered Countries, or, based on its reasonable country of origin inquiry, an issuer reasonably believes that its conflict minerals are from recycled or scrap sources, the issuer is not required to move to step three. In another change from the proposal, the final rule does not require an issuer to retain reviewable business records to support its reasonable country of origin conclusion, although maintenance of appropriate records may be useful in demonstrating compliance with the final rule, and may be required by any nationally or internationally recognized due diligence framework applied by an issuer. As noted above, if the issuer knows that it has necessary conflict minerals that originated in the Covered Countries, or if the issuer has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources, the issuer must move to the third step. The third step, consistent with the proposal, requires such an issuer to exercise due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report describing its due diligence measures, among other matters. As noted above, however, the final rule requires an issuer to provide its Conflict Minerals Report as an exhibit to its specialized disclosure report on Form SD, instead of as an exhibit to its annual report on Form 10–K, Form 20–F, or Form 40–F, as proposed. Generally, the content of the Conflict Minerals Report is substantially similar to the proposal. One modification from the proposal, based on comments we received, is that the final rule requires an issuer to use a nationally or internationally recognized due diligence framework, if such a framework is available for the specific conflict mineral. We are persuaded by commentators that doing so will enhance the quality of an issuer’s due diligence, promote comparability of the Conflict Minerals Reports of different issuers, and provide a framework by which auditors can assess an issuer’s due diligence.54 This requirement 54 The proposed rules would not have required the use of a particular due diligence framework, but the Proposing Release indicated that an issuer whose conduct conformed to a nationally or internationally recognized set of standards of, or guidance for, due diligence regarding its conflict VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 should make the rule more workable and less costly than if no framework was specified. Presently, it appears that the only nationally or internationally recognized due diligence framework available is the due diligence guidance approved by the Organisation for Economic Co-operation and Development (‘‘OECD’’).55 As proposed, the final rule requires an independent private sector audit of an issuer’s Conflict Minerals Report. However, in response to comments, we modified the proposal such that the final rule specifies an audit objective. The audit’s objective is to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and whether the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. Also, consistent with the proposal, the final rule refers to the audit standards established by the GAO. The GAO staff has indicated to our staff that the GAO does not intend to establish new standards for the Conflict Minerals Report audit. Instead, the GAO plans to look to its existing Government Auditing Standards (‘‘GAGAS’’), which is commonly referred to as ‘‘the Yellow Book.’’56 Unlike the proposed rule, which would have required descriptions in the Conflict Minerals Report of an issuer’s products that ‘‘are not ‘DRC conflict free,’’’ where ‘‘DRC conflict free’’ means that they ‘‘do not contain minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries, the final rule requires descriptions in the Conflict Minerals Report of an issuer’s products ‘‘that have not been found to be ‘DRC conflict minerals supply chain would provide evidence that the issuer used due diligence in its Conflict Minerals Report. 55 See OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (2011), available at https://www.oecd.org/daf/ internationalinvestment/ guidelinesformultinationalenterprises/ 46740847.pdf. 56 See U.S. Gov’t Accountability Office, GAO–12– 331G, Government Auditing Standards 2011 Revision (Dec. 2011), available at https:// www.gao.gov/assets/590/587281.pdf. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 56281 free.’’’ We believe this change will lead to more accurate disclosure. As suggested by a number of commentators, the final rule also modifies the proposal by providing a temporary transition period for two years for all issuers and four years for smaller reporting companies.57 During this period, issuers may describe their products as ‘‘DRC conflict undeterminable’’ if they are unable to determine that their minerals meet the statutory definition of ‘‘DRC conflict free’’ for either of two reasons: First, they proceeded to step three based upon the conclusion, after their reasonable country of origin inquiry, that they had conflict minerals that originated in the Covered Countries and, after the exercise of due diligence, they are unable to determine if their conflict minerals financed or benefited armed groups in the Covered Countries; or second, they proceeded to step three based upon the conclusion, after their reasonable country of origin inquiry, that they had a reason to believe that their necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources and the information they gathered as a result of their subsequently required exercise of due diligence failed to clarify the conflict minerals’ country of origin, whether the conflict minerals financed or benefited armed groups in those countries, or whether the conflict minerals came from recycled or scrap sources. These issuers will have already conducted a reasonable country of origin inquiry, and their undeterminable status would be based on the information they were able to gather from their exercise of due diligence. However, if these products also contain conflict minerals that the issuer knows directly or indirectly financed or benefited armed groups in the Covered Countries, the issuer may not describe those products as ‘‘DRC conflict undeterminable.’’ Also, during the transition period, issuers with products that may be described as ‘‘DRC conflict undeterminable’’ are not required to have their Conflict Minerals Report audited. Such issuers, however, must still file a Conflict Minerals Report describing their due diligence, and must additionally describe the steps they have taken or will take, if any, since the end of the period covered in their most recent prior Conflict Minerals Report, to mitigate the risk that their necessary conflict minerals benefit armed groups, 57 ‘‘Smaller reporting company’’ is defined in Rule 12b-2 [17 CFR 240.12b-2] under the Exchange Act. E:\FR\FM\12SER2.SGM 12SER2 56282 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES including any steps to improve their due diligence. This temporary provision will apply for the first two reporting calendar years after effectiveness of the final rule for all issuers that are not smaller reporting companies, and for the first four reporting calendar years after effectiveness of the final rule for smaller reporting companies. We believe it is appropriate to allow a two-year temporary period, in recognition that, as commentators noted, the processes for tracing conflict minerals through the supply chain must develop further to make such determinations for the issuer community at large. Also, we believe it is appropriate to allow an additional two years to this temporary period for smaller reporting companies because, as commentators noted, smaller companies may face disproportionally higher burdens than larger companies and a longer temporary period may help alleviate some of those burdens. After the four-year period for smaller reporting companies and two-year period for all other issuers, issuers that have proceeded to step three but are unable to determine that their conflict minerals did not originate in the VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Covered Countries or are unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups must describe their products containing those conflict minerals as not having been found to be ‘‘DRC conflict free.’’ Unlike the proposed rules, the final rule requires issuers with necessary conflict minerals exercising due diligence regarding whether their conflict minerals are from recycled or scrap sources to conform the due diligence to a nationally or internationally recognized due diligence framework, if one is available for a particular recycled or scrap conflict mineral. A gold supplement to the OECD’s due diligence guidance has been approved by the OECD.58 This gold supplement is presently the only nationally or internationally recognized due diligence framework for any conflict mineral from recycled or scrap 58 See OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Supplement on Gold (2012), available at https://www.oecd.org/ corporate/guidelinesformultinationalenterprises/ FINAL%20Supplement%20on%20Gold.pdf. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 sources of which we are aware. Therefore, we anticipate that issuers will use the OECD gold supplement to conduct their due diligence for recycled or scrap gold. We are not aware that the OECD or any other body has a similar recycled or scrap due diligence framework for the other conflict minerals. Issuers with conflict minerals without a nationally or internationally recognized due diligence framework are still required to exercise due diligence in determining that their conflict minerals were from recycled or scrap sources. The due diligence that must be exercised regarding such conflict minerals focuses only on whether those conflict minerals are from recycled or scrap sources. In such circumstances where a nationally or internationally recognized due diligence framework becomes available for any such conflict mineral, issuers will be required to utilize that framework in exercising due diligence to determine that conflict minerals are from recycled or scrap sources. E. Flowchart Summary of the Final Rule BILLING CODE 8011–01–P E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations II. Discussion of the Final Rule A. ‘‘Conflict Minerals’’ Definition sroberts on DSK5SPTVN1PROD with RULES 1. Proposed Rules The Conflict Minerals Statutory Provision defines the term ‘‘conflict mineral’’ as cassiterite, columbitetantalite, gold, wolframite, or their derivatives, or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Covered Countries.59 We 59 Section 1502(e)(4) of the Act. Presently, the Secretary of State has not designated any other VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 used the same definition of this term in the proposed rules. As we discussed in the Proposing Release, 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.60 Columbitetantalite is the metal ore from which tantalum is extracted. Tantalum is used in electronic components, including mineral as a conflict mineral. Therefore, the conflict minerals include only cassiterite, columbitetantalite, gold, wolframite, or their derivatives. 60 Tin Statistics and Information, U.S. Geological Survey, available at https://minerals.usgs.gov/ minerals/pubs/commodity/tin/. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 mobile telephones, computers, videogame consoles, and digital cameras, and as an alloy for making carbide tools and jet engine components.61 Gold is used for making jewelry and is used in electronic, communications, and aerospace equipment.62 Finally, wolframite is the metal ore that is used to produce 61 Niobium (Columbium) and Tantalum Statistics and Information, U.S. Geological Survey, available at https://minerals.usgs.gov/minerals/pubs/ commodity/niobium. 62 Gold Statistics and Information, U.S. Geological Survey, available at https://minerals.usgs. gov/minerals/pubs/commodity/gold. E:\FR\FM\12SER2.SGM 12SER2 ER12SE12.000</GPH> BILLING CODE 8011–01–C 56283 56284 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations tungsten, which is used for metal wires, electrodes, and contacts in lighting, electronic, electrical, heating, and welding applications.63 Based on the many uses of these minerals, we expect the Conflict Minerals Statutory Provision to apply to many companies and industries and, thereby, the final rule to apply to many issuers. 2. Comments on the Proposed Rules sroberts on DSK5SPTVN1PROD with RULES Several commentators requested that the final rule set forth the specific conflict derivatives that would trigger the rule’s disclosure and reporting obligations.64 Many of these commentators recommended that the final rule limit the derivatives of columbite-tantalite, cassiterite, and wolframite to tantalum, tin, and tungsten, respectively,65 unless the State Department determines subsequently that additional specific minerals or their derivatives are financing or benefitting armed groups.66 One of these commentators pointed out that such a limit is appropriate because, although conflict minerals have other derivatives, tantalum, tin, and tungsten are the only economically significant derivatives of the conflict minerals.67 For example, one commentator noted that oxygen and iron are derivatives of wolframite that could be subject to the final rule, but wolframite is not currently a significant commercial source for oxygen or iron.68 Another commentator noted that niobium is a derivative of columbite-tantalite that, absent clarification to the contrary, could be subject to the final rule as well.69 Some commentators, however, asserted that the final rule should not solely be limited to tantalum, tin, tungsten, or gold.70 63 Tungsten Statistics and Information, U.S. Geological Survey, available at https://minerals.usgs. gov/minerals/pubs/commodity/tungsten. 64 See, e.g., letters from American AAFA, Global Tungsten & Powders Corp. (Mar. 1, 2011) (‘‘Global Tungsten I’’), Industry Group Coalition I, IPC I, IPC—Association Connecting Electronics Industries (Nov. 1, 2011) (‘‘IPC II’’), Materion Corporation (Nov. 1, 2011) (‘‘Materion’’), National Retail Federation (Nov. 1, 2011) (‘‘NRF II’’), PCP, Robert W. Row (Jan. 18, 2011) (‘‘Row’’), SEMI, and Society of the Plastics Industry Inc. (Nov. 9, 2011) (‘‘SPI’’). 65 Gold is produced in its metallic form and has no derivatives. 66 See, e.g., letters from AAFA, IPC II, NRF II, PCP, and SPI. 67 See letters from IPC II and NRF II. See also Transcript of SEC Roundtable, Section 0039 Lines 9–10 (‘‘MR. MATHESON: The economic interest is in the three Ts plus gold.’’). 68 See letter from SEMI. 69 See letter from Row. 70 See, e.g., letters from BC Investment Management Corporation (Mar. 28, 2011) (‘‘BCIMC’’) and Save the Congo (Nov. 1, 2011) (‘‘Save’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 One commentator recommended that the definition of ‘‘conflict mineral’’ not include organic metal compounds formed from a conflict mineral metal derivative, such as tin and tungsten, because these substances are no longer metals or alloys and ‘‘use of these chemical compounds is too attenuated from the original source of the mineral.’’ 71 According to the commentator, these organometallic compounds, which include catalysts, stabilizers, and polymerization aids, are commodity chemicals used in the production of raw materials such as silicones, polyurethanes, vinyls, and polyesters. For example, the commentator noted that tin is used in a reaction with chlorine gas, after which the intermediate tin tetrachloride compound undergoes further chemical reactions with any number of organic substrates to produce an organotin compound with the final compounds becoming substances such as stannous octoate, monobutyl tin trichloride, and dioctyltin dilaurate. These substances contain tin but have several organic groups chemically bound to the tin nucleus and are compounds that are materially and chemically distinct from metallic tin. According to the commentator, the use of organotin in many manufacturing sectors has not yet been recognized by manufacturers, supply chains, or regulators, which may increase costs of the final rule if organic tin compounds are included in the definition of ‘‘conflict minerals.’’ In addition, a number of commentators recommended that the final rule selectively use the term ‘‘conflict mineral’’ because not doing so would unfairly stigmatize the four minerals and unjustifiably hurt some companies’ reputations.72 These commentators noted that the term ‘‘conflict mineral’’ in the proposed rules 71 See letter from SPI. e.g., letters from Advanced Medical Technology Association (Feb. 28, 2011) (‘‘AdvaMed I’’), Barrick Gold Corporation (Feb. 28, 2011) (‘‘Barrick Gold’’), Cleary Gottlieb Steen & Hamilton LLP (Mar. 2, 2011) (‘‘Cleary Gottlieb’’), Global Tungsten I, JVC et al. II, Malaysia Smelting Corporation (Jan. 26, 2011) (‘‘MSC I’’), National Association of Manufacturers (Nov. 1, 2011) (‘‘NAM III’’), Niotan Inc. (Jan. 30, 2011) (‘‘Niotan I’’), Niotan Inc. (Mar. 21, 2011) (‘‘Niotan II’’), National Mining Association (Mar. 2, 2011) (‘‘NMA II’’), SEMI, Tanzania I, TIC, and WGC II. See also MJB Consulting (Apr. 28, 2011) (‘‘MJB I’’) (arguing that the Conflict Minerals Statutory Provision is unclear as to whether the definition of ‘‘conflict minerals’’ refers to columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, per se, originating from the Covered Countries, or columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives originating from the Covered Countries and that do not directly or indirectly finance or benefit armed groups in the Covered Countries). 72 See, PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 provides no clear distinction between the four named minerals and their derivatives that did not benefit or finance armed groups, and those that did finance or benefit armed groups. Specifically, one of these commentators noted, ‘‘refer[ring] to all cassiterite, wolframite, gold, and tantalum in the world, regardless of its origin and relationship to conflict actors’’ as ‘‘conflict minerals,’’ imposes ‘‘a reputational taint on these entire industries,’’ and ‘‘makes it highly challenging for companies in these industries to communicate effectively with investors and the public.’’ 73 Commentators suggested that we limit the final rule’s definition of ‘‘conflict minerals’’ only to minerals that financed or benefited armed groups and that the final rule use another name to describe minerals that did not finance or benefit armed groups, such as ‘‘potential conflict minerals,’’ ‘‘suspect conflict minerals,’’ ‘‘subject minerals,’’ or ‘‘covered minerals.’’ 74 Additionally, for the same reasons, some commentators indicated that the final rule should change the names of the required headings from ‘‘Conflict Minerals Disclosure’’ to ‘‘Country of Origin Disclosure’’ and change the name of the Conflict Minerals Report to ‘‘Report on Minerals Sourced from Central Africa.’’ 75 3. Final Rule After considering the comments, we are revising the proposal in the final rule. We are clarifying our position as to which derivatives are conflict minerals, which appears consistent with the views of various stakeholders,76 73 See letter from Niotan II. letters from Cleary Gottlieb, Niotan II, SEMI, and TIC. 75 See letters from Barrick Gold and Niotan I. 76 See, e.g., letter from H.E. Ambassador Liberata Mulamula, International Conference on the Great ´ Lakes Region, Angel Gurrıa, Secretary-General, Organisation for Economic Co-operation and Development, and Fred Robarts, Coordinator, United Nations Group of Experts on the Democratic Republic of the Congo (Jul. 29, 2011) (‘‘OECD I’’) (‘‘We consider that the OECD and UN GoE due diligence recommendations, as integrated into the framework of the ICGLR Regional Initiative against the Illegal Exploitation of Natural Resources and the Regional Certification Mechanism, can be used by persons subject to Section 1502 of the Dodd-Frank Act (‘‘issuers’’) to reliably determine whether the tin, tantalum, tungsten or gold in their products originate from the DRC or adjoining countries, and if so, to determine the facilities used to process those minerals, the country of origin, and the mine or location of origin with the greatest possible specificity, and describe the products manufactured or contracted to be manufactured that are not DRC conflict free.’’); OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 12 (2011), available at https://www.oecd.org/daf/ internationalinvestment/ 74 See E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES including at least one co-sponsor of the legislation and other members of Congress.77 As a commentator guidelinesformultinationalenterprises/46740847. pdf (discussing due diligence as a basis for responsible global supply chain management of ‘‘tin, tantalum, tungsten, their ores and mineral derivates, and gold’’); Final Report of the United Nations Group of Experts on the Democratic Republic of the Congo, Nov. 29, 2010 [S/2010/596] (stating that relevant individuals and entities should establish effective systems of control and transparency over the mineral supply chain, the nature of which will vary according to the mineral being traded, with the gold supply chain exhibiting characteristics different to those for tin, tantalum, and tungsten, and according to the position of the individual or entity in the supply chain); Enough Project, From Mine to Mobile Phone: The Conflict Minerals Supply Chain (Nov. 10, 2009) available at https://www.enoughproject.org/files/publications/ minetomobile.pdf (indicating its desire to increase transparency in the supply chains for tin, tantalum, and tungsten, or the 3Ts, as well as gold, which are key elements of electronics products including cell phones and personal computers and are the principal source of revenue for armed groups and military units that prey on civilians in eastern Congo, and the 3Ts are produced from mineral ores, including tin from cassiterite, tungsten from wolframite, and tantalum from columbite-tantalite, known throughout Congo as coltan); and Global Witness, Do No Harm: Excluding conflict minerals from the supply chain, 2 (July 2010), available at https://www.globalwitness.org/sites/default/files/ pdfs/do_no_harm_global_witness.pdf (stating that ‘‘the warring parties [in the DRC] finance themselves via control of most of the mines in [eastern DRC] that produce tin, tantalum and tungsten ores and gold’’). See also State Department, Statement Concerning Implementation of Section 1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due Diligence, 1 (July 15, 2011), available at https://www.state.gov/ documents/organization/168851.pdf (noting that the State Department ‘‘is undertaking a number of actions to address the problem of conflict minerals—or the exploitation and trade of gold, columbite-tantalite (coltan), cassiterite (tin), wolframite (tungsten), or their derivatives—sourced from the eastern’’ DRC that have ‘‘helped to fuel the conflict in the eastern DRC’’). 77 See letters from Representative Mark E. Amodei (Dec. 20, 2011) (‘‘Rep. Amodei’’) (referring to ‘‘tungsten’’); Representatives Howard L. Berman, Donald M. Payne, and Christopher H. Smith (Nov. 8, 2010) (Pre-Proposing Release Web site) (‘‘Rep. Berman et al. pre-proposing’’) (‘‘Section 1502 was designed to limit the ability of armed groups in the Democratic Republic of Congo (DRC) to profit from the illicit mining of tin ore, coltan, gold, and other mineral resources that eventually end up in computers, cell phones, and other products.’’); Representatives Howard L. Berman, Donald M. Payne, Jim McDermott, Karen Bass, and Barney Frank (Sep. 23, 2011) (‘‘Rep. Berman et al.’’); Representative Renee L. Ellmers (Dec. 13, 2011) (‘‘Rep. Ellmers’’) (referring to ‘‘tungsten’’); Rep. Lee (referring to gold, tin, tantalum, and tungsten as ‘‘conflict minerals,’’ by stating that ‘‘[f]or years, minerals such as gold and other raw materials commonly used to produce tin, tantalum, and tungsten have been mined and sold illegally by rebel groups in parts of the Democratic Republic of the Congo (DRC) and neighboring countries,’’ and that ‘‘[t]hese ‘conflict minerals’ have fueled decades of fighting in central Africa.’’); Representative Tim Murphy (Dec. 29, 2011) (‘‘Rep. Murphy’’) (referring to ‘‘tungsten’’); and Senator Barbara Boxer, Senator John Boozman, Senator Christopher A. Coons, Senator Patrick J. Leahy, Senator Frank R. Lautenberg, and Senator Jeff Merkley (Oct. 18, 201) (‘‘Sen. Boxer et al. I’’) (‘‘The purpose of Sec. 1502 VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 suggested, our failure in the proposal to specify the 3T derivatives (tantalum, tin, and tungsten, which are known as the ‘‘3Ts’’) would have introduced too much ambiguity in our rule,78 which would have expanded the Conflict Mineral Provision’s reach, cost, and complexity without increasing its effectiveness.79 The term ‘‘conflict mineral’’ in the final rule is defined to include cassiterite, columbite-tantalite, gold, wolframite, and their derivatives, which are limited to the 3Ts, unless the Secretary of State determines that additional derivatives are financing conflict in the Covered Countries, in which case they are also considered ‘‘conflict minerals;’’ or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Covered Countries. Additionally, despite the suggestion by certain commentators that we limit the definition of the term ‘‘conflict mineral’’ to minerals that financed or benefited armed groups, the final rule continues to use the term ‘‘conflict mineral’’ to refer to columbite-tantalite, cassiterite, gold, wolframite, and their derivatives, and any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Covered Countries whether or not they actually financed or benefited armed groups. We believe this approach is appropriate because it is consistent with the use of that term in the Conflict Minerals Statutory Provision and to change the definition of the term for the final rule could cause confusion among interested parties between the use of the term in the statutory provision and the use of the term in the final rule. However, issuers whose conflict minerals did not finance or benefit armed groups may describe their products containing those minerals as ‘‘DRC conflict free’’ in their specialized disclosure report, provided that the issuer is able to determine on the basis of due diligence conducted in accordance with a nationally or internationally recognized due diligence framework that such products are ‘‘DRC conflict free’’ as defined in the final rule. is to create transparency and accountability in the mineral supply chain in the DRC. Minerals from the DRC—which include tin, tantalum, tungsten and gold—are commonly used in products such as cellphones, laptops and jewelry.’’). 78 See letter from SEMI. 79 See letters from IPC II and NRF II. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 56285 B. Step One—Issuers Covered by the Conflict Mineral Provision 1. Issuers That File Reports Under the Exchange Act a. Proposed Rules As we discussed in the Proposing Release, we recognize there is some ambiguity as to whom the Conflict Minerals Statutory Provision applies given that the provision states that the Commission shall promulgate regulations for any ‘‘person described’’ 80 and that a ‘‘person is described’’ if ‘‘conflict minerals are necessary to the functionality or production of a product manufactured by such person.’’ 81 Therefore, the Conflict Minerals Statutory Provision could be interpreted to apply to a wide range of private companies not previously subject to our disclosure and reporting rules. Given the provision’s legislative background, its statutory location, and the absence of Congressional direction to apply the provision to companies not previously subject to those rules,82 however, we believe the more appropriate interpretation is that the rules apply only to issuers that file reports with the Commission under Section 13(a) or Section 15(d) of the Exchange Act, and that is what we proposed.83 Also, consistent with the statutory language, our proposed rules would have applied equally to domestic companies, foreign private issuers, and smaller reporting companies. 80 See Exchange Act Section 13(p)(1)(A). Exchange Act Section 13(p)(2)(B). 82 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.’’). 83 Exchange Act Section 13(a) requires issuers with classes of securities registered under Exchange Act Section 12 [15 U.S.C. 78l] to file periodic and other reports. See 15 U.S.C. 78m. Exchange Act Section 15(d) requires issuers with effective registration statements under the Securities Act of 1933 (the ‘‘Securities Act’’) to file reports similar to Exchange Act Section 13(a) for the fiscal year within which such registration statement became effective. See 15 U.S.C. 78n. Therefore, if our proposed rules did not include issuers required to file reports under Exchange Act Section 15(d), some issuers who file annual reports may not otherwise be required to comply with our proposed conflict minerals rules. 81 See E:\FR\FM\12SER2.SGM 12SER2 56286 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations b. Comments on the Proposed Rules sroberts on DSK5SPTVN1PROD with RULES i. Issuers That File Reports Under Sections 13(a) and 15(d) of the Exchange Act Many commentators addressing the issue agreed with the proposal that the final rule should apply to issuers that file reports under Sections 13(a) and 15(d) of the Exchange Act and not to private companies or individuals.84 Some of these and other commentators acknowledged, however, that not including individuals and private companies in the final rule could unfairly burden Sections 13(a) and 15(d) issuers and put them at a competitive disadvantage by increasing their costs.85 On the other hand, some of these commentators noted that not including private companies and individuals in the final rule may not unduly burden Sections 13(a) and 15(d) issuers because the commercial pressure on private companies by issuers that need this information for their reports and by the public in general demanding that issuers make this information available could be sufficient enough for the private companies to provide voluntarily their conflict minerals information as standard practice.86 Another commentator argued that the effects of the final rule on competition ‘‘are likely to be benign.’’ 87 This commentator asserted that ‘‘conflict minerals disclosure costs will not increase the cost of being a publicly 84 See, e.g., letters from AngloGold; Arkema, Inc. (Mar. 1, 2011) (‘‘Arkema’’); Calvert; Cleary Gottlieb; Communications and Information Network Association of Japan, Japan Auto Parts Industries Association, Japan Business Machine and Information System Industries Association, Japan Electronics and Information Technology Industries Association, The Japan Electrical Manufacturers’ Association, Japan Machinery Center for Trade and Investment (Mar. 2, 2011) (‘‘Japanese Trade Associations’’); CRS I; Earthworks; Howland; IPC I; JVC et al. II; KEMET Corporation (Nov. 1, 2011) (‘‘Kemet’’); PCP; Rockefeller Financial Asset Management (Mar. 1, 2011) (‘‘Rockefeller’’); SIF I; State II; TIC; and TriQuint I. 85 See, e.g., letters from Howland, IPC I, ITIC I, NMA II, National Retail Federation (Mar. 2, 2011) (‘‘NRF I’’); TIC; and TriQuint I. 86 Letter from Howland (noting that ‘‘private companies (non reporters) will likely need to provide the same [conflict minerals] information to their customers who will need the information for their reports,’’ and that providing conflict minerals information is ‘‘likely’’ to ‘‘become a de facto standard similar to RoHS (EU Restriction of hazardous Substances) for electronics’’) and TIC (‘‘Further, provided that the regulations apply to large and small issuers, they will form a critical mass which will, in practice, create sufficient commercial pressure on private companies and individuals who manufacture products involving potential conflict materials. Noncompliant companies will be unable to withstand the political and consumer pressures. Accordingly, there is no need for the SEC to seek to expand its jurisdiction.’’). 87 See letter from Green II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 traded company by a significant percentage’’ and that being able to declare a company’s products as ‘‘DRC conflict free’’ could become a competitive advantage.88 Further, in response to our request for comment in the Proposing Release, all four commentators that discussed the issue agreed that an issuer with a class of securities exempt from Exchange Act registration pursuant to Exchange Act Rule 12g3–2(b) 89 should not be subject to the final rule.90 One commentator recommended ‘‘that entities with OverThe-Counter American Depository Receipts (OTC ADRS) that file an annual report with the SEC should also be required to file a ‘Conflict Minerals Disclosure’ report.’’ 91 Some commentators stated that the final rule should not necessarily require private companies to submit to us their conflict minerals information, but the final rule should provide mechanisms that allow private companies to report voluntarily on their conflict minerals in a manner similar to Sections 13(a) and 15(d) issuers,92 which could include working with other agencies that regulate non-reporting companies to have those agencies require their filers to provide similar conflict minerals information.93 Moreover, the State Department commented that it would encourage private companies not subject to the final rule to disclose voluntarily conflict minerals information.94 Other commentators disagreed with the proposed rules and indicated that the final rule should apply to more than just issuers that file reports under Sections 13(a) and 15(d) of the Exchange Act.95 A comment letter submitted jointly by two of the co-sponsors of the legislation stated that their ‘‘intent was for the requirements of Section 1502 to apply to all companies that fall under the jurisdiction of the SEC, including those who issue classes of securities otherwise exempt from reporting.’’ 96 88 Id. 89 17 CFR 240.12g3–2(b). Cleary Gottlieb, JVC et al. II, New York State Bar Association (Mar. 1, 2011) (‘‘NY State Bar’’), and SIF I. 91 See letter from Calvert. 92 See letters from Earthworks and TriQuint I. 93 See letter from TriQuint I. 94 See letter from State II. 95 See, e.g., letters from Catholic Charities Diocese of Houma-Thibodaux (Apr. 21, 2011) (‘‘Catholic Charities’’), International Corporate Accountability Roundtable and Global Witness (Nov. 1, 2011) (‘‘ICAR et al. II’’), ITIC I, NRF I, Sen. Durbin/Rep. McDermott, Sisters of Good Shepherd (Apr. 8, 2011) (‘‘Good Shepherd’’), TIC, and Tiffany. 96 See letter from Sen. Durbin/Rep. McDermott. 90 See PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 ii. Smaller Reporting Companies Many commentators agreed that the final rule, as we proposed, should not exempt smaller reporting companies.97 In this regard, one commentator noted that, although there would be additional costs for smaller reporting companies to comply with the rules, the increased costs will apply also to larger companies.98 Another commentator asserted that compliance costs for small issuers ‘‘will be relatively modest’’ due to their smaller scale and lower complexity of their businesses.99 One commentator did not believe that the proposed rules would impose higher costs on smaller companies significant enough to justify an exemption because smaller reporting companies would have fewer products to track than a larger company, which would decrease their compliance costs.100 The commentator based its belief on the fact that, although it was a small human rights group with a modest budget, it regularly undertakes field investigations and supply chain research that is very similar to the due diligence measures it recommended the Commission adopt. According to this commentator, if it is able to perform due diligence with a small staff, so too can a smaller reporting company. Some commentators noted that exempting smaller reporting companies from the final rule could increase the burdens on larger reporting companies because the larger reporting companies may be less able to require their smaller reporting company suppliers to provide the conflict minerals information needed by the larger reporting companies.101 One of these commentators noted also that permitting limited disclosure and reporting obligations for smaller companies is unlikely to reduce significantly their burdens because larger companies would likely impose contractual obligations on them to track and provide their conflict minerals information for the larger companies.102 Other commentators supported exempting smaller reporting companies because these companies would be less 97 See, e.g., letters from BCIMC, Calvert, CRS I, Earthworks, Global Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen. Durbin/Rep. McDermott, SIF I, State II, TIAA–CREF, TIC, and TriQuint I. 98 See letter from Howland. 99 See letter from Green II. See also letter from ICAR et al. II (stating that ‘‘because these issuers are smaller, it stands to reason that they will have fewer products that contain conflict minerals, thus reducing the amount of products that must undergo a reasonable country of origin inquiry and supply chain due diligence’’). 100 See letter from Global Witness I. 101 See, e.g., letters from IPC I and TriQuint I. 102 See letters from IPC I. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations able to compel their suppliers to provide conflict minerals information due to their lack of leverage,103 and because it would be more expensive for smaller reporting companies to comply with the rule relative to their revenues than for other companies.104 However, one commentator argued that, although such issuers may lack leverage, this disadvantage may be reduced through the influence exerted over their suppliers by larger issuers that use the same supplier base and that have more leverage to request such information.105 Some commentators argued that smaller reporting companies should be allowed to phase-in the rules or that the implementation date of the final rule should be deferred for them.106 sroberts on DSK5SPTVN1PROD with RULES iii. Foreign Private Issuers A number of commentators believed that the final rule should not exempt foreign private issuers.107 As one commentator noted,108 exempting foreign private issuers from the final rule could increase domestic issuers’ burdens by making it very difficult for them to compel their foreign private issuer suppliers to provide conflict minerals information. As another commentator noted,109 exempting foreign private issuers from the final rule could also result in a competitive disadvantage for domestic issuers because foreign private issuers would not be subject to the final rule. Further, this commentator indicated that not exempting foreign private issuers could actually motivate foreign companies to advocate for similar conflict minerals regulations in their home jurisdictions to reduce any competitive disadvantages they may have with companies from their jurisdictions that do not register with us. Finally, the commentator suggested that exempting foreign private issuers may hurt conflict minerals supply chain transparency, which would be contrary to the intent of Congress. Only one commentator, a foreign private issuer, stated specifically that foreign private issuers should be exempt 103 See, e.g., letters from ABA, JVC et al. II, and Society of Corporate Secretaries and Governance Professionals (Mar. 3, 2011) (‘‘Corporate Secretaries I’’). 104 See letter from Corporate Secretaries I and Howland. 105 See letter from Green II. 106 See, e.g., letters from ABA, Howland, and JVC et al. II. 107 See, e.g., letters from AngloGold, BCIMC, Calvert, CRS I, Earthworks, Global Witness I, Howland, JVC et al. II, NEI Investments (Mar. 2, 2011) (‘‘NEI’’), NY State Bar, SIF I, State II, TIAA– CREF, TriQuint I, WGC II, and WLF. 108 See letter from TriQuint I. 109 See letter from NEI. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 from the final rule.110 This commentator argued that any Congressional intent to give laws extraterritorial effect must be clearly expressed and stated, which the Conflict Minerals Statutory Provision fails to do. Also, the commentator noted that the proposed rules would violate international principles of diplomatic comity and could put diplomats from countries with foreign private issuers in jeopardy. Another commentator suggested that, if the final rule would cause ‘‘more than an insignificant number of foreign private issuers to leave the U.S. markets or not to enter the U.S. markets,’’ we should consider exempting all or some foreign private issuers from the final rule.111 A further commentator stated that, although it recommended that the final rule not exempt foreign private issuers, it expects that the final rule ‘‘will represent just one more strong disincentive for such issuers to access the U.S. markets.’’ 112 c. Final Rule After considering the comments, we are adopting the final rule as proposed. Therefore, the final rule applies to any issuer that files reports with the Commission under Section 13(a) or Section 15(d) of the Exchange Act, including domestic companies, foreign private issuers, and smaller reporting companies. We believe the statutory language is clear on this point and believe that it only applies to issuers that file reports with the Commission under Section 13(a) or Section 15(d) of the Exchange Act. There is no clear indication that Congress intended to cover issuers other than those that file such reports. Although we appreciate the views expressed in the comment letter submitted jointly by two of the cosponsors of the legislation,113 the legislative history only refers to companies that file with or report to the Commission or that are listed on a United States stock exchange.114 The 110 See letter from Taiwan Semi. letter from ABA. 112 See letter from NY State Bar. 113 See letter from Sen. Durbin/Rep. McDermott. 114 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.’’); 156 Cong. Rec. S3976 (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 111 See PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 56287 location of the statute adopted by Congress in the section of the Exchange Act dealing with reporting issuers reflects a more limited scope, as well.115 The statute is silent with respect to any distinction among issuers based on the issuer’s size or domesticity. Although not specifically in the context of smaller reporting companies or foreign private issuers, some commentators suggested that we use our general exemptive authority under Exchange Act Section 36(a) 116 to exempt certain classes of companies from full and immediate compliance with the disclosures required by the Conflict Minerals Statutory Provision.117 The only limiting factor in the Conflict Minerals Statutory Provision itself as to the type of issuer to which it applies is based on whether conflict minerals are ‘‘necessary to the functionality or production’’ of products manufactured or contracted by the issuer to be manufactured.118 Moreover, Congress included a specific provision for Commission revisions and waivers to the reporting obligation that requires the President to determine such waiver or revision to be in the national security interest and limits such a Commission exemption to two years. In our view, the high standard set for this statutory waiver, as well as its limited duration, evinces a congressional intent for the Conflict Minerals Statutory Provision to apply broadly and exempting large categories of issuers would be inconsistent with this intent. We also recognize that section 1502 is not simply a disclosure obligation for issuers, but a comprehensive legislative scheme that contemplates coordinated Statutory 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’’). 115 See Exchange Act Section 13 entitled ‘‘Periodical and Other Reports.’’ 116 15 U.S.C. 78mm(a) (‘‘[T]he Commission, by rule, regulation, or order, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this chapter or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.’’). 117 See, e.g., letters from Davis Polk & Wardwell LLP (Mar. 2, 2011) (‘‘Davis Polk’’); National Cable & Telecommunications Association (Oct. 31, 2011) (‘‘NCTA’’); Representatives Spencer Bachus, Gary G. Miller, Chairman, Robert J. Dold, and Steve Stivers (Jul. 28, 2011) (‘‘Rep. Bachus et al.’’) Verizon; and Wilmer Cutler Pickering Hale and Dorr LLP Hale on behalf of IPC (Jun. 2, 2011) (‘‘WilmerHale’’). 118 Exchange Act Section 13(p)(2)(B). E:\FR\FM\12SER2.SGM 12SER2 56288 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES action by a number of federal agencies aimed at making public information about conflict minerals from the Covered Countries.119 We are concerned that any broad categories of exemptions would be inconsistent with this scheme and the statutory objective of reducing the use of conflict minerals from the Covered Countries that contribute to conflict.120 Congress chose to pursue this goal through the implementation of a comprehensive disclosure regime. In order to allow the provision to have the effect we understand Congress intended, we believe our rules must be consistent with the statutory language and not exempt broad categories of issuers from its application. Thus, we are not exempting smaller reporting companies or foreign private issuers. Additionally, it is unclear whether exempting smaller reporting companies in particular would significantly reduce their burdens because smaller reporting companies could still be required to track and provide their conflict minerals information for larger issuers.121 Moreover, to the extent there are benefits to smaller companies from an exemption, such an exemption could increase the burden on larger companies that rely on smaller reporting company suppliers to provide conflict minerals information needed by the larger reporting companies. Further, as discussed in greater detail below, the final rule temporarily will 119 Sections 1502(c) and (d) of the Act. We recognize that Congress also required the Comptroller General to periodically report on, among other things, publicly available information regarding persons who are ‘‘not required to file reports * * * pursuant to Section 13(p)(1)(A)’’ and who manufacture products for which ‘‘conflict minerals are necessary to the functionality or production.’’ Section 1502(d)(2)(C). We interpret this provision to require reporting by the Comptroller General on persons—such as private companies not subject to our disclosure and reporting rules—who are not subject to the requirements of the Conflict Minerals Statutory Provision even though conflict minerals may be necessary to the functionality or production of their products. Any issuers that receive waivers or revisions pursuant to Section 13(p)(3) would also be included. 120 See letters from Global Witness I and State II and Transcript of SEC Roundtable on Conflict Minerals, Section 141 (Oct. 18, 2011) (Statement of Tim Mohin), available at https://www.sec.gov/ spotlight/conflictminerals/ conflictmineralsroundtable101811-transcript.txt (stating that although no single company working alone can determine whether minerals in its products supported armed groups, large and small companies working together can make such a determination), id. at 22 (Statement of Bennett Freeman) (arguing that all companies across the value and supply chain should be covered by the rule because disclosures by all companies are important to investors). See also id. at 62, 92, and 103 (Statements of Andrew Matheson, Benedict S. Cohen, and Representative James McDermott, respectively) (assuming that small issuers would be covered by the rule). 121 See letters from IPC I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 permit all issuers that are unable to determine that their conflict minerals did not originate in the Covered Countries or that are unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups to describe their products as ‘‘DRC conflict undeterminable,’’ and temporarily will not require such issuers to obtain an independent private sector audit of their Conflict Minerals Report with respect to those minerals. This temporary accommodation will be available to all issuers for the first two years of reporting under the final rule. The final rule extends that period for smaller reporting companies for an additional two years, providing a temporary fouryear provision for smaller reporting companies. This approach is consistent with some commentators’ recommendations as to the applicability of the reporting requirement to smaller reporting companies.122 Similarly, we are not exempting foreign private issuers because we do not believe that it would give effect to Congressional intent of the provision. As commentators noted, exempting foreign private issuers could make it difficult for issuers to compel their foreign private issuer suppliers to provide conflict minerals information, result in a competitive disadvantage for domestic issuers, and hurt conflict minerals supply chain transparency.123 Also, we note that including foreign private issuers in the final rule does not give the Conflict Minerals Statutory Provision an extraterritorial effect because it applies only to foreign private issuers that enter the securities markets of the United States. 2. ‘‘Manufacture’’ and ‘‘Contract to Manufacture’’ Products a. Proposed Rules The Conflict Minerals Statutory Provision applies to any person for 122 See letter from Howland (stating that, although ‘‘[t]here will be additional costs that may be proportionally higher for small companies, but increased costs will also apply to large firms,’’ a way that the final rule can ‘‘mitigate the cost is to phase in the acceptable level of rigor for due diligence over several years and based on company size’’). See also letter from JVC et al. II (stating that, ‘‘[w]ith respect to smaller reporting companies, it is reasonable to assume that the costs of compliance may disproportionately harm them by comparison with any concomitant benefit in achieving the statutory goals, since these companies lack the leverage to pressure suppliers and smelters to certify regarding the source of a particular conflict mineral,’’ so ‘‘we believe it would be appropriate to allow smaller reporting companies even more time in which to adapt the results of these broader global initiatives to their individual facts and circumstances’’). 123 See letters from NEI and TriQuint I. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 whom conflict minerals are necessary to the functionality or production of a product manufactured by that person. The proposed rules would likewise have applied to reporting persons for whom conflict minerals are necessary to the functionality or production of products they manufacture. We did not define the term ‘‘manufacture’’ in the proposed rules, because we believed the term to be generally understood.124 In addition, based on the text of the Conflict Minerals Statutory Provision as well as statutory intent, the proposed rules would also have applied to issuers that contract to manufacture products. As discussed in the Proposing Release, one section of the Conflict Minerals Statutory 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,’’ 125 while another section of the provision requires an issuer to describe ‘‘the products manufactured or contracted to be manufactured that are not DRC conflict free’’ [emphasis added] in its Conflict Mineral Report.126 The absence of the phrase ‘‘contract to manufacture’’ from the ‘‘person described’’ definition raised 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, we expressed in the Proposing Release our belief 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. The proposed rules, therefore, would have applied equally to issuers that manufacture products and to issuers that ‘‘contract to manufacture’’ their products. We noted that this approach would allow the ‘‘contracted to be manufactured’’ language to have effect in the Conflict Minerals Report. In the Proposing Release, we explained that the proposed rules would apply to issuers that contract for the manufacturing of products over which they had any influence regarding the manufacturing of those products. As proposed, they also would have applied to issuers selling generic products under their own brand name or a separate 124 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). 125 Exchange Act Section 13(p)(2)(B). 126 Exchange Act Section 13(p)(1)(A)(ii). E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations brand name that they had established, regardless of whether those issuers had any influence over the manufacturing specifications of those products, as long as an issuer had contracted with another party to have the product manufactured specifically for that issuer. We did not, however, propose that the rules would apply to retail issuers that sell only the products of third parties if those retailers had no contract or other involvement regarding the manufacturing of those products, or if those retailers did not sell those products under their brand name or a separate brand they had established and did not have those products manufactured specifically for them. b. Comments on the Proposed Rules sroberts on DSK5SPTVN1PROD with RULES i. ‘‘Manufacture’’ Many commentators agreed with the proposed rules that the final rule should not define the term ‘‘manufacture’’ because that term is generally understood.127 Many other commentators, however, believed that the final rule should define the term,128 and most of these commentators provided their recommendations for the definition. A number of commentators indicated that the definition should mirror the North American Industry Classification System (‘‘NAICS’’),129 which classifies entities as manufacturers if they engage in the mechanical, physical, or chemical transformation of materials, substances, or components into new products from raw materials that are products of agriculture, forestry, fishing, mining, or quarrying. Some commentators stated that the final rule should define the term inclusively or broadly so as to include all steps in the supply chain, from mining to manufacturing the product, because otherwise it would become exponentially more difficult for 127 See, e.g., letters from ABA, Global Witness I, Howland, NYCBar I, NYCBar II, State II, TIC, and United States Steel Corporation (Mar. 4, 2011) (‘‘US Steel’’). 128 See, e.g., letters from American Association of Exporters and Importers (Jan. 21, 2011) (‘‘AAEI’’); AngloGold; Columban Center for Advocacy and Outreach, Leadership Conference of Women Religious, Sisters of Mercy of the Americas— Institute Justice Team, Missionary Oblates, and Maryknoll Office for Global Concerns (Mar. 2, 2011) (‘‘Columban Center et al.’’); CTIA—The Wireless Association (Mar. 1, 2011) (‘‘CTIA’’); Earthworks; Enough Project I; International Corporate Accountability Roundtable, Enough Project, and Global Witness (Sep. 23, 2011) (‘‘ICAR et al. I’’); Metalsmiths; NAM I; NEI; NMA II; RILA–CERC; SIF I; TriQuint I; and WGC II. 129 See letters from AAEI, AngloGold, BCE Inc. (Oct. 31, 2011) (‘‘BCE’’), Canadian Wireless Telecommunications Association (Oct. 28, 2011) (‘‘CWTA’’), CTIA, NAM I, NCTA, NMA II, RILA– CERC, and WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 manufacturing issuers downstream in the supply chain to comply with the final rule.130 One commentator indicated that the term should include all steps from mining, refining, and production to the importing, exporting, or sale of ingredients, materials, and/or processes.131 A few commentators indicated that the final rule should provide a definition consistent with the U.S. Controlled Substances Act, which includes the production, preparation, assembling, propagation, combination, compounding, or processing of a drug or other substance, either directly or indirectly or by extraction from substances of natural origin.132 One of these commentators stated that such a consistent definition would include 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.’’ 133 One commentator asserted that the definition should include any entity ‘‘involved in the process of changing a product * * * from one form to another.’’ 134 One commentator suggested that the definition ‘‘should be tailored only to include OEM’s and those who design and specify bills of materials for products with control over the procurement or fabrication of the same products’ bill of materials and specification of the constituent materials of the components.’’ 135 One commentator urged us to provide clear guidance indicating that real estate development does not constitute manufacturing.136 ii. ‘‘Contract to Manufacture’’ Not all commentators agreed on whether the final rule should include an issuer that contracts to manufacture a product. However, many commentators that agreed that the final rule should include an issuer that contracts to manufacture a product, or did not agree but argued in the alternative, recommended that an issuer should be required to have some amount of control or influence over the manufacturing 130 See letters from Columban Center et al., Metalsmiths, and TriQuint I. 131 See letter from Earthworks. 132 See letters from Enough Project I and SIF I. 133 See letter from Enough Project I (citing to its earlier letter submitted Sep. 24, 2010 on the PreProposing Release Web site). 134 See letter from Jeffrey Trott (Jan. 31, 2011) (‘‘Trott’’). 135 See letter from Retail Industry Leaders Association (Nov. 1, 2011) (‘‘RILA’’). 136 See letter from National Association of Real Estate Investment Trusts (Nov. 23, 2011) (‘‘NAREIT’’). PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 56289 process before the final rule considers that issuer to be contracting to manufacture a product.137 A number of commentators suggested the level of control necessary to be considered contracting to manufacture a product under the final rule. In this regard, some commentators suggested that only an issuer with direct, close, active, and/or substantial involvement or control in the sourcing of materials, parts, ingredients, or components to be included in its products or in the manufacturing of those products should meet the minimum control threshold necessary to be considered contracting to manufacture a product.138 One commentator recommended that an issuer should be considered to be contracting to manufacture a product only if it exercises ‘‘a sufficient level of influence, involvement or control over the process to be able to control, in a meaningful manner, the use of conflict minerals, or to evaluate and influence the use of conflict minerals.’’139 Some commentators asserted that the minimum control threshold should be met only if the issuer explicitly specifies the inclusion of conflict minerals in the product.140 Another commentator advised that the contracting activities that should trigger conflict minerals reporting should include designing the product, controlling the approved materials or vendor lists for the product, and including the issuer’s name on the product.141 Some of these commentators, as well as others, asserted that an issuer should not be considered to meet the control threshold to the extent that the product is not manufactured to meet an issuer’s custom specifications, but rather is manufactured to meet industry-standard specifications common to the issuer’s competitors generally.142 For example, a group of jewelry industry commentators argued in one letter that a jewelry retail issuer ordering products from jewelry manufacturers should not be considered contracting to manufacture for those products if the retail issuer specifies only weight, karat, or other indicators of 137 See, e.g., letters from AdvaMed I, AT&T Inc. (Mar. 9, 2011) (‘‘AT&T’’), Chamber I, Cleary Gottlieb, Consumer Electronics Retailers Coalition (Nov. 1, 2011) (‘‘CERC’’), Industry Group Coalition I, IPC I, IPC II, JVC et al. II, NAM I, NCTA, Niotan I, NMA II, NRF I, NRF II, PCP, RILA, Roundtable, SEMI, TIAA–CREF, and TriQuint I. 138 See letters from AT&T, CERC, Corporate Secretaries I, CTIA, JVC et al. II, NCTA, NRF I, RILA, and Verizon. 139 See letter from ABA. 140 See letters from NAM I and SEMI. 141 See letter from TriQuint I. 142 See letters from AngloGold, AT&T, BCE, JVC et al. II, NCTA, and RILA–CERC. E:\FR\FM\12SER2.SGM 12SER2 56290 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations quality.143 As another example, a mobile phone service provider asserted that it should not be considered contracting to manufacture its mobile phones even though it specifies to its manufacturers that the phones must be compatible with their networks and have certain cosmetic design requirements.144 Some commentators suggested that the final rule should not consider an issuer to be contracting to manufacture products if the issuer is selling products under its own brands, labels, trademarks, or licenses if it had little or no influence in manufacturing those products.145 Other commentators recommended that the final rule should consider such issuers to be contracting to manufacture those products.146 One commentator asserted that generic products should be held to the same standard as branded products and that the final rule should avoid using any definitions that create a perverse incentive for an issuer to work with special purpose entities designed to follow the technical requirements of the law but evade its intent.147 Another commentator suggested that the final rule should apply to issuers selling generic products under their own name or a separate brand name, but not to retailers who do not do so and have no influence over the manufacturing of products they sell.148 Some commentators recommended that an issuer should be considered to be contracting to manufacture a product only if the issuer has a direct contractual relationship with the manufacturer of the product to be sold by the issuer, the issuer has substantial control over the manufacturer and the material specifications of the product and specifies the conflict minerals to be used in the product, the product will be manufactured exclusively for the issuer, 143 See letter from JVC et al. II. letter from AT&T. See also letter from BCE (stating that the commentator, a distributor of a wide range of telecommunications and electronic products supplied by hundreds of manufacturers, ‘‘exerts no substantial control over the design or the technical features of those products or any control, direct or indirect, over the supply chains, which may be quite complex, of such manufacturers,’’ and its ‘‘sole input into the manufacturing process relates to providing brand name manufacturers with certain technical specifications to ensure compliance with applicable Canadian regulatory standards or to requesting special product features, cosmetic in nature, to meet Canadian consumer market demands’’). 145 See letters from AT&T, BCE, Cleary Gottlieb, CTIA, Industry Group Coalition I, JVC et al. II, NAM I, NCTA, and NRF I. 146 See letters from Enough Project I, Howland, NEI, SIF I, State II, and TriQuint I. 147 See letter from AxamTrade (Feb. 10, 2011) (‘‘Axam’’). 148 See letter from NYCBar II. sroberts on DSK5SPTVN1PROD with RULES 144 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 and the product will be sold by the issuer under its own brand name or a brand name owned by the issuer or exclusively licensed to the issuer by the owner of the brand.149 One of these commentators went on to assert that an issuer should not be considered to be exerting ‘‘substantial control’’ over manufacturing by ‘‘merely attaching a brand label to a generic good, contracting for the exclusive distribution of goods, or specifying the form, fit or function of a product,’’ and should not be considered to be contracting to manufacture a product solely by ‘‘attaching a brand label to a generic good, contracting for the exclusive distribution of goods, or specifying the form, fit or function of a product.’’ 150 Other commentators stressed that the final rule should not apply to any issuer contracting to manufacture its products.151 These commentators argued generally that the statute does not include an issuer that contracts to manufacture its products because the phrase does not appear in the subsection of the Conflict Minerals Statutory Provision discussing a ‘‘person described.’’ Instead, the phrase appears only in the subsection that describes the disclosures required in a Conflict Minerals Report. Therefore, Congress’s intent in including the phrase was only to ensure that a manufacturer otherwise subject to the Conflict Minerals Statutory Provision could not intentionally evade its reporting obligation merely by distancing itself, through contracting, from the manufacturing process.152 c. Final Rule i. ‘‘Manufacture’’ After considering the comments, we are modifying the proposed rules, in part. The final rule, as proposed, applies to any issuer for which conflict minerals are necessary to the functionality or production of a product manufactured or contracted by that issuer to be manufactured. The final rule does not define the term ‘‘manufacture’’ because we continue to believe, as discussed in the Proposing Release, that the term is generally understood. We note, however, that we do not consider an issuer that only services, maintains, or repairs a product containing conflict minerals to be ‘‘manufacturing’’ a 149 See letters from CERC and RILA. letter from RILA. 151 See, e.g., letters from BCE, CERC, CTIA, Davis Polk, NCTA, RILA–CERC, TIC, and United States Telecom Association (Mar. 2, 2011) (‘‘US Telecom’’). 152 See letters from AT&T, CTIA, and RILA– CERC. 150 See PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 product; 153 this interpretation is not a change from the Proposing Release, but a clarification in response to comments.154 We believe narrowing or expanding the definition of ‘‘manufacture’’ as suggested by some commentators would be inconsistent with the language and framework of Section 1502. For example, the NAICS definition, which a number of commentators suggested, appears to exclude any issuer that manufactures a product by assembling that product out of materials, substances, or components that are not in raw material form. Such a definition would exclude large categories of issuers that manufacture products through assembly, such as certain auto and electronics manufacturers, whom we believe are intended to be covered by the Conflict Minerals Statutory Provision. As another example, the manufacturing definition put forth by one commentator appears to include ‘‘importing, exporting, or sale of conflict minerals,’’ 155 which would expand the definition to include issuers that clearly do not manufacture products. Also, many of the other suggested definitions simply expound upon the generally understood meaning of the term, which we do not believe we need to define. ii. ‘‘Contract to Manufacture’’ Consistent with the proposal, the final rule applies to any issuer for which conflict minerals are necessary to the functionality or production of a product contracted by that issuer to be manufactured, including conflict minerals in a component of a product. In general, the question of whether an issuer contracts to manufacture a product will depend on the degree of influence exercised by the issuer on the manufacturing of the product based on the individual facts and circumstances surrounding an issuer’s business and industry. The final rule does not define when an issuer contracts to manufacture a product because, although we believe this concept is intuitive at a basic level, after considering comments and attempting to develop a precise definition, we concluded that, for ‘‘contract to manufacture’’ to cover issuers operating in the wide variety of the impacted industries and structured 153 See letter from JVC et al. II (commenting that ‘‘certain assembly and repair functions commonly performed by jewelry retailers’’ should not be defined as manufacturing). 154 See, e.g., letter from ABA (commenting that the Commission ‘‘should, either in the final rule or in the corresponding adopting release, provide additional guidance as to activities that will not be considered to be the manufacturing of a product for the purposes of the rule’’). 155 See letter from Earthworks. E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations in various manners, any definition of that term would be so complicated as to be unworkable. We do, however, provide guidance below on some general principles that we believe are relevant in determining whether an issuer should be considered to be contracting to manufacture a product. As a threshold matter, consistent with the proposal, we believe the statutory intent to include issuers that contract to manufacture their products is clear based on the statutory obligation for issuers to describe in their Conflict Minerals Reports products that are manufactured and contracted to be manufactured that do not meet the definition of ‘‘DRC conflict free.’’ 156 We recognize that commentators asserted that the statute does not include an issuer that contracts to manufacture its products and that the sole intent behind including the phrase in the provision was to keep manufacturers from intentionally evading reporting requirements by contracting the manufacturing of their products to third parties. Nonetheless, Exchange Act Section 13(p)(1)(A)(ii) requires issuers that must file a Conflict Minerals Report to describe their ‘‘products manufactured or contracted to be manufactured that are not DRC conflict free’’ (emphasis added). In our view, the inclusion of products that are ‘‘contracted to be manufactured’’ in this requirement indicates that Congress intended the Conflict Mineral Statutory Provision to apply to such products, and including issuers who contract to manufacture their products in the scope of the rule effectuates this intent. We believe our reading is more consistent with the statute than the alternative reading—that Congress required a description of products that were ‘‘contracted to be manufactured’’ and were not ‘‘DRC conflict free,’’ but did not require issuers that contracted to manufacture products to determine whether a Conflict Minerals Report was required to be filed. This would be internally inconsistent. It would significantly undermine the purpose of the statutory provision to fail to apply it to issuers that contract to manufacture their products. As another threshold matter, we believe the phrase ‘‘contract to manufacture’’ captures manufacturers that contract the manufacturing of components of their products. Generally, we believe that manufacturing issuers that contract the manufacturing of certain components of their products should, for purposes of the Conflict Minerals Statutory 156 See Exchange Act Section 13(p)(1)(A)(ii). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Provision, be viewed as responsible for the conflict minerals in those products to the same extent as if they manufactured the components themselves. We believe it is inconsistent with the Conflict Minerals Statutory Provision to allow these manufacturers to avoid the final rule’s requirements by contracting out the manufacture of components in their products that contain conflict minerals. As two of the co-sponsors of the Conflict Minerals Statutory Provision noted, ‘‘[m]any companies use component parts from any one of several suppliers when assembling their products’’ to ‘‘help drive down the price for parts through competition,’’ but ‘‘[i]t is of paramount importance that this business model choice not be used as a rationale to avoid reporting and transparency.’’ 157 In the proposal, we expressed our belief that an issuer that does not manufacture a product itself but that has ‘‘any’’ influence over the product’s manufacturing should be considered to be contracting to manufacture that product. Also, we expressed our belief that an issuer that offers a generic product under its own brand name or a separate brand name should be considered to be contracting to manufacture that product so long as the issuer had contracted to have the product manufactured specifically for itself. We had believed that these issuers should have been considered to be contracting those products to be manufactured because the issuers would implicitly influence the manufacturing of the products. However, we are persuaded by commentators that this level of control set forth in the Proposing Release was ‘‘overbroad’’ and ‘‘confusing’’ and would impose on such an issuer ‘‘significant,’’ ‘‘unrealistic,’’ and ‘‘costly’’ burdens.158 Consistent with our approach in the Proposing Release, we believe that ‘‘contract to manufacture’’ is intended to include issuers that have some actual influence over the manufacturing of their products. However, we have modified our view as to the circumstances under which an issuer is considered to be contracting to manufacture a product. An issuer is considered to be contracting to manufacture a product depending on the degree of influence it exercises over the materials, parts, ingredients, or 157 See letter from Senator Richard J. Durbin and Representative Jim McDermott (Oct. 4, 2010) (PreProposing Release Web site) (‘‘Sen. Durbin/Rep. McDermott pre-proposing’’). 158 See, e.g., letters from ABA, AT&T, Corporate Secretaries I, Davis Polk, and Verizon. See also letter from NRF I (stating that our proposed approach would be ‘‘draconian’’). PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 56291 components to be included in any product that contains conflict minerals or their derivatives. The degree of influence necessary for an issuer to be considered to be contracting to manufacture a product is based on each issuer’s individual facts and circumstances. However, based on comments we received, we believe an issuer should not be viewed for the purposes of the Conflict Minerals Statutory Provision as contracting to manufacture a product if its actions involve no more than: (a) Specifying or negotiating contractual terms with a manufacturer that do not directly relate to the manufacturing of the product, such as training or technical support, price, insurance, indemnity, intellectual property rights, dispute resolution, or other like terms or conditions concerning the product, unless the issuer specifies or negotiates taking these actions so as to exercise a degree of influence over the manufacturing of the product that is practically equivalent to contracting on terms that directly relate to the manufacturing of the product; or (b) Affixing its brand, marks, logo, or label to a generic product manufactured by a third party; or (c) Servicing, maintaining, or repairing a product manufactured by a third party. For example, we agree with commentators that an issuer that is a service provider that specifies to a manufacturer that a cell phone it will purchase from that manufacturer to sell at retail must be able to function on a certain network does not in-and-of-itself exert sufficient influence to ‘‘contract to manufacture’’ the phone for purposes of the final rule. Under the proposed rules, however, such an issuer may have reached the ‘‘any’’ influence threshold. Conversely, we do not agree with commentators that an issuer must have ‘‘substantial’’ influence or control over the manufacturing of a product before the issuer is considered to be contracting to manufacture that product.159 Such a standard would significantly limit the coverage of the Conflict Minerals Statutory Provision for issuers that contract to manufacture products, and we do not believe that such a narrow scope is consistent with the intent of the Conflict Minerals Statutory Provision. For example, if there are specifications made by an issuer to a manufacturer that it contracts with for the inclusion of a particular conflict mineral in the product, the 159 See, e.g., letters from AT&T, Corporate Secretaries I, CTIA, JVC et al. II, NRF I, and Verizon. E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56292 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations issuer might not be viewed as exerting ‘‘substantial’’ influence on the overall manufacturing of the product. However, we would view such an issuer as covered under the final rule as contracting to manufacture the product. In addition, we disagree with commentators that suggested that the final rule should apply only to issuers that explicitly specify that conflict minerals be included in their products.160 We believe this is too narrow an interpretation of the statutory provision and, read in this manner, the statute would be illogical. For example, as commentators argued, Congress inserted ‘‘contract to manufacture’’ in the disclosure of products to prevent manufacturers from skirting the disclosure requirements by contracting to manufacture certain products. However, if ‘‘contract to manufacture’’ is not included in the definition of ‘‘person described,’’ an issuer may evade the statute by contracting its manufacturing to a third party. Therefore, an issuer would never be required to disclose its minerals because the issuer would not qualify for steps two and three. Moreover, in contrast to our approach in the Proposing Release, we do not consider an issuer to be contracting to manufacture a product for the purposes of our rule solely if it offers a generic product under its own brand name or a separate brand name without additional involvement by the issuer. We are persuaded by commentators that such an issuer would not necessarily exert a sufficient degree of influence on the manufacturer to be considered as contracting to manufacture the product for purposes of the Conflict Minerals Statutory Provision. As one commentator noted, it seems that such a relationship between an issuer and manufacturer is better characterized as one in which the manufacturer is using the issuer as a ‘‘sales channel’’ as opposed to one in which the issuer is ‘‘outsourcing manufacturing to’’ the manufacturer.161 Such a relationship limits the issuer’s influence on the product’s manufacturing to the extent that it puts the issuer in a similar position to that of a pure retailer. One commentator noted that the purposes of the Conflict Minerals Statutory Provision are not served by classifying such an issuer as contracting to manufacture a product.162 We agree. However, an issuer with generic products that include its brand name or a separate brand name and that has 160 See, e.g., letters from NAM I and SEMI. letter from AT&T. 162 See letter from Cleary Gottlieb. 161 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 involvement in the product’s manufacturing beyond only including such brand name would need to consider all of the facts and circumstances in determining whether its influence reaches such a degree so as to be considered contracting to manufacture that product. 3. Mining Issuers as ‘‘Manufacturing’’ Issuers a. Proposed Rules Under the proposed rules, we would have considered an issuer that mines conflict minerals to be manufacturing those minerals and an issuer contracting for the mining of conflict minerals to be contracting for the manufacture of those minerals. In this regard, we proposed in an instruction to the rules that mining issuers be considered to be manufacturing conflict minerals when they extract those minerals.163 We did, however, request comment on this point. b. Comments on the Proposed Rules A number of commentators stated specifically that the final rule should consider any issuer that mines conflict minerals as ‘‘manufacturing’’ those conflict minerals as ‘‘products.’’ 164 A few commentators noted that mining issuers should be included as manufacturers because they begin the conflict minerals supply chain and other reporting issuers must rely on them for information.165 As such, without the final rule including mining issuers, other issuers would have a very difficult time complying with the rules, which would eliminate transparency from the supply chain and undermine the provision.166 Other commentators indicated that the final rule should not treat mining issuers as manufacturers of the conflict minerals they extract.167 Some of these 163 See Industry Guide 7 [17 CFR 229.802(g)] (implying that companies may ‘‘produce’’ minerals from a mining reserve). 164 See, e.g., letters from Bario-Neal Jewelry (Mar. 1, 2011) (‘‘Bario-Neal’’); Brilliant Earth, Inc. (Feb. 28, 2011) (‘‘Brilliant Earth’’); CRS I; Earthworks; Electronics TakeBack Coalition (Mar. 2, 2011) (‘‘TakeBack’’); Enough Project I; Enough Project (Nov. 2, 2011) (‘‘Enough Project IV’’); Global Tungsten I; Hacker Jewelers, Designers & Goldsmiths, Inc. (Mar. 1, 2011) (‘‘Hacker Jewelers’’); Hoover & Strong, Inc. (Mar. 1, 2011) (‘‘Hoover & Strong’’); ICAR et al. I; NEI; Niotan I; NYCBar I; SIF I; State II; TIAA–CREF; TriQuint I; and U.S. Steel. 165 See letters from Global Witness I and TriQuint I (noting that mining companies do, in fact, engage in a transformative process such that they transform natural resources into ores, which should be considered ‘‘manufacturing’’). 166 See letter from Enough Project I. 167 See, e.g., letters from ABA, AngloGold, Barrick Gold, Cleary Gottlieb, ITRI Ltd. (Jan. 27, 2011) (‘‘ITRI I’’), NAM III, NMA II, Vale S.A. (Mar. 3, 2011) (‘‘Vale’’), and WGC II. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 commentators argued that the final rule should incorporate the NAICS definition of ‘‘manufacturing,’’ which they noted does not include mining as a type of manufacturing activity.168 Certain commentators noted that mining of conflict minerals, especially gold, shares no characteristics with the manufacturing of products.169 Finally, some commentators asserted that Congress did not intend to include mining issuers as manufacturers based on previous versions of the Conflict Minerals Statutory Provision, legislative statements, and a plain reading of the statute.170 As some of these commentators noted, the Conflict Minerals Statutory Provision was preceded by other legislative proposals that were drafted to include mining issuers, but the Conflict Minerals Statutory Provision was not drafted in such a manner.171 One such commentator indicated that these previous bills ‘‘explicitly applied not only to companies using covered minerals in their manufacturing processes, but also to persons engaged in ‘the commercial exploration, extraction, importation, exportation, or sale’ of the covered minerals.’’172 According to the commentator, the fact that Congress chose not to include extraction activities in the Conflict Minerals Statutory Provision demonstrates that Congress’s intent was not to have the Conflict Minerals Statutory Provision include mining as manufacturing. c. Final Rule After considering the comments, we are modifying the proposal. We do not consider an issuer that mines or contracts to mine conflict minerals to be manufacturing or contracting to manufacture those minerals unless the issuer also engages in manufacturing, whether directly or indirectly through contract, in addition to mining. In this regard, we do not believe that mining is ‘‘manufacturing’’ based on a plain reading of the provision. We agree with the commentators concerned that the statutory language does not explicitly include mining anywhere in the Conflict Minerals Statutory Provision and including mining would expand the statutory mandate. The Conflict Minerals Statutory Provision does not specifically refer to mining and, as one 168 See letters from AngloGold and WGC II. letters from AngloGold and Barrick Gold. 170 See letters from AngloGold, NMA II, National Mining Association (Nov. 1, 2011) (‘‘NMA III’’), and Vale. 171 See, e.g., letters from AngloGold and NMA II. 172 Letter from NMA II (referring to S. 891 and S.A. 2707 (2009)). 169 See E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations commentator noted, ‘‘[t]o extend the terms ‘manufacture’ of a ‘product’ to include the mining of conflict minerals contorts the plain meaning of those terms.’’ 173 As discussed by commentators, legislative history demonstrates that Congress did not intend to include issuers that solely mine conflict minerals in the Conflict Minerals provision because it removed references to such activities from prior versions of the provision. For example, one commentator in two comment letters noted that prior versions of the Conflict Minerals Statutory Provision explicitly applied to anyone either using covered minerals in their manufacturing processes or engaging in ‘‘the commercial exploration, extraction, importation, exportation or sale of the covered minerals.’’ 174 However, the final version of the Conflict Minerals Statutory Provision omits any reference to extraction-related activities and refers solely to manufacturing.175 As this commentator stated, Congress’s omission of mining activities evidences its intent ‘‘to address the manufacturing of goods which use or contain, as opposed to the extracting and processing of, the covered minerals.’’ 176 Therefore, based on both the plain reading of the provision and the legislative history of the provision, we are persuaded that it would be inconsistent with the language in the Conflict Minerals Statutory Provision to include mining issuers as manufacturing issuers under the final rule unless the mining issuer engages in manufacturing, either directly or through contract, in addition to mining. 4. When Conflict Minerals Are ‘‘Necessary’’ to a Product The Conflict Minerals Statutory Provision requires us to promulgate regulations requiring that any ‘‘person described’’ disclose annually whether conflict minerals that are ‘‘necessary’’ originated in the Covered Countries and, if so, submit to us a Conflict Minerals Report.177 The provision further states that a ‘‘person is described’’ if ‘‘conflict 173 See letter from AngloGold. letters from NMA II and NMA III. These letters discuss two legislative proposals introduced in the Senate in 2009 that were similar to the Conflict Minerals Statutory Provision. See Congo Conflict Minerals Act of 2009, S. 891, 111th Cong. (2009) and S.A. 2707, 111th Cong. (2009). Both of these earlier conflict minerals proposals explicitly applied to companies using conflict minerals in their manufacturing processes and also to persons engaged in ‘‘the commercial exploration, extraction, importation, exportation, or sale’’ of conflict minerals. 175 See letters from NMA II. 176 Id. 177 Exchange Act Section 13(p)(1)(A). sroberts on DSK5SPTVN1PROD with RULES 174 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 minerals are necessary to the functionality or production of a product manufactured by such person.’’ 178 The provision, however, provides no additional explanation or guidance as to the meaning of ‘‘necessary to the functionality or production of a product.’’ Likewise, we did not propose to define when a conflict mineral is necessary to the functionality or production of a product. We did, however, request comment on whether and how our rules should define this phrase and we provided some guidance as to the meaning of ‘‘necessary to the production of a product.’’ a. Proposed Rules Although we did not propose to define ‘‘necessary to the functionality or production’’ in the rules, we noted in the Proposing Release that, if a mineral is necessary, the product was included within the scope of the rules without regard to the amount of the mineral involved. Further, we indicated in the Proposing Release that a conflict mineral would be considered necessary to the production of a product if the conflict mineral was intentionally included in a product’s production process and was necessary to that process, even if that conflict mineral was not ultimately included anywhere in the product. On the other hand, as proposed, a conflict mineral 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 that product, even if that tool or machine was necessary to producing the product. For example, if an automobile containing no conflict minerals was produced using a wrench that contains or was itself produced using conflict minerals necessary to the functionality or production of that wrench, the proposed rules would not consider the conflict minerals in that wrench necessary to the production of the automobile. That the conflict minerals must be ‘‘necessary to the functionality or production’’ of an issuer’s products is the only limiting factor in the Conflict Minerals Statutory Provision.179 The provision has no materiality thresholds for disclosure based on the amount of conflict minerals an issuer uses in its manufacturing processes. Therefore, we did not propose to include a materiality threshold for the disclosure or reporting requirements in the proposed rules. We did, however, request comment in the Proposing Release as to whether there 178 Exchange 179 Exchange PO 00000 Frm 00021 Act Section 13(p)(2)(B). Act Section 13(p)(2)(B). Fmt 4701 Sfmt 4700 56293 should be a de minimis threshold in our rules based on the amount of conflict minerals used by an issuer in a particular product or in its overall enterprise and, if so, whether such a threshold would be consistent with the Conflict Minerals Statutory Provision. b. Comments on the Proposed Rules Many commentators suggested that the final rule explicitly define the phrase, ‘‘necessary to the functionality or production of a product,’’ 180 while other commentators indicated that the final rule should not define the phrase.181 Several commentators suggested possible definitions.182 One commentator noted that manufacturers make certain deliberate choices about products, such as how they look, function, perform, cost, or are supplied, so when there has been a choice to incorporate conflict minerals into a product, the final rule should consider the conflict minerals ‘‘necessary’’ to the product because the designer has deemed them to be so.183 Another commentator was concerned that the proposed rules did not provide any guidance as to either the phrase ‘‘necessary to the functionality or production’’ or the term ‘‘product.’’ 184 As such, this commentator noted that the proposed rules could apply to financial products that are backed by gold or other mineral commodities, such as futures contracts for gold bullion, shares in mutual funds that invest in gold mining stocks, or gold bullion storage agreements with vault services providers. i. ‘‘Necessary to the Functionality’’ A number of different commentators indicated that a conflict mineral should be considered ‘‘necessary to the functionality’’ of a product if that conflict mineral is intentionally added to the product.185 Of these commentators, however, many were open to other potential requirements. For example, many commentators 180 See, e.g., letters from CRS I, Davis Polk, Earthworks, Enough Project I, FRS, Howland, ICAR et al. I, MSG I, NRF I, PCP, Give Peace A Deadline (Jan. 21, 2011) (‘‘Peace’’), SEMI, SIF I, TIC, Tiffany, TriQuint I, and US Steel. 181 See, e.g., letters from Cleary Gottlieb, Global Witness I, ITIC I, State II, and WGC II. 182 See, e.g., letters from AAEI, AAFA, Bario-Neal, Brilliant Earth, CRS I, Davis Polk, Earthworks, Enough Project I, Hacker Jewelers, Hoover & Strong, Howland, MSG I, NAM I, Niotan I, NMA II, NRF I, PCP, Peace, SEMI, Sen. Durbin/Rep. McDermott, SIF I, TIAA–CREF, TIC, TriQuint I, and US Steel. 183 See letter from Matheson II. 184 See letter from Tiffany. 185 See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth, Hacker Jewelers, Hoover & Strong, Howland, ITIC I, NRF I, NYCBar II, SEMI, Sen. Durbin/Rep. McDermott, TIAA–CREF, and WGC II. E:\FR\FM\12SER2.SGM 12SER2 56294 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations suggested further requirements in addition to, or instead of, being intentionally added before a conflict mineral should be considered ‘‘necessary to the functionality’’ of a product. Many of these commentators indicated that a conflict mineral must be intentionally added and/or necessary either for the product’s use, purpose, or marketability, financial success, or some combination thereof.186 A few commentators asserted that a conflict mineral must be intentionally added and essential to the product’s function.187 One commentator stated that a conflict mineral must be intentionally added and have a concentration in the product that exceeds 1,000 ppm per homogeneous material.188 Only a few commentators proposed guidance as to when a conflict mineral would be considered ‘‘intentionally added’’ to a product, and they differed on when a conflict mineral should be considered ‘‘intentionally added.’’ One commentator stated that a conflict mineral should not be considered intentionally added if it was unilaterally included in a sub-component acquired by the issuer from a sub-contractor.189 Two of the co-sponsors of the Conflict Minerals Statutory Provision, however, took the opposite position and stated that a conflict mineral should be considered intentionally added if it is intentionally added in sub-components that an issuer contracts to manufacture through third parties or subsidiaries.190 Several commentators agreed that a conflict mineral occurring naturally in a product should not be considered intentionally added to that product.191 Instead of being intentionally added to a product, some commentators provided other bases for concluding that a conflict mineral is ‘‘necessary to the functionality’’ of a product. Some commentators indicated that a conflict mineral should be considered ‘‘necessary to the functionality’’ of a product if that conflict mineral is necessary for the product’s basic function.192 Other commentators stated sroberts on DSK5SPTVN1PROD with RULES 186 See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth, Earthworks, Enough Project I, Hacker Jewelers, Hoover & Strong, MSG I, Peace, and SIF I, and TIAA–CREF. 187 See, e.g., letters from Howland, NAM I, and NRF I. 188 See letter from TriQuint I. 189 See letter from SEMI. 190 See letter from Sen. Durbin/Rep. McDermott. 191 See letters from ITIC I, PCP, and Sen. Durbin/ Rep. McDermott. 192 See letters from AAFA, NYCBar I, and WGC II. See also letter from NYCBar II (stating that a ‘‘component in a product necessary to its functionality if it is needed for either its basic function or another commercially valuable function VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 that the basic function test would be unworkable because there is no meaningful distinction between a product’s basic and auxiliary functions.193 Some commentators stated that a conflict mineral should be considered ‘‘necessary to the functionality’’ of a product if that conflict mineral is required either for the financial success or marketability of the product.194 One commentator noted that ‘‘necessary to the functionality’’ should be defined broadly enough that it encompasses uses necessary to the product’s economic utility,195 while others disagreed due to the subjective nature of what provides economic utility to a product.196 In this regard, one commentator asserted that a conflict mineral should be considered ‘‘necessary to the functionality’’ of a product if the issuer ‘‘uses’’ conflict minerals in any manner in a product, regardless of how those conflict minerals relate to the product’s function, because any other test would be too subjective.197 ii. ‘‘Necessary to the Production’’ Many commentators agreed that a conflict mineral should be considered ‘‘necessary to the production’’ of a product if it is intentionally added to the production process, and should not be considered ‘‘necessary to the production’’ of a product if it is unintentionally added to a product or naturally occurring in a product.198 Some commentators agreed with the proposal to consider such conflict minerals ‘‘necessary to the production’’ of a product even if the minerals are washed away or consumed in the production process and do not end up in the product, such as with a catalyst.199 As one of these commentators suggested as an example, a ‘‘catalyst used to make a substance or a die containing [conflict mineral] metals used to make a part’’ should be considered ‘‘necessary to the production’’ of the product using that part because the ‘‘part is made with of that product,’’ and stating that it does not ‘‘believe that ‘basic function’ in this regard needs to be defined since it will differ for each product’’). 193 See letters from NEI, SEMI, and TIC. 194 See, e.g., letters from Enough Project I, MSG I, Peace, and TIAA–CREF. 195 See letter from CRS I (suggesting ‘‘that ‘necessary to the functionality or production of a product’ be defined broadly enough that it encompasses uses necessary to the economic utility and/or marketability of that product’’). 196 See, e.g., letters from NRF I and SEMI. 197 See letter from Kemet. 198 See, e.g., letters from ITIC I, Global Witness I, Japanese Trade Associations, NYCBar I, PCP, SEMI, Sen. Durbin/Rep. McDermott, and TIC. 199 See, e.g., letters from Howland, MSG I, Niotan I, PCP, SEMI, and TriQuint I. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 direct involvements of the [conflict mineral] metal and then the part/ material is used in the product,’’ even if the conflict mineral does not end up in the product.200 Other commentators, however, did not believe that conflict minerals used in the production of a product should be considered necessary to that production process if they are washed away or consumed in the process.201 As one of these commentators pointed out, it would be ‘‘impossible for a retailer to know whether his supplier’s supplier’s supplier used and washed away a conflict mineral’’ because ‘‘there is no meaningful measurement capability or audit trail, especially as a product moves through dozens of suppliers in a supply chain.’’ 202 A number of commentators addressed whether a conflict mineral necessary to the production of the tools, machines, or similar equipment that are used to produce an issuer’s product should be considered ‘‘necessary to the production’’ of the issuer’s product.203 The large majority of these commentators, including those from industry associations,204 a multistakeholder group representing both human rights organizations and industry,205 and institutional investors,206 agreed with the proposed rules that such tools, machines, and other production equipment should not be considered necessary to the production of the issuer’s products.207 A small number of commentators disagreed and stated that such tools, machines, or similar equipment should be considered necessary to the production of an issuer’s product.208 One of these commentators specified 200 See letter from Howland. e.g., letters from Industry Group Coalition I, IPC II, NAM I, Griffin Teggeman (Dec. 16, 2010) (‘‘Teggeman’’), and WGC II. 202 See letter from Teggeman. 203 See, e.g., letters from AAFA, Industry Group Coalition I, IPC I, ITIC I, Japanese Trade Associations, NAM I, NEI, Niotan I, Refractory Metals Association (Feb. 28, 2011) (‘‘RMA’’), SEMI, SIF I, TIAA–CREF, TIC, and TriQuint I. 204 See, e.g., letters from AAFA, Industry Group Coalition I, IPC I, ITIC I, Japanese Trade Associations, NAM I, RMA, SEMI, and TIC. 205 See letter from MSG I (stating that ‘‘when conflict minerals are present in tooling or other production machinery, they should not be considered to be necessary to production of the product’’). The letter from MSG was signed by a number of human rights groups, including Enough Project, Free the Slaves, and Friends of the Congo, among others. 206 See, e.g., letters from NEI, SIF I, and TIAA– CREF. 207 See, e.g., letters from AAFA, Industry Group Coalition I, IPC I, ITIC I, Japanese Trade Associations, NAM I, NEI, RMA, SEMI, SIF I, TIAA–CREF, and TIC. 208 See letters from Niotan I and TriQuint I. 201 See, E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations that tools, machines, or similar equipment purchased going forward should be considered necessary to the production of the issuer’s product, although an issuer’s existing production equipment should not be deemed necessary to production.209 Another commentator stated that production equipment should not be considered necessary to the production of an issuer’s products unless the issuer intentionally and explicitly required the producer of the tools, machines, or other production equipment to include conflict minerals.210 In this regard, one commentator stated that the final rule should not consider any indirect equipment, such as computers or power lines, as necessary to production.211 Another commentator indicated that conflict minerals used in products that are ‘‘not intended to be sold into commerce,’’ such as those utilized solely for research and development purposes, components provided at cost on a business-tobusiness basis, or products or components used only for engineering or testing purposes, should not be considered necessary to the production of the product that is ultimately placed in the stream of commerce.212 iii. De Minimis Threshold We received mixed comments regarding whether the final rule should have a de minimis threshold exception, with some commentators opposed to a de minimis exception,213 and other commentators supporting it.214 Some commentators provided a legal basis for including a de minimis exception despite the lack of a de minimis exception in the Conflict Minerals Statutory Provision.215 Generally, these commentators asserted that, as long as legislation does not forbid establishing a de minimis threshold, an agency’s regulations may allow for one. Also, one commentator noted that we have ‘‘inherent authority to employ de minimis exceptions to avoid 209 See letter from TriQuint I. letter from SEMI. 211 See letter from Howland. 212 See letter from ITIC I. See also letter from TechAmerica (Nov. 1, 2011) (‘‘Industry Group Coalition II’’) (suggesting that the final rule should exclude ‘‘research and development equipment made available on a business-to-business basis from the scope of the rule’’). 213 See, e.g., letters from Calvert, Earthworks, Episcopal Conference of Catholic Bishops of the DRC (Nov. 8, 2011) (‘‘CENCO II’’), Global Witness I, Howland, Matheson II, NEI, NYCBar I, NYCBar II, Rep. Berman et al., SIF I, State II, and Trott. 214 See, e.g., letters from AAFA, AdvaMed I, AngloGold, Chamber I, Davis Polk, IPC I, IPC II, IPMI I, NAM I, NRF I, PCP, Rep. Bachus et al., Roundtable, SEMI, Teggeman, TIC, and WGC II. 215 See letters from Materion, NAM I, and NRF I. sroberts on DSK5SPTVN1PROD with RULES 210 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 unreasonable and absurd results in crafting [the] final rule,’’ which is ‘‘inherent and clearly established by precedent.’’ 216 Some commentators provided recommendations on possible de minimis thresholds. Two commentators suggested that there should be a de minimis exception if the cost of the conflict minerals in an issuer’s products make up less than 1% of the issuer’s consolidated total production costs.217 Other commentators recommended a de minimis exception for trace, nominal, or insignificant amounts of conflict minerals in an issuer’s products.218 One commentator suggested a de minimis exception when the end product derived from conflict minerals reflects less than a certain percentage of the value of the product, such as if the value was 5% or less of the total manufacturing costs.219 Another commentator recommended a de minimis exception relating to the inability of an issuer to determine the origin of its minerals, such as allowing that issuer’s product to be considered ‘‘DRC conflict free’’ where the issuer is unable to determine the origin of only 5% of the product’s minerals.220 One commentator noted that the final rule should permit a de minimis exception, but indicated that the value used for the de minimis exception should be based on how the phrase ‘‘necessary to the functionality or production’’ of a product is to be defined in the final rule.221 Another commentator recommended that the final rule permit a de minimis exception for products containing less that 0.1% by weight of a conflict mineral.222 One commentator provided three possible de minimis scenarios in which an issuer would be excepted from reporting, specifically: If an issuer’s conflict minerals comprised less than 0.1% of a component or product, if an issuer’s global usage of conflict minerals comprised less than 0.01% of its materials, or if an issuer comprised the bottom 20% of its industry’s conflict minerals use.223 216 See letter from Materion. letters from AngloGold and WGC II. 218 See letters from Davis Polk, NRF I, and Roundtable. 219 See letter from TIC. 220 See letter from IPMI I. 221 See letter from SEMI (stating that, if the phrase was limited to materials explicitly or intentionally added to a product or caused to be added to a product, the de minimis threshold should be one gram per year of necessary minerals, but if the final rule included a ‘‘more conservative’’ meaning of the phrase, a higher de minimis should be used, such as 0.1% of the weight of any particular component acquired as a whole by the issuer). 222 See letter from IPC I. 223 See letter from NAM I. 217 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 56295 c. Final Rule After considering the comments, we are adopting a final rule that, like the proposed rules, does not define when a conflict mineral is ‘‘necessary to the functionality’’ of a product or when it is ‘‘necessary to the production’’ of a product.224 However, as we did in the Proposing Release, we are providing guidance regarding the interpretation of these phrases. The guidance is modified to a degree from the guidance in the Proposing Release based on comments we received. Whether a conflict mineral is deemed ‘‘necessary to the functionality’’ of a product or ‘‘necessary to the production’’ of product depends on the issuer’s particular facts and circumstances, but there are certain factors we believe issuers should consider in making their determinations. As described below, in determining whether its conflict minerals are ‘‘necessary to the functionality’’ of a product, an issuer should consider: (a) Whether a conflict mineral is contained in and intentionally added to the product or any component of the product and is not a naturally-occurring by-product; (b) whether a conflict mineral is necessary to the product’s generally expected function, use, or purpose; or (c) if a conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration. Based on the applicable facts and circumstances, any of these factors, either individually or in the aggregate, may be determinative as to whether conflict minerals are ‘‘necessary to the functionality’’ of a given product. In determining whether its conflict minerals are ‘‘necessary to the production’’ of a product, an issuer should consider whether a conflict mineral is contained in the product and intentionally added in the product’s production process, including the production process of any component of the product; and whether the conflict mineral is necessary to produce the product. We describe changes to our guidance regarding ‘‘necessary to the functionality’’ and ‘‘necessary to the production’’ below. 224 As a threshold matter, we believe that the Conflict Minerals Statutory Provision requires separate consideration as to whether a conflict mineral is ‘‘necessary to the production’’ of a product from whether a conflict mineral is ‘‘necessary to the functionality’’ of the product, because the Conflict Minerals Statutory Provision includes both phrases. See infra Part II.B.4.c.iii. See also Exchange Act Sections 13(p)(1)(A) and 13(p)(2). E:\FR\FM\12SER2.SGM 12SER2 56296 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations i. Contained in the Product After considering the comments and reviewing the Conflict Minerals Statutory Provision, as described below, we are persuaded that only a conflict mineral that is contained in the product should be considered ‘‘necessary to the functionality or production’’ of that product. We believe this approach is appropriate in light of the Conflict Minerals Statutory Provision’s statutory construction. As discussed above, the Conflict Minerals Statutory Provision requires issuers with conflict minerals ‘‘necessary to the functionality or production’’ of a product manufactured or contracted by the issuer to be manufactured that originated in the Covered Countries to provide a Conflict Minerals Report.225 The provision includes two distinct subsections, Exchange Act Section 13(p)(1)(A)(i) and Exchange Act Section 13(p)(1)(A)(ii), regarding the information required in that Conflict Minerals Report. Generally, Exchange Act Section 13(p)(1)(A)(i) deals with an issuer’s description of its due diligence measures on the source and chain of custody of its conflict minerals, including the independent private sector audit, and Exchange Act Section 13(p)(1)(A)(ii) requires the issuer’s description of its products that have not been found to be ‘‘DRC conflict free.’’ The Conflict Minerals Statutory Provision defines ‘‘DRC conflict free’’ to mean ‘‘products that do not contain minerals that directly or indirectly finance or benefit armed groups’’ in the Covered Countries.226 The use of the term ‘‘contain’’ indicates that the disclosures required under Exchange Act Section 13(p)(1)(A)(ii) are limited to issuers with conflict minerals actually contained in their products.227 We believe it is appropriate to include this limitation in interpreting when a conflict mineral is necessary to the functionality or production of a product. We note that Exchange Act Section 13(p)(1)(A)(i) does not include a similar limitation that the product must ‘‘contain’’ the necessary conflict minerals. As a result, it is possible to interpret the Conflict Minerals Statutory Provision such that the term ‘‘contain’’ in Exchange Act Section 13(p)(1)(A)(ii) 225 See Exchange Act Section 13(p)(1)(A). (emphasis added). See also Section 1502(e)(4) of the Act (defining the phrase in the same manner as Exchange Act Section 13(p)(1)(A)(ii), except that Section 1502(e)(4) of the Act refers to ‘‘conflict minerals’’ instead of just ‘‘minerals’’). 227 We note that the Second Edition of the Random House Webster’s Dictionary defines ‘‘contain’’ to include the ‘‘to hold within a volume or area.’’ Random House Webster’s Dictionary, 142 (2d ed. 1996). sroberts on DSK5SPTVN1PROD with RULES 226 Id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 does not mean that a conflict mineral must be included in the product for it to be ‘‘necessary to the functionality or production’’ of the product. However, we do not believe that such an interpretation would be the proper construction. Following that approach, the provision could be interpreted to require issuers with conflict minerals that are ‘‘necessary to the functionality or production’’ of a product but are not included in that product to submit an audited Conflict Minerals Report describing their due diligence, as required under Exchange Act Section 13(p)(1)(A)(i), but not describing any products produced using those minerals that directly or indirectly financed or benefited armed groups in the Covered Countries as having not been found to be ‘‘DRC conflict free’’ because the conflict minerals are not ‘‘contained’’ in the product. We do not believe, however, that such an interpretation is the better construction. It would mean that the Conflict Minerals Statutory Provision envisions a situation in which an issuer with a conflict mineral that is ‘‘necessary to the functionality or production’’ of its product originated in the Covered Countries and benefited armed groups in those countries would be required to submit a Conflict Minerals Report describing its due diligence on the source and chain of custody of that mineral but would not have to describe its products as having not been found to be ‘‘DRC conflict free.’’ We believe the better interpretation that gives meaning to the term ‘‘contain’’ is that only conflict minerals contained in the product would be considered ‘‘necessary’’ to that product, so only those minerals trigger the requirement to conduct a reasonable country of origin inquiry. Additionally, we do not believe the final rule should include conflict minerals ‘‘necessary to the functionality or production’’ of a product that are not contained in the product because we appreciate commentators’ concerns that the application of the provision to minerals that do not end up in the product is especially challenging. As noted above, commentators were mixed in their views regarding how the rule should treat catalysts and other conflict minerals necessary to the production of a product that do not appear in the product. However, we note that there are products where a catalyst is used and is not completely washed away.228 228 See letters from Industry Group Coalition I and NAM I (referring specifically to situations in which catalysts are used to chemically react with and produce products, and trace levels of the PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 In those situations, the product contains a necessary conflict mineral that is necessary to its production and is subject to the final rule. ii. Intentionally Added Although commentators did not agree on an exact definition, most commentators from across the spectrum agreed that a conflict mineral should be considered ‘‘necessary to the functionality or production’’ of a product for the purposes of the Conflict Minerals Statutory Provision if, at a minimum, it was intentionally added to the product or production process.229 While we are not defining the phrase, we agree that being intentionally added, rather than being a naturally-occurring by-product, is a significant factor in determining whether a conflict mineral is ‘‘necessary to the functionality or production’’ of a product. This is true regardless of who intentionally added the conflict mineral to the product so long as it is contained in the product. In this regard, we note that one commentator asserted that a conflict mineral should not be considered ‘‘intentionally added’’ by an issuer ‘‘if it is present in a sub-component acquired by the issuer based on a unilateral decision of the supplier or a subcontractor, or a party further upstream in the supply chain.’’ 230 We disagree. As two of the co-sponsors of the provision asserted, determining whether a conflict mineral is considered ‘‘necessary’’ to a product should not depend on whether the conflict mineral is added directly to the product by the issuer or whether it is added to a component of the product that the issuer receives from a third party. Instead, the issuer should ‘‘report on the totality of the product and work with suppliers to comply with the requirements.’’ 231 Therefore, in determining whether a conflict mineral is ‘‘necessary’’ to a product, an issuer must consider any conflict mineral contained in its product, even if that conflict mineral is only in the product because it was included as part of a component of the product that was catalyst are found in the reacted manufactured product, but the catalysts do not contribute to the performance of the product). 229 See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth, Earthworks, Enough Project I, Global Witness I, Hacker Jewelers, Hoover & Strong, Howland, ITIC I, Japanese Trade Associations, MSG I, Niotan I, NRF I, Peace, PCP, SEMI, Sen. Durbin/ Rep. McDermott, SIF I, TIAA–CREF, TriQuint I, and WGC II. 230 See letter from SEMI. 231 See letter from Sen. Durbin/Rep. McDermott (indicating that a car manufacturer must report on any conflict minerals in the car’s radio, even if there are no conflict minerals elsewhere in the car). E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES manufactured originally by a third party. iii. ‘‘Necessary to the Functionality’’ In addition to being contained in the product and intentionally added, another factor in determining whether its conflict minerals are ‘‘necessary to the functionality’’ of a product is whether the conflict mineral is necessary to the product’s generally expected function, use, or purpose. Some commentators suggested that we limit an issuer’s consideration of whether its conflict minerals are ‘‘necessary to the functionality’’ of a product to the ‘‘basic function’’ or ‘‘economic utility’’ tests. However, we believe limiting a determination to those tests would not provide greater certainty or clarity to issuers required to make such determinations. As one commentator noted, ‘‘the distinction between a ‘basic function’ and an ancillary function is murky and undefinable.’’ 232 Similarly, as another commentator noted, ‘‘[e]conomic utility is very subjective and it can be the unforeseen consequence of a derivative buried deep within a subcomponent.’’ 233 Therefore, we believe these tests are so subjective as to be mostly unworkable. We believe it is more appropriate instead to focus on a product’s generally expected function, use, or purpose, recognizing that there are situations in which a product has multiple generally expected functions, uses, and purposes. In such situations, a conflict mineral need only be necessary for one such function, use, or purpose to be necessary to the product as a whole. For example, a smart phone has multiple generally expected functions, uses, and purposes, such as making and receiving phone calls, accessing the internet, and listening to stored music. If a conflict mineral is necessary to the function, use, or purpose of any one of these, it is necessary to the functionality of the phone. Another factor in determining whether its conflict minerals are ‘‘necessary to the functionality’’ of a product is whether the conflict mineral is incorporated for purposes of ornamentation, decoration, or embellishment. If a primary purpose of the product is mainly ornamentation or decoration, it is more likely that a conflict mineral added for purposes of ornamentation, decoration or embellishment is ‘‘necessary to the functionality’’ of the product. For example, the gold in a gold pendant 232 See 233 See letter from TIC. letter from SEMI. VerDate Mar<15>2010 21:18 Sep 11, 2012 hanging on a necklace is necessary to the functionality of the pendant because it is incorporated for purposes of ornamentation, decoration, or embellishment, and a primary purpose of the pendant is ornamentation or decoration. Conversely, if a conflict mineral is incorporated into a product for purposes of ornamentation, decoration, or embellishment, and the primary purpose of the product is not ornamentation or decoration, it is less likely to be ‘‘necessary to the functionality’’ of the product. As one commentator noted, ‘‘if, for example, gold is used in an article as an ancillary feature [of a product] strictly for purposes of ornamentation, then it is unrelated to the functionality of the product and would be exempt from the reporting requirements of the statute.’’ 234 We would agree that these facts would tend to indicate that the conflict mineral is not necessary to the functionality of the product, provided that the primary purpose of the product is not for ornamentation or decoration. Even so, this would only be one factor among all the facts and circumstances in the issuer’s overall determination as to whether the conflict mineral is necessary to the functionality of the product. iv. ‘‘Necessary to the Production’’ As with determining whether a conflict mineral is ‘‘necessary to the functionality’’ of a product, determining whether a conflict mineral is ‘‘necessary to the production’’ of a product involves consideration of an issuer’s particular facts and circumstances. As noted above, the conflict mineral must be contained in the product to trigger the determination of whether the conflict mineral is ‘‘necessary to the production’’ of the product. Consistent with this approach, we do not consider a conflict mineral used as a catalyst or in another manner in the production process of a product to be ‘‘necessary to the production’’ of the product if that conflict mineral is not contained in the product, even though, based on the facts and circumstances, the conflict mineral would have otherwise been considered ‘‘necessary to the production’’ of the product had the conflict mineral been included in the product. As one commentator noted for gold, and we believe this is applicable for the other conflict minerals as well, the ‘‘use of gold as a catalyst in producing products which do not in themselves contain gold will broaden the reach of the regulations beyond what Section 1502 234 See Jkt 226001 PO 00000 letter from NRF I. Frm 00025 Fmt 4701 Sfmt 4700 56297 envisaged.’’ 235 We do, however, consider a conflict mineral used as a catalyst or in another manner in the production process of a product to be ‘‘necessary to the production’’ of the product if that conflict mineral otherwise is necessary to the production of the product and is contained in any amount, including trace amounts, in the product.236 As we indicated in the Proposing Release, we continue to believe that a conflict mineral in a physical tool or machine used to produce a product does not fall under the ‘‘necessary to the production’’ language in the Conflict Minerals Statutory Provision.237 One commentator asserted that the language in the Conflict Minerals Statutory Provision is intended to cover conflict minerals in tools or machines that are necessary for the production of a product and, ‘‘[i]n the absence of such specificity, the rule will fail to ensure reporting on the use of such tools or catalysts, thus leaving out a significant market for the minerals and undermining the purpose of the law.’’ 238 We do not believe that a conflict mineral in a tool or machine is captured by the Conflict Minerals Statutory Provision because, although the conflict mineral may be included in the tool or machine, it is the tool or machine and not the conflict mineral that is necessary to the production.239 Additionally, the tool or machine is 235 See WGC II. note that this interpretation continues to bring catalysts within the scope of the reporting requirements when they are necessary to the production of the product. We understand that not all catalysts are washed away in the production process, and the remaining minerals may not be ‘‘necessary to the functionality’’ of the product. See letters from Industry Group Coalition I and NAM I (referring specifically to situations in which catalysts are used to chemically react with and produce products, and trace levels of the catalyst are found in the reacted manufactured product, but the catalysts do not contribute to the performance of the product). 237 However, the issuer that manufactures or contracts to manufacture the tool or machine would likely come within the ‘‘necessary to the production’’ or ‘‘necessary to functionality’’ language. 238 See letter from Niotan I. 239 As described above, we consider a conflict mineral that is ‘‘necessary to the functionality’’ of a component product also to be ‘‘necessary to the functionality’’ of any subsequent product that incorporates the component product. We recognize that this could be seen as a two-step analysis, and thus it could be asserted that the conflict mineral in the component product is not necessary to the functionality of the subsequent product. We disagree with this view, however, because a component added to a subsequent product becomes part of that subsequent product, which removes any segregation from the component and the subsequent product and makes the conflict mineral directly necessary to the functionality of the subsequent product. 236 We E:\FR\FM\12SER2.SGM 12SER2 56298 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES unlikely to be contained in the final product. Like tools and machines, indirect equipment used to produce a product, such as computers and power lines, does not bring the product that is produced with the equipment into the ‘‘necessary to the production’’ language.240 We do not consider a conflict mineral necessary to the functionality or production of such indirect equipment to be necessary to the production of the product because that conflict mineral is only tangentially necessary for production of the product. Similarly, we do not require issuers to report on the conflict minerals in materials, prototypes, and other demonstration devices containing or produced using conflict minerals that are necessary to the functionality or production of those items because we do not consider those items to be products. Once an issuer enters those items in the stream of commerce by offering them to third parties for consideration, the issuer will be required to report on any conflict minerals necessary to the functionality or production of those products. v. De Minimis Threshold Finally, after considering the comments, the final rule does not include a de minimis exception. The statute itself does not contain a de minimis exception, and for several reasons we believe it would be contrary to the Conflict Minerals Statutory Provision and Congressional purpose to include one in the final rule. First, we note that the Conflict Minerals Statutory Provision does include an express limiting factor—namely that a conflict mineral must be ‘‘necessary to the functionality or production’’ of an issuer’s product to trigger any disclosure regarding those conflict minerals.241 As discussed above, this standard focuses on whether the conflict mineral is ‘‘necessary’’ to a product’s functionality or production; it does not focus on the amount of a conflict mineral contained in the product. We believe that Congress understood, in selecting the standard it did, that a conflict mineral used in even a very small amount could be ‘‘necessary’’ to the product’s functionality or production. If it had intended that the provision be limited further, so as not to apply to a de minimis use of conflict minerals, we 240 However, the issuer that manufactures or contracts to manufacture the indirect equipment would likely come within the definition of either ‘‘necessary to the functionality’’ or ‘‘necessary to the production’’ for the indirect equipment. 241 See Exchange Act Sections 13(p)(1)(A) and 13(p)(2)(B). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 think Congress would have done so explicitly. In this regard, we note that in Section 1504 of the Act, which adds Exchange Act Section 13(q) as part of the same title (Title XV) of the Act (‘‘Miscellaneous Provisions’’), Congress did explicitly include a de minimis threshold for the requirement to disclose certain payments by resource extraction issuers.242 In addition, we believe that the purpose of the Conflict Minerals Statutory Provision would not be properly implemented if we included a de minimis exception in our final rule. As the State Department noted in its comment letter, ‘‘[i]n light of the nature’’ of the conflict minerals, they are often used in products ‘‘in very limited quantities,’’ so including a de minimis threshold ‘‘could have a significant impact on’’ the final rule.243 Consistent with the views of the State Department, we believe Congress intended the disclosure provisions to apply to the use of even small amounts of conflict minerals originating in the Covered Countries. We are cognizant of the fact that, by not including a de minimis exception, even minute or trace amounts of a conflict mineral could trigger disclosure obligations.244 However, a de minimis amount of conflict minerals triggers disclosure obligations only if those conflict minerals are necessary for the functionality or production of a product, and we understand that there are instances in which only a minute amount of conflict minerals is necessary for the functionality or production of a product. Therefore, consistent with the proposal, our final rule applies to issuers for which any conflict minerals are necessary to the functionality or production of a product manufactured or contracted by the issuer to be manufactured regardless of the amount of the conflict mineral. We recognize that not including a de minimis exception in the final rule will be more costly for issuers than if we included one. As described above, however, we are of the view that Congress intended not to provide for a de minimis exception, and including one in the final rule would therefore thwart, rather than advance, the provision’s purpose. Further, we believe focusing on whether the mineral was intentionally added addresses some of the concerns regarding de minimis amounts of minerals. For example, according to one commentator, a number of metal alloys, including the high volume materials of cold rolled steel, hot rolled steel, and stainless steel, contain tin only as a contaminant, such that it is not part of the specification of these alloys.245 Therefore, the tin in these alloys is not intentionally added, and we do not consider the tin ‘‘necessary to the functionality or production’’ of any product containing those alloys. 242 See Section 1504 of the Act and Exchange Act Section 13(q). Exchange Act Section 13(q)(1)(C) states that ‘‘the term ‘payment,’ means a payment that is made to further the commercial development of oil, natural gas, or minerals; and not de minimis.’’ 243 See State II (‘‘In light of the nature in which the covered minerals are often used in products, i.e. often in very limited quantities, such a change could have a significant impact on the proposed regulations. A de minimis threshold should not be considered under current circumstances.’’). 244 See letters from Chamber I and NRF I. 245 See letter from Claigan Environmental Inc. (Dec. 16, 2011) (‘‘Claigan III’’). 246 17 CFR 249.310. 247 17 CFR 249.220f. 248 17 CFR 249.240f. 249 In the Proposing Release, we indicated that, by requiring an issuer to provide its Conflict Minerals Report as an exhibit to its annual report, the proposed rules would enable anyone accessing the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (the ‘‘EDGAR’’ system) to determine quickly whether an issuer furnished a Conflict Minerals Report with its annual report. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 C. Location, Status, and Timing of Conflict Minerals Information Once it is determined that conflict minerals are necessary to the functionality or production of a product manufactured or contracted by the issuer to be manufactured, the issuer will have to submit conflict minerals information in accordance with the final rule. 1. Location of Conflict Minerals Information a. Proposed Rules Our proposed rules would have required issuers to provide their disclosure about conflict minerals in their annual reports on Form 10–K for a domestic issuer,246 Form 20–F for a foreign private issuer,247 and Form 40– F for a Canadian issuer that files under the Multijurisdictional Disclosure System,248 with their Conflict Minerals Reports as an exhibit to their annual report.249 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 have required this disclosure in the existing Form 10–K, Form 20–F, or Form 40–F annual report because issuers were already required to file these reports so we believed this approach would be less burdensome than requiring a separate annual report. E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 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 have required issuers to include brief conflict minerals disclosure under a separate heading entitled ‘‘Conflict Minerals Disclosure’’ and more extensive information in a separate exhibit to the annual report. We proposed to 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 Covered Countries, based on its reasonable country of origin inquiry, and, for its conflict minerals that did not originate in the Covered Countries, a brief description of the reasonable country of origin inquiry it conducted in making such a determination. The proposed rules would not have required an issuer that determined that its conflict minerals did not originate in the Covered Countries, based on its reasonable country of origin inquiry, to provide any further disclosures. We also proposed that an issuer include brief additional disclosure in the body of the annual report if the issuer’s conflict minerals originated in the Covered Countries or if the issuer could not determine that its conflict minerals did not originate in the Covered Countries, based on its reasonable country of origin inquiry. As proposed, these rules would have required an issuer to disclose that its conflict minerals originated in the Covered Countries, or that it was unable to conclude that its conflict minerals did not originate in the Covered Countries, that its Conflict Minerals Report had been furnished as an exhibit to the annual report, that the Conflict Minerals Report, including the certified independent private sector audit, was publicly available on the issuer’s Internet Web site, and the issuer’s Internet address on which the Conflict Minerals Report and audit report were located. The Conflict Minerals Statutory Provision requires that each issuer make its Conflict Minerals Report available to the public on the issuer’s Internet Web site.250 Consistent with the statute, we proposed rules to require an issuer to make such a report, including the certified audit report, available to the 250 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).’’ VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 public by posting the text of the report on its Internet Web site. As proposed, the rules would require that the text of the Conflict Minerals Report remain on the issuer’s Web site at least until it filed its subsequent annual report. Although the proposed rules would have required an issuer that furnished a Conflict Minerals Report to provide some disclosures in the body of its annual report regarding that report, we would not have required that an issuer post this disclosure on its Web site. We believed this was appropriate because any information disclosed in the body of the annual report would also be included in the Conflict Minerals Report, which would have been required to be posted on the issuer’s Internet Web site. b. Comments on the Proposed Rules We received mixed comments on the proposal. While many commentators believed that the final rule should not require an issuer’s conflict minerals information to be provided in that issuer’s annual report,251 other commentators believed that an issuer’s conflict minerals information should be provided in that issuer’s annual report, as proposed.252 Commentators that did not want the conflict minerals information included in the annual report generally agreed that the information should be provided either in a newly created report or form, or in a current report on Form 8–K 253 or Form 6–K,254 instead.255 A small number of commentators stated that an issuer’s conflict minerals information should be provided solely on its Internet Web site.256 Some commentators suggested that the final rule should allow issuers to submit their conflict minerals information on a separate form or in a current report, noting that the Conflict Minerals Statutory Provision does not require explicitly that the information be submitted in a Form 10– K, Form 20–F, or Form 40–F annual 251 See, e.g., letters from AdvaMed I, AngloGold, Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, CTIA, Davis Polk, Ford Motor Company (Mar. 2, 2011) (‘‘Ford’’), Industry Group Coalition I, ITIC I, Japanese Trade Associations, JVC et al. II, NAM I, NAM III, NCTA, NMA II, NY State Bar, Roundtable, SEMI, Taiwan Semi, and Tiffany. 252 See, e.g., letters from Earthworks, Enough Project I, Global Witness I, Methodist Pension, Peace, and TIAA–CREF. 253 17 CFR 249.308. 254 17 CFR 249.306. 255 See, e.g., letters from AdvaMed I, AngloGold, Barrick Gold, Cleary Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. II, NAM I, NMA II, NY State Bar, and Taiwan Semi. 256 See letters from Corporate Secretaries I, CTIA, NCTA, and Tiffany. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 56299 report.257 As one commentator noted, this requirement contrasts with the one in Section 1503 of the Act,258 which states that mine safety disclosure be provided in ‘‘each periodic report filed with the Commission under the securities laws.’’ 259 Therefore, these commentators reasoned that if Congress intended the Conflict Minerals Statutory Provision to require an issuer to provide the conflict minerals information in the annual report on Forms 10–K, 20–F, or 40–F, Congress would have used language similar to that in Section 1503. Certain commentators asserted that the subject matter underlying the conflict minerals information is both very specialized and substantively different from the financial and business information in the annual report on Forms 10–K, 20–F, or 40–F.260 Some of these commentators stated that the existing Exchange Act reporting system is designed to provide investors with material information from a financial perspective, whereas the Conflict Minerals Statutory Provision uses the securities disclosure laws to provide conflict mineral supply chain information for the purpose of stopping the humanitarian crisis in the Covered Countries.261 Commentators suggested that the processes with which to obtain and provide conflict minerals information should be different from those processes developed for current year-end reporting.262 Other commentators argued that the disclosures required by the final rule should be treated no differently than other disclosures required by the Exchange Act.263 In this regard, one such commentator agreed that the final rule should require that an issuer’s conflict minerals information be included in the issuer’s annual report because such a requirement is inherent in the policy goals underlying the Conflict Minerals Statutory Provision and would foster consistency in the form, location, and timing of the information.264 Similarly, another such commentator stated that not requiring 257 See, e.g., letters from AngloGold, ITIC I, JVC et al. II, and NAM I. Exchange Act Section 13(p)(1)(A) requires only that issuers ‘‘disclose annually’’ their conflict minerals information. 258 Section 1503 of the Act. 259 See letter from AngloGold. 260 See, e.g., letters from Barrick Gold, CEI I, Cleary Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. II, NAM I, NMA II, NY State Bar, PCP, Taiwan Semi, and SEMI. 261 See, e.g., letters from CEI I, NY State Bar, and Taiwan Semi. 262 See letters from Davis Polk and NAM I. 263 See letters from CRS I, Global Witness I, Methodist Pension, Sen. Durbin/Rep. McDermott, and SIF I. 264 See letter from Global Witness I. E:\FR\FM\12SER2.SGM 12SER2 56300 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations conflict minerals information in the annual report on Forms 10–K, 20–F, or 40–F would inhibit the public’s ability to monitor an issuer’s use of conflict minerals and allow issuers to hide their conflict minerals information.265 In this regard, a number of commentators believed that there is little or no difference in the purposes of the Conflict Minerals Statutory Provision and the rest of the Exchange Act, in that both require the disclosure of meaningful supply chain and reputational information about an issuer for the benefit of investors.266 For example, the co-sponsors of the legislation stated explicitly that the purposes of the Conflict Minerals Statutory Provision and the rest of the Exchange Act are ‘‘very much the same’’ because they both ‘‘‘assure a stream of current information about an issuer for the benefit of purchasers * * * and for the public.’’’ 267 As another example, a commentator asserted that ‘‘conflict minerals disclosures are material to investors and will inform and improve an investor’s ability to assess social (i.e., human rights) and reputational risks in an issuer’s supply chain.’’ 268 Some commentators were concerned about providing conflict minerals information in the annual report on Forms 10–K, 20–F, or 40–F due to the timing of filing an annual report.269 These commentators noted that the increased burden on issuers in collecting and reporting conflict minerals information could cause those issuers to be unable to file their annual reports in a timely manner. Some commentators offered an alternative scheme in which an issuer would be permitted to provide its conflict mineral information on either a new report or form, an amended annual report, or a current report on Form 8–K or Form 6– K within a certain number of days following the end of the issuer’s fiscal year.270 A few of these commentators 271 pointed out that the Commission permits delays in providing certain information on an annual report, such as with prospective incorporation by reference of information from an issuer’s proxy statement under General 265 See letter from Peace. e.g., letters from CRS I, FRS, Global Witness I, Methodist Pension, Sen. Durbin/Rep. McDermott, Sen. Leahy et al., SIF I, and SIF II. 267 See letter from Sen. Durbin/Rep. McDermott. 268 See letter from SIF I. 269 See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA, Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI. 270 See letters from AngloGold, Cleary Gottlieb, CTIA, IPC I, ITIC I, JVC et al. II, NAM I, NY State Bar, Roundtable, and SEMI. 271 See letters from Cleary Gottlieb and NY State Bar. sroberts on DSK5SPTVN1PROD with RULES 266 See, VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Instruction G.(3) of Form 10–K 272 and prospective incorporation by reference of separate financial statements of unconsolidated entities under Item 3–09 of Regulation S–X.273 Commentators proposed a variety of time periods, including 120, 150, and 180 days after an issuer’s fiscal year-end, in which an issuer could be required to provide its conflict minerals information as part of its annual report.274 Similarly, as discussed in greater detail below, some commentators suggested that the final rule should consider a single start and end date for the reporting period for all companies, regardless of their particular fiscal year,275 and one of these commentators recommended that this one year period coincide with the calendar year.276 Additionally, some commentators were concerned about the liability of the principal executive offers, principal financial officers, and auditors who must certify an annual report under Sections 302 277 and 906 278 of the Sarbanes-Oxley Act if the rule requires that an issuer provide its conflict minerals information in its filed annual report.279 In this regard, one commentator stated that, if the final rule requires an issuer to provide conflict minerals information in its annual report, the Commission should amend rules 13a–14(a) and (b) 280 and 15d– 14(a) and (b) 281 under the Exchange Act 272 General Instruction G.(3) of Form 10–K [17 CFR 249.310]. 273 Item 3–09 of Regulation S–X [17 CFR 210.3– 09]. 274 See letters from AngloGold, CTIA, ITIC I, NAM I, Roundtable, and SEMI. 275 See letters from Advanced Micro Devices, Inc., Africa Faith and Justice Network, Boston Common Asset Management, LLC, Calvert Asset Management Co., Inc., Congo Global Action, Enough Project, Falling Whistles, Free the Slaves, Future 500, General Electric Company, Global Witness, HewlettPackard Company, Interfaith Center on Corporate Responsibility, Jantzi-Sustainalytics, Jesuit Conference, Jewish World Watch, Mercy Investment Services, Inc., Microsoft Corporation, Royal Philips Electronics, Trillium Asset Management, Unity Minerals, US SIF: The Forum for Sustainable and Responsible Investment (Aug. 22, 2011) (‘‘MSG II’’) and State II. 276 See letter from MSG II (‘‘We respectfully request that the SEC rule synchronize the timing for the information contained in the Conflict Minerals Reports from all issuers on a calendar year basis. The MSG recommends that all issuers begin exercising and reporting due diligence on the source and chain of custody for the subject minerals used in their products on a common calendar date.’’). 277 Public Law 107–204, 116 Stat. 745, Sec. 302 (2002). 278 Public Law 107–204, 116 Stat. 745, Sec. 906 (2002). 279 See, e.g., letters from ITIC I, NMA II, and Taiwan Semi. 280 Rule 13a–14(a) [17 CFR 240.13a–14(a)] and Rule 13a–14(b) [17 CFR 240.13a–14(b)]. 281 Rule 15d–14(a) [17 CFR 240.15d–14(a)] and Rule 15d–14(b) [17 CFR 240.15d–14(b)]. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 to acknowledge that the various officer certifications required by those rules do not extend to any conflict minerals information provided either in or as an exhibit to the annual report.282 Another commentator stated that, if we required conflict minerals disclosure in the existing annual reports, we should include ‘‘a clear statement in the rules or the adopting release that the officer certifications required to be included as exhibits to the existing annual reports would not apply to the conflict minerals disclosure.’’ 283 Also, some commentators were concerned about the negative effects that providing the information in the annual report on Forms 10–K, 20–F, or 40–F would have on form or other eligibility, incorporation by reference into Securities Act filings, and home country reporting in the case of foreign private issuers.284 Some commentators indicated that, regardless of where the information was provided, they wanted the conflict minerals information in a location that was easily available to the public,285 or on the Web sites of both the issuer and the Commission.286 In this regard, certain commentators recommended that the final rule require an issuer to post its Conflict Minerals Reports and/ or its audit reports on its Internet Web site, as we proposed.287 However, some of these commentators suggested that the final rule should require an issuer to keep that information on its Internet Web site longer than until the issuer filed its subsequent annual report.288 Other commentators noted that the final rule should not require an issuer to post its audit report online 289 because, as one of the commentators noted,290 such 282 See letter from NY State Bar. letter from Cleary Gottlieb. 284 See, e.g., letters from Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, Davis Polk, ITIC I, NMA II, NY State Bar, and WGC II. But see letter from Global Witness I (stating that conflict minerals information should be incorporated by reference into Securities Act filings). 285 See, e.g., letters from Episcopal Conference of Catholic Bishops of the DRC (Apr. 5, 2011) (‘‘CENCO I’’) and Good Shepherd. 286 See, e.g., letter from Catholic Charities. 287 See letters from CRS I, Douglas Hileman Consulting LLC (Oct. 31, 2011) (‘‘Hileman Consulting’’), Howland, NEI, SEMI, SIF I, and TriQuint I. 288 See letters from Hileman Consulting (suggesting ‘‘more than the proposed one year’’), NEI (suggesting ‘‘issuers to post several years worth of reports on their Web sites’’), SIF I (suggesting that an ‘‘issuer should be required to keep posted its Conflict Minerals Report and audit reports on its Internet Web site for five years’’), and TriQuint I (suggesting that an issuer’s Conflict Minerals Reports should be posted on its Web site ‘‘for 10 years after the issuer’s products were last sold on the open market’’). 289 See letters from AngloGold and NMA II. 290 See letter from AngloGold. 283 See E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations a requirement would increase costs without increasing benefits. Finally, some commentators suggested that the final rule should address how an issuer must handle a situation in which it acquires or otherwise obtains control over a company that manufactures or contracts to manufacture products with conflict minerals necessary to the functionality or production of products that previously had not been obligated to provide conflict minerals information to us.291 These commentators noted that the acquired company may not have any processes in place to determine the origin of conflict minerals in its products and, therefore, the acquiring issuer would most likely need a ‘‘reasonable amount of time’’ 292 to establish those processes before it could provide an accurate specialized disclosure report that included the acquired company’s supply chain. Some commentators recommended that the issuer not be required to report on the products manufactured by the acquired company until the end of the first reporting period that begins no sooner than eight months after the effective date of the acquisition.293 One commentator suggested that the issuer not be required to report on the products manufactured by the acquired company until the end of the first reporting period that begins no sooner than 18 months from the date of the acquisition.294 Another commentator recommended that the issuer not be obligated to report with respect to the products manufactured by or for the acquired entity ‘‘until the first fiscal year beginning after the fiscal year in which the acquisition is consummated.’’295 sroberts on DSK5SPTVN1PROD with RULES c. Final Rule After considering the comments, we are revising the proposed rules to require that an issuer provide its conflict minerals information in a new report on a new Exchange Act form. As 291 See, e.g., letters from ABA, Industry Group Coalition I, Industry Group Coalition II, NAM I, and Semiconductor. 292 Letter from Semiconductor. 293 See letters from Industry Group Coalition I (suggesting an eight month lead-in period because it is similar to the time that will elapse between the adoption of final rules implementing the Act and the commencement of the reporting period applicable to calendar-year filers, and that time period is necessary to allow sufficient time for the acquiring issuer to implement its conflict minerals reasonable inquiry and due diligence processes throughout the supply chain of the acquired firm), NAM I (same), and Semiconductor (same). 294 See letter from Industry Group Coalition II. See also letters from Industry Group Coalition I, NAM I, and Semiconductor. 295 See letter from ABA. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 proposed, however, the final rule requires an issuer to provide its Conflict Minerals Report as an exhibit, and not in the body of the new report. In this regard, we continue to believe that providing the Conflict Minerals Report as an exhibit to the specialized disclosure report will enable anyone accessing the EDGAR system to determine quickly whether an issuer provided a Conflict Minerals Report with its specialized disclosure report. We proposed requiring disclosure regarding conflict minerals in an issuer’s annual report because we believed that this approach would be less burdensome than requiring that an issuer provide a separate report. Based on the comments we received, however, it appears that issuers will find it less burdensome to provide their conflict minerals information on a new report that is separate from the annual report and due later than the annual report. For example, one commentator explained that ‘‘between an issuer’s fiscal year end and the date the issuer is required to file its audited annual financial statements, the issuer’s accounting and financial reporting teams focus their resources on preparing the issuer’s annual report,’’ so ‘‘[r]equiring the conflict minerals disclosure to be furnished at the same time as the issuer’s Exchange Act annual report would put further strain on these resources at a time when they are likely already to be operating near full capacity.’’ 296 Another commentator noted that issuers are going to be required to utilize ‘‘significantly different processes to comply with the new reporting requirement that are outside the scope of processes developed for regular year-end reporting, and it may be a burden to complete the necessary inquiry and due diligence pertaining to conflict minerals on the same timetable as’’ an annual report.297 We considered commentators’ arguments that it would be easier for investors to locate the information in Forms 10–K, 20–F, and 40–F. We believe, however, that new Form SD should provide ready access to the information. Indeed, it may be easier for investors to find the information when it is included in the new Form SD, rather than as one of potentially dozens of exhibits in a voluminous Form 10–K, Form 20–F, or Form 40–K.298 Therefore, 296 Letter from AngloGold. from NAM I. 298 Under the proposed rules, an issuer would have been required to furnish its conflict minerals information in its annual report on Form 10–K, Form 20–F or Form 40–F. As such, investment companies that are registered under the Investment 297 Letter PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 56301 the final rule requires an issuer with conflict minerals necessary to the functionality or production of a product it manufactures or contracts to be manufactured to provide us a specialized disclosure report on Form SD by May 31 of each year, reporting on the preceding calendar year. The specialized disclosure report is due later than when an annual report is due for calendar year end issuers so as not to interfere with such issuer’s preparation of its Exchange Act annual report, as requested by a number of commentators.299 Also, as discussed in greater detail below, the final rule requires each issuer to provide its conflict minerals information for each calendar year, rather than its fiscal year. We agree with the comments we received that a reasonable amount of additional time to submit the conflict minerals information is appropriate where an issuer acquires or otherwise obtains control over a company that manufactures or contracts to manufacture products with conflict minerals necessary to the functionality or production of those products that previously had not been obligated to provide conflict minerals information to us. We have added an instruction to the final rule to reflect this delay. Therefore, the final rule allows an issuer to delay the initial reporting period on the products manufactured by the acquired company until the first calendar year beginning no sooner than eight months after the effective date of the acquisition. This option appears to be a reasonable approach based on some of the comments we received.300 We note that a shorter period, such as requiring an issuer to report with respect to the products manufactured by or for the acquired entity during the first fiscal year beginning after the fiscal year in which the acquisition is consummated, may leave an issuer that acquires a company late in the year with an insufficient amount of time to establish Company Act of 1940 [15 U.S.C. 80a et seq.] (‘‘registered investment companies’’) would not have been subject to the disclosure requirement because those companies are not required to file Form 10–K, Form 20–F or Form 40–F. Our decision to require this disclosure in a new form is not intended to change the scope of companies subject to the disclosure requirement. Therefore, consistent with the proposal, registered investment companies that are required to file reports on Form N–CSR or Form N–SAR pursuant to Rule 30d–1 under the Investment Company Act (17 CFR 270.30d–1) will not be subject to the final rule. 299 See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA, Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI. 300 See, e.g., letters from Industry Group Coalition I, Industry Group Coalition II, NAM I, and Semiconductor. E:\FR\FM\12SER2.SGM 12SER2 56302 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations systems to gather and report on the conflict minerals information. Additionally, we are modifying the proposed rules regarding how long an issuer must keep its conflict minerals disclosure or its Conflict Minerals Report available on the issuer’s Internet Web site to reflect that the information is not to be included in an issuer’s annual report on Form 10–K, Form 20– F, or Form 40–K. The proposed rules would have required an issuer to keep its conflict minerals information on its Internet Web site until its subsequent annual report was filed. We intended this period to last only one year because, whether or not the issuer had any conflict minerals information to provide in its subsequent annual report, the issuer had to file the subsequent annual report one year after its prior annual report or cease to be a reporting issuer. However, with the final rule requiring an issuer to provide its conflict minerals information in a specialized disclosure report on Form SD, the period between specialized disclosure reports may be more than one year if an issuer has no reportable conflict minerals in its subsequent calendar year. If we did not modify the proposed rules, such an issuer may have been required to keep its conflict minerals information on its Internet Web site for more than one year, possibly indefinitely. Therefore, the final rule specifies that an issuer must make its conflict minerals disclosure or its Conflict Minerals Report available on the issuer’s Internet Web site for one year. In response to concerns expressed by commentators that the information should be required to be mandated longer, we note that the issuer’s Form SD with the Conflict Minerals Report will be available on EDGAR indefinitely, so the information will continue to be widely available. In another release we are issuing today, we are requiring issuers to disclose certain resource extraction payment information on Form SD.301 Because of the order of the releases, we are adopting the form in this release and amending it in the resource extraction release. We intend, however, for the form to be used equally for these two separate disclosure requirements. sroberts on DSK5SPTVN1PROD with RULES 2. ‘‘Filing’’ of Conflict Minerals Information a. Proposed Rules The proposed rules would have required an issuer’s conflict minerals information to be provided in the issuer’s annual report on Form 10–K, 21:18 Sep 11, 2012 Jkt 226001 b. Comments on the Proposed Rules A number of commentators stated specifically that the final rule should, as proposed, require an issuer to ‘‘furnish’’ rather than ‘‘file’’ its conflict minerals information.305 Many of these commentators believed that the nature and purpose of the conflict minerals disclosure is qualitatively different from the other disclosure required under Exchange Act Section 13 and the conflict minerals information is not 302 15 U.S.C. 78r. Exchange Act Section 13(p)(1)(C). 304 15 U.S.C. 78m(a) and 15 U.S.C. 78o(d). 305 See, e.g., letters from AngloGold, Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, Deloitte & Touche LLP (Mar. 2, 2011) (‘‘Deloitte’’), Ford, ITIC I, JVC et al. II, NAM III, NMA II, NY State Bar, Taiwan Semi, and WGC II. 303 See 301 Disclosure of Payments by Resource Extraction Issuers, Release No. 34–67717 (Aug. 22, 2012). VerDate Mar<15>2010 Form 20–F, or Form 40–F, as applicable, and the Conflict Minerals Report to be included as an exhibit to the issuer’s annual report. Certain proposed item requirements would have instructed an issuer to furnish its Conflict Minerals Report as an exhibit to its annual report. Additionally, as proposed, an issuer’s Conflict Minerals Report, which would have included the independent private sector audit report, would not be ‘‘filed’’ for purposes of Section 18 of the Exchange Act and thus would not be subject to potential liability of that section of the Exchange Act, unless the issuer stated explicitly that the Conflict Minerals Report and the independent private sector audit report were filed under the Exchange Act. Instead, these documents would only have been furnished to the Commission. Similarly, as proposed, the rules would not have considered the Conflict Minerals Report and the independent private sector audit report to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the issuer specifically incorporated them by reference into the documents. As noted above and in the Proposing Release, furnishing the Conflict Minerals Report would not have subjected the issuer to Section 18 liability,302 but the issuer would still have had liability for its conflict minerals information. Under Exchange Act Section 13(p)(1)(C), a failure to comply with the Conflict Minerals Statutory Provision would have rendered the issuer’s due diligence process ‘‘unreliable,’’ and, therefore, the Conflict Minerals Report would ‘‘not satisfy’’ the proposed rules.303 In this regard, as proposed, an issuer that failed to comply with the proposed rules would have been subject to liability for violations of Exchange Act Sections 13(a) or 15(d), as applicable.304 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 material to investors.306 As one commentator explained, ‘‘[n]othing in the statute itself suggests that the ‘reasonable’ investor would find this information to be important in deciding whether to buy or sell’’ an issuer’s securities, which is ‘‘the touchstone of materiality under the federal securities laws.’’ 307 However, this commentator acknowledged that ‘‘socially conscious investors might well factor this information into an investment decision.’’ 308 Some commentators asserted that the conflict minerals information is different from other information in required filings, so the conflict minerals information should be ‘‘furnished.’’ 309 Other commentators noted that, if the conflict minerals information is material to a reasonable person’s investment decision, it would have to be disclosed in an issuer’s filings even without the Conflict Minerals Statutory Provision, so any other information regarding conflict minerals should be ‘‘furnished.’’ 310 Another commentator recommended that the conflict minerals information should be ‘‘furnished’’ because, whereas the data used to generate the financial statements in issuers’ ‘‘filed’’ periodic reports are generally within their control and subject to internal controls, issuers would be required to rely on third parties (suppliers, smelters, etc.) for their conflict minerals data that are mostly beyond the issuer’s control.311 Some commentators argued that the conflict minerals information should be ‘‘furnished’’ so that Exchange Act Section 18 liability would not attach to the conflict minerals information.312 One of these commentators asserted that Section 18 liability should not be available because there is no indication that Congress intended for an issuer’s conflict minerals information to be subject to such liability.313 In this regard, some commentators contended that, if ‘‘furnished,’’ issuers’ conflict minerals information would still receive significant attention and scrutiny, and the issuers’ disclosures regarding this information will still be subject to liability sufficient enough to deter 306 See, e.g., letters from AngloGold, Barrick Gold, Cleary Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and Taiwan Semi. 307 See letter from JVC et al. II. 308 See id. 309 See, e.g., letters from AngloGold, Barrick Gold, Cleary Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and Taiwan Semi. 310 See letter from AngloGold and NMA II. 311 See letter from Ford. 312 See letters from Barrick Gold, Cleary Gottlieb, NMA II, Society of Corporate Secretaries and Governance Professionals (Aug. 16, 2011) (‘‘Corporate Secretaries III’’), and WGC II. 313 See letter from the WGC II. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES abuse.314 The commentators pointed out that issuers would still be liable for any materially false or misleading statements under the antifraud provisions of the federal securities laws, including, Section 10(b) of the Exchange Act and Rule 10b–5 there under.315 They indicated further that failure to comply with the Conflict Minerals Statutory Provision would render the issuer’s due diligence ‘‘unreliable’’ and, therefore, the Conflict Minerals Report would not satisfy the final rule, which would subject the issuer to liability for violations of Exchange Act Sections 13(a) or 15(d), as applicable.316 Conversely, other commentators indicated that the final rule should require an issuer to ‘‘file’’ its conflict minerals information.317 Two of the cosponsors of the statutory provision noted that Congress intended for an issuer’s conflict minerals information, particularly the Conflict Minerals Report, to be ‘‘filed’’ rather than ‘‘furnished’’ so that the information would be subject to the liability provisions in Section 18 of the Exchange Act and, thereby, allow for private sector remedies for false and misleading statements.318 These cosponsors asserted that, in the Proposing Release, we incorrectly reasoned that the Conflict Minerals Statutory Provision’s requirement that an issuer ‘‘submit’’ its Conflict Minerals Report means that Congress intended that the information be ‘‘furnished’’ instead of ‘‘filed.’’ They noted that the term ‘‘furnish’’ is included throughout the Act 41 times, but that term is ‘‘expressly not used in Section 1502,’’ which demonstrates that ‘‘Congress intended for the word ‘submit’ to be synonymous with ‘filed,’ not ‘furnished.’’’ 319 Similarly, another comment letter written by other members of Congress also emphasized that it was Congress’s legislative intent to the Conflict Minerals Report be ‘‘filed’’ not ‘‘furnished.’’ 320 The letter stated that it was made clear ‘‘during the legislative process, meetings with the SEC, and in written comments to the Commission that Section 1502 was designed as a transparency measure to provide 314 See letters from Barrick Gold, Ford, and JVC et al. II. 315 See letters from Barrick Gold and JVC et al. II. 316 See letters from Ford and JVC et al. II. 317 See, e.g., letters from Bario-Neal, Brilliant Earth, Columban Center et al., Earthworks, Enough Project I, Global Witness I, Hacker Jewelers, Hoover & Strong, Metalsmiths, Sen. Durbin/Rep. McDermott, SIF II, TakeBack, TIAA–CREF, and World Vision US and World Vision DRC (Feb. 21, 2012) (‘‘World Vision II’’). 318 See letter from Sen. Durbin/Rep. McDermott. 319 See id. 320 See letter from Sen. Leahy et al. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 investors and the public the information needed to make informed choices.’’ 321 Therefore, according to the letter, ‘‘[p]rotecting investor interests by making companies liable for fraudulent or false reporting of conflict minerals is critical—so the reports must be ‘filed,’ not ‘furnished.’’’ 322 Further commentators asserted that a plain reading of the Conflict Minerals Statutory Provision demonstrates that Congress intended that the term ‘‘submit’’ to mean ‘‘file.’’ 323 The commentators argued that ‘‘submit’’ means ‘‘file’’ in the provision because new Exchange Act Section 13(p)(2)(A) states that conflict minerals disclosure is required if conflict minerals are necessary to the functionality or production of a product manufactured by a person described and the person described is required to ‘‘file’’ reports with us pursuant to the Conflict Minerals Statutory Provision. Also, one of the commentators noted that the term ‘‘furnish’’ is not in the text of the provision.324 Additionally, some commentators asserted that requiring the conflict minerals information be ‘‘filed’’ would benefit investors by making an issuer’s conflict minerals information more transparent, accessible, accurate, and complete. In this regard, one of these commentators suggested that requiring the conflict minerals information to be ‘‘filed’’ would allow for private rights of action, which would permit investors to seek remedies for material misstatements regarding conflict minerals disclosures, and provide an incentive for issuers and others to conduct an appropriate due diligence.325 Another commentator noted that requiring issuers to ‘‘file’’ their conflict minerals information ‘‘promotes greater transparency, makes Section 1502 more effective,’’ and helps ‘‘facilitate access to this information.’’326 In a further comment letter, a group of investors indicated that requiring issuers to ‘‘file’’ their conflict minerals information would ‘‘allow investors greater assurance that conflict minerals disclosure is as comprehensive, transparent and accurate as possible.’’327 Finally, some commentators argued that the conflict minerals information is material and, therefore, should be 321 Id. 322 Id. 323 See letters from Global Witness I and Enough Project I. 324 See letter from Global Witness I. 325 See id. 326 See letter from Enough Project I. 327 See letter from SIF II. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 56303 ‘‘filed.’’ 328 A group of investors in one comment letter noted that the conflict minerals information is material to an investor in evaluating its investment decision, so the information should be ‘‘filed.’’ 329 Specifically, the letter stated that ‘‘[g]iven the materiality of the data in evaluating a company’s risk, we urge the Commission to require all information outlined in the proposed rule to be filed in the body of the annual report rather than furnished as an exhibit.’’ 330 Also, in another comment letter, an institutional investor indicated that the conflict minerals information is material to an investment decision and, therefore, ‘‘as material information[,] this report should be filed, not furnished as proposed by the Commission.’’ 331 Moreover, one commentator argued that allowing the conflict minerals information to be ‘‘furnished’’ instead of ‘‘filed’’ would ‘‘send a regrettable signal that the Commission believes these disclosures to be of lesser importance at the very moment that issuers, regulators, investors, and governments around the world are looking to the Commission to help establish the way forward,’’ which would ‘‘scale back the vigor of issuer compliance and undermine the entire purpose of the statute’’ and ‘‘undermine the goals of ending the resource-related violence in the DRC and providing meaningful and reliable disclosures to the American consumer and investor.’’ 332 c. Final Rule Although the proposal would have required the conflict minerals information to be ‘‘furnished,’’ after considering the comments, the final rule we are adopting requires issuers with necessary conflict minerals to ‘‘file’’ the conflict minerals information provided in their specialized disclosure reports, including any Conflict Minerals Reports and independent private sector audit reports.333 As discussed above, commentators disagreed as to whether the required information should be ‘‘furnished’’ or ‘‘filed,’’ 334 and in our 328 See letters from Global Witness I, SIF II, and TIAA–CREFF. 329 See letter from SIF II. 330 Id. 331 See letter from TIAA–CREF. 332 See letter from Global Witness I. 333 15 U.S.C. 78r. 334 Compare letters from AngloGold, Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM III, NMA II, NY State Bar, Taiwan Semi, and WGC II (supporting a requirement to ‘‘furnish’’ the disclose), with letters from Bario-Neal, Brilliant Earth, Columban Center et al., Earthworks, Enough Project I, Global Witness I, Hacker Jewelers, Hoover E:\FR\FM\12SER2.SGM Continued 12SER2 56304 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES view the Conflict Minerals Provision is ambiguous on this question. In reaching our conclusion that the information should be ‘‘filed’’ instead of ‘‘furnished,’’ we note particularly that although Section 13(p)(1)(a) states that a Conflict Minerals Report should be ‘‘submitted’’ to the Commission, the definition of a ‘‘person described,’’ who is required to submit a report, uses the term ‘‘file.’’ This reference in the statute indicates that the reports should be filed. Additionally, commentators asserted that allowing the information to be ‘‘furnished’’ would diminish the importance of the information,335 and that requiring the information to be ‘‘filed’’ would enhance the quality of the disclosures.336 Some commentators argued that the conflict minerals information should not be treated as of lesser importance than other required disclosures,337 and another commentator indicated specifically that the conflict minerals information is qualitatively similar to disclosures that are required to be ‘‘filed.’’ 338 Other commentators supporting the proposal that the disclosure be ‘‘furnished’’ argued that the information is not material to investors,339 while some argued that it was.340 Given the disagreement, and that materiality is a fact-specific inquiry, we are not persuaded that this is a reason to provide that the information should be ‘‘furnished.’’ Additionally, we appreciate the comments that the conflict minerals information should be ‘‘furnished’’ because issuers should not be held liable for the information when they are required to rely on third parties for their conflict minerals data and direct knowledge of relevant facts may not be available to them.341 We note, however, that section 18 does not create strict liability for filed information. Rather, it states that a person shall not be liable for misleading statements in a filed document if it can establish that it acted in good faith and had no & Strong, Metalsmiths, Sen. Durbin/Rep. McDermott, SIF II, TakeBack, TIAA–CREF, and World Vision II (supporting a requirement to ‘‘file’’ the disclosure). 335 See letter from Global Witness I. 336 See letters from Enough Project I and SIF II. 337 See letter from Global Witness I. 338 See Sen. Durbin/Rep. McDermott. 339 See letters from AngloGold, Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM III, NMA II, NY State Bar, Taiwan Semi, and WGC II. 340 See letters from Sen. Leahy et al., SIF I, SIF II, and TIAA–CREF. 341 See letter from Ford. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 knowledge that the statement was false or misleading.342 Moreover, as discussed below, the final rule will include a transition period in which issuers that are required to perform due diligence and are unable to determine that their conflict minerals did not originate in the Covered Countries or unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups in the Covered Countries may describe their products with such conflict minerals as ‘‘DRC conflict undeterminable.’’ We believe this period will allow issuers sufficient time to obtain more data on, and control over, their supply chain through revised contracts with suppliers and smelter verification confirmations, thereby mitigating this liability concern.343 3. Uniform Reporting Period a. Proposed Rules The Conflict Minerals Statutory Provision requires, and we proposed to require, that issuers provide their initial conflict minerals disclosure and, if necessary, their initial Conflict Minerals Report after their first full fiscal year following the adoption of our final 342 Exchange Act Section 18(a) provides: ‘‘Any person who shall make or cause to be made any statement in any application, report, or document filed pursuant to this title or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 15 of this title, 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 was false or misleading. A person seeking to enforce such liability may sue at law or in equity in any court of competent jurisdiction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit, and assess reasonable costs, including reasonable attorneys’ fees, against either party litigant.’’ A plaintiff asserting a claim under Section 18 would need to meet the elements of the statute to establish a claim, including reliance and damages. In addition, we note that issuers that fail to comply with the final rule could also be violating Exchange Act Sections 13(a) and (p) and 15(d), as applicable. Issuers would also be subject to potential liability under Exchange Act Section 10(b) [15 U.S.C. 78j] and Rule 10b–5 [17 CFR 240.10b–5], promulgated thereunder, for any false or misleading material statements in the information disclosed pursuant to the rule. 343 As discussed above, requiring the disclosure in a new form, rather than in issuers’ Exchange Act annual reports, should alleviate some commentators’ concerns about the disclosure being subject to the officer certifications required by Rules 13a–14 and 15d–14 under the Exchange Act. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 rule.344 The report would be required to cover that first full fiscal year. b. Comments on the Proposed Rules We included a request for comment asking whether our rules should allow individual issuers to establish their own criteria for determining which reporting period to cover in any required conflict minerals disclosure or Conflict Minerals Report, provided that the issuers are consistent and clear with their criteria from year-to-year. Some commentators agreed that the final rule should allow individual issuers flexibility in choosing the appropriate criteria for determining the reporting period in which conflict minerals disclosures are made, provided that the issuer’s methodology is clear.345 Other commentators, however, asserted that the final rule should require that the conflict minerals reporting period correspond to the issuer’s fiscal year in its annual report.346 We did not request comment specifically on whether an issuer’s conflict minerals reporting period should correspond to an issuer’s fiscal year. Even so, some commentators indicated that an issuer’s annual reporting period for conflict minerals disclosure should not be based on its fiscal year but, instead, should be based on a one-year period that is the same for all issuers.347 One of these commentators recognized that ‘‘synchronizing the timing for the information* * *from all issuers on a calendar year basis* * *would offer integrity and consistency throughout the various supply chains’’ and because ‘‘component manufacturers and others through the supply chain provide products for many customers who have different fiscal years, it would be more efficient and more accurate if the whole supply chain worked towards a common deadline.’’ 348 Another commentator noted that a uniform calendar year reporting period ‘‘would clarify the reporting obligations, level the playing field among the various companies, and provide a clearer date of implementation for due diligence and related initiatives in the region.’’ 349 A further commentator asserted that a ‘‘single reporting date will allow for 344 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’’). 345 See letters from Howland, IPC I, and NMA II. 346 See letters from AngloGold and TIC. 347 See letters from IPC II; Matheson II; MSG II; Multi-Stakeholder Group comprised of 29 issuers, non-governmental organizations, and investors (Nov. 10, 2011) (‘‘MSG III’’); and State II. 348 Letter from MSG II. See also letter from MSG III. 349 Letter from State II. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations increased efficiency and thus lower costs, without reducing the effectiveness of the regulations.’’ 350 c. Final Rule After considering the comments, the final rule will require each issuer to provide its conflict minerals information on a calendar year basis regardless of any particular issuer’s fiscal year end.351 The final rule requires an issuer to provide its annual conflict minerals information in its specialized disclosure report on Form SD for every calendar year from January 1 to December 31 and the specialized disclosure report will be due to the Commission on May 31 of the following year. In this regard, the first reporting period for all issuers will be from January 1, 2013 to December 31, 2013, and the first specialized disclosure report must be filed on or before May 31, 2014. We agree with the commentators that explained that burdens on participants in the supply chain could be reduced if our final rule adopted a uniform reporting period. This requirement allows component suppliers that are part of a manufacturer’s supply chain to provide reports to their upstream purchasers regarding the conflict minerals in their components only once a year. Otherwise, if the due date of the Conflict Minerals Report was tied to an issuer’s fiscal year end, as proposed, component suppliers could have to provide reports regarding the conflict minerals in their components on a continuous basis throughout the year because their customers may have different fiscal year ends. If a component supplier has numerous purchasers, it might have to provide separate reports regarding the conflict minerals in its components every month, or even more often, which could be very burdensome and costly.352 Additionally, requiring a uniform May 31 due date for the specialized disclosure report responds to concerns raised by certain industry commentators that there would not be sufficient time in the period between the end of an 350 Letter from IPC II. are aware that Exchange Act Section 13(p)(1)(A) requires that we promulgate regulations requiring any ‘‘person described’’ to disclose annually its conflict minerals information, ‘‘beginning with the person’s first full fiscal year that begins after the date of promulgation of such regulations.’’ The Conflict Minerals Statutory Provision does not tie any required conflict minerals information to an issuer’s annual report or its audited financial statements. Therefore, although the provision requires an issuer to begin reporting after an issuer’s full fiscal year has cycled through, there is no requirement for the final rule’s reporting period to correspond to an issuer’s fiscal year. 352 See letter from MSG II. sroberts on DSK5SPTVN1PROD with RULES 351 We VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 issuer’s fiscal year until its annual report is due to gather, report on, and have audited their conflict minerals information, as discussed above.353 The specialized disclosure report will be due later than an Exchange Act annual report is due for calendar year end issuers so as not to interfere with an issuer’s preparation of its Exchange Act annual report, as requested by commentators. Also, the final rule will require each issuer to provide its conflict minerals information for each calendar year, rather than its fiscal year. The May 31 due date is approximately 150 days after the calendar year end, which is consistent with a commentator’s suggested due date for an issuer to provide us with its conflict minerals information.354 4. Time Period for Providing Conflict Minerals Information a. Proposed Rules The Conflict Minerals Statutory Provision requires issuers to provide the specified disclosure with respect to necessary conflict minerals ‘‘in the year for which such reporting is required.’’ 355 We proposed that the date an issuer takes possession of a conflict mineral would determine which reporting year that issuer would have to provide its required conflict minerals information. Also, if an issuer contracted the manufacturing of a product in which a conflict mineral is necessary to the production of that product, but the conflict mineral would not be included in the product, the issuer would, under the proposal, have used the date it takes possession of the product to determine which reporting year the issuer would have to provide the required conflict minerals information. b. Comments on the Proposed Rules Some commentators suggested that, as proposed, an issuer should be required to provide its conflict minerals information in the reporting period during which the issuer took possession of its conflict minerals.356 Other commentators recommended, however, that the final rule should use some other determining factor.357 Some 353 See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA, Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI. 354 See letter from AngloGold (suggesting that an issuer be required to provide its conflict minerals information on a Form 8–K or Form 6–K ‘‘within 150 calendar days after the issuer’s fiscal yearend’’). 355 Exchange Act Section 13(p)(1)(A). 356 See, e.g., letters from Cleary Gottlieb, ITIC I, and WGC II. 357 See, e.g., letters from AngloGold, NAM I, RJC, and TIC. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 56305 commentators did not provide alternative factors to consider in determining for which annual reporting period an issuer must report its conflict minerals information, but stated only that an issuer should be allowed the flexibility to establish its own criteria for determining when an issuer would be required to provide information on the conflict minerals it obtained.358 Other commentators provided alternative factors, such as the year in which the mineral is purchased, the year the issuer takes possession and ownership of the mineral, the year the mineral is processed, or the year the product containing conflict minerals is produced or placed on the market.359 c. Final Rule After considering the comments, the final rule is revised from the proposal such that possession is not the determining factor for deciding for which reporting year an issuer has to provide its required conflict minerals information. We are making this revision because we agree, as one commentator noted, that the ‘‘statutory requirement to report is triggered not by acquisition or possession of conflict minerals.’’ 360 Instead, the final rule provides that an issuer must provide its required conflict minerals information for the calendar year in which the manufacture of a product that contains any conflict minerals is completed, irrespective of whether the issuer manufactures the product or contracts to have the product manufactured.361 We believe this approach is appropriate because it should be relatively easy for an issuer to identify when the manufacture of a product is completed, as the issuer has a certain amount of control over this decision. Thus, this approach also allows issuers some flexibility in determining the reporting period. For example, if an issuer completes the manufacture of a product with conflict minerals necessary to the functionality or production of that product on December 30, 2018, the issuer must provide a specialized disclosure report regarding the conflict minerals in that product for the 2018 calendar year. However, if that issuer completes the manufacture of that same product on January 2, 2019, the issuer must provide a specialized disclosure 358 See, e.g., letters from Howland, IPC I, and NMA II. 359 See, e.g., letters from AngloGold, NAM I, RJC, and TIC. 360 See letter from NAM I. 361 See id. (recommending that, ‘‘[i]f the rule specifies a reporting trigger, it should be producing or placing on the market a product containing conflict minerals’’). E:\FR\FM\12SER2.SGM 12SER2 56306 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES report regarding the conflict minerals in that product for the 2019 calendar year. This timeframe is the same for an issuer that contracts the manufacturing of its products. An issuer that contracts the manufacturing of a product must provide its required conflict minerals information for the calendar year in which the issuer’s contract manufacturer completes the manufacturing of product. For example, if an issuer’s contractor completes the manufacturing of the product with conflict minerals necessary to the functionality or production of that product on December 30, 2018, the issuer must provide a specialized disclosure report regarding the conflict minerals in that product for the 2018 calendar year, even if the issuer does not receive the product until January 2, 2019. However, if that issuer’s contractor completes the manufacturing of that same product on January 2, 2019, the issuer must provide a specialized disclosure report regarding the conflict minerals in that product for the 2019 calendar year. This outcome is the same for an issuer that manufactures the product using a component product with conflict minerals necessary to the functionality of the product that is manufactured by an independent third party. If the manufacturer of the product completes the product that incorporates the component product with necessary conflict minerals on December 30, 2018, the issuer that manufactured the product must provide a specialized disclosure report regarding the conflict minerals in that product for the 2018 calendar year. However, the reporting period of the independent third party manufacturer of the component product, if it is a reporting issuer, is not determined by when the manufacturing of the subsequent product containing its component product is completed. Instead, the reporting period for that component product manufacturing issuer is determined by when it completes the manufacturing of the component product. Therefore, an issuer that completes the manufacture of a component product on December 30, 2018, must provide a specialized disclosure report regarding the conflict minerals in that completed component product for the 2018 calendar year. 5. Conflict Minerals Already in the Supply Chain a. Proposed Rules The proposed rules did not discuss specifically how an issuer would handle any conflict minerals already in the supply chain at the time our final rule VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 takes effect, including existing stockpiles of conflict minerals. The Proposing Release, however, requested comment on this point. b. Comments on the Proposed Rules Almost all commentators that discussed the topic recommended that an issuer’s existing stockpile of conflict minerals should be exempt from the final rule.362 One commentator explained, that ‘‘[c]ategorizing existing stock as ‘conflict’ simply because the mineral was mined before SEC rules have been agreed and published serves no purpose in furthering the aims of the legislation and would cause serious financial loss to the holders of that stock[pile].’’ 363 In this regard, one commentator asserted that ‘‘[s]tockpiled minerals may have originated in mines that support the conflict; however, it would be impractical to ask companies to trace the origin of these minerals.’’ 364 Another commentator argued specifically that, if the final rule causes owners to dispose of their existing conflict minerals inventory because they are unable to determine that they are ‘‘DCR conflict free,’’ the cost of the rule would increase ‘‘dramatically.’’ 365 Panelists discussed this issue further at the SEC Roundtable. Some panelists explained that there are stocks of metals and other materials stored throughout the world in warehouses and vaults by many individuals and institutions that are already past the point in the supply chain at which they could contribute to conflict.366 One panelist representing a human rights group appeared to acknowledge that stockpiled conflict 362 See, e.g., letters from AAEI; AngloGold; ArcelorMittal; Arkema; Cleary Gottlieb; CTIA; Davis Polk; Earthworks; Enough Project I; Enough Project IV; Global Tungsten I; Global Tungsten & Powders Corp. (Oct. 13, 2011) (‘‘Global Tungsten II’’); Howland; Industry Group Coalition I; ICAR et al. II; IPC I; IPMI I; ITIC I; ITRI I; ITRI Ltd. (Oct. 19, 2011) (‘‘ITRI III’’); ITRI Ltd. (Oct. 31, 2011) (‘‘ITRI IV’’); Japanese Trade Associations; Jean Goldschmidt International SA (Feb. 14, 2011) (‘‘JGI’’); JVC et al. II; Jewelers Vigilance Committee, American Gem Society, Manufacturing Jewelers & Suppliers of America, Jewelers of America, and Fashion Jewelry & Accessories Trade Association (Nov. 1, 2011) (‘‘JVC et al. III’’); Kemet; Kuala Lumpur Tin Market (Jan. 17, 2011) (‘‘Kuala Tin’’); LBMA I; Metal Solutions Corporation (Dec. 28, 2010) (‘‘Solutions’’); MSG III; NAM I; NEI; NMA II; NMA III; Pact II; PCP; Responsible Jewellery Council (Feb. 25, 2011) (‘‘RJC I’’); RMA; SEMI; Signet Jewelers Ltd. (Nov. 1, 2011) (‘‘Signet’’); Somima; TIAA–CREF; SIF I; and WGC II. 363 Letter from ITRI I. 364 Letter from Enough Project I. 365 See letter from Claigan Environmental Inc. (Oct. 28, 2011) (‘‘Claigan I’’). 366 See Transcript of SEC Roundtable on Conflict Minerals, Sections 0171–0174 (Oct. 18, 2011), available athttps://www.sec.gov/spotlight/ conflictminerals/ conflictmineralsroundtable101811-transcript.txt. PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 minerals stored outside the Covered Countries would not contribute to conflict in the Covered Countries.367 Another panelist asserted that a stockpile ‘‘exemption is essential for both existing unsmelted mineral and refined metal stocks held by industry, metal warehouses, investors and even in US Government stockpile,’’ because the ‘‘value of current tin stocks is probably around US$7billion, generally with nonspecific mine origin,’’ so not exempting such minerals would lead to ‘‘market disruption and financial losses on this potentially unsaleable material.’’ 368 Many commentators suggested different requirements for when a conflict mineral should be considered stockpiled and, therefore, excluded from the final rule. A number of commentators recommended that the final rule should exempt any conflict minerals mined prior to the adoption of the final rule.369 One commentator noted, however, that ‘‘the date of extraction is not generally recorded or known for minerals purchased from artisanal miners.’’ 370 Some commentators asserted that the final rule should exempt any conflict minerals smelted or refined by a certain date 371 because, as one of these commentators indicated, ‘‘[e]ach metal batch produced by a smelter will possess a dated certificate of analysis which may be considered as the production date.’’372 Similarly, another commentator recommended that stockpiled gold that ‘‘has been fully refined before the effective date’’ of the final rule be exempted.373 In this regard, one commentator suggested that the final rule exclude ‘‘inventory produced before the date on which Dodd-Frank 1502 will first apply to the issuer.’’ 374 Another commentator ‘‘proposed that the effective date of disclosure requirement on metal should be for ingot produced [one] year after the effective date’’ of the final rule.375 A few commentators urged that the final rule exempt any conflict minerals outside the Covered Countries by July 15, 2010.376 One commentator suggested 367 See id. at Section 0172 lines 19–23 (stating that ‘‘there’s a truth to the fact that if something is stockpiled out of the region, and it’s being held somewhere else, does it really get at what the intent of the law is’’). 368 See id. at Section 0118 lines 8–15. See also letter from ITRI III. 369 See, e.g., letters from AAEI, Davis Polk, ITIC I, Kemet, MSG III, RJC I, RMA, and WGC II. 370 See letter from ITRI I. 371 See letters from ITRI I, LBMA I, and Signet. 372 See letter from ITRI I. 373 See letter from LBMA I. 374 See letter from ArcelorMittal. 375 See letter from ITRI III. 376 See letters from Earthworks and SIF I. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations that conflict minerals should be exempt if, by January 1, 2013, those minerals are included in components or products already incorporated in finished goods in a supplier’s inventory or are included in parts or components included in the repair or maintenance of products.377 One commentator recommended that the final rule should exempt gold in the issuer’s possession by, or extracted before, the effective date of the final rule.378 Another commentator asserted that the final rule should exempt any conflict mineral that an issuer took possession of before the first full fiscal year following the adoption of the final rule.379 This commentator suggested also that the final rule should not require reporting on conflict minerals in an issuer’s supply chain that have been manufactured prior to the beginning of the issuer’s first reporting year. One commentator asserted that the final rule should exclude, as of the date of the effectiveness of the final rule, ‘‘gold bars in storage at the central banks,’’ ‘‘bars marked with the London Bullion Marketers Association (LBMA) stamp,’’ and ‘‘gold coins issued by governments or other entities.’’ 380 One commentator recommended that the final rule include a 24-month ‘‘grace period’’ that would permit the ‘‘sale of existing stockpiles of minerals that have already been mined and have been sitting in warehouses’’ in the DRC.381 c. Final Rule After considering the comments, the final rule excludes any conflict minerals that are ‘‘outside the supply chain’’ prior to January 31, 2013. The final rule considers conflict minerals to be ‘‘outside the supply chain’’ only in the following instances: After any columbite-tantalite, cassiterite, and wolframite minerals have been smelted; after gold has been fully refined; or after any conflict mineral, or its derivatives, that have not been smelted or fully refined are located outside of the Covered Countries. We are aware that these existing stockpiles could have financed or benefited armed groups in the Covered Countries. However, once those 377 See letter from NAM I. letter from AngloGold. 379 See letter from SEMI. 380 See letter from NMA III. 381 See letter from Charles F. Blakeman (Mar. 15, 2012) (‘‘Blakeman III’’) (arguing overall that no final rule should be adopted, but seeking a 24-month grace period for the sale of existing stockpiles of conflict minerals, in the alternative, should the Commission adopt a final rule). See also letter from Charles Blakeman (Nov. 17, 2011) (‘‘Blakeman II’’) (recommending a grace period for conflict minerals already, but not specifying a length of time for the grace period). sroberts on DSK5SPTVN1PROD with RULES 378 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 minerals are smelted, refined, or outside of the Covered Countries, it appears unlikely that they could further finance or benefit armed groups. Therefore, applying the final rule to these alreadystockpiled minerals would not further the purpose of the Conflict Minerals Statutory Provision because those minerals would not contribute to further conflict. Similarly, requiring issuers to determine the origin and chain of custody of these minerals that may have been extracted prior to the passage of the Conflict Minerals Statutory Provision, could result in undue costs if the minerals could not be sold, as suggested by one commentator.382 We considered exempting stockpiled conflict minerals that were extracted before a date certain, as one commentator recommended.383 We decided not to do so, however, because, as another commentator noted, the date of extraction is not generally recorded or known for minerals from artisanal miners.384 Further, if the final rule exempts conflict minerals extracted at a date certain, the rule would not necessarily account for payments illegally demanded by armed groups of those that transport conflict minerals through remote areas of the DRC. Instead, we believe that the proper point to use for ensuring that a conflict mineral is truly stockpiled is the smelting or primary refining date because the dates of these actions are more likely to be reliably recorded.385 Similarly, as is true with smelted or refined conflict minerals, conflict minerals stockpiled outside the Covered Countries would not contribute to conflict in the Covered Countries.386 Therefore, the final rule exempts any conflict minerals outside the Covered Countries as well. We recognize that there may be situations in which conflict minerals are past the point in the supply chain where they are able to be used to finance or benefit armed groups, but these minerals have yet to be stored outside the Covered Countries,387 smelted, or refined. Even so, we believe that smelting, refining, or being outside the Covered Countries marks the first opportunity in the supply chain that offers reliable proof that the conflict 382 See letter from Claigan I. letter from ITIC I. 384 See letter from ITRI I. 385 Id. 386 See Transcript of SEC Roundtable on Conflict Minerals, at Section 0172 lines 19–23. 387 For example, a stockpile of conflict minerals could be stored in a warehouse in a DRC country that is insulated from and is beyond the reach of any armed group, so these conflict minerals would not contribute to conflict. 383 See PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 56307 minerals will no longer benefit or finance armed groups. We note, however, that market participants may need additional time to move their stockpiles outside the Covered Countries or have those stockpiles smelted or refined. Therefore, to accommodate this timing constraint, the final rule provides transition relief to permit market participants sometime after the final rule becomes effective to move, smelt, or refine any existing stocks of conflict minerals without having to comply with the rule’s requirements. 6. Timing of Implementation a. Proposed Rules The Conflict Minerals Statutory Provision states that issuers must disclose their conflict minerals information annually beginning with the issuer’s first full fiscal year that begins after the date of promulgation of our final rule.388 Therefore, the proposed rules would have included neither a transition period for issuers unable to determine that their conflict minerals did not originate in the Covered Countries or unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups, nor a general delay of the rules. We requested comment, however, regarding whether we should provide a transition period or a delay. b. Comments on the Proposed Rules In response to our request for comment, a number of commentators stated that the final rule should not permit any general delay or specific phase-in period for issuers to provide their conflict minerals information.389 A number of other commentators, however, indicated that the final rule should allow for some type of delay or 388 Exchange Act Section 13(p)(1)(A). e.g., letters from Catholic Charities; Earthworks; Global Witness I; Good Shepherd; ICAR et al. II; Larry Cox of Amnesty International, Lisa Shannon of A Thousand Sisters, John Bradshaw of Enough Project, Karen Stauss of Free the Slaves, Corinna Gilfillan of Global Witness, Arvind Ganesan of Human Rights Watch, Tzivia Schwartz Getzug of Jewish World Watch, Morton Halperin of Open Society Policy Center, Rabbi David Saperstein of Religious Action Center of Reform Judaism, Kent Hill of World Vision (Mar. 1, 2011) (‘‘Amnesty et al.’’); Rep. Berman et al.; Sen. Boxer et al. I; Senators Barbara Boxer, Frank R. Lautenberg, Barbara A. Mikulski, Sheldon Whitehouse and Ron Wyden (Feb. 16, 2012) (‘‘Sen. Boxer et al. II’’); Sen. Durbin/Rep. McDermott; Delly Mawazo Sesete (Dec. 19, 2011) (‘‘Sesete’’); State II; Synergie des Femmes Pour les Victimes des Violences Sexuelles (Mar. 7, 2011) (‘‘Synergie’’); World Vision US (Jul. 8, 2011) (‘‘World Vision I’’); and World Vision II. 389 See, E:\FR\FM\12SER2.SGM 12SER2 56308 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES phase-in period.390 Some of the commentators specified that there should be a phase-in for only certain categories of issuers, such as foreign private issuers, accelerated filers, and smaller reporting companies.391 Other commentators recommended that the final rule should include a phase-in period but did not provide any details for implementing such a mechanism.392 Some commentators asserted that the effectiveness of the final rule should be delayed for all issuers until either the Comptroller General has established auditing standards and/or the State Department has developed its conflict minerals map and its strategy to address linkages between human rights abuses and conflict minerals.393 Other commentators stated that the final rule’s effectiveness for all issuers should be delayed for two to five years after promulgation for issuers to set up traceability systems in the Covered Countries and clear mineral stockpiles from the supply chain.394 One commentator stated that we should establish a general reporting delay for one year following promulgation of the final rule to allow issuers the opportunity to eliminate conflict minerals from their products and, during this time, issuers would not be required to provide conflict minerals information.395 Another commentator recommended a one-year general phasein of the final rule ‘‘so that a thorough and reliable traceability process can be 390 See, e.g., letters from AAEI; AAFA; AdvaMed I; AngloGold; Arkema; Barrick Gold; BEST II; Boeing Company (Oct. 18, 2011) (‘‘Boeing’’); Bureau d’Etudes Scientifiques et Techiques (Mar. 10, 2011) (‘‘BEST I’’); Chamber I; Corporate Secretaries I; ´ ´ CTIA; Davis Polk; Federation des Enterprises du Congo (Feb. 25, 2011) (‘‘FEC I’’); Howland; Industry Group Coalition I; IPC I; ITIC I; ITRI I; ITRI II; ITRI IV; JGI; JVC et al. II; JVC et al. III; Medtronic, Inc. (Mar. 2, 2011) (‘‘Medtronic’’); Malaysia Smelting Corporation (Oct. 25, 2011) (‘‘MSC II’’); NAM I; National Association of Manufacturers (Jul. 26, 2011) (‘‘NAM II’’); NEI; NRF I; Pact I; PCP; Plexus (Feb. 25, 2011) (‘‘Plexus’’); Representative Mark S. Critz (Feb. 29, 2012) (‘‘Rep. Critz’’); RILA; RMA; Roundtable; Solutions; Somima; Taiwan Semi; TechAmerica, Professional Services Council, National Defense Industrial Association, American Council of Engineering Companies, Aerospace Industries Association, and U.S. Chamber of Commerce (Nov. 28, 2011) (‘‘CODSIA’’); TIC; TriQuint I; TriQuint Semiconductor Manufacturing Company, Ltd. (Mar. 2. 2011) (‘‘TriQuint II’’); and WGC II. 391 See letters from AngloGold, Howland, and Taiwan Semi. 392 See, e.g., letters from AAEI, AAFA, Arkema, BEST I, Chamber I, Davis Polk, FEC I, ITRI I, JGI, Medtronic, Solutions, MSC I, NEI, Pact I, Rep. Critz, and RMA. 393 See letters from Barrick Gold, Corporate Secretaries I, NRF I, Roundtable, and WGC II. 394 See, e.g., letters from AdvaMed I, Arkema, BEST II, FEC I, IPC I, ITRI I, ITRI II, ITRI IV, JVC et al. II, NAM I, Plexus, and TriQuint II. 395 See letter from PCP. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 instituted.’’ 396 In this regard, one commentator indicated that the ‘‘private sector is moving forward on this issue,’’ and that one company ‘‘aims to have built the first verifiably conflict free microprocessor’’ by 2013.397 Another commentator suggested that the final rule ‘‘set clear and specific dates for when company reporting will take effect,’’ because ‘‘using benchmarks or trigger points will prolong the uncertainty that is causing so much trouble and suffering.’’ 398 A number of commentators recommended and described specific phase-in periods that focused on issuers unable to determine the origins of their conflict minerals.399 Although each of these approaches varied to some degree, they all provided that, for a certain number of years after adoption of the final rule, an issuer unable to determine its conflict minerals’ origins must disclose this fact, but would not be required to describe the products containing these conflict minerals as not ‘‘DRC conflict free.’’ Some of these commentators recommended that we require an issuer, during a phase-in period, to describe its conflict minerals policy, its reasonable country of origin inquiry, the conflict minerals in its supply chains, and/or certain other information.400 A few commentators indicated that we should phase-in the final rule for particular issuers based on the issuer’s position in supply chain, so that an issuer closer in position to the mine or smelter would have to disclose more information regarding its conflict minerals.401 One commentator recommended that the final rule permit a three-year phase-in period in which all issuers would be required only to receive certifications from their first-tier suppliers during the first year after promulgation, identify the smelters used to process their conflict minerals in the second year, and fully implement the rules in the third year.402 Many commentators, including industry associations, corporations, human rights groups, institutional 396 See also letter from Somima. letter from Senator Jeff Merkley and Representatives Peter DeFazio, Earl Blumenauer, Kurt Schrader, and Suzanne Bonamici (May 17, 2012) (‘‘Sen. Merkley et al.’’). See also letter from Enough Project (Aug. 10, 2011) (‘‘Enough Project III’’) (providing a link to an article that ‘‘details current efforts on the ground in response to Section 1502’’). 398 See letter from BEST II. 399 See, e.g., letters from AdvaMed I, CTIA, Industry Group Coalition I, IPC I, ITIC I, JVC et al. II, and NAM I. 400 See letters from AdvaMed I, Industry Group Coalition I, and NAM I. 401 See letters from NRF I and Teggeman. 402 See letter from TriQuint II. 397 See PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 investors, members of Congress, and individuals, agreed that all conflict minerals should be treated equally, as proposed.403 Some commentators asserted that gold should be treated differently than the other three conflict minerals because of its unique qualities, and the OECD had not approved the supplement to its due diligence guidance specifically for gold,404 which at the time of the Proposing Release was scheduled to be published by the end of 2011. Subsequent commentators noted that the OECD’s gold supplement would not be finalized until sometime in 2012,405 and some commentators suggested that the final rule’s application to gold be delayed until the OECD has adopted its gold supplement.406 At present, the final gold supplement has been approved by the OECD.407 One of the commentators suggested that the final rule be delayed for gold until the beginning of an issuer’s first full fiscal year following adoption and issuance of the OECD’s gold supplement.408 Another one of the commentators argued that any ‘‘effort to establish credible and effective due diligence systems in the absence of OECD guidance will be stymied by the lack of a widely accepted base for responsible sourcing.’’409 One commentator, however, asserted that the final rule should not be delayed for gold regardless of whether the OECD’s gold supplement has been completed.410 This commentator argued that, even if the OECD’s gold supplement has not been completed when an issuer’s reporting period begins, the issuer 403 See, e.g., letters from Bario-Neal, Brilliant Earth, Calvert, Catholic Charities, CRS I, Earthworks, Enough Project I, Metalsmiths, Good Shepherd, Hacker Jewelers, Hoover & Strong, Howland, IPC I, ITRI I, NAM I, Niotan I, Peace, Rep. Berman et al., Sen. Durbin/Rep. McDermott, SIF I, State II, TakeBack, and TIAA–CREF. 404 See, e.g., letters from AngloGold, IPMI I, JVC et al. II, LBMA II, NMA II, Tiffany, TriQuint I, and WGC II. 405 See letters from Government of Canada, Foreign Affairs and International Trade (Dec. 23, 2011) (‘‘Canada’’); JVC et al. III; Signet; World Gold Council, London Bullion Market Association, and Responsible Jewellery Council (Oct. 28, 2011) (‘‘WGC et al. I’’); and World Gold Council, London Bullion Market Association, and Responsible Jewellery Council (Dec. 9, 2011) (‘‘WGC et al. II’’). 406 See, e.g., letters from Boeing, JVC et al. III, Signet, World Gold Council (Jun. 20, 2011) (‘‘WGC III’’), WGC et al. I, and WGC et al. II. 407 See OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Supplement on Gold (2012), available at https://www.oecd.org/ corporate/guidelinesformultinationalenterprises/ FINAL%20Supplement%20on%20Gold.pdf. 408 See letter from WGC et al. II. 409 See letter from JVC et al. III. 410 See letter from ICAR et al. II. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations would still be able to apply the OECD’s core due diligence framework to gold. The commentators that advocated treating gold differently from the other conflict minerals comprise mostly gold, mining, and jewelry companies or associations. Of these commentators, only one indicated that the final rule should initially be more stringent with issuers using gold because 80% of the funds generated by conflict minerals for armed groups come from gold.411 The other commentators indicated that the final rule should be more lenient for gold and that we should defer full incorporation of gold into the final rule because such a large percentage of gold coming from the DRC is illegally exported that it will require greater time and effort to make the gold supply chain transparent than it will for the other conflict minerals.412 One commentator was concerned that, until a more transparent supply chain is developed, the final rule would stigmatize gold and thereby harm that mineral’s ability to be used as a hedge and damage the global financial economy because so many companies would not be able to determine the origin of their gold.413 Finally, a few commentators stated that the final rule should permit issuers to exclude certain information from public dissemination regarding the storage and transportation routes of gold for security reasons.414 sroberts on DSK5SPTVN1PROD with RULES c. Final Rule After considering the comments, the final rule will not provide a general delay of effectiveness, nor will the proposal be withdrawn and reproposed. Although many commentators advocated that the final rule include an extended general delay of the rule’s effectiveness, we do not believe this approach would appropriately implement Congress’s directive in the Conflict Minerals Statutory Provision. The provision states when an issuer must begin to report on its conflict minerals. Congress directed us to promulgate regulations requiring any ‘‘person described’’ to disclose annually ‘‘beginning with the person’s first full fiscal year that begins after the date of promulgation of such regulations.’’ 415 Additionally, it is not clear that a general delay of the final rule is necessary or appropriate. As noted by two of the co-sponsors of the statutory provision, conflict minerals 411 See letter from TriQuint I. letters from AngloGold, IPMI I, JVC et al. II, NMA II, and WGC II. 413 See letter from WGC II. 414 See letters from NMA II, NAM III, and WGC II. 415 See Exchange Act Section 13(p)(1)(A). 412 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 legislation was first considered in 2008, the Conflict Minerals Statutory Provision was over a year old at the time of the letter, and many issuers have been working with various groups in developing supply chain tracing for years.416 Therefore, under the final rule, most issuers with necessary conflict minerals will be required to file a specialized disclosure report on or before May 31, 2014 containing conflict minerals disclosure for the initial reporting period that will extend from January 1, 2013 to December 31, 2013. Since Congress adopted the Conflict Minerals Statutory Provision in July 2010, we have sought comment on our implementation of the provision, including our proposal, and have provided opportunities for commentators to provide their input, both before and after the rules were proposed. As noted above, we extended the comment period for the rule proposal and convened an October 2011 roundtable at the request of commentators. We have continued to receive comment letters through August 2012, all of which we have considered. Some commentators have provided responses to other commentators, particularly on the Economic Analysis. This robust, public, and interactive debate has allowed us to more fully consider how to develop our final rule. Additionally, as discussed further in the Economic Analysis section, below, we have considered and analyzed the numerous comments received regarding the costs and complexities of the statute and proposed rule, and have taken them into account in the final rule. Overall, we believe interested parties have had sufficent opportunity to review the proposed rules, as well as the comment letters, and to provide views on the proposal, other comment letters, including data to inform our consideration of the final rule. Accordingly, we do not believe that withdrawal of the proposed rule and reproposal is necessary. While the final rule does not include a general delay for the reasons noted, we acknowledge that there are legitimate concerns about the feasibility of preparing the required disclosure in the near term because of the stage of development of the supply chain tracing mechanisms. In order to address these concerns, rather than providing an extended general delay of effectiveness, the final rule includes a targeted and temporary provision intended to help issuers address some of the burdens and costs of compliance with the final rule. For all issuers, this period will last two 416 See PO 00000 years, including issuers’ 2013 and 2014 reporting periods, but will not be permitted for the reporting period beginning January 1, 2015. For smaller reporting companies, this period will last four years, including issuers’ 2013 through 2016 reporting periods, but will not be permitted for the reporting period beginning January 1, 2017. We note that, although some commentators recommended that there be no such transition period and other commentators recommended that such a transition period be permitted for either a shorter or longer amount of time, a number of commentators appeared to suggest that a transition period through 2014 would be appropriate to allow the necessary traceability systems in the Covered Countries to be established.417 Issuers taking advantage of this temporary category are still be required to conduct due diligence and prepare and file a Conflict Minerals Report, and are required to disclose in their Conflict Mineral Report all steps taken by such issuer, if any, since the issuer’s last such report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence. As discussed in greater detail below, the final rule provides a temporary ‘‘DRC conflict undeterminable’’ category for a two-year period for all issuers and a four-year period for smaller reporting companies. This category is available for issuers that proceed to step three but are unable to determine, after exercising their required due diligence,418 whether 417 See, e.g., letters from AdvaMed I (recommending an ‘‘unknown determination’’ transition period at least through 2014), FEC I (‘‘Disclosure of minerals mined could be mainly conflict free for 2014 and finally the companies could successfully report to the Securities and Exchange Commission in 2015.’’), JVC et al. II (urging ‘‘the Commission to adopt a calibrated ‘phase-in’ disclosure approach spanning the period from April 15, 2011 (the statutorily-prescribed effective date of the Commission’s implementing rules) through at least early 2014, to afford all affected issuers a minimum two-year transition period before becoming obligated to furnish an audited CMR’’), Plexus (suggesting that a ‘‘phase in compliance schedule of at least 2 years is needed in order to provide time for the due diligence systems to be set-up, most importantly on the ground in the DRC,’’ but even ‘‘this would be a significant challenge’’), Verizon (recommending ‘‘delaying the full applicability of the due diligence requirements of the Conflict Minerals Report until after fiscal 2014, to allow the DRC Zone countries to develop the traceability protocols and related infrastructure required in order to supply Conflict Free Smelters’’), and WilmerHale (‘‘After fiscal year 2014, when sufficient infrastructure is expected to have been developed to permit companies to determine the source of all their conflict minerals, the ‘indeterminate source’ category would no longer be available.’’). 418 As discussed in greater detail below, issuers are required to exercise due diligence on the source letter from Sen. Durbin/Rep. McDermott. Frm 00037 Fmt 4701 Sfmt 4700 56309 E:\FR\FM\12SER2.SGM Continued 12SER2 56310 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations their conflict minerals originated in the Covered Countries or whether their conflict minerals that originated in the Covered Countries directly or indirectly finance or benefit armed groups in the Covered Countries. The final rule permits any such issuer for purposes of the conflict minerals disclosure to describe its products with such conflict minerals as ‘‘DRC conflict undeterminable,’’ unless those products also include other conflict minerals that directly or indirectly financed or benefited armed groups in the Covered Countries. Further, although issuers with ‘‘DRC conflict undeterminable’’ products are required to provide a Conflict Minerals Report that describes, among other matters, the measures taken by the issuer to exercise due diligence on the source and chain of custody of the conflict minerals, during the temporary period they will not have to provide an independent private sector audit of that report. We believe that not requiring an independent private sector audit of the Conflict Minerals Report during the temporary period is appropriate because an audit of the design of an issuer’s due diligence that results in an undeterminable conclusion would not appear to have a meaningful incremental benefit. sroberts on DSK5SPTVN1PROD with RULES D. Step Two—Determining Whether Conflict Minerals Originated in the Democratic Republic of the Congo or Adjoining Countries and the Resulting Disclosure Once an issuer determines that conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the issuer, the Conflict Minerals Statutory Provision requires the issuer to determine whether those conflict minerals originated in the Covered Countries.419 If so, the issuer must submit a Conflict Minerals Report concerning those conflict minerals that originated in the Covered Countries,420 and make that report available on its and chain of custody of their conflict minerals and potentially provide a Conflict Minerals Report if, following their reasonable country of origin inquiry, they know they have conflict minerals from the Covered Countries and not from recycled or scrap sources, or they have reason to believe that their conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources. Only after these issuers have exercised their required due diligence may they use the ‘‘DRC conflict undeterminable’’ alternative if they are still unable to determine that their conflict minerals originated in the Covered Countries or, if they determine that their minerals did originate in the Covered Countries, but they are unable to determine that their conflict minerals directly or indirectly financed or benefited armed groups in the Covered Countries. 419 See Exchange Act Section 13(p)(1)(A). 420 See id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Internet Web site.421 To determine whether their conflict minerals originated in the Covered Countries, so as to determine whether they must exercise due diligence on the source and chain of custody of those minerals and provide a Conflict Minerals Report, the final rule requires issuers with necessary conflict minerals to conduct a reasonable country of origin inquiry. 1. Reasonable Country of Origin Inquiry a. Proposed Rules We proposed that an issuer would be required to disclose whether it has necessary conflict minerals that originated in the Covered Countries based on its ‘‘reasonable country of origin inquiry.’’ Our proposed rules did not specify, however, what constituted a reasonable country of origin inquiry. Rather than describing what a reasonable country of origin inquiry would entail, we indicated that such a determination would depend on each issuer’s particular facts and circumstances. In this regard, we noted that the reasonable country of origin inquiry requirement was not meant to suggest that issuers would have to determine with absolute certainty whether their conflict minerals originated in the Covered Countries as we have often stated that a reasonableness standard is not the same as an absolute standard.422 b. Comments on the Proposed Rules One commentator indicated that the final rule should not include a reasonable country of origin inquiry for determining whether an issuer’s conflict minerals originated in the Covered Countries.423 This commentator objected to the use of a reasonable country of origin inquiry because it believed that the origin of a product should be determined based on where the product is produced rather than where the minerals in the product were mined. Another commentator recommended that the final rule not require issuers to make any reasonable country of origin inquiry at all if they 421 See Exchange Act Section 13(p)(1)(D). 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.’ ’’ 423 See letter from Teggeman. 422 Cf. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 determine, based on whatever means they believe appropriate, that their conflict minerals did not originate in the Covered Countries, provided they disclose this fact.424 Many other commentators on this subject agreed that the proposed rules’ reasonable country of origin inquiry approach is appropriate.425 Some of these commentators disagreed, however, on the meaning and application of the standard. Some such commentators asserted that a reasonable country of origin standard should be equivalent to the due diligence standard required for the Conflict Minerals Report.426 Others suggested that the reasonable country of origin standard should conform, at least in part, to international standards,427 such as the ‘‘preliminary review’’ in the OECD guidance.428 Many commentators agreed that the final rule should not define the reasonable country of origin standard, or should provide only general guidance regarding the standard, so that the rules would allow for greater flexibility to evolve as processes improved.429 Some of these commentators provided examples of the general guidance that 424 See letter from Roundtable (stating that the ‘‘Conflict Minerals Statutory Provision requires issuers to disclose ‘whether’ their conflict minerals originated in the Covered Countries, and, in the case of a positive determination, to provide a Conflict Minerals Report,’’ and it ‘‘does not impose any obligation on an issuer who determines that the conflict minerals did not originate in the Covered Countries to make any disclosure beyond that fact, nor does it specify how the issuer is to determine that the conflict minerals did not originate in the Covered Countries’’). 425 See, e.g., letters from AAFA, AngloGold, ArcelorMittal, Barrick Gold, Boeing, Chamber I, Cleary Gottlieb, CRS I, Enough Project I, Evangelical Alliance, Evangelicals, Global Witness I, Howland, ICGLR, Industry Group Coalition I, IPC I, IPMI I, ITIC I, JVC et al. II, LBMA I, Metalsmiths, Methodist Board, MSG I, NAM I, NEI, NMA II, NYCBar I, NYCBar II, RILA–CERC, SEMI, Semiconductor, SIF I, SIF II, PCP, Presbyterian Church II, Sen. Durbin/ Rep. McDermott, State II, TIAA–CREF, TIC, TriQuint I, and WGC II. 426 See letters from Metalsmiths and Sen. Durbin/ Rep. McDermott. 427 See letters from CRS I and IPMI I. 428 See letter from IPMI I (stating that ‘‘the OECD advocates an initial determination of origin inquiry’’). See also OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 33 (2011), available at https://www.oecd.org/ daf/internationalinvestment/ guidelinesformultinationalenterprises/ 46740847.pdf. (‘‘This Guidance applies to actors operating in a conflict-affected and high-risk area, or potentially supplying or using tin (cassiterite), tantalum (tantalite) or tungsten (wolframite), or their smelted derivates, from a conflict-affected and high-risk area. Companies should preliminarily review their mineral or metal sourcing practices to determine if the Guidance applies to them.’’). 429 See, e.g., letters from AAFA, AngloGold, ArcelorMittal, Industry Group Coalition I, IPC I, IPMI I, ITIC I, JVC et al. II, NAM I, RILA–CERC, Semiconductor, SIF I, TriQuint I, and WGC II. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES the final rule could include while still allowing flexibility.430 For example, some commentators suggested that we indicate that the reasonable country of origin inquiry could differ among issuers based on their size, products, and relationships with suppliers.431 In addition, one commentator recommended that the final rule should clarify that a ‘‘reasonable person’’ standard applies to the reasonable country of origin standard.432 As a further example, some commentators sought flexibility for the reasonable country of origin standard that permits some combination of reasonable supplier declarations, contractual obligations, risk-based follow-up, and/or smelter validations.433 One commentator asserted that an issuer’s reasonable country of origin inquiry should be conducted under a reasonable care standard that requires ‘‘more than a passive acceptance by the filer of information provided by their suppliers,’’ which does not ‘‘mandate that an issuer always reach the legally correct conclusion, but does require sufficient investigation by an issuer to support reasonable cause to believe in the conclusion.’’ 434 Some commentators asserted that the final rule should define or provide specific guidance on what constitutes a ‘‘reasonable country of origin inquiry,’’ although many of these commentators did not provide suggested definitions or guidance.435 A few commentators argued, however, that any definition or guidance in the final rule should make clear that a reasonable country of origin standard should not be an absolute standard.436 One commentator suggested that the reasonable country of origin inquiry standard should require an issuer to take ‘‘sufficient steps to accurately determine and disclose whether its conflict minerals originate from the DRC,’’ and the commentator, therefore, recommended that an issuer should disclose the steps it undertook to complete its inquiry.437 430 See, e.g., letters from Industry Group Coalition I, IPC I, ITIC I, NAM I, RILA–CERC, and SIF I. 431 See letters from IPC I and ITIC I. 432 See letter from RILA–CERC. 433 See, e.g., letters from Industry Group Coalition I and NAM I. 434 See letter from Enough Project IV. 435 See, e.g., letters from CRS I, Earthworks, Enough Project I, Evangelical Alliance, Evangelicals, Global Witness I, Howland, ICGLR, IPC I, IPMI I, Metalsmiths, Methodist Board, MSG I, NYCBar I, NYCBar II, PCP, Presbyterian Church II, Roundtable, SEMI, Sen. Durbin/Rep. McDermott, State II, and TIC. 436 See letters from Chamber I, Cleary Gottlieb, and NAM I. 437 See letter from SIF II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 A large number of commentators suggested that, as part of a reasonable country of origin standard, the final rule should permit an issuer to rely on reasonable representations from suppliers and/or smelters.438 Other commentators recommended, however, that written representations could provide only some evidence in making a reasonable country of origin inquiry but should not, by themselves, satisfy the reasonable country of origin inquiry standard.439 Some of these commentators provided examples of other evidence an issuer could use in addition to written representations in satisfying a reasonable country of origin standard, including contractually obligating suppliers to source only from conflict-free smelters, conducting spot checks of suppliers and smelters to verify they are obtaining conflict minerals from only conflict-free sources, disclosing publicly the smelters used and the processes undertaken to ensure that only conflict-free minerals are used, and/or determining that there is no contrary evidence or ‘‘red flags’’ that would cast doubt on the minerals’ origins.440 Some commentators suggested that an issuer should be able to rely on representations from smelters only if the smelter was designated ‘‘compliant’’ by nationally or internationally recognized standards.441 A few commentators, however, asserted that smelters and refiners are unable to verify the country of origin of the minerals they process at the present time.442 One commentator argued that an issuer should be able to rely on reasonable representations ‘‘one or two 438 See, e.g., letters from AngloGold, Arkema, Cleary Gottlieb, Global Tungsten I, Global Tungsten II, Howland, ICGLR, IPC I, IPC II, NAM I, NEI, NMA II, PCP, RILA, Roundtable, SEMI, Taiwan Semi, TIAA–CREF, TIC, TriQuint I, US Telecom, and WGC II. 439 See, e.g., letters from CTIA, Enough Project I, Global Witness I, Howland, IPMI I, ITIC I, MSG I, NYCBar II, Sen. Durbin/Rep. McDermott, SIF I, and TIC. 440 See, e.g., letters from Enough Project I, Global Witness I, IPMI I, and MSG I. 441 See letters from Howland, Enough Project I, ITIC I, MJB Consulting (May 30, 2011) (‘‘MJB III’’), MSG III, NYCBar II, SIF I, and TIC. 442 See letters from Nordic Sun Worldwide Ltd. (Mar. 17, 2012) (‘‘Nordic Sun’’) (stating that, before smelter verification schemes can be relied upon, ‘‘a more scientific component must be added,’’ and that only ‘‘the addition of a low acquisition cost mineral analyzer with a reasonably detailed geologic mineralization fingerprinting capability that include GPS location data and certification tag data in a tamper-proof format will add the necessary missing step to all the 3T minerals and smelter certification systems’’) and Southern Africa Resource Watch (Apr. 4, 2012) (‘‘SARW’’) (stating that any scheme that ‘‘essentially depends on assurances from refining and smelting facilities will not be helpful’’). But see letter from iTSCi Programme Governance Committee (Apr. 14, 2012) (‘‘iTSCi’’) (refuting the letter from Nordic Sun). PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 56311 steps up the supply chain,’’ but that these representations should be made public.443 Commentators were almost evenly split about whether the final rule should allow an issuer to use qualifying or explanatory language in concluding whether its conflict minerals originated in the Covered Countries.444 Some of the commentators that believed the final rule should permit some qualification or explanation, however, qualified their recommendations.445 c. Final Rule After considering the comments, we are adopting the final rule regarding the reasonable country of origin inquiry substantially as proposed, but with some modification. The final rule does not specify what steps and outcomes are necessary to satisfy the reasonable country of origin inquiry requirement because, as stated in the Proposing Release, such a determination depends on each issuer’s particular facts and circumstances. A reasonable country of origin inquiry can differ among issuers based on the issuer’s size, products, relationships with suppliers, or other factors.446 Further, as we stated in the Proposing Release, we continue to believe that the steps necessary to constitute a reasonable country of origin inquiry depend on the available infrastructure at a given time. As commentators noted, such an approach 443 See letter from Hileman Consulting. commentators asserted that such language should be permitted. See letters from AngloGold, Cleary Gottlieb, Howland, NAM I, NMA II, and WGC II. Others took the opposite view. See letters from CRS I, Earthworks, Global Witness I, NEI, and State II. 445 See letters from Howland (stating that an issuer should be able to use qualifying language only if it knows that 80% or more of its conflict minerals did not originate from the Covered Countries), MSG I (stating that qualifying language is not relevant as long as an issuer discloses the manner in which it determined its reasonable country of origin inquiry), NAM I (stating that qualifying language should be permitted only when there is appropriate information to support the conclusion), NMA II (same), and TriQuint I (stating that the final rule should allow qualifying language when an issuer concludes that its conflict minerals are not ‘‘DRC conflict free,’’ but should not allow such a qualification if it states that its conflict minerals are, in fact, ‘‘DRC conflict free’’). 446 As we indicated in the Proposing Release, although a reasonable country of origin inquiry may be based on a particular issuer’s size, products, relationships with suppliers, or another factor, an issuer may not conclude that, because of the large (or small) amount of conflict minerals it uses in its products or the large (or small) number of products that include conflict minerals, it is unreasonable for that issuer to conduct any inquiry into the origin of its conflict minerals. Instead, that issuer must make some inquiry into the origin of its conflict minerals. 444 Some E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56312 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations allows the final rule to be flexible and evolve with available tracing processes. Even though the final rule does not specify the steps necessary to satisfy the reasonable country of origin inquiry requirement, the final rule includes general standards governing the inquiry and the steps required as a result of the inquiry. First, the final rule provides that, to satisfy the reasonable country of origin inquiry requirement, an issuer’s reasonable country of origin inquiry must be reasonably designed to determine whether the issuer’s conflict minerals did originate in the Covered Countries, or did come from recycled or scrap sources, and it must be performed in good faith. The proposed rules did not discuss the design of an issuer’s reasonable country of origin inquiry or an issuer’s performance in carrying out its reasonable country of origin inquiry. We believe providing these standards in the rule will facilitate compliance with the rule by providing guidance to issuers about what is required to satisfy the reasonable country of origin inquiry. In this regard, we note that one commentator stated that ‘‘[i]t is essential, in order to make the implementation of 1502 practical and cost effective, that the concept of reasonableness, and good faith efforts’’ be recognized in the final rule.447 Further, we believe the notion of good faith performance is important so that an issuer will not be able to establish a reasonably designed inquiry but subsequently fail to undertake the steps necessary to carry out the actual inquiry. Although we do not prescribe the steps constituting a reasonable country of origin inquiry, we do view an issuer as satisfying the reasonable country of origin inquiry standard if it seeks and obtains reasonably reliable representations indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources. These representations could come either directly from that facility or indirectly through the issuer’s immediate suppliers, but the issuer must have a reason to believe these representations are true given the facts and circumstances surrounding those representations. An issuer must also take into account any applicable warning signs or other circumstances indicating that its conflict minerals may have originated in the Covered Countries or did not come from recycled 447 See letter from ITRI IV (emphasis in original). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 or scrap sources.448 An issuer would have reason to believe representations were true if a processing facility received a ‘‘conflict-free’’ designation by a recognized industry group that requires an independent private sector audit of the smelter, or an individual processing facility, while it may not be part of the industry group’s ‘‘conflictfree’’ designation process, obtained an independent private sector audit that is made publicly available. An issuer’s policies with respect to the sourcing of conflict minerals will generally form a part of the issuer’s reasonable country of origin inquiry, and therefore would generally be required to be disclosed in the issuer’s Form SD. Moreover, the issuer is not required to receive representations from all of its suppliers. The standard focuses on reasonable design and good faith inquiry. Therefore, if an issuer reasonably designs an inquiry and performs the inquiry in good faith, and in doing so receives representations indicating that its conflict minerals did not originate in the Covered Countries, the issuer may conclude that its conflict minerals did not originate in the Covered Countries, even though it does not hear from all of its suppliers, as long as it does not ignore warning signs or other circumstances indicating that the remaining amount of its conflict minerals originated or may have originated in the Covered Countries. For example, we would agree that, ‘‘if reasonable inquiry has been made, and if no evidence of [Covered Country] origin has arisen, and if the origin of only a small amount of gold were still unknown, a manufacturer should be allowed to declare that its gold is not from the [Covered Countries] and is DRC conflict free.’’ 449 448 As discussed below, this approach is consistent with the OECD’s due diligence guidance, which states that issuers should preliminarily review their sourcing practices to determine if their due diligence guidance applies, and provides nonexclusive examples of situations that it states should trigger the guidance. See OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (2011), available at https://www.oecd.org/daf/ internationalinvestment/ guidelinesformultinationalenterprises/ 46740847.pdf. See also OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Supplement on Gold (2012), available at https://www.oecd.org/corporate/ guidelinesformultinationalenterprises/ FINAL%20Supplement%20on%20Gold.pdf. 449 See letter from IPMI I. Commentators opining on whether the statutory language requiring due diligence and a Conflict Minerals Report applies only to issuers that know that their conflict minerals originated in the Covered Countries or whether that statutory language applies also to issuers that are unable to determine that their conflict minerals did not originate in the Covered PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 The reasonable country of origin inquiry is consistent with the supplier engagement approach in the OECD guidance where issuers use a range of tools and methods to engage with their suppliers.450 The results of the inquiry may or may not trigger due diligence. This is the first step issuers take under the OECD guidance to determine if the further work outlined in the OECD guidance—due diligence—is necessary. The Conflict Minerals Statutory Provision specifically contemplates due diligence, which goes beyond inquiry and involves further steps to establish the truth or accuracy of relevant information, by requiring a description of the measures the issuer took to exercise due diligence on the source and chain of custody of the minerals. The Conflict Minerals Statutory Provision specifically notes that due diligence includes the audit discussed below. Second, the final rule establishes a different standard from that included in the proposal for determining whether due diligence on the conflict minerals’ source and chain of custody and a Conflict Minerals Report is required after the reasonable country of origin inquiry. The proposed rules would have required an issuer to conduct due diligence and provide a Conflict Minerals Report if, based on its reasonable country of origin inquiry, the issuer determined that its conflict minerals originated in the Covered Countries, the issuer was unable to determine that its conflict minerals did not originate in the Covered Countries, or the issuer determined that its conflict minerals came from recycled or scrap sources. Under the proposal, issuers could only avoid providing a Conflict Minerals Report if they could prove a negative—that their conflict minerals did not originate in the Covered Countries. This approach would arguably be more burdensome than necessary to accomplish the purpose of the statutory provision. The reasonable country of origin inquiry standard does not require an issuer to determine to a Countries did not necessarily discuss this topic in relation to conflict minerals from recycled or scrap sources. 450 In June 2012, the OECD issued a report regarding implementation of the OECD guidance. See OECD, Downstream Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, Cycle 2 Interim Progress Report on the Supplement on Tin, Tantalum, and Tungsten Final Draft (June 2012), available at https://www.oecd.org/investment/ guidelinesformultinationalenterprises/ Downstream%20cycle%202%20report%20%20Edited%20Final%20-%201%20June.pdf. This additional guidance includes sample letters to suppliers and customers regarding the use of conflict minerals. E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations certainty that all its conflict minerals did not originate in the Covered Countries because the standard required is a reasonable inquiry, and requiring a certainty in this setting would not be reasonable and may impose undue costs.451 Under the final rule, if (i) an issuer determines that, based on its reasonable country of origin inquiry, its necessary conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources, or (ii) based on its reasonable country of origin inquiry, the issuer has no reason to believe that its conflict minerals may have originated in the Covered Countries or the issuer reasonably believes that its conflict minerals are from recycled or scrap sources, the issuer is not required to exercise due diligence on its conflict minerals’ source or chain of custody or file a Conflict Minerals Report with respect to such conflict minerals. Instead, the issuer only is required, in the body of its specialized disclosure report, to disclose its determination and briefly describe the reasonable country of origin inquiry it undertook in making its determination and the results of the inquiry it performed. Conversely, an issuer must exercise due diligence on its conflict minerals’ source and chain of custody and provide a Conflict Minerals Report if the issuer knows that it has necessary conflict minerals that originated in the Covered Countries and did not come from recycled or scrap sources. In addition, if, based on its reasonable country of origin inquiry, the issuer has reason to believe that its necessary conflict minerals may have originated in the Covered Countries (and may not have come from recycled or scrap sources), the issuer must also exercise due diligence on the source and chain of custody of its conflict minerals. If, however, as a result of that due diligence, such an issuer determines that its conflict minerals did not originate in the Covered Countries or that its conflict minerals did come from recycled or scrap sources, no Conflict Minerals Report is required, but the issuer is required, in the body of its specialized disclosure report, to disclose its determination and briefly describe its due diligence and the results of the due diligence. If, based on its due diligence, the issuer determines that its conflict minerals did originate in the Covered Countries, and did not come from recycled or scrap sources, the issuer is required to submit a Conflict Minerals 451 As discussed below, certainty also is not required for the due diligence inquiry. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Report. If, based on its due diligence, the issue cannot determine the source of its conflict minerals, it is also required to submit a Conflict Minerals Report. This revised approach does not require an issuer to prove a negative to avoid moving to step three, but it also does not allow an issuer to ignore or be willfully blind to warning signs or other circumstances indicating that its conflict minerals may have originated in the Covered Countries. This approach appears consistent with the ‘‘reason-tobelieve approach’’ provided by one commentator.452 Also, as some commentators noted,453 this approach is consistent with the OECD’s due diligence guidance, which states that issuers ‘‘should preliminarily review their mineral or metal sourcing practices to determine if the [due diligence] Guidance applies to them.’’ 454 In its due diligence guidance, the OECD provides non-exclusive examples of circumstances, or red flags, that it states should trigger its guidance.455 One example of a circumstance that, absent other information, should provide an 452 See letter from Tiffany (‘‘A better way to address this issue would be to impose the obligation to submit a conflict minerals report on only those companies that actually have a reason to believe that they use gold (or some other ‘conflict mineral’) that does, in fact, originate in the DRC or surrounding countries (the ‘reason-to-believe approach’).’’). 453 See letters from Enough Project I (stating that, through its reasonable country of origin inquiry, ‘‘an issuer should identify red flags that would alert it to the possibility that the minerals in its products support conflict in the DRC and adjoining countries,’’ and citing to the OECD’s due diligence guidance), Global Witness I (stating that an issuer should ‘‘[r]eview for and consider ‘red flags’ indicating possible sourcing from Covered Countries,’’ and citing to the OECD’s due diligence guidance), and IPMI I (‘‘The OECD’s new international standard for an initial inquiry is a specific point where harmonization will be particularly advantageous, while conforming well to the direction of Congress for a reasonable country of origin inquiry. Like Congress, the OECD advocates an initial determination of origin inquiry: ‘Companies should preliminarily review their mineral or metal sourcing practices to determine if the Guidance applies to them.’’’). 454 See OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 33 (2011), available at https://www.oecd.org/daf/ internationalinvestment/ guidelinesformultinationalenterprises/ 46740847.pdf. 455 See id. (providing a number of examples, including whether conflict minerals are claimed to originate from a country that has limited known reserves of the conflict mineral in question) and OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Supplement on Gold (2012), available at https://www.oecd.org/corporate/ guidelinesformultinationalenterprises/ FINAL%20Supplement%20on%20Gold.pdf. The gold supplement also addresses circumstances triggering due diligence for gold claimed to have come from recycled or scrap sources. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 56313 issuer with reason to believe that its conflict minerals may have originated in the Covered Countries is if an issuer becomes aware that some of its conflict minerals were processed by smelters that sourced from many countries, including the Covered Countries, but the issuer is unable to determine whether the particular minerals it received from such a ‘‘mixed smelter’’ were from the Covered Countries.456 We appreciate that commentators differ in their views as to when due diligence and, potentially, a Conflict Minerals Report is required under the language of the Conflict Minerals Statutory Provision. The provision requires issuers to provide a Conflict Minerals Report if their conflict minerals ‘‘did originate’’ in the Covered Countries but does not address how to determine whether the minerals ‘‘did originate’’ in those countries.457 The final rule adopts the reasonable country of origin inquiry as the procedure for making this determination. Some commentators argued that the statutory language should be read to require that only an issuer that knows, after conducting its reasonable country of origin inquiry, that its conflict minerals originated in the Covered Countries must perform due diligence and provide a Conflict Minerals Report.458 Alternatively, other commentators argued that the provision should be read to require issuers that are unable to determine that their conflict minerals did not originate in the Covered Countries to perform due diligence and potentially submit a Conflict Minerals Report.459 We believe the approach that is most consistent with the statutory language and its purposes, however, is to require any issuer that, after the reasonable country of origin inquiry, knows that its minerals originated in the Covered Countries and did not come from recycled or scrap sources to perform due diligence regarding those 456 This scenario is consistent with the OECD due diligence framework’s statement that ‘‘tracing minerals in a company’s possession are generally unfeasible after smelting, with refined metals entering the consumer market as small parts of various components in end products.’’ See OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 33 (2011), available at https:// www.oecd.org/daf/internationalinvestment/ guidelinesformultinationalenterprises/ 46740847.pdf. 457 See Exchange Act Section 13(p)(1)(A) (stating that ‘‘in cases in which such conflict minerals did originate in the’’ Covered Countries (emphasis added), the issuer must ‘‘submit to the Commission’’ a Conflict Minerals Report). 458 See, e.g., letters from AngloGold, Clearly Gottlieb, NAM I, and Tiffany. 459 See, e.g., letters from NEI, NYCBar I, and NYCBar II. E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56314 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations minerals and submit a Conflict Minerals Report. In addition, any issuer that, after conducting its reasonable country of origin inquiry, has reason to believe that its minerals may have originated in the Covered Countries, and may not have come from recycled or scrap sources must perform due diligence. If, as a result of that due diligence, such an issuer determines that its conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources, no Conflict Minerals Report is required (although, as discussed below, such due diligence, and the results thereof, must be disclosed in the body of such issuer’s specialized disclosure report, together with the description of such issuer’s reasonable country of origin inquiry). Otherwise, such an issuer must submit a Conflict Minerals Report. We are adopting this approach in the final rule. Interpreting the Conflict Minerals Statutory Provision to require due diligence only if an issuer has affirmatively determined that its conflict minerals originated in the Covered Countries and does not come from recycled or scrap sources would undermine the goals of the statute. For instance, if we allowed an issuer to stop its inquiry after learning that its necessary conflict minerals came from a smelter that includes minerals from the Covered Countries and other sources without knowing if its particular minerals came from the Covered Countries, there would be an incentive for issuers to avoid learning the ultimate source of the minerals. Thus, although we realize our approach will be more costly than only requiring due diligence and, potentially, a Conflict Minerals Report if the issuer has affirmative knowledge that its minerals came from the Covered Countries, in our view, requiring further steps by issuers that have reason to believe that they have necessary conflict minerals that may have originated in the Covered Countries is necessary to carry out the requirements contemplated by the statute. Moreover, this approach strikes a more appropriate balance than requiring an issuer to prove a negative— that their necessary conflict minerals did not originate in the Covered Countries—which would be even more costly. Alternatively, the Conflict Minerals Statutory Provision could be interpreted to require all issuers to determine whether their conflict minerals originated in the Covered Countries through the exercise of due diligence. This inquiry could be quite costly, especially in a situation in which an issuer is unable to determine that a very VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 small amount of its overall conflict minerals did not originate in the Covered Countries or come from recycled or scrap sources. While such an interpretation of the provision is plausible and, in fact, was suggested by two of the co-sponsors of the provision as the accurate interpretation of the Conflict Minerals Statutory Provision,460 we do not believe that approach is necessary to achieve Congress’s goal. Instead, we believe the reasonable country of origin inquiry standard provides a clearer way for issuers to make the necessary determination and does so in a manner that significantly reduces burdens and is more cost-effective. Although the reasonable country of origin inquiry will impose costs on issuers, we believe the costs are lower than those that would be incurred if issuers were always required to perform due diligence. Finally, we note that an issuer conducting an appropriate reasonable country of origin inquiry may not be able to determine to a certainty the origin of all its conflict minerals or whether they came from recycled or scrap sources. A certainty is not required to satisfy the reasonable country of origin inquiry standard. Disclosure indicating that the determination is uncertain is unnecessary. Consistent with this approach, issuers may explicitly state that, if true, their reasonable country of origin inquiry was reasonably designed to determine whether the conflict minerals did originate in the Covered Countries or did not come from recycled or scrap sources and was performed in good faith, and the issuer’s conclusion that the conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources was made at that reasonableness level. 2. Disclosures in the Body of the Specialized Disclosure Report a. Proposed Rules Under the proposed rules, an issuer would have been required to make a reasonable country of origin inquiry as to whether its conflict minerals originated in the Covered Countries. After the reasonable country of origin inquiry, if an issuer concluded that its conflict minerals did not originate in the Covered Countries, the issuer would have been required to disclose its 460 See letter from Sen. Durbin/Rep. McDermott (‘‘The proposed rule differentiates between the country of origin inquiry and the due diligence involved in determining the source and chain of custody of conflict minerals, indicating that the former could be ‘less exhaustive.’ This is a misreading of our intent—we see no difference in the effort that should be exercised in each case.’’). PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 conclusion in the body of its annual report and on its Internet Web site.461 Also, the proposed rules would have required that such an issuer disclose in the body of its annual report and on its Internet Web site the reasonable country of origin inquiry it used in making that determination. The proposed rules would not, however, have required an issuer that, after its reasonable country of origin inquiry, determined that its conflict minerals did not originate in the Covered Countries to disclose the actual countries from which the conflict minerals originated. The issuer would have been required to provide in the body of the annual report the Internet address on which the disclosure was posted and retain the information on the Web site at least until the issuer’s subsequent annual report was filed. Finally, the issuer would have been required to maintain reviewable business records in support of its negative determination. The issuer, however, would not have been required to make any other disclosures with regard to the conflict minerals that did not originate in the Covered Countries. Alternatively, if an issuer determined through its reasonable country of origin inquiry that any of its conflict minerals originated in the Covered Countries, or if the issuer was unable to determine after a reasonable country of origin inquiry that its conflict minerals did not originate in the Covered Countries, the proposed rules would have required the issuer to disclose this result in the body of its annual report and disclose that the Conflict Minerals Report was furnished as an exhibit to its annual report. Additionally, the issuer would have been required to make available its Conflict Minerals Report on its Internet Web site until its subsequent annual report was filed, disclose in the body of its annual report that the Conflict Minerals Report was posted on its Internet Web site, and provide the Internet address on which the Conflict Minerals Report was located.462 Under the proposed rules, such an issuer would have been required to post the Conflict Minerals Report on its Internet Web site, but the issuer would not have had to post any of the disclosures it provided in the body of its annual report on its Web site. b. Comments on the Proposed Rules Almost all of those that commented on this point believed that the final rule should require some very brief 461 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 its subsequent annual report. 462 See Exchange Act Section 13(p)(1)(E). E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES discussion of the conflict minerals information in the body of the annual report.463 Some commentators indicated, however, that an issuer should not have to provide any disclosure in the body of the annual report,464 and one commentator stated that an issuer should not have to describe the findings of its Conflict Minerals Report in the body of the annual report.465 Other commentators remarked that the full text of the Conflict Minerals Report could be provided as an exhibit to an issuer’s annual report.466 In contrast, a few commentators asserted that an issuer should be required to include its full country of origin disclosure and the full text of its Conflict Minerals Report in the body of the annual report.467 A number of commentators agreed that, as proposed, an issuer with conflict minerals that did not originate in the Covered Countries should be required to disclose its reasonable country of inquiry because not requiring such disclosure would undercut the essential purpose of the Conflict Minerals Statutory Provision.468 A number of other commentators, however, disagreed,469 and some of these commentators justified their position by noting that the Conflict Minerals Statutory Provision does not require such disclosure and asserted that such disclosure would not serve any constructive purpose.470 Also, of the many commentators that discussed this topic,471 one asserted that an issuer with no conflict minerals from the Covered Countries should be required to disclose the name of the country from which its conflict minerals’ originated so that investors could determine the veracity of the conclusion.472 Most of the commentators that discussed the topic agreed that, as proposed, an issuer should be required 463 See, e.g., letters from AngloGold, Howland, NEI, NY State Bar, SEMI, SIF I, and TriQuint I. 464 See letters from ITIC I and WGC II. 465 See letter from NY State Bar. 466 See letters from Ford, NEI, and WGC II. 467 See letters from CRS I and Earthworks. 468 See, e.g., letters from CRS I, Earthworks, Hileman Consulting, Methodist Pension, MSG I, NEI, TIC, Tiffany, and TriQuint I. 469 See, e.g., letters from AngloGold, Cleary Gottlieb, Howland, NMA II, NY State Bar, SEMI, and WGC II. 470 See letters from Cleary Gottlieb, NY State Bar, and SEMI. 471 See, e.g., letters from AngloGold, Global Tungsten I, Howland, IPC I, ITRI I, JVC et al. II, NAM I, NEI, NMA II, RMA, SEMI, State II, TIC, TriQuint I, and WGC II. 472 See letter from SIF I. See also letter from State II (noting that such a requirement would encourage issuers to establish due diligence procedures across their conflict mineral supply chains regardless of the minerals’ country of origin). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 to maintain reviewable business records when it determines that its conflict minerals did not originate in the Covered Countries.473 These commentators disagreed, however, about the length of time that the final rule should require the records be kept. The suggested durations ranged from one year to a period covering the duration of the law.474 In addition, some commentators recommended that the final rule clarify the meaning of ‘‘reviewable business records.’’ 475 There were a few commentators, however, that did not believe that the final rule should require an issuer to retain reviewable business records at all because such a requirement is not in the Conflict Minerals Statutory Provision, an issuer should be permitted to create its own records as it does for the financial and other information in its annual reports, and such a rule would provide an independent books and records requirement that goes beyond the Conflict Minerals Statutory Provision.476 c. Final Rule After considering the comments, we are modifying the proposal regarding the substantive disclosures in the body of the specialized disclosure report, in part. An issuer that determines that, following its reasonable country of origin inquiry, its conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources or has no reason to believe that its necessary conflict minerals may have originated in the Covered Countries or may not be from recycled or scrap sources, is required to make certain disclosures in the body of its specialized disclosure report on Form SD,477 under the ‘‘Conflict Minerals Disclosure’’ heading. This requirement is generally consistent with the proposal, except that 473 See, e.g., letters from AngloGold, Columban Center et al., CRS I, Hileman Consulting, Earthworks, Global Witness I, Howland, ICGLR, JVC et al. II, Kemet, MSG I, NEI, NMA II, Sen. Durbin/ Rep. McDermott, SIF I, State II, TIAA–CREF, TIC, TriQuint I, and WGC II. 474 Suggested durations included, ‘‘multiple years,’’ ‘‘a sufficiently long period of time,’’ ‘‘as long as their home jurisdictions (of foreign private issuers) require,’’ ‘‘for the duration of the law,’’ one year, two years, three years, five years, seven years, and 10 years. See, e.g., letters from AngloGold, Columban Center et al., CRS I, Earthworks, Global Witness I, Hileman Consulting, Howland, ICGLR, Kemet, MSG I, NEI, NMA II, Sen. Durbin/Rep. McDermott, SIF I, State II, TIC, TriQuint I, Trott, and WGC II. 475 See letters from JVC et al. II and TIC. 476 See letters from Cleary Gottlieb, NAM I, SEMI, and Tiffany. 477 As discussed above, the final rule will require that all disclosure be in the body of the issuer’s specialized disclosure report on new Form SD instead of its annual report. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 56315 the proposal required due diligence regarding conflict minerals from recycled or scrap sources. An issuer determining that its conflict minerals that did not originate in the Covered Countries or that came from recycled or scrap sources or that has no reason to believe that its necessary conflict minerals may have originated in the Covered Countries or may not be from recycled or scrap sources must disclose its determination and results and provide a brief description of the inquiry it undertook and the results and provide a link to its Internet Web site where the disclosure is publicly available. However, in a change from the proposal, the final rule requires such an issuer to provide a brief description of the results of the inquiry it performed to demonstrate the basis for concluding that it is not required to submit a Conflict Minerals Report. As discussed above, we note that there may be instances in which an issuer determines, based on its reasonable country of origin inquiry, that it has reason to believe it has conflict minerals that may have originated in the Covered Countries and may not be from recycled or scrap sources and, therefore, must exercise due diligence on the source and chain of custody of the conflict minerals. If, at any point during the exercise of that due diligence, the issuer determines that its conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources, the issuer is not required to submit a Conflict Minerals Report. The issuer, however, is still required to submit a specialized disclosure report disclosing its determination and briefly describing the reasonable country of origin inquiry and the due diligence efforts it exercised and the results of the inquiry and due diligence efforts to demonstrate why the issuer believes that the conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources. We note the views of some commentators that requiring issuers to describe their reasonable country of origin inquiry would impose costs neither justified nor required by the provision. Also, we note that the Conflict Minerals Statutory Provision requires only that a ‘‘person described’’ disclose annually ‘‘whether conflict minerals that are necessary * * * did originate in the Democratic Republic of the Congo or an adjoining country and, in cases in which such conflict minerals did originate in any such country, E:\FR\FM\12SER2.SGM 12SER2 56316 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations submit to the Commission a report.’’ 478 Therefore, the Conflict Minerals Statutory Provision only explicitly requires an issuer to provide additional disclosure if the issuer determines that its conflict minerals did originate in the Covered Countries.479 We believe, however, that requiring an issuer to provide a brief description of the reasonable country of origin inquiry it undertook is appropriate despite the additional costs associated with providing such a description. As discussed above, the reasonable country of origin inquiry is not a prescriptive standard and does not require certainty. As a result, there will likely be variation in the approaches taken by issuers. Consequently, we believe it is appropriate to require disclosure regarding the reasonable country of origin inquiry so that interested parties can evaluate ‘‘the degree of care’’ the issuer used in making its negative determination,480 and it will ‘‘help ensure credibility of issuer disclosure.’’ 481 Also, although the Conflict Minerals Statutory Provision does not explicitly require an issuer to provide further disclosure if the issuer determines that its conflict minerals did not originate in the Covered Countries, the provision does not provide that such disclosures cannot be required. Therefore, we believe that requiring this disclosure is permitted as well as appropriate. As described above, the final rule does not prescribe particular steps or require an issuer to establish to a certainty that its minerals did not originate in the Covered Countries or come from recycled or scrap sources. Instead, the final rule relies on a reasonable design and good faith execution approach. Requiring an issuer to briefly describe the results of the inquiry it performed is intended to enable stakeholders to assess the issuer’s reasonable country of origin design and its efforts in carrying out that design. Also, this disclosure is intended to allow stakeholders to form their own views on the reasonableness of the issuer’s efforts. Based on this 478 See Exchange Act Section 13(p)(1)(A). e.g., letter from Cleary Gottlieb. This commentator argued ‘‘an issuer that concludes it has necessary conflict minerals that did not (emphasis in original) originate in the Covered Countries must only disclose that conclusion— there is no requirement in the Dodd-Frank Act for disclosure of the inquiry process the issuer undertook in coming to that conclusion,’’ because the provision ‘‘only provides for increased disclosure requirements * * * once an issuer has affirmatively determined that its necessary conflict minerals originated in a DRC country.’’ Id. 480 See letter from MSG I. 481 See letter from NEI. sroberts on DSK5SPTVN1PROD with RULES 479 See, VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 information, stakeholders could advocate for different processes for individual issuers if they believe it is necessary.482 In addition, it is expected that reasonable country of origin inquiry processes will change over time based both on improved supply chain visibility and the results of an issuer’s prior year inquiry. Requiring an issuer to provide a brief description of the results of its inquiry, therefore, will allow stakeholders to track that progress and advocate for different procedures if they think it is necessary. We have decided, however, not to adopt the proposed requirement for an issuer to maintain reviewable business records supporting its conclusion that its conflict minerals did not originate in the Covered Countries based on its reasonable country of origin. The Conflict Minerals Statutory Provision does not require an issuer to maintain reviewable business records to support its determination of the source of its conflict minerals. In addition, there does not appear to be a need for the rule to require that an issuer maintain such records. As one commentator noted, issuers ‘‘provide vast amounts of material information in, for example, Management’s Discussion and Analysis in periodic reports, for which the SEC does not impose specific record retention requirements for maintaining the source materials used to generate the disclosures.’’ 483 Therefore, we believe that it is unnecessary for us to require an issuer to maintain reviewable business records, although maintenance of appropriate records may be useful in demonstrating compliance with the final rule, and may be required by any nationally or internationally recognized due diligence framework applied by an issuer. Also, in contrast to the proposal, we are not requiring an issuer to disclose in either its specialized disclosure report or its annual report, under a separate heading entitled ‘‘Conflict Minerals Disclosure,’’ whether any of its necessary conflict minerals originated in the Covered Countries or did not come from recycled or scrap sources or that the issuer was unable to determine that its conflict minerals did not originate in the Covered Countries or come from recycled or scrap sources. Under the 482 In this regard, an issuer’s description of the results of the reasonable country of origin inquiry should make clear why it determined that its conflict minerals did not originate in the Covered Countries. This is also the case for issuers that must disclose their reasonable country of origin inquiry and due diligence efforts if they determine, following their due diligence, that their conflict minerals did not originate in the Covered Countries or did come from recycled or scrap sources. 483 See letter from NAM I. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 proposal, an issuer required to provide a Conflict Minerals Report, including an issuer required to provide a Conflict Minerals Report because its conflict minerals came from the recycled or scrap sources, would have been required to disclose in the body of its annual report that it furnished a Conflict Minerals Report as an exhibit to its annual report, that the Conflict Minerals Report and certified independent private sector audit report were available on its Internet Web site, and the Internet address where the Conflict Minerals Report and audit report were located. Instead, to reduce some costs and burdens to issuers, the final rule only requires an issuer required to provide a Conflict Minerals Report to disclose in its specialized disclosure report, under a separate heading entitled ‘‘Conflict Minerals Disclosure,’’ that a Conflict Minerals Report is provided as an exhibit to its specialized disclosure report and to disclose a link to its Internet Web site where the Conflict Minerals Report is publicly available. The final rule does not require an issuer to disclose in the body of its specialized disclosure report the reason that the issuer is providing a Conflict Minerals Report because that information will be disclosed by the issuer in the Conflict Minerals Report. Requiring that information also in the body of the specialized disclosure report would be redundant and unnecessary. Similarly, the final rule does not require an issuer to disclose in its specialized disclosure report that it has provided an audit report or a certification of the audit, if applicable, because the audit report and certification would be part of the Conflict Minerals Report already, so specifically mentioning the audit report or certification here is not necessary and may be confusing. E. Step Three—Conflict Minerals Report’s Content and Supply Chain Due Diligence The Conflict Minerals Statutory Provision requires an issuer that determines that its necessary conflict minerals originated in the Covered Countries to submit a Conflict Minerals Report.484 The Conflict Minerals Report must include, 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.485 In this regard, the Conflict Minerals Statutory Provision states also 484 See 485 See E:\FR\FM\12SER2.SGM Exchange Act Section 13(p)(1)(A). Exchange Act Section 13(p)(1)(A)(i). 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 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.’’ 486 Also, the Conflict Minerals Statutory Provision requires that the Conflict Minerals Report must provide a description of the products ‘‘manufactured or contracted to be manufactured that are not ‘DRC conflict free,’ ’’ the entity that conducted the independent private sector audit, 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.487 1. Content of the Conflict Minerals Report a. Proposed Rules The proposed rules would have required an issuer to exercise due diligence on the source and chain of custody of its conflict minerals that it was unable to determine, based on its reasonable country of origin inquiry, did not originate in the Covered Countries and to describe those due diligence measures in its Conflict Minerals Report. Consistent with the Conflict Minerals Statutory Provision,488 we proposed to require that the description of the measures taken by an issuer to exercise due diligence on the source and chain of custody of its conflict minerals would include a certified independent private sector audit conducted in accordance with the standards established by the Comptroller General of the United States.489 The proposed rules also stated that the audit would constitute a critical component of due diligence.490 To implement the Conflict Minerals Statutory Provision’s requirement that an issuer ‘‘certify the audit,’’ 491 we proposed that an issuer would be required to certify that it obtained an independent private sector audit of its Conflict Minerals Report,492 and we proposed that an issuer would provide this certification in that report. 486 See Exchange Act Section 13(p)(1)(B). Exchange Act Section 13(p)(1)(A)(ii). 488 See Exchange Act Sections 13(p)(1)(A)(i) and 13(p)(1)(B). 489 See Exchange Act Section 13(p)(1)(A). 490 See Exchange Act Section 13(p)(1)(B). 491 See id. 492 As discussed in the Proposing Release, 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 did not propose this approach. sroberts on DSK5SPTVN1PROD with RULES 487 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Further, as required by the Conflict Minerals Statutory Provision,493 we proposed that the rules would require descriptions, in the Conflict Minerals Report, of an issuer’s 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. The Conflict Minerals Statutory Provision uses the phrase ‘‘facilities used to process the conflict minerals,’’ which we noted in the Proposing Release would appear to refer to the smelter or refinery through which the issuer’s minerals passed. We noted also that the Conflict Minerals Statutory 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.494 The Proposing Release also noted that 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,’’ 495 as they relate to the Covered Countries (‘‘Country Reports’’).496 Our proposed rules included a cross reference to that definition to provide guidance. Under the proposed rules, an issuer that was unable to determine that its conflict minerals did not originate in the Covered Countries would have been required to furnish a Conflict Minerals Report to the same extent as an issuer with conflict minerals that originated in the Covered Countries. We recognized that an issuer unable to determine that its conflict minerals did not originate in the Covered Countries may not be able to determine to a certainty whether any of its products are or are not ‘‘DRC conflict free,’’ insofar as its initial effort to determine the origin of the conflict minerals in those products under the reasonable country of origin inquiry was inconclusive and its subsequent due diligence on the source and chain of custody of such minerals was also inconclusive. Consistent with Exchange Act Section 13(p)(1)(A)(ii), we proposed that an issuer unable to determine that its conflict minerals did not originate in the Covered Countries would be required to describe all of its products that contain such conflict minerals and 493 See Exchange Act Section 13(p)(1)(A)(ii). Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D). 495 22 U.S.C. 2151n(d) and 2304(b). 496 Section 1502(e)(3) of the Act. 494 See PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 56317 identify these products as ‘‘not DRC conflict free’’ 497 because the issuer would not have determined that the products satisfied the statutory definition of ‘‘DRC conflict free’’—that the products do ‘‘not contain conflict minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries. The proposed rules would have allowed an issuer to provide additional disclosure explaining, for example, that although these products were categorized as not ‘‘DRC conflict free’’ in compliance with the proposed rules implementing the Conflict Minerals Statutory Provision and the statutory definition of ‘‘DRC conflict free,’’ the issuer had been unable to determine the source of the conflict minerals, including whether the conflict minerals in these products actually benefited or financed armed groups in the Covered Countries. Also, such an issuer would have been 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.498 Any issuer with products considered not ‘‘DRC conflict free’’ would have been required to provide a description of those products in its Conflict Minerals Report. That description would have been based on the issuer’s individual facts and circumstances so that the description sufficiently identified the products or categories of products. For example, an issuer could disclose each model of a product containing conflict minerals that directly or indirectly financed or benefited armed groups in the Covered Countries, each category of a product containing such conflict minerals, the specific products containing such conflict minerals that were produced during a specific time period, that all its 497 If any products contained both conflict minerals that did not originate in the Covered Countries and conflict minerals that the issuer was unable to determine did not originate in the Covered Countries, the issuer, under the proposal, would be required to classify those products as not ‘‘DRC conflict free.’’ Similarly, if any of an issuer’s products contained conflict minerals that did not originate in the Covered Countries, that the issuer was unable to determine did not originate in the Covered Countries, or that originated in the Covered Countries but did not directly or indirectly finance or benefit armed groups in the Covered Countries, and also contained conflict minerals that originated in the Covered Countries and that directly or indirectly financed or benefited armed groups in the Covered Countries, the issuer would be required to classify those products as not ‘‘DRC conflict free.’’ 498 We recognized that such an issuer would not be able to provide the country of origin of those minerals, so the proposed rules would not require this information. E:\FR\FM\12SER2.SGM 12SER2 56318 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations products contain such conflict minerals, or another such description depending on the issuer’s facts and circumstances. As proposed, our rules would have required an issuer to furnish, as part of its Conflict Minerals Report, the audit report prepared by the independent private sector auditor and the identity of the auditor.499 We noted that, 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 believed that approach was not the better reading of the Conflict Minerals Statutory Provision. As noted above, the Conflict Minerals Statutory Provision emphasizes that the independent audit is a ‘‘critical component of due diligence.’’ In light of the importance of this audit report to the proposed reporting requirements and the statutory language, we proposed to require that the audit report be furnished with the Conflict Minerals Report. Proposed Item 4(a) of Form 10–K (referring to proposed Instruction 2 to Item 104 of Regulation S–K), proposed Instruction 3 to Item 16 of Form 20–F, and proposed Instruction 3 to General Instruction B(16) of Form 40–F would have provided 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 incorporated it by reference. For example, if an issuer incorporated by reference its annual report into a Securities Act registration statement, that issuer would not also automatically incorporate the Conflict Minerals Report into that Securities Act document. Also, in such a situation, the independent private sector auditor would not have assumed expert liability and the issuer would not,500 therefore, have been required to file a consent from that auditor unless the issuer specifically incorporated by reference the Conflict Minerals Report into the Securities Act registration statement. sroberts on DSK5SPTVN1PROD with RULES b. Comments on the Proposed Rules A number of commentators agreed with the proposed rules’ requirement that an issuer unable to determine that its conflict minerals did not originate in 499 Our proposal to 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).’’ 500 See Rule 436 of Regulation C [17 CFR 230.436]. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 the Covered Countries be required to describe its products as not ‘‘DRC conflict free’’ in its Conflict Minerals Report.501 In one comment letter, five senators stated that Congress did not intend for the Conflict Minerals Statutory Provision to allow issuers to report that the origins of their conflict minerals was undeterminable.502 Instead, the letter argued that Congress ‘‘intended and directed’’ the final rule to require that, if an issuer ‘‘cannot affirm that the minerals are ‘conflict-free,’ the only other conclusion that could be reported would be that the product may contain materials that directly or indirectly finance armed groups in the DRC.’’ 503 In another comment letter, members of Congress asserted that conflict minerals information that does ‘‘not clearly list a company’s activities and rules allowing a category of ‘indeterminate’ would undermine congressional intent.’’ 504 Other commentators indicated, however, that the final rule should not require an issuer unable to determine that its conflict minerals did not originate in the Covered Countries to state that its conflict minerals are not ‘‘DRC conflict free’’ either on a temporary or permanent basis.505 Some commentators who are members of Congress requested that we consider, as an alternative to the proposed rules, ‘‘phasing-in implementation to allow for materials of indeterminate origin currently in the supply chain to be properly classified.’’ 506 In another letter, members of Congress suggested that the final rule create a temporary classification for minerals of an indeterminate origin that would exempt companies with such minerals from the requirement to provide a Conflict Minerals Report.507 Some commentators suggested that such issuers should be required to state that its products with such conflict minerals are not ‘‘DRC conflict free’’ after a certain number of years.508 Some commentators asserted that the proposed rules would violate 501 See, e.g., letters from CRS I, Earthworks, Evangelical Alliance, Evangelicals, Howland, Methodist Board, NEI, Presbyterian Church II, Rep. Berman et al., Sen. Boxer et al. II, Sen. Durbin/Rep. McDermott, State II, and World Vision II. 502 See letter from Sen. Boxer et al. II. 503 Id. 504 See letter from Sen. Leahy et al. 505 See, e.g., letters from AdvaMed I, Cleary Gottlieb, IPC I, ITRI I, JVC et al. II, NAM I, NAM III, Rep. Bachus et al., Rep. Critz, Rep. Ellmers, Rep. Murphy, TIAA–CREF, Tiffany, TriQuint I, and WGC II. 506 See letters from Rep. Critz, Rep. Ellmers, and Rep. Murphy. 507 See letter from Rep. Bachus et al. 508 See letters from IPC I, SIF I, TIAA–CREF, and TriQuint I. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 the First Amendment because, among other reasons, the rules would compel speech that is not of a commercial nature, which is different from other corporate disclosures, and would require some issuers, such as those unable to determine that their conflict minerals did not originate in the Covered Countries, to provide false, stigmatizing information.509 Some commentators urged that an issuer unable to determine that its conflict minerals did not originate in the Covered Countries should not be required to submit a Conflict Minerals Report that is audited by an independent private sector auditor.510 As one commentator asserted, the provision ‘‘does not require an issuer that has been unable to determine (after proper inquiry) the source of its conflict minerals * * * to provide a Conflict Minerals Report,’’ because the ‘‘statute uses the phrase ‘in cases in which such conflict minerals did originate in [a DRC country],’ as the trigger for providing a Conflict Minerals Report’’ (emphasis and bracket in original).511 One commentator, in two separate letters, disagreed with this position, however, and stated that any issuer that is unable to determine that its conflict minerals did not originate in the Covered Countries must be required to submit an audited Conflict Minerals Report to support its conclusion.512 Another commentator recommended that the final rule allow issuers to provide annual, unaudited conflict minerals disclosure that would identify the issuer’s products that the issuer ‘‘reasonably believes may contain ‘conflict minerals;’ ’’ indicate that the origin of these minerals is indeterminate and explain why the minerals origin is indeterminate; identify and disclose the issuer’s involvement in any governmental, semi-governmental, and private sector diligence initiatives; and describe the measures the issuer has undertaken to develop a management 509 See letters from Taiwan Semi, Tiffany, and WLF. 510 See, e.g., letters from AngloGold, Cleary Gottlieb, NAM I, and Tiffany. 511 See letter from Cleary Gottlieb. 512 See letters from NYCBar I (‘‘We also believe the rules should require reporting firms that cannot, after due diligence, determine the origin of the materials used in their products to submit a Conflict Minerals Report and an independent audit of such report to ensure such issuers cannot easily avoid their obligations and disclosure requirements prescribed by these rules.’’) and NYCBar II (‘‘The rules should require reporting firms that cannot, after due diligence, determine the origin of the materials used in their products to submit a Conflict Minerals Report and an independent audit of such report to ensure such issuers cannot easily avoid their obligations and disclosure requirements prescribed by the rules.’’). E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations due diligence system covering its supply chain for each conflict mineral.513 One commentator asserted that investors would have ‘‘insufficient material information to evaluate a company’s supply chain risk’’ if the final rule allowed issuers to declare their conflict minerals from an indeterminate origin ‘‘without describing the steps they have taken to make their determination,’’ and recommended that the final rule ‘‘require reporting to be sufficiently detailed to inform investors of the steps an issuer has taken to determine whether the minerals the issuer purchases come from the DRC or an adjoining country.’’ 514 Although we did not propose to require any type of physical label on a product, one commentator stated that it is essential for the final rule to mandate that an issuer with products containing conflict minerals that did not finance or benefit an armed group label those products as ‘‘DRC conflict free.’’ 515 Many commentators, however, remarked that an issuer should not be required to physically label its products.516 Some commentators asserted that an issuer should be permitted to describe its products as ‘‘DRC conflict free’’ only if the issuer sources its conflict minerals in those products from the Covered Countries and those conflict minerals did not finance or benefit armed groups.517 Another commentator added specifically that products should be labeled as ‘‘DRC conflict free’’ only if either they are not from the Covered Countries or do not directly or indirectly support armed groups in the Covered Countries.518 Also, all commentators that discussed the subject agreed that the final rule should, as proposed, allow issuers to provide additional disclosure in describing any of their products that have not been found to be ‘‘DRC conflict free’’ 519 A number of commentators mentioned that the final rule should, as proposed, require an issuer to disclose the facilities, countries of origin, and efforts to determine the mine or location of origin only for its conflict minerals that directly or indirectly financed or 513 See letter from Signet. letter from SIF II. 515 See, e.g., letter from Catholic Relief Services of St. Cloud, Minnesota (Apr. 14, 2011) (‘‘CRS I— St. Cloud’’). 516 See, e.g., letters from Columban Center et al., Howland, Industry Group Coalition I, ITIC I, Japanese Trade Associations, MSG I, NAM I, and SIF I. 517 See letters from ITRI III, MSG I, and SIF I. 518 See letter from State II. 519 See letters from Howland, IPC I, NMA II, SEMI, TriQuint I, and WGC II. sroberts on DSK5SPTVN1PROD with RULES 514 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 benefited armed groups in the Covered Countries.520 A few commentators suggested that all issuers with conflict minerals originating in the Covered Countries, including issuers with conflict minerals that did not directly or indirectly finance or benefit armed groups in the Covered Countries and issuers with conflict minerals that did directly or indirectly finance or benefit armed groups in the Covered Countries, should be required to disclose the facilities, countries of origin, and efforts to determine the mine or location of origin of those conflict minerals.521 Two commentators further recommended that all issuers with conflict minerals, regardless of whether the minerals originated within or without of the Covered Countries, should be required to disclose the facilities, countries of origin, and efforts to determine the mine or location of origin of those conflict minerals.522 Some commentators agreed that the final rule should, as proposed, require an issuer to disclose only the efforts to determine the conflict minerals’ mine or location of origin with the greatest possible specificity.523 Other commentators suggested going further and requiring an issuer to disclose the actual mine or location of origin with the greatest possible specificity.524 Still other commentators argued that the final rule should not require issuers to include specific supply chain information, such as conflict mineral sources, quantities, transit routes, or store houses because such disclosures could hurt an issuer’s competitive advantage or subject the issuer or its employees to violence.525 Alternatively, these commentators recommended that the rule allow for generic descriptions or approximate geographic locations or permit an issuer to redact sensitive or secure information.526 A number of commentators indicated that an issuer should, as proposed, ‘‘certify the audit’’ by certifying that it 520 See, e.g., letter from AngloGold, Barrick Gold, Cleary Gottlieb, Howland, IPC I, JVC et al. II, NAM I, NMA II, and WGC II. 521 See letters from MSG I, NEI, SIF I, and TriQuint I. 522 See letters from Earthworks and Trott. 523 See, e.g., letters from AngloGold, Barrick Gold, JVC et al. II, NAM I, TriQuint I, and WGC II. 524 See, e.g., letters from CRS I, Howland, ICGLR, NEI, State II (acknowledging that, as a best practices approach, an issuer should make every effort to include specific information regarding the mine), TakeBack, and Trott (stating that the final rule should require an issuer to provide as much information as possible regarding its conflict minerals’ mine or location of origin). 525 See letters from Barrick Gold, Global Tungsten II, IPMI I, NMA II, NMA III, and TIC. 526 See letters from Barrick Gold, NMA II, and TIC. PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 56319 obtained an independent private sector audit.527 Many of these commentators, plus some others, remarked that these certifications should either not be signed or, if they are required to be signed, be signed by the issuer or by an individual on behalf of the issuer and not in any individual capacity.528 In contrast, one commentator recommended that an issuer’s senior management or executive officers in some manner certify the independent private sector audit,529 another commentator asserted that it is ‘‘essential that there be CEO level involvement in the filing of the disclosures in order to make sure that companies do not simply ‘game the system,’ ’’ 530 and a further commentator argued that the ‘‘certification of an audit will make little sense unless the signatories verify on a quarterly basis that certain minimal standards have been maintained by the auditors.’’ 531 One commentator asserted that certifying the audit is unnecessary because the audit report will be submitted to the Commission in the Conflict Minerals Report.532 This commentator and another stated that requiring an issuer to certify the audit would prevent an issuer from stating that its products are ‘‘DRC conflict free’’ because no issuer could be so certain of that conclusion that its officers would certify the audit.533 One commentator suggested that no liability should be assigned to individuals that may sign the certifications ‘‘unless the situation involves a knowing and willful intent to mislead.’’ 534 Some commentators agreed that the audit report should, as proposed, be included as part of the Conflict Minerals Report.535 Other commentators recommended that an issuer’s audit report should not be submitted as part of the Conflict Minerals Report because such a requirement would increase audit costs without providing comparable benefits.536 Certain commentators opposed having to make the audit report public and suggested instead that issuers provide the audit 527 See, e.g., letters from Barrick Gold, Cleary Gottlieb, Ford, ICGLR, ITIC I, NAM I, NY State Bar, and WGC II. 528 See, e.g., letters from AngloGold, Barrick Gold, Cleary Gottlieb, Ford, Howland, JVC et al. II, NAM I, NEI, and WGC II. 529 See letter from Grant Thornton LLP (Mar. 2, 2011) (‘‘Grant Thornton’’). 530 See letter from TakeBack. 531 See letter from SARW. 532 See letter from TIC. 533 See letters from Teggeman and TIC. 534 See letters from Cleary Gottlieb and NMA II. 535 See, e.g., letters from Howland, NEI, and Sen. Durbin/Rep. McDermott. 536 See letters from AngloGold and WGC II. E:\FR\FM\12SER2.SGM 12SER2 56320 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES report to the Commission confidentially, allow for sensitive portions to be redacted, or provide it to the Commission with the Commission making it available to the public only in hardcopy form at the Commission’s headquarters.537 Similarly, one commentator objected to requiring an issuer to post the audit report on the issuer’s Internet Web site as long as the Conflict Minerals Report describes the audit report,538 whereas another commentator argued that the final rule should require an issuer to post the audit report on an issuer’s Web site.539 Some commentators indicated that, as proposed, an audit report should not be deemed incorporated by reference into any filing under the Securities Act or Exchange Act unless the issuer specifically incorporates the audit into such a filing.540 A few commentators further suggested that an auditor should not be considered an ‘‘expert’’ under Rule 436 of the Securities Act and recommended that audit reports submitted in subsequent years be able to build off prior audit reports to eliminate duplicative work and, thereby, reduce costs.541 One commentator went further and suggested that any issuer with a recognized supply chain tracking process should not be required to obtain an audit of its Conflict Minerals Report.542 Some commentators requested that the final rule define how an issuer would ‘‘directly or indirectly finance or benefit an armed group.’’ 543 Some of these commentators and others recommended that the Country Reports not be the basis for the Commission’s final rule because those reports are not sufficiently specific with respect to which groups it labels as ‘‘armed groups’’ such that it is unclear whether the DRC army would be considered an ‘‘armed group.’’ 544 For example, one commentator submitted an article arguing that the Conflict Minerals Statutory Provision ‘‘targets units of the Congolese army as much as it does militias precisely because the army is 537 See, e.g., letters from Barrick Gold, Materials Management Corporation (Jan. 13, 2011) (‘‘Materials I’’), NAM I, and NMA II. 538 See letter from ITIC I. 539 See letter from Columban Center et al. 540 See, e.g., letters from Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, NY State Bar, and WGC II. 541 See letters from NY State Bar and WGC II. 542 See letter from TIC. 543 See, e.g., letters from NMA II, Peace, and WGC II. 544 See letters from ITRI I, NMA II, NYCBar I, and Peace. See also letter from NYCBar II (stating specifically that the final rule should include ‘‘the Congolese military (FARDC) in its definition of ‘armed group’’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 comprised largely of ex-rebels, is the major player in the conflict minerals trade and regularly commits appalling crimes against the civilian population.’’ 545 Another commentator, however, stated that if the final rule defined ‘‘armed group’’ using the Country Reports, it would exclude the ex-militia groups that joined the DRC armed forces but continue to contribute to conflict and commit human rights violations.546 One commentator recommended that the final rule define ‘‘armed group’’ using the OECD’s definition for that term.547 Another commentator suggested that the final rule apply only to issuers that are ‘‘directly funding the conflict (or who knowingly indirectly fund the conflict).’’ 548 One commentator recommended that the final rule define ‘‘indirect financing’’ of an armed group to include ‘‘[a]ny way in which an illegitimate armed group profits from the mining, sale, transportation or taxation of minerals or mineral derivatives.’’ 549 Some commentators asserted that the final rule should clarify the definition of an ‘‘armed group’’ or disclose the steps issuers must take to verify whether their conflict minerals benefited armed groups.550 Other commentators suggested that the definition of ‘‘armed group’’ in the final rule should not refer to the ‘‘most recently issued’’ version of the Country Reports ‘‘for the year the annual report is due’’ because the most recently issued version of the Country Reports may not be published for the year the annual report is due.551 c. Final Rule The final rule requires any issuer that, after its reasonable country of origin inquiry, knows that its conflict minerals originated in the Covered Countries and did not come from recycled or scrap sources to provide a Conflict Minerals Report that includes a description of the measures the issuer has taken to exercise due diligence on the source and chain of custody of those conflict minerals. It also requires an issuer that, after its reasonable country of origin inquiry, had reason to believe that its minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources and, after the exercise of due diligence, still has reason to believe that its 545 See letter from ICAR II. letter from Save. 547 See letter from Pact II. 548 See letter from CEI I. 549 See letter from Peace. 550 See, e.g., letters from CRS I—St. Cloud, ITRI I, NMA II, NYCBar I, Peace, and TIC. 551 See, e.g., letters from ITRI I and TIC. 546 See PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources, to provide a Conflict Minerals Report that includes a description of the measures the issuer has taken to exercise due diligence on the source and chain of custody of those conflict minerals. Additionally, in circumstances in which an independent private sector audit is required, the final rule requires, as proposed, that an issuer include a certified independent private sector audit conducted in accordance with the standards established by the Comptroller General of the United States as part of its due diligence on the source and chain of custody of its conflict minerals. Further, the final rule states that, as proposed, the audit constitutes a critical component of due diligence. To implement the Conflict Minerals Statutory Provision’s requirement that issuers ‘‘certify the audit,’’ 552 as proposed, an issuer must certify that it obtained an independent private sector audit of its Conflict Minerals Report and include that certification in the Conflict Minerals Report.553 While we did not specify this in the Proposing Release or proposed rules, in response to commentators’ concerns, the final rule clarifies that the issuer’s audit certification need not be signed by an officer. Instead, the certification takes the form of a statement in the Conflict Minerals Report that the issuer obtained an independent private sector audit. The final rule also requires, unless an issuer’s products are ‘‘DRC conflict free,’’ the Conflict Minerals Report to include a description of 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. As noted in the Proposing Release, we believe that the phrase in the Conflict Minerals Statutory Provision, ‘‘facilities used to process the conflict minerals,’’ refers to the smelter or refinery through which the issuer’s minerals pass. One commentator pointed out that smelting and refining processes are not similar.554 Smelting refers to the 552 Exchange Act Section 13(p)(1)(B). are not adopting the alternative interpretation of the Conflict Minerals Statutory Provision that an issuer must ensure that the audit it obtained is accurate. The Conflict Minerals Report contains management’s assertions related to compliance with this rule; the third-party audit is designed to attest to certain of those assertions. Given this relationship, there does not appear to be a need to have management assert to the accuracy of the audit. 554 Letter from ITRI I. In the Proposing Release, we stated that columbite-tantalite, cassiterite, and 553 We E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES conversion of the mineral ore into its metal form, but the metal still contains many impurities that must be removed by refining the metal. Columbitetantalite, cassiterite, and wolframite are mined only as ores and are smelted into their metal derivatives. Gold, however, is mined in its metallic form because it is found that way naturally. Therefore, gold does not have to be smelted into a metal, but does have to be refined to remove any impurities. In both instances, however, we recognize that as a practical matter it is very difficult, if not impossible, to trace conflict minerals to their mine or other location of origin after columbite-tantalite, cassiterite, and wolframite have been smelted initially and after gold has been refined initially other than through the smelter or refinery. Exchange Act Section 13(p)(1)(A)(ii) also requires an issuer with conflict minerals originating in the Covered Countries to submit a Conflict Minerals Report that includes a description of the issuer’s products ‘‘that are not DRC conflict free.’’ 555 The Conflict Minerals Statutory Provision does not define ‘‘not DRC conflict free,’’ but instead defines ‘‘DRC conflict free.’’ 556 Products are considered ‘‘DRC conflict free’’ under Exchange Act Section 13(p)(1)(A)(ii) if they ‘‘do not contain minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries. (Emphasis added).557 As discussed above, under the proposed rules’ approach, an issuer with a product containing conflict minerals of an undeterminable origin cannot know that its product is ‘‘DRC conflict free;’’ that is, the issuer cannot know that its product ‘‘do[es] not contain conflict minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries, so the issuer would have to describe the product as ‘‘not ‘DRC conflict free.’ ’’ A commentator raised concerns that this approach could lead to incorrect and misleading disclosures and could unfairly punish companies that lack complete visibility into their supply wolframite are smelted into their component metals whereas gold is refined, and we indicated that both processes are substantially similar such that, when we would refer to smelting a conflict mineral, those references were intended to include the refining of gold. 555 See Exchange Act Section 13(p)(1)(A)(ii). 556 See id. and Exchange Act Section 13(p)(1)(D). 557 Exchange Act Section 13(p)(1)(A)(ii). Also, although similar, the definition of ‘‘DRC conflict free’’ under Exchange Act Section 13(p)(1)(D) is slightly different than the definition under Exchange Act Section 13(p)(1)(A)(ii). Exchange Act Section 13(p)(1)(D) states that ‘‘a product may be labeled as ‘DRC conflict free’ if the product does not contain minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 chains.558 The commentator noted that it could turn out that, upon further investigation of the minerals’ origins, the minerals were not from the Covered Countries or did not finance or benefit armed groups, in which case the products made with solely those minerals would be ‘‘DRC conflict free.’’ Of course, we are concerned that any disclosure requirement results in accurate disclosure. At the same time, we are cognizant of our responsibility to fulfill Congress’s directive in Section 1502 and to remain faithful to the language of the statute, and promulgating rules that provide an incentive for issuers to avoid determining the origins of the conflict minerals that they use could undermine the reporting system that Congress has established in Section 13(p) of the Exchange Act. Accordingly, we have modified the final rule to address the commentator’s concerns while remaining faithful to the language and intent of the statute. As described above, during a temporary period, instead of requiring issuers that have proceeded to step three that are unable to determine that their conflict minerals did not originate in the Covered Countries, that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups, or that their conflict minerals came from recycled or scrap sources to describe their products as ‘‘not ‘DRC conflict free,’ ’’ the final rule permits such issuers to describe products containing those conflict minerals as ‘‘DRC conflict undeterminable.’’ An issuer with products that are ‘‘DRC conflict undeterminable’’ is required to exercise due diligence on the source and chain of custody of its conflict minerals and submit a Conflict Minerals Report describing its due diligence; the steps it has taken or will take, if any, since the end of the period covered in its most recent prior Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence; the country of origin of the conflict minerals, if known; the facilities used to process the conflict minerals, if known; and the efforts to determine the mine or location of origin with the greatest possible specificity, if applicable.559 Such an issuer is not, 558 See letter from Tiffany. recognize that an issuer that is unable to determine the origin of its conflict minerals, or unable to determine whether its conflict minerals came from recycled or scrap sources, may not also be able to determine the processing facility of those conflict minerals and will not be able to determine the minerals’ country of origin. Therefore, these 559 We PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 56321 however, required to obtain an independent private sector audit of that Conflict Minerals Report. We are permitting this temporary category to address concerns of many industry commentators that supply chain due diligence mechanisms have not yet been established; 560 and, therefore, many issuers will not be able to readily determine whether their conflict minerals did not originate in the Covered Countries, did not finance or benefit armed groups, or did come from recycled or scrap sources. This temporary category should allow issuers time to establish supply chain due diligence mechanisms to determine whether their minerals originated in the Covered Countries, directly or indirectly financed or benefited armed groups in the Covered Countries, or came from recycled or scrap sources. This additional time should also decrease the possibility that issuers that might ultimately be able to determine that their necessary minerals did not originate in the Covered Countries, did not finance or benefit armed groups, or came from recycled or scrap sources would initially be required to report that their products have not been found to be ‘‘DRC conflict free’’ simply because they had not yet been able to determine the minerals’ origins or whether they were from recycled or scrap sources. By decreasing this possibility, the temporary category will lead to more accurate disclosure. We believe this approach will allow the final rule to more appropriately target the population of issuers from which Congress intended to require this disclosure and will allow time for processes to be put in place so that issuers may be able to determine the origin of their conflict minerals. The ‘‘undeterminable’’ reporting alternative, however, is only permitted temporarily. For all issuers, this alternative will be permitted during the first two reporting cycles following the effectiveness of the final rule, which includes the specialized disclosure reports for 2013 through 2014. For smaller reporting companies, this alternative will be permitted during the first four reporting cycles following the issuers only have to describe the processing facilities if they are known to the issuer and do not have to disclose the country of origin. Also, an issuer that is unable to determine whether its conflict minerals came from recycled or scrap sources does not have to describe its efforts to determine the mine or location of origin with the greatest possible specificity because issuers with conflict minerals from recycled or scrap sources are not required to determine the mine or location of origin. 560 See, e.g., letters from CTIA, FEC I, JVC et al. II, NAM III, NRF I, Roundtable, and WilmerHale. E:\FR\FM\12SER2.SGM 12SER2 56322 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES effectiveness of the final rule, which includes the specialized disclosure reports for 2013 through 2016. Beginning with the third reporting period, from January 1, 2015 to December 31, 2015, for all issuers and the fifth reporting period, from January 1, 2017 to December 31, 2017, for smaller reporting companies, every such issuer will have to describe products in its Conflict Minerals Report as having ‘‘not been found to be ‘DRC conflict free.’’’ Also, issuers will be required to make such a disclosure even if they proceed to step three and are unable to determine that their conflict minerals did not originate in the Covered Countries, that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups, or that their conflict minerals came from recycled or scrap sources. These issuers will also be required to provide an independent private sector audit of their Conflict Minerals Report.561 While this disclosure is required after the temporary period, even when issuers are unable to determine the origin of their conflict minerals, we have changed the language of the disclosure from the proposal to address concerns raised about the accuracy of the disclosure required in these circumstances. In our view, it is accurate to describe such products as having ‘‘not been found to be ‘DRC conflict free.’ ’’ ‘‘DRC conflict free’’ is a defined term in the statute, meaning that the product ‘‘do[es] not contain conflict minerals that directly or indirectly finance or benefit armed groups in the’’ Covered Countries. An issuer that does not know that its conflict minerals did not originate in the Covered Countries, that its conflict minerals that originated in the Covered Countries did not finance or benefit armed groups, or that the minerals came from recycled or scrap sources cannot accurately state that its conflict minerals have been found to meet this definition; therefore, its products have not been found to be ‘‘DRC conflict free’’ as defined in the statute. Additionally, under the final rule, as proposed, issuers can add disclosure or clarification. This allows issuers to include the statutory definition of ‘‘DRC conflict free’’ in the disclosure to make clear that ‘‘DRC conflict free’’ has a very 561 As noted below, an issuer exercising due diligence to determine whether a conflict mineral is from a recycled or scrap source is not required to obtain an independent private sector audit of its Conflict Minerals Report, regarding that conflict mineral, if there is no nationally or internationally recognized due diligence framework for that recycled or scrap conflict mineral. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 specific meaning, or to otherwise address their particular situation.562 We also believe that the revised disclosure that the products ‘‘have not been found to be ‘DRC conflict free’ ’’ mitigates concerns expressed by some commentators that the Proposing Release’s specific required language, ‘‘are not ‘DRC conflict free,’ ’’ would impose an unfair stigma, particularly on issuers that did not know whether their minerals directly or indirectly financed or benefited armed groups in the Covered Countries. Although it does not appear that any individual commentator suggested the exact approach we are adopting, this approach incorporates suggestions from various commentators. One commentator recommended that we adopt a ‘‘phase-in or transitional approach in order to address the substantial practical difficulties issuers currently face in seeking to trace the origins of conflict minerals included in their products and to determine if these minerals are or are not ‘DRC conflict free.’ ’’ 563 This commentator’s recommendation was for the final rule to include a phase-in period through 2014 in which any issuer with conflict minerals for which the issuer was unable to determine their origin would describe the conflict minerals as from an ‘‘indeterminate source’’ and would be permitted, instead of providing a Conflict Minerals Report, to disclose its conflict minerals policy and provide a statement that, due to the lack of current infrastructure, it is not possible to determine the origin of its conflict minerals. The commentator recommended that the ‘‘indeterminate source’’ category would be available only through 2014. Another commentator recommended that the final rule allow a similar phase-in 562 For example, in addition to the disclosure in the Conflict Minerals Report, the issuer could state: ‘‘The following is a description of our products that have not been found to be ‘‘DRC conflict free’’ (where ‘DRC conflict free’ is defined under the federal securities laws to mean that a product does not contain conflict minerals necessary to the functionality or production of that product that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country).’’ Alternatively, an issuer that is still unable to determine the origin of some of its conflict minerals after the two-year or four-year period, might state: ‘‘We have been unable to determine the origins of some of our conflict minerals. Because we cannot determine the origins of the minerals, we are not able to state that products containing such minerals do not contain conflict minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country. Therefore, under the federal securities laws we must describe the products containing such minerals as having not been found to be ‘DRC conflict free.’ Those products are listed below.’’ 563 See letter from WilmerHale. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 period through 2014 in which issuers would be permitted to use an ‘‘unknown determination’’ category in which such issuers would be required only to disclose their conflict minerals policy, reasonable country of origin inquiry, and the conflict minerals used in their supply chain.564 Other commentators recommended similar temporary approaches for conflict minerals when an issuer could not determine the origin of its conflict minerals.565 In this regard, one commentator noted that, ‘‘requiring issuers that are unable to determine that the conflict mineral in their products did not originate in the Covered Countries to submit a Conflict Minerals Report providing the required information that is available to them, is reasonable.’’ 566 Also, one commentator recognized that, during the initial period after the rule is finalized, it expected that some conflict minerals would be of unknown origin, and issuers with those conflict minerals should, among other information, disclose ‘‘any progress made in the reporting year toward determination of origin.’’ 567 Finally, some commentators suggested that smaller reporting companies should be allowed to phasein or that the implementation of the final rule should be deferred for them.568 Based on the comments we have received, we believe that permitting all issuers to describe their products as ‘‘DRC conflict undeterminable’’ for a two-year period is appropriate to allow viable tracking systems to be put in place in the Covered Countries and throughout supply chains and avoid a de-facto embargo on conflict minerals from the Covered Countries. We also believe that allowing this category for a two-year period will avoid a situation in which virtually all issuers would describe their products as having not 564 See letter from AdvaMed I. e.g., letters from TIAA–CREF (‘‘Where the source of minerals cannot be confirmed, we believe it would be most accurate to allow companies to use indeterminate language such as ‘may not be DRC conflict free,’ but not language that would suggest a presumption that minerals would be conflict free absent specific evidence to the contrary. Moreover, over time the information systems necessary to trace these minerals will likely improve. We suggest that, after a reasonable time interval, the SEC consider reviewing whether a higher standard might be warranted.’’) and TriQuint I (recommending that the final rule ‘‘allow companies to label their products as ‘May Not Be DRC Conflict Free’ until such a time when it is expected that companies will be able to purchase processed conflict minerals from smelters that have been validated as ‘DRC conflict free’ ’’). 566 See letter from ABA. 567 See letter from SIF I. 568 See, e.g., letters from Howland and JVC et al. II. 565 See, E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES been found to be ‘‘DRC conflict free,’’ simply because they could not determine the origin of their conflict minerals, which would render that disclosure less meaningful.569 Similarly, we believe that allowing smaller reporting companies four years to describe their products as ‘‘DRC conflict undeterminable’’ is appropriate because these issuers may lack the leverage to obtain detailed information regarding the source of a particular conflict mineral.570 We do not, however, believe that a permanent ‘‘DRC conflict undeterminable’’ category would be consistent with the language in the statute, and we believe it would undermine the overall goals of Section 1502. Such an approach might create incentives for issuers not to exercise care in identifying the origins of their necessary conflict minerals. Also, we do not believe that, after the temporary reporting period, the number of issuers that would describe their products as having not been found to be ‘‘DRC conflict free’’ would be so substantial as to render the disclosure meaningless because, based on our review of the comments, it appears that there should be systems in place at that time on which issuers could rely to determine whether their conflict minerals originated in the Covered Countries and, if so, whether they contributed to conflict. Overall, we believe that the change from ‘‘not ‘DRC conflict free’ ’’ to having ‘‘not been found to be ‘DRC conflict free,’ ’’ the ability to add additional explanation and disclosure, and the periods for the ‘‘DRC conflict undeterminable’’ category will provide issuers who are initially unable to determine that their conflict minerals did not originate in the Covered Countries or unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups in the Covered Countries means to make their disclosure while still accomplishing the goals that Congress intended when it required the disclosure of products that are not ‘‘DRC conflict free.’’ We believe that this approach also responds to the First Amendment concerns raised by the commentators. 569 See, e.g., letters from AdvaMed I, ITIC I, and ITRI II. 570 See letters from ABA, Corporate Secretaries I, and JVC et al. II. But see letter from Green II (arguing that, although smaller reporting companies may lack leverage, this disadvantage may be reduced through the influence exerted over their suppliers by larger issuers that use the same supplier base and that have more leverage to request such information.). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 As to the concern that the rule impermissibly compels speech that is not of a commercial nature, we presume that Congress acted constitutionally when it passed the statute.571 And, as discussed above, we believe that the changes made in the final rule mitigate the concern that the rule compels speech that may be false or unfairly stigmatizing for some issuers. The requirement that issuers that know or have reason to believe that their conflict minerals may have originated in the Covered Countries but that cannot determine the origin or cannot determine whether they financed or benefited armed groups state that their products have not been found to be ‘‘DRC conflict free’’ compels an accurate disclosure in light of the statutory definition of ‘‘DRC conflict free.’’ Moreover, the use of this revised language, the ability of issuers to add additional explanation and disclosure, and the provision of a temporary ‘‘undeterminable’’ period all represent accommodations to ensure that the rule is appropriately tailored to lessen the impact on First Amendment interests while still accomplishing Congress’s objective. We note that many commentators appeared to believe that the proposed rules would require that an issuer physically label its products as ‘‘DRC conflict free’’ or not ‘‘DRC conflict free.’’ 572 Although we used the term ‘‘label’’ in the Proposing Release, we did so in the context of the disclosure required in the annual report. The final rule does not require a physical label on any product. Instead, the final rule requires that an issuer describe in its Conflict Minerals Reports any products that have not been found to be ‘‘DRC conflict free,’’ as defined in the final rule. Also, consistent with the proposal, the final rule permits issuers the flexibility to describe their products based on each issuer’s individual facts and circumstances. We believe this flexibility is important because, as one commentator noted, an issuer is in the best position to know its products and to describe them in terms commonly 571 See Nebraska v. EPA, 331 F.3d 995, 997 (DC Cir. 2003) (‘‘Agencies do not ordinarily have jurisdiction to pass on the constitutionality of federal statutes.’’) (citing Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 215 (1994)); Todd v. SEC, 137 F.2d 475, 478 (6th Cir. 1943) (same); William J. Haberman, 53 SE.C. 1024, 1029 n.14 (1998) (‘‘[W]e have no power to invalidate the very statutes that Congress has directed us to enforce.’’) (citing Milton J. Wallace, 45 SE.C. 694, 697 (1975); Walston & Co., 5 SE.C. 112, 113 (1939)). 572 See, e.g., letters from Howland, Industry Group Coalition I, Japanese Trade Associations, MSG I, NAM I, and SIF I. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 56323 understood within its industry.573 Also, to remedy any confusion in the Proposing Release, an issuer with products that are ‘‘DRC conflict free’’ does not have to describe those products in the Conflict Minerals Report in any manner. An issuer with such products may describe them in its specialized disclosure report as ‘‘DRC conflict free’’ if it chooses to do so, provided, the products do not contain any conflict minerals that directly or indirectly financed or benefited armed groups in the Covered Countries. The Conflict Minerals Statutory Provision requires the State Department to ‘‘produce a map of mineral-rich zones, trade routes, and areas under the control of armed groups’’ in the Covered Countries.574 Also, the Conflict Minerals Statutory Provision requires the State Department to submit to Congress a strategy to address the linkages between human rights abuses, armed groups, mining of conflict minerals, and commercial products that contains a ‘‘plan to provide guidance to commercial entities seeking to exercise due diligence on and formalize the origin and chain of custody of conflict minerals used in their products and on their suppliers to ensure that conflict minerals used in the products of such suppliers do not directly or indirectly finance armed conflict or result in labor or human rights violations.’’ 575 Some commentators have suggested that we delay the implementation of the final rule until the State Department’s map and/or strategy have been published,576 or that we should allow an issuer to rely on the State Department’s map for its conflict minerals information.577 The State Department has published a conflict minerals map already.578 Also, we understand that the State Department has developed guidance for commercial entities seeking to exercise due diligence on and formalize the origin and chain of custody of conflict minerals used in their products and on their suppliers.579 Even so, it does not 573 See letter from WGC II. 1502(c)(2) of the Act. 575 Section 1502(c)(1) of the Act. 576 See, e.g., letters from Barrick Gold, Corporate Secretaries I, NRF I, and WGC II. 577 See, e.g., letters from AngloGold and NRF I. 578 See State Department, Humanitarian Information Unit, Democratic Republic of the Congo Mineral Exploitation by Armed Groups Map (Jun. 14, 2011), available at https://hiu.state.gov/ Products/DRC_MineralExploitation_2010Jun28_ HIU_U182.pdf. 579 See State Department, Bureau of Economic, Energy, and Business Affairs, Statement Concerning Implementation of Section 1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due Diligence (July 15, 2011), available at https:// www.state.gov/e/eb/diamonds/docs/168632.htm. 574 Section E:\FR\FM\12SER2.SGM 12SER2 56324 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES appear that either the State Department’s map or guidance is necessary for complying with the final rule. First, it does not appear that Congress intended that they be necessary to comply with our rule. The map and guidance requirements are located in a part of Section 1502 that is not incorporated into the Exchange Act and that part of Section 1502 is directed solely to agencies other than the Commission.580 Therefore, although they may be related to our final rule, it does not appear that the map and guidance were intended to have direct impact on the rule. Also, we do not believe that an issuer must rely solely on the State Department’s map or guidance for determining whether its conflict minerals contributed to conflict in the Covered Countries because other resources are available. For example, as discussed above, the OECD has developed an internationally recognized system of due diligence that an issuer can use as guidance in exercising its due diligence. The OECD’s due diligence guidance does not rely on or incorporate the State Department map and guidance referenced in the Conflict Minerals Statutory Provision in determining the steps an issuer must take to exercise due diligence. However, as discussed above, due to the stage of development of the supply chain tracing mechanisms, we recognize that there are concerns about obtaining this information reliably in the near term. Therefore, we are providing this targeted and temporary period in the final rule. The final rule requires, as proposed, an issuer with conflict minerals that originated in the Covered Countries to determine whether those minerals directly or indirectly financed or benefited armed groups in the Covered Countries. The Conflict Minerals Statutory 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’’ in the Covered Countries.581 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,’’ 582 as they relate to the Covered 580 The map and guidance requirements are in Section 1502(c) of the Act, but only Section 1502(b) of the Act actually amends the Exchange Act and directs the Commission to promulgate rules. 581 See Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D). 582 22 U.S.C. 2151n(d) and 2304(b). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Countries.583 The final rule includes, as proposed, a cross reference to that definition to provide guidance to issuers. This cross reference, however, removes the phrases ‘‘most recently issued’’ and ‘‘for the year the annual report is due’’ to address the concerns of commentators.584 The final rule mirrors the Conflict Minerals Statutory Provision in its definition of ‘‘armed group’’ and does not include any extraneous phrases that were included in the proposal. The Conflict Minerals Statutory Provision assigns to the State Department the authority to identify perpetrators of serious human rights abuses in that agency’s annual Country Reports, and we lack the authority and expertise to provide further guidance or qualify the State Department’s conclusions in this area. We note that some commentators indicated that we should consider products containing conflict minerals obtained from mines not controlled by armed groups when purchased to be considered ‘‘DRC conflict free’’ even if those mines subsequently come under the control of armed groups.585 We agree and consider products ‘‘DRC conflict free’’ if, when the conflict minerals contained in those products are purchased and transported through the supply chain from the mine to the issuer, those conflict minerals do not directly or indirectly finance or benefit armed groups in the Covered Countries, even if some point in that supply chain subsequently becomes controlled by an armed group. For example, if an issuer’s conflict minerals are purchased from a mine that does not directly or indirectly finance or benefit armed groups in the Covered Countries when they are purchased, but the next day that mine is taken over by an armed group and the armed group takes the money previously provided to the miner from the issuer to purchase the conflict minerals that already left the mine, the products containing those conflict minerals may be considered ‘‘DRC conflict free,’’ even though the money used to purchase the conflict minerals does, in fact, benefit that armed group subsequently. 2. Due Diligence Standard in the Conflict Minerals Report We have interpreted the Conflict Minerals Statutory Provision as requiring an issuer to exercise due diligence based on the provision’s requirement that an issuer describe the due diligence it exercised on the source 583 Section 1502(e)(3) of the Act. e.g., letters from ITRI I and TIC. 585 See, e.g., letters from AAEI, IPC I, and NRF I. 584 See, PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 and chain of custody of its conflict minerals.586 In addition, the provision requires that an issuer include an independent private sector audit of the Conflict Minerals Report as a ‘‘critical component of due diligence.’’ 587 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 any Conflict Minerals Report that relies on such unreliable due diligence process would not satisfy the statute’s reporting requirement.588 a. Proposed Rules The proposed rules would have required an issuer to use due diligence regarding the supply chain determinations 589 in its Conflict Minerals Report. Other than requiring that the due diligence be reliable, the proposed rules would not have dictated the standard for, or otherwise provided guidance concerning, the due diligence that an issuer would be required to use in making such determinations. Instead, the proposed rules would have required an issuer to disclose the due diligence it used in making its determinations, such as whether it used any nationally or internationally recognized standards or guidance for supply chain due diligence. In the Proposing Release, we noted our belief that the statutory provision contemplates that an issuer must use due diligence in its supply chain determinations. Although we did not propose to establish any particular conduct requirements, we believed that due diligence would be required to be exercised and information about what conduct the issuer exercised in its due diligence regarding its supply chain determinations was relevant to determine the extent of the issuer’s due diligence. As proposed, the rules, therefore, would require issuers to describe the due diligence used in making these determinations. In particular, we noted that we would have expected that an issuer whose conduct conformed to a nationally or internationally recognized set of standards of, or guidance for, due diligence regarding its conflict minerals supply chain determinations would provide evidence that it used due 586 Exchange Act Section 13(p)(1)(A)(i). Act Section 13(p)(1)(B). 588 Exchange Act Section 13(p)(1)(C). 589 We refer to the ‘‘supply chain determinations’’ as an issuer’s determinations regarding the source and chain of custody of its conflict minerals, the facilities used to process those minerals, the country of origin of those minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity. 587 Exchange E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations diligence in making those determinations. b. Comments on the Proposed Rules sroberts on DSK5SPTVN1PROD with RULES Some commentators believed that the Conflict Minerals Statutory Provision expressly requires an issuer to exercise due diligence on the source and chain of custody of its conflict minerals.590 One commentator noted that nothing in the statute gives us explicit authority to develop due diligence guidance.591 Another commentator asserted that Congress intended the Conflict Minerals Statutory Provision to require due diligence only on the source and chain of custody of conflict minerals mined in the DRC and on the transportation routes through which such minerals pass in countries adjoining the DRC.592 This commentator claimed that Congress did not intend for the Conflict Minerals Statutory Provision to require due diligence on the source and chain of custody of minerals mined in the adjoining countries and recommended that the final rule not require such due diligence. Many commentators supported our proposal to not prescribe any specific due diligence requirements and allow an issuer to have flexibility in developing its due diligence measures based on the issuer’s own facts and circumstances.593 A number of these commentators, however, suggested that the final rule provide guidance as to what would be considered acceptable due diligence.594 Many other commentators recommended that the final rule provide a definition of or prescribe specific guidance for any 590 See, e.g., letters from NEI (‘‘We agree that issuers should be required to use due diligence, as proposed.’’), Presbyterian Church USA (Feb. 15, 2012) (‘‘Presbyterian Church I’’) (stating that the Conflict Minerals Statutory Provision ‘‘requires due diligence’’), Sen. Durbin/Rep. McDermott (stating that ‘‘Section 1502 requires companies to exercise strict due diligence to determine the source of conflict minerals in their products’’), and State II (‘‘It is unclear how a reasonable conflict minerals determination can be made without due diligence given the complexity of the region and the risk of fraud.’’). 591 See letter from TriQuint I. This commentator suggested that the Commission work with other government agencies to establish rules that govern what due diligence processes are reliable. 592 See letter from Minister of Energy and Minerals of the United Republic of Tanzania (May 23, 2011) (‘‘Tanzania II’’). 593 See, e.g., letters from AAEI, AngloGold, Cleary Gottlieb, Industry Group Coalition Group I, IPC I, ITIC I, ITRI I, Japanese Trade Associations, NAM I, NEI, Niotan II, NMA II, NRF I, RILA, RILA–CERC, RMA, Roundtable, Sen. Durbin/Rep. McDermott, TriQuint I, and WGC II. 594 See, e.g., letters from AAEI, Cleary Gottlieb, Earthworks, Howland, IPC I, ITIC I, ITRI I, NAM I, NEI, NMA II, NRF I, RILA, Sen. Durbin/Rep. McDermott, and WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 56325 required due diligence.595 Some of these commentators reasoned that the final rule should prescribe a specific due diligence standard so that an issuer will be unable to ‘‘engage in a type of ‘forum shopping’’’ for the least burdensome standard and so that each issuer’s due diligence measures will be consistent, accurate, and reliable.596 Other commentators suggested that the final rule should prescribe a safe harbor for an issuer’s conduct allowing an issuer to avoid any undue or impractical requirements set forth by independent private sector auditors.597 While we did not propose to require satisfaction of a particular set of standards, we requested comment on whether we should. A number of commentators suggested that the final rule should refer to, incorporate, or require the use of national or international standards or guidance in some manner, such as accepting an issuer’s due diligence as reliable if that issuer used a national or international standard or guidance, considering national or international due diligence standards or guidance when developing the final rule, or requiring an issuer to use a national or international due diligence framework for that due diligence to be considered reliable.598 Some commentators did not believe the final rule should require that an issuer use any particular national or international due diligence standard.599 Other commentators recommended against incorporating voluntary international standards, such as the OECD due diligence framework, into the final rule or suggested that we identify and assess the potential latent risks and/ or impacts to industry and auditors related to codifying voluntary industry standards, such as the OECD due diligence framework, into the final rule.600 Some commentators specifically referenced the due diligence framework developed by the OECD in discussing what they believed the final rule should consider as acceptable due diligence.601 One commentator recommended that the final rule not only refer to the OECD due diligence framework, but also should require issuers to disclose the steps that they took to complete the OECD due diligence.602 Some commentators recommended that a due diligence standard should not require an absolute standard of care.603 Instead, these commentators suggested either a ‘‘reasonable care’’ or a ‘‘commercially practicable efforts’’ standard that would encompass contractual obligations, risk-based programs, and industry-wide processes, but not necessarily include the identification of all the parties in the supply chain or the determination of every mineral used for manufactured items. Some commentators recommended that an issuer’s due diligence should be presumed reliable if the issuer performs some or all of the following steps: uses information from an industry-wide process, creates a conflict minerals policy that requires conflict-mineral free provisions in all contracts, conducts supply chain risk assessments, requires suppliers to push policies upstream and transmit information downstream, establishes policies and procedures to remediate instances of non-conformity of policy, obtains independent third party audits, and publishes its supply chain findings.604 Similarly, other commentators indicated that due diligence should be presumed reliable if these conditions are met, but only if the issuer requires upstream and downstream due diligence and describes that due diligence.605 Other commentators suggested that the due diligence standard in the final rule should be commensurate with the issuer’s position in the supply chain such that the due diligence requirement for an issuer would be less rigorous the 595 See, e.g., letters from Arkema, Earthworks, Enough Project I, CENCO I, CODSIA, Global Witness I, Howland, ICAR et al. II, Materials I, Andrew Matheson (Mar. 2, 2011) (‘‘Matheson I’’), MSG I, NYCBar I, Rep. Berman et al., SEMI, SIF I, State I, State II, and WGC et al. I. 596 See letters from Global Witness I and ICAR et al. II. 597 See, e.g., letters from ArcelorMittal, Chamber I, ITIC I, Materials I, NAM I, NRF I, and RILA. 598 See, e.g., letters from Arkema, CODSIA, Earthworks, Enough Project I, Global Witness I, Howland, ICAR et al. II, IPC I, ITIC I, ITRI I, Matheson I, MSG I, NEI, NYCBar I, Rep. Berman et al., SEMI, Sen. Durbin/Rep. McDermott, SIF I, State I, State II, WGC II, and WGC et al. I. 599 See, e.g., letters from Cleary Gottlieb, NAM I, NMA II, and WGC II. 600 See letters from Auditing Roundtable, Inc. (Oct. 31, 2011) (‘‘ARI’’) and Board of Environmental, Health & Safety Auditor Certifications (Oct. 31, 2011) (‘‘BEAC’’). 601 See, e.g., letters from Arkema, Boeing, CODSIA, Earthworks, Enough Project I, Evangelical Alliance, Evangelicals, Global Witness I, ICAR et al. II, ITRI I, ITRI IV, Matheson I, Methodist Board, MSG I, NEI, NYCBar I, NYCBar II, Presbyterian Church II, Rep. Berman et al., Sen. Durbin/Rep. McDermott, SEMI, SIF I, SIF II, State I, State II, and WGC II, and WGC et al. I. 602 See letter from SIF II. 603 See, e.g., letters from AAEI, Chamber I, CRS I, Industry Group Coalition I, ITIC I, and NAM I. 604 See, e.g., letters from AAEI, Global Witness I, Industry Coalition Group II, NAM I, and NRF I. These steps are similar to the steps in the Annex I of the OECD’s due diligence guidance. 605 See, e.g., letters from Earthworks, Enough Project I, MSG I, and SIF I. The upstream and downstream due diligence that would be required by these commentators is similar to the upstream and downstream due diligence described in the Supplement on Tin, Tantalum, and Tungsten to the OECD’s due diligence guidance. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 56326 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES farther that issuer’s position in the supply chain is from the mine or other location of origin.606 In the Proposing Release, we requested comment as to whether the final rule should prescribe different due diligence measures for gold because of any unique characteristics of the gold supply chain. In response, most commentators that discussed this point agreed that the due diligence required for gold should be the same as the due diligence required for the other three conflict minerals.607 Two commentators, however, stated that gold is unique among the four conflict minerals so the due diligence requirements for it should be different than for the other minerals.608 As discussed above, a few commentators further recommended that the final rule permit issuers to exclude certain information from public dissemination regarding the storage and transportation routes of gold for security reasons.609 In the Proposing Release, we also requested comment as to whether the final rule should state that an issuer is permitted to rely on the reasonable representations of its smelters or any other actor in the supply chain, provided there is a reasonable basis to believe the representations of the smelters or other parities. A number of commentators suggested, in response, that the final rule should allow an issuer to rely on reasonable representations from suppliers and/or smelters in satisfying their due diligence requirement.610 Some of these commentators, however, explained that such written representations must be accompanied by additional processes, such as industry-wide smelter verification programs, before they could be relied upon.611 One commentator recommended that the final rule should allow due diligence to be satisfied if an issuer includes obligations in its supply contracts and receives reasonable representations from its suppliers 606 See letters from CERC, Chamber I, ITIC I, NRF I, and RILA. 607 See, e.g., letters from Earthworks, Global Witness I, ITRI I, SIF I, and State II. 608 See letters from AngloGold and WGC II. 609 See letters from NMA II, NAM III, and WGC II. 610 See, e.g., letters from AngloGold, Global Witness I, Howland, IPC I, ITIC I, Japanese Trade Associations, JVC et al. II, Kemet, NEI, NMA II, RILA–CERC, RMA, Roundtable, SEMI, Sen. Durbin/ Rep. McDermott, State II, Taiwan Semi, and WGC II. 611 See letters from Global Witness I, Howland, ITIC I, JVC et al. II (stating that written representations would not have to be accompanied by additional processes ‘‘until such time as reliable smelter/refiner certification and due diligence systems can be implemented’’), Kemet, NMA II, RMA, Sen. Durbin/Rep. McDermott, and State II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 regarding the conflict-free nature of the minerals.612 c. Final Rule After considering the comments, we are revising the final rule. The final rule requires that an issuer describe the due diligence it exercised in determining the source and chain of custody of its conflict minerals. The final rule requires that an issuer’s due diligence follow a nationally or internationally recognized due diligence framework. We are persuaded by commentators that requiring an issuer to use a nationally or internationally recognized due diligence framework that is relevant to the audit objectives and permits consistent assessment of the subject matter will provide an independent private sector auditor with a structure by which to assess an issuer’s due diligence, which we believe should make the rule more workable and less costly than if no framework was specified. We are also persuaded by commentators that requiring the use of nationally or internationally recognized due diligence framework will enhance the quality of an issuer’s due diligence and will promote comparability of the Conflict Minerals Reports of different issuers. Also, we believe that requiring such due diligence will provide issuers with a degree of certainty and, as one commentator noted, ‘‘ameliorate the risk that a due diligence process will later be judged to be unreliable.’’ 613 The OECD’s ‘‘Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’’ 614 satisfies our criteria and may be used as a framework for purposes of satisfying the final rule’s requirement that an issuer exercise due diligence in determining the source and chain of custody of its conflict minerals. As one commentator noted, the OECD is an international organization with 34 member countries, including the United States, that works internationally with governments and businesses and approved its due diligence guidance as the ‘‘the result of a collaborative initiative among governments, international organizations, civil society organizations, and industry participants to promote accountability and transparency in the supply chain of minerals from conflict-affected and 612 See letter from Roundtable. letter from NAM I. 614 OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (2011), available at https://www.oecd.org/daf/ internationalinvestment/ guidelinesformultinationalenterprises/46740847. pdf. 613 See PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 high-risk areas.’’ 615 A comment letter submitted by the OECD in conjunction with the United Nations Group of Experts on the Democratic Republic of the Congo (‘‘Group of Experts’’) and the International Conference on the Great Lakes Region (‘‘ICGLR’’) indicated that the OECD due diligence guidance was ‘‘adopted as an OECD Recommendation by forty one OECD and non-OECD countries meeting at ministerial level on 25 May 2011 under the chairmanship of U.S. Secretary of State Hillary Rodham Clinton.’’ 616 The final rule does not mandate that an issuer use any particular nationally or internationally recognized due diligence framework, such as the OECD’s due diligence guidance, in recognition of the fact that other evaluation standards may develop that satisfy the intent of the Conflict Minerals Statutory Provision. However, to satisfy the requirements of the final rule, the nationally or internationally recognized due diligence framework used by the issuer must have been established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment, and be consistent with the criteria standards in GAGAS established by the GAO. As a related matter, one commentator stated that the final rule should clarify whether an issuer has to describe generally its due diligence processes or whether issuers have to describe specifically purchase contracts associated with particular conflict minerals in their products.617 We believe an issuer’s description of its due diligence should be based on the individual issuer’s facts and circumstances. In this regard, if an issuer’s due diligence process is relatively consistent throughout its supply chain, the issuer could satisfy the requirements by generally describing its due diligence. We recognize, however, that an issuer may use different due diligence processes for different aspects of its supply chain. For example, an issuer using the OECD due diligence guidance may use different due diligence processes for tin, tantalum, and tungsten as compared with that for gold. If an issuer exercises significantly different due diligence processes for different aspects of its supply chain, such as with separate conflict minerals or products, that issuer should describe how they are different. As we note above, a number of commentators recommended that the final rule allow an issuer to rely on 615 See letter from Global Witness I. letter from OECD I. 617 See letter from ITIC I. 616 See E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations reasonable representations from suppliers and/or smelters in satisfying their due diligence requirement,618 whereas other commentators argued that written representations should not be able to satisfy due diligence by themselves.619 The final rule requires that an issuer’s due diligence follow a nationally or internationally recognized due diligence framework. Therefore, whether an issuer may rely on reasonable representations from suppliers and/or smelters in satisfying its due diligence requirement will be dependent on the nationally or internationally recognized due diligence framework. 3. Independent Private Sector Audit Requirements a. Proposed Rules Consistent with the Conflict Minerals Statutory Provision, we proposed that the description of the measures taken by an issuer to exercise due diligence on the source and chain of custody of its conflict minerals include a certified independent private sector audit conducted in accordance with the standards established by the Comptroller General of the United States.620 Under the Conflict Minerals Statutory Provision, the GAO is to establish the appropriate standards for the independent private sector audit. Therefore, we did not include any auditing standards in the proposed rules or discuss such standards in the Proposing Release. sroberts on DSK5SPTVN1PROD with RULES b. Comments on the Proposed Rules A number of commentators indicated that the final rule must clarify the independent private sector audit’s criteria, objectives, and standards.621 One commentator was concerned that, if neither the Comptroller General nor the Commission required uniform 618 See, e.g., letters from AngloGold, Global Witness I, Howland, IPC I, ITIC I, Japanese Trade Associations, JVC et al. II, NEI, NMA II, RILA– CERC, RMA, SEMI, State II, Taiwan Semi, and WGC II. 619 See letters from Global Witness I, Howland, ITIC I, and RMA. 620 See Exchange Act Section 13(p)(1)(A)(i). 621 See, e.g., letters from American Institute of Certified Public Accountants (Mar. 1, 2011) (‘‘AICPA I’’), American Institute of Certified Public Accountants (Nov. 17, 2011) (‘‘AICPA II’’), Barrick Gold, BEAC, Calvert, Deloitte, The Elm Consulting Group International LLC (Mar. 1, 2011) (‘‘Elm’’), Ernst & Young LLP (Mar. 2, 2011) (‘‘E&Y’’), Grant Thornton (recommending that the Commission establish a ‘‘working group to support the Comptroller General in the development of the appropriate form of engagement, including the criteria to be used to evaluate the subject matter and the opinion (or conclusion) to be expressed thereon’’), Hileman Consulting, ICGLR, IPC II, KPMG LLP (Mar. 2, 2011) (‘‘KPMG’’), MSG III, NEI, NYCBar I, WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 objectives and standards, the audits would not be useful because they would lack any comparability.622 Some commentators remarked that the Comptroller General or the Commission must delineate suitable criteria for the measurement and presentation of the information in the Conflict Minerals Report, including the elements of the Conflict Minerals Report subject to the audit, so as to provide an audit framework that would aid both issuers and auditors.623 Such criteria would provide the basis for the auditor to measure the information provided by the issuer, and this criteria should be objective, measurable, complete, and relevant.624 Commentators noted, however, that the criteria would differ based on the objective of the audit. For example, the criteria for evaluating whether an issuer is correct in concluding that its products are ‘‘DRC conflict free’’ are different from the criteria for determining whether the issuer’s process for determining whether its products are ‘‘DRC conflict free’’ is sufficient.625 Commentators from the accounting profession and others recommended that the final rule clearly state the objective of the audit and the subject matter to be audited.626 Some of these commentators identified possible audit objectives, including: whether management’s description of the procedures and controls performed in an issuer’s due diligence process are fairly described in the Conflict Minerals Report; 627 whether the design of an issuer’s due diligence process described in the Conflict Minerals Report conforms to a recognized standard of due diligence; 628 whether management’s description of an issuer’s due diligence process in its Conflict Minerals Report is accurate, the results of that process are fairly stated, and the issuer has evaluated/identified the upstream and downstream due diligence processes; 629 whether the 622 See letter from WGC II. e.g., letters from Deloitte and KPMG. 624 See letters from Deloitte and Grant Thornton. 625 See letters from AICPA I and Grant Thornton. 626 See letters from AICPA I, AICPA II, Barrick Gold, Grant Thornton, IPC II, KPMG, MSG III, and SIF II. 627 See letters from AICPA I, AICPA II, Grant Thornton, and KPMG. 628 See letters from AICPA I, AICPA II, IPC II, and KPMG. Commentators also observed that this second objective would require the final rule to provide a clear due diligence standard against which an auditor could compare the issuer’s due diligence process. 629 See letter from MSG III (noting, however, that the audit scope should not include verification of the ultimate conclusions of the Conflict Minerals Report, only that the process was applied as described). See also letter from SIF II (stating that 623 See, PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 56327 design of the due diligence process described in the Conflict Minerals Report conforms to a recognized a standard and whether the process was sufficiently effective; 630 whether the issuer’s conclusion regarding the source and chain of custody of its conflict minerals is accurate; 631 and whether the issuer appropriately included in the report all its products described as not ‘‘DRC conflict free.’’ 632 Generally, commentators recommended that the final rule not require an audit objective to include a determination as to whether an issuer’s due diligence process was effective or that any conclusion based on that due diligence process was accurate, because that would be very challenging and expensive to undertake.633 Additionally, some commentators indicated that the Comptroller General or the Commission must identify the acceptable auditing standards for firms to use when auditing an issuer’s Conflict Minerals Report.634 In this regard, as some commentators noted,635 the Proposing Release stated that the staff of the GAO informed our staff of its preliminary view that no new audit standards need to be promulgated. Therefore, the audit of the Conflict Minerals Report would be performed under GAGAS, and auditors could use either the provisions for Attestation Engagements or Performance Audits in GAGAS.636 However, as commentators noted, in addition to certain substantive differences between the two standards in GAGAS, only a licensed certified public accountant or person working with a certified public accounting firm or governmental auditing organization may perform an Attestation Engagement.637 Similarly, commentators noted that Performance Audits are not required to be conducted by certified public accountants, but auditors using the Performance Audit standard would still need to satisfy certain qualification requirements under GAGAS, such as continuing professional education requirements, quality control measures, and the audit of the Conflict Minerals Report should include a ‘‘review of management systems and processes, and of conclusions reached’’). 630 See letter from AICPA I. 631 See letters from AICPA I and KPMG. 632 See id. 633 See, e.g., letters from AICPA I, AICPA II, Deloitte, ITIC I, KPMG, MSG III, and Roundtable. 634 See letters from AICPA I, Deloitte, E&Y, Elm, and KPMG. 635 See, e.g., letters from Barrick Gold and E&Y. 636 See letters from AICPA I, AICPA II, BEAC, Deloitte, E&Y, Elm, Grant Thornton, and MSG III. 637 See, e.g., letters from AICPA I and BEAC. E:\FR\FM\12SER2.SGM 12SER2 56328 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations independent peer reviews.638 In this regard, to increase the pool of auditors and thereby reduce costs, some commentators recommended that the final rule allow auditors to use the Performance Audit standard under GAGAS.639 Some of these commentators recommended that auditors that are not certified public accountants could satisfy GAGAS’s Performance Audit qualification requirements by receiving a professional certification relating to environmental, health, and safety auditing from organizations that certify auditors by requiring that an auditor meet certain standards, such as having a code of conduct, committing to a code of ethics and rigorous practices, engaging in continuing professional development and education, being subjected to review, and other provisions to maintain a high caliber of expertise.640 One commentator suggested that the final rule should allow any auditor to perform the audit as long as it was knowledgeable and able to meet the requirements of the OECD’s criteria for the competence of auditors.641 Other commentators noted, however, that the OECD’s criteria for the competence of auditors are inadequate because they fail to provide any guidance as to how this would be assured.642 Another commentator recommended that the final rule should delineate specific requirements for the accreditation and selection of auditors but did not provide any suggested requirements.643 Several commentators asserted that the final rule should clarify the independence standards for auditors.644 Some of these commentators 645 recommended that the final rule state that performing the independent private sector audit of the Conflict Minerals Report is not inconsistent with the Commission’s auditor independence requirements in Rule 2–01 of Regulation S–X.646 One commentator noted, however, that the OECD’s independence requirements prohibit a Conflict Minerals Report auditor from having provided any other service for the issuer within a 24-month period.647 Similarly, two other commentators asserted that 638 See letter from Deloitte and BEAC. e.g., letters from ArcelorMittal, ARI, BEAC, Hileman Consulting, IPC II, and MSG III. 640 See letters from BEAC and Hileman Consulting. 641 See letter from NYCBar I. 642 See letter from ARI and BEAC. 643 See letter from ICGLR. 644 See, e.g., letters from AICPA I, Deloitte, E&Y, Grant Thornton, Hileman Consulting, and KPMG. 645 See letters from AICPA I, Deloitte, and E&Y. 646 17 CFR 210.2–01. 647 See letter from KPMG. sroberts on DSK5SPTVN1PROD with RULES 639 See, VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 the statement in the proposed rules and the Conflict Minerals Statutory Provision that the independent private sector audit would be considered a ‘‘critical component of due diligence’’ could create confusion regarding the application of our auditor independence requirements in Rule 2–01 of Regulation S–X.648 c. Final Rule i. Auditing Standards As noted above, the GAO staff has indicated to our staff that the GAO does not intend to develop new standards for the independent private sector audit of the Conflict Minerals Report. As we noted in the Proposing Release, GAO staff informed our staff that existing GAGAS standards,649 such as the standards for Attestation Engagements or the standards for Performance Audits will be applicable.650 The GAO staff has also indicated to our staff that the GAGAS Performance Standards could be used by the auditor to express a conclusion as to whether the design of the issuer’s due diligence measures are in conformity with the criteria set forth in a nationally or internationally recognized due diligence framework used by the issuer, such as the OECD’s ‘‘Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas,’’ and whether the issuer’s description of the due diligence measures it performed, as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. Therefore, unless the GAO makes some formal pronouncement, it appears that any auditor of the Conflict Minerals Report will need to conduct the audit using the standards set forth in GAGAS. Because the Conflict Minerals Statutory Provision provides that the audit standards are to be established by the GAO, the GAO is responsible for matters pertaining to the audit standards, including questions or letters from E&Y and Grant Thornton. U.S. Gov’t Accountability Office, GAO–12– 331G, Government Auditing Standards 2011 Revision (Dec. 2011), available at https:// www.gao.gov/assets/590/587281.pdf. 650 The GAGAS Attestation Engagement standards, in Chapter 3.75, require that auditors be ‘‘licensed certified public accountants, persons working for a licensed certified public accounting firm or for a government auditing organization, or licensed accountants in states that have multi-class licensing systems that recognize licensed accountants other than certified public accountants.’’ Unlike the GAGAS Attestation Engagement standards, the GAGAS Performance Audit standards allow auditors other than certified public accountants to perform a Performance Audit. concerns about the application of such standards. ii. Auditor Independence Similarly, entities performing an independent private sector audit of the Conflict Minerals Report must comply with any independence standards established by the GAO, and any questions regarding applicability of GAGAS on this point should be directed to the GAO. We are not adopting any additional independence requirements. Also, the independence required for the independent private sector audit of the Conflict Minerals Report is not the same as the OECD’s independence requirement for auditors conducting audits of conflict mineral smelters. We acknowledge commentators’ requests to clarify how our own independence requirements would apply to an accountant that performed both the independent private sector audit of the Conflict Minerals Report and an engagement (e.g., the audit of the financial statements of an issuer) subject to the independence requirements in Rule 2–01 of Regulation S–X.651 The independent private sector audit of the Conflict Minerals Report is specifically described in the Act as constituting a ‘‘critical component’’ of the registrant’s due diligence process,652 which commentators were concerned may suggest the auditor would perform work that would impair independence. Despite this language, the Conflict Minerals Statutory Provision only requires an audit and no other functions that may imperil independence, such as ‘‘management functions’’ described in Rule 2–01(c)(4)(vi) of Regulation S–X. Therefore, we do not believe that it would be inconsistent with the independence requirements in Rule 2– 01 of Regulation S–X if the independent public accountant also performs the independent private sector audit of the Conflict Minerals Report. The engagement to perform the independent private sector audit of the Conflict Minerals Report would nevertheless be considered a ‘‘non-audit service’’ subject to the pre-approval requirements 648 See 649 See PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 651 Rule 2–01 of Regulation S–X [17 CFR 210.2– 01]. 652 Exchange Act Section 13(p)(1)(A)(i), as added by Section 1502 of the Act, states that the independent private sector audit of the conflict minerals report is included in the ‘‘measures taken by the [issuer] to exercise due diligence on the source and chain of custody of such minerals.’’ Exchange Act Section 13(p)(1)(B) further provides that the audit must be certified by the issuer and states that the certified audit ‘‘is a critical component of due diligence in establishing the source and chain of custody of such minerals.’’ These provisions make clear that the independent private sector audit is one step in management’s due diligence process. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations of Rule 2–01(c)(7) of Regulation S–X. In addition, the fees related to the independent private sector audit of the Conflict Minerals Report would need to be included in the ‘‘All Other Fees’’ category of the principal accountant fee disclosures.653 If the accountant were to provide services that extended beyond the scope of the independent private sector audit of the Conflict Minerals Report, the accountant would need to consider whether those services were inconsistent with Rule 2–01 of Regulation S–X. sroberts on DSK5SPTVN1PROD with RULES iii. Audit Objective We agree with commentators that the final rule should clearly state the objective of the Conflict Minerals Statutory Provision’s independent private sector audit and the subject matter to be audited to provide a basis for the auditor to measure the information provided by the issuer. Therefore, the final rule specifies an audit objective. The final rule states that the audit’s objective is to express an opinion or conclusion as to whether the design of the issuer’s due diligence framework as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and whether the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. The Conflict Minerals Statutory Provision requires an issuer to submit a Conflict Mineral Report that includes ‘‘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 measurers shall include an independent private sector audit of such report,’’ 654 and ‘‘a description of the products manufactured or contracted to be manufactured that are not DRC conflict free.’’ 655 We recognize that the final rule does not require an audit of the entire Conflict Minerals Report. We believe, however, that it is appropriate for the final rule to limit the audit only 653 See Item 9(e)(4) of Schedule 14A [17 CFR 240.14a-101]. Registrants also are required to describe the nature of the services comprising the fees disclosed under the ‘‘All Other Fees’’ category. As such, the independent private sector audit of the Conflict Mineral Report should be included in that description. 654 Exchange Act Section 13(p)(1)(A)(i). 655 Exchange Act Section 13(p)(1)(A)(ii). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 to the sections of the Conflict Minerals Report that discuss the design of the issuer’s due diligence framework and the due diligence measures the issuer performed because the provision’s requirement for an issuer to obtain an independent private sector audit is located in the provision’s subsection relating to due diligence.656 The audit requirement is not discussed in the subsequent subsection that requires a description in the Conflict Minerals Report of the issuer’s products manufactured or contracted to be manufactured that are ‘‘not DRC conflict free,’’ 657 and the final rule does not require an audit of that information. We note that the objective we are adopting differs significantly from the objectives of other audits required by our rules.658 Nonetheless, in light of the statutory structure, as well as concerns about the costs that could arise from a requirement to audit the conclusion about the conflict minerals’ status or take other approaches,659 we have concluded that the audit objective should be limited in this manner. We recognize that an audit objective requiring an auditor to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and whether the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook, is not as comprehensive as an audit objective requiring an auditor to express an opinion or conclusion as to whether the due diligence measures were effective, 656 See Exchange Act Section 13(p)(1)(A)(i). Exchange Act Section 13(p)(1)(A)(ii). 658 The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. See paragraph .01 of AU sec. 110, Responsibilities and Functions of the Independent Auditor. The auditor’s objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company’s internal control over financial reporting, as a part of which the auditor should test the design effectiveness of controls, as well as the operating effectiveness of controls. See paragraphs 3, 42, and 44 of Auditing Standard No. 5, An Audit of Internal Control over Financial Reporting That Is Integrated With An Audit of Financial Statements. 659 See, e.g., letters from AICPA I, Deloitte, and KPMG. 657 See PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 56329 or to express an opinion or conclusion as to whether or not the issuer’s necessary conflict minerals are ‘‘DRC conflict free,’’ which are more similar to audit objectives in our other rules. However, we believe that the audit is still meaningful because investors and other users will have some assurance from an independent third party that the issuer’s due diligence framework, as set forth in the Conflict Minerals Report, is designed in conformity with the relevant nationally or internationally recognized due diligence framework. Further, we believe it is necessary and appropriate to require the audit to address whether the issuer actually performed the due diligence measures that it represents that it performed in the Conflict Minerals Report, so that the audit also addresses, in a cost efficient manner, the actual performance of the due diligence and not just the design, as well as provides independent third party confirmation that the work described was performed. 4. Recycled and Scrap Minerals a. Proposed Rules As proposed, the rules would allow for different treatment of conflict minerals from recycled and scrap sources than from original sources due to the difficulty of looking through the recycling or scrap process to determine the mine or other location of origin of the minerals. Given this difficulty, we expected that an issuer generally would not know the origins of its recycled or scrap conflict minerals, so we believed it would be appropriate for the proposed rules to require that an issuer using recycled or scrap conflict minerals furnish a Conflict Minerals Report subject to special rules. Under the proposed rules, if an issuer obtained conflict minerals from a recycled or scrap source, it would have been required to consider the products containing or produced with those conflict minerals to be ‘‘DRC conflict free.’’ 660 As proposed, an issuer with conflict minerals that originated from recycled or scrap sources would have been required to disclose in its annual report, under the ‘‘Conflict Minerals Disclosure’’ heading, that its conflict minerals were obtained from recycled or 660 Because the proposed rules would have automatically classified recycled or scrap conflict minerals as ‘‘DRC conflict free,’’ issuers with products containing such minerals would not have needed 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 have been required to describe their efforts to determine the mine or location of origin with the greatest possible specificity. E:\FR\FM\12SER2.SGM 12SER2 56330 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations scrap sources and that it furnished a Conflict Minerals Report regarding those recycled or scrap minerals. Also, under the proposed rules, an issuer would have been required to state that its products containing or produced with recycled or scrap minerals in the Conflict Minerals Report were considered ‘‘DRC conflict free.’’ In addition, such an issuer would have described the measures taken to exercise due diligence in determining that its conflict minerals were recycled or scrap and obtain an independent private sector audit of that report. We did not propose to define when a conflict mineral is from recycled or scrap sources. Instead, any issuer seeking to use this alternative approach would describe the measures it took to exercise due diligence in determining that the conflict minerals came from recycled or scrap sources. The Proposing Release stated, however, that we would consider conflict minerals to be ‘‘recycled’’ if they are reclaimed enduser or post-consumer products, but we would not consider those minerals ‘‘recycled’’ if they are partially processed, unprocessed, or a byproduct from another ore.661 sroberts on DSK5SPTVN1PROD with RULES b. Comments on the Proposed Rules Commentators offered a wide variety of views on the appropriate approach to conflict minerals from recycled or scrap sources. A number of commentators stated that they either agreed with the recycled and scrap alternative reporting requirements, as proposed, or agreed with some type of recycled and scrap alternative reporting requirements or exemption, although some of these commentators did not necessarily discuss the mechanics of such reporting alternatives.662 Some commentators 661 As we noted in the Proposing Release, the proposed rules regarding recycled and scrap conflict minerals would apply to all conflict minerals equally. If recycled or scrap minerals were mixed with new minerals, the recycled and scrap alternative approach would apply to only the portion of the minerals that were 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 Covered Countries, that Conflict Minerals Report would contain only information regarding the recycled or scrap minerals. If, however, the new conflict minerals originated in the Covered Countries, or the issuer was unable to determine that its new conflict minerals did not originate in the Covered Countries, the Conflict Minerals Report would include information regarding both the new conflict minerals and the recycled or scrap conflict minerals. 662 See, e.g., letters from AAEI, AAFA, CRS I, Global Tungsten I, Global Witness I, Japanese Trade Associations, MSC I, NRF I, Ohio Precious Metals (Mar. 2, 2011) (‘‘OPM’’), PCP, Representative Jason Altmire (Mar. 23, 2012) (‘‘Rep. Altmire’’), Rep. Amodei, Rep. Bachus et al., Rep. Critz, Rep. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 indicated that they supported, as proposed, alternative recycled or scrap reporting that requires an issuer to perform due diligence in determining that the conflict minerals were, in fact, from recycled and scrap sources and to submit a Conflict Minerals Report describing the due diligence exercised that includes an audit of the report.663 A number of commentators believed that the final rule should require that an issuer only conduct the equivalent of a reasonable country of origin inquiry, instead of due diligence, to determine whether its conflict minerals were from recycled or scrap sources.664 Also, some of these and other commentators stated explicitly that an issuer should not be required to submit a Conflict Minerals Report and/or an audit of its recycled or scrap conflict minerals.665 Other commentators, including a number of members of Congress, recommended that the final rule exempt conflict minerals from recycled or scrap sources.666 Other commentators stated that the final rule should require due diligence but not a Conflict Minerals Report, not require a Conflict Minerals Report but require an audit of the inquiry into whether the conflict minerals are from recycled or scrap sources, require a ‘‘reliable process’’ to determine whether Ellmers, Representative Steven LaTourette (Jun. 13, 2012) (‘‘Rep. LaTourette’’), Representative Robert E. Latta (May 16, 2012) (‘‘Rep. Latta’’), Rep. Murphy, Representatives Tim Murphy and Peter J. Visclosky (Aug. 2, 2012) (‘‘Reps. Murphy and Visclosky’’), Representative James B. Renacci (Mar. 6, 2012) (‘‘Rep. Renacci’’), Representative Bill Shuster (Mar. 12, 2012) (‘‘Rep. Shuster’’), Representative Patrick J. Toomey (Apr. 12, 2012) (‘‘Rep. Toomey’’), Representative Stephen A. Womack (Dec. 23, 2011) (‘‘Rep. Womack’’), RMA, SEMI, Senator Mark Pryor (Mar. 19, 2012) (‘‘Sen. Pryor’’), and US Steel. 663 See, e.g., letters from Bario-Neal, Brilliant Earth, Earthworks, Enough Project I, Enough Project IV, Hacker Jewelers, ICAR et al. II, Howland, SIF I, and TIAA–CREF. 664 See, e.g., letters from AdvaMed I, Advanced Medical Technology Association (Nov. 1, 2011) (‘‘AdvaMed II’’), AngloGold, Global Tungsten II, Industry Group Coalition I, ITIC I, ITRI I, ITRI IV, JVC et al. II, LBMA I, Metalor Technologies USA (Feb. 25, 2011) (‘‘Metalor’’), NMA I, RJC I, United States Chamber of Commerce (Nov. 29, 2011) (‘‘Chamber III’’), and WGC II. 665 See, e.g., letters from AdvaMed I, AdvaMed II, ArcelorMittal, Copper & Brass Fabricators Council, Inc. (Mar. 2, 2011) (‘‘Copper & Brass’’), Global Tungsten II, IPC I, IPC II, ITIC I, ITRI I, ITRI III, ITRI IV, JVC et al. II, JVC et al. III, Materials I, NAM I, Rep. Altmire, Rep. Amodei, Rep. Bachus et al., Rep. Ellmers, Rep. Murphy, Rep. Shuster, Sen. Pryor, Specialty Steel Industry of North America (Mar. 2, 2011) (‘‘SSINA’’), Tiffany, and WGC II. See also letter from Rep. Critz (stating that we should consider ‘‘reconfiguring the auditing requirement as it relates to recycled scrap materials’’). 666 See, e.g., letters from Rep. Altmire, Rep. Murphy, Reps. Murphy and Visclosky (recommending exempting recycled or scrap steel that contains conflict minerals), Rep. Renacci, Rep. Shuster, Rep. Toomey, Rep. Womack, and Sen. Pryor. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 the conflict minerals are from recycled or scrap sources, or not require that an issuer provide any information other than a statement that the conflict minerals are from recycled or scrap sources.667 Some commentators agreed that products with conflict minerals from recycled and scrap sources should be considered ‘‘DRC conflict free,’’ as proposed.668 Other commentators indicated that the final rule should require an issuer with products containing conflict minerals from recycled or scrap sources to label those products with a name other than ‘‘DRC conflict free,’’ such as ‘‘recycled’’ or ‘‘scrap’’ products.669 Some commentators stated that the more the alternative reporting approach for conflict minerals from recycled or scrap sources resembles our approach for newly mined conflict minerals the greater the risk of creating a disincentive for a manufacturers to use conflict minerals from recycled or scrap sources.670 As one of these commentators asserted, without certain alternative reporting requirements for issuers with conflict minerals from recycled or scrap sources, such minerals ‘‘would be doomed for burial in a land fill until mined anew under a different authority having jurisdiction,’’ which would be a ‘‘clear waste’’ of conflict minerals that ‘‘cannot contribute to new suffering in the DRC even though its disposition regarding past suffering may not be clear.’’ 671 According to this commentator, ‘‘it is possible that dishonest people may find a way to pass new material off as recycled,’’ but this possibility ‘‘does not outweigh the very obvious benefit of using recycled products and materials.’’ 672 In this regard, other commentators argued that requiring issuers to provide the reason they determined that their conflict minerals came from recycled or scrap sources, including the due diligence processes they used in making their determination, would offset the reduced burden provided by the exemption.673 One commentator suggested that an issuer should be able to describe a product as using recycled or scrap minerals if a majority of the minerals used in the product are from recycled or 667 See, e.g., letters from Cleary Gottlieb, JVC et al. II, MSG I, and NEI. 668 See, e.g., letters from Copper & Brass, JVC et al. II, MSG I, NEI, NMA II, SIF I, SSINA, TIAA– CREF, and WGC II. 669 See, e.g., letters from CRS I, Global Witness I, and State II. 670 See, e.g., letters from Copper & Bass, Global Tungsten I, RMA, SEMI, and SSINA. 671 See letter from SEMI. 672 See id. 673 See letters from Rep. LaTourette and Rep. Latta. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations scrap sources or a combination of recycled, scrap, and newly mined conflict minerals because it would be impossible to determine whether all the minerals in a product were from recycled or scrap sources.674 Another commentator recommended that the final rule should allow an issuer to describe its products as ‘‘DRC conflict free’’ if a majority of the conflict minerals in those products are from recycled or scrap sources.675 One commentator asserted that tolled material (scrap, second life-cycle materials, or ores processed into raw materials suitable for use in the manufacture of products) received from processing facilities or suppliers should be treated as conflict free if the original material supplied was conflict free.676 A number of other commentators suggested that the final rule allow an issuer to designate the origin of any recycled or scrap conflict minerals as the country in which those minerals were generated and collected or otherwise initially submitted into the recycling or scrap supply chain, which is consistent with the United States customs law.677 Also, commentators agreed that the alternative reporting requirements for recycled and scrap minerals should apply to all conflict minerals and issuers equally.678 Many commentators discussed the Proposing Release’s statement that we would consider conflict minerals to be from a recycled or scrap sources if those minerals are reclaimed end-user or postconsumer products but would not consider those minerals ‘‘recycled’’ if they are partially processed, unprocessed, or a byproduct from another ore. Some of these commentators recommended that the final rule expand this statement to match the OECD’s definition of recycled and scrap minerals or explicitly adopt the OECD’s definition in the final rule.679 Likewise, certain commentators recommended that the final rule clarify that we would consider conflict minerals from recycled or scrap sources to include scrap processed metals created during product manufacturing, which is part of the OECD definition.680 These commentators, however, were concerned that the Proposing Release 674 See letter from AngloGold. letter from WGC II. 676 See letter from Global Tungsten II. 677 See, e.g., letters from IPMI I, LBMA I, Metalor, NMA II, and RJC I. 678 See, e.g., letters from Howland, IPC I, ITRI I, and NEI. 679 See, e.g., letters from Global Witness I, MSG I, and SIF I. 680 See, e.g., letters from Copper & Brass and SSINA. sroberts on DSK5SPTVN1PROD with RULES 675 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 did not consider partially processed materials as being recycled, because they believed that such a definition would exclude industrial scrap, sometimes referred to as ‘‘new’’ scrap, generated by downstream manufacturers from the treatment given to recycled minerals.681 Some commentators provided alternative definitions for recycled and scrap minerals. One commentator stated that the final rule should define a recycled or scrap conflict mineral as ‘‘a conflict mineral or a conflict mineral derivative that is within, or has been reclaimed from, a used product that was collected directly from the last product end user, or that was collected from a municipal waste stream.’’ 682 Other commentators indicated that conflict minerals should be considered recycled or scrap only if they have been through a cycle of production and application.683 A further commentator suggested that the final rule adopt, in substantial part, the Environmental Protection Agency’s definition of solid waste for our definition of conflict minerals from recycled or scrap sources, with the related exclusions and definitions of various scrap materials.684 One commentator recommended that we incorporate the Electronic Industry Citizenship Coalition’s (‘‘EICC’’) definition of ‘‘scrap’’ for tantalum as the definition for scrap in the final rule.685 Certain commentators sought to limit the definition of recycled and scrap minerals to 100% post-consumer metals.686 Some commentators suggested a definition that would include reclaimed materials from the manufacture of downstream products that incorporate those metals, processes utilizing those metals, or end-user or post-consumer products, which would not include minerals partially processed, materials from the partially processed minerals, or materials from intermediate stages of the smelting and refining process.687 One commentator recommended that the final rule consider as conflict minerals from recycled or scrap sources, ‘‘not only * * * post-consumer scrap, but also * * * scrap that is the result of an industrial process.’’ 688 Additionally, some commentators provided recommendations specifically for treating conflict minerals in jewelry, coins, and bars as recycled or scrap. One such commentator stated that conflict minerals from discarded consumer jewelry should be considered recycled or scrap.689 Another commentator argued that any definition of recycled and scrap gold should grandfather gold bars and gold coins produced before the effective date of the final rule and exclude sludges, slimes, flue dust, carbon fines, slag, and other by-products from consideration as conflict minerals.690 Conversely, other commentators stated that the definition of conflict minerals from recycled or scrap sources should include only those conflict minerals from post-consumer products and not include any jewelry unsold or not previously owned as enduse products by consumers.691 Also, some of these commentators indicated that gold coins and bars should not be classified as recycled or scrap 692 because, as some of these commentators stated, they do not represent a clear consumer end-of-life product and are less identifiable as not newly-mined gold.693 c. Final Rule We are revising the proposal’s treatment of conflict minerals from recycled and scrap sources in the final rule. We agree with commentators that it is appropriate to provide alternative treatment for such conflict minerals so that the final rule does not provide a disincentive for using conflict minerals from recycled and scrap sources. However, we also want to include safeguards to prevent issuers from claiming to use conflict minerals from recycled and scrap sources when that is not the case. We believe, as certain commentators noted,694 requiring an issuer with necessary conflict minerals to conduct an inquiry similar to the reasonable country of origin inquiry to determine whether its minerals are from 688 See letter from ArcelorMittal. letter from JVC et al. II. 690 See letter from NMA II. 691 See, e.g., letters from Brilliant Earth, BarioNeal, Earthworks, Enough Project I, Hacker Jewelers, ICAR et al. II, and TakeBack 692 See, e.g., letters from Brilliant Earth, BarioNeal, Enough Project I, Hacker Jewelers, ICAR et al. II, and TakeBack. 693 See letter from Enough Project I and ICAR et al. II. 694 See, e.g., letters from AdvaMed I, AdvaMed II, AngloGold, Global Tungsten II, Industry Group Coalition I, ITIC I, ITRI I, ITRI IV, JVC et al. II, LBMA I, Metalor, NMA I, RJC I, Chamber III, and WGC II. 689 See 681 Id. 682 See letter from SEMI (defining a ‘‘used product’’ as ‘‘a product that, prior to recycling or disposal, is commercially sold or otherwise distributed to a buyer not in the commercial chain of distribution and used for some period of time’’). 683 See letters from Global Tungsten I and RMA. 684 See letter from Elm. 685 See letter from H.C. Starck GmbH (Jul. 27, 2011) (‘‘Starck’’). 686 See, e.g., letters from Bario-Neal, Brilliant Earth, Earthworks, Metalsmiths, Hacker Jewelers, and TakeBack. 687 See letters from ITRI I, JGI, and Solutions. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 56331 E:\FR\FM\12SER2.SGM 12SER2 56332 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES recycled or scrap sources is an appropriate way to balance these concerns.695 Under the final rule, if an issuer has reason to believe, as a result of its reasonable country of origin inquiry, that its conflict minerals may not have been from recycled or scrap sources, it must exercise due diligence. The issuer would then be required to provide a Conflict Minerals Report if it is unable to determine that the conflict minerals came from recycled or scrap sources. We believe this approach for any issuer with conflict minerals from recycled or scrap sources is consistent with the Conflict Minerals Statutory Provision. The provision was intended to affect the ‘‘exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo [that] is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo.’’ 696 As noted by some commentators, however, armed groups in the Covered Countries are financed and benefit from the extraction and illegal taxation of newly mined conflict minerals and their transport, not the use of recycled or scrap conflict minerals.697 No further revenue or other benefit will be provided to the armed groups from any transaction involving the conflict minerals from recycled or scrap sources because the armed groups ‘‘have already extracted their revenue and do not stand to gain with [their] use or sale.’’ 698 In this regard, we believe it is appropriate, as proposed, to allow an issuer, if it wishes, to describe its products containing conflict minerals from recycled or scrap sources as ‘‘DRC conflict free.’’ As one commentator 695 Because we envision these inquiries to be similar, we use the term ‘‘reasonable country of origin inquiry’’ to refer to an issuer’s inquiry into both the conflict minerals’ country of origin and whether the minerals are from recycled or scrap sources. 696 See Section 1502(a) of the Act. 697 See letters from AAEI and Global Tungsten I. 698 See letter from AAEI. See also OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 7 n.2 (2011), available at https:// www.oecd.org/daf/internationalinvestment/ guidelinesformultinationalenterprises/ 46740847.pdf (stating that metals ‘‘reasonably assumed to be recycled are excluded from the scope of this’’ guidance) and OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Supplement on Gold, 28 n.34 (2012), available at https://www.oecd.org/corporate/ guidelinesformultinationalenterprises/ FINAL%20Supplement%20on%20Gold.pdf (stating that ‘‘[r]ecycled material is not itself a concern for contributing to conflict, however, recycled material is a potential means of laundering gold that has been mined in conflict-affected and high-risk areas in order to hide its origin’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 explained, the ‘‘intent of the statute is to provide investors with information about whether minerals used in manufacturing processes may contribute to the ongoing conflict in the DRC,’’ 699 and it is ‘‘comfortable that legitimate recycled post-consumer or scrap minerals do not contribute to the crisis and can be therefore identified as ‘DRC conflict free.’ ’’ 700 We are aware that the underlying conflict minerals that were recycled or from scrap sources may have once directly or indirectly financed or benefited armed groups in the Covered Countries. However, because the purpose of the provision is to provide information about whether minerals used in manufacturing directly or indirectly financed or benefited armed groups in the Covered Countries, and conflict minerals from recycled or scrap sources no longer do so, we believe it is appropriate to deem all products with conflict minerals from recycled or scrap source as ‘‘DRC conflict free.’’ 701 This prevents the final rule from providing a disincentive to use conflict minerals from recycled or scrap sources. i. Definition of ‘‘Recycled and Scrap Sources’’ We are revising the proposed rules to adopt a definition of conflict minerals from recycled or scrap sources, which mirrors the OECD definition of recycled metals.702 We are persuaded by commentators that argued that it is important for us to prescribe clear definitions regarding conflict minerals from recycled or scrap sources so that an issuer does not use this alternative reporting scheme as a means to avoid the requirement to exercise due diligence on the source and chain of custody of its conflict minerals in order to describe its products as ‘‘DRC conflict free.’’ 703 Also, we agree with one of these commentators that the definition should be included in the body of the 699 See letter from TIAA–CREF. id. 701 We also note that, going forward, newly mined minerals, even if they are eventually recycled, will be covered under the final rule when they are first used. 702 See OECD, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, 12 n.2 (2011), available at https://www.oecd.org/dataoecd/ 62/30/46740847.pdf. (‘‘Recycled metals are reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing. Recycled metal includes excess, obsolete, defective, and scrap metal materials which contain refined or processed metals that are appropriate to recycle in the production of tin, tantalum, tungsten and/or gold. Minerals partially processed, unprocessed or a bi-product from another ore are not recycled metals.’’). 703 See, e.g., letters from Global Witness I, MSG I, and SIF I. 700 See PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 final rule and not just included as guidance in the release.704 Further, we are persuaded by commentators that we should use the OECD definition to provide certainty and prevent an issuer from using an alternative definition that would allow the issuer to classify it minerals as recycled or scrap when they were not.705 Therefore, the final rule states that conflict minerals are considered to be from recycled or scrap sources if they are from recycled metals, which are reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing. Also, based on the OECD definition, the final rule states that recycled metal includes excess, obsolete, defective, and scrap metal materials that contain refined or processed metals that are appropriate to recycle in the production of tin, tantalum, tungsten and/or gold. The final rule states further, however, that minerals partially processed, unprocessed, or a byproduct from another ore will not be included in the definition of recycled metal. The definition included in the final rule should alleviate certain commentators’ concern that the Proposing Release would limit the definition of conflict minerals from recycled or scrap sources to only enduser or post-consumer scrap and not include scrap processed metals created during product manufacturing.706 The final rule’s definition, which is consistent with the OECD definition, includes scrap processed metals created during product manufacturing. ii. Due Diligence for Conflict Minerals That May Not Be From ‘‘Recycled and Scrap Sources’’ In a change from the proposal, the final rule only requires an issuer with conflict minerals from recycled or scrap sources to exercise due diligence if it has reason to believe, following its reasonable country of origin inquiry, that its conflict minerals that it thought were from recycled or scrap sources may not be from such sources. If so, as is true for issuers with conflict minerals from newly mined sources, the issuer must exercise due diligence that conforms to a nationally or internationally recognized due diligence framework, if such a framework is available. The proposed rules would have required issuers with conflict minerals from recycled or scrap sources to exercise due diligence in determining 704 See letter from Global Witness I. e.g., letters from Global Witness I, MSG I, and SIF I. 706 See letters from Copper & Brass and SSINA. 705 See, E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations that their conflict minerals were from recycled or scrap sources without requiring adherence to any due diligence framework. Presently, it appears that the OECD’s supplement for gold is the only nationally or internationally recognized due diligence framework for any conflict mineral from recycled or scrap sources. Therefore, we anticipate that issuers would use the gold supplement to conduct their due diligence for gold that issuer has reason to believe may not come from recycled or scrap sources. However, neither the OECD nor any other body has a similar due diligence framework for cassiterite, columbitetantalite, or wolframite. Therefore, until such a framework is developed, the required due diligence for issuers who may have those recycled or scrap conflict minerals is the same as proposed. Those issuers are required to exercise due diligence in determining that their conflict minerals were from recycled or scrap sources without the benefit of a due diligence framework. If, however, a nationally or internationally recognized due diligence framework becomes available for any of the remaining conflict minerals, issuers will be required to utilize that framework for that mineral. Specifically, if due diligence guidance for a particular conflict mineral under a nationally or internationally recognized due diligence framework becomes available prior to June 30 of a calendar year, the first reporting period in which issuers must use the framework for that conflict mineral will be the subsequent calendar year. However, if the due diligence guidance is not approved until after June 30 of a calendar year, issuers are not required to use that framework for that conflict mineral until the second calendar year after approval to provide a full year before implementation. For example, if the OECD or another body adopts a nationally or internationally recognized due diligence framework for cassiterite, columbitetantalite, or wolframite from recycled or scrap sources prior to June 30, 2013, the initial reporting period in which issuers with those conflict minerals from recycled or scrap sources must use the due diligence framework will begin on January 1, 2014 and their specialized disclosure reports that discuss their exercise of such due diligence will be due on May 31, 2015. If, however, the OECD or another body adopts such a due diligence framework on or after July 1, 2013, but before June 30, 2014, the initial reporting period for issuers with those conflict minerals to use the framework will begin on January 1, 2015 and their specialized disclosure reports VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 with respect to those minerals will be due on May 31, 2016. Issuers with gold from recycled or scrap sources, however, are required to submit a specialized disclosure report for that mineral using the OECD’s due diligence for recycled or scrap gold for the reporting period beginning January 1, 2013, which will be due on May 31, 2014. Further, consistent with the proposal, because our final rule considers products with conflict minerals from recycled or scrap sources to be ‘‘DRC conflict free,’’ the final rule does not require a discussion of processing facilities, countries of origin, or efforts to determine the mine or location of origin with the greatest possible specificity. Therefore, we believe that our approach is consistent with comments that indicated that the final rule should not require an issuer with conflict minerals from recycled or scrap sources to provide a Conflict Minerals Report, but should require such issuers to ‘‘disclose how they have determined that sources are genuine scrap recycled.’’ 707 Without this disclosure, such issuers ‘‘might otherwise be encouraged to ‘launder’ new DRC conflict minerals through their operations—misleading consumers and other stakeholders, and undermining the value of the disclosure exercise.’’ 708 F. Other Matters If any provision of this rule, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. Moreover, if any portion of Form SD not related to conflict minerals disclosure is held to be invalid, such invalidity shall not affect the use of the form for purposes of disclosure pursuant to Exchange Act Section 13(p). III. Economic Analysis A. Introduction As discussed in greater detail above,709 Section 1502 amended the Exchange Act by adding new Section 13(p), which requires us to promulgate disclosure and reporting regulations 707 See letter from NEI. id. (recommending also that ‘‘[i]ssuers should use due diligence in determining whether conflict minerals are from scrap/recycled sources’’). 709 We are incorporating Sections I and II of this release, which fully describe the statutory requirements of Section 1502 of the Act and the final rule in detail, into Section III of the release and providing only a short summary of the statutory requirements and final rule in this section. 708 See PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 56333 regarding the use of conflict minerals from the Covered Countries. Section 13(p) mandates that the Commission promulgate regulations requiring that a person described disclose annually whether any conflict minerals that are necessary to the functionality or production of a product manufactured by such person originated in the Covered Countries, and make that disclosure publicly available on the issuer’s Internet Web site. If a person concludes that the person’s conflict minerals originated in the Covered Countries, that person must submit a Conflict Minerals Report, which must be posted on the person’s Internet Web site, that includes a description of the measures taken by the person to exercise due diligence on the minerals’ source and chain of custody, which must include an independent private sector audit of the Conflict Minerals Report that is conducted according to standards established by the GAO. The person submitting the Conflict Minerals Report must also identify the independent private sector auditor and certify the independent private sector audit. Further, the 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. We are adopting amendments to our rules to implement the Conflict Minerals Statutory Provision. The final rule requires any reporting 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 annually in a separate specialized disclosure report on a new form the results of its reasonable inquiry into whether its conflict minerals originated in the Covered Countries or came from recycled or scrap sources. Under the final rule, following its reasonable country of origin inquiry, if (a) The issuer knows that its conflict minerals did not originate in the Covered Countries or knows that they came from recycled or scrap sources, or (b) the issuer has no reason to believe its conflict minerals may have originated in the Covered Countries, or (c) the issuer reasonably believes its conflict minerals came from recycled or scrap sources, then in all such cases the issuer must, in the body of Form SD, disclose its determination and describe briefly the reasonable country of origin E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56334 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations inquiry it undertook and the results of the inquiry. On the other hand, following its reasonable country of origin inquiry, if (a) the issuer knows that its conflict minerals originated in the Covered Countries and knows that they did not come from recycled or scrap sources, or the issuer has reason to believe that its conflict minerals may have originated in the Covered Countries, and (b) the issuer knows that its conflict minerals did not come from recycled or scrap sources or has reason to believe that its conflict minerals may not have come from recycled or scrap sources, then the issuer must exercise due diligence on the source and chain of custody of its conflict minerals that conforms to a nationally or internationally recognized due diligence framework, if one is available. Following that due diligence, unless the issuer determines, based on that due diligence, that its conflict minerals did not originate in the Covered Countries or that its conflict minerals did come from recycled or scrap sources, the issuer must file a Conflict Minerals Report. In most circumstances, the issuer must obtain an independent private sector audit of its Conflict Minerals Report. The issuer must also describe in its Conflict Minerals Report, among other information, its products manufactured or contracted to be manufactured that have not been found to be ‘‘DRC conflict free.’’ For a temporary two-year period for all issuers, and for a temporary four-year period for smaller reporting issuers, an issuer that must perform due diligence and is unable to determine that the conflict minerals in its products originated in the Covered Countries or came from recycled or scrap sources, or unable to determine that the conflict minerals in those products that originated in the Covered Countries financed or benefited armed groups, may consider those products ‘‘DRC conflict undeterminable.’’ In that case, the issuer must describe, among other information, its products manufactured or contracted to be manufactured that are ‘‘DRC conflict undeterminable’’ and the steps it has taken or will take, if any, since the end of the period covered in its most recent prior Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence. An issuer with products that are ‘‘DRC conflict undeterminable’’ is not required to obtain an independent private sector audit of the Conflict Minerals Report VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 regarding the conflict minerals in those products. Finally, after its reasonable country of origin inquiry, an issuer that determines that its conflict minerals it thought were from recycled or scrap sources might instead be from newly mined sources must exercise due diligence that conforms to a nationally or internationally recognized due diligence framework developed specifically for conflict minerals from recycled sources to determine that its conflict minerals are from recycled or scrap sources. The issuer must also describe its due diligence in its Conflict Minerals Report. Currently, gold is the only conflict mineral with a nationally or internationally recognized due diligence framework for recycled or scrap conflict minerals. If no nationally or internationally recognized due diligence framework for a particular recycled or scrap conflict mineral is available, which is the case for the other three minerals, until such a framework is developed, the issuer must exercise due diligence in determining that its conflict minerals are from recycled or scrap sources and describe the due diligence measures it exercised in its Conflict Minerals Report. As we considered how to implement the requirements of Section 1502, we considered the costs and benefits imposed by the new rule and form we are adopting, as well as their effects on efficiency, competition, and capital formation. Many of the economic effects of the rule stem from the statutory mandate, and the discussion below addresses the costs and benefits resulting from both the statute and from our exercise of discretion, and the comments we received about these matters. The Proposing Release cited some pre-proposal letters we received from commentators indicating the potential impact of the proposed rules on competition and capital formation. In addition to requesting comment throughout the release on the proposal and on potential alternatives to the proposal, we also solicited comment in the Proposing Release on whether the proposal, if adopted, would promote efficiency, competition, or capital formation, or have an impact or burden on competition. We also requested comment on the potential effect on efficiency, competition, or capital formation should we not adopt certain exceptions or accommodations. As discussed throughout this release, we received many comments addressing the potential economic and competitive impact of the proposed rules. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 We note, however, that one commentator recommended that the proposed rules be withdrawn because the commentator did not believe we fully analyzed the potential costs, supply chain complexities, and other practical obstacles to implementing the final rule.710 We disagree. As discussed above, members of the public interested in making their views known were invited to submit comment letters in advance of the official comment period for the proposed rules. In addition, in response to the suggestion by some commentators that we extend the comment period to allow the public additional time to thoroughly consider the matters addressed in the Proposing Release and to submit comprehensive responses, we extended the comment period for an additional 30 days and have continued to receive comment letters through August 2012, which we have considered. In addition, we convened an October 2011 roundtable at the request of commentators. Some commentators have provided responses to other commentators, particularly on the Economic Analysis. This robust, public, and interactive debate has allowed us to more fully consider how to develop our final rules. Additionally, as discussed further in the Economic Analysis section, below, we have considered and analyzed the numerous comments received regarding the costs and complexities of the statute and proposed rule, and have taken them into account in the final rule. Overall, we believe interested parties have had sufficient opportunity to review the proposed rules, as well as the comment letters, and to provide views on the proposals and on the other comment letters and data to inform our consideration of the final rules. Accordingly, we do not believe that withdrawal of the proposed rule and reproposal is necessary. After analyzing the comments and taking into account additional data and information, we believe it is likely that the initial cost of compliance is approximately $3 billion to $4 billion, while the annual cost of ongoing compliance will be between $207 million and $609 million. As discussed in detail below, we reach this estimate by taking into account the many comments we received on potential costs, relying particularly on those comment letters that provided quantification and were transparent about their methodologies. As will be discussed in more detail below, after thoroughly considering each comment letter, we determined that it was 710 See E:\FR\FM\12SER2.SGM letter from Chamber I. 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES appropriate to modify and/or expand upon some of the submitted estimates and methodologies to reflect data and information submitted by other commentators, as well as our own judgment and experience. Our considered estimate of the total costs thus reflects these synthesized data and analyses. We consider the full range of these costs in the following sections, although where it is possible to discuss separately the costs and benefits related to our discretionary choices in the rule, we attempt to do so.711 Exchange Act Section 23(a)(2) 712 also requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition, and Exchange Act Section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition, Exchange Act Section 3(f) 713 requires us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider whether the action will promote efficiency, competition, and capital formation. Accordingly, as we considered how to implement the requirements of Section 1502, we considered the impact on the economy, burden on competition, and promotion of efficiency, competition, and capital formation. Given the specific language of the statute and our understanding of Congress’s objectives, we believe it is appropriate for the final rule generally to track the statutory provision. Our discretionary authority to implement Section 13(p) is limited, and we are committed to executing the Congressional mandate. Throughout this release, and in the following Economic Analysis, we discuss the benefits and costs arising from the new mandatory reporting requirement, those choices in which we have exercised our discretion, and the comments we received about these matters. Sections III.B and III.C below provide a narrative discussion of the costs and benefits resulting from the mandatory reporting requirement and our exercise of discretion, respectively. In Section III.D below, based on commentators’ estimates and our estimates, we provide a quantitative 711 As discussed above, our discretionary choices are informed by the statutory mandate and thus, discussion of the benefits and costs of those choices will necessarily involve the benefits and costs of the underlying statute. 712 15 U.S.C. 78w(a)(2). 713 15 U.S.C. 78c(f). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 discussion of the costs associated with the final rule as adopted.714 B. Benefits and Costs Resulting From the Mandatory Reporting Requirement 1. Benefits Congress intended for the rule issued pursuant to Section 1502 to decrease the conflict and violence in the DRC, particularly sexual- and gender-based violence.715 We note also that the Congressional object is to promote peace and security in the Covered Countries.716 As a means to address the humanitarian situation in the DRC, new Section 13(p) requires issuers to understand and report on their use and source of certain minerals from the Covered Countries. By mandating the additional disclosure requirements of Exchange Act Section 13(p), we understand that Congress likely sought to reduce the amount of money provided to armed groups engaged in conflict in the DRC,717 thereby achieving the stated objective of the statute.718 Some commentators have 714 As noted below, Congress’s goals of reducing violence and promoting peace and security in the Covered Countries, as well as enhanced transparency through Section 13(p) and this rulemaking is intended to result in benefits that cannot be readily quantified with any precision, and therefore, our quantitative analysis focuses on the costs. 715 Section 1502(a) of the Act (‘‘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).’’). 716 See Exchange Act Section 1502(c)(1)(B)(i) (stating that the Secretary of State, in consultation with the Administrator of the United States Agency for International Development, shall submit to Congress a plan to ‘‘promote peace and security’’ in the Covered Countries). See also Section 1502(d)(2)(A) of the Act (directing the GAO to assess the effectiveness of Exchange Act Section 13(p) in promoting peace and security in the Covered Countries). 717 Cf. Exchange Act Section 1502(c)(1) requiring the Secretary of State in consultation with the Administrator of the United States Agency for International Development to submit a report to Congress discussing a strategy to address the linkages between human rights abuses, armed groups, mining of conflict minerals, and commercial products that includes a plan to promote peace, a plan to provide guidance to commercial entities seeking to exercise due diligence, and a description of possible punitive measures. 718 As discussed above, some commentators, including co-sponsors of the legislation and other members of Congress, indicated that the Conflict Minerals Statutory Provision also materially informs an investor’s understanding of the risks in an issuer’s reputation and supply chain. See, e.g., letters from CRS I, FRS, Global Witness I, Methodist Pension, Sen. Durbin/Rep. McDermott, Sen. Leahy et al., SIF I, and SIF II. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 56335 argued that the Conflict Minerals Statutory Provision has already made progress in this area.719 For example, some commentators have argued that the Conflict Minerals Statutory Provision has already pressured DRC authorities to begin to demilitarize some mining areas and to increase mining oversight.720 Congress provided that the disclosure requirements of Exchange Act Section 13(p) shall remain in effect until the President determines and certifies that ‘‘no armed groups continue to be directly involved in and benefitting from commercial activity involving conflict minerals.’’ 721 The statute therefore aims to achieve compelling social benefits, which we are unable to readily quantify with any precision, both because we do not have the data to quantify the benefits and because we are not able to assess how effective Section 1502 will be in achieving those benefits. Additionally, the social benefits are quite different from the economic or investor protection benefits that our rules ordinarily strive to achieve. We also note that these objectives of Section 1502 do not appear to be those that will necessarily generate measurable, direct economic benefits to investors or issuers. Some commentators urged, however, that conflict minerals information is material 719 See, e.g., letters from International Corporate Accountability Roundtable (Jul. 29, 2011) (‘‘ICAR I’’), Sen. Boxer et al. I, Sen. Leahy et al., and United Nations Group of Experts on the Democratic Republic of Congo (Oct. 21, 2011) (‘‘UN Group of Experts’’). Other commentators, however, have argued that the Conflict Minerals Statutory Provision has hurt the general economy and population of the DRC. See, e.g., letters from BEST II (‘‘Though [the Conflict Minerals Statutory Provision] seeks to provide a mechanism for combating the corruption and violence crippling the DRC, its impact on the upstream mining industry has been devastating to the mining communities and the broader economy of Eastern DRC.’’), CEI II (‘‘There are already indications that Dodd-Frank has had damaging consequences for the artisanal miners. In a recently published New York Times op-ed, freelance reporter David Aronson observed that the law is harming the very people it is aimed at protecting, and that the sole beneficiaries are those perpetrating the violence.’’), and FEC II (stating that, ‘‘we can confirm today that as expected there is more smuggling activities, very big decrease in revenue of the Government of DRC, huge impact on the live hoods of thousands of Congolese, there is no more formal business in the Kivus due to this interpretation of consumers which is far more than the requirements of the law and does not give chance for the improvements that had already begun to work’’). 720 See, e.g., Sen. Boxer et al. I, Sen. Leahy et al., and United Nations Group of Experts on the Democratic Republic of Congo (Oct. 21, 2011) (‘‘UN Group of Experts’’). Other commentators, however, have argued that the Conflict Minerals Statutory Provision has hurt the general economy and population of the DRC. See, e.g., letters from BEST II, CEI II, and FEC II. 721 Exchange Act Section 13(p)(4). E:\FR\FM\12SER2.SGM 12SER2 56336 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations to an investment decision and, therefore, similar to other disclosures required to be filed by issuers.722 For example, one commentator noted that, ‘‘[a]s a sustainable and responsible investor,’’ this commentator ‘‘values companies’ prudent management of risk in their global supply chains and has been particularly concerned in recent years by the use of certain minerals to fund the continuing bloody conflict in the’’ DRC.723 As another example, a different commentator stated that, ‘‘[a]s sustainable and responsible investors, we carefully assess the prudent management of risk in companies’ global supply chains and we have been particularly concerned in recent years by the use of certain minerals, namely tin, tantalum, tungsten and gold, to fund the continuing bloody conflict in the’’ DRC.724 sroberts on DSK5SPTVN1PROD with RULES 2. Cost Estimates in the Comment Letters In the Proposing Release, we included our estimates of the costs of the disclosure requirements.725 A number of commentators indicated that we underestimated the costs.726 One commentator, however, asserted that Economic Analysis was both ‘‘thorough and accurate.’’ 727 In this regard, another commentator stated that the cost estimates in comment letters from industry ‘‘seem[ed] significantly inflated.’’ 728 Some commentators discussed the costs in a more specific manner. In the Specific Comments 722 See letters from Calvert, Global Witness I, Sen. Durbin/Rep. McDermott Sen. Leahy et al., SIF I, SIF II, and TIAA–CREFF. But see letters from AngloGold, Barrick Gold, Cleary Gottlieb, Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM III, NMA II, NY State Bar, Taiwan Semi, and WGC II. 723 See letter from Calvert. 724 See letter from SIF II. 725 In the Proposing Release, we estimated solely for the purposes of the Paperwork Reduction Act 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 hours of company personnel time and to be approximately $71,243,000 for the services of outside professionals. Also, we estimated that the PRA burden for the audit and due diligence requirements to the industry would be approximately $46,475,000. These cost estimates were calculated based on the effect that the proposed 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. 726 See, e.g., letters from Barrick Gold, CEI II, Chamber I, Ford, Howland, IPC I, ITRI I, ITRI II, NAM I, NRF I, PCP, Rep. Lee, RILA, TriQuint I, Tulane University Payson Center for International Development (Oct. 25, 2011) (‘‘Tulane’’), and WGC II. 727 See letter from ICAR et al. I. 728 See letter from Enough Project IV. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 section below, we discuss the comments we consider to be the most useful regarding the costs of the disclosure requirements. In both the general and specific comments, commentators did not typically distinguish between the costs and benefits of the statutory mandate and the costs and benefits of the specific aspects of the rule for which we exercised discretion. The overall specific cost range provided by commentators, as discussed in greater detail below, was between $387,650,000 729 and $16 billion.730 In analyzing the comments, we believe it is more likely that the initial cost of complying with the statutory requirement is approximately $3 billion to $4 billion. We explain why as we consider and describe the full range of these costs below, although where it is possible to discuss separately the costs and benefits related to our discretionary choices in the rule, we attempt to do so. a. General Comments Most commentators stated that they fully support the humanitarian goals of the Conflict Minerals Statutory Provision of reducing the levels of violence in the DRC,731 but some commentators argued that the Proposing Release did not adequately demonstrate any benefits to investors.732 As noted above, the purpose of Section 1502 is furthering the humanitarian goals of reducing violence and advancing peace and security in the DRC and the benefits Congress intended are derived directly from the statute. Other commentators, including two of the co-sponsors of the provision and other members of Congress, have indicated in comment letters that the provision also serves important investor protection objectives, such as additional disclosure on a company’s supply chain,733 although the legislative history and statutory language do not generally reference investor protection. Therefore, we have designed a final rule to help achieve the intended humanitarian benefits in the way that Congress directed, even though we recognize that the final rule will impose significant compliance costs on 729 See letter from Claigan III. letter from NAM I. 731 See, e.g., letters from ABA, Chamber I, Industry Group Coalition I, NAM I, and WGC II. 732 See, e.g., letters from Chamber I and PCP. These commentators stated also that the Proposing Release did not demonstrate adequately the proposed rules’ efficiencies for the market place or any promotion of capital formation, as discussed below. 733 See, e.g., letter from Senator Leahy et al. (‘‘[I]t seems abundantly clear that when a publicly traded company relies on an unstable black market for inputs essential to manufacturing its products it is of deep material interest to investors.’’). 730 See PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 companies who use or supply conflict minerals. Although, as one commentator noted, it would be difficult to determine a realistic cost approximation,734 most of these commentators believed that compliance costs would be high. b. Specific Comments Four commentators in particular attempted to catalogue the expense of complying with the new reporting requirements. The commentators generally focused on three categories of costs as the most significant: Due diligence for both suppliers and issuers, information technology (‘‘IT’’) costs, and audit costs. Although there is a general consensus among these four commentators as to the broadest categories of significant costs, in several cases they provided divergent cost estimates as well as supplying differing levels of detail as to how they developed these estimates. The following section is intended to lay out the cost estimates as submitted by the commentators. i. Manufacturing Industry Association Comments In its comment letter, a manufacturing industry association 735 stated that, based on its research, of the 5,994 issuers that the Proposing Release stated could be affected by the final rule, the average issuer would have between 2,000 and 10,000 first-tier suppliers, which would result in the total initial costs to issuers of complying with the final rule being anywhere from approximately $8 billion to $16 billion.736 The industry association noted that ‘‘a large portion of America’s 278 thousand small and medium-sized manufacturers could be affected by the requirement to provide information on the origin of the minerals in the parts and components they supply to companies subject to the SEC.’’ It estimated, however, that ‘‘only one in five smaller companies would be in one or more issuer’s supply 734 See letter from Howland. letter from NAM I. The manufacturing industry association indicated that, in developing its cost estimates, it consulted with its manufacturing members and relied on research by The Global Research Center for Strategic Supply Management at the W.P. Carey School of Business at Arizona State University. 736 But see letter from the Fafo Institute for Applied International Studies (Oct. 17, 2011) (‘‘Fafo’’). This commentator asserted that the manufacturing industry association’s cost estimate was too high because of some incorrect assumptions regarding an issuer’s costs of changing legal obligations, obtaining an independent private sector audit, monitoring of the supply chain, administering procurement and contracts, implementing remediation recommendations, conducting internal audits of its due diligence system, and reporting to the Commission. 735 See E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations chains,’’ 737 and these smaller companies’ only costs regarding the proposed rules would be a $25,000 audit cost. Therefore, the proposed rules would cost smaller companies, which are not required to report with us under Exchange Act Sections 13(a) or 15(d), approximately $1.4 billion.738 Further, the commentator remarked that our $25,000 estimate 739 of the cost of the independent private sector audit ‘‘would only cover the initiation of an audit for a small company with a simple supply chain,’’ and argued that, at a minimum, an independent private sector audit of a company with a more complex supply chain would cost at least $100,000.740 Additionally, the manufacturing industry association ‘‘conservatively estimate[d]’’ that approximately 75% of the issuers that would be required to provide conflict minerals information also would be required to provide a Conflict Minerals Report and an audit rather than the 20% that we estimated in the Proposing Release, which would equate to approximately 4,500 issuers out of the 5,994 issuers we estimated would be affect by the final rule.741 Taking into consideration the higher estimated number of affected issuers, the industry association estimated that the total cost to all affected issuers to obtain an independent private sector audit of their Conflict Minerals Report would be $450 million. In addition, the commentator estimated that, to implement their new due diligence policies, it would cost $1.2 billion for the 5,994 affected issuers to change their legal obligations with 56337 each issuer’s estimated 2,000 first-tier suppliers, and an additional $300 million for issuers to implement riskbased programs that use control processes to verify that suppliers are providing them with credible information and pushing legal obligations upstream. Also, the commentator estimated that affected issuers would need to expend a collective total of $6 billion to develop new information technology systems to collect information on each issuer’s first-tier suppliers.742 Therefore, the sum of the costs to affected issuers would total approximately $8 billion. Below is a summary of the manufacturing industry association’s cost estimates in tabular form: Calculation Manufacturing Industry Association Commentator Estimate Issuers affected ...................................................................................................... Average Number of 1st tier suppliers .................................................................... Issuer Due Diligence Reform 743 Number of compliance hours per issuer ................................................................ Cost per hour .......................................................................................................... 5,994 2,000 2 $50 Total compliance cost ..................................................................................... $1,198,800,000 IT Systems Modification 744 Cost per issuer ....................................................................................................... $1,000,000 Total cost ......................................................................................................... $5,994,000,000 5,994*$1,000,000 Conflict Minerals Report Audits Issuers affected 745 ................................................................................................. Audit cost ................................................................................................................ 4,500 $100,000 5,994*75% Total cost ......................................................................................................... $450,000,000 4,500*100,000 Issuer Verification of Supplier Information Number of hours ..................................................................................................... Cost per hour .......................................................................................................... 0.5 $50 Total cost ......................................................................................................... $299,700,000 5,994*2000*0.5*$50 Smaller Supplier Due Diligence 746 Suppliers affected (only 20% to conduct) 747 ......................................................... Due diligence cost .................................................................................................. 55,600 $25,000 278,000 * .2 Total cost ......................................................................................................... $1,390,000,000 278,000*.2*$25,000 Total ......................................................................................................... $9,332,500,000 Total for affected issuers ......................................................................... $7,942,500,000 × .20 = 55,600. × .20 × $25,000 = $1,390,000,000. 739 As discussed in the Proposing Release, we indicated that each independent private sector audit of the Conflict Minerals Report would cost approximately $25,000 on average based on the preliminarily estimates of one industry group. 740 See letter from NAM I. 741 See id. The manufacturing industry association commentator estimated that 75% of affected issuers would be required to submit a Conflict Minerals Report because, according to the 737 278,000 sroberts on DSK5SPTVN1PROD with RULES 738 278,000 VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 commentator, the majority of issuers would not be able to determine the origin of their conflict minerals. 742 See letter from NAM I. 743 The manufacturing industry association commentator refers to this as ‘‘changes to corporate compliance policies.’’ 744 The manufacturing industry association commentator refers to this as IT system development or revision. 745 We are using the rounded estimate (4,500) that was used by the university group and PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 5,994*2000*2*$50 $9,332,500,000 ¥ $1,390,000,000 manufacturing industry association commentators in their calculations even though a more exact number of issuers would be 4,496 (.75 × 5,994 = 4,495.5). See infra note 869. 746 The manufacturing industry association commentator refers to this as the cost of ‘‘provid[ing] proper information regarding the source of minerals.’’ 747 Supplier compliance cost in the manufacturing industry association commentator’s proposal is considered an audit cost and is not limited to smaller suppliers that are issuers. E:\FR\FM\12SER2.SGM 12SER2 56338 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Additionally, this commentator calculated that the costs of the final rule could be ‘‘as high as $16 billion’’ by ‘‘extrapolating from the recent experience of company costs in complying with the European Union’s hazardous waste directive (‘‘RoHS’’), and estimated on that basis the economic impact of the SEC’s proposed regulations.’’ 748 In fact, this commentator postulated that ‘‘Section 1502 may be broader in scope because’’ it ‘‘covers more products and sectors than RoHS,’’ it ‘‘discriminates against origin,’’ and it ‘‘does not include a de minimis or weight-based exception.’’ 749 The commentator stated that, according to Technology Forecasters, Inc., the RoHS directive cost the electronics industry $2,640,000 per company to achieve initial RoHS compliance and another $482,000 annually to maintain compliance. Therefore, based on these per company figures, the commentator calculated that initial compliance of all 5,994 issuers would be approximately $16 billion. sroberts on DSK5SPTVN1PROD with RULES ii. Electronic Interconnect Industry Association Comments Another commentator, an electronic interconnect industry association,750 estimated that the electronic interconnection industry suppliers would incur compliance costs of approximately $279 million in the first year and approximately $165 million in ongoing annual costs.751 Additionally, this commentator stated that there could be additional hidden costs for companies that varied widely from no additional costs to more than $2 million in such costs.752 This commentator did 748 See letter from NAM I. This commentator estimated that each issuer affected by RoHS had an initial compliance cost of $2,640,000. For the 5,994 issuers that we estimate may be affected by the final rule, the estimated total cost to comply with RoHS would be $15,824,160,000 ($2,640,000 × 5,994 = $15,824,160,000). 749 See id. 750 See letter from IPC I. 751 See id. The letter includes an Appendix A, which consists of a published survey produced by Market Research Service of the electronic interconnect industry association commentator entitled, ‘‘Results of an IPC Survey on the Impact of U.S. Conflict Minerals Reporting Requirements’’ (Feb. 2011) (‘‘electronic interconnect industry group survey’’). Much of the information cited from this commentator is located in the published survey. For the survey, the commentator surveyed 3,839 of its members in the electronic interconnection industry with a total of 60 separate companies actually participating in the survey. Of these 60 companies, 30% were public issuers while the remaining 70% were private companies. Despite acknowledging that the survey was not intended ‘‘to produce statistical significant data,’’ the commentator argued that the survey respondents do ‘‘make up a representative sample of the U.S. electronic interconnect supply chain.’’ See id. 752 See id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 not provide an estimate of the costs to all potentially affected issuers, but focused on the electronic interconnect industry. The electronic interconnect industry association also argued that more than 20% of the 5,994 affected issuers would have to provide an independent private sector audit.753 The commentator noted that, although the Covered Countries may, at most, supply 20% of the world’s supply of conflict minerals, this 20% could be distributed to 100% of the issuers. Therefore, all issuers could be required to file a Conflict Minerals Report and obtain an independent private sector audit, and the electronic interconnect industry group ‘‘expected that nearly 100% of affected issuers will need to complete a [Conflict Minerals Report], especially in the initial years of the regulation.’’ 754 In this regard, the commentator noted that respondents to its survey stated that ‘‘[s]upplier verification and auditing was a frequently cited anticipated cost,’’ and the respondents ‘‘estimated direct costs of [$]10,000 to [$]100,000 for the third party due diligence audits.’’ 755 The commentator also indicated that the average number of suppliers in the supply chain for those companies responding to their survey was 163. iii. University Group Comments Another commentator, a university group, provided its own cost figures regarding the proposed rules in its comment letter.756 The university group contended that our model underestimated the costs of the proposed rules due to, among other reasons, our failure to consider the costs incurred by all actors, especially firsttier private company suppliers, that are required to modify their management systems to provide critical information to its customers that are the issuers. In contrast, the university group found that the manufacturing industry group’s economic model overstated the costs by overestimating the number of suppliers and failing to account for cost efficiencies. The university group contended that all affected companies, both issuers and 753 Id. 754 See id. This commentator noted as well that ‘‘the vast majority of users will be unable to identify the origin of their conflict minerals * * * and therefore will need to complete’’ a Conflict Minerals Report. 755 See id. 756 See letter from Tulane. The staff of Senator Richard J. Durbin, one of the co-sponsors of the Conflict Minerals Statutory Provision, contacted this commentator ‘‘with a specific request for help in providing a detailed estimate of what it would cost companies to implement the Congo Conflict Mineral Act.’’ Id. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 private companies, would need to carry out three principal actions to implement Section 1502. These actions consisted of strengthening internal management systems in view of performing due diligence, instituting necessary information technology systems, and obtaining independent private sector audits. The university group’s model indicated that the largest driving cost factor was strengthening companies’ management systems, which would total approximately $5.17 billion for both issuers and private companies, with issuers’ costs being approximately $26 million and private companies’ costs being approximately $5.14 billion. The other costs would be borne only by issuers. These other costs included instituting the necessary information technology systems, which would cost approximately $2.56 billion, and obtaining an independent private sector audit, which would cost companies approximately $207 million. Ultimately, according to the university group, the proposed rules would cost all affected companies, both issuers and private companies involved in the conflict minerals supply chain, approximately $7.93 billion initially and approximately $207 million annually thereafter. As noted, the university group commentator estimated the due diligence costs to both issuers and their private company suppliers. The total initial labor costs, including both laborers and consultants, to all 5,994 issuers would be approximately $26 million. For the costs to private company suppliers, the university group estimated the total number of small private company suppliers to be 148,459, and the number of large private company suppliers to be 711,607.757 The total initial labor costs, including both laborers and consultants, to all 860,066 private company suppliers would be approximately $5.14 billion. In sum, the total initial labor costs for due diligence to both the 5,994 issuers and the 860,066 private company suppliers would be approximately $5.17 billion. Also, the university group disagreed with the manufacturing industry group’s estimate that the costs for modifying 757 The university group commentator developed these estimates by multiplying the number of issuers by the company size factor (large or small) and multiplying the number of relevant first tier supplier contracts by an overlap factor of 0.40. This factor attempts to differentiate and correct for the number of estimated material supply contracts versus the number of unique businesses impacted. Tulane estimated a 60% overlap factor meaning that only 40% (100% ¥ 60% = 40%) of the supply contracts corresponded to non-overlapping suppliers. See letter from Tulane. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations each issuer’s information technology systems would be $1 million. The university group agreed that these costs would be borne solely by issuers because they would be responsible for creating tracking systems for the supplier-furnished supply chain information, and that large issuers that use complex information technology systems to manage their supply chains would have costs of $1 million per company. However, the university group argued that the unit costs for small companies, based on the data from the 2011 electronic interconnect industry association commentator survey, would be $205,000 per company. The university group estimated that the information technology costs for the affected small issuers would be approximately $885 million, and the cost for the affected large issuers would be approximately $1.68 billion. Therefore, the total costs to the 5,994 affected issuers of changing information technology systems would be approximately $2.56 billion. Finally, the university group discussed the costs associated with the independent private sector audit. The university group disagreed with the manufacturing industry group’s assertion that private company suppliers would be required to obtain a private sector audit to demonstrate to their issuer customers that they performed sufficient due diligence. The university group noted that there is no requirement that private company suppliers obtain such an audit, so the burden and cost for a private company supplier to obtain an audit is voluntary in the context of the proposed rules. Further, the university group noted that the impetus for issuers to demand such audits would be reduced if issuers are 56339 allowed to use ‘‘reasonably reliable representations’’ from suppliers. For these reasons, the university group excluded any costs for independent private sector audits for private company suppliers from their cost estimates. The university group, however, agreed with the manufacturing industry group’s cost estimates and indicated that the cost for an audit of a small issuer would be $25,000 and the cost to a large issuer would be $100,000. Based on these assumptions, the university group estimated that the audit costs for small issuers would be $81 million,758 and those costs for large issuers would be approximately $126 million.759 Therefore, the total audit cost for all issuers would be approximately $207 million per year.760 Below is a summary of the university group commentator’s estimates in tabular form: Calculation Total cost ............................................................................................................................. $26,013,000 IT Systems Modification: Cost per large issuer .................................................................................................................. Cost per small issuer .................................................................................................................. Total large issuer cost ................................................................................................................ Total small issuer cost ................................................................................................................ $1,000,000 $205,000 $1,678,000,000 $884,780,000 Total costs ........................................................................................................................... $2,562,780,000 Conflict Minerals Report Audits: Issuers affected 761 ..................................................................................................................... Number of large issuers ............................................................................................................. Number of small issuers ............................................................................................................. Large issuer cost ........................................................................................................................ Small issuer cost ........................................................................................................................ Total costs for large issuers ....................................................................................................... Total costs for small issuers ....................................................................................................... 4,500 1,260 3,240 $100,000 $25,000 $126,000,000 $81,000,000 4,500*0.72 4,500*0.28 ........................................ ........................................ 1,260*$100,000 3,240*$25,000 Total costs ........................................................................................................................... sroberts on DSK5SPTVN1PROD with RULES University Group Commentator Estimate: Issuers affected .......................................................................................................................... Large issuer (28% of issuers) .................................................................................................... Small issuer (72% of issuers) .................................................................................................... Average number of 1st tier suppliers (53% of manufacturing industry association commentator) ........................................................................................................................................ Issuer Due Diligence Reform: Number of compliance hours for large issuer ............................................................................ Number of compliance hours for small issuer ........................................................................... Internal cost per hour ................................................................................................................. Internal costs for large issuer (90% of total work load) ............................................................. Internal costs for small issuer (75% of total work load) ............................................................. Consulting cost per hour ............................................................................................................ Consulting costs for large issuer (10% of total work load) ........................................................ Consulting costs for small issuer (25% of total work load) ........................................................ $207,000,000 ........................................ Supplier Due Diligence Reform: Average number of 1st tier supply contracts per large issuer ................................................... Average number of 1st tier supply contracts per small issuer .................................................. Overlap factor (percent of suppliers affected) ............................................................................ Total large suppliers ................................................................................................................... Total small suppliers ................................................................................................................... Number of compliance hours for large supplier ......................................................................... 1,060 86 0.4 711,472 148,470 100 ........................................ 1,678*1,060*0.4 4,316*86*0.4 ........................................ 758 5,994 issuers × 75% of issuers requiring an audit × 72% for number of small issuers × $25,000 per audit = $80,919,000. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 759 5,994 issuers × 75% of issuers requiring an audit × 28% for number of large issuers × $100,000 per audit = $125,874,000. PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 5,994 1,678 4,316 5,994*0.28 5,994*0.72 1,060 2,000*0.53 100 40 $50 $7,551,000 $6,473,520 $200 $3,356,000 $8,632,000 1,678*0.9*100*$50 4,316*0.75*40*$50 760 $80,919,000 E:\FR\FM\12SER2.SGM 12SER2 1,678*0.1*100*$200 4,316*0.25*40*$200 ........................................ ........................................ 1,678*$1,000,000 4,316*$205,000 + $125,874,000 = $206,793,000. 56340 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Calculation Number of compliance hours for small supplier ........................................................................ Internal cost per hour ................................................................................................................. Internal costs for large supplier (90% of total work load) .......................................................... Internal costs for small supplier (75% of total work load) .......................................................... Consulting cost per hour ............................................................................................................ Consulting costs for large supplier (10% of total work load) ..................................................... Consulting costs for small supplier (25% of total work load) ..................................................... 40 $50 $3,201,624,000 $222,705,000 $200 $1,422,944,000 $296,940,000 Total cost ............................................................................................................................. $5,144,213,000 Total ............................................................................................................................. $7,940,006,000 sroberts on DSK5SPTVN1PROD with RULES iv. Environmental Consultancy Company Comments An additionalcommentator, an environmental consultancy company, provided cost figures regarding the proposed rules.762 The environmental consultancy company asserted that the models provided by the manufacturing industry group and the university group significantly overestimated the costs of the proposed rules, whereas our PRA section underestimated the paperwork costs. Specifically, the commentator stated that the manufacturing industry association group’s and the university group’s ‘‘estimates provide cost projections that do not reflect current industry practice in compliance programs by the vast majority of affected issuers,’’ so it ‘‘would be inadvisable to use’’ their ‘‘data as the basis for an accurate cost estimate for implementation of Section 1502.’’ 763 Also, the environmental consultancy company argued that we underestimated the costs of the proposed rules primarily because we overestimated issuers’ knowledge of the origin of materials in their products. According to the commentator, most of the compliance costs for the proposed rules would be derived from identifying where an issuer’s materials are sourced. Further, the commentator suggested that our estimate of the percentage of affected issuers was too low, we did not recognize that issuers needed to expend greater internal efforts in 761 We are using the rounded estimate (4,500) that was used by the university group and manufacturing industry association commentators in their calculations even though a more exact number of issuers would be 4,496 (.75 × 5,994 = 4,495.5). See infra note 869. 762 See letter from Claigan I. In this letter, the commentator stated that it submitted its letter because it was asked ‘‘by Congress and others’’ to comment on the potential costs of implementing the final rule. 763 See letter from Claigan Environmental Inc. (Jan. 17, 2012) (‘‘Claigan IV’’). But see letters from IPC—Association Connecting Electronics Industries (Feb. 14, 2012) (‘‘IPC III’’) and National Association of Manufacturers (Feb. 10, 2012) (‘‘NAM IV’’) (challenging certain of the assumptions made by the environmental consultancy company in its comment letters). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 communicating requirements throughout their companies, we failed to account for the costs of issuers’ software changes, and we did not acknowledge that ‘‘many companies’’ may work to a higher standard than the rules would require due to public sensitivity of this issue. Conversely, the commentator asserted that the manufacturing industry group’s $8 billion and the university group’s $7.93 billion cost estimates were too high. The environmental consultancy company argued that the manufacturing industry group’s estimate regarding the cost for issuers to modify legal responsibilities should be only $300 million, instead of the manufacturing industry group’s estimated $1.2 billion.764 Similarly, the environmental consultancy company maintained that the university group’s $5.17 billion estimate to strengthen internal management systems was too high because of incorrect assumptions, and that the actual cost should be only $600 million.765 764 According to the environmental consultancy company, the manufacturing industry group’s assumption that every issuer would have to amend every legal obligation with its suppliers was incorrect because ‘‘[a]ll standard contracts with suppliers of public companies contain standard provisions requiring suppliers to comply with relevant laws.’’ Letter from Claigan I. As a result, it would be unlikely that many contracts would need to be modified to enable compliance. Also, the environmental consultancy company asserted that the manufacturing industry group overestimated the cost of modifying legal responsibilities because the manufacturing industry group assumed that every supplier supplies components or products containing conflict minerals to an issuer, which the environmental consultancy company claimed was ‘‘very unlikely.’’ Instead, a more reasonable estimate of the numbers of suppliers affected that would require a modification to its legal obligations ‘‘would be closer to 50% of suppliers.’’ This commentator asserted that number, however, should be further reduced by an additional 50% due to duplicative and overlapping relationships within and among suppliers. 765 The environmental consultancy company commentator noted that the university group commentator estimated that there were 860,066 first tier suppliers. However, a 2008 study by the Consumer Electronics Association (‘‘CEA’’) on RoHS that identified only 90,000 total electronic suppliers. In this regard, the environmental consultancy company noted that, although conflict PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 ........................................ ........................................ 711,472*100*0.9*$50 148,470*40*0.75*$50 ........................................ 711,472*100*0.1*$200 148,470*40*0.25*$200 Further, the environmental consultancy company suggested that the manufacturing industry group’s cost estimate regarding issuers’ information technology systems should be adjusted from $6 billion to $350 million and that the university group’s estimate should be adjusted from $2.56 billion to $360 million.766 Additionally, the environmental consultancy company asserted that the $100,000 per company audit costs provided by both the manufacturing industry group and the university group were too high because companies’ financial statement audits represent only 0.2 to 0.25% of a company’s annual revenue, which would mean that a $100,000 cost for a Conflict Minerals Report audit would represent 5% of the total audit costs for a company with a $1 billion per year revenue. Instead, the commentator argued that it would be more accurate to assume that the Conflict Minerals Report audit would represent 1% to 2% of the total audit costs for such a company.767 Also, the environmental consultancy company contended that only 50% of all reporting issuers would be required to provide a Conflict Minerals Report because the ‘‘majority of Energy sector, finance and utilities minerals disclosure is required by more than just electronics industry issuers, ‘‘the total number of affected first-tier suppliers being over 100,000 seems unrealistic based on this more substantiated information.’’ Also, the environmental consultancy company noted that, in many cases, first-tier suppliers may not be supplying products or components containing conflict minerals, or these products or components will represent only a small fraction of their business. 766 The environmental consultancy company commentator noted that the CEA study found that the average cost for information technology systems changes for RoHS was $120,000 per company, and it discovered that the most expensive conflict minerals software was $40,000 by conferring with a provider of conflict minerals compliance software to confirm that their most expensive software for conflict minerals compliance was $40,000 for the first year. 767 In its second letter, however, the environmental consultancy company commentator acknowledged that it had limited expertise regarding estimates of the cost of third party audits. See letter from Claigan Environmental Inc. (Dec. 1, 2011) (‘‘Claigan II’’). E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations will not have to create’’ a Conflict Minerals Report, and ‘‘[n]o more than half of the consumer discretionary, consumer staples, and materials sectors is expected’’ to provide a Conflict Minerals Report.768 Finally, the environmental consultancy company developed its own cost model,769 which was based on current service quotations in the industry and past costs for RoHS compliance based on the 2008 CEA study. In this regard, the commentator provided its estimate of the typical initial costs for affected issuers with revenue of $1 billion per year. Initially, in its first comment letter, the environmental consultancy company concluded that the proposal’s compliance cost for a typical affected issuer with $1 billion of revenue would be approximately $315,000 per year.770 In a subsequent letter to us, the environmental consultancy company lowered its cost estimate.771 Instead of the $315,000 per issuer estimate in its initial letter, the environmental consultancy company argued that the cost per issuer for compliance would be closer to $213,000 per issuer because of ‘‘more recent information on corporate budgeting and expenditures’’ that ‘‘better reflect current corporate implementation strategies.’’ 772 Further, in another letter, the environmental consultancy company lowered its cost 768 See letter from Claigan I. sroberts on DSK5SPTVN1PROD with RULES 769 Id. 770 The environmental consultancy company commentator noted that the $315,000 per year cost would equate to approximately 0.03% of an issuer’s revenue, but argued that, based on certain variations, the cost range could be anywhere between 0.02% and 0.05% of revenue. Id. The commentator stated further that the average cost of initial compliance with RoHS for a company with annual revenue of $1 billion was close to 0.8% of revenue. However, the commentator indicated that the data gathering and the software costs for RoHS was approximately 0.08% of the initial RoHS compliance costs, which the commentator argued was ‘‘the same order of magnitude’’ of its 0.03% calculation. This commentator suggested that its ‘‘slightly lower’’ cost projections were due to less expensive conflict minerals software packages, as compared to RoHS, and the large data gathering cost for RoHS, the need to gather data for every part and create new part numbers for compliant parts, are not required for conflict minerals. The commentator noted also that, if the final rule would cause issuers to dispose of their current conflict mineral inventories because the conflict minerals were of indeterminate origin or our rule would not exempt conflict minerals from recycled or scrap sources, the expected costs of compliance would be closer to 0.5% of revenue.1 Finally, the commentator claimed that this initial cost of compliance is expected to increase by a factor of 2.5 for an issuer having ten times the annual revenue ($10 billion) and decrease by a factor of 2.5 for an issuer with 10% of revenue ($100 million). Id. 771 See letter from Claigan II. 772 Id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 estimate again to approximately $64,673 per issuer.773 v. Other Specific Comments One commentator, an environmental research company, discussed some of the specific cost estimates above and discussed some cost estimates it gathered through interviews with potentially affected issuers.774 This commentator conducted a study, sponsored by Global Witness, based on interviews with executives at more than 20 global companies that ranged in size from $500 million per year in revenue to over $120 billion in annual revenue, including companies engaged in electronic components, computers, consumer health care, automotive, and retail. Also, the commentator spoke with industry associations, consulting firms, and software providers. Generally, the commentator found that, based on its interviews, costs for complying with the provision ‘‘will vary widely with the size and complexity of companies’ supply chains but seem to be manageable for all company sizes.’’ 775 In this regard, the commentator also found that the better informed executives were regarding the Conflict Minerals Statutory Provision and its impacts on their company, the more likely they thought the costs of compliance would be manageable. The commentator stated that the largest companies with annual revenues over $50 billion would have one-time costs ranging from $500,000 to $2 million, but the companies with well-developed responsible sourcing systems may only need to spend half as much. Also, the commentator found that many smaller companies ‘‘should be able to meet their obligations for less than the cost of a 773 See letter from Claigan III. In this letter, the environmental consultancy group commentator broke down the number of affected issuers by size and cost per issuer based on that size. The commentator determined that the total cost to 6,000 affected issuers would be $387,650,000, which would be $64,608 per issuer. However, because we estimated that there would be 5,994 affected issuers, we divided the $387,650,000 by 5,994 issuer to come up with $64,673 per issuer. See also letter from Assent Compliance (Dec. 19, 2011) (‘‘Assent’’) (discussing the software costs to issuers for implementing Section 1502, which apparently was included as part of the overall cost calculation in the letter from Claigan III). Further, the environmental consultancy company commentator provided an additional comment letter that did not revise its cost estimate, but expanded upon differences between costing estimates it submitted and previous costing estimates submitted by the manufacturing industry association and university group commentators. See letter from Claigan IV. 774 See letter from Green II. At the end of the letter, the commentator describes itself as a ‘‘research, advisory and consulting firm focusing on clean tech, alternative energy and corporate sustainability.’’ 775 See id. PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 56341 full-time employee in the first year with costs declining over time.’’ 776 Regarding the above cost estimates by other commentators, the commentator argued that the manufacturing industry association commentator’s cost estimate ‘‘significantly overstates the costs most companies will incur, especially those of updating IT systems.’’ 777 Also, the commentator noted that the electronic interconnect industry commentator’s cost estimate was overstated because the estimate included electronics manufacturing services companies, and that industry is ‘‘dominated by very large companies,’’ which ‘‘probably account[ed] for the higher median cost estimates.’’ 778 Further, the commentator noted of the environmental consultancy company commentator’s letter that the ‘‘relative magnitude of the costs shown by the [environmental consultancy company commentator] estimate are aligned with what [environmental research company commentator] found in [its] interviews: that the effort to gather reliable data from supply chain partners is likely to be more costly initially than any systems changes required.’’ 779 Another commentator that is attempting to establish a due diligence ‘‘bag-and-tag’’ monitoring system in the Covered Countries asserted that the total costs incurred by local governments and industry as a whole just for the on-theground set-up and implementation of this system in the Covered Countries would be $52 million for the first year.780 This commentator noted that this $52 million estimate is much higher than our $8 to $10 million estimated cost for setting up a mineral source validation scheme in the Proposing Release. Similarly, another commentator provided the February 2011 five-year plan of the organization that administers the bag-and-tag scheme.781 The commentator noted that, according to the five-year plan, ‘‘the cost of cleanly bagged-and-tagged minerals, including taxes, will remain below the world market price.’’ 782 Also, according to the document provided, it appears that the funding requirements for the bag-andtag scheme, including a 10% contingency, in Eastern DRC and 776 See id. id. 778 See id. 779 See id. 780 See letter from ITRI II. 781 Representative Jim McDermott (Oct. 12, 2011) (‘‘Rep. McDermott’’) (providing the five-year plan authored by iTSCi, the International Tin Research Institute’s Tin Supply Chain Initiative, in February 2011). 782 Id. 777 See E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56342 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Rwanda will be approximately $38,971,000 from 2011 through 2015. Also, this commentator stated that trading companies, transporters, and concentrate treatment facilities that continue to trade with the Covered Countries would incur additional costs in relation to the greatly increased levels of administration and auditing that ‘‘may amount to an additional man year,’’ which is ‘‘approximately US$100,000 per year’’ per trading company, transporter, and concentrate treatment facility going forward.783 The costs to trading companies, transporters, and concentrate treatment facilities that stop treating minerals from the Covered Countries would be less ‘‘but still of significance.’’ The commentator estimated that these companies’ costs could ‘‘perhaps be an additional half a man year,’’ which would be approximately $50,000 per year per company. Further, this commentator indicated that smelters and processing facilities may be requested to perform an independent audit every six months or every year, which would cost these smelters and processing facilities approximately $60,000 per audit. Finally, the commentator argued that the ‘‘sum cost of new auditing requirements and increasing burden of documentation in the international supply chain may amount to a total of US$7 million per year.’’ A few commentators provided other, less specific cost estimates. One commentator indicated that it would require 1,400 hours in the first year working with its suppliers to implement the proposed rules and an additional 700 hours in each subsequent year to comply with the proposed rules.784 The commentator calculated this figure by using the 450 different materials the commentator would have to research, and estimated that it would require three hours per material, which would equate to approximately 1,400 hours.785 The commentator stated that this estimate did ‘‘not take into account the days and weeks that will be required to write any required reports and work with auditors.’’ Although the commentator provided an estimate of the number of hours required to comply with the rules, it did not disclose the costs associated with its number of estimated hours. The commentator noted, however, that it is ‘‘a relatively small company, [and] these costs will be 783 See letter from ITRI II. letter from TriQuint I. 785 Id. The commentator did not provide a similar breakdown of its calculation regarding its 700 hour per subsequent year estimate. 784 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 multiplied many times throughout the entire economy.’’ Another commentator indicated that ‘‘the initial cost for establishing record keeping processes, staffing, and identifying the contacts throughout the supply chain will run approximately [four times] the on-going annual staffing [and] cost for certification.’’ 786 In addition, this commentator asserted that the ‘‘software to track and retain these records for [five to ten] years could add another [two times] the annual cost for certification.’’ 787 Ultimately, although the commentator did not disclose the actual costs associated with its estimates, it concluded that complying with the proposed rules would be ‘‘very expensive’’ for even one year. Another commentator argued that the costs of the proposed rules to implement the statute would be expensive even for an issuer with existing systems in place to track inputs in the supply chain because such an issuer would still have to add capability to its existing systems, provide additional supplier training, and revise its existing information technology systems.788 A few commentators noted Apple Inc.’s Supplier Responsibility 2011 Progress Report.789 As one of these commentators noted, Apple investigated the use of extractives at all levels of its supply base and mapped its supply chain to the smelter level to know which of its suppliers are using tantalum, tin, tungsten, or gold and from where they are receiving the metal.790 Accordingly, Apple determined that it has a total of 142 suppliers of conflict minerals.791 Some commentators asserted that the costs of the proposed rules could be disproportionally higher to smaller issuers.792 Other commentators asserted that the Proposing Release failed to account for the costs to non-issuers, which would be significant.793 Other commentators asserted also that the $25,000 estimated audit cost is not the correct cost for the type of audit that would be required.794 One such commentator noted that the ‘‘cost of an 786 See letter from Teggeman. id. 788 See letter from Ford. 789 See, e.g., letters from Enough Project I (citing to Apple Inc.’s Supplier Responsibility 2011 Progress Report at https://images.apple.com/ supplierresponsibility/pdf/ Apple_SR_2011_Progress_Report.pdf), Enough Project IV, and Fafo (citing to https:// images.apple.com/supplierresponsibility/pdf/ Apple_SR_2011_Progress_Report.pdf). 790 See letter from Enough Project I. 791 See letters from Enough Project IV and Fafo. 792 See letter from Howland. 793 See letters from NAM I and WGC II. 794 See letters from CTIA, ITRI I, and KPMG. 787 See PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 independent audit [sic] of $25,000 is also not specifically for the type of audits that would be required either on the upstream supply chain, or at the smelters.’’ 795 Another commentator stated that we ‘‘did not specify the scope of the independent private sector audit of the Conflict Minerals Report’’ in the Proposing Release, and our $25,000 estimate would correspond only to an audit of whether the issuer’s Conflict Minerals Report accurately describes the due diligence the issuer exercised.796 According to this commentator, this cost estimate, however, could be far higher depending on the audit scope to be outlined in the final rule. A further commentator indicated that our assumptions about the scope and objective of the audit in the Proposing Release were not clear, but it appeared that the estimate ‘‘may depend on a company relying on an industry-wide due diligence process and that company being able to conclude that its conflict minerals did not originate in a DRC country.’’ 797 This commentator stated that it was not aware of any such industry-wide due diligence process in place. C. Benefits and Costs Resulting From Commission’s Exercise of Discretion As discussed in detail in Section II, we have revised the rules from the Proposing Release to address comments we received while remaining faithful to the language and intent of the statute as adopted by Congress. In addition to the statutory benefits and costs noted above, we believe that the use of our discretion in implementing the statutory requirements will result in a number of benefits and costs to issuers and users of the conflict minerals information. Below, we discuss the most significant choices we made in implementing the statute and the associated benefits and costs. We are unable to quantify the impact of each of the decisions we discuss below with any precision because reliable, empirical evidence regarding the effects is not readily available to the Commission, and commentators did not provide sufficient information to allow us to do so. Thus, in this section, our discussion on the costs and benefits of our individual discretionary choices is qualitative. Later in the release, we present a quantified analysis on the overall costs and benefits of the final rule that includes all aspects of the implementation of the statute. 795 See letter from ITRI I. letter from CTIA. 797 See letter from KPMG. 796 See E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 1. Reasonable Country of Origin Inquiry The Conflict Minerals Statutory Provision requires any issuer with necessary conflict minerals that ‘‘did originate’’ in the Covered Countries to provide a Conflict Minerals Report.798 The provision, however, does not specify how an issuer is to determine whether its conflict minerals originated in the Covered Countries. The provision states only that any issuer with such conflict minerals must submit a report to us that describes, among other matters, the measures taken by the issuer to determine the source and chain of custody of those conflict minerals. We used our discretion in the final rule to require that issuers covered by Section 1502 of the Act conduct a good faith ‘‘reasonable country of origin inquiry’’ that is reasonably designed to determine whether their conflict minerals originated in the Covered Countries or are from recycled or scrap sources. We do not specify what would constitute a ‘‘reasonable country of origin inquiry.’’ We believe that this decision to employ a performance standard rather than a design standard should benefit issuers by allowing them the flexibility to use the reasonable country of origin inquiry standard that is best suited to their circumstances. Although the final rule does not specify what would constitute a reasonable country of origin inquiry, it requires that the issuer conduct in good faith an inquiry that is reasonably designed to determine whether any of its conflict minerals originated in the Covered Countries or came from recycled or scrap sources. Although the proposal did not state explicitly that an issuer must reasonably design its inquiry and conduct it in good faith, we believe that this is not a change from the proposal, but a clarification of the proposal’s intent. We believe providing this clarification will facilitate compliance with the rule by providing further guidance to issuers about what is required to satisfy the reasonable country of origin inquiry. Other than being reasonably designed and performed in good faith, however, the final rule does not require issuers to conduct an exhaustive inquiry to establish to a certainty whether their conflict minerals originated in Covered Countries or came from recycled or scrap sources. We believe this is appropriate because, under the Conflict Minerals Statutory Provision, issuers are required to ascertain whether their conflict minerals did originate in the Covered Countries to know whether 798 Exchange VerDate Mar<15>2010 Act Section 13(p)(1)(A). 21:18 Sep 11, 2012 Jkt 226001 they must submit a Conflict Minerals Report. Therefore, some inquiry is necessary. We could have required an issuer to exercise due diligence in determining whether its conflict minerals originated in the Covered Countries or came from recycled or scrap sources. We also could have required an exhaustive inquiry in which an issuer would be required to determine to a certainty whether each mineral originated in the Covered Countries. However, while these would be plausible alternatives, such inquiries likely would be more costly, and we do not believe those approaches are necessary. Instead, we believe the reasonable country of origin inquiry standard provides a clear way for issuers to make the necessary determination and does so in a more cost-effective manner. The reasonable country of origin inquiry is consistent with the supplier engagement approach in the OECD guidance where issuers use a range of tools and methods to engage with their suppliers.799 The results of the inquiry may or may not trigger due diligence. This is the first step issuers take under the OECD guidance to determine if the further work outlined in the OECD guidance—due diligence— is necessary. The Conflict Minerals Statutory Provision specifically contemplates due diligence, which goes beyond inquiry and involves further steps to establish the truth or accuracy of relevant information, by requiring a description of the measures the issuer took to exercise due diligence on the source and chain of custody of the minerals. The Conflict Minerals Statutory Provision specifically notes that due diligence includes the audit discussed below. We recognize that our reasonable country of origin approach is broad enough that some issuers might perform an insufficiently rigorous inquiry and some issuers might perform an overly rigorous inquiry. An insufficiently rigorous inquiry could result in an erroneous determination that the issuer is not required to submit a Conflict Minerals Report, thus reducing the utility of the disclosure with respect to 799 In June 2012, the OECD issued a report regarding implementation of the OECD guidance. See OECD, Downstream Implementation of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, Cycle 2 Interim Progress Report on the Supplement on Tin, Tantalum, and Tungsten Final Draft (June 2012), available at https://www.oecd.org/investment/ guidelinesformultinationalenterprises/ Downstream%20cycle%202%20report%20%20Edited%20Final%20-%201%20June.pdf. This additional guidance includes sample letters to suppliers and customers regarding the use of conflict minerals. PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 56343 the issuer’s use of conflict minerals. An overly rigorous inquiry, on the other hand, could cause issuers to incur greater costs than they would otherwise. We believe, however, that the requirement that issuers make certain disclosures about the particular reasonable country of origin inquiry they undertook mitigates concerns about an insufficiently rigorous inquiry. Similarly, we believe our guidance that issuers need only conduct an inquiry reasonably designed to determine whether conflict minerals originated in the Covered Countries mitigates concerns about an overly rigorous inquiry. Overall, we believe that the benefit of mitigating issuer compliance costs justifies the ‘‘reasonable country of origin’’ approach we have chosen. Also, in a change from the proposal, the final rule establishes a different standard for the issuer in determining, based on its reasonable country of origin inquiry, whether due diligence on the conflict minerals’ source and chain of custody and a Conflict Minerals Report is required. The proposed rules would have required an issuer to conduct due diligence and provide a Conflict Minerals Report, based on its reasonable country of origin inquiry, if, among other conclusions, the issuer was unable to determine that its conflict minerals did not originate in the Covered Countries or came from recycled or scrap sources. Under the proposal, issuers could only avoid providing a Conflict Minerals Report if they could prove a negative—that their conflict minerals did not originate in the Covered Countries. That approach would arguably have been more burdensome than necessary to accomplish the purpose of the statutory provision. Under the final rule, however, an issuer must exercise due diligence on its conflict minerals’ source and chain of custody and potentially provide a Conflict Minerals Report if the issuer knows that its necessary conflict minerals originated in the Covered Countries and did not come from recycled or scrap sources, or has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources. This new approach does not require an issuer to prove a negative to avoid performing due diligence, but it also does not allow an issuer to ignore warning signs or circumstances reasonably indicating that its conflict minerals may have originated in the Covered Countries or may not have been from recycled or scrap sources. This approach should reduce the total costs E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56344 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations of the final rule, by enabling an issuer that, following a reasonable country of origin inquiry, is unable to determine that its conflict minerals did not originate in the Covered Countries or come from recycled or scrap sources, but has no reason to believe that its necessary conflict minerals may have originated in the Covered Countries or do not come from recycled or scrap sources, to fully comply with the rule without conducting due diligence, obtaining an audit, or preparing and filing a Conflicts Mineral Report. We realize that requiring a Conflict Minerals Report if, after exercising a reasonable country of origin inquiry, the issuer has reason to believe that it has necessary conflict minerals that may have originated in the Covered Countries and may not have come from recycled or scrap sources will be more costly than only requiring a report if the issuer has affirmatively determined that its minerals did come from the Covered Countries. However, as already discussed, we believe that such an approach is required to achieve the benefits intended by the statute. Moreover, this approach provides an appropriate balance compared to the more costly possible approach of requiring an issuer to submit a Conflict Minerals Report unless it determines to a certainty that its necessary conflict minerals did not originate in the Covered Countries. This approach regarding when an issuer must exercise due diligence as to the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report could increase costs of the final rule. Some issuers may expend more resources than necessary to satisfy the standard in order to assure themselves that their minerals did not originate in the Covered Countries. On the other hand, other issuers may expend insufficient resources which could lead to inadequate inquiries. However, we anticipate that overall this approach will result in fewer issuers engaging in due diligence and providing a Conflict Minerals Report because, although an issuer may not be able to determine to a certainty, even after a reasonable country of origin inquiry, that its conflict minerals did not originate in the Covered Countries or are from recycled and scrap sources, that issuer may have no reason to believe that its necessary conflict minerals may have originated in the Covered Countries and not come from recycled or scrap sources. This situation will reduce costs to such issuers because those issuers are not required to exercise due diligence and provide a Conflict Minerals Report. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 In a further change from the proposal, the final rule requires an issuer that determines that, following its reasonable country of origin inquiry, its conflict minerals did not originate in the Covered Countries or come from recycled or scrap sources or has no reason to believe that its necessary conflict minerals may have originated in the Covered Countries or did not come from recycled or scrap sources to provide a brief description of the results of that inquiry. The proposal required issuers to disclose their reasonable country of origin inquiry and their determination based on that inquiry. Compared to an alternative that does not require such description, this requirement will increase the disclosure costs to issuers. However, the disclosure will enable users of the information to assess more thoroughly the issuer’s reasonable country of origin design and its efforts in carrying out that design. This information will allow stakeholders to form their own views on the reasonableness of the issuer’s efforts and track those efforts over a number of years. Based on this information, stakeholders could advocate for different processes for individual issuers if they believe it is necessary, thereby maximizing the potential benefits of the performance-based approach we are adopting. Additionally, we revised the final rule from the proposal so that, following its reasonable country of origin inquiry, an issuer that determines its conflict mineral did not originate in the Covered Countries is not required to keep reviewable records for five years. We believe this decision should benefit issuers by allowing them greater flexibility and by reducing their compliance costs because they no longer have a record retention cost, which should reduce the overall costs involved as compared to the other possible methods of implementing the statute. 2. Information in the Specialized Disclosure Report We revised the final rule from the proposal so that an issuer that must file a Conflict Minerals Report is not required to disclose, in its specialized disclosure report under a separate ‘‘Conflict Minerals Disclosure’’ heading, the reason it is filing its Conflict Minerals Report. Similarly, the final rule does not require an issuer to disclose in its specialized disclosure report that it has provided an audit report or a certification of the audit because the audit report and certification are part of the Conflict Minerals Report already, so specifically mentioning the audit report or PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 certification here is not necessary and may be confusing. Instead, the issuer must only disclose that a Conflict Minerals Report is provided as an exhibit to its specialized disclosure report and a link to its Internet Web site where the Conflict Minerals Report is publicly available. We believe these decisions should benefit issuers by not requiring them to provide as much disclosure in the specialized disclosure report, which should reduce the costs involved as compared to the other possible methods of implementing the statute. However, we do not believe that such decisions will reduce the benefits to be achieved by the final rule, because the information that the proposal required to be disclosed in the specialized disclosure report is already provided in the Conflict Minerals Report, which is required to be filed as an exhibit to Form SD. 3. ‘‘DRC Conflict Undeterminable’’ Determination The final rule temporarily permits issuers to describe their products as ‘‘DRC conflict undeterminable’’ if they are required to file a Conflict Minerals Report and are either unable to determine that their conflict minerals did not originate in the Covered Countries or are unable to determine that their conflict minerals that originated or may have originated in the Covered Countries did not directly or indirectly benefit or finance armed groups in the Covered Countries. An issuer with products that are ‘‘DRC conflict undeterminable’’ is required to exercise due diligence on the source and chain of custody of its conflict minerals and submit a Conflict Minerals Report describing the due diligence, the country of origin of the conflict minerals, if known, the facilities used to process the conflict minerals, if known, and the efforts to determine the mine or location of origin with the greatest possible specificity. Also, such an issuer is required to describe its products containing these conflict minerals as ‘‘DRC conflict undeterminable,’’ rather than stating that they have not been found to be ‘‘DRC conflict free.’’ An issuer with such conflict minerals, however, is not required to obtain an independent private sector audit of that Conflict Minerals Report. This reporting alternative is temporary and will be available only during the first two reporting cycles following the effectiveness of the final rule for all issuers, which includes the specialized disclosure reports for 2013 and 2014, and the first four reporting cycles following the effectiveness of the final rule for smaller reporting companies, E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations which includes the specialized disclosure reports for 2013 through 2016. After these times, an issuer unable to determine that its conflict minerals did not originate in the Covered Countries or unable to determine that its conflict minerals that originated or may have originated in the Covered Countries did not directly or indirectly finance or benefit armed groups in the Covered Countries must describe its products containing those minerals as having not been found to be ‘‘DRC conflict free’’ and provide an independent private sector audit of its Conflict Minerals Report. This temporary provision will have the benefit of lowering the initial costs of the rule both because an audit will not be required and because, to the extent issuers suffer negative consequences from disclosure that their products have not been found to be ‘‘DRC conflict free,’’ those consequences would likely not be as significant for an issuer that is able to disclose that it has conducted due diligence on its conflict minerals and not found a connection to armed groups. We believe that not requiring an independent private sector audit of the Conflict Minerals Report during this temporary period is appropriate because an audit of the design of an issuer’s due diligence that results in an undeterminable conclusion would not appear to have a meaningful incremental benefit. Also, we recognize the concerns about the feasibility of preparing the required disclosure in the near term because of the stage of development of the supply chain tracing mechanisms. We adopted this temporary provision to allow sufficient time for more comprehensive tracking systems to be developed by industry and trade groups. The development and use of such comprehensive tracking systems should improve due diligence performance and lower the cost of compliance with the statute by reducing duplication and taking advantage of economies of scale. We believe that a two-year period for issuers with an indeterminate conclusion is appropriate because this appeared to be the approximate amount of time that many commentators stated would be necessary to establish traceability systems in the Covered Countries.800 Also, we believe that a four-year period for smaller reporting companies with an indeterminate conclusion is appropriate because they may have fewer resources to implement the final rule and may lack the leverage to obtain detailed 800 See, e.g., letters from AdvaMed I, FEC I, JVC et al. II, Plexus, Verizon, and WilmerHale. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 information regarding the source of a particular conflict mineral.801 Issuers that are unable to determine, following their exercise of due diligence, that their conflict minerals did not originate in the Covered Countries; that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups in the Covered Countries; or, after their exercise of due diligence, are unable to determine that their conflict minerals came from recycled or scrap sources are required to file a Conflicts Minerals Report describing, among other matters, the due diligence they exercised and the steps they have taken or will take, if any, since the end of the period covered in their most recent prior Conflict Minerals Report to mitigate the risk that their necessary conflict minerals benefit armed groups, including any steps to improve their due diligence. After the transition period, such issuers will be required to include an independent private sector audit of their Conflict Minerals Reports with respect to those minerals, which is likely to increase costs for those issuers. One commentator argued that ‘‘Section 1502 does not require an issuer that has been unable to determine (after a proper inquiry) the source of its conflict minerals * * * to provide a Conflict Minerals Report.’’ 802 As discussed above, we believe the process that better reflects the statutory intent is as follows: • An issuer that, following a reasonable country of origin inquiry, has reason to believe that its necessary conflict minerals may have originated in the Covered Countries, and may not be from recycled or scrap sources, must conduct due diligence on the source and custody of such conflict minerals, in accordance with a nationally or internationally recognized due diligence framework, and • If, following such due diligence, such issuer is unable to determine that such conflict minerals did not originate in the Covered Countries (and is unable to determine that such conflict minerals are from recycled or scrap sources), then such issuer is required to submit a Conflict Minerals Report. While this approach may add to the overall costs of compliance, we do not 801 Using the cost of audit estimates provided by the university group and the manufacturing industry group commentators, which we also use below, we estimate that this exercise of discretion by the Commission would reduce the initial compliance cost of a small issuer by approximately $25,000 and the initial compliance cost of a large issuer by approximately $100,000 per year for each year of the applicable temporary period based upon the analysis of the university group commentator. 802 See letter from Cleary Gottlieb. PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 56345 believe the alternative reading suggested by commentators is consistent with the purposes of the statute. The final rule’s temporary provision for ‘‘DRC conflict undeterminable’’ products, however, is designed to reduce compliance costs during the transition period. 4. ‘‘Contract To Manufacture’’ As discussed above, the final rule applies to issuers that contract to manufacture products. This requirement is based on our interpretation of the statute in light of our understanding of the statutory intent and a reading of the statute’s text. We recognize that this approach affects the overall compliance costs and burdens, in particular, on the subset of issuers that contract to manufacture products. However, we have sought to mitigate these costs by not defining the term ‘‘contract to manufacture’’ in the final rule, and instead letting issuers determine based on their own facts and circumstances which of their products have conflict minerals that may trigger a reporting obligation. Compared to the alternative approach of defining this term, our decision not to define the term provides issuers with significant flexibility to use a definition that applies best to their particular circumstances. Such flexibility may lower issuers’ compliance costs to the extent any definition could have been overbroad. But, we also recognize that our decision not to define this phrase could increase uncertainty for issuers on how the phrase should be implemented and may result in additional costs to some issuers. For example, the uncertainty associated with leaving the phrase undefined could lead some issuers to interpret the definitions in a manner that is more expansive than if the phrase was defined, thus incurring a higher compliance cost than is necessary. In this regard, some issuers may decide to use more internal or external resources than if this phrase was defined to make sure they are compliant with the rule, which would also increase compliance costs. The lack of a clear definition could also result in a diminishment of the benefit if some issuers are less rigorous in determining and reporting on their products that have conflict minerals, which would reduce the utility of their disclosure. Overall, however, we believe the potential benefit of flexibility outweighs the potential increases in costs. In the proposal, we expressed our view that an issuer that does not manufacture a product itself but that has ‘‘any’’ influence over the product’s manufacturing should be considered to be contracting to manufacture that E:\FR\FM\12SER2.SGM 12SER2 56346 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations product. Also, we expressed our view that an issuer that offers a generic product under its own brand name or a separate brand name should be considered to be contracting to manufacture that product so long as the issuer had contracted to have the product manufactured specifically for itself. As noted in the Proposing Release, we had believed that these issuers should have been considered to be contracting those products to be manufactured because the issuers would implicitly influence the manufacturing of the products. However, we are persuaded by commentators that this level of control set forth in the Proposing Release was ‘‘overbroad’’ and ‘‘confusing’’ and would impose on such an issuer ‘‘significant,’’ ‘‘unrealistic,’’ and ‘‘costly’’ burdens.803 Therefore, we provide guidance indicating that an issuer is considered to be contracting to manufacture a product depending on the degree of influence it exercises over the materials, parts, ingredients, or components to be included in any product as well as examples. We believe that this guidance may decrease issuers’ flexibility for some issuers, but it will provide more certainty for others. sroberts on DSK5SPTVN1PROD with RULES 5. Nationally or Internationally Recognized Due Diligence Framework (Including Gold) Although Exchange Act Section 13(p)(1)(A)(i) requires issuers to describe the measures taken to exercise due diligence, the provision does not indicate the due diligence required. The final rule’s requirement that issuers use a nationally or internationally recognized due diligence framework in their Conflict Minerals Reports may result in a certain degree of standardization in the preparation of the disclosure and may reduce audit costs by focusing the audit. To the extent issuers tend to use the same due diligence framework, this standardization will benefit users of the information by making the Conflict Minerals Reports easier to compare, thus reducing costs for users of comparing information across issuers. Also, requiring a nationally or internationally recognized due diligence framework allows us to provide a clear audit objective that includes whether the design of an issuer’s due diligence measures is in conformity with the criteria set forth in the nationally or internationally recognized due diligence framework and whether an issuer’s 803 See, e.g., letters from ABA, AT&T, Corporate Secretaries I, Davis Polk, and Verizon. See also letter from NRF I (stating that our proposed approach would be ‘‘draconian’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 description of the due diligence measures it performed is consistent with the due diligence process it undertook. As discussed below, having a clear audit objective based on the design of an issuer’s due diligence framework lowers audit costs compared with a rule that does not require a specified framework because it focuses the scope of the audit that must be performed and, therefore, makes the audit less time-consuming and less costly. Further, the final rule requires that an issuer’s due diligence follow a nationally or internationally recognized due diligence framework that is established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment, and is consistent with the criteria standards in GAGAS established by the GAO. This requirement improves the credibility and usefulness of the reports. Also, requiring adherence to a nationally or internationally recognized due diligence framework will provide issuers with a degree of certainty that their due diligence process is reliable and will pass a regulatory review. However, this requirement also will limit the issuer’s flexibility in determining the source of origin and chain of custody of their conflict minerals. If the established requirement is more burdensome than what the issuer might have otherwise considered sufficient due diligence, it might make it more costly for issuers compared to using a due diligence process based on their own facts and circumstances. 6. Liability for the Audit and Audit Certifications Exchange Act Section 13(p)(1)(A)(i) requires the independent private sector audit to be conducted in accordance with the standards established by the GAO. Exchange Act Section 13(p)(1)(B) states that the issuer must certify the audit and that certified audit constitutes a critical component of due diligence.804 804 As noted elsewhere in this release, the staff of the GAO has indicated to our staff that the GAO does not intend to publish standards for the independent private sector audit and that GAGAS’ Performance Audit or Attestation Engagement standards can be used for these audits. See U.S. Gov’t Accountability Office, GAO–12–331G, Government Auditing Standards 2011 Revision (Dec. 2011), available at https://www.gao.gov/assets/ 590/587281.pdf. Therefore, to conduct an independent private sector audit, an auditor must comply with certain quality control procedures and peer reviews, which are required under the GAGAS Performance Audit and Attestation Engagement standards. The GAGAS Attestation Engagement standards, in Chapter 3.75, require that auditors be ‘‘licensed certified public accountants, persons working for a licensed certified public accounting firm or for a government auditing organization, or PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 Under the final rule, an issuer’s audit certification is in the form of a statement in the Conflict Minerals Report that the issuer obtained an independent private sector audit. This should benefit issuers by not subjecting individuals employed by the issuer to liability for the information in the Conflict Minerals Report or the audit. Additionally, the final rule does not require an auditor to assume expert liability regarding the audit because the audit report would not be incorporated by reference or otherwise included in Securities Act filings. Therefore, depending on the state of competition in the market for independent private sector audits, not requiring the assumption of such liability may result in lower audit fees, which in turn should decrease conflict minerals-reporting companies’ cost of compliance with the statute. However, not requiring the certification to be signed by an officer and not requiring an auditor to assume expert liability could decrease the benefits of the rule if it results in issuers taking less care in their certifications and auditors conducting less thorough audits. 7. Audit Objective The final rule provides a clear audit objective. We believe that the audit is meaningful because investors and other users will have some assurance from an independent third party that the issuer’s due diligence framework, as set forth in the Conflict Minerals Report, is designed in conformity with the relevant nationally or internationally recognized due diligence framework, and that the issuer actually performed the due diligence measures that it represents that it performed in the Conflict Minerals Report. We recognize that an audit objective requiring an auditor to express an opinion or conclusion as to the design and description of an issuer’s due diligence measures is not as comprehensive as an audit objective requiring an auditor to express an opinion or conclusion as to the effectiveness of due diligence measures or the accuracy of conclusions in the Conflict Minerals Report. However, we believe that the audit will licensed accountants in states that have multi-class licensing systems that recognize licensed accountants other than certified public accountants.’’ Unlike the GAGAS Attestation Engagement standard, the GAGAS Performance Audit standard allows auditors other than certified public accountants to perform a Performance Audit, provided the auditor complies with the applicable qualification requirements under GAGAS, which will increase the number of firms eligible to conduct the private sector audits. Increasing the number of firms that are eligible to conduct the independent private sector audits should increase competition, which should make it less costly for an issuer to obtain such an audit. E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations still be meaningful because it will provide some assurance from an independent third party that the issuer’s due diligence framework is designed in conformity with the relevant nationally or internationally recognized due diligence framework and that the issuer actually performed the due diligence measures as they were described. With respect to what audit objective is appropriate, we considered the following possible audit objective alternatives from commentators: whether management’s description of procedures and controls performed in their due diligence process are fairly described in the report; whether an issuer’s design of its due diligence process described in the report conformed to a recognized standard of due diligence; whether management’s description of an issuer’s due diligence process in its report is accurate, the results of that process are fairly stated, and the issuer has evaluated/identified the upstream and downstream due diligence processes; whether the design of the due diligence process described in the report conformed to a recognized standard and whether the process was effective; whether the issuer’s conclusion regarding the source and chain of custody of its conflict minerals is accurate; and whether the issuer appropriately included in the report all its products described as having not been found to be ‘‘DRC conflict free.’’ We used our discretion to make the audit objective in the final rule similar to the first and second alternatives with some modification. The final rule states that the objective of the independent private sector audit is for the auditor to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and whether the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. We believe that our choice of audit objective in the final rule will reduce the costs and burdens more than certain other alternatives. However, we recognize that the audit objective will not reduce the costs and burdens as much as if the audit objective required only an opinion or conclusion as to whether the design of the issuer’s due diligence measures is in conformity VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 with the criteria set forth in the nationally or internationally recognized due diligence framework. We believe an audit related to whether the issuer actually performed the due diligence measures that it represents that it performed in the Conflict Minerals Report is necessary and appropriate so that the audit also addresses, in a cost effective manner, the actual performance of the due diligence and not just the design as well as provide independent third party confirmation that the work described was performed. Based on the comments we received, however, an audit objective based on any of the alternatives other than just the design of the issuer’s due diligence measures and the issuer’s description of the due diligence measures it performed would be very costly and burdensome to undertake due to the breadth of those alternatives and the fact that most of the evidence required for those alternatives would be held by third party suppliers and smelters. 8. Conflict Minerals From Recycled or Scrap Sources The Conflict Minerals Statutory Provision is silent as to the treatment of conflict minerals from recycled or scrap sources. In the final rule, however, we provided for alternative treatment for conflict minerals from recycled or scrap sources. The alternative reporting requirements for conflict minerals from recycled or scrap sources should benefit issuers by reducing issuers’ compliance costs with the disclosure requirements in Section 1502 because those issuers will conduct a reasonable inquiry regarding whether those minerals are from recycled or scrap sources instead of having to exercise due diligence and provide a Conflict Minerals Report in all cases. Also, issuers that, following a reasonable inquiry conducted in good faith, reasonably believe their minerals are from recycled or scrap sources will not have to obtain an independent private sector audit. A reduction in costs of not having to exercise due to diligence or obtain an independent private sector audit is likely to be significant for those industries that use a high concentration of conflict minerals that are from recycled or scrap sources.805 The final rule requires issuers with conflict minerals that have reason to believe their conflict minerals may not come from recycled or scrap sources to 805 We are unable to estimate the total magnitude of these cost savings because we do not have empirical evidence regarding the scope of the use of conflict minerals that are from recycled or scrap sources. See below Section D for a further analysis of the potential costs of this provision. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 56347 exercise due diligence in determining whether the minerals are, in fact, from recycled or scrap sources. That due diligence must follow a nationally or internationally recognized due diligence framework, if such framework is available. While providing a higher degree of certainty that those conflict minerals came from recycled or scrap sources, the requirement will also increase the costs to issuers, compared to an alternative that would allow issuers to rely on their own due diligence approach to verify that these minerals are from recycled or scrap sources. Eliminating the requirement of an independent private sector audit of their Conflict Minerals Report, however, could potentially decrease costs to issuers. We believe that the magnitude of the cost savings for issuers with conflict minerals from recycle or scrap sources will be greatest for companies that use exclusively scrap and recycled materials. Although we did not receive any information from commentators as to the number of companies that may fall into this category, a number of commentators stated that the use of conflict minerals from recycled or scrap sources is significant. For example, some commentators noted that China controls approximately 85% of the world’s tungsten supply, but China is cutting back on tungsten exports, which is causing the price of tungsten to increase by 130%.806 According to these commentators, this development has caused American manufactures to move to recycled tungsten, which represented approximately 55% of apparent consumption of tungsten in all forms. Also, as another example, one commentator noted that up to 40% of the world’s gold supply is from recycled or scrap sources.807 Even so, issuers that use both conflict minerals from recycled or scrap sources and newly mined minerals may still need to exercise due diligence and obtain an audit regarding the conflict minerals that are not from recycled or scrap sources and thus, may not have significant additional cost savings. Overall, however, even with these requirements, we believe that providing an alternative treatment for conflict minerals from recycled or scrap sources should benefit issuers by reducing their compliance costs for those minerals as compared with the costs applicable to newly mined conflict minerals. Moreover, an indirect consequence of our differential 806 See, e.g., letters from Rep. Altmire, Rep. Murphy, Rep. Renacci, Rep. Shuster, Rep. Toomey, Rep. Womack, and Sen. Pryor. 807 See letter from WGC II. E:\FR\FM\12SER2.SGM 12SER2 56348 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES treatment of scrap and recycling materials may be to increase the extent to which these materials are recycled. Finally, the reasonable country of origin inquiry requirements are likely to improve the disclosures regarding conflict materials from recycled or scrap sources. 9. Conflict Minerals ‘‘Outside the Supply Chain’’ Like conflict minerals from recycled and scrap sources, the Conflict Minerals Statutory Provision is silent as to the treatment of conflict minerals ‘‘outside the supply chain’’ at the time our final rule takes effect, including existing stockpiles of conflict minerals. However, in the final rule we have determined to exclude any conflict minerals that are ‘‘outside the supply chain’’ prior to January 31, 2013. The final rule considers conflict minerals to be ‘‘outside the supply chain’’ after such conflict minerals have been smelted (in the case of tantalum, tin, or tungsten) or refined (in the case of gold), or, if not smelted or refined, are physically located outside of the Covered Countries. We are aware of the concern that these existing stockpiles could have come from activities that financed or benefited armed groups in the Covered Countries. However, once those minerals have been smelted, refined, or transported out of the Covered Countries, it seems unlikely that they could further finance or benefit armed groups. Therefore, we believe excluding these stockpiled minerals would be consistent with the statutory intent of the Conflict Minerals Statutory Provision and does not significantly impair the benefits sought by the statute. Moreover, the approach we have chosen may substantially reduce compliance costs for some issuers by not requiring them to determine the origin and chain of custody of these stockpiled minerals. An alternative approach that requires issuers to determine the origin and chain of custody of their stockpiled minerals would greatly increase costs, particularly for conflict minerals that were extracted prior to the contemplation of the Conflict Minerals Statutory Provision because issuers would not have known they were expected to determine the origin of those minerals at the time of their extraction. Further, if stockpiled minerals were not excluded, issuers might not be able to sell those minerals and could be forced to dispose of their existing conflict minerals inventory at below market prices, or at a loss. If such a situation occurred, as one VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 commentator noted, the cost of the final rule would increase ‘‘dramatically.’’ 808 10. Conflict Mineral Derivatives The Conflict Minerals Statutory Provision defines the term ‘‘conflict mineral’’ as cassiterite, columbitetantalite, gold, wolframite, or their derivatives, or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Covered Countries.809 The Proposing Release provided the same definition of the term ‘‘conflict mineral’’ as well. In the final rule, however, we used our discretion to limit the term ‘‘conflict mineral’’ to include only cassiterite, columbite-tantalite, gold, wolframite, and their derivatives, which are limited to only the 3Ts, unless the Secretary of State determines that additional derivatives are financing conflict in the Covered Countries, in which case they are also considered ‘‘conflict minerals.’’ By using our discretion to limit the covered mineral derivatives, we could be limiting the usefulness of the information of the conflict minerals disclosure. This potential disadvantage is mitigated, however, by the fact that tantalum, tin, and tungsten are by far the most common derivatives of these minerals.810 A different approach would increase costs to issuers by increasing the number of derivatives that they would have to determine are in their products. 11. Method and Timing of Disclosure on Form SD Exchange Act Section 13(p)(1)(A) requires issuers to ‘‘disclose annually’’ their conflict minerals information, but does not specify how issuers should disclose this information or at what time during the year the disclosure must be provided. The final rule requires issuers to provide this information annually in a new specialized disclosure report on new Form SD that covers a calendar year, regardless of the issuer’s fiscal year end, and is due on May 31 of the subsequent year. Our decision to provide through rulemaking that issuers use the new form for the disclosure of conflict minerals’ origin and the Conflict Minerals Report makes it easier for those interested in the disclosed information to locate the form. In addition, the final rule requires that issuers present the information in a 808 See letter from Claigan I. 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, columbitetantalite, gold, wolframite, or their derivatives. 810 See letters from AAFA, ITIC I, and PCP. 809 Section PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 standardized manner. Users that find the information about an issuer’s conflict minerals relevant to their decision making will benefit from the standardization and simplification of the disclosure. Further, requiring issuers to use a new form with a uniform filing date rather than submitting conflict minerals information in their annual reports would benefit most issuers by allowing them to have sufficient time to prepare and file their conflict minerals information independent from the due dates for annual reports.811 Moreover, we believe that this staggered filing date will benefit issuers because they could, if they choose to do so, use the same personnel to handle this filing as their annual reports. Another benefit for issuers of requiring issuers to provide their conflict minerals information on a new form, instead of an annual report on Form 10–K, Form 20–F, or Form 40– F, is to remove the conflict minerals information from the disclosure that principal executive and financial officers must certify under Sections 302 and 906 of Sarbanes-Oxley, which could reduce costs to issuers. Also, requiring a uniform reporting period for all issuers will benefit companies that supply products or components with conflict minerals by allowing them to provide reports once per year for all their customers, rather than having to prepare reports throughout the year for customers with different reporting periods, which will reduce such companies’ costs. Our decision to require a new form will result in costs related to the preparation of this form, as we discuss below in the Paperwork Reduction Act section. Also, our decision to require an issuer to provide its Conflict Minerals Report and its independent private sector audit report as an exhibit to its specialized disclosure report on Form SD will result in costs related to the preparation of such an exhibit. Requiring covered issuers to file, instead of furnish, their Conflict Minerals Reports gives investors the ability to bring suit if issuers fail to comply with the new disclosure requirements, for instance under Exchange Act Section 18. This may, therefore, potentially improve the avenues of redress available to investors. This, in turn, may provide benefits to investors to the extent they rely on the information to make investment decisions. Because this could improve investors’ ability to seek 811 We estimate that almost 58% of total number of affected issuers uses December 31 as a fiscal year end. E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations redress, it is possible that covered issuers could be found liable for the disclosure. Our decision to require issuers to ‘‘file,’’ rather than ‘‘furnish,’’ the information will potentially subject issuers to litigation under Section 18 and may ‘‘incentivize issuers (and auditors and underwriters) to conduct an appropriate level of diligence’’ in preparing the disclosures,812 thereby increasing issuers’ cost of complying with the final rule.813 In addition, our decision to require a uniform reporting period could further increase costs to issuers that do not have calendar year fiscal years by requiring separate reporting outside of the issuer’s normal reporting period. 12. ‘‘Necessary to the Functionality or Production’’ Exchange Act Section 13(p)(2)(B) 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.’’ The Conflict Minerals Statutory Provision, however, provides no additional explanation or guidance as to the meaning of ‘‘necessary to the functionality or production of a product.’’ We use our discretion not to define this phrase in the final rule. Compared to an alternative of the rule, which would define this phrase, our decision not to provide a definition gives issuers significant flexibility to use a definition that applies best to their particular circumstances. Such flexibility generally lowers issuers’ compliance costs as issuers can determine whether the phrase is applicable based upon their specific facts and circumstances. But we also recognize that our decision not to define this phrase could increase uncertainty for issuers on how the phrase should be implemented and may therefore result in additional costs to some issuers. For example, the uncertainty associated with leaving the phrase undefined could lead some issuers to interpret the definitions in a manner that is more expansive than if these terms were defined, thus incurring a higher 812 See letter from Global Witness I. the increased potential for litigation may increase costs, we note that Section 18 claims have not been prevalent in recent years and a plaintiff asserting a claim under Section 18 would need to meet the elements of the statute, including materiality, reliance, and damages. See Louis Loss and Joel Seligman, Ch. 11 ‘‘Civil Liability,’’ Subsect. c ‘‘False Filings [§ 18],’’ Fundamentals of Securities Regulation (3rd Ed. 2005). We are unable to estimate the magnitude of this potential cost increase because we cannot predict at this time whether Section 18 claims will increase (and if so, by how much) and how costly it may be to ultimately prove the required elements or defend such a case. sroberts on DSK5SPTVN1PROD with RULES 813 While VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 compliance cost than is necessary. In this regard, some issuers may decide to use more internal or external resources than if this phrase was defined to make sure they are compliant with the rule, which would also increase compliance costs. The lack of a clear definition could also result in a diminishment of the benefit of the rule if some issuers are less rigorous in determining and reporting on their products that have conflict minerals, which would reduce the informativeness of their disclosure. We have attempted to mitigate the potential cost of leaving the phrase undefined by the guidance we provide in the release. Our guidance provides issuers with contributing factors that they should use in their determination of ‘‘necessary to the functionality or production,’’ which will reduce the possibility that some issuers may interpret the phrase in either an over or underinclusive manner. Also, we noted concerns that there is ambiguity in the application of the provision to conflict minerals that do not end up in the product, and, as noted above, commentators were mixed in their views regarding how the rule should treat catalysts and other conflict minerals necessary to the production of a product that do not appear in the product. After considering the comments, we agree that it would be very difficult for any manufacturer of products that do not themselves contain conflict minerals to know every conflict mineral used in the production process. Therefore, we used our discretion to decide that, for a conflict mineral to be considered ‘‘necessary to the production’’ of the product, the conflict mineral must be contained in the product—and be necessary to the product’s production. Therefore, although this requirement may decrease the number of issuers that are covered under the final rule, we believe this is a reasonable approach that reduces costs to issuers by eliminating an especially challenging aspect from the proposal. 13. Categories of Issuers We do not read the statute as making any distinction among issuers based on the issuer’s size or domesticity. As discussed above, although not specifically in the context of smaller reporting companies or foreign private issuers, some commentators suggested that we exempt certain classes of companies from full and immediate compliance with the disclosures required by the Conflict Minerals Statutory Provision.814 We are 814 See, e.g., letters from Davis Polk, NCTA, Verizon, and WilmerHale. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 56349 concerned that any broad categories of exemptions would undermine the statutory objectives discussed above. For the provision to have the effect we understand Congress intended, we are not exempting any class of issuer from its application. We recognize that this imposes a cost burden on those issuers who are not exempted, but conclude that this burden is required by the statute. Additionally, as one commentator noted, it is unclear whether exempting smaller reporting companies would significantly reduce their burdens because smaller reporting companies could still be required to track and provide their conflict minerals information for larger issuers.815 Moreover, as other commentators noted, to the extent there are benefits to smaller companies from an exemption, such an exemption could increase the burden on larger companies that rely on smaller reporting company suppliers to provide conflict minerals information needed by the larger reporting companies.816 Further, the temporary availability of the ‘‘DRC conflict undeterminable’’ category is likely to reduce the compliance burden for all companies, including smaller reporting companies. In this regard, not including private companies and individuals in the final rule may not unduly burden reporting issuers because the commercial pressure on private companies from issuers that need this information for their reports and from the public in general demanding that issuers make this information available could be sufficient for the private companies to provide voluntarily their conflict minerals information as standard practice.817 Further, the extension of the availability of the ‘‘DRC conflict undeterminable’’ category for an additional two years is likely to reduce the compliance burden even more for some smaller reporting companies. Similarly, exempting foreign private issuers from the final rule could increase domestic issuers’ burdens by making it very difficult for them to compel their foreign private issuer suppliers to provide conflict minerals information. In addition, exempting foreign private issuers from the final rule could result in a competitive disadvantage for domestic issuers because foreign private issuers would not be subject to the final rule.818 Overall, we are not exempting foreign 815 See letters from IPC I. e.g., letters from IPC I and TriQuint I. 817 See letter from Howland and TIC. 818 See letter from CEI II, Rep. Amodei, Rep. Ellmers, Rep. Murphy, and TriQuint I. 816 See, E:\FR\FM\12SER2.SGM 12SER2 56350 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations private issuers because we believe that doing so would not give effect to Congressional intent. sroberts on DSK5SPTVN1PROD with RULES 14. Not Including Mining Issuers as Manufacturing Issuers The Conflict Minerals Statutory Provision does not state whether issuers that mine conflict minerals should be considered to be manufacturing those minerals and be included under the provision. We do not consider an issuer that mines or contracts to mine conflict minerals to be manufacturing or contracting to manufacture those minerals unless the issuer also engages in manufacturing, whether directly or through contract, in addition to mining. In this regard, we do not believe that mining is ‘‘manufacturing’’ based on a plain reading of the provision. Excluding such mining issuers from the universe of covered companies could create a competitive advantage for those companies over covered companies to the extent that they are competitors, but this advantage should be diminished for mining companies that are suppliers of conflict minerals to covered companies because the covered companies would require the conflict minerals information from the mining company. Also, excluding such mining issuers from the final rule could increase costs to other issuers along the supply chain because, without being covered, such mining issuers may not have the incentive to share origin and chain of custody information about the conflict minerals they mined. However, not including such mining issuers may decrease certain costs for mining issuers, since such issuers will not have to comply with the Conflict Minerals Statutory Provision with respect to conflict minerals mined by such issuers (unless necessary to the production or functionality of a product manufactured, or contracted to be manufactured, by such issuer). However, we expect that such mining issuers will incur costs to provide information on the source and custody of conflict minerals mined by such issuers to their customers, and other participants in their supply chain, who are subject to the Conflict Minerals Statutory Provision. D. Quantified Assessment of Overall Economic Effects As noted above, Congress intended for the rule issued pursuant to Section 1502 to decrease the conflict and violence in the DRC, particularly sexual and gender based violence.819 A related goal of the 819 Section 1502(a) of the Act (‘‘It is the sense of the Congress that the exploitation and trade of VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 statute is the promotion of peace and security in the Congo.820 These are compelling social benefits, which we are unable to readily quantify with any precision, both because we do not have the data to quantify the benefits and because we are not able to assess how effective Section 1502 will be in achieving those benefits.821 We also note that these objectives of Section 1502 appear to be directed at achieving overall social benefits and are not necessarily intended to generate measurable, direct economic benefits to investors or issuers specifically. Additionally, the social benefits are quite different from the economic or investor protection benefits that our rules ordinarily strive to achieve. We therefore have not attempted to quantify the benefits of the final rule. Based on comments and our analysis, we do expect that the statute will result in significant economic effects. We have noted the views of commentators on direct compliance costs, and we acknowledge that these costs are substantial. In addition, issuers with a reporting obligation under the Conflict Minerals Statutory Provision could be put at a competitive disadvantage with respect to private companies that do not have such an obligation.822 We note, however, that non-reporting companies are part of the supply chain of reporting issuers and will bear many of the compliance costs of determining whether their minerals are conflictfree.823 We also expect that the implementation of the statute may provide significant advantage to foreign 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).’’). 820 See Section 1502(d)(2)(A) of the Act (directing the GAO to assess the effectiveness of Exchange Act Section 13(p) in promoting peace and security in the Covered Countries). 821 Some commentators argued, however, that the Conflict Minerals Statutory Provision has already pressured DRC authorities to begin to demilitarize some mining areas and to increase mining oversight. See, e.g., letters from International Corporate Accountability Roundtable (Jul. 29, 2011) (‘‘ICAR I’’), Sen. Boxer et al. I, Sen. Leahy et al., and United Nations Group of Experts on the Democratic Republic of Congo (Oct. 21, 2011) (‘‘UN Group of Experts’’). 822 In our Economic Analysis, we use the term ‘‘competition’’ to mean competition in the industries of the affected issuers, not competition in all of the markets that the Commission is charged with regulating, which are the United States securities markets. We do not expect any effects of the rule on the competition in the United States securities markets. 823 See, e.g., letters from Japanese Trade Associations and NAM I. PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 companies that are not reporting in the United States—and thus need not comply—but do compete directly with reporting issuers in the United States. In requiring the Commission to promulgate this rule, however, Congress determined that its costs were necessary and appropriate in furthering the goals of helping end the conflict in the DRC and promoting peace and security in the DRC. To the extent the final rule implementing the statute imposes a burden on competition in the industries of affected issuers, therefore, we believe the burden is necessary and appropriate in furtherance of the purposes of Section 13(p). Also, if foreign jurisdictions implement similar laws or regulations similar to Section 1502 or the final rule,824 any advantages available to foreign companies listed in such jurisdictions but not listed in the United States may be diminished. As we have observed, unlike in most of the securities laws, Congress intended the Conflicts Mineral Provision to serve a humanitarian purpose, which is to prevent armed groups from benefiting from the trade of conflict minerals. There may also be a benefit to investors given the view expressed by some commentators that the provision also protects investors by requiring disclosure of information that may be material to their understanding of the risks of investing in an issuer or its supply chain. To the extent that the required disclosure will help investors in pricing the securities of the issuers subject to the Conflict Minerals Statutory Provision, the rule could improve informational efficiency. Because, however, the cost of compliance for this provision will be borne by the shareholders of the company, which could potentially divert capital away from other productive opportunities, the rule may result in a loss of allocative efficiency. The reduction in allocative efficiency could be offset, somewhat, by increased demand for the firm’s products and/or shares by socially conscious consumers and investors. We do not expect that the rule would negatively impact prospects of the affected industries to an extent 824 See cf. letters from Member of the European Parliament (Nov. 17, 2011) (‘‘European Parliament’’) (stating that in ‘‘2010 the European Parliament adopted a resolution welcoming the adoption of the new US ‘Conflict Minerals’ Law and asked the Commission and the Council to examine a legislative initiative along these lines’’) and NEI (stating that ‘‘[s]imilar action can be expected in other countries in response to the SEC’s leadership, and as global awareness of the conflict minerals issue increases,’’ that ‘‘conflict minerals legislation [in Canada] has already been tabled,’’ and ‘‘the Canadian Securities Administrators (CSA) pay[s] close attention to SEC rule-making developments’’). E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations that would result in withdrawal of capital from these industries. Thus, we do not expect the rule to have a significant impact on capital formation. There may, however, be several indirect economic effects that could be significant. The high cost of compliance provides an incentive for issuers to choose only suppliers that obtain their minerals exclusively from outside the Covered Countries, thereby avoiding the need to prepare a Conflict Minerals Report. To the extent that Covered Countries are the lowest cost suppliers of the minerals affected by the statute, issuers preferring to find substitutes or other suppliers of non-DRC minerals would have to increase the costs of their products to recoup the higher costs. Reducing the viable supply of such minerals may have the indirect effect of increasing the cost of acquiring these minerals. As mentioned above, the overall specific range of costs for compliance with the rule provided by commentators was between $387,650,000 and $16 billion. The wide divergence of the cost estimates among the four separate analyses submitted by a manufacturing industry association,825 an electronic interconnect industry association,826 a university group,827 and an environmental consultancy company 828 illustrates to us the difficulty of ascertaining the estimated costs of implementing the statute and our discretionary choices. We have reviewed the proposal and the comments received and have used the information provided by commentators to inform our Economic Analysis of the final rule. In the remaining part of this section we attempt to quantify, to the extent possible, the compliance costs resulting from the final rule by relying on and critically evaluating the estimates and the analyses that commentators provided. Rather than using a single analysis, a combination of the analyses can provide a useful framework for understanding various cost components of our implementing the rule. Our approach strives to achieve a balanced and reasonable analysis based on the data and assumptions provided by all commentators, as well as our own analysis and assumptions. When it is deemed prudent, we have chosen to make conservative assumptions that may, in some cases, lead to an overestimation of the costs. Overall, after performing our analysis we conclude that the costs of the statute 825 See Section III.B.2.b.i. Section III.B.2.b.ii. 827 See Section III.B.2.b.iii. 828 See Section III.B.2.b.iv. 826 See VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 will be substantial. Thus, we have revised our own prior estimate of the cost of complying with the rule. Based on our analysis of the data, we provide a range of the costs of both initial compliance and the annual cost of ongoing compliance. In our view, because of the potential variations in the manner in which issuers will undertake compliance, providing such a range is more appropriate than providing a precise cost estimate. Our revised estimate is that the initial cost of compliance is between approximately $3 billion to $4 billion, while the annual cost of ongoing compliance will be between $207 million and $609 million. We start our analysis of the cost of compliance by incorporating all of the comments that provide quantified data on the aggregate potential costs of the proposed rule. So, while our overarching consideration of the costs of the rule we are adopting today takes into account the information provided by a broad range of commentators, the most useful frameworks for considering costs were provided by the manufacturing industry association and university group commentators. Other comments, while also providing certain valuable insights into how our rules would be implemented, were either not as transparent in their analytical frameworks or not easily generalizable in terms of aggregating the costs across multiple industries.829 We also found it significant that the two analyses by the manufacturing industry association and university group commentators take into account the categories of costs most often identified as significant by commentators and that we agree are likely to be deemed as such. Moreover, we did not find the assumptions underlying their frameworks to be qualitatively different from the discussions of costs provided by other commentators. At the same time, in our view, even these two studies did not provide sufficiently documented evidence to support all of their assumptions and assertions and consequently, commentators differed on the quantification of these costs. We have therefore taken into account the views expressed in other comment letters, and made modifications to the analyses provided by the manufacturing industry 829 As shown below, while we draw on the quantified analyses supplied by the electronic interconnect industry association and the environmental consultancy company commentators, these letters did not provide as broad a range of quantified cost estimates as those provided by the manufacturing industry association and university group commentators. PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 56351 association and university group commentators accordingly. What follows is a modified analysis of the manufacturing industry association and university group commentators’ estimates that we believe better synthesizes the information provided to us in the comment process. First, in both of these estimates, an important consideration is the cost of upgrading or implementing changes to IT systems. Based on the letters submitted as well as estimates from other commentators, we believe the manufacturing industry association and university group commentators may have been over-inclusive in their estimates. For example, the environmental consultancy company commentator estimates a much smaller number of $25,000 for the IT system and $10,000 for IT support.830 The commentator then states that, ‘‘a cost of $6B is 10 times the total annual sales for all restricted materials software (of which conflict minerals is a small part) and does not seem realistic * * * [p]articularly since conflict minerals software for small companies can be downloaded for free.’’ The environmental consultancy company commentator further states that ‘‘[t]he systems quoted by [the manufacturing industry association and university group commentators] are the most expensive systems on the market,’’ and that ‘‘[m]ost companies we interviewed said they would not need to invest in new software solely for conflict minerals * * * .’’ 831 While we are persuaded by the argument that an average issuer should not expect to spend $1,000,000 to invest in a new IT system, we do not accept the environmental consultancy company commentator’s own estimate of $35,000 because it does not provide a factual basis for the assertion. In modifying the estimates of the manufacturing industry association and university group commentators, we do not intend to replace the manufacturing industry association and university group commentators’ cost estimates with the smaller estimate provided; rather, for purposes of our cost estimate, the appropriate estimate lies somewhere in between those two estimates. Based on the university group commentator’s analysis, we assumed $205,000 for small company computer costs rather than $1,000,000. Further, we assumed that the computer costs for 830 See letter from Claigan III. See also letter from Assent (critiquing the cost estimates of both the manufacturing industry association commentator and the university group commentator). 831 Letter from Claigan III. E:\FR\FM\12SER2.SGM 12SER2 56352 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES large issuers would be twice those for smaller issuers, or $410,000, and not four times those for a smaller issuer as assumed by the university group commentator.832 In order to make the IT cost analysis consistent between the university group and the manufacturing group’s revised analysis, we averaged the total IT cost per company in the university analysis and divided it by the total number of issuers for an average IT cost for all companies (irrespective of size) of approximately $250,000 and apply it to the manufacturing group’s analysis.833 This respectively changes the manufacturing industry association and university group commentators’ estimates of the total IT cost from $5.9 billion and $2.6 billion, respectively, to approximately $1.5 billion. Second, another important cost assumption is that the manufacturing industry association commentator assumes that each issuer has an average of 2000 first-tier suppliers. They arrive at this number based on their ‘‘consultations with a number of large manufacturers, and based on research by’’ others. This estimate of the average number of first-tier suppliers is, however, not supported by other estimates, and is in fact difficult to reconcile with figures reported by other commentators. For example, the average number of suppliers per company in the electronic interconnect industry association commentator study is only 163.834 The environmental consultancy company commentator also believes the supply chain would be much simpler than the manufacturing industry association commentator predicts, based on the EICC/GeSI process. The manufacturing industry association commentator maintains, however, that many of its members have well over 2,000 suppliers. We do think a prudent reduction in the manufacturing industry association commentator’s estimate is warranted, but here again, we do not know that 163 is any more representative of an average company’s experience. Thus, we use the university group commentator’s estimate of 1,060 suppliers while employing the manufacturing industry association commentator’s analysis. Revising the manufacturing industry association commentator’s number of suppliers in the supply chain lowers their estimate 832 The environmental consultancy company commentator estimates the IT costs for a company with $1 billion in revenue to be $35,000. Our estimate of IT costs attempts to incorporate these two widely varying viewpoints. See letter from Claigan III. 833 Approximately $1.5 billion/5,994 issuers. 834 See letter from IPC I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 of compliance costs from $1.2 billion to $635 million. In addition, we are not convinced that the estimate of cost to suppliers is appropriately generated by a top-down approach (number of supplier relationships). Indeed, we think a topdown approach may not reflect how our rule may be implemented because it is not clear how the market may react in placing the various burdens of traces on the countless entities in the supply chains. In this top-down approach (which is the approach used by many commentators) each firm using these minerals will need to track backwards through each supplier. If many firms share the same supplier, the underlying assumption is there are few economies of scale in determining whether the minerals are conflict-free. Under this approach, each firm pays an independent cost of finding out from each of their suppliers where the minerals originate.835 We believe, however, that due diligence on the part of suppliers likely will be a bottom-up approach in which materials are tagged at the mine and certified at the smelter and then are introduced into the supply chain. Given this bottom-up approach, each supplier will then track whether the mineral is conflict-free and to whom it will be sold. While the system for tracking the sales of these minerals may increase in magnitude with the number of companies the supplier supplies, we believe the better approach to estimating costs of the supply chain would be to estimate the total number of affected suppliers (bottom-up) rather than the total number of supplier relations (topdown). A bottom-up approach places more emphasis on the number of suppliers and assumes that there are economies of scale in the cost because suppliers need only determine the source of their minerals once and then spread the cost of determining the source across many issuing firms. For example, if issuers have many suppliers to choose from, they may find it easier to deal with— and hence more valuable to employ— only those suppliers who can fully attest that they are conflict-free. Therefore, if all first-tier suppliers bear the burden of certifying and providing conflict 835 The university group commentator states that there are ‘‘overlap’’ or ‘‘mutuality’’ cost efficiencies that will emerge on the supplier side, as the same supplier may have supply contracts with more than one issuer thus allowing them to use any management systems changes to meet the needs of multiple issuers. This commentator estimates that supplier efforts will be reduced by 60% because of this supplier-issuer overlap and modifies the number of suppliers accordingly. See letter from Tulane. PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 reports, then the relative burden on the issuers will be very small. All of this will, however, depend in turn on the comparative bargaining power between the issuers and the suppliers at every level. Ultimately, none of the studies have provided compelling explanations for the precise dynamics that will govern the issuer-supplier or first-tier supplier-second-tier supplier relationships. On the whole, we think it would be much more reasonable to believe that suppliers at all levels will expend some effort individually in providing information to some of their customers regarding the source of their minerals, but each supplier’s effort in turn will most likely reduce the cost of its customers to comply with our rules. Few commentators provided an estimate of the total number of suppliers affected. In the university group commentator’s estimate, even after adjusting for potential overlap, the total number of suppliers to be affected totals over 860,000, which is based on the total supply chain. Using the total supply chain to estimate the affected suppliers will create redundancies because a supplier may be in more than one supply chain and therefore, be counted multiple times. Thus, we believe the total number of suppliers affected in the university group commentator’s analysis is likely to be too high. The manufacturing industry association commentator, on the other hand, estimated the total number of small and medium-sized manufacturing businesses to be affected at 278,000 and states that many of these small businesses are likely to be suppliers. The 2009 Statistics of U.S. Businesses from the U.S. Census estimates the total number of manufacturing businesses at 266,175, and the number of small manufacturing businesses (those with fewer than 500 employees) at 262,524.836 Both of these numbers are 836 See U.S. Census Bureau, Statistics of U.S. Business (2009), available at https:// www.census.gov/econ/susb/. We recognize that the U.S. Census Bureau uses the NAICS definitions, including the definition of ‘‘manufacturing.’’ As discussed above, we did not adopt that definition for the final rule because it appears to exclude any issuer that manufactures a product by assembling that product out of materials, substances, or components that are not in raw material form, which would exclude large categories of issuers that manufacture products through assembly. However, we believe it is not inappropriate to use the Census Bureau’s data regarding the total number of manufacturing businesses and the number of small manufacturing businesses in determining whether to use the number of suppliers provided by the university group commentator or the number provided by the manufacturing industry association commentator. Because we only have two real choices in the number of suppliers to use for our calculations, we need some way to determine which figure is a more viable estimate. Despite the E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations similar to the number provided by the manufacturing industry association commentator. We therefore have revised the university group commentator’s analysis on the number of affected suppliers to be consistent with the manufacturing industry association commentator at 278,000 to reflect this judgment. In addition, consistent with the university group commentator framework, we assumed that the same percentage of suppliers as issuers would be considered large (28%) and small (72%). Thus, in our revised university group commentator’s analysis, the total number of large suppliers is 77,840 while the total number of small suppliers is 200,160. This changes the total compliance cost for suppliers from $5.1 billion in the university group commentator’s analysis to $1.2 billion in our revised analysis. The overall impact of these changes to the analysis, a reduction in IT costs (to both the manufacturing industry association and university group commentators), a modification in the number of suppliers in the supply chain (to the manufacturing industry association commentator) and a decrease in the number of suppliers affected (to the university group commentator) changes the total 56353 estimated cost of compliance substantially. The manufacturing industry association commentator’s estimate declines from $9.3 billion to $4.1 billion while the university group commentator’s estimate drops from $7.94 billion to $3.0 billion. The combination of these modifications in the two analyses leads us to estimate that initial compliance costs could be between $3.0 and $4.0 billion for all companies to comply with the statutory requirements. Below are the two revised analyses in tabular form with the revised estimates highlighted in bold: Revised Calculation Manufacturing Industry Association Commentator Estimate: Issuers affected .......................................................................................................................... Average number of 1st tier suppliers ......................................................................................... Issuer Due Diligence Reform: 837 Number of compliance hours per supplier ................................................................................. Cost per hour .............................................................................................................................. 5,994 1,060 ........................................ 2000*.53 2 $50 ........................................ ........................................ Total compliance cost ......................................................................................................... $635,364,000 5,994*1,060*2*$50 IT Systems Modification: 838 Cost per issuer ........................................................................................................................... Total cost ............................................................................................................................. $250,000 $1,498,500,000 ........................................ 5,994*$250,000 Conflict Minerals Report Audits: Issuers to do audit 839 ................................................................................................................. Audit cost for issuers .................................................................................................................. 4,500 $100,000 5,994*75% ........................................ Total cost ............................................................................................................................. $450,000,000 4,500*100,000 Issuer Verification of Supplier Information: Number of hours ......................................................................................................................... Cost per hour .............................................................................................................................. 0.5 $50 ........................................ ........................................ Total cost ............................................................................................................................. $158,841,000 5,994*1,060*0.5*$50 Smaller Supplier Due Suppliers affected (only 20% to conduct) .................................................................................. Due diligence cost ...................................................................................................................... 55,600 $25,000 278,000*.2 ........................................ Total cost ............................................................................................................................. $1,390,000,000 278,000*.2*$25,000 Total ............................................................................................................................. $4,132,705,000 ........................................ Diligence: 840 Revised Calculation sroberts on DSK5SPTVN1PROD with RULES University Group Commentator Estimate: Issuers affected .......................................................................................................................... Large issuer (28% of issuers) .................................................................................................... Small issuer (72% of issuers) .................................................................................................... Number of 1st tier suppliers (53% of NAM) ............................................................................... Issuer Due Diligence Reform: Number of compliance hours for large issuer ............................................................................ Number of compliance hours for small issuer ........................................................................... Internal cost per hour ................................................................................................................. fact that the Census Bureau uses the NAICS definition of ‘‘manufacturing,’’ which may exclude certain manufacturers, it would need to exclude almost 600,000 manufacturers for the university group commentator’s figure to be more accurate than the manufacturing industry association commentator’s figure. This appears to be too high. Therefore, because the manufacturing industry association commentator’s figure is so much closer to the Census Bureau’s figures, we decided it would not be inappropriate to use the manufacturing VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 industry association commentator’s figure even though our reasoning was based on the NAICS definition of ‘‘manufacturing.’’ 837 The manufacturing industry association commentator refers to this as ‘‘changes to their corporate compliance policies.’’ See letter from NAM I. 838 The manufacturing industry association commentator refers to this as IT system development or revision. See id. PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 5,994 1,678 4,316 1,060 .............................. 100 40 $50 ........................................ 5,994*0.28 5,994*0.72 2,000*0.53 ........................................ ........................................ ........................................ ........................................ 839 We are using the rounded estimate (4,500) that was used by the university group and manufacturing industry association commentators in their calculations even though a more exact number of issuers would be 4,496 (.75 × 5,994 = 4,495.5). See infra note 869. 840 The manufacturing industry association commentator refers to this as the cost of providing ‘‘proper information regarding the source of minerals.’’ Id. E:\FR\FM\12SER2.SGM 12SER2 56354 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Revised Calculation $7,551,000 $6,474,000 $200 $3,356,000 $8,632,000 1,678*0.9*100*$50 4,316*0.75*40*$50 ........................................ 1,678*0.1*100*$200 4,316*0.25*40*$200 Total cost ............................................................................................................................. $26,013,000 ........................................ IT Systems Modification: Cost per large issuer .................................................................................................................. Cost per small issuer .................................................................................................................. Total large issuer cost ................................................................................................................ Total small issuer cost ................................................................................................................ $410,000 $205,000 $687,980,000 $884,780,000 ........................................ ........................................ 1,678*$410,000 4,316*$205,000 Total costs ........................................................................................................................... $1,572,760,000 ........................................ Conflict Minerals Report Audits: Issuers affected 841 ..................................................................................................................... Number of large issuers ............................................................................................................. Number of small issuers ............................................................................................................. Large issuer cost ........................................................................................................................ Small issuer cost ........................................................................................................................ Total costs for large issuers ....................................................................................................... Total costs for small issuers ....................................................................................................... 4,500 1,260 3,240 $100,000 $25,000 $126,000,000 $81,000,000 ........................................ 4,500*0.72 4,500*0.28 ........................................ ........................................ 1,260*$100,000 3,240*$25,000 Total costs ........................................................................................................................... $207,000,000 ........................................ Supplier Due Diligence Reform: Total large suppliers ................................................................................................................... Total small suppliers ................................................................................................................... Number of compliance hours for large supplier ......................................................................... Number of compliance hours for small supplier ........................................................................ Internal cost per hour ................................................................................................................. Internal costs for large supplier (90% of total work load) .......................................................... Internal costs for small supplier (75% of total work load) .......................................................... Consulting cost per hour ............................................................................................................ Consulting costs for large supplier (10% of total work load) ..................................................... Consulting costs for small supplier (25% of total work load) ..................................................... 77,840 200,160 100 40 $50 $350,280,000 $300,240,000 $200 $155,680,000 $400,320,000 278,000*.28 278,000*.72 ........................................ ........................................ ........................................ 77,840*100*0.9*$50 200,160*40*0.75*$50 ........................................ 77,840*100*0.1*$200 200,160*40*0.25*$200 Total cost ............................................................................................................................. $1,206,520,000 ........................................ Total ............................................................................................................................. sroberts on DSK5SPTVN1PROD with RULES Internal costs for large issuer (90% of total work load) ............................................................. Internal costs for small issuer (75% of total work load) ............................................................. Consulting cost per hour ............................................................................................................ Consulting costs for large issuer (10% of total work load) ........................................................ Consulting costs for small issuer (25% of total work load) ........................................................ $3,012,293,000 ........................................ The manufacturing industry association and the university group commentators also provided estimates of ongoing compliance costs. As discussed above, we consider the framework provided by these commentators to be the most useful for estimating costs. The only other commentator to provide an estimate of ongoing costs was the electronic interconnect industry association commentator, but its analysis only included companies in that industry. The analyses provided by the manufacturing industry association and university group commentators yield costs estimates across multiple industries. The manufacturing industry association group commentator estimated an ongoing audit cost of $450 million and an ongoing cost estimate of 841 We are using the rounded estimate (4,500) that was used by the university group and manufacturing industry association commentators in their calculations even though a more exact number of issuers would be 4,496 (.75 × 5,994 = 4,495.5). See infra note 869. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 approximately $300 million for issuer verification of supplier information.842 In our table above, however, we revised the estimate for issuer verification of supplier information to approximately $159 million.843 We did not modify the approximately $450 million cost estimate of the audit, which was based on its estimate that the cost of such an audit for these issuers would be $100,000 per issuer, and not the $25,000 we estimated it to be in the Proposing Release. The total estimate of ongoing compliance costs based on our revisions to the manufacturing industry association commentator’s analysis is therefore approximately $609 million.844 We believe that the university group commentator’s only significant recurring costs are the approximately $207 million audit 842 See letter from NAM I. *0.5 *$50 = $158,841,000 844 $450,000,000 + $158,841,000 = $608,841,000 843 5,994*1,060 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 costs.845 As with the manufacturing industry association commentator, we did not modify the approximately $207 million cost estimate of the audit. Therefore, we believe that the ongoing compliance cost estimate is likely to be in the range of $207 million to $609 million.846 845 The university group commentator noted that ‘‘there would be some internal operations costs associated with performing ongoing due diligence and maintaining the necessary [information technology] systems on a company-to-company basis over the years,’’ but that the ‘‘recurring costs of operating same is very low compared with the initial implementation.’’ See letter from Tulane. 846 The manufacturing industry association commentator also quotes compliance costs by Technology Forecasters, Inc on the RoHS directive. Using the RoHS directive, they estimate total compliance costs of $32 billion and $3 billion annually for maintenance. See letter from NAM I. One potential method to estimate ongoing costs is to apply the ratio of initial compliance costs to ongoing compliance costs (9.375%) in the submitted RoHS analysis ($3 billion/$32 billion or 9.375%) and apply it to our revised estimates of the analyses of the manufacturing industry association and university group commentators. This results in total ongoing estimated compliance costs of $400 E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations IV. Paperwork Reduction Act A. Background Certain provisions of the final rule contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (the ‘‘PRA’’).847 We published a notice requesting comment on the collection of information requirements in the Proposing Release for the proposed rules and amendments. The proposed rules and amendments would have amended one regulation and three forms. In response to comments received from the public, the Commission has decided to adopt a new disclosure form, rather than amend existing rules and forms. We have submitted the new collection of information requirements to the Office of Management and Budget (the ‘‘OMB’’) for review in accordance with the PRA.848 The title for the collection of information is: ‘‘Form SD’’ (a new collection of information). The form is adopted under the Exchange Act and sets forth the disclosure requirements for reports filed by certain issuers regarding their use of conflict minerals from the Covered Countries. The hours and costs associated with preparing and submitting the form constitute the reporting and cost burdens imposed by the 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. Compliance with the rule is mandatory. Responses to the information collection will not be kept confidential and there is no mandatory retention period for the information disclosed. B. Summary of the Comment Letters sroberts on DSK5SPTVN1PROD with RULES In the Proposing Release, we requested comment on the PRA analysis. We received only one comment letter that addressed the PRA explicitly,849 but we received a number of other comment letters and submissions that discussed the costs and burdens to issuers generally that would have an effect on the PRA million ($4.1 billion * 9.375%) and $281 million ($3.0 billion * 9.375%), respectively. However, because the manufacturing industry association commentator does not specify the composition of these maintenance costs (e.g., it is not stated whether this includes audit costs), nor does it provide the underlying RoHS study for verification, we are unable to confirm the accuracy of this ratio. 847 44 U.S.C. 3501 et seq. 848 44 U.S.C. 3507(d) and 5 CFR 1320.11. 849 See letter from NAM I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 analysis.850 A detailed discussion of these comments is included in the section III above regarding the Economic Analysis of the statute. In the Proposing Release, we estimated that approximately 5,994 of the approximately 14,600 annual reports are filed by issuers that would be affected by the proposed rules and form amendments. The letter discussing the PRA specifically was from the manufacturing industry association commentator.851 The commentator concluded that, of the 5,994 issuers that the Proposing Release stated could be affected by the final rule, the average issuer would have between 2,000 to 10,000 first-tier suppliers. The commentator agreed, therefore, with our statement in the Proposing Release that the paperwork costs could be significant because the disclosure requirement in the proposed rules ‘‘drastically increases the amount of paperwork issuers will have to collect and provide to the SEC to make the required disclosures.’’ 852 The amount calculated by the commentator was $9.4 billion, which included approximately ‘‘$8 billion for issuers and $1.4 billion from smaller companies that are not issuers.’’ 853 Our PRA analysis pertains solely to the paperwork burdens of issuers that file reports with us, although we discuss the burdens and costs of the final rule to both reporting issuers and nonreporting companies in our Economic Analysis section above. Therefore, for the purpose of the PRA analysis, we do 850 See, e.g., letters from Assent, Barrick Gold, CEI I, CEI II, Chamber I, Chamber III, Claigan I, Claigan II, Claigan III, CTIA, Ford, Howland, IPC I, ITRI I, ITRI II, ITRI III, Japanese Trade Associations, NAM I, NRF I, PCP, Rep. Lee, Roundtable, Society of Corporate Secretaries and Governance Professionals (Jun. 21, 2011) (‘‘Corporate Secretaries II’’), TriQuint I, Tulane, United States Chamber of Commerce (Jul. 18, 2011) (‘‘Chamber II’’), and WGC I. 851 See letter from NAM I. 852 Id. 853 See id. In response to our estimate in the Proposing Release, of 793 reporting companies that would qualify as ‘‘small entities’’ for purposes of the Initial Regulatory Flexibility Act and that have conflict minerals necessary to the functionality or production of products they manufacture or contract to manufacture, the manufacturing industry association commentator noted that ‘‘a large portion of America’s 278 thousand small and medium-sized manufacturers could be affected by the requirement to provide information on the origin of the minerals in the parts and components they supply to companies subject to the SEC.’’ Id. The commentator estimated, however, that ‘‘only one in five smaller companies would be in one or more issuer’s supply chains,’’ and these smaller companies’ only costs regarding the proposed rules would be a $25,000 audit cost. Id. Therefore, the proposed rules would cost smaller companies that are not required to report with us under Exchange Act Sections 13(a) or 15(d) approximately $1.4 billion. Id. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 56355 not take into account the commentator’s $1.4 billion figure because it relates solely to non-reporting companies. As a result, the commentator’s paperwork burden estimate appears to be approximately $8 billion, which is much higher than our estimate of $46,475,000 in the Proposing Release. Also, as we note above, other commentators provided costs estimates. These commentators did not specifically discuss the costs of the statute or the rule as they relate to the PRA. However, as discussed in greater detail below, we have attempted to extrapolate the paperwork costs from the overall cost estimates of these commentators.854 C. Revisions to PRA Reporting and Cost Burden Estimates For purposes of the PRA, in the Proposing Release, we estimated that the total annual increase in the paperwork burden for all companies to prepare the disclosure that would be required under the proposed rules would be approximately 153,864 hours of company personnel time and a cost of approximately $71,243,000 for the services of outside professionals. These figures reflected our estimated costs for issuers to satisfy the due diligence and audit requirements of the proposed rules, which we estimated would be $46,475,000. As discussed in more detail below, we are revising our PRA burden and cost estimates in light of the comments we received. For purposes of the PRA for the final rule, we estimate the total annual increase in the paperwork burden for all affected companies to comply with the collection of information requirements in our final rule is approximately 2,225,273 hours of company personnel time and approximately $1,178,378,167 for the services of outside professionals.855 These estimates include the time and cost of collecting the information, preparing and reviewing disclosure, and submitting documents. In this regard, we include due diligence, which includes updating information technology systems and obtaining an independent private sector audit, as part of collecting information. We estimate that the total cost for issuers to satisfy their due diligence is $1,030,026,667. We added this estimate to our estimate of the cost to issuers to hire outside professionals to prepare and review disclosure, submit 854 See letters from Claigan I, Claigan II, Claigan III, Claigan IV, IPC I, and Tulane. 855 $1,030,026,667 + $148,351,500 = $1,178,378,167. E:\FR\FM\12SER2.SGM 12SER2 56356 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES documents, and retain records, which is $148,351,500.856 Consistent with our methodology in the Proposing Release, in deriving our estimates for the final rule, 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, 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 final rule and some issuers may experience less than these average costs. We base our revised estimates of the effect that the final rule will have on the collection of information as a result of the required reasonable country of origin inquiry, due diligence process, and independent private sector audit of the Conflict Minerals Report primarily on information that we have obtained from comment letters. In the Proposing Release, we noted that the DRC accounts for approximately 15% to 20% of the world’s tantalum, and accounts for a considerably smaller percentage of the other three conflict minerals.857 Therefore, for the purposes of the PRA, we assumed in the Proposing Release that only 20% of the 5,994 affected issuers would have to provide an audited Conflict Minerals Report, which would have been 1,199 issuers. Both the manufacturing industry association commentator and the university group commentator, however, estimated in their comment letters that 75% of issuers would have to submit a Conflict Minerals Report.858 Also, the electronic interconnect industry association commentator indicated that it expected ‘‘nearly 100% of affected issuers will need to complete’’ a Conflict Minerals Report because ‘‘the vast majority of [issuers] will be unable to identify the origin of their conflict minerals.’’ 859 However, because of the reasonable country of origin inquiry requirement, the fact that 856 We note that commentators rounded many of the calculations they made and used. However, for clarity in the body of the release, we refer to many rounded figures, but we have included the more exact figures and our calculations in the footnotes. Regardless, it does not appear that the rounded numbers vary significantly from the more exact calculations to make them meaningfully different. 857 See Proposing Release. See also Jessica Holzer, Retailers Fight to Escape ‘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 JVC et al. II (citing to GFMS Gold Survey 2010). 858 See letters from NAM I and Tulane. 859 See letter from IPC I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 only issuers who know or have reason to believe that their conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources are required to proceed to step three, and the ‘‘DRC conflict undeterminable’’ temporary provision, we believe it is appropriate to estimate that some percentage of issuers will not be required to submit a Conflict Minerals Report, an independent private sector audit, or both. Therefore, for the final rule, we estimate that 75% of all the 5,994 issuers, which is approximately 4,496 issuers,860 will have to submit a Conflict Minerals Report and provide an independent private sector audit of that report for the first two years after implementation. We note that, under the final rule, issuers that proceed to step three but are unable to determine whether their conflict minerals originated in the Covered Countries, came from recycled or scrap sources, or financed or benefited armed groups in those countries are required to provide a Conflict Minerals Report, but that report does not have to be audited for the first two years following the rule’s adoption for all issuers and the first four years for smaller reporting issuers. This change from the proposal could cause the actual costs to issuers for the first two years after implementation, for all issuers and four years after implementation for smaller issuers, to be lower than the commentators’ cost estimates. We believe, however, that our assumption that 75% of affected issuers will have to submit a Conflict Minerals Report and provide an independent private sector audit of that report will balance some of the cost estimate discrepancies because 75% was lower than the 100% estimate of the number of affected issuers.861 1. Estimate of Conducting Due Diligence, Including the Audit We received a number of comments regarding the estimated costs of the proposed rules, particularly setting up the overall supply chain tracking systems and conducting an audit. The cost estimates provided by the manufacturing industry association commentator and the university group commentator were the most comprehensive because they discussed the costs to all companies, including issuers and private company issuers × 75% = 4,495.5. letters from IPC I (stating that nearly 100% of affected issuers would have to complete a Conflict Minerals Report) and NAM I (stating that it ‘‘conservatively’’ estimated that 75% of affected issuers would have to provide an audited Conflict Minerals Report). 860 5,994 861 See PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 suppliers.862 We note that the electronic interconnect industry association commentator provided an extensive discussion of the costs of the proposed rules.863 Its discussion and cost estimates, however, were limited to the electronic interconnect industry, which is only one segment of affected issuers. Also, although the tin industry association commentator’s estimates were useful, they were limited to the costs of its bag-and-tag system, which covers only the costs of due diligence for the portion of the supply chain from the mine to the smelter.864 For the PRA estimate of the due diligence costs, we relied primarily on the cost estimates from the manufacturing industry association and the university group commentators and, to a lesser extent, we also relied on the electronic interconnect industry association commentator’s estimates.865 The manufacturing industry association commentator estimated that the initial costs to affected issuers would be approximately $8 billion.866 This commentator’s only two recurring costs in its $8 billion estimate were the approximately $300 million cost for risk-based programs needed to verify the credibility of suppliers’ information, which the commentator indicated would be incurred ‘‘on an annual basis,’’ 867 and the approximately $450 million cost for the annual audit of the Conflict Minerals Report, which together total $750 million.868 The university group commentator estimated that the initial costs to affected issuers would be approximately 862 See letters from NAM I and Tulane. letter from IPC I. 864 See letter from ITRI II. 865 We note that in the Economic Analysis above, we provided a range to estimate the ongoing compliance costs. For purposes of the PRA, however, which calls for a specific estimate of the total annual paperwork burden imposed by the rule, we are using two of the data points within that range based on the more comprehensive comment letters we received and are then averaging the results to yield a final PRA estimate. 866 We calculate the exact amount, based on the commentator’s estimates and assumptions, to be $7,941,250,000. The commentator stated that this cost would include changing legal obligations, changing IT systems, obtaining an independent private sector audit, and implementing risk-based programs. Changing legal obligations would entail 2 hours for each affected issuer’s 2,000 suppliers at $50 per hour [2 × $50 × 2,000 × 5,994 = $1,198,800,000.]. Changing IT systems would entail a cost of $1 million per affected issuer [$1 million × 5,994 = $5,994,000,000]. Obtaining an audit would entail a cost of $100,000 for 75% of all affected issuers [$100,000 × 75% × 5,994 = $449,550,000]. Implementing risk-based programs would entail 1,000 hours at a cost of $50 per hour for all affected issuers [1,000 × $50 × 5,994 = $299,700,000]. 867 See letter from NAM I. 868 The actual cost would be $749,250,000 [$449,550,000 + $299,700,000 = $749,250,000]. 863 See E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES $2.8 billion,869 and the cost to affected issuers in subsequent years would consist primarily of the approximately $207 million portion of that amount that would be used for the annual audit of the Conflict Minerals Report.870 As discussed above in section III, however, we adjusted the cost estimates provided to us by the manufacturing industry association and the university group commentators. Therefore, our overall estimate regarding the costs of conducting due diligence, including the audit, is based on the modified cost figures. Although the manufacturing industry association commentator estimated that the initial costs to affected issuers would be approximately $8 billion, we modified that figure to be approximately $2.7 billion for affected issuers.871 In this regard, we modified that commentator’s approximately $300 million cost estimate for risk-based programs to be approximately $159 million.872 We did not, however, modify the commentator’s approximately $450 million cost estimate of the independent private sector audit for affected issuers, which was based on its estimate that the cost of such an audit for these issuers would be $100,000 per issuer, and not the $25,000 we estimated it to be in the 869 The actual estimated cost was $2,795,793,000. This cost estimate included a $2,562,780,000 cost for instituting the necessary IT systems [$1,678,000,000 for large issuers plus $884,780,000 for small issuers], a $26,013,000 cost for strengthening internal management systems in view of performing due diligence, and a $207,000,000 cost for the independent private sector audit. The university group commentator estimated the audit cost to be exactly $207 million by using the manufacturing industry association commentator’s estimate that 4,500 of the 5,994 affected issuers (75%) would be required to obtain an audit of their Conflict Minerals Report. The 4,500 figure, however, is rounded up from a more exact calculation of 75% of 5,994. The more exact calculation for 75% of 5,994 is 4,496 [5,994 × .75 = 4,459.5], and not 4,500, but both the university group commentator and the manufacturing industry association commentator rounded to 4,500. Using the electronic interconnect industry association commentator’s estimates that 72% of all affected issuers are small and medium-sized issuers (under $99 million in annual sales) and 28% are large issuers, the university group estimated that, of the 4,500 affected issuers, 3,240 were small and medium-sized issuers and 1,260 were large issuers. The university group commentator assumed that, based on the manufacturing industry association commentator’s estimates, an audit for small and medium-sized issuers would cost $25,000 per audit and an audit for large issuers would cost $100,000 per audit. Using these estimates, the university group determined that the total audit cost amount for affected issuers would be $207 million exactly. 870 See letter from Tulane. 871 Our estimate of the cost is $2,742,705,000. This cost estimate included a $635,364,000 cost for issuer due diligence reform, a $1,498,500,000 cost for IT system modifications, a $450,000,000 cost for the independent private sector audit, and a $158,841,000 cost of risk-based programs needed to verify the credibility of suppliers’ information. 872 Our estimate of the cost is $158,841,000. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Proposing Release.873 We note that the electronic interconnect industry association commentator agreed that the costs for an independent private sector audit could be as much as $100,000.874 The manufacturing industry association commentator noted, however, that $25,000 would cover the audit for a small company with a simple supply chain.875 From the approximately $159 million cost estimate for the risk-based programs needed to verify the credibility of suppliers’ information, based on our revised calculations of the manufacturing industry association commentator’s figures, and that commentator’s approximately $450 million cost estimate for the audit, we derive an approximate estimate of $609 million for annual recurring costs.876 We note that the initial approximately $2.7 billion burden is much greater than the subsequent approximately $609 million annual burden, and we averaged the burdens over the first three years. Over a three-year period, the average annual cost to affected issuers would be approximately $1.32 billion using the manufacturing industry association commentator’s figures.877 Additionally, although the university group commentator estimated that the initial costs to affected issuers would be approximately $2.8 billion, we modify that figure to be approximately $1.8 billion.878 We did not, however, modify the university group commentator’s approximately $207 million cost estimate of the independent private sector audit for affected issuers. Therefore, we do not modify the estimate of the cost to affected issuers in subsequent years, which would still be approximately $207 million. Again, the initial approximately $1.8 billion burden is much greater than the subsequent approximately $207 million annual burden, and we also averaged 873 See letter from NAM I. letter from IPC I. 875 See letter from NAM I. We note that the manufacturing industry association commentator separately indicated that costs of the final rule could be $16 billion or more by extrapolating from the costs of compliance with the RoHS. We did not use this estimate in our analysis because, despite the fact that this commentator claimed that both directives require companies to trace materials used in their products, the commentator did not discuss how RoHS compares to the requirements in the final rule. 876 $450,000,000 + $158,841,000 = $608,841,000. 877 ($2,742,705,000 + $608,841,000 + $608,841,000)/3 = $1,320,129,000. 878 The estimated cost was $1,805,773,000. This cost estimate for issuers included the modified $1,572,760,000 cost for instituting the necessary IT systems, the $207,000,000 cost for the independent private sector audit, and the $26,013,000 cost for strengthening internal management systems in view of performing due diligence. 874 See PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 56357 the burdens over the first three years. Over a three-year period, the average annual cost to affected issuers would be approximately $740 million using the university group commentator’s figures.879 To estimate the overall costs of conducting due diligence, including the audit, we averaged the modified estimates from the manufacturing industry association and the university group commentators discussed above. The average of these two costs is approximately $1.03 billion.880 2. Estimate of Preparing the Disclosure The few estimates that we received from commentators regarding the number of hours it would take issuers to prepare and review the proposed disclosure requirements varied widely. One commentator, a semiconductor company, asserted that it would require 1,400 hours initially to implement the proposed rules and 700 hours in subsequent years.881 The university group commentator suggested that a small issuer would require 40 manhours to comply with the proposed rules and a large issuer would require 100 man-hours,882 and it appears that these costs would be recurring.883 The manufacturing industry association commentator concluded that changing legal obligations to reflect a company’s new due diligence would require ‘‘at a minimum’’ two hours of employee time, 879 ($1,805,773,000 + $207,000,000 + $207,000,000)/3 = $739,924,333. 880 ($1,320,129,000 + $739,924,333)/2 = $1,030,026,667. 881 See letter from TriQuint I. 882 See letter from Tulane. This commentator stated that an issuer’s compliance could be ‘‘facilitated’’ by using third parties. The commentator assumed that large issuers would use third parties for 10% of their compliance needs and small companies would use third parties for 25% of their compliance needs. In our calculations for the number of hours issuers would require in complying with our proposed rules, we did not include third parties because it appears that the use of third parties would not affect the number of hours required for compliance, but would only affect the cost. 883 Id. This commentator stated that the 100 hours or 40 hours needed to comply with the proposed rules would involve multiple tasks, including: Initial reviews of the issuer’s policies, procedures, and controls; developing a gap analysis and compliance plan, and modifying that plan as needed; developing draft revised policies, procedures, and controls; conducting initial testing on those revised policies, procedures, and controls; and implementing the revised policies, procedures, and controls, training personnel on them, and communicating them to suppliers. Although many of these are described as ‘‘initial’’ actions, issuers will need to review and modify many of them as well. For example, it is likely that each year issuers may need to review and test their policies, procedures, and controls, modify them as needed, and implement any new further revised policies, procedures, and controls. E:\FR\FM\12SER2.SGM 12SER2 56358 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations ‘‘and considerably more than two hours is a distinct possibility.’’ 884 In calculating the number of hours necessary to prepare and review the disclosure required by the final rule, we derived an average based on the estimates provided by the semiconductor company and university group commentators.885 For the semiconductor company commentator estimate, we multiplied its initial 1,400 hour estimate by the 5,994 affected issuers, so the first year’s burden for all affected issuers would be approximately 8.4 million hours,886 and the 700 hour subsequent year estimate also by the 5,994 affected issuers, which resulted in approximately 4.2 million hours for each subsequent year.887 Averaging the burden hours over the first three years resulted in an average burden hour estimate of approximately 5.6 million hours per year.888 To determine the estimated number of hours per year per issuer, we divided the 5.6 million hours by 5,994 affected issuers, which resulted in 933 hours per year per affected issuer to comply with the proposed rules.889 The university group commentator separated its estimated hours between small and large issuers using the estimated breakdown between the number of affected large and small companies provided by the electronic interconnect industry association in its comment letter.890 Because we recognized that companies of varying sizes may incur different burdens, we also differentiated between large and small companies in our estimate of burden hours. Therefore, we multiplied the university group commentator’s 100 hour estimate for large issuers by the electronic interconnect industry association commentator’s estimated 28% for large affected issuers, so the burden for large affected issuers would be 167,832 hours,891 and multiplied the 40 hour estimate for small issuers by the electronic interconnect industry association commentator’s 72% for small affected issuers, which resulted in 172,627 hours for small affected issuers.892 To determine the estimated number of hours per year per issuer, we added the estimated hours for the small and large companies, which would be 340,459 hours,893 and divided that number by all the 5,994 affected issuers. Therefore, the average amount of hours per year for each issuer, both large and small, to prepare and review the disclosure required by our rule would be approximately 57 hours.894 Although not explicit in its comment letter, it appears that the burden hours for the university group commentator’s estimates would be incurred annually, so we did not average these hours over the first three years as we did for the semiconductor company commentator’s estimate. Next, we averaged the two burden hour estimates by adding the 933 hour estimate to the 57 hour estimate (and by dividing by two) and determined that each affected issuer, on average, would spend 495 burden hours preparing and reviewing the disclosure.895 We assumed that 75% of the burden of preparation would have been carried by the company internally and that 25% of the burden of the preparation would have been carried by outside professionals retained by the company at an average cost of $200 per hour.896 The portion of the burden carried by outside professionals would have been reflected as a cost, while the portion of the burden carried by the company internally would have been reflected in hours. Therefore, the total number of internal preparation hours for affected issuers would be 2,225,273 hours.897 Similarly, the total cost for external preparation for affected issuers would be $148,351,500.898 3. Revised PRA Estimate The following table illustrates the estimated changes in annual compliance burden in the collection of information in hours and costs for the new Exchange Act specialized disclosure report that will result from the final rule. The burden hours figure is the 2,225,273 internal burden hours estimate for preparing the disclosure. We are adding the $148,351,500 estimate of external professional costs for preparing the disclosure to the $1,030,026,667 estimate of conducting due diligence, including the audit, to determine the $1,178,378,167 professional costs in the below table. Form Current annual responses Final annual responses Current burden hours (A) Increase in burden hours (B) Final burden hours (C) = (A) + (B) Current professional costs (D) Increase in professional costs (E) Final professional costs (F) = (D) + (E) S–D ............ .................. 5,994 .................. 2,225,273 2,225,273 ........................ $1,178,378,167 $1,178,378,167 V. Final Regulatory Flexibility Act Analysis This Final Regulatory Flexibility Act Analysis (‘‘FRFA’’) 899 relates to new 884 See letter from NAM I. did not include the two-hour figure from the manufacturing industry association commentator in our estimate because it was so much lower than the other two estimates and did not appear to include all the necessary steps to comply with the proposed rules. Instead, this estimate was based only on the time required to make changes to an issuer’s corporate compliance policies and supply chain operating procedures. Also, the university group commentator specifically disagreed with this estimate and the manufacturing industry association commentator acknowledged that these actions may take ‘‘considerably more than two hours.’’ 886 1,400 hours × 5,994 affected issuers = 8,391,600 hours. 887 700 hours × 5,994 affected issuers = 4,195,800 hours. sroberts on DSK5SPTVN1PROD with RULES 885 We VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 rule 13p–1 and new Form SD, which implement Section 13(p) of the Exchange Act. Section 13(p) concerns certain disclosure and reporting obligations of issuers with conflict minerals necessary to the functionality or production of any product manufactured or contracted by those 888 [8,391,600 hours + (4,195,800 hours × 2)]/3 = 5,594,400 hours average per year. 889 5,594,400 hours/5,994 affected issuers = 933 hours. 890 See letter from Tulane. 891 100 hours × 5,994 affected issuers × 28% large affected issuers = 167,832 hours. 892 40 hours × 5,994 affected issuers × 72% small affected issuers = 172,627 hours. 893 167,832 hours + 172,627 hours = 340,459 hours. 894 340,459 hours/5,994 affected issuers = 56.80 hours. 895 933 hours + 57 hours/2 = 495 hours. 896 The university group commentator estimated that outside professionals would cost $200 per hour because it believed that ‘‘a substantial portion’’ of required consulting work will be done by ‘‘lower cost environmental and sustainability consulting firms’’ instead of large accounting firms that would be more expensive. We frequently use a $400 per hour estimate in our PRA analysis on the assumption that attorneys will be involved in the preparation of the securities law disclosures required by our rules. The disclosure required by the final rule may likely involve work by other types of professionals, so that the $200 per hour estimate may be more appropriate in this circumstance. 897 495 hours × 75% internal preparation × 5,994 affected issuers = 2,225,272.50 hours. 898 495 hours × 25% external preparation × $200 per hour for outside consultants × 5,994 affected issuers = $148,351,500. 899 This analysis has been prepared in accordance with 5 U.S.C. 601. PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES issuers to be manufactured. An Initial Regulatory Flexibility Act Analysis was prepared in accordance with the Regulatory Flexibility Act and included in the Proposing Release. A. Reasons for, and Objectives of, the Final Action The final rule is designed to implement the requirements of Section 1502 of the Act. Specifically, we are adopting amendments to our rules to implement the Conflict Minerals Statutory Provision. The final rule requires any reporting 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 annually in a separate specialized disclosure report on a new form the results of its reasonable country of origin inquiry into whether its conflict minerals originated in the Covered Countries or came from recycled or scrap sources. Under the final rule, following its reasonable country of origin inquiry, if (a) The issuer knows that its conflict minerals did not originate in the Covered Countries or knows that they came from recycled or scrap sources, or (b) the issuer has no reason to believe its conflict minerals may have originated in the Covered Countries, or (c) the issuer reasonably believes its conflict minerals came from recycled or scrap sources, then in all such cases the issuer must disclose its determination and describe briefly in the body of Form SD, the reasonable country of origin inquiry it undertook and the results of the inquiry. On the other hand, following its reasonable country of origin inquiry, if (a) the issuer knows that its conflict minerals originated in the Covered Countries and knows that they did not come from recycled or scrap sources, or the issuer has reason to believe that its conflict minerals may have originated in the Covered Countries, and (b) the issuer knows that its conflict minerals did not come from recycled or scrap sources or has reason to believe that its conflict minerals may not have come from recycled or scrap sources, then the issuer must exercise due diligence on the source and chain of custody of its conflict minerals that conforms to a nationally or internationally recognized due diligence framework, if one is available. If one is not available, the issuer must exercise due diligence without the benefit of such a framework. Following its due diligence, unless the issuer determines, based on that due diligence, that its conflict minerals did not originate in the Covered Countries or that its conflict minerals did come VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 from recycled or scrap sources, the issuer must file a Conflict Minerals Report. In most circumstances, the issuer must obtain an independent private sector audit of its Conflict Minerals Report. The issuer must also describe in its Conflict Minerals Report, among other information, its products manufactured or contracted to be manufactured that have not been found to be ‘‘DRC conflict free.’’ For a temporary two-year period for all issuers, and for a temporary four-year period for smaller reporting issuers, an issuer that must perform due diligence and is unable to determine that the conflict minerals in its products originated in the Covered Countries or came from recycled or scrap sources, or unable to determine that the conflict minerals in those products that originated in the Covered Countries financed or benefited armed groups in those countries, may consider those products ‘‘DRC conflict undeterminable.’’ In that case, the issuer must describe, among other information, its products manufactured or contracted to be manufactured that are ‘‘DRC conflict undeterminable’’ and the steps it has taken or will take, if any, since the end of the period covered in its most recent prior Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence. An issuer with products that are ‘‘DRC conflict undeterminable’’ is not required to obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict minerals in those products. Finally, after its reasonable country of origin inquiry, an issuer that has reason to believe that its conflict minerals may not have been from recycled or scrap sources must exercise due diligence that conforms to a nationally or internationally recognized due diligence framework developed specifically for conflict minerals from recycled sources to determine that its conflict minerals are from recycled or scrap sources. The issuer must also describe its due diligence in its Conflict Minerals Report. Currently, gold is the only conflict mineral with a nationally or internationally recognized due diligence framework for recycled or scrap conflict minerals. If no nationally or internationally recognized due diligence framework for a particular recycled or scrap conflict mineral is available, which is the case for the other three minerals, until such a framework is developed, the issuer must exercise due diligence in determining that its conflict minerals are from recycled or scrap PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 56359 sources and describe the due diligence measures it exercised in its Conflict Minerals Report. B. Significant Issues Raised by Public Comments In the Proposing Release, we requested comment on any aspect of the IRFA, including the number of small entities that would be affected by the proposed rules, the nature of the impact, how to quantify the number of small entities that would be affected, and how to quantify the impact of the proposed rules. We received some comments that specifically referenced the Regulatory Flexibility Analysis (‘‘RFA’’).900 Some of these commentators claimed that we underestimated the number of small entities that would be impacted by the proposal because our estimate did not account for the number of small businesses that do not report with us but participate in a reporting issuer’s supply chain.901 In this regard, the SBA recommended that we publish an amended IFRA for the proposed rules to ‘‘more accurately reflect the costs of the proposed rule and the number of small businesses that it will affect.’’ 902 Another commentator noted specifically that we must look beyond the 793 reporting issuers that are also small entities because, when an issuer seeks to establish whether its supply chain is free of conflict minerals, it will have to turn to its first-tier suppliers and require due diligence.903 This commentator indicated, therefore, that ‘‘a large portion of America’s 278 thousand small and medium-sized manufacturers could be affected by’’ the final rule. Moreover, for purposes of determining the cost of the independent private sector audit on smaller companies, the commentator estimated that one in five smaller companies would be in an issuer’s supply chain. As discussed in the Economic Analysis section above, we acknowledge that the statute and the final rule will affect many companies, including both companies that are directly subject to the rule’s requirements and those that are not reporting companies but are part of a reporting issuer’s supply chain.904 For 900 See, e.g., letters from Industry Group Coalition II; IPC I; NAM I; Senator Olympia J. Snowe, Representative Sam Graves, Senator Scott P. Brown, Representative Roscoe Barlett, Representative Scott Tipton, and Representative Joe Walsh (Nov. 17, 2011) (‘‘Sen. Snowe et al.’’); and the Small Business Administration’s Office of Advocacy (Oct. 25, 2011) (‘‘SBA’’). 901 See, e.g., letters from NAM I, SBA, Sen. Snowe et al., and WGC II. 902 See letter from SBA. 903 See letter from NAM I. 904 Id. E:\FR\FM\12SER2.SGM 12SER2 56360 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sroberts on DSK5SPTVN1PROD with RULES purposes of the RFA, however, the focus is the impact on entities on which our rules impose direct requirements.905 Therefore, although we do acknowledge the rule’s impact on non-reporting small entities, they were not included in our RFA estimate of the 793 small entities that would be directly subject to the final rule. Additionally, several commentators addressed aspects of the proposed rules that could potentially affect smaller reporting companies or small companies generally.906 These commentators did not clarify whether they were referring to ‘‘small entities’’ as that term is defined under Exchange Act Rule 0– 10(a).907 In particular, certain commentators argued that the costs of the rules could be disproportionally higher to smaller issuers.908 One commentator suggested that the Conflict Minerals Statutory Provision ‘‘does create a burden on small businesses, but not as high or disproportionate to revenue as has been reported’’ by other commentators.909 Also, as discussed above, one commentator argued that the final rule should exempt smaller reporting companies.910 Many other commentators argued, however, that final rule should not exempt smaller reporting companies.911 Many commentators indicated that exempting smaller reporting companies would not reduce significantly their burdens 912 because, among other reasons, many of these smaller companies are part of larger companies’ supply chains and these larger companies would require the smaller companies to provide conflict minerals information so that the larger companies could meet their obligations under the rule.913 Two 905 See, e.g., Mid-Tex Electric Cooperative v. FERC, 773 F.2d 327 (D.C. Cir. 1985) and White Eagle Cooperative Ass’n v. Conner, 553 F.3d 467 (7th Cir. 2009). See also Small Bus. Admin., Office of Advocacy, A Guide for Government Agencies: How to Comply with the Regulatory Flexibility Act (June 2010) (‘‘SBA Guidance’’), available at https:// archive.sba.gov/advo/laws/rfaguide.pdf. 906 See, e.g., letters from BCIMC, Corporate Secretaries I, CRS I, Earthworks, Global Witness I, Howland, IPC I, JVC et al. II, NAM I, Rep. Bachus et al., Rockefeller, Sen. Durbin/Rep. McDermott, SIF I, State II, TIAA–CREF, TIC, TriQuint I, and WGC II. 907 17 CFR 240.0–10(a) (defining 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). 908 See, e.g., letters from Howland, NAM I, and WGC II. 909 See letter from Claigan IV. 910 See letter from Corporate Secretaries I. 911 See, e.g., letters from BCIMC, CRS I, Earthworks, Global Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen. Durbin/Rep. McDermott, SIF I, State II, TIAA–CREF, TIC, and TriQuint I. 912 See, e.g., letters from IPC I and TriQuint I. 913 See letter from IPC I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 commentators agreed that smaller reporting companies should not be exempt from the rule, but stated that they should be allowed to phase-in the rules to mitigate their costs and not drain their resources.914 C. Small Entities Subject to the Final Rule The final rule will affect some reporting issuers that are small entities. Exchange Act Rule 0–10(a) 915 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 final rule would affect small entities with necessary conflict minerals as defined under Exchange Act Section 13(p). In the Proposing Release, we estimated that there were approximately 793 issuers to which conflict minerals are necessary and that may be considered small entities. As discussed above some commentators indicated that we underestimated the number of small entities that would be impacted by the rule, but that was based on the assertion that we consider small entities that are not directly subject to the requirements of the final rule.916 We note that no commentator provided any other number of small entities or disagreed that 793 is the number that will be directly subject to the final rule. We continue to believe that there are 793 small entities that file reports with us under Exchange Act Sections 13(a) and 15(d) and that will be directly subject to the final rule because they likely have conflict minerals necessary to the functionality or production of products they manufacture or contract to manufacture. D. Reporting, Recordkeeping, and Other Compliance Requirements The final rule will add to the annual disclosure requirements of issuers 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 new specialized disclosure reports on Form SD that certain issuers will be required to file annually. Among other matters, that information must include, as applicable: • Disclosure in the body of the specialized disclosure report as to whether such issuer knows or has reason to believe that conflict minerals 914 See letters from Howland and JVC et al. II. CFR 240.0–10(a). 916 See, e.g., letters from NAM I, SBA, and WGC 915 17 II. PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 necessary to the functionality or production of a product manufactured or contracted by an issuer to be manufactured originated in the Covered Countries or may have originated in the Covered Countries and may not have come from recycled or scrap sources; • If not, or if the issuer knows or has reason to believe that its necessary conflict minerals came from recycled or scrap sources, disclosure in the body of the specialized disclosure report and on the issuer’s Internet Web site of that determination and a brief description of the reasonable country of origin inquiry used in making that determination and the results of the inquiry it performed, and disclosure in the body of the specialized disclosure report of the address of the issuer’s Internet Web site where that information is publicly available; • If so, and the issuer is able to determine whether its conflict minerals directly or indirectly financed or benefited armed groups in the Covered Countries, Æ A Conflict Minerals Report filed as an exhibit to the specialized disclosure report, which includes a certified independent private sector audit report, a description of the nationally or internationally recognized due diligence framework the issuer used to determine the source and chain of custody of its conflict minerals, a description of the issuer’s products that have not been found to be ‘‘DRC conflict free,’’ and a description of the facilities used to process the necessary conflict minerals in those products, the country of origin of the necessary conflict minerals in those products, and the efforts to determine the mine or location of origin with the greatest possible specificity; Æ Disclosure in the body of the specialized disclosure report that a Conflict Minerals Report is filed as an exhibit to the specialized disclosure report and is publicly available on the issuer’s Internet Web site, and disclosure within the body of the specialized disclosure report of the address of the issuer’s Internet Web site on which the Conflict Minerals Report is publicly available; Æ Posting of the Conflict Minerals Report on the issuer’s publicly available Internet Web site. • If so, but the issuer is unable to determine that its conflict minerals did not directly or indirectly finance or benefit armed groups in the Covered Countries, if the issuer has reason to believe that its conflict minerals may have originated in the Covered Countries but is unable to determine the origin, E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Æ A Conflict Minerals Report filed as an exhibit to the specialized disclosure report that includes a description of the nationally or internationally recognized due diligence framework the issuer used to determine the source and chain of custody of its conflict minerals, a description of the facilities used to process the necessary conflict minerals in those products, if known, the country of origin of the necessary conflict minerals in those products, if known, and the efforts to determine the mine or location of origin with the greatest possible specificity, and, for a temporary period, a description of the issuer’s products that are ‘‘DRC conflict undeterminable’’ (for the temporary period, such issuers are not required to have their Conflict Minerals Report audited regarding such minerals); Æ Disclosure in the body of the specialized disclosure report that a Conflict Minerals Report is filed as an exhibit to the specialized disclosure report and is publicly available on the issuer’s Internet Web site and the address of the issuer’s Internet Web site on which the Conflict Minerals Report is publicly available; Æ Posting of the Conflict Minerals Report on the issuer’s publicly available Internet Web site. • If there is reason to believe that the conflict minerals may not be from recycled or scrap sources and there is a nationally or internationally recognized due diligence framework for those particular conflict minerals, Æ A Conflict Minerals Report filed as an exhibit to the specialized disclosure report, which includes a description of the nationally or internationally recognized due diligence framework the issuer used to determine that those conflict minerals were or has reason to believe may have been from recycled or scrap sources, which includes a certified independent private sector audit report regarding those minerals; Æ Disclosure in the body of the specialized disclosure report that a Conflict Minerals Report is filed as an exhibit to the specialized disclosure report and is publicly available on the issuer’s Internet Web site and the address of the issuer’s Internet Web site on which the Conflict Minerals Report is publicly available. • If there is reason to believe that the conflict minerals may not be from recycled or scrap sources but there is no nationally or internationally recognized due diligence framework for those particular conflict minerals, Æ A Conflict Minerals Report filed as an exhibit to the specialized disclosure report, which includes a description of the due diligence the issuer used to VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 determine that those conflict minerals were or has reason to believe may have been from recycled or scrap (until a nationally or internationally recognized due diligence framework is available for those conflict minerals from recycled or scrap sources, such issuers are not required to have their Conflict Minerals Report audited regarding such minerals); Æ Disclosure in the body of the specialized disclosure report that a Conflict Minerals Report is filed as an exhibit to the specialized disclosure report and is publicly available on the issuer’s Internet Web site and the address of the issuer’s Internet Web site on which the Conflict Minerals Report is publicly available. The same disclosure and reporting requirements apply to U.S. and foreign issuers. However, under the final rule, issuers that proceed to step three but are unable to identify the origin of their conflict minerals or whether their conflict minerals came from recycled or scrap sources are required to provide a Conflict Minerals Report, but that report does not have to be audited for the first four years following the rule’s adoption for smaller reporting companies. We are creating new Form SD that requires every issuer to file its conflict minerals information for each applicable calendar year on May 31 of the following year. E. Agency Action To Minimize Effect on Small Entities 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 final rule, we considered the following alternatives: (1) Establishing different compliance or reporting requirements which take into account the resources available to small entities; (2) Exempting small entities from coverage of the disclosure requirements, or any part thereof; (3) Clarification, consolidation, or simplification of the rules compliance and reporting requirements for small entities; and (4) Use of performance standards rather than design standards. We considered but did not establish different compliance requirements for small entities. As discussed above in response to commentators’ suggestions that we exempt smaller reporting companies, we similarly believe that separate disclosure requirements for small entities that would differ from the final reporting requirements for other issuers, or exempting them from those PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 56361 requirements, would not achieve Congress’s objectives of Section 13(p). The final rule is 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. In any case, as several commentators noted, many smaller companies are part of larger companies’ supply chains and would need to provide conflict minerals information so that the larger companies could meet their obligations under the rule.917 However, under the final rule, issuers that proceed to step three but are unable to determine their conflict minerals originated in the Covered Countries or came from recycled or scrap sources, or unable to determine that the conflict minerals that originated in the Covered Countries financed or benefited armed groups in those countries are required to provide a Conflict Minerals Report, but that report does not have to be audited for the first four years following the rule’s adoption for smaller reporting companies and the issuers may describe the product with known origin as ‘‘DRC conflict undeterminable.’’ We clarified and simplified aspects of the final rule for all issuers, including small entities. For example, the final rule specifies and clarifies the objective for the audit of a Conflict Minerals Report for newly-mined conflict minerals. The final rule also requires an issuer to disclose the information in the body of and as an exhibit to its specialized disclosure report, which may simplify the process of submitting the conflict minerals disclosure and Conflict Minerals Report as compared with requiring disclosure in an issuer’s annual report on Form 10–K, Form 20– F, or Form 40–F. We have generally used design rather than performance standards in connection with the final rule because we believe design standards will better accomplish Congress’s objectives. The reasonable country of origin inquiry is the performance standard. In addition, the specific disclosure requirements in the final rule will promote consistent and comparable disclosure among all issuers with necessary conflict minerals. However, we are providing guidance regarding ‘‘contract to manufacture,’’ and ‘‘necessary to the functionality and production,’’ which we believe will allow issuers to comply with the statutory requirements in a manner more tailored to their individual circumstances. 917 See, e.g., letters from NAM I, SBA, Sen. Snowe et al., and WGC II. E:\FR\FM\12SER2.SGM 12SER2 56362 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations VI. Statutory Authority and Text of the Final Rule We are adopting the rule amendments contained in this document under the authority set forth in Sections 3(b), 12, 13, 15(d), 23(a), and 36 of the Exchange Act, as amended. List of Subjects in 17 CFR Parts 240 and 249b Reporting and recordkeeping requirements, Securities. In accordance with the foregoing, we are amending Title 17, Chapter II of the Code of Federal Regulations as follows: Section 249b.400 is also issued under secs. 1502, Pub. L. 111–203, 124 Stat. 2213. ■ 4. Add § 249b.400 to read as follows: § 249b.400 Form SD, specialized disclosure report. 2. If the deadline for filing this form occurs on a Saturday, Sunday or holiday on which the Commission is not open for business, then the deadline shall be the next business day. This Form shall be filed pursuant to § 240.13p–1 of this chapter by registrants that file reports with the Commission pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 and are required to disclose the information required by Section 13(p) under the Securities Exchange Act of 1934 and Rule 13p–1 (§ 240.13p–1) of this chapter. ■ 5. Add Form SD (referenced in § 249b.400) to read as follows: C. Inapplicability to Registered Investment Companies. or organization) lllllllllllllllllllll (Commission File Number) lllllllllllllllllllll (IRS Employer Identification No.) lllllllllllllllllllll (Address of principal executive offices) (Zip code) lllllllllllllllllllll (Name and telephone number, including area code, of the person to contact in connection with this report.) The General Rules and Regulations under the Act (17 CFR Part 240) contain certain general requirements which are applicable to reports on any form. These general requirements should be carefully read and observed in the preparation and filing of reports on this form. The disclosures required in Form SD shall not apply to investment companies required to file reports pursuant to Rule 30d–1 (17 CFR 270.30d–1) under the Investment Company Act of 1940. D. Preparation of Report. This form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report meeting the requirements of Rule 12b–12 (17 Note: The text of Form SD does not appear CFR 240.12b–12). The report shall in the Code of Federal Regulations. ■ 1. The authority citation for part 240 contain the number and caption of the is amended by adding an authority for applicable item, but the text of such UNITED STATES SECURITIES AND § 240.13p–1 in numerical order to read item may be omitted, provided the EXCHANGE COMMISSION as follows: answers thereto are prepared in the Washington, D.C. 20549 manner specified in Rule 12b–13 (17 Authority: 15 U.S.C. 77c, 77d, 77g, 77j, CFR 240.12b–13). All items that are not 77s, 77z–2, 77z–3, 77eee, 77ggg, 77jjj, 77kkk, FORM SD 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, required to be answered in a particular Specialized Disclosure report 78i, 78j, 78j–1, 78k, 78k–1, 78 l, 78m, 78n, report may be omitted and no reference 78n–1, 78o, 78o–4, 78o–8, 78p, 78q, 78s, lllllllllllllllllllll thereto need be made in the report. All 78u–5, 78w, 78x, 78dd(b), 78dd(c), 78 ll, (Exact name of the registrant as specified in instructions should also be omitted. 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– its charter) 3, 80b–4, 80b–11, 7201 et seq., and 8302; 18 lllllllllllllllllllll E. Application of General Rules and U.S.C. 1350; 12 U.S.C. 5221(e)(3), and Pub. Regulations. (State or other jurisdiction of incorporation PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 L. 111–203, Sec. 712, 124 Stat. 1376 (2010), unless otherwise noted. * * * * * Section 240.13p–1 is also issued under sec. 1502, Pub. L. 111–203, 124 Stat. 1376. * * * * * 2. Add § 240. 13p–1 to read as follows: ■ § 240.13p–1 Requirement of report regarding disclosure of registrant’s supply chain information regarding conflict minerals. Every 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, having conflict minerals that are necessary to the functionality or production of a product manufactured or contracted by that registrant to be manufactured, shall file a report on Form SD within the period specified in that Form disclosing the information required by the applicable items of Form SD as specified in that Form (17 CFR 249b.400). sroberts on DSK5SPTVN1PROD with RULES PART 249b—FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934 3. The authority citation for part 249b is amended by adding an authority for § 249b.400 to read as follows: ■ Authority: 15 U.S.C. 78a et seq., unless otherwise noted. * * * VerDate Mar<15>2010 * * 21:18 Sep 11, 2012 Jkt 226001 Check the appropriate box to indicate the rule pursuant to which this form is being filed, and provide the period to which the information in this form applies: ll Rule 13p–1 under the Securities Exchange Act (17 CFR 240.13p–1) for the reporting period from January 1 to December 31, llll. lllllllllllllllllllll GENERAL INSTRUCTIONS A. Rule as to Use of Form SD. This form shall be used for a report pursuant to Rule 13p–1 (17 CFR 240.13p–1) under the Exchange Act. B. Information to be Reported and Time for Filing of Reports. 1. Form filed under Rule 13p–1. A report on this Form shall be filed on EDGAR no later than May 31 after the end of the issuer’s most recent calendar year. PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 F. Signature and Filing of Report. The report must be signed by the registrant on behalf of the registrant by an executive officer. INFORMATION TO BE INCLUDED IN THE REPORT Section 1—Conflict Minerals Disclosure Item 1.01 Conflict Minerals Disclosure and Report (a) If any conflict minerals, as defined by paragraph (d)(3) of this item, are necessary to the functionality or production of a product manufactured by the registrant or contracted by the registrant to be manufactured and are required to be reported in the calendar year covered by the specialized disclosure report, the registrant must conduct in good faith a reasonable country of origin inquiry regarding those conflict minerals that is reasonably designed to determine whether any of the conflict minerals originated in the Democratic Republic of the Congo or an adjoining country, as E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations defined by paragraph (d)(1) of this item, or are from recycled or scrap sources, as defined by paragraph (d)(6) of this item. (b) Based on its reasonable country of origin inquiry, if the registrant determines that its necessary conflict minerals did not originate in the Democratic Republic of the Congo or an adjoining country or did come from recycled or scrap sources, or if it has no reason to believe that its necessary conflict minerals may have originated in the Democratic Republic of the Congo or an adjoining country, or if based on its reasonable country of origin inquiry the registrant reasonably believes that its necessary conflict minerals did come from recycled or scrap sources, the registrant must, in the body of its specialized disclosure report under a separate heading entitled ‘‘Conflict Minerals Disclosure,’’ disclose its determination and briefly describe the reasonable country of origin inquiry it undertook in making its determination and the results of the inquiry it performed. Also, the registrant must disclose this information on its publicly available Internet Web site and, under a separate heading in its specialized disclosure report entitled ‘‘Conflict Minerals Disclosure,’’ provide a link to that Web site. (c) Alternatively, based on its reasonable country of origin inquiry, if the registrant knows that any of its necessary conflict minerals originated in the Democratic Republic of the Congo or an adjoining country and are not from recycled or scrap sources, or has reason to believe that its necessary conflict minerals may have originated in the Democratic Republic of the Congo or an adjoining country and has reason to believe that they may not be from recycled or scrap sources, the registrant must exercise due diligence on the source and chain of custody of its conflict mineral, as discussed in paragraph (c)(1) of this item, that conforms to a nationally or internationally recognized due diligence framework, if such a framework is available for the conflict mineral. If, as a result of that due diligence, the registrant determines that its conflict minerals did not originate in the Democratic Republic of the Congo or an adjoining country or the registrant determines that its conflict minerals did come from recycled or scrap sources, a Conflict Minerals Report is not required, but the registrant must disclose its determination and briefly describe, in the body of its specialized disclosure report under a separate heading entitled ‘‘Conflict Minerals Disclosure,’’ the reasonable country of origin inquiry and the due diligence efforts it undertook in VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 making its determination and the results of the inquiry and due diligence efforts it performed. Also, the registrant must disclose this information on its publicly available Internet Web site and, under a separate heading in its specialized disclosure report entitled ‘‘Conflict Minerals Disclosure,’’ provide a link to that Web site. Otherwise, the registrant must file a Conflict Minerals Report as an exhibit to its specialized disclosure report and provide that report on its publicly available Internet Web site. Under a separate heading in its specialized disclosure report entitled ‘‘Conflict Minerals Disclosure,’’ the registrant must disclose that it has filed a Conflict Minerals Report and provide the link to its Internet Web site where the Conflict Minerals Report is publicly available. The Conflict Minerals Report must include the following information: (1) Due Diligence: A description of the measures the registrant has taken to exercise due diligence on the source and chain of custody of those conflict minerals; (i) The registrant’s due diligence must conform to a nationally or internationally recognized due diligence framework, if such a framework is available for the conflict mineral; (ii) Except as provided in paragraphs (c)(1)(iv), (c)(1)(v), and (c)(1)(vi) of this item, the due diligence measures shall include but not be limited to an independent private sector audit of the Conflict Minerals Report that is conducted in accordance with standards established by the Comptroller General of the United States and certified pursuant to paragraph (c)(1)(ii)(B) of this item, which shall constitute a critical component of the registrant’s due diligence in establishing the source and chain of custody of the necessary conflict minerals. (A) The objective of the audit of the Conflict Minerals Report is to express an opinion or conclusion as to whether the design of the registrant’s due diligence measures as set forth in, and with respect to the period covered by, the registrant’s Conflict Minerals Report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the registrant, and whether the registrant’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the registrant undertook. (B) The registrant’s Conflict Minerals Report must include a statement that the registrant has obtained an independent PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 56363 private sector audit of the Conflict Minerals Report, which shall constitute an audit certification; (C) As part of the Conflict Minerals Report, the registrant must identify the independent private sector auditor of the report, if the auditor is not identified in the audit report, and provide the audit report prepared by the auditor in accordance with standards established by the Comptroller General of the United States; (iii) Any registrant that manufactures products or contracts for products to be manufactured that are ‘‘DRC conflict undeterminable,’’ as defined in paragraph (d)(5) of this item, must disclose the steps it has taken or will take, if any, since the end of the period covered in its most recent prior Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups, including any steps to improve its due diligence. (iv) For the temporary period specified in Instruction 2 to Item 1.01, following its exercise of appropriate due diligence, a registrant with products that are ‘‘DRC conflict undeterminable’’ is not required to obtain an independent private sector audit of its Conflict Minerals Report regarding the conflict minerals that the registrant is unable to determine did not originate in the Democratic Republic of the Congo or an adjoining country, or that the registrant is unable to determine did not directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country. (v) If a nationally or internationally recognized due diligence framework does not exist for a necessary conflict mineral, until such a framework is developed, the registrant is required to exercise appropriate due diligence in determining the source and chain of custody of the necessary conflict mineral, including whether the conflict mineral is from recycled or scrap sources, without the benefit of a due diligence framework. If a nationally or internationally recognized due diligence framework becomes available for the necessary conflict mineral prior to June 30 of a calendar year, the registrant must use that framework in the subsequent calendar year. If the due diligence guidance does not become available until after June 30 of a calendar year, the registrant is not required to use that framework until the second calendar year after the framework becomes available to provide a full calendar year before implementation. If no nationally or internationally recognized due diligence framework is available for a particular conflict mineral from recycled or scrap sources, the due E:\FR\FM\12SER2.SGM 12SER2 sroberts on DSK5SPTVN1PROD with RULES 56364 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations diligence inquiry regarding the conflict mineral focuses on whether the conflict mineral is from recycled or scrap sources. In addition, an independent private sector audit will not be required for the section of the Conflict Minerals Report pertaining to the registrant’s due diligence on that recycled or scrap conflict mineral. (vi) If the registrant performs due diligence because it has a reason to believe that its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country, and as a result of that due diligence it determines that its conflict minerals did not originate in the Democratic Republic of the Congo or an adjoining country (or it determines as a result of that due diligence that its necessary conflict minerals did come from recycled or scrap sources), a Conflict Minerals Report and an audit is not required. (2) Product Description: Any registrant that manufactures products or contracts for products to be manufactured that have not been found to be ‘‘DRC conflict free,’’ as defined in paragraph (d)(4) of this item, must provide a description of those products, the facilities used to process the necessary conflict minerals in those products, the country of origin of the necessary conflict minerals in those products, and the efforts to determine the mine or location of origin with the greatest possible specificity. (i) For the temporary period specified in Instruction 2 to Item 1.01, following its exercise of appropriate due diligence, any registrant that manufactures products or contracts for products to be manufactured that are ‘‘DRC conflict undeterminable’’ must provide a description of those products, the facilities used to process the necessary conflict minerals in those products, if known, the country of origin of the necessary conflict minerals in those products, if known, and the efforts to determine the mine or location of origin with the greatest possible specificity; (ii) A registrant is not required to provide the information in paragraph (c)(2) of this item if the necessary conflict minerals in its product are solely from recycled or scrap sources because those products are considered ‘‘DRC conflict free.’’ (d) For the purposes of this item, 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 VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 human rights abuses in 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. (3) Conflict mineral. The term conflict mineral means: (i) Columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which are limited to tantalum, tin, and tungsten, unless the Secretary of State determines that additional derivatives are financing conflict in the Democratic Republic of the Congo or an adjoining country; 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 necessary to the functionality or production of that product that directly or indirectly finance or benefit armed groups, as defined in paragraph (d)(2) of this item, in the Democratic Republic of the Congo or an adjoining country. Conflict minerals that a registrant obtains from recycled or scrap sources, as defined in paragraph (d)(6) of this item, are considered DRC conflict free. (5) DRC conflict undeterminable. The term DRC conflict undeterminable means, with respect to any product manufactured or contracted to be manufactured by a registrant, that the registrant is unable to determine, after exercising due diligence as required by paragraph (c)(1) of this item, whether or not such product qualifies as DRC conflict free. (6) Conflict Minerals from Recycled or Scrap Sources. Conflict minerals are considered to be from recycled or scrap sources if they are from recycled metals, which are reclaimed end-user or postconsumer products, or scrap processed metals created during product manufacturing. Recycled metal includes excess, obsolete, defective, and scrap metal materials that contain refined or processed metals that are appropriate to recycle in the production of tin, tantalum, tungsten and/or gold. Minerals partially processed, unprocessed, or a bi-product from another ore will not be included in the definition of recycled metal. (7) Outside the Supply Chain. A conflict mineral is considered outside the supply chain after any columbitetantalite, cassiterite, and wolframite minerals, or their derivatives, have been smelted; any gold has been fully refined; or any conflict mineral, or its PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 derivatives, that have not been smelted or fully refined are located outside of the Democratic Republic of the Congo or an adjoining country. (8) Nationally or internationally recognized due diligence framework. The term ‘‘nationally or internationally recognized due diligence framework’’ means a nationally or internationally recognized due diligence framework established following due-process procedures, including the broad distribution of the framework for public comment, and is consistent with the criteria standards in the Government Auditing Standards established by the Comptroller General of the United States. Item 1.02 Exhibit Registrants shall file, as an exhibit to this Form SD, the Conflict Minerals Report required by Item 1.01. Instructions to Item 1.01 (1) A registrant that mines conflict minerals would not be considered to be manufacturing those minerals for the purpose of this item. The specialized disclosure report on Form SD shall cover a calendar year, regardless of the registrant’s fiscal year, and be due annually on May 31 for the prior calendar year. (2) During the first two calendar years following November 13, 2012 for all registrants and the first four calendar years for any smaller reporting company, a registrant will not be required to submit an audit report of its Conflict Minerals Report prepared by an independent private sector auditor with respect to the conflict minerals in any of its products that are ‘‘DRC conflict undeterminable.’’ Beginning with the third or fifth reporting calendar year, as applicable, a registrant with products manufactured or contracted to be manufactured that are ‘‘DRC conflict undeterminable,’’ must describe those products as having not been found to be ‘‘DRC conflict free’’ and must provide the information required in paragraph (c) of this item including the audit report. (3) A registrant that acquires or otherwise obtains control over a company that manufactures or contracts to manufacture products with conflict minerals necessary to the functionality or production of those products that previously had not been obligated to provide a specialized disclosure report with respect to its conflict minerals will be permitted to delay reporting on the products manufactured by the acquired company until the end of the first reporting calendar year that begins no E:\FR\FM\12SER2.SGM 12SER2 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations sooner than eight months after the effective date of the acquisition. (4) A registrant is not required to provide any information regarding its conflict minerals that, prior to January 31, 2013, are located outside of the supply chain, as defined by paragraph (d)(7) of this item. (5) A registrant must provide its required conflict minerals information for the calendar year in which the manufacture of a product that contains any conflict minerals necessary to the functionality or production of that product is completed, irrespective of whether the registrant manufactures the product or contracts to have the product manufactured. Section 2—Exhibits Item 2.01 Exhibits List below the following exhibit filed as part of this report. Exhibit 1.01—Conflict Minerals Report as required by Items 1.01 and 1.02 of this Form. SIGNATURES pursuant to Section 1504 of the DoddFrank Wall Street Reform and Consumer Protection Act relating to disclosure of payments by resource extraction issuers. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which requires the Commission to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. Section 13(q) requires a resource extraction issuer to provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government. In addition, Section 13(q) requires a resource extraction issuer to provide information regarding those payments in an interactive data format. Effective date: November 13, 2012. Compliance date: A resource extraction issuer must comply with the new rules and form for fiscal years ending after September 30, 2013. For the lllllllllllllllllllll first report filed for fiscal years ending (Registrant) after September 30, 2013, a resource lllllllllllllllllllll extraction issuer may provide a partial By (Signature and Title)* year report if the issuer’s fiscal year lllllllllllllllllllll began before September 30, 2013. The (Date) issuer will be required to provide a * Print name and title of the registrant’s report for the period beginning October signing executive officer under his or 1, 2013 through the end of its fiscal her signature. year. For any fiscal year beginning on or after September 30, 2013, a resource * * * * * extraction issuer will be required to file Dated: August 22, 2012. a report disclosing payments for the full By the Commission. fiscal year. DATES: Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the duly authorized undersigned. Elizabeth M. Murphy, Secretary. FOR FURTHER INFORMATION CONTACT: [FR Doc. 2012–21153 Filed 9–11–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34–67717; File No. S7–42–10] sroberts on DSK5SPTVN1PROD with RULES RIN 3235–AK85 Disclosure of Payments by Resource Extraction Issuers Securities and Exchange Commission. ACTION: Final rule. AGENCY: We are adopting new rules and an amendment to a new form SUMMARY: VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 Tamara Brightwell, Senior Special Counsel, Division of Corporation Finance, Elliot Staffin, Special Counsel, Office of International Corporate Finance, Division of Corporation Finance, or Eduardo Aleman, Special Counsel, Office of Rulemaking, Division of Corporation Finance, at (202) 551– 3290, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–4553. We are adopting new Rule 13q–1 1 and an amendment to new Form SD 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’).3 SUPPLEMENTARY INFORMATION: 1 17 CFR 240.13q–1. CFR 249.448. 3 15 U.S.C. 78a et seq. 2 17 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 56365 Table of Contents I. Background II. Final Rules Implementing Section 13(q) A. Summary of the Final Rules B. Definition of ‘‘Resource Extraction Issuer’’ and Application of the Disclosure Requirements 1. Proposed Rules 2. Comments on the Proposed Rules 3. Final Rules C. Definition of ‘‘Commercial Development of Oil, Natural Gas, or Minerals’’ 1. Proposed Rules 2. Comments on the Proposed Rules 3. Final Rules D. Definition of ‘‘Payment’’ 1. Types of Payments 2. The ‘‘Not De Minimis’’ Requirement 3. The Requirement To Provide Disclosure for ‘‘Each Project’’ 4. Payments by ‘‘a Subsidiary * * * or an Entity Under the Control of * * *’’ E. Definition of ‘‘foreign government’’ 1. Proposed Rules 2. Comments on the Proposed Rules 3. Final Rules F. Disclosure Required and Form of Disclosure 1. Annual Report Requirement 2. Exhibits and Interactive Data Format Requirements 3. Treatment for Purposes of Securities Act and Exchange Act G. Effective Date 1. Proposed Rules 2. Comments on the Proposed Rules 3. Final Rules III. Economic Analysis A. Introduction B. Benefits and Costs Resulting From the Mandatory Reporting Requirement 1. Benefits 2. Costs C. Benefits and Costs Resulting From Commission’s Exercise of Discretion 1. Definition of ‘‘Commercial Development of Oil, Natural Gas, or Minerals’’ 2. Types of Payments 3. Definition of ‘‘Not De Minimis’’ 4. Definition of ‘‘Project’’ 5. Annual Report Requirement 6. Exhibit and Interactive Data Requirement D. Quantified Assessment of Overall Economic Effects IV. Paperwork Reduction Act A. Background B. Summary of the Comment Letters C. Revisions to PRA Reporting and Cost Burden Estimates D. Revised PRA Estimate V. Final Regulatory Flexibility Act Analysis A. Reasons for, and Objectives of, the Final Rules B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Final Rules D. Reporting, Recordkeeping, and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities VI. Statutory Authority and Text of Final Rule and Form Amendments E:\FR\FM\12SER2.SGM 12SER2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 177 (Wednesday, September 12, 2012)]
[Rules and Regulations]
[Pages 56273-56365]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21153]



[[Page 56273]]

Vol. 77

Wednesday,

No. 177

September 12, 2012

Part II





Securities and Exchange Commission





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17 CFR Parts 240, 249, and 249b





Conflict Minerals; Disclosure of Payments by Resource Extraction 
Issuers; Final Rules

Federal Register / Vol. 77 , No. 177 / Wednesday, September 12, 2012 
/ Rules and Regulations

[[Page 56274]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-67716; File No. S7-40-10]
RIN 3235-AK84


Conflict Minerals

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting a new form and rule pursuant to Section 1502 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
relating to the use of conflict minerals. Section 1502 added Section 
13(p) to the Securities Exchange Act of 1934, which requires the 
Commission to promulgate rules requiring issuers with conflict minerals 
that are necessary to the functionality or production of a product 
manufactured by such person to disclose annually whether any of those 
minerals originated in the Democratic Republic of the Congo or an 
adjoining country. If an issuer's conflict minerals originated in those 
countries, Section 13(p) requires the issuer to submit a report to the 
Commission that includes a description of the measures it took to 
exercise due diligence on the conflict minerals' source and chain of 
custody. The measures taken to exercise due diligence must include an 
independent private sector audit of the report that is conducted in 
accordance with standards established by the Comptroller General of the 
United States. Section 13(p) also requires the issuer submitting the 
report to identify the auditor and to certify the audit. In addition, 
Section 13(p) requires the report to 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. Section 13(p) 
requires the information disclosed by the issuer to be available to the 
public on its Internet Web site.

DATES: Effective Date: November 13, 2012.
    Compliance Date: Issuers must comply with the final rule for the 
calendar year beginning January 1, 2013 with the first reports due May 
31, 2014.

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: We are adopting new Rule 13p-1 \1\ and new 
Form SD \2\ under the Securities Exchange Act of 1934 (``Exchange 
Act'').\3\
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    \1\ 17 CFR 240.13p-1.
    \2\ 17 CFR 249.448.
    \3\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Background and Summary
    A. Statutory Provision
    B. Summary of the Proposed Rules
    C. Summary of Comments on the Proposed Rules
    D. Summary of Changes to the Final Rule
    E. Flowchart Summary of the Final Rule
II. Discussion of the Final Rule
    A. ``Conflict Minerals'' Definition
    1. Proposed Rules
    2. Comments on the Proposed Rules
    3. Final Rule
    B. Step One--Issuers Covered by the Conflict Mineral Provision
    1. Issuers That File Reports Under the Exchange Act
    a. Proposed Rules
    b. Comments on the Proposed Rules
    i. Issuers that File Reports Under Sections 13(a) and 15(d) of 
the Exchange Act
    ii. Smaller Reporting Companies
    iii. Foreign Private Issuers
    c. Final Rule
    2. ``Manufacture'' and ``Contract To Manufacture'' Products
    a. Proposed Rules
    b. Comments on the Proposed Rules
    i. ``Manufacture''
    ii. ``Contract To Manufacture''
    c. Final Rule
    i. ``Manufacture''
    ii. ``Contract To Manufacture''
    3. Mining Issuers as ``Manufacturing'' Issuers
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    4. When Conflict Minerals Are ``Necessary'' to a Product
    a. Proposed Rules
    b. Comments on the Proposed Rules
    i. ``Necessary to the Functionality''
    ii. ``Necessary to the Production''
    iii. De Minimis Threshold
    c. Final Rule
    i. Contained in the Product
    ii. Intentionally Added
    iii. ``Necessary to the Functionality''
    iv. ``Necessary to the Production''
    v. De Minimis Threshold
    C. Location, Status, and Timing of Conflict Minerals Information
    1. Location of Conflict Minerals Information
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    2. ``Filing'' of Conflict Minerals Information
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    3. Uniform Reporting Period
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    4. Time Period for Providing Conflict Minerals Information
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    5. Conflict Minerals Already in the Supply Chain
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    6. Timing of Implementation
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    D. Step Two--Determining Whether Conflict Minerals Originated in 
the Democratic Republic of the Congo or Adjoining Countries and the 
Resulting Disclosure
    1. Reasonable Country of Origin Inquiry
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    2. Disclosures in the Body of the Specialized Disclosure Report
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    E. Step Three--Conflict Minerals Report's Content and Supply 
Chain Due Diligence
    1. Content of the Conflict Minerals Report
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    2. Due Diligence Standard in the Conflict Minerals Report
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    3. Independent Private Sector Audit Requirements
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    i. Auditing Standards
    ii. Auditor Independence
    iii. Audit Objective
    4. Recycled and Scrap Minerals
    a. Proposed Rules
    b. Comments on the Proposed Rules
    c. Final Rule
    i. Definition of ``Recycled and Scrap Sources''
    ii. Due Diligence for Conflict Minerals From ``Recycled and 
Scrap Sources''
    F. Other Matters
III. Economic Analysis
    A. Introduction
    B. Benefits and Costs Resulting From the Mandatory Reporting 
Requirement
    1. Benefits
    2. Cost Estimates in the Comment Letters
    a. General Comments
    b. Specific Comments
    i. Manufacturing Industry Association Comments
    ii. Electronic Interconnect Industry Association Comments
    iii. University Group Comments
    iv. Environmental Consultancy Company Comments
    v. Other Specific Comments
    C. Benefits and Costs Resulting From Commission's Exercise of 
Discretion

[[Page 56275]]

    1. Reasonable Country of Origin Inquiry
    2. Information in the Specialized Disclosure Report
    3. ``DRC Conflict Undeterminable''
    4. ``Contract To Manufacture''
    5. Nationally or Internationally Recognized Due Diligence 
Framework (Including Gold)
    6. Liability for the Audit and Audit Certifications
    7. Audit Objective
    8. Conflict Minerals From Recycled and Scrap Sources
    9. Conflict Minerals ``Outside the Supply Chain''
    10. Conflict Mineral Derivatives
    11. Method and Timing of Disclosure on Form SD
    12. ``Necessary to the Functionality or Production''
    13. Categories of Issuers
    14. Not Including Mining Issuers as Manufacturing Issuers
    D. Quantified Assessment of Overall Economic Effects
IV. Paperwork Reduction Act
    A. Background
    B. Summary of the Comment Letters
    C. Revisions to PRA Reporting and Cost Burden Estimates
    1. Estimate of Conducting Due Diligence, Including the Audit
    2. Estimate of Preparing the Disclosure
    3. Revised PRA Estimate
V. Final Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Final Action
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Rule
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority and Text of the Final Rule

I. Background and Summary

A. Statutory Provision

    On December 15, 2010, we proposed a number of amendments to our 
rules \4\ to implement the requirements of Section 1502 (``Conflict 
Minerals Statutory Provision'') of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Act''),\5\ relating to new disclosure 
and reporting obligations by issuers concerning ``conflict minerals'' 
\6\ that originated in the Democratic Republic of the Congo (``DRC'') 
or an adjoining country \7\ (together with the DRC, the ``Covered 
Countries'').\8\ Section 1502 amended the Exchange Act by adding new 
Section 13(p).\9\ New Exchange Act Section 13(p) requires us to 
promulgate disclosure and reporting regulations regarding the use of 
conflict minerals from the Covered Countries.\10\
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    \4\ Conflict Minerals, Release No. 34-63547 (Dec. 15, 2010) [75 
FR 80948] (the ``Proposing Release'').
    \5\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \6\ 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 Democratic 
Republic of the Congo or an adjoining country.
    \7\ 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, which presently includes Angola, 
Burundi, Central African Republic, the Republic of the Congo, 
Rwanda, South Sudan, Tanzania, Uganda, and Zambia.
    \8\ In the Proposing Release, we referred to the DRC and its 
adjoining countries as the ``DRC Countries.'' In this release, we 
use the term ``Covered Countries'' instead. Both terms have the same 
meaning. For consistency within this release, there are instances 
when we refer to the text of the Proposing Release and use the term 
``Covered Countries'' instead of ``DRC Countries,'' which was used 
in the Proposing Release.
    \9\ 15 U.S.C. 78m(p).
    \10\ See Exchange Act Section 13(p)(1)(A). This Exchange Act 
Section requires that the Commission promulgate rules no later than 
270 days after the date of enactment.
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    As reflected in the title of Section 1502(a), which states the 
``Sense of the Congress on Exploitation and Trade of Conflict Minerals 
Originating in the Democratic Republic of the Congo,'' in enacting the 
Conflict Minerals Statutory Provision, Congress intended to further the 
humanitarian goal of ending the extremely violent conflict in the DRC, 
which has been partially financed by the exploitation and trade of 
conflict minerals originating in the DRC. This section explains that 
the exploitation and trade of conflict minerals by armed groups is 
helping to finance the conflict and that the emergency humanitarian 
crisis in the region warrants the disclosure requirements established 
by Exchange Act Section 13(p).\11\
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    \11\ See Section 1502(a) of the Act (``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).'').
---------------------------------------------------------------------------

    Similarly, the legislative history surrounding the Conflict 
Minerals Statutory Provision, and earlier legislation addressing the 
trade in conflict minerals, reflects Congress's motivation to help end 
the human rights abuses in the DRC caused by the conflict.\12\ Other 
parts of the Conflict Minerals Statutory Provision also point to the 
fact that Congress intended to promote peace and security.\13\ For 
example, the Conflict Minerals Statutory Provision states that once 
armed groups no longer continue to be directly involved and benefiting 
from commercial activity involving conflict minerals, the President may 
take action to terminate the provision.\14\ To accomplish the goal of 
helping end the human rights abuses in the DRC caused by the conflict, 
Congress chose to use the securities laws disclosure requirements to 
bring greater public awareness of the source of issuers' conflict 
minerals and to promote the exercise of due diligence on conflict 
mineral supply chains. By doing so, we

[[Page 56276]]

understand Congress's main purpose to have been to attempt to inhibit 
the ability of armed groups in the Covered Countries to fund their 
activities by exploiting the trade in conflict minerals. Reducing the 
use of such conflict minerals is intended to help reduce funding for 
the armed groups contributing to the conflict and thereby put pressure 
on such groups to end the conflict. The Congressional object is to 
promote peace and security in the Covered Countries.\15\
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    \12\ The Congo conflict has been an issue raised in the United 
States Congress for a number of years. For example, in the 109th 
Congress, then-Senator Sam Brownback, along with Senator Richard J. 
Durbin and then-Senator Barack Obama, among others, co-sponsored S. 
2125, the Democratic Republic of Congo Relief, Security, and 
Democracy Promotion Act of 2006. See Public Law 109-456 (Dec. 22, 
2006) (stating that the National Security Strategy of the United 
States, dated September 17, 2002, concludes that disease, war, and 
desperate poverty in Africa threatens the United States' core value 
of preserving human dignity and threatens the United States' 
strategic priority of combating global terror). The legislation 
committed the United States to work toward peace, prosperity, and 
good governance in the Congo. As another example, in the 110th 
Congress, then-Senator Brownback and Senator Durbin introduced S. 
3058, the Conflict Coltan and Cassiterite Act, which would have 
prohibited the importation of certain products containing columbite-
tantalite or cassiterite that was mined or extracted in the DRC by 
groups that committed serious human rights and other violations. See 
S. 3058, 110th Cong. (2008). As a further example, in the 111th 
Congress, then-Senator Brownback introduced S. 891, the Congo 
Conflict Minerals Act of 2009. See S. 891, 111th Cong. (2009). This 
bill would have required U.S.-registered companies selling products 
using conflict minerals to disclose annually to the Commission the 
country of origin of these minerals and, if the country of origin 
was one of the Covered Countries, to disclose the mine of origin. 
Additionally, later in the 111th Congress, then-Senator Brownback 
sponsored S.A. 2707, which was similar to S. 891. See S.A. 2707, 
111th Cong. (2009). We note also that the Democratic Republic of 
Congo Relief, Security, and Democracy Promotion Act of 2006 states 
that the National Security Strategy of the United States, dated 
September 17, 2002, concludes that disease, war, and desperate 
poverty in Africa threatens the United States' core value of 
preserving human dignity and threatens the United States' strategic 
priority of combating global terror. See Pub. L. 109-456 (Dec. 22, 
2006). See also U.S. Gov't Accountability Office, GAO-12-763, 
Conflict Minerals Disclosure rule: SEC's Actions and Stakeholder-
Developed Initiatives (Jul. 2012) (discussing the Democratic 
Republic of Congo Relief, Security, and Democracy Promotion Act of 
2006), available at https://www.gao.gov/products/GAO-12-763.
    \13\ See Section 1502(d)(2)(A) of the Act (stating that two 
years after enactment of the Act and annually thereafter, ``the 
Comptroller General of the United States shall submit to the 
appropriate congressional committees a report that includes'' an 
``assessment of the effectiveness'' of the Conflict Minerals 
Statutory Provision ``in promoting peace and security'' in the 
Covered Countries).
    \14\ See Exchange Act Section 13(p)(4) (stating that the 
provision ``shall terminate on the date on which 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'').
    \15\ See Exchange Act Section 1502(c)(1)(B)(i) (stating that the 
Secretary of State, in consultation with the Administrator of the 
United States Agency for International Development, shall submit to 
Congress a plan to ``promote peace and security'' in the Covered 
Countries).
---------------------------------------------------------------------------

    Congress chose to use the securities laws disclosure requirements 
to accomplish its goals. In addition, one of the co-sponsors of the 
provision noted in a floor statement that the provision will ``enhance 
transparency'' and ``also help American consumers and investors make 
more informed decisions.'' \16\ Also, as discussed throughout the 
release, a number of commentators on our rule proposal, including co-
sponsors of the legislation and other members of Congress, have 
indicated that the Conflict Minerals Statutory Provision will provide 
information that is material to an investor's understanding of the 
risks in an issuer's reputation and supply chain.\17\
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    \16\ See 156 Cong. Rec. S3976 (daily ed. May 19, 2010) 
(statement of Sen. Feingold) (``Mr. President, I am pleased to be an 
original cosponsor of two amendments to the Restoring American 
Financial Stability Act that seek to ensure there is greater 
transparency around how international companies are addressing 
issues of foreign corruption and violent conflict that relate to 
their business. Creating 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.'').
    \17\ See, e.g., letters from Aditi Mohapatra of Calvert Asset 
Management Company, Inc. on behalf of 49 investors, including the 
Social Investment Forum and Interfaith Center of Corporate 
Responsibility (Mar. 2, 2011) (``SIF I''); Boston Common Asset 
Management, LLC, Calvert Asset Management Co., Inc., Interfaith 
Center on Corporate Responsibility, Jesuit Conference of the United 
States, Marianist Province of the US, Mercy Investment Services, 
Inc., Missionary Oblates of Mary Immaculate, Responsible Sourcing 
Network, Sustainalytics, Trillium Asset Management, and Tri-State 
Coalition for Responsible Investment (Feb. 1, 2012) (``SIF II''); 
Calvert Investments (Oct. 18, 2011) (``Calvert''); General Board of 
Pension and Health Benefits of The United Methodist Church (Mar. 7, 
2011) (``Methodist Pension''); State Board of Administration of 
Florida (Feb. 3, 2011) (``FRS''); and Teachers Insurance and Annuity 
Association and College Retirement Equities Fund (Mar. 2, 2011) 
(``TIAA-CREF''). See also letters from Catholic Relief Services 
(Feb. 8, 2011) (``CRS I'') (``We submit these comments with the hope 
the SEC will consider the need of investors to access information to 
make sound business decisions that reflect both their social and 
their financial concerns.''); Enough Project (Mar. 31, 2011) 
(``Enough Project II'') (stating that advancing the ``goal of 
resolving a humanitarian crisis that continues to cause countless 
deaths and unimaginable suffering'' is ``of great interest to many, 
including investors''); Senator Richard J. Durbin and Representative 
Jim McDermott (Feb. 28, 2011) (``Sen. Durbin/Rep. McDermott'') 
(suggesting that the provision's purposes were both to end conflict 
in the DRC and to provide current information for investors, and the 
latter purpose is identical to the purpose of requiring the 
disclosure of other information in an issuer's the periodic reports) 
and Senator Patrick Leahy, Senator Christopher Coons, Congressman 
Howard Berman, Congressman Jim McDermott, Congressman Donald Payne, 
Congressman Gregory Meeks, and Congressmember Karen Bass (Feb. 16, 
2012) (``Sen. Leahy et al.'') (asserting that an issuer's conflict 
minerals information is ``critical to both investors and to capital 
formation'' because ``when a publicly traded company relies on an 
unstable black market for inputs essential to manufacturing its 
products it is of deep material interest to investors'').
---------------------------------------------------------------------------

    Exchange Act Section 13(p) mandates that we promulgate regulations 
requiring that a ``person described'' \18\ disclose annually whether 
any ``conflict minerals'' that are ``necessary to the functionality or 
production of a product manufactured by such person'' \19\ originated 
in the Covered Countries, and make that disclosure publicly available 
on the issuer's Internet Web site.\20\ If such a person's conflict 
minerals originated in the Covered Countries, that person must submit a 
report (``Conflict Minerals Report'') to us that includes a description 
of the measures taken by the person to exercise due diligence on the 
minerals' source and chain of custody.\21\ Under Exchange Act Section 
13(p), the measures 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 our promulgated rules, 
in consultation with the Secretary of State.\22\ The person submitting 
the Conflict Minerals Report must also identify the independent private 
sector auditor \23\ and certify the independent private sector 
audit.\24\
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    \18\ The term ``person described'' is defined in Exchange Act 
Section 13(p)(2) as one who is required to file reports under 
Exchange Act Section 13(p)(1)(A), and for whom the conflict minerals 
are necessary to the functionality or production of a product 
manufactured by such person. Exchange Act Section 13(p)(1)(A) does 
not provide a definition but refers back to Exchange Act Section 
13(p)(2).
    \19\ Exchange Act Section 13(p)(2)(B).
    \20\ 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)).
    \21\ See Exchange Act Section 13(p)(1)(A)(i).
    \22\ 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 Statutory Provision 
assigns certain responsibilities to other federal agencies. In 
developing our proposed rules, our staff has consulted with the 
staff of these other agencies in developing our proposed rules. 
These agencies include, including the Government Accountability 
Office (the ``GAO''), which is headed by the Comptroller General of 
the United States, and the United States Department of State.
    \23\ 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)'').
    \24\ 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.''
---------------------------------------------------------------------------

    Further, according to Exchange Act Section 13(p), the Conflict 
Minerals Report must include ``a description of the products 
manufactured or contracted to be manufactured that are not DRC conflict 
free,'' \25\ 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.'' \26\ Also, Exchange Act Section 13(p) dictates that each 
person described ``shall make available to the public on the Internet 
Web site of such person'' the conflict minerals information required by 
Exchange Act Section 13(p)(1)(A).\27\
---------------------------------------------------------------------------

    \25\ The term ``DRC conflict free'' is defined in Exchange Act 
Section 13(p)(1)(A)(ii) and Exchange Act Section 13(p)(1)(D). 
Exchange Act Section 13(p)(1)(A)(ii) defines ``DRC conflict free'' 
as ``the products that do not contain minerals that directly or 
indirectly finance or benefit armed groups in the'' Covered 
Countries. Similarly, Exchange Act Section 13(p)(1)(D) defines ``DRC 
conflict free'' as products that do ``not contain conflict minerals 
that directly or indirectly finance or benefit armed groups in the'' 
Covered Countries. We note that the definitions in the two sections 
are slightly different in that Exchange Act Section 13(p)(1)(A)(ii) 
refers to ``minerals'' without any limitation, whereas Exchange Act 
Section 13(p)(1)(D) refers specifically to ``conflict minerals.'' We 
believe, based on the totality of the Conflict Minerals Statutory 
Provision, that ``DRC conflict free'' is meant to refer only to 
``conflict minerals,'' as that term is defined in Section 1502(e)(4) 
of the Act, that directly or indirectly finance or benefit armed 
groups in the Covered Countries, and not to all minerals that 
directly or indirectly finance or benefit armed groups in the 
Covered Countries.
    \26\ See Exchange Act Section 13(p)(1)(A)(ii).
    \27\ See Exchange Act Section 13(p)(1)(E).
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B. Summary of the Proposed Rules

    We proposed rules to apply to certain issuers that file reports 
with us under Exchange Act Sections 13(a) \28\ or 15(d).\29\ Based on 
the Conflict Minerals Statutory Provision, we proposed a disclosure 
requirement for conflict minerals that would divide into three

[[Page 56277]]

steps. The first step would have required an issuer to determine 
whether it was subject to the Conflict Minerals Statutory Provision. An 
issuer would have only been subject to the Conflict Minerals Statutory 
Provision if it was a reporting issuer for which conflict minerals were 
``necessary to the functionality or production of a product 
manufactured'' \30\ or contracted to be manufactured by such person. If 
an issuer did not meet that definition, the issuer was not required to 
take any action, make any disclosures, or submit any reports. If, 
however, an issuer met this definition, that issuer would move to the 
second step.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78m(a).
    \29\ 15 U.S.C. 78o(d).
    \30\ Exchange Act Section 13(p)(2).
---------------------------------------------------------------------------

    The second step would have required the issuer to determine after a 
reasonable country of origin inquiry whether its conflict minerals 
originated in the Covered Countries. If the issuer determined that its 
conflict minerals did not originate in the Covered Countries, the 
issuer was to disclose this determination and the reasonable country of 
origin inquiry it used in reaching this determination in the body of 
its annual report. The issuer also would have been required to provide 
on its Internet Web site its determination that its conflict minerals 
did not originate in the Covered Countries, disclose in its annual 
report that the disclosure was posted on its Internet Web site, and 
disclose the Internet address on which this disclosure was posted. It 
would further have been required to maintain records demonstrating that 
its conflict minerals did not originate in the Covered Countries. Such 
an issuer would not have any further disclosure or reporting 
obligations with regard to its conflict minerals.
    If, however, the issuer determined that its conflict minerals did 
originate in the Covered Countries, if it was unable to conclude that 
its conflict minerals did not originate in the Covered Countries, or if 
it determined that its conflict minerals were from recycled or scrap 
sources, the issuer would have been required to disclose this 
conclusion in its annual report. Also, the issuer would have been 
required to note that the Conflict Minerals Report, which included the 
certified independent private sector audit report, was furnished as an 
exhibit to the annual report; furnish the Conflict Minerals Report; 
make available the Conflict Minerals Report on its Internet Web site; 
disclose that the Conflict Minerals Report was posted on its Internet 
Web site; and provide the Internet address of that site. This issuer 
would then have moved to the third step.
    Finally, the third step would have required an issuer with conflict 
minerals that originated in the Covered Countries, or an issuer that 
was unable to conclude that its conflict minerals did not originate in 
the Covered Countries, to furnish a Conflict Minerals Report. The 
proposed rules would have required an issuer to provide, in its 
Conflict Minerals Report, a description of the measures it had taken to 
exercise due diligence on the source and chain of custody of its 
conflict minerals, which would have included a certified independent 
private sector audit of the Conflict Minerals Report that identified 
the auditor and was furnished as part of the Conflict Minerals Report. 
Further, the issuer would have been required to include in the Conflict 
Minerals Report a description of its products manufactured or 
contracted to be manufactured containing conflict minerals that it was 
unable to determine did not ``directly or indirectly finance or benefit 
armed groups'' in the Covered Countries. The issuer would identify such 
products by describing them in the Conflict Mineral Report as not ``DRC 
conflict free.'' \31\ If any of its products contained conflict 
minerals that did not ``directly or indirectly finance or benefit'' 
these armed groups, the issuer would be permitted to describe such 
products in the Conflict Mineral Report as ``DRC conflict free'' 
whether or not the minerals originated in the Covered Countries. In 
addition, the issuer would have been required to disclose in the 
Conflict Minerals Report the facilities used to process those conflict 
minerals, those conflict minerals' country of origin, and the efforts 
to determine the mine or location of origin with the greatest possible 
specificity.
---------------------------------------------------------------------------

    \31\ The definition of the term ``DRC conflict free'' in our 
proposed rules would be identical to the definition in Exchange Act 
Section 13(p)(1)(D).
---------------------------------------------------------------------------

    The proposed rules would have allowed for different treatment of 
conflict minerals from recycled and scrap sources. An issuer with such 
conflict minerals would have been required to furnish a Conflict 
Minerals Report that described the measures taken to exercise due 
diligence in determining that its conflict minerals were from recycled 
or scrap sources and to provide the reasons for believing, based on its 
due diligence, that its conflict minerals were from recycled or scrap 
sources. Such an issuer would also have been required to obtain a 
certified independent private sector audit of the Conflict Minerals 
Report.

C. Summary of Comments on the Proposed Rules

    The Proposing Release requested comment on a variety of significant 
aspects of the proposed rules. The original comment period in the 
Proposing Release was to end on January 31, 2011. Prior to that date, 
however, we received requests for an extension of time for public 
comment on the proposal to allow for, among other matters, the 
collection of information and to improve the quality of responses.\32\ 
On January 28, 2011, we extended the comment period for the proposal 
from January 31, 2011 to March 2, 2011.\33\ Additionally, in response 
to suggestions from commentators,\34\ we held a public roundtable on 
October 18, 2011 (``SEC Roundtable'') at which invited participants, 
including investors, affected issuers, human rights organizations, and 
other stakeholders, discussed their views and provided input on issues 
related to our required rulemaking.\35\ In conjunction with the SEC 
Roundtable, we requested further comment.\36\ We received approximately 
420 individual comment letters in response to the proposed rules, with 
approximately 145 of those letters being received after the SEC 
Roundtable, and over 40 letters regarding the Conflict Minerals 
Statutory Provision prior to the

[[Page 56278]]

proposed rules.\37\ We also received approximately 13,400 form letters 
from those supporting ``promptly'' implementing a ``strong'' final rule 
regarding the Conflict Minerals Statutory Provision,\38\ with 
approximately 9,700 of those letters requesting some specific 
requirements in the final rule,\39\ and two petitions supporting the 
proposed amendments with an aggregate of over 25,000 signatures.
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    \32\ See letters from Advanced Medical Technology Association, 
Aerospace Industries Association, American Association of Exporters 
and Importers, American Automotive Policy Council, Business Alliance 
for Customs Modernization, IPC--Association Connecting Electronics 
Industries Joint Industry Group, National Association of 
Manufacturers, National Electrical Manufacturers Association, 
National Foreign Trade Council, National Retail Federation, Retail 
Industry Leaders Association, Semiconductor Equipment and Materials 
International, TechAmerica, USA*ENGAGE, and U.S. Chamber of Commerce 
(Dec. 16, 2010) (``Advanced Medical Technology Association et 
al.''); Jewelers Vigilance Committee, American Gem Society, 
Manufacturing Jewelers & Suppliers of America, Jewelers of America, 
and Fashion Jewelry & Accessories Trade Association (Jan. 10, 2011) 
(``JVC et al. I''); National Mining Association (Jan. 3, 2011) 
(``NMA I''); National Stone, Sand Gravel Association (Jan. 13, 2011) 
(``NSSGA''); Representative Spencer Bachus (Jan. 25, 2011) (``Rep. 
Bachus''); Robert D. Hormats, Under Secretary of State for Economic, 
Energy, and Agricultural Affairs, and Maria Otero, Democracy and 
Global Affairs (Jan. 25, 2011) (``State I''); and World Gold Council 
(Jan. 7, 2011) (``WGC I'').
    \33\ Conflict Minerals, Release No. 34-63793 (Jan. 28, 2011) [76 
FR 6110].
    \34\ See, e.g., letter from United States Chamber of Commerce 
(Feb. 28, 2011) (``Chamber I'').
    \35\ See Press Release, Securities and Exchange Commission, SEC 
Announces Agenda and Panelists for Roundtable on Conflict Minerals 
(Oct. 14, 2011), available at https://www.sec.gov/news/press/2011/2011-210.htm.
    \36\ Roundtable on Issues Relating to Conflict Minerals, Release 
No. 34-65508 (Oct. 7, 2011) [76 FR 63573].
    \37\ To facilitate public input on rulemaking required by the 
Act, the Commission provided a series of email links, organized by 
topic, on its Web site at https://www.sec.gov/spotlight/regreformcomments.shtml. The comments relating to the Conflict 
Minerals Statutory Provision are located at https://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml (``Pre-Proposing Release Web site''). These 
comments were received before we made public the Proposing Release 
or proposed rules and are separate from the comments we received 
after we published the Proposing Release and proposed rules, which 
are located at https://www.sec.gov/comments/s7-40-10/s74010.shtml 
(``Post-Proposing Release Web site''). Many commentators provided 
comments on both the pre- and post-Proposing Release Web sites. 
Generally, our references to comment letters refer to the comments 
on the post-Proposing Release Web site. When we refer to a comment 
letter from the Pre-Proposing Release Web site, however, we make 
that clear in the footnote.
    \38\ See form letters A (urging us to institute ``strong 
rules''), B (urging that the final rule not allow the legislation's 
intent to be compromised and to keep the ``LEGISLATION STRONG'' 
(emphasis in original)), E (indicating ``deep disappointment and 
concern'' that the final rule had not been adopted, and urging us to 
``release a strong, final rule''), F (urging us to ``promptly issue 
strong final regulations''), G (stating that delays in adopting a 
final rule will ``significantly hinder progress toward a legitimate 
mining sector in eastern'' DRC, and urging us to ``urgently release 
final regulations on conflict minerals''), H (calling on us to 
``release a strong, final rule as soon as possible''), and I (urging 
us to ``issue strong final rules as soon as possible'').
    \39\ See form letters A (stating that the final rule should, 
among other requirements, include gold and metals mining companies, 
apply to all possible companies, require that conflict minerals 
disclosures be filed, include strong and defined due diligence, and 
define recycled metals as 100% post-consumer metals), G (stating 
that the final rule should ``incorporate the UN Group of Experts and 
OECD due diligence guidelines' concept of mitigation''), H (stating 
that the final rule should, among other requirements, reject any 
delays or phased-in implementation, adopt the ``OECD due diligence 
standard,'' have equal reporting for all conflict minerals, include 
all companies regardless of size, define terms narrowly, define the 
reasonable country of origin inquiry, have issuers file reports, and 
not include a de minimis category for conflict minerals), and I 
(stating that the final rule must, among other requirements, reject 
an indeterminate origin category, define the reasonable country of 
origin standard, and adopt the ``OECD Due Diligence standard'').
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    The comment letters came from corporations, professional 
associations, human rights and public policy groups, bar associations, 
auditors, institutional investors, investment firms, United States and 
foreign government officials,\40\ and other interested parties and 
stakeholders. In general, most commentators supported the human rights 
objectives of the Conflict Minerals Statutory Provision and the 
proposed rules.\41\ As discussed in greater detail throughout this 
release, however, many of these commentators provided recommendations 
for revising the proposed rules and suggested modifications or 
alternatives to the proposal. Only a few commentators generally opposed 
the Conflict Minerals Statutory Provision and/or our adoption of any 
rule based on the provision.\42\ One commentator recommended that the 
proposed rules be withdrawn entirely ``and that the potential costs, 
supply chain complexities, and other practical obstacles to 
implementation be more fully analyzed before new rules are proposed.'' 
\43\
---------------------------------------------------------------------------

    \40\ Among the foreign officials to provide comment letters was 
the DRC's Minister of Mines. See letters from Martin Kabwelulu, 
Minister of Mines, Democratic Republic of the Congo (July 15, 2011) 
(``DRC Ministry of Mines I''); Martin Kabwelulu, Minister of Mines, 
Democratic Republic of the Congo (Oct. 15, 2011) (``DRC Ministry of 
Mines II''); and Martin Kabwelulu, Minister of Mines, Democratic 
Republic of the Congo (Nov. 8, 2011) (``DRC Ministry of Mines 
III'').
    \41\ See, e.g., letters from Advanced Medical Technology 
Association, American Apparel & Footwear Association, American 
Association of Exporters and Importers, Consumer Electronics 
Association, Consumer Electronics Retailers Coalition, Emergency 
Committee for American Trade, IPC-Association Connecting Electronics 
Industries, Joint Industry Group, National Association of 
Manufacturers, National Foreign Trade Council, National Retail 
Federation, Retail Industry Leaders Association, TechAmerica, and 
USA Engage (Mar. 2, 2011) (``Industry Group Coalition I'') (stating 
its ``support [for] the underlying goal of Sec. 1502 to prevent the 
atrocities occurring'' in the Covered Countries); American Bar 
Association (Jun. 20, 2011) (``ABA'') (stating that it ``supports 
and endorses the humanitarian efforts to end the armed conflict in 
the eastern Democratic Republic of the Congo''); Chamber I (stating 
that it ``supports the fundamental goal, as embodied in Section 1502 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(`Dodd-Frank Act'), of preventing the exploitation of conflict 
minerals for the purpose of financing human rights violations within 
the Democratic Republic of Congo''); National Association of 
Manufacturers (Mar. 2, 2011) (``NAM I'') (stating its ``support the 
underlying goal of Sec. 1502 to address the atrocities occurring in 
the'' Covered Countries); and World Gold Council (Feb. 28, 2011) 
(``WGC II'') (stating that it ``believes it is important to state 
[its] support for the humanitarian goals of Section 1502'').
    \42\ See, e.g., letters from Michael Beggs (Jan. 12, 2012) 
(``Beggs''), Charles Blakeman (Oct. 9, 2011) (``Blakeman I''), Gary 
P. Bradley (Sept. 19, 2011) (``Bradley''), Joseph Cummins (Dec. 20, 
2011) (``Cummins''), Walter Grail (Oct. 1, 2011) (``Grail''), 
Kirtland C. Griffin (Jun. 16, 2011) (``Griffin''), Clark Grey Howell 
(Sep. 20, 2011) (``Howell''), Edward Lynch (Dec. 16, 2011) 
(``Lynch''), and Melanie Matthews (Sep. 19, 2011) (``Matthews'').
    \43\ See letter from Chamber I. See also letters from Chamber II 
(reiterating the withdrawal request from its initial comment letter 
and requesting we open a second comment period regarding the 
proposed rules), Chamber III (requesting that we allow companies 
additional time for commenting on the proposed rules), and United 
States Chamber of Commerce (Jul. 11, 2012) (``Chamber IV'') 
(requesting that we re-propose the rule and re-open the comment 
period).
---------------------------------------------------------------------------

    Also, although they may have offered their support of the human 
rights concerns underlying the Conflict Minerals Statutory Provision 
and the proposed rules, some commentators were concerned about 
potentially negative effects of the Conflict Minerals Statutory 
Provision and the resulting rule. In this regard, some of those 
commentators argued that the provision and/or rule could lead to a de 
facto boycott or embargo on conflict minerals from the Covered 
Countries,\44\ other of these commentators suggested that the

[[Page 56279]]

provision and/or rule could compel speech in a manner that violates the 
First Amendment,\45\ and at least one such commentator indicated that 
the final rule would adversely affect employment in the United 
States.\46\ One commentator, however, suggested that there could be 
some ``business benefits'' from complying with the final rule beyond 
the humanitarian benefits discussed by Congress.\47\ This commentator 
argued that such benefits could include eliminating any competitive 
disadvantage to companies already engaged in ensuring their conflict 
mineral purchases do not fund conflict in the DRC, providing an 
opportunity to improve a company's existing risk management and supply 
chain management, stimulating innovation, supporting companies' 
requests for conflict minerals information from suppliers through legal 
mandate, and preparing companies to meet a new generation of 
expectations for greater supply chain transparency and 
accountability.\48\
---------------------------------------------------------------------------

    \44\ See, e.g., letters from AngloGold Ashanti Limited (Jan. 31, 
2011) (``AngloGold''), Bureau d'Etudes Scientifiques et Techiques 
(Dec. 26, 2011) (``BEST II''), Competitive Enterprise Institute 
(Mar. 2, 2011) (``CEI I''), Competitive Enterprise Institute (Aug. 
22, 2011) (``CEI II,''), F[eacute]d[eacute]ration des Enterprises du 
Congo (Oct. 28, 2011) (``FEC II''), G[eacute]n[eacute]rale des 
Coop[eacute]ratives Mini[egrave]res du Sud Kivu (Apr. 8, 2011) 
(``Gecomiski''), IPC--Association Connecting Electronics Industries 
(Mar. 2, 2011) (``IPC I''), ITRI Ltd. (Feb. 25, 2011) (``ITRI II''), 
London Bullion Market Association (Mar. 2, 2011) (``LBMA I''), 
London Bullion Market Association (Aug. 5, 2011) (``LBMA II''), 
Minister of Energy and Minerals of the United Republic of Tanzania 
(May 23, 2011) (``Tanzania I''), Ministry of Mines and Energy of the 
Republic of Burundi (May 12, 2011) (``Burundi''), North Kivu 
Artisanal Mining Cooperatives Representative (Mar. 1, 2011) 
(``Comimpa''), Pact Inc. (Mar. 2, 2011) (``Pact I''), Pact Inc. 
(Oct. 13, 2011) (``Pact II''), Representative Christopher J. Lee 
(Feb. 3, 2011) (``Rep. Lee''), Soci[eacute]t[eacute] Mini[egrave]re 
du Maniema SPRL (Mar. 21, 2012) (``Somima''), Verizon Communications 
(Jun. 24, 2011) (``Verizon''), and WGC II. But see letters from 
Enough Project (Mar. 2, 2011) (``Enough Project I'') (``Enough notes 
that critics of the legislation are quick to predict that private 
sector investors and companies may walk away from the Congo if faced 
with meaningful due diligence and reporting requirements. On the 
contrary, Congo's mineral reserves are too great for world markets 
to ignore.''), International Corporate Accountability Roundtable 
(Aug. 24, 2011) (``ICAR II'') (recognizing that ``[c]ritics of the 
law are arguing that whatever its intentions, it will in practice 
end the trade in minerals mined in the east of Congo,'' and that, 
although ``mineral exports from the region have dropped 
significantly in recent months, and that this has forced many 
artisanal miners to seek alternative livelihoods,'' which ``has 
serious implications for miners and their families,'' the ``downturn 
stems from a six month suspension of mining and trading activities 
imposed by the Congolese government and an overly restrictive 
interpretation of Dodd Frank by industry associations'' and the 
``idea that the current hiatus is a permanent shut-down of the trade 
is misplaced, however.''), Andrew Matheson (Oct. 26, 2011) 
(``Matheson II'') (``No such embargo exists, nor is an embargo 
contemplated by the multi[hyphen]stakeholder group, the EICC/GeSI 
initiative, or ITRI. Import statistics show that minerals continue 
to be sourced in substantial volumes from the DRC, for example 
tantalum ores going into China.''), and Sen. Durbin/Rep. McDermott 
(``NGO experts in Congo note that only approximately one percent of 
the Congolese workforce depends on mining, so even if a de facto ban 
came to pass--which we doubt--the economic impact would not be as 
great as commonly assumed.'').
    \45\ See, e.g., letters from Taiwan Semiconductor Manufacturing 
Company Ltd. (Jan. 27, 2011) (``Taiwan Semi''), Tiffany & Co. (Feb. 
22, 2011) (``Tiffany''), and Washington Legal Fund (Mar. 30, 2011) 
(``WLF'').
    \46\ See letter from Rep. Lee (``Ultimately, these new 
regulations may cost U.S. jobs and send them overseas.'').
    \47\ See letter from Green Research (Jan. 27, 2012) (``Green 
II''). See also letter from Green Research (Oct. 29, 2011) (``Green 
I'') (stating that, although ``[i]t seems clear that, by most 
accounting, there are costs of compliance'' of the Conflict Minerals 
Statutory Provision, ``there are benefits as well'').
    \48\ See id.
---------------------------------------------------------------------------

    We have reviewed and considered all of the comments that we 
received relating to the rulemaking. The final rule reflects changes 
from the proposed rules made in response to many of these comments. As 
discussed throughout this release, we are adopting final rules designed 
to provide flexibility to issuers to reduce their compliance costs. At 
the same time, our final rules retain the requirements from our 
proposed rules that create the disclosure regime mandated by Congress 
by means of Exchange Act reporting requirements. We discuss our 
revisions with respect to each proposed rule amendment in more detail 
throughout this release.

D. Summary of Changes to the Final Rule

    We are adopting a three-step process, as proposed, but some of the 
mechanisms within the three steps have been modified in response to 
comments. We recognize that the final rule will impose significant 
compliance costs on companies who use or supply conflict minerals, and 
in modifying the rule we tried to reduce the burden of compliance in 
areas in which we have discretion while remaining faithful to the 
language and intent of the Conflict Minerals Statutory Provision that 
Congress adopted. A flowchart presenting a general overview of the 
conflict minerals rule that we are adopting is included following the 
end of this section. The chart is intended merely as a guide, however, 
and issuers should refer to the rule text and the preamble's more 
complete narrative description for the requirements of the rule.
    The first step continues to be for an issuer to determine whether 
it is subject to the requirements of the Conflict Minerals Statutory 
Provision. Pursuant to the Conflict Minerals Statutory Provision, the 
Commission is required to promulgate regulations requiring certain 
conflict minerals disclosures by any ``person described,'' which, under 
the Conflict Minerals Statutory Provision, includes one for whom 
``conflict minerals are necessary to the functionality or production of 
a product manufactured by such person''.\49\ As in our proposal, under 
the final rule this includes issuers whose conflict minerals are 
necessary to the functionality or production of a product manufactured 
or contracted by that issuer to be manufactured.\50\ If an issuer does 
not meet this definition, the issuer is not required to take any 
action, make any disclosures, or submit any reports under the final 
rule. If, however, an issuer meets this definition, that issuer moves 
to the second step.
---------------------------------------------------------------------------

    \49\ Exchange Act Section 13(p)(2).
    \50\ See Exchange Act Section 13(p)(1)(ii) (requiring a person 
described to include a description of certain of the person's 
products that were manufactured by the person, or were contracted by 
the person to be manufactured).
---------------------------------------------------------------------------

    In the final rule, some aspects of the first step differ from the 
proposed rules based on comments we received. Consistent with the 
proposal, the final rule does not define the phrases ``contract to 
manufacture,'' ``necessary to the functionality'' of a product, and 
``necessary to the production'' of a product. In response to comments, 
however, we provide additional guidance for issuers to consider 
regarding whether those phrases apply to them.\51\ The guidance states 
that whether an issuer will be considered to ``contract to 
manufacture'' a product depends on the degree of influence it exercises 
over the materials, parts, ingredients, or components to be included in 
any product that contains conflict minerals or their derivatives. An 
issuer will not be considered to ``contract to manufacture'' a product 
if it does no more than take the following actions: (1) The issuer 
specifies or negotiates contractual terms with a manufacturer that do 
not directly relate to the manufacturing of the product (unless it 
specifies or negotiates taking these actions so as to exercise a degree 
of influence over the manufacturing of the product that is practically 
equivalent to contracting on terms that directly relate to the 
manufacturing of the product); (2) the issuer affixes its brand, marks, 
logo, or label to a generic product manufactured by a third party; or 
(3) the issuer services, maintains, or repairs a product manufactured 
by a third party.
---------------------------------------------------------------------------

    \51\ In the Proposing Release, although we did not provide 
guidance for the other phrases, we provided some guidance for the 
phrase ``necessary to the production'' of a product. As discussed 
below, we are revising the guidance for this phrase.
---------------------------------------------------------------------------

    Similarly, the determination of whether a conflict mineral is 
deemed ``necessary to the functionality'' or ``necessary to the 
production'' of a product depends on the issuer's particular facts and 
circumstances, as discussed in more detail below. But to assist issuers 
in making their determination, we provide guidance for issuers. In 
determining whether a conflict mineral is ``necessary to the 
functionality'' of a product, an issuer should consider: (1) Whether 
the conflict mineral is intentionally added to the product or any 
component of the product and is not a naturally-occurring by-product; 
(2) whether the conflict mineral is necessary to the product's 
generally expected function, use, or purpose; and (3) if conflict 
mineral is incorporated for purposes of ornamentation, decoration or 
embellishment, whether the primary purpose of the product is 
ornamentation or decoration.
    In determining whether a conflict mineral is ``necessary to the 
production'' of a product, an issuer should consider: (1) Whether the 
conflict mineral is intentionally included in the product's production 
process, other than if it is included in a tool, machine, or equipment 
used to produce the product (such as computers or power lines); (2) 
whether the conflict mineral is included in the product; and (3) 
whether the conflict mineral is necessary to produce the product. In 
this regard, we are modifying our guidance from the proposal such that, 
for a conflict mineral to be considered ``necessary to the production'' 
of a product, the mineral must be both contained in the product and 
necessary to the product's production. We do not consider a conflict 
mineral ``necessary to the production'' of a product if the conflict 
mineral is used as a catalyst, or

[[Page 56280]]

in a similar manner in another process, that is necessary to produce 
the product but is not contained in that product.
    Further, in a change from the proposal and in response to comments 
suggesting that including mining would expand the statutory mandate, 
the final rule does not treat an issuer that mines conflict minerals as 
manufacturing those minerals unless the issuer also engages in 
manufacturing. Additionally, the final rule exempts any conflict 
minerals that are ``outside the supply chain'' prior to January 31, 
2013. Under the final rule, conflict minerals are ``outside the supply 
chain'' if they have been smelted or fully refined or, if they have not 
been smelted or fully refined, they are outside the Covered Countries. 
In response to comments, the final rule allows issuers that obtain 
control over a company that manufactures or contracts for the 
manufacturing of products with necessary conflict minerals that 
previously had not been obligated to provide a specialized disclosure 
report for those minerals to delay reporting on the acquired company's 
products until the end of the first reporting calendar year that begins 
no sooner than eight months after the effective date of the 
acquisition.
    As suggested by commentators, the final rule modifies the proposal 
as to the location, timing, and status of any conflict minerals 
disclosures and any Conflict Minerals Report. The final rule requires 
an issuer to provide the conflict minerals disclosures that would have 
been in the body of the annual report in the body of a new specialized 
disclosure report on a new form, Form SD. An issuer required to provide 
a Conflict Minerals Report will provide that report as an exhibit to 
the specialized disclosure report. Additionally, based on comments that 
it will reduce the burdens on supply chain participants, the final rule 
requires that the conflict minerals information in the specialized 
disclosure report and/or in the Conflict Minerals Report cover the 
calendar year from January 1 to December 31 regardless of the issuer's 
fiscal year end, and the specialized disclosure report covering the 
prior year must be provided each year by May 31. Further, in a change 
from the proposal, urged by multiple commentators, the final rule 
requires Form SD, including the conflict minerals information therein 
and any Conflict Minerals Report submitted as an exhibit to the form, 
to be ``filed'' under the Exchange Act and thereby subject to potential 
Exchange Act Section 18 liability. The proposal would have required the 
information to be ``furnished.''
    The second step continues to require an issuer to conduct a 
reasonable country of origin inquiry regarding the origin of its 
conflict minerals. Consistent with the proposal, and the position of 
certain commentators,\52\ the final rule does not prescribe the actions 
for a reasonable country of origin inquiry that are required, as the 
required inquiry depends on each issuer's facts and circumstances. 
However, in a change from the proposed rules, to clarify the scope of 
the required inquiry as requested by certain other commentators,\53\ 
the final rule provides general standards applicable to the inquiry. 
Specifically, the final rule provides that, to satisfy the reasonable 
country of origin inquiry requirement, an issuer must conduct an 
inquiry regarding the origin of its conflict minerals that is 
reasonably designed to determine whether any of its conflict minerals 
originated in the Covered Countries or are from recycled or scrap 
sources, and must perform the inquiry in good faith. The final rule 
requires an issuer that determines that its conflict minerals did not 
originate in the Covered Countries or did come from recycled or scrap 
sources to disclose in its specialized disclosure report its 
determination and in its specialized disclosure report briefly describe 
the reasonable country of origin inquiry it used in reaching the 
determination and the results of the inquiry. The requirement for an 
issuer to briefly describe its inquiry and the results of the inquiry 
is a change from the disclosure required in the proposed rules.
---------------------------------------------------------------------------

    \52\ Some commentators agreed that, to allow for greater 
flexibility, the reasonable country of origin inquiry standard 
should either not be defined or that only general guidance should be 
provided. See, e.g., letters from Apparel & Footwear Association 
(Mar. 2, 2011) (``AAFA''); AngloGold; ArcelorMittal (Oct. 31, 2011) 
(``ArcelorMittal''); Industry Group Coalition I; IPC I; Information 
Technology Industry Council (Feb. 24, 2011) (``ITIC I''); 
International Precious Metals Institute (Jan. 19, 2011) (``IPMI 
I''); Jewelers Vigilance Committee, American Gem Society, 
Manufacturing Jewelers & Suppliers of America, Jewelers of America, 
and Fashion Jewelry & Accessories Trade Association (Mar. 2, 2011) 
(``JVC et al. II''); NAM I, Retail Industry Leaders Association and 
Consumer Electronics Retailers Coalition (Mar. 2, 2011) (``RILA-
CERC''); Semiconductor Industry Association (Mar. 2, 2011) 
(``Semiconductor''); SIF I; TriQuint Semiconductor, Inc. (Jan. 26, 
2011) (``TriQuint I''); and WGC II.
    \53\ Some commentators argued that either the reasonable country 
of origin inquiry standard should be defined or that there should 
specific guidance regarding the standard. See, e.g., letters from 
Business Roundtable (Mar. 2, 2011) (``Roundtable''), CRS I, 
Department of State (Mar. 24, 2011) (``State II''), EARTHWORKS' No 
Dirty Gold Campaign (Mar. 2, 2011) (``Earthworks''), Enough Project 
I, Ethical Metalsmiths (Feb. 28, 2011) (``Metalsmiths''), General 
Board of Church and Society of the United Methodist Church (Apr. 19, 
2012) (``Methodist Board''), Global Witness (Feb. 28, 2011) 
(``Global Witness I''), Howland Greene Consultants LLC (Jan. 28, 
2011) (``Howland''), International Conference of the Great Lakes 
Region (Jan. 31, 2011) (``ICGLR''), National Association of 
Evangelicals (Feb. 17, 2012) (``Evangelicals''), New York City Bar 
Association (Jan. 31, 2011) (``NYCBar I''), New York City Bar 
Association (Feb. 8, 2012) (``NYCBar II''), Personal Care Products 
Council (Mar. 1, 2011) (``PCP''), Presbyterian Church USA (Feb. 23, 
2012) (``Presbyterian Church II''), Semiconductor Equipment and 
Materials International (Feb. 15, 2011) (``SEMI''), Sen. Durbin/Rep. 
McDermott, Tantalum-Niobium International Study Center (Jan. 27, 
2011) (``TIC''), Twenty-four organizations of the Multi-Stakeholder 
Group (Mar. 2, 2011) (``MSG I''), and World Evangelical Alliance 
(Feb. 17, 2012) (``Evangelical Alliance'').
---------------------------------------------------------------------------

    Also, in a change from the proposal, the final rule modifies the 
trigger for determining whether or not an issuer is required to proceed 
to step three under the rule. The proposed rules would have required an 
issuer to conduct due diligence on the source and chain of custody of 
its conflict minerals and provide a Conflict Minerals Report if, based 
on its reasonable country of origin inquiry, it determined that its 
conflict minerals originated in the Covered Countries or was unable to 
determine that its conflict minerals did not originate in the Covered 
Countries, or if its conflict minerals came from recycled or scrap 
sources. Under the final rule, an issuer must exercise due diligence on 
the source and chain of custody of its conflict minerals and provide a 
Conflict Minerals Report if, based on its reasonable country of origin 
inquiry, the issuer knows that it has necessary conflict minerals that 
originated in the Covered Countries and did not come from recycled or 
scrap sources, or if the issuer has reason to believe that its 
necessary conflict minerals may have originated in the Covered 
Countries and may not have come from recycled or scrap sources.
    As an exception to this requirement, however, an issuer that must 
conduct due diligence because, based on its reasonable country of 
origin inquiry, it has reason to believe that its necessary conflict 
minerals may have originated in the Covered Countries and may not have 
come from recycled or scrap sources is not required to submit a 
Conflict Minerals Report if, during the exercise of its due diligence, 
it determines that its conflict minerals did not, in fact, originate in 
the Covered Countries, or it determines that its conflict minerals did, 
in fact, come from recycled or scrap sources. Such an issuer is still 
required to submit a specialized disclosure report disclosing its 
determination and briefly describing its inquiry and its due diligence 
efforts and the results of that inquiry and due diligence efforts, 
which should demonstrate why the issuer believes that the conflict 
minerals did not originate in the Covered Countries

[[Page 56281]]

or that they did come from recycled or scrap sources. On the other 
hand, if, based on its reasonable country of origin inquiry, an issuer 
has no reason to believe that its conflict minerals may have originated 
in the Covered Countries, or, based on its reasonable country of origin 
inquiry, an issuer reasonably believes that its conflict minerals are 
from recycled or scrap sources, the issuer is not required to move to 
step three. In another change from the proposal, the final rule does 
not require an issuer to retain reviewable business records to support 
its reasonable country of origin conclusion, although maintenance of 
appropriate records may be useful in demonstrating compliance with the 
final rule, and may be required by any nationally or internationally 
recognized due diligence framework applied by an issuer.
    As noted above, if the issuer knows that it has necessary conflict 
minerals that originated in the Covered Countries, or if the issuer has 
reason to believe that its necessary conflict minerals may have 
originated in the Covered Countries and may not have come from recycled 
or scrap sources, the issuer must move to the third step. The third 
step, consistent with the proposal, requires such an issuer to exercise 
due diligence on the source and chain of custody of its conflict 
minerals and provide a Conflict Minerals Report describing its due 
diligence measures, among other matters. As noted above, however, the 
final rule requires an issuer to provide its Conflict Minerals Report 
as an exhibit to its specialized disclosure report on Form SD, instead 
of as an exhibit to its annual report on Form 10-K, Form 20-F, or Form 
40-F, as proposed.
    Generally, the content of the Conflict Minerals Report is 
substantially similar to the proposal. One modification from the 
proposal, based on comments we received, is that the final rule 
requires an issuer to use a nationally or internationally recognized 
due diligence framework, if such a framework is available for the 
specific conflict mineral. We are persuaded by commentators that doing 
so will enhance the quality of an issuer's due diligence, promote 
comparability of the Conflict Minerals Reports of different issuers, 
and provide a framework by which auditors can assess an issuer's due 
diligence.\54\ This requirement should make the rule more workable and 
less costly than if no framework was specified. Presently, it appears 
that the only nationally or internationally recognized due diligence 
framework available is the due diligence guidance approved by the 
Organisation for Economic Co-operation and Development (``OECD'').\55\
---------------------------------------------------------------------------

    \54\ The proposed rules would not have required the use of a 
particular due diligence framework, but the Proposing Release 
indicated that an issuer whose conduct conformed to a nationally or 
internationally recognized set of standards of, or guidance for, due 
diligence regarding its conflict minerals supply chain would provide 
evidence that the issuer used due diligence in its Conflict Minerals 
Report.
    \55\ See OECD, OECD Due Diligence Guidance for Responsible 
Supply Chains of Minerals from Conflict-Affected and High-Risk Areas 
(2011), available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
---------------------------------------------------------------------------

    As proposed, the final rule requires an independent private sector 
audit of an issuer's Conflict Minerals Report. However, in response to 
comments, we modified the proposal such that the final rule specifies 
an audit objective. The audit's objective is to express an opinion or 
conclusion as to whether the design of the issuer's due diligence 
measures as set forth in the Conflict Minerals Report, with respect to 
the period covered by the report, is in conformity with, in all 
material respects, the criteria set forth in the nationally or 
internationally recognized due diligence framework used by the issuer, 
and whether the issuer's description of the due diligence measures it 
performed as set forth in the Conflict Minerals Report, with respect to 
the period covered by the report, is consistent with the due diligence 
process that the issuer undertook. Also, consistent with the proposal, 
the final rule refers to the audit standards established by the GAO. 
The GAO staff has indicated to our staff that the GAO does not intend 
to establish new standards for the Conflict Minerals Report audit. 
Instead, the GAO plans to look to its existing Government Auditing 
Standards (``GAGAS''), which is commonly referred to as ``the Yellow 
Book.''\56\
---------------------------------------------------------------------------

    \56\ See U.S. Gov't Accountability Office, GAO-12-331G, 
Government Auditing Standards 2011 Revision (Dec. 2011), available 
at https://www.gao.gov/assets/590/587281.pdf.
---------------------------------------------------------------------------

    Unlike the proposed rule, which would have required descriptions in 
the Conflict Minerals Report of an issuer's products that ``are not 
`DRC conflict free,''' where ``DRC conflict free'' means that they ``do 
not contain minerals that directly or indirectly finance or benefit 
armed groups in the'' Covered Countries, the final rule requires 
descriptions in the Conflict Minerals Report of an issuer's products 
``that have not been found to be `DRC conflict free.''' We believe this 
change will lead to more accurate disclosure.
    As suggested by a number of commentators, the final rule also 
modifies the proposal by providing a temporary transition period for 
two years for all issuers and four years for smaller reporting 
companies.\57\ During this period, issuers may describe their products 
as ``DRC conflict undeterminable'' if they are unable to determine that 
their minerals meet the statutory definition of ``DRC conflict free'' 
for either of two reasons: First, they proceeded to step three based 
upon the conclusion, after their reasonable country of origin inquiry, 
that they had conflict minerals that originated in the Covered 
Countries and, after the exercise of due diligence, they are unable to 
determine if their conflict minerals financed or benefited armed groups 
in the Covered Countries; or second, they proceeded to step three based 
upon the conclusion, after their reasonable country of origin inquiry, 
that they had a reason to believe that their necessary conflict 
minerals may have originated in the Covered Countries and may not have 
come from recycled or scrap sources and the information they gathered 
as a result of their subsequently required exercise of due diligence 
failed to clarify the conflict minerals' country of origin, whether the 
conflict minerals financed or benefited armed groups in those 
countries, or whether the conflict minerals came from recycled or scrap 
sources. These issuers will have already conducted a reasonable country 
of origin inquiry, and their undeterminable status would be based on 
the information they were able to gather from their exercise of due 
diligence. However, if these products also contain conflict minerals 
that the issuer knows directly or indirectly financed or benefited 
armed groups in the Covered Countries, the issuer may not describe 
those products as ``DRC conflict undeterminable.'' Also, during the 
transition period, issuers with products that may be described as ``DRC 
conflict undeterminable'' are not required to have their Conflict 
Minerals Report audited. Such issuers, however, must still file a 
Conflict Minerals Report describing their due diligence, and must 
additionally describe the steps they have taken or will take, if any, 
since the end of the period covered in their most recent prior Conflict 
Minerals Report, to mitigate the risk that their necessary conflict 
minerals benefit armed groups,

[[Page 56282]]

including any steps to improve their due diligence.
---------------------------------------------------------------------------

    \57\ ``Smaller reporting company'' is defined in Rule 12b-2 [17 
CFR 240.12b-2] under the Exchange Act.
---------------------------------------------------------------------------

    This temporary provision will apply for the first two reporting 
calendar years after effectiveness of the final rule for all issuers 
that are not smaller reporting companies, and for the first four 
reporting calendar years after effectiveness of the final rule for 
smaller reporting companies. We believe it is appropriate to allow a 
two-year temporary period, in recognition that, as commentators noted, 
the processes for tracing conflict minerals through the supply chain 
must develop further to make such determinations for the issuer 
community at large. Also, we believe it is appropriate to allow an 
additional two years to this temporary period for smaller reporting 
companies because, as commentators noted, smaller companies may face 
disproportionally higher burdens than larger companies and a longer 
temporary period may help alleviate some of those burdens. After the 
four-year period for smaller reporting companies and two-year period 
for all other issuers, issuers that have proceeded to step three but 
are unable to determine that their conflict minerals did not originate 
in the Covered Countries or are unable to determine that their conflict 
minerals that originated in the Covered Countries did not directly or 
indirectly finance or benefit armed groups must describe their products 
containing those conflict minerals as not having been found to be ``DRC 
conflict free.''
    Unlike the proposed rules, the final rule requires issuers with 
necessary conflict minerals exercising due diligence regarding whether 
their conflict minerals are from recycled or scrap sources to conform 
the due diligence to a nationally or internationally recognized due 
diligence framework, if one is available for a particular recycled or 
scrap conflict mineral. A gold supplement to the OECD's due diligence 
guidance has been approved by the OECD.\58\ This gold supplement is 
presently the only nationally or internationally recognized due 
diligence framework for any conflict mineral from recycled or scrap 
sources of which we are aware. Therefore, we anticipate that issuers 
will use the OECD gold supplement to conduct their due diligence for 
recycled or scrap gold. We are not aware that the OECD or any other 
body has a similar recycled or scrap due diligence framework for the 
other conflict minerals. Issuers with conflict minerals without a 
nationally or internationally recognized due diligence framework are 
still required to exercise due diligence in determining that their 
conflict minerals were from recycled or scrap sources. The due 
diligence that must be exercised regarding such conflict minerals 
focuses only on whether those conflict minerals are from recycled or 
scrap sources. In such circumstances where a nationally or 
internationally recognized due diligence framework becomes available 
for any such conflict mineral, issuers will be required to utilize that 
framework in exercising due diligence to determine that conflict 
minerals are from recycled or scrap sources.
---------------------------------------------------------------------------

    \58\ See OECD, Due Diligence Guidance for Responsible Supply 
Chains of Minerals from Conflict-Affected and High-Risk Areas: 
Supplement on Gold (2012), available at https://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.
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E. Flowchart Summary of the Final Rule

BILLING CODE 8011-01-P

[[Page 56283]]

[GRAPHIC] [TIFF OMITTED] TR12SE12.000

BILLING CODE 8011-01-C

II. Discussion of the Final Rule

A. ``Conflict Minerals'' Definition

1. Proposed Rules
    The Conflict Minerals Statutory 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 Covered Countries.\59\ We used the same definition of 
this term in the proposed rules. As we discussed in the Proposing 
Release, 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.\60\ 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.\61\ Gold is used for making 
jewelry and is used in electronic, communications, and aerospace 
equipment.\62\ Finally, wolframite is the metal ore that is used to 
produce

[[Page 56284]]

tungsten, which is used for metal wires, electrodes, and contacts in 
lighting, electronic, electrical, heating, and welding 
applications.\63\ Based on the many uses of these minerals, we expect 
the Conflict Minerals Statutory Provision to apply to many companies 
and industries and, thereby, the final rule to apply to many issuers.
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    \59\ 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.
    \60\ Tin Statistics and Information, U.S. Geological Survey, 
available at https://minerals.usgs.gov/minerals/pubs/commodity/tin/.
    \61\ Niobium (Columbium) and Tantalum Statistics and 
Information, U.S. Geological Survey, available at https://minerals.usgs.gov/minerals/pubs/commodity/niobium.
    \62\ Gold Statistics and Information, U.S. Geological Survey, 
available at https://minerals.usgs.gov/minerals/pubs/commodity/gold.
    \63\ Tungsten Statistics and Information, U.S. Geological 
Survey, available at https://minerals.usgs.gov/minerals/pubs/commodity/tungsten.
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2. Comments on the Proposed Rules
    Several commentators requested that the final rule set forth the 
specific conflict derivatives that would trigger the rule's disclosure 
and reporting obligations.\64\ Many of these commentators recommended 
that the final rule limit the derivatives of columbite-tantalite, 
cassiterite, and wolframite to tantalum, tin, and tungsten, 
respectively,\65\ unless the State Department determines subsequently 
that additional specific minerals or their derivatives are financing or 
benefitting armed groups.\66\ One of these commentators pointed out 
that such a limit is appropriate because, although conflict minerals 
have other derivatives, tantalum, tin, and tungsten are the only 
economically significant derivatives of the conflict minerals.\67\ For 
example, one commentator noted that oxygen and iron are derivatives of 
wolframite that could be subject to the final rule, but wolframite is 
not currently a significant commercial source for oxygen or iron.\68\ 
Another commentator noted that niobium is a derivative of columbite-
tantalite that, absent clarification to the contrary, could be subject 
to the final rule as well.\69\ Some commentators, however, asserted 
that the final rule should not solely be limited to tantalum, tin, 
tungsten, or gold.\70\
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    \64\ See, e.g., letters from American AAFA, Global Tungsten & 
Powders Corp. (Mar. 1, 2011) (``Global Tungsten I''), Industry Group 
Coalition I, IPC I, IPC--Association Connecting Electronics 
Industries (Nov. 1, 2011) (``IPC II''), Materion Corporation (Nov. 
1, 2011) (``Materion''), National Retail Federation (Nov. 1, 2011) 
(``NRF II''), PCP, Robert W. Row (Jan. 18, 2011) (``Row''), SEMI, 
and Society of the Plastics Industry Inc. (Nov. 9, 2011) (``SPI'').
    \65\ Gold is produced in its metallic form and has no 
derivatives.
    \66\ See, e.g., letters from AAFA, IPC II, NRF II, PCP, and SPI.
    \67\ See letters from IPC II and NRF II. See also Transcript of 
SEC Roundtable, Section 0039 Lines 9-10 (``MR. MATHESON: The 
economic interest is in the three Ts plus gold.'').
    \68\ See letter from SEMI.
    \69\ See letter from Row.
    \70\ See, e.g., letters from BC Investment Management 
Corporation (Mar. 28, 2011) (``BCIMC'') and Save the Congo (Nov. 1, 
2011) (``Save'').
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    One commentator recommended that the definition of ``conflict 
mineral'' not include organic metal compounds formed from a conflict 
mineral metal derivative, such as tin and tungsten, because these 
substances are no longer metals or alloys and ``use of these chemical 
compounds is too attenuated from the original source of the mineral.'' 
\71\ According to the commentator, these organometallic compounds, 
which include catalysts, stabilizers, and polymerization aids, are 
commodity chemicals used in the production of raw materials such as 
silicones, polyurethanes, vinyls, and polyesters. For example, the 
commentator noted that tin is used in a reaction with chlorine gas, 
after which the intermediate tin tetrachloride compound undergoes 
further chemical reactions with any number of organic substrates to 
produce an organotin compound with the final compounds becoming 
substances such as stannous octoate, monobutyl tin trichloride, and 
dioctyltin dilaurate. These substances contain tin but have several 
organic groups chemically bound to the tin nucleus and are compounds 
that are materially and chemically distinct from metallic tin. 
According to the commentator, the use of organotin in many 
manufacturing sectors has not yet been recognized by manufacturers, 
supply chains, or regulators, which may increase costs of the final 
rule if organic tin compounds are included in the definition of 
``conflict minerals.''
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    \71\ See letter from SPI.
---------------------------------------------------------------------------

    In addition, a number of commentators recommended that the final 
rule selectively use the term ``conflict mineral'' because not doing so 
would unfairly stigmatize the four minerals and unjustifiably hurt some 
companies' reputations.\72\ These commentators noted that the term 
``conflict mineral'' in the proposed rules provides no clear 
distinction between the four named minerals and their derivatives that 
did not benefit or finance armed groups, and those that did finance or 
benefit armed groups. Specifically, one of these commentators noted, 
``refer[ring] to all cassiterite, wolframite, gold, and tantalum in the 
world, regardless of its origin and relationship to conflict actors'' 
as ``conflict minerals,'' imposes ``a reputational taint on these 
entire industries,'' and ``makes it highly challenging for companies in 
these industries to communicate effectively with investors and the 
public.'' \73\ Commentators suggested that we limit the final rule's 
definition of ``conflict minerals'' only to minerals that financed or 
benefited armed groups and that the final rule use another name to 
describe minerals that did not finance or benefit armed groups, such as 
``potential conflict minerals,'' ``suspect conflict minerals,'' 
``subject minerals,'' or ``covered minerals.'' \74\ Additionally, for 
the same reasons, some commentators indicated that the final rule 
should change the names of the required headings from ``Conflict 
Minerals Disclosure'' to ``Country of Origin Disclosure'' and change 
the name of the Conflict Minerals Report to ``Report on Minerals 
Sourced from Central Africa.'' \75\
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    \72\ See, e.g., letters from Advanced Medical Technology 
Association (Feb. 28, 2011) (``AdvaMed I''), Barrick Gold 
Corporation (Feb. 28, 2011) (``Barrick Gold''), Cleary Gottlieb 
Steen & Hamilton LLP (Mar. 2, 2011) (``Cleary Gottlieb''), Global 
Tungsten I, JVC et al. II, Malaysia Smelting Corporation (Jan. 26, 
2011) (``MSC I''), National Association of Manufacturers (Nov. 1, 
2011) (``NAM III''), Niotan Inc. (Jan. 30, 2011) (``Niotan I''), 
Niotan Inc. (Mar. 21, 2011) (``Niotan II''), National Mining 
Association (Mar. 2, 2011) (``NMA II''), SEMI, Tanzania I, TIC, and 
WGC II. See also MJB Consulting (Apr. 28, 2011) (``MJB I'') (arguing 
that the Conflict Minerals Statutory Provision is unclear as to 
whether the definition of ``conflict minerals'' refers to columbite-
tantalite (coltan), cassiterite, gold, wolframite, or their 
derivatives, per se, originating from the Covered Countries, or 
columbite-tantalite (coltan), cassiterite, gold, wolframite, or 
their derivatives originating from the Covered Countries and that do 
not directly or indirectly finance or benefit armed groups in the 
Covered Countries).
    \73\ See letter from Niotan II.
    \74\ See letters from Cleary Gottlieb, Niotan II, SEMI, and TIC.
    \75\ See letters from Barrick Gold and Niotan I.
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3. Final Rule
    After considering the comments, we are revising the proposal in the 
final rule. We are clarifying our position as to which derivatives are 
conflict minerals, which appears consistent with the views of various 
stakeholders,\76\

[[Page 56285]]

including at least one co-sponsor of the legislation and other members 
of Congress.\77\ As a commentator suggested, our failure in the 
proposal to specify the 3T derivatives (tantalum, tin, and tungsten, 
which are known as the ``3Ts'') would have introduced too much 
ambiguity in our rule,\78\ which would have expanded the Conflict 
Mineral Provision's reach, cost, and complexity without increasing its 
effectiveness.\79\ The term ``conflict mineral'' in the final rule is 
defined to include cassiterite, columbite-tantalite, gold, wolframite, 
and their derivatives, which are limited to the 3Ts, unless the 
Secretary of State determines that additional derivatives are financing 
conflict in the Covered Countries, in which case they are also 
considered ``conflict minerals;'' or any other minerals or their 
derivatives determined by the Secretary of State to be financing 
conflict in the Covered Countries.
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    \76\ See, e.g., letter from H.E. Ambassador Liberata Mulamula, 
International Conference on the Great Lakes Region, Angel 
Gurr[iacute]a, Secretary-General, Organisation for Economic Co-
operation and Development, and Fred Robarts, Coordinator, United 
Nations Group of Experts on the Democratic Republic of the Congo 
(Jul. 29, 2011) (``OECD I'') (``We consider that the OECD and UN GoE 
due diligence recommendations, as integrated into the framework of 
the ICGLR Regional Initiative against the Illegal Exploitation of 
Natural Resources and the Regional Certification Mechanism, can be 
used by persons subject to Section 1502 of the Dodd-Frank Act 
(``issuers'') to reliably determine whether the tin, tantalum, 
tungsten or gold in their products originate from the DRC or 
adjoining countries, and if so, to determine the facilities used to 
process those minerals, the country of origin, and the mine or 
location of origin with the greatest possible specificity, and 
describe the products manufactured or contracted to be manufactured 
that are not DRC conflict free.''); OECD, Due Diligence Guidance for 
Responsible Supply Chains of Minerals from Conflict-Affected and 
High-Risk Areas, 12 (2011), available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf (discussing due diligence as a basis for responsible 
global supply chain management of ``tin, tantalum, tungsten, their 
ores and mineral derivates, and gold''); Final Report of the United 
Nations Group of Experts on the Democratic Republic of the Congo, 
Nov. 29, 2010 [S/2010/596] (stating that relevant individuals and 
entities should establish effective systems of control and 
transparency over the mineral supply chain, the nature of which will 
vary according to the mineral being traded, with the gold supply 
chain exhibiting characteristics different to those for tin, 
tantalum, and tungsten, and according to the position of the 
individual or entity in the supply chain); Enough Project, From Mine 
to Mobile Phone: The Conflict Minerals Supply Chain (Nov. 10, 2009) 
available at https://www.enoughproject.org/files/publications/minetomobile.pdf (indicating its desire to increase transparency in 
the supply chains for tin, tantalum, and tungsten, or the 3Ts, as 
well as gold, which are key elements of electronics products 
including cell phones and personal computers and are the principal 
source of revenue for armed groups and military units that prey on 
civilians in eastern Congo, and the 3Ts are produced from mineral 
ores, including tin from cassiterite, tungsten from wolframite, and 
tantalum from columbite-tantalite, known throughout Congo as 
coltan); and Global Witness, Do No Harm: Excluding conflict minerals 
from the supply chain, 2 (July 2010), available at https://www.globalwitness.org/sites/default/files/pdfs/do_no_harm_global_witness.pdf (stating that ``the warring parties [in the DRC] 
finance themselves via control of most of the mines in [eastern DRC] 
that produce tin, tantalum and tungsten ores and gold''). See also 
State Department, Statement Concerning Implementation of Section 
1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due 
Diligence, 1 (July 15, 2011), available at https://www.state.gov/documents/organization/168851.pdf (noting that the State Department 
``is undertaking a number of actions to address the problem of 
conflict minerals--or the exploitation and trade of gold, columbite-
tantalite (coltan), cassiterite (tin), wolframite (tungsten), or 
their derivatives--sourced from the eastern'' DRC that have ``helped 
to fuel the conflict in the eastern DRC'').
    \77\ See letters from Representative Mark E. Amodei (Dec. 20, 
2011) (``Rep. Amodei'') (referring to ``tungsten''); Representatives 
Howard L. Berman, Donald M. Payne, and Christopher H. Smith (Nov. 8, 
2010) (Pre-Proposing Release Web site) (``Rep. Berman et al. pre-
proposing'') (``Section 1502 was designed to limit the ability of 
armed groups in the Democratic Republic of Congo (DRC) to profit 
from the illicit mining of tin ore, coltan, gold, and other mineral 
resources that eventually end up in computers, cell phones, and 
other products.''); Representatives Howard L. Berman, Donald M. 
Payne, Jim McDermott, Karen Bass, and Barney Frank (Sep. 23, 2011) 
(``Rep. Berman et al.''); Representative Renee L. Ellmers (Dec. 13, 
2011) (``Rep. Ellmers'') (referring to ``tungsten''); Rep. Lee 
(referring to gold, tin, tantalum, and tungsten as ``conflict 
minerals,'' by stating that ``[f]or years, minerals such as gold and 
other raw materials commonly used to produce tin, tantalum, and 
tungsten have been mined and sold illegally by rebel groups in parts 
of the Democratic Republic of the Congo (DRC) and neighboring 
countries,'' and that ``[t]hese `conflict minerals' have fueled 
decades of fighting in central Africa.''); Representative Tim Murphy 
(Dec. 29, 2011) (``Rep. Murphy'') (referring to ``tungsten''); and 
Senator Barbara Boxer, Senator John Boozman, Senator Christopher A. 
Coons, Senator Patrick J. Leahy, Senator Frank R. Lautenberg, and 
Senator Jeff Merkley (Oct. 18, 201) (``Sen. Boxer et al. I'') (``The 
purpose of Sec. 1502 is to create transparency and accountability in 
the mineral supply chain in the DRC. Minerals from the DRC--which 
include tin, tantalum, tungsten and gold--are commonly used in 
products such as cellphones, laptops and jewelry.'').
    \78\ See letter from SEMI.
    \79\ See letters from IPC II and NRF II.
---------------------------------------------------------------------------

    Additionally, despite the suggestion by certain commentators that 
we limit the definition of the term ``conflict mineral'' to minerals 
that financed or benefited armed groups, the final rule continues to 
use the term ``conflict mineral'' to refer to columbite-tantalite, 
cassiterite, gold, wolframite, and their derivatives, and any other 
mineral or its derivatives determined by the Secretary of State to be 
financing conflict in the Covered Countries whether or not they 
actually financed or benefited armed groups. We believe this approach 
is appropriate because it is consistent with the use of that term in 
the Conflict Minerals Statutory Provision and to change the definition 
of the term for the final rule could cause confusion among interested 
parties between the use of the term in the statutory provision and the 
use of the term in the final rule. However, issuers whose conflict 
minerals did not finance or benefit armed groups may describe their 
products containing those minerals as ``DRC conflict free'' in their 
specialized disclosure report, provided that the issuer is able to 
determine on the basis of due diligence conducted in accordance with a 
nationally or internationally recognized due diligence framework that 
such products are ``DRC conflict free'' as defined in the final rule.

B. Step One--Issuers Covered by the Conflict Mineral Provision

1. Issuers That File Reports Under the Exchange Act
a. Proposed Rules
    As we discussed in the Proposing Release, we recognize there is 
some ambiguity as to whom the Conflict Minerals Statutory Provision 
applies given that the provision states that the Commission shall 
promulgate regulations for any ``person described'' \80\ and that a 
``person is described'' if ``conflict minerals are necessary to the 
functionality or production of a product manufactured by such person.'' 
\81\ Therefore, the Conflict Minerals Statutory Provision could be 
interpreted to apply to a wide range of private companies not 
previously subject to our disclosure and reporting rules. Given the 
provision's legislative background, its statutory location, and the 
absence of Congressional direction to apply the provision to companies 
not previously subject to those rules,\82\ however, we believe the more 
appropriate interpretation is that the rules apply only to issuers that 
file reports with the Commission under Section 13(a) or Section 15(d) 
of the Exchange Act, and that is what we proposed.\83\ Also, consistent 
with the statutory language, our proposed rules would have applied 
equally to domestic companies, foreign private issuers, and smaller 
reporting companies.
---------------------------------------------------------------------------

    \80\ See Exchange Act Section 13(p)(1)(A).
    \81\ See Exchange Act Section 13(p)(2)(B).
    \82\ 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.'').
    \83\ Exchange Act Section 13(a) requires issuers with classes of 
securities registered under Exchange Act Section 12 [15 U.S.C. 78l] 
to file periodic and other reports. See 15 U.S.C. 78m. Exchange Act 
Section 15(d) requires issuers with effective registration 
statements under the Securities Act of 1933 (the ``Securities Act'') 
to file reports similar to Exchange Act Section 13(a) for the fiscal 
year within which such registration statement became effective. See 
15 U.S.C. 78n. Therefore, if our proposed rules did not include 
issuers required to file reports under Exchange Act 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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[[Page 56286]]

b. Comments on the Proposed Rules
i. Issuers That File Reports Under Sections 13(a) and 15(d) of the 
Exchange Act
    Many commentators addressing the issue agreed with the proposal 
that the final rule should apply to issuers that file reports under 
Sections 13(a) and 15(d) of the Exchange Act and not to private 
companies or individuals.\84\ Some of these and other commentators 
acknowledged, however, that not including individuals and private 
companies in the final rule could unfairly burden Sections 13(a) and 
15(d) issuers and put them at a competitive disadvantage by increasing 
their costs.\85\ On the other hand, some of these commentators noted 
that not including private companies and individuals in the final rule 
may not unduly burden Sections 13(a) and 15(d) issuers because the 
commercial pressure on private companies by issuers that need this 
information for their reports and by the public in general demanding 
that issuers make this information available could be sufficient enough 
for the private companies to provide voluntarily their conflict 
minerals information as standard practice.\86\ Another commentator 
argued that the effects of the final rule on competition ``are likely 
to be benign.'' \87\ This commentator asserted that ``conflict minerals 
disclosure costs will not increase the cost of being a publicly traded 
company by a significant percentage'' and that being able to declare a 
company's products as ``DRC conflict free'' could become a competitive 
advantage.\88\ Further, in response to our request for comment in the 
Proposing Release, all four commentators that discussed the issue 
agreed that an issuer with a class of securities exempt from Exchange 
Act registration pursuant to Exchange Act Rule 12g3-2(b) \89\ should 
not be subject to the final rule.\90\ One commentator recommended 
``that entities with Over-The-Counter American Depository Receipts (OTC 
ADRS) that file an annual report with the SEC should also be required 
to file a `Conflict Minerals Disclosure' report.'' \91\
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    \84\ See, e.g., letters from AngloGold; Arkema, Inc. (Mar. 1, 
2011) (``Arkema''); Calvert; Cleary Gottlieb; Communications and 
Information Network Association of Japan, Japan Auto Parts 
Industries Association, Japan Business Machine and Information 
System Industries Association, Japan Electronics and Information 
Technology Industries Association, The Japan Electrical 
Manufacturers' Association, Japan Machinery Center for Trade and 
Investment (Mar. 2, 2011) (``Japanese Trade Associations''); CRS I; 
Earthworks; Howland; IPC I; JVC et al. II; KEMET Corporation (Nov. 
1, 2011) (``Kemet''); PCP; Rockefeller Financial Asset Management 
(Mar. 1, 2011) (``Rockefeller''); SIF I; State II; TIC; and TriQuint 
I.
    \85\ See, e.g., letters from Howland, IPC I, ITIC I, NMA II, 
National Retail Federation (Mar. 2, 2011) (``NRF I''); TIC; and 
TriQuint I.
    \86\ Letter from Howland (noting that ``private companies (non 
reporters) will likely need to provide the same [conflict minerals] 
information to their customers who will need the information for 
their reports,'' and that providing conflict minerals information is 
``likely'' to ``become a de facto standard similar to RoHS (EU 
Restriction of hazardous Substances) for electronics'') and TIC 
(``Further, provided that the regulations apply to large and small 
issuers, they will form a critical mass which will, in practice, 
create sufficient commercial pressure on private companies and 
individuals who manufacture products involving potential conflict 
materials. Noncompliant companies will be unable to withstand the 
political and consumer pressures. Accordingly, there is no need for 
the SEC to seek to expand its jurisdiction.'').
    \87\ See letter from Green II.
    \88\ Id.
    \89\ 17 CFR 240.12g3-2(b).
    \90\ See Cleary Gottlieb, JVC et al. II, New York State Bar 
Association (Mar. 1, 2011) (``NY State Bar''), and SIF I.
    \91\ See letter from Calvert.
---------------------------------------------------------------------------

    Some commentators stated that the final rule should not necessarily 
require private companies to submit to us their conflict minerals 
information, but the final rule should provide mechanisms that allow 
private companies to report voluntarily on their conflict minerals in a 
manner similar to Sections 13(a) and 15(d) issuers,\92\ which could 
include working with other agencies that regulate non-reporting 
companies to have those agencies require their filers to provide 
similar conflict minerals information.\93\ Moreover, the State 
Department commented that it would encourage private companies not 
subject to the final rule to disclose voluntarily conflict minerals 
information.\94\ Other commentators disagreed with the proposed rules 
and indicated that the final rule should apply to more than just 
issuers that file reports under Sections 13(a) and 15(d) of the 
Exchange Act.\95\ A comment letter submitted jointly by two of the co-
sponsors of the legislation stated that their ``intent was for the 
requirements of Section 1502 to apply to all companies that fall under 
the jurisdiction of the SEC, including those who issue classes of 
securities otherwise exempt from reporting.'' \96\
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    \92\ See letters from Earthworks and TriQuint I.
    \93\ See letter from TriQuint I.
    \94\ See letter from State II.
    \95\ See, e.g., letters from Catholic Charities Diocese of 
Houma-Thibodaux (Apr. 21, 2011) (``Catholic Charities''), 
International Corporate Accountability Roundtable and Global Witness 
(Nov. 1, 2011) (``ICAR et al. II''), ITIC I, NRF I, Sen. Durbin/Rep. 
McDermott, Sisters of Good Shepherd (Apr. 8, 2011) (``Good 
Shepherd''), TIC, and Tiffany.
    \96\ See letter from Sen. Durbin/Rep. McDermott.
---------------------------------------------------------------------------

ii. Smaller Reporting Companies
    Many commentators agreed that the final rule, as we proposed, 
should not exempt smaller reporting companies.\97\ In this regard, one 
commentator noted that, although there would be additional costs for 
smaller reporting companies to comply with the rules, the increased 
costs will apply also to larger companies.\98\ Another commentator 
asserted that compliance costs for small issuers ``will be relatively 
modest'' due to their smaller scale and lower complexity of their 
businesses.\99\ One commentator did not believe that the proposed rules 
would impose higher costs on smaller companies significant enough to 
justify an exemption because smaller reporting companies would have 
fewer products to track than a larger company, which would decrease 
their compliance costs.\100\ The commentator based its belief on the 
fact that, although it was a small human rights group with a modest 
budget, it regularly undertakes field investigations and supply chain 
research that is very similar to the due diligence measures it 
recommended the Commission adopt. According to this commentator, if it 
is able to perform due diligence with a small staff, so too can a 
smaller reporting company.
---------------------------------------------------------------------------

    \97\ See, e.g., letters from BCIMC, Calvert, CRS I, Earthworks, 
Global Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen. 
Durbin/Rep. McDermott, SIF I, State II, TIAA-CREF, TIC, and TriQuint 
I.
    \98\ See letter from Howland.
    \99\ See letter from Green II. See also letter from ICAR et al. 
II (stating that ``because these issuers are smaller, it stands to 
reason that they will have fewer products that contain conflict 
minerals, thus reducing the amount of products that must undergo a 
reasonable country of origin inquiry and supply chain due 
diligence'').
    \100\ See letter from Global Witness I.
---------------------------------------------------------------------------

    Some commentators noted that exempting smaller reporting companies 
from the final rule could increase the burdens on larger reporting 
companies because the larger reporting companies may be less able to 
require their smaller reporting company suppliers to provide the 
conflict minerals information needed by the larger reporting 
companies.\101\ One of these commentators noted also that permitting 
limited disclosure and reporting obligations for smaller companies is 
unlikely to reduce significantly their burdens because larger companies 
would likely impose contractual obligations on them to track and 
provide their conflict minerals information for the larger 
companies.\102\
---------------------------------------------------------------------------

    \101\ See, e.g., letters from IPC I and TriQuint I.
    \102\ See letters from IPC I.
---------------------------------------------------------------------------

    Other commentators supported exempting smaller reporting companies 
because these companies would be less

[[Page 56287]]

able to compel their suppliers to provide conflict minerals information 
due to their lack of leverage,\103\ and because it would be more 
expensive for smaller reporting companies to comply with the rule 
relative to their revenues than for other companies.\104\ However, one 
commentator argued that, although such issuers may lack leverage, this 
disadvantage may be reduced through the influence exerted over their 
suppliers by larger issuers that use the same supplier base and that 
have more leverage to request such information.\105\ Some commentators 
argued that smaller reporting companies should be allowed to phase-in 
the rules or that the implementation date of the final rule should be 
deferred for them.\106\
---------------------------------------------------------------------------

    \103\ See, e.g., letters from ABA, JVC et al. II, and Society of 
Corporate Secretaries and Governance Professionals (Mar. 3, 2011) 
(``Corporate Secretaries I'').
    \104\ See letter from Corporate Secretaries I and Howland.
    \105\ See letter from Green II.
    \106\ See, e.g., letters from ABA, Howland, and JVC et al. II.
---------------------------------------------------------------------------

iii. Foreign Private Issuers
    A number of commentators believed that the final rule should not 
exempt foreign private issuers.\107\ As one commentator noted,\108\ 
exempting foreign private issuers from the final rule could increase 
domestic issuers' burdens by making it very difficult for them to 
compel their foreign private issuer suppliers to provide conflict 
minerals information. As another commentator noted,\109\ exempting 
foreign private issuers from the final rule could also result in a 
competitive disadvantage for domestic issuers because foreign private 
issuers would not be subject to the final rule. Further, this 
commentator indicated that not exempting foreign private issuers could 
actually motivate foreign companies to advocate for similar conflict 
minerals regulations in their home jurisdictions to reduce any 
competitive disadvantages they may have with companies from their 
jurisdictions that do not register with us. Finally, the commentator 
suggested that exempting foreign private issuers may hurt conflict 
minerals supply chain transparency, which would be contrary to the 
intent of Congress.
---------------------------------------------------------------------------

    \107\ See, e.g., letters from AngloGold, BCIMC, Calvert, CRS I, 
Earthworks, Global Witness I, Howland, JVC et al. II, NEI 
Investments (Mar. 2, 2011) (``NEI''), NY State Bar, SIF I, State II, 
TIAA-CREF, TriQuint I, WGC II, and WLF.
    \108\ See letter from TriQuint I.
    \109\ See letter from NEI.
---------------------------------------------------------------------------

    Only one commentator, a foreign private issuer, stated specifically 
that foreign private issuers should be exempt from the final rule.\110\ 
This commentator argued that any Congressional intent to give laws 
extraterritorial effect must be clearly expressed and stated, which the 
Conflict Minerals Statutory Provision fails to do. Also, the 
commentator noted that the proposed rules would violate international 
principles of diplomatic comity and could put diplomats from countries 
with foreign private issuers in jeopardy. Another commentator suggested 
that, if the final rule would cause ``more than an insignificant number 
of foreign private issuers to leave the U.S. markets or not to enter 
the U.S. markets,'' we should consider exempting all or some foreign 
private issuers from the final rule.\111\ A further commentator stated 
that, although it recommended that the final rule not exempt foreign 
private issuers, it expects that the final rule ``will represent just 
one more strong disincentive for such issuers to access the U.S. 
markets.'' \112\
---------------------------------------------------------------------------

    \110\ See letter from Taiwan Semi.
    \111\ See letter from ABA.
    \112\ See letter from NY State Bar.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are adopting the final rule as 
proposed. Therefore, the final rule applies to any issuer that files 
reports with the Commission under Section 13(a) or Section 15(d) of the 
Exchange Act, including domestic companies, foreign private issuers, 
and smaller reporting companies. We believe the statutory language is 
clear on this point and believe that it only applies to issuers that 
file reports with the Commission under Section 13(a) or Section 15(d) 
of the Exchange Act. There is no clear indication that Congress 
intended to cover issuers other than those that file such reports. 
Although we appreciate the views expressed in the comment letter 
submitted jointly by two of the co-sponsors of the legislation,\113\ 
the legislative history only refers to companies that file with or 
report to the Commission or that are listed on a United States stock 
exchange.\114\ The location of the statute adopted by Congress in the 
section of the Exchange Act dealing with reporting issuers reflects a 
more limited scope, as well.\115\
---------------------------------------------------------------------------

    \113\ See letter from Sen. Durbin/Rep. McDermott.
    \114\ 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.''); 156 Cong. 
Rec. S3976 (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 Statutory 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'').
    \115\ See Exchange Act Section 13 entitled ``Periodical and 
Other Reports.''
---------------------------------------------------------------------------

    The statute is silent with respect to any distinction among issuers 
based on the issuer's size or domesticity. Although not specifically in 
the context of smaller reporting companies or foreign private issuers, 
some commentators suggested that we use our general exemptive authority 
under Exchange Act Section 36(a) \116\ to exempt certain classes of 
companies from full and immediate compliance with the disclosures 
required by the Conflict Minerals Statutory Provision.\117\ The only 
limiting factor in the Conflict Minerals Statutory Provision itself as 
to the type of issuer to which it applies is based on whether conflict 
minerals are ``necessary to the functionality or production'' of 
products manufactured or contracted by the issuer to be 
manufactured.\118\ Moreover, Congress included a specific provision for 
Commission revisions and waivers to the reporting obligation that 
requires the President to determine such waiver or revision to be in 
the national security interest and limits such a Commission exemption 
to two years. In our view, the high standard set for this statutory 
waiver, as well as its limited duration, evinces a congressional intent 
for the Conflict Minerals Statutory Provision to apply broadly and 
exempting large categories of issuers would be inconsistent with this 
intent. We also recognize that section 1502 is not simply a disclosure 
obligation for issuers, but a comprehensive legislative scheme that 
contemplates coordinated

[[Page 56288]]

action by a number of federal agencies aimed at making public 
information about conflict minerals from the Covered Countries.\119\ We 
are concerned that any broad categories of exemptions would be 
inconsistent with this scheme and the statutory objective of reducing 
the use of conflict minerals from the Covered Countries that contribute 
to conflict.\120\ Congress chose to pursue this goal through the 
implementation of a comprehensive disclosure regime. In order to allow 
the provision to have the effect we understand Congress intended, we 
believe our rules must be consistent with the statutory language and 
not exempt broad categories of issuers from its application. Thus, we 
are not exempting smaller reporting companies or foreign private 
issuers.
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78mm(a) (``[T]he Commission, by rule, 
regulation, or order, may conditionally or unconditionally exempt 
any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or 
provisions of this chapter or of any rule or regulation thereunder, 
to the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of 
investors.'').
    \117\ See, e.g., letters from Davis Polk & Wardwell LLP (Mar. 2, 
2011) (``Davis Polk''); National Cable & Telecommunications 
Association (Oct. 31, 2011) (``NCTA''); Representatives Spencer 
Bachus, Gary G. Miller, Chairman, Robert J. Dold, and Steve Stivers 
(Jul. 28, 2011) (``Rep. Bachus et al.'') Verizon; and Wilmer Cutler 
Pickering Hale and Dorr LLP Hale on behalf of IPC (Jun. 2, 2011) 
(``WilmerHale'').
    \118\ Exchange Act Section 13(p)(2)(B).
    \119\ Sections 1502(c) and (d) of the Act. We recognize that 
Congress also required the Comptroller General to periodically 
report on, among other things, publicly available information 
regarding persons who are ``not required to file reports * * * 
pursuant to Section 13(p)(1)(A)'' and who manufacture products for 
which ``conflict minerals are necessary to the functionality or 
production.'' Section 1502(d)(2)(C). We interpret this provision to 
require reporting by the Comptroller General on persons--such as 
private companies not subject to our disclosure and reporting 
rules--who are not subject to the requirements of the Conflict 
Minerals Statutory Provision even though conflict minerals may be 
necessary to the functionality or production of their products. Any 
issuers that receive waivers or revisions pursuant to Section 
13(p)(3) would also be included.
    \120\ See letters from Global Witness I and State II and 
Transcript of SEC Roundtable on Conflict Minerals, Section 141 (Oct. 
18, 2011) (Statement of Tim Mohin), available at https://www.sec.gov/spotlight/conflictminerals/conflictmineralsroundtable101811-transcript.txt (stating that although no single company working 
alone can determine whether minerals in its products supported armed 
groups, large and small companies working together can make such a 
determination), id. at 22 (Statement of Bennett Freeman) (arguing 
that all companies across the value and supply chain should be 
covered by the rule because disclosures by all companies are 
important to investors). See also id. at 62, 92, and 103 (Statements 
of Andrew Matheson, Benedict S. Cohen, and Representative James 
McDermott, respectively) (assuming that small issuers would be 
covered by the rule).
---------------------------------------------------------------------------

    Additionally, it is unclear whether exempting smaller reporting 
companies in particular would significantly reduce their burdens 
because smaller reporting companies could still be required to track 
and provide their conflict minerals information for larger 
issuers.\121\ Moreover, to the extent there are benefits to smaller 
companies from an exemption, such an exemption could increase the 
burden on larger companies that rely on smaller reporting company 
suppliers to provide conflict minerals information needed by the larger 
reporting companies.
---------------------------------------------------------------------------

    \121\ See letters from IPC I.
---------------------------------------------------------------------------

    Further, as discussed in greater detail below, the final rule 
temporarily will permit all issuers that are unable to determine that 
their conflict minerals did not originate in the Covered Countries or 
that are unable to determine that their conflict minerals that 
originated in the Covered Countries did not directly or indirectly 
finance or benefit armed groups to describe their products as ``DRC 
conflict undeterminable,'' and temporarily will not require such 
issuers to obtain an independent private sector audit of their Conflict 
Minerals Report with respect to those minerals. This temporary 
accommodation will be available to all issuers for the first two years 
of reporting under the final rule. The final rule extends that period 
for smaller reporting companies for an additional two years, providing 
a temporary four-year provision for smaller reporting companies. This 
approach is consistent with some commentators' recommendations as to 
the applicability of the reporting requirement to smaller reporting 
companies.\122\
---------------------------------------------------------------------------

    \122\ See letter from Howland (stating that, although ``[t]here 
will be additional costs that may be proportionally higher for small 
companies, but increased costs will also apply to large firms,'' a 
way that the final rule can ``mitigate the cost is to phase in the 
acceptable level of rigor for due diligence over several years and 
based on company size''). See also letter from JVC et al. II 
(stating that, ``[w]ith respect to smaller reporting companies, it 
is reasonable to assume that the costs of compliance may 
disproportionately harm them by comparison with any concomitant 
benefit in achieving the statutory goals, since these companies lack 
the leverage to pressure suppliers and smelters to certify regarding 
the source of a particular conflict mineral,'' so ``we believe it 
would be appropriate to allow smaller reporting companies even more 
time in which to adapt the results of these broader global 
initiatives to their individual facts and circumstances'').
---------------------------------------------------------------------------

    Similarly, we are not exempting foreign private issuers because we 
do not believe that it would give effect to Congressional intent of the 
provision. As commentators noted, exempting foreign private issuers 
could make it difficult for issuers to compel their foreign private 
issuer suppliers to provide conflict minerals information, result in a 
competitive disadvantage for domestic issuers, and hurt conflict 
minerals supply chain transparency.\123\ Also, we note that including 
foreign private issuers in the final rule does not give the Conflict 
Minerals Statutory Provision an extraterritorial effect because it 
applies only to foreign private issuers that enter the securities 
markets of the United States.
---------------------------------------------------------------------------

    \123\ See letters from NEI and TriQuint I.
---------------------------------------------------------------------------

2. ``Manufacture'' and ``Contract to Manufacture'' Products
a. Proposed Rules
    The Conflict Minerals Statutory Provision applies to any person for 
whom conflict minerals are necessary to the functionality or production 
of a product manufactured by that person. The proposed rules would 
likewise have applied to reporting persons for whom conflict minerals 
are necessary to the functionality or production of products they 
manufacture. We did not define the term ``manufacture'' in the proposed 
rules, because we believed the term to be generally understood.\124\
---------------------------------------------------------------------------

    \124\ 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).
---------------------------------------------------------------------------

    In addition, based on the text of the Conflict Minerals Statutory 
Provision as well as statutory intent, the proposed rules would also 
have applied to issuers that contract to manufacture products. As 
discussed in the Proposing Release, one section of the Conflict 
Minerals Statutory 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,'' \125\ while 
another section of the provision requires an issuer to describe ``the 
products manufactured or contracted to be manufactured that are not DRC 
conflict free'' [emphasis added] in its Conflict Mineral Report.\126\ 
The absence of the phrase ``contract to manufacture'' from the ``person 
described'' definition raised 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, we expressed in the 
Proposing Release our belief 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. The proposed rules, therefore, would have 
applied equally to issuers that manufacture products and to issuers 
that ``contract to manufacture'' their products. We noted that this 
approach would allow the ``contracted to be manufactured'' language to 
have effect in the Conflict Minerals Report.
---------------------------------------------------------------------------

    \125\ Exchange Act Section 13(p)(2)(B).
    \126\ Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------

    In the Proposing Release, we explained that the proposed rules 
would apply to issuers that contract for the manufacturing of products 
over which they had any influence regarding the manufacturing of those 
products. As proposed, they also would have applied to issuers selling 
generic products under their own brand name or a separate

[[Page 56289]]

brand name that they had established, regardless of whether those 
issuers had any influence over the manufacturing specifications of 
those products, as long as an issuer had contracted with another party 
to have the product manufactured specifically for that issuer. We did 
not, however, propose that the rules would apply to retail issuers that 
sell only the products of third parties if those retailers had no 
contract or other involvement regarding the manufacturing of those 
products, or if those retailers did not sell those products under their 
brand name or a separate brand they had established and did not have 
those products manufactured specifically for them.
b. Comments on the Proposed Rules
i. ``Manufacture''
    Many commentators agreed with the proposed rules that the final 
rule should not define the term ``manufacture'' because that term is 
generally understood.\127\ Many other commentators, however, believed 
that the final rule should define the term,\128\ and most of these 
commentators provided their recommendations for the definition. A 
number of commentators indicated that the definition should mirror the 
North American Industry Classification System (``NAICS''),\129\ which 
classifies entities as manufacturers if they engage in the mechanical, 
physical, or chemical transformation of materials, substances, or 
components into new products from raw materials that are products of 
agriculture, forestry, fishing, mining, or quarrying.
---------------------------------------------------------------------------

    \127\ See, e.g., letters from ABA, Global Witness I, Howland, 
NYCBar I, NYCBar II, State II, TIC, and United States Steel 
Corporation (Mar. 4, 2011) (``US Steel'').
    \128\ See, e.g., letters from American Association of Exporters 
and Importers (Jan. 21, 2011) (``AAEI''); AngloGold; Columban Center 
for Advocacy and Outreach, Leadership Conference of Women Religious, 
Sisters of Mercy of the Americas--Institute Justice Team, Missionary 
Oblates, and Maryknoll Office for Global Concerns (Mar. 2, 2011) 
(``Columban Center et al.''); CTIA--The Wireless Association (Mar. 
1, 2011) (``CTIA''); Earthworks; Enough Project I; International 
Corporate Accountability Roundtable, Enough Project, and Global 
Witness (Sep. 23, 2011) (``ICAR et al. I''); Metalsmiths; NAM I; 
NEI; NMA II; RILA-CERC; SIF I; TriQuint I; and WGC II.
    \129\ See letters from AAEI, AngloGold, BCE Inc. (Oct. 31, 2011) 
(``BCE''), Canadian Wireless Telecommunications Association (Oct. 
28, 2011) (``CWTA''), CTIA, NAM I, NCTA, NMA II, RILA-CERC, and WGC 
II.
---------------------------------------------------------------------------

    Some commentators stated that the final rule should define the term 
inclusively or broadly so as to include all steps in the supply chain, 
from mining to manufacturing the product, because otherwise it would 
become exponentially more difficult for manufacturing issuers 
downstream in the supply chain to comply with the final rule.\130\ One 
commentator indicated that the term should include all steps from 
mining, refining, and production to the importing, exporting, or sale 
of ingredients, materials, and/or processes.\131\ A few commentators 
indicated that the final rule should provide a definition consistent 
with the U.S. Controlled Substances Act, which includes the production, 
preparation, assembling, propagation, combination, compounding, or 
processing of a drug or other substance, either directly or indirectly 
or by extraction from substances of natural origin.\132\ One of these 
commentators stated that such a consistent definition would include 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.'' \133\ One 
commentator asserted that the definition should include any entity 
``involved in the process of changing a product * * * from one form to 
another.'' \134\ One commentator suggested that the definition ``should 
be tailored only to include OEM's and those who design and specify 
bills of materials for products with control over the procurement or 
fabrication of the same products' bill of materials and specification 
of the constituent materials of the components.'' \135\ One commentator 
urged us to provide clear guidance indicating that real estate 
development does not constitute manufacturing.\136\
---------------------------------------------------------------------------

    \130\ See letters from Columban Center et al., Metalsmiths, and 
TriQuint I.
    \131\ See letter from Earthworks.
    \132\ See letters from Enough Project I and SIF I.
    \133\ See letter from Enough Project I (citing to its earlier 
letter submitted Sep. 24, 2010 on the Pre-Proposing Release Web 
site).
    \134\ See letter from Jeffrey Trott (Jan. 31, 2011) (``Trott'').
    \135\ See letter from Retail Industry Leaders Association (Nov. 
1, 2011) (``RILA'').
    \136\ See letter from National Association of Real Estate 
Investment Trusts (Nov. 23, 2011) (``NAREIT'').
---------------------------------------------------------------------------

ii. ``Contract to Manufacture''
    Not all commentators agreed on whether the final rule should 
include an issuer that contracts to manufacture a product. However, 
many commentators that agreed that the final rule should include an 
issuer that contracts to manufacture a product, or did not agree but 
argued in the alternative, recommended that an issuer should be 
required to have some amount of control or influence over the 
manufacturing process before the final rule considers that issuer to be 
contracting to manufacture a product.\137\ A number of commentators 
suggested the level of control necessary to be considered contracting 
to manufacture a product under the final rule. In this regard, some 
commentators suggested that only an issuer with direct, close, active, 
and/or substantial involvement or control in the sourcing of materials, 
parts, ingredients, or components to be included in its products or in 
the manufacturing of those products should meet the minimum control 
threshold necessary to be considered contracting to manufacture a 
product.\138\ One commentator recommended that an issuer should be 
considered to be contracting to manufacture a product only if it 
exercises ``a sufficient level of influence, involvement or control 
over the process to be able to control, in a meaningful manner, the use 
of conflict minerals, or to evaluate and influence the use of conflict 
minerals.''\139\ Some commentators asserted that the minimum control 
threshold should be met only if the issuer explicitly specifies the 
inclusion of conflict minerals in the product.\140\ Another commentator 
advised that the contracting activities that should trigger conflict 
minerals reporting should include designing the product, controlling 
the approved materials or vendor lists for the product, and including 
the issuer's name on the product.\141\
---------------------------------------------------------------------------

    \137\ See, e.g., letters from AdvaMed I, AT&T Inc. (Mar. 9, 
2011) (``AT&T''), Chamber I, Cleary Gottlieb, Consumer Electronics 
Retailers Coalition (Nov. 1, 2011) (``CERC''), Industry Group 
Coalition I, IPC I, IPC II, JVC et al. II, NAM I, NCTA, Niotan I, 
NMA II, NRF I, NRF II, PCP, RILA, Roundtable, SEMI, TIAA-CREF, and 
TriQuint I.
    \138\ See letters from AT&T, CERC, Corporate Secretaries I, 
CTIA, JVC et al. II, NCTA, NRF I, RILA, and Verizon.
    \139\ See letter from ABA.
    \140\ See letters from NAM I and SEMI.
    \141\ See letter from TriQuint I.
---------------------------------------------------------------------------

    Some of these commentators, as well as others, asserted that an 
issuer should not be considered to meet the control threshold to the 
extent that the product is not manufactured to meet an issuer's custom 
specifications, but rather is manufactured to meet industry-standard 
specifications common to the issuer's competitors generally.\142\ For 
example, a group of jewelry industry commentators argued in one letter 
that a jewelry retail issuer ordering products from jewelry 
manufacturers should not be considered contracting to manufacture for 
those products if the retail issuer specifies only weight, karat, or 
other indicators of

[[Page 56290]]

quality.\143\ As another example, a mobile phone service provider 
asserted that it should not be considered contracting to manufacture 
its mobile phones even though it specifies to its manufacturers that 
the phones must be compatible with their networks and have certain 
cosmetic design requirements.\144\
---------------------------------------------------------------------------

    \142\ See letters from AngloGold, AT&T, BCE, JVC et al. II, 
NCTA, and RILA-CERC.
    \143\ See letter from JVC et al. II.
    \144\ See letter from AT&T. See also letter from BCE (stating 
that the commentator, a distributor of a wide range of 
telecommunications and electronic products supplied by hundreds of 
manufacturers, ``exerts no substantial control over the design or 
the technical features of those products or any control, direct or 
indirect, over the supply chains, which may be quite complex, of 
such manufacturers,'' and its ``sole input into the manufacturing 
process relates to providing brand name manufacturers with certain 
technical specifications to ensure compliance with applicable 
Canadian regulatory standards or to requesting special product 
features, cosmetic in nature, to meet Canadian consumer market 
demands'').
---------------------------------------------------------------------------

    Some commentators suggested that the final rule should not consider 
an issuer to be contracting to manufacture products if the issuer is 
selling products under its own brands, labels, trademarks, or licenses 
if it had little or no influence in manufacturing those products.\145\ 
Other commentators recommended that the final rule should consider such 
issuers to be contracting to manufacture those products.\146\ One 
commentator asserted that generic products should be held to the same 
standard as branded products and that the final rule should avoid using 
any definitions that create a perverse incentive for an issuer to work 
with special purpose entities designed to follow the technical 
requirements of the law but evade its intent.\147\ Another commentator 
suggested that the final rule should apply to issuers selling generic 
products under their own name or a separate brand name, but not to 
retailers who do not do so and have no influence over the manufacturing 
of products they sell.\148\
---------------------------------------------------------------------------

    \145\ See letters from AT&T, BCE, Cleary Gottlieb, CTIA, 
Industry Group Coalition I, JVC et al. II, NAM I, NCTA, and NRF I.
    \146\ See letters from Enough Project I, Howland, NEI, SIF I, 
State II, and TriQuint I.
    \147\ See letter from AxamTrade (Feb. 10, 2011) (``Axam'').
    \148\ See letter from NYCBar II.
---------------------------------------------------------------------------

    Some commentators recommended that an issuer should be considered 
to be contracting to manufacture a product only if the issuer has a 
direct contractual relationship with the manufacturer of the product to 
be sold by the issuer, the issuer has substantial control over the 
manufacturer and the material specifications of the product and 
specifies the conflict minerals to be used in the product, the product 
will be manufactured exclusively for the issuer, and the product will 
be sold by the issuer under its own brand name or a brand name owned by 
the issuer or exclusively licensed to the issuer by the owner of the 
brand.\149\ One of these commentators went on to assert that an issuer 
should not be considered to be exerting ``substantial control'' over 
manufacturing by ``merely attaching a brand label to a generic good, 
contracting for the exclusive distribution of goods, or specifying the 
form, fit or function of a product,'' and should not be considered to 
be contracting to manufacture a product solely by ``attaching a brand 
label to a generic good, contracting for the exclusive distribution of 
goods, or specifying the form, fit or function of a product.'' \150\
---------------------------------------------------------------------------

    \149\ See letters from CERC and RILA.
    \150\ See letter from RILA.
---------------------------------------------------------------------------

    Other commentators stressed that the final rule should not apply to 
any issuer contracting to manufacture its products.\151\ These 
commentators argued generally that the statute does not include an 
issuer that contracts to manufacture its products because the phrase 
does not appear in the subsection of the Conflict Minerals Statutory 
Provision discussing a ``person described.'' Instead, the phrase 
appears only in the subsection that describes the disclosures required 
in a Conflict Minerals Report. Therefore, Congress's intent in 
including the phrase was only to ensure that a manufacturer otherwise 
subject to the Conflict Minerals Statutory Provision could not 
intentionally evade its reporting obligation merely by distancing 
itself, through contracting, from the manufacturing process.\152\
---------------------------------------------------------------------------

    \151\ See, e.g., letters from BCE, CERC, CTIA, Davis Polk, NCTA, 
RILA-CERC, TIC, and United States Telecom Association (Mar. 2, 2011) 
(``US Telecom'').
    \152\ See letters from AT&T, CTIA, and RILA-CERC.
---------------------------------------------------------------------------

c. Final Rule
i. ``Manufacture''
    After considering the comments, we are modifying the proposed 
rules, in part. The final rule, as proposed, applies to any issuer for 
which conflict minerals are necessary to the functionality or 
production of a product manufactured or contracted by that issuer to be 
manufactured. The final rule does not define the term ``manufacture'' 
because we continue to believe, as discussed in the Proposing Release, 
that the term is generally understood. We note, however, that we do not 
consider an issuer that only services, maintains, or repairs a product 
containing conflict minerals to be ``manufacturing'' a product; \153\ 
this interpretation is not a change from the Proposing Release, but a 
clarification in response to comments.\154\
---------------------------------------------------------------------------

    \153\ See letter from JVC et al. II (commenting that ``certain 
assembly and repair functions commonly performed by jewelry 
retailers'' should not be defined as manufacturing).
    \154\ See, e.g., letter from ABA (commenting that the Commission 
``should, either in the final rule or in the corresponding adopting 
release, provide additional guidance as to activities that will not 
be considered to be the manufacturing of a product for the purposes 
of the rule'').
---------------------------------------------------------------------------

    We believe narrowing or expanding the definition of ``manufacture'' 
as suggested by some commentators would be inconsistent with the 
language and framework of Section 1502. For example, the NAICS 
definition, which a number of commentators suggested, appears to 
exclude any issuer that manufactures a product by assembling that 
product out of materials, substances, or components that are not in raw 
material form. Such a definition would exclude large categories of 
issuers that manufacture products through assembly, such as certain 
auto and electronics manufacturers, whom we believe are intended to be 
covered by the Conflict Minerals Statutory Provision. As another 
example, the manufacturing definition put forth by one commentator 
appears to include ``importing, exporting, or sale of conflict 
minerals,'' \155\ which would expand the definition to include issuers 
that clearly do not manufacture products. Also, many of the other 
suggested definitions simply expound upon the generally understood 
meaning of the term, which we do not believe we need to define.
---------------------------------------------------------------------------

    \155\ See letter from Earthworks.
---------------------------------------------------------------------------

ii. ``Contract to Manufacture''
    Consistent with the proposal, the final rule applies to any issuer 
for which conflict minerals are necessary to the functionality or 
production of a product contracted by that issuer to be manufactured, 
including conflict minerals in a component of a product. In general, 
the question of whether an issuer contracts to manufacture a product 
will depend on the degree of influence exercised by the issuer on the 
manufacturing of the product based on the individual facts and 
circumstances surrounding an issuer's business and industry. The final 
rule does not define when an issuer contracts to manufacture a product 
because, although we believe this concept is intuitive at a basic 
level, after considering comments and attempting to develop a precise 
definition, we concluded that, for ``contract to manufacture'' to cover 
issuers operating in the wide variety of the impacted industries and 
structured

[[Page 56291]]

in various manners, any definition of that term would be so complicated 
as to be unworkable. We do, however, provide guidance below on some 
general principles that we believe are relevant in determining whether 
an issuer should be considered to be contracting to manufacture a 
product.
    As a threshold matter, consistent with the proposal, we believe the 
statutory intent to include issuers that contract to manufacture their 
products is clear based on the statutory obligation for issuers to 
describe in their Conflict Minerals Reports products that are 
manufactured and contracted to be manufactured that do not meet the 
definition of ``DRC conflict free.'' \156\ We recognize that 
commentators asserted that the statute does not include an issuer that 
contracts to manufacture its products and that the sole intent behind 
including the phrase in the provision was to keep manufacturers from 
intentionally evading reporting requirements by contracting the 
manufacturing of their products to third parties. Nonetheless, Exchange 
Act Section 13(p)(1)(A)(ii) requires issuers that must file a Conflict 
Minerals Report to describe their ``products manufactured or contracted 
to be manufactured that are not DRC conflict free'' (emphasis added). 
In our view, the inclusion of products that are ``contracted to be 
manufactured'' in this requirement indicates that Congress intended the 
Conflict Mineral Statutory Provision to apply to such products, and 
including issuers who contract to manufacture their products in the 
scope of the rule effectuates this intent. We believe our reading is 
more consistent with the statute than the alternative reading--that 
Congress required a description of products that were ``contracted to 
be manufactured'' and were not ``DRC conflict free,'' but did not 
require issuers that contracted to manufacture products to determine 
whether a Conflict Minerals Report was required to be filed. This would 
be internally inconsistent. It would significantly undermine the 
purpose of the statutory provision to fail to apply it to issuers that 
contract to manufacture their products.
---------------------------------------------------------------------------

    \156\ See Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------

    As another threshold matter, we believe the phrase ``contract to 
manufacture'' captures manufacturers that contract the manufacturing of 
components of their products. Generally, we believe that manufacturing 
issuers that contract the manufacturing of certain components of their 
products should, for purposes of the Conflict Minerals Statutory 
Provision, be viewed as responsible for the conflict minerals in those 
products to the same extent as if they manufactured the components 
themselves. We believe it is inconsistent with the Conflict Minerals 
Statutory Provision to allow these manufacturers to avoid the final 
rule's requirements by contracting out the manufacture of components in 
their products that contain conflict minerals. As two of the co-
sponsors of the Conflict Minerals Statutory Provision noted, ``[m]any 
companies use component parts from any one of several suppliers when 
assembling their products'' to ``help drive down the price for parts 
through competition,'' but ``[i]t is of paramount importance that this 
business model choice not be used as a rationale to avoid reporting and 
transparency.'' \157\
---------------------------------------------------------------------------

    \157\ See letter from Senator Richard J. Durbin and 
Representative Jim McDermott (Oct. 4, 2010) (Pre-Proposing Release 
Web site) (``Sen. Durbin/Rep. McDermott pre-proposing'').
---------------------------------------------------------------------------

    In the proposal, we expressed our belief that an issuer that does 
not manufacture a product itself but that has ``any'' influence over 
the product's manufacturing should be considered to be contracting to 
manufacture that product. Also, we expressed our belief that an issuer 
that offers a generic product under its own brand name or a separate 
brand name should be considered to be contracting to manufacture that 
product so long as the issuer had contracted to have the product 
manufactured specifically for itself. We had believed that these 
issuers should have been considered to be contracting those products to 
be manufactured because the issuers would implicitly influence the 
manufacturing of the products. However, we are persuaded by 
commentators that this level of control set forth in the Proposing 
Release was ``overbroad'' and ``confusing'' and would impose on such an 
issuer ``significant,'' ``unrealistic,'' and ``costly'' burdens.\158\
---------------------------------------------------------------------------

    \158\ See, e.g., letters from ABA, AT&T, Corporate Secretaries 
I, Davis Polk, and Verizon. See also letter from NRF I (stating that 
our proposed approach would be ``draconian'').
---------------------------------------------------------------------------

    Consistent with our approach in the Proposing Release, we believe 
that ``contract to manufacture'' is intended to include issuers that 
have some actual influence over the manufacturing of their products. 
However, we have modified our view as to the circumstances under which 
an issuer is considered to be contracting to manufacture a product. An 
issuer is considered to be contracting to manufacture a product 
depending on the degree of influence it exercises over the materials, 
parts, ingredients, or components to be included in any product that 
contains conflict minerals or their derivatives. The degree of 
influence necessary for an issuer to be considered to be contracting to 
manufacture a product is based on each issuer's individual facts and 
circumstances. However, based on comments we received, we believe an 
issuer should not be viewed for the purposes of the Conflict Minerals 
Statutory Provision as contracting to manufacture a product if its 
actions involve no more than:
    (a) Specifying or negotiating contractual terms with a manufacturer 
that do not directly relate to the manufacturing of the product, such 
as training or technical support, price, insurance, indemnity, 
intellectual property rights, dispute resolution, or other like terms 
or conditions concerning the product, unless the issuer specifies or 
negotiates taking these actions so as to exercise a degree of influence 
over the manufacturing of the product that is practically equivalent to 
contracting on terms that directly relate to the manufacturing of the 
product; or
    (b) Affixing its brand, marks, logo, or label to a generic product 
manufactured by a third party; or
    (c) Servicing, maintaining, or repairing a product manufactured by 
a third party.
    For example, we agree with commentators that an issuer that is a 
service provider that specifies to a manufacturer that a cell phone it 
will purchase from that manufacturer to sell at retail must be able to 
function on a certain network does not in-and-of-itself exert 
sufficient influence to ``contract to manufacture'' the phone for 
purposes of the final rule. Under the proposed rules, however, such an 
issuer may have reached the ``any'' influence threshold. Conversely, we 
do not agree with commentators that an issuer must have ``substantial'' 
influence or control over the manufacturing of a product before the 
issuer is considered to be contracting to manufacture that 
product.\159\ Such a standard would significantly limit the coverage of 
the Conflict Minerals Statutory Provision for issuers that contract to 
manufacture products, and we do not believe that such a narrow scope is 
consistent with the intent of the Conflict Minerals Statutory 
Provision. For example, if there are specifications made by an issuer 
to a manufacturer that it contracts with for the inclusion of a 
particular conflict mineral in the product, the

[[Page 56292]]

issuer might not be viewed as exerting ``substantial'' influence on the 
overall manufacturing of the product. However, we would view such an 
issuer as covered under the final rule as contracting to manufacture 
the product. In addition, we disagree with commentators that suggested 
that the final rule should apply only to issuers that explicitly 
specify that conflict minerals be included in their products.\160\ We 
believe this is too narrow an interpretation of the statutory provision 
and, read in this manner, the statute would be illogical. For example, 
as commentators argued, Congress inserted ``contract to manufacture'' 
in the disclosure of products to prevent manufacturers from skirting 
the disclosure requirements by contracting to manufacture certain 
products. However, if ``contract to manufacture'' is not included in 
the definition of ``person described,'' an issuer may evade the statute 
by contracting its manufacturing to a third party. Therefore, an issuer 
would never be required to disclose its minerals because the issuer 
would not qualify for steps two and three.
---------------------------------------------------------------------------

    \159\ See, e.g., letters from AT&T, Corporate Secretaries I, 
CTIA, JVC et al. II, NRF I, and Verizon.
    \160\ See, e.g., letters from NAM I and SEMI.
---------------------------------------------------------------------------

    Moreover, in contrast to our approach in the Proposing Release, we 
do not consider an issuer to be contracting to manufacture a product 
for the purposes of our rule solely if it offers a generic product 
under its own brand name or a separate brand name without additional 
involvement by the issuer. We are persuaded by commentators that such 
an issuer would not necessarily exert a sufficient degree of influence 
on the manufacturer to be considered as contracting to manufacture the 
product for purposes of the Conflict Minerals Statutory Provision. As 
one commentator noted, it seems that such a relationship between an 
issuer and manufacturer is better characterized as one in which the 
manufacturer is using the issuer as a ``sales channel'' as opposed to 
one in which the issuer is ``outsourcing manufacturing to'' the 
manufacturer.\161\ Such a relationship limits the issuer's influence on 
the product's manufacturing to the extent that it puts the issuer in a 
similar position to that of a pure retailer. One commentator noted that 
the purposes of the Conflict Minerals Statutory Provision are not 
served by classifying such an issuer as contracting to manufacture a 
product.\162\ We agree. However, an issuer with generic products that 
include its brand name or a separate brand name and that has 
involvement in the product's manufacturing beyond only including such 
brand name would need to consider all of the facts and circumstances in 
determining whether its influence reaches such a degree so as to be 
considered contracting to manufacture that product.
---------------------------------------------------------------------------

    \161\ See letter from AT&T.
    \162\ See letter from Cleary Gottlieb.
---------------------------------------------------------------------------

3. Mining Issuers as ``Manufacturing'' Issuers
a. Proposed Rules
    Under the proposed rules, we would have considered an issuer that 
mines conflict minerals to be manufacturing those minerals and an 
issuer contracting for the mining of conflict minerals to be 
contracting for the manufacture of those minerals. In this regard, we 
proposed in an instruction to the rules that mining issuers be 
considered to be manufacturing conflict minerals when they extract 
those minerals.\163\ We did, however, request comment on this point.
---------------------------------------------------------------------------

    \163\ See Industry Guide 7 [17 CFR 229.802(g)] (implying that 
companies may ``produce'' minerals from a mining reserve).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    A number of commentators stated specifically that the final rule 
should consider any issuer that mines conflict minerals as 
``manufacturing'' those conflict minerals as ``products.'' \164\ A few 
commentators noted that mining issuers should be included as 
manufacturers because they begin the conflict minerals supply chain and 
other reporting issuers must rely on them for information.\165\ As 
such, without the final rule including mining issuers, other issuers 
would have a very difficult time complying with the rules, which would 
eliminate transparency from the supply chain and undermine the 
provision.\166\
---------------------------------------------------------------------------

    \164\ See, e.g., letters from Bario-Neal Jewelry (Mar. 1, 2011) 
(``Bario-Neal''); Brilliant Earth, Inc. (Feb. 28, 2011) (``Brilliant 
Earth''); CRS I; Earthworks; Electronics TakeBack Coalition (Mar. 2, 
2011) (``TakeBack''); Enough Project I; Enough Project (Nov. 2, 
2011) (``Enough Project IV''); Global Tungsten I; Hacker Jewelers, 
Designers & Goldsmiths, Inc. (Mar. 1, 2011) (``Hacker Jewelers''); 
Hoover & Strong, Inc. (Mar. 1, 2011) (``Hoover & Strong''); ICAR et 
al. I; NEI; Niotan I; NYCBar I; SIF I; State II; TIAA-CREF; TriQuint 
I; and U.S. Steel.
    \165\ See letters from Global Witness I and TriQuint I (noting 
that mining companies do, in fact, engage in a transformative 
process such that they transform natural resources into ores, which 
should be considered ``manufacturing'').
    \166\ See letter from Enough Project I.
---------------------------------------------------------------------------

    Other commentators indicated that the final rule should not treat 
mining issuers as manufacturers of the conflict minerals they 
extract.\167\ Some of these commentators argued that the final rule 
should incorporate the NAICS definition of ``manufacturing,'' which 
they noted does not include mining as a type of manufacturing 
activity.\168\ Certain commentators noted that mining of conflict 
minerals, especially gold, shares no characteristics with the 
manufacturing of products.\169\ Finally, some commentators asserted 
that Congress did not intend to include mining issuers as manufacturers 
based on previous versions of the Conflict Minerals Statutory 
Provision, legislative statements, and a plain reading of the 
statute.\170\ As some of these commentators noted, the Conflict 
Minerals Statutory Provision was preceded by other legislative 
proposals that were drafted to include mining issuers, but the Conflict 
Minerals Statutory Provision was not drafted in such a manner.\171\ One 
such commentator indicated that these previous bills ``explicitly 
applied not only to companies using covered minerals in their 
manufacturing processes, but also to persons engaged in `the commercial 
exploration, extraction, importation, exportation, or sale' of the 
covered minerals.''\172\ According to the commentator, the fact that 
Congress chose not to include extraction activities in the Conflict 
Minerals Statutory Provision demonstrates that Congress's intent was 
not to have the Conflict Minerals Statutory Provision include mining as 
manufacturing.
---------------------------------------------------------------------------

    \167\ See, e.g., letters from ABA, AngloGold, Barrick Gold, 
Cleary Gottlieb, ITRI Ltd. (Jan. 27, 2011) (``ITRI I''), NAM III, 
NMA II, Vale S.A. (Mar. 3, 2011) (``Vale''), and WGC II.
    \168\ See letters from AngloGold and WGC II.
    \169\ See letters from AngloGold and Barrick Gold.
    \170\ See letters from AngloGold, NMA II, National Mining 
Association (Nov. 1, 2011) (``NMA III''), and Vale.
    \171\ See, e.g., letters from AngloGold and NMA II.
    \172\ Letter from NMA II (referring to S. 891 and S.A. 2707 
(2009)).
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are modifying the proposal. We 
do not consider an issuer that mines or contracts to mine conflict 
minerals to be manufacturing or contracting to manufacture those 
minerals unless the issuer also engages in manufacturing, whether 
directly or indirectly through contract, in addition to mining. In this 
regard, we do not believe that mining is ``manufacturing'' based on a 
plain reading of the provision. We agree with the commentators 
concerned that the statutory language does not explicitly include 
mining anywhere in the Conflict Minerals Statutory Provision and 
including mining would expand the statutory mandate. The Conflict 
Minerals Statutory Provision does not specifically refer to mining and, 
as one

[[Page 56293]]

commentator noted, ``[t]o extend the terms `manufacture' of a `product' 
to include the mining of conflict minerals contorts the plain meaning 
of those terms.'' \173\
---------------------------------------------------------------------------

    \173\ See letter from AngloGold.
---------------------------------------------------------------------------

    As discussed by commentators, legislative history demonstrates that 
Congress did not intend to include issuers that solely mine conflict 
minerals in the Conflict Minerals provision because it removed 
references to such activities from prior versions of the provision. For 
example, one commentator in two comment letters noted that prior 
versions of the Conflict Minerals Statutory Provision explicitly 
applied to anyone either using covered minerals in their manufacturing 
processes or engaging in ``the commercial exploration, extraction, 
importation, exportation or sale of the covered minerals.'' \174\ 
However, the final version of the Conflict Minerals Statutory Provision 
omits any reference to extraction-related activities and refers solely 
to manufacturing.\175\ As this commentator stated, Congress's omission 
of mining activities evidences its intent ``to address the 
manufacturing of goods which use or contain, as opposed to the 
extracting and processing of, the covered minerals.'' \176\ Therefore, 
based on both the plain reading of the provision and the legislative 
history of the provision, we are persuaded that it would be 
inconsistent with the language in the Conflict Minerals Statutory 
Provision to include mining issuers as manufacturing issuers under the 
final rule unless the mining issuer engages in manufacturing, either 
directly or through contract, in addition to mining.
---------------------------------------------------------------------------

    \174\ See letters from NMA II and NMA III. These letters discuss 
two legislative proposals introduced in the Senate in 2009 that were 
similar to the Conflict Minerals Statutory Provision. See Congo 
Conflict Minerals Act of 2009, S. 891, 111th Cong. (2009) and S.A. 
2707, 111th Cong. (2009). Both of these earlier conflict minerals 
proposals explicitly applied to companies using conflict minerals in 
their manufacturing processes and also to persons engaged in ``the 
commercial exploration, extraction, importation, exportation, or 
sale'' of conflict minerals.
    \175\ See letters from NMA II.
    \176\ Id.
---------------------------------------------------------------------------

4. When Conflict Minerals Are ``Necessary'' to a Product
    The Conflict Minerals Statutory Provision requires us to promulgate 
regulations requiring that any ``person described'' disclose annually 
whether conflict minerals that are ``necessary'' originated in the 
Covered Countries and, if so, submit to us a Conflict Minerals 
Report.\177\ 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.'' \178\ The 
provision, however, provides no additional explanation or guidance as 
to the meaning of ``necessary to the functionality or production of a 
product.'' Likewise, we did not propose to define when a conflict 
mineral is necessary to the functionality or production of a product. 
We did, however, request comment on whether and how our rules should 
define this phrase and we provided some guidance as to the meaning of 
``necessary to the production of a product.''
---------------------------------------------------------------------------

    \177\ Exchange Act Section 13(p)(1)(A).
    \178\ Exchange Act Section 13(p)(2)(B).
---------------------------------------------------------------------------

a. Proposed Rules
    Although we did not propose to define ``necessary to the 
functionality or production'' in the rules, we noted in the Proposing 
Release that, if a mineral is necessary, the product was included 
within the scope of the rules without regard to the amount of the 
mineral involved. Further, we indicated in the Proposing Release that a 
conflict mineral would be considered necessary to the production of a 
product if the conflict mineral was intentionally included in a 
product's production process and was necessary to that process, even if 
that conflict mineral was not ultimately included anywhere in the 
product. On the other hand, as proposed, a conflict mineral 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 that product, even if that tool or machine was necessary 
to producing the product. For example, if an automobile containing no 
conflict minerals was produced using a wrench that contains or was 
itself produced using conflict minerals necessary to the functionality 
or production of that wrench, the proposed rules would not consider the 
conflict minerals in that wrench necessary to the production of the 
automobile.
    That the conflict minerals must be ``necessary to the functionality 
or production'' of an issuer's products is the only limiting factor in 
the Conflict Minerals Statutory Provision.\179\ The provision has no 
materiality thresholds for disclosure based on the amount of conflict 
minerals an issuer uses in its manufacturing processes. Therefore, we 
did not propose to include a materiality threshold for the disclosure 
or reporting requirements in the proposed rules. We did, however, 
request comment in the Proposing Release as to whether there should be 
a de minimis threshold in our rules based on the amount of conflict 
minerals used by an issuer in a particular product or in its overall 
enterprise and, if so, whether such a threshold would be consistent 
with the Conflict Minerals Statutory Provision.
---------------------------------------------------------------------------

    \179\ Exchange Act Section 13(p)(2)(B).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Many commentators suggested that the final rule explicitly define 
the phrase, ``necessary to the functionality or production of a 
product,'' \180\ while other commentators indicated that the final rule 
should not define the phrase.\181\ Several commentators suggested 
possible definitions.\182\ One commentator noted that manufacturers 
make certain deliberate choices about products, such as how they look, 
function, perform, cost, or are supplied, so when there has been a 
choice to incorporate conflict minerals into a product, the final rule 
should consider the conflict minerals ``necessary'' to the product 
because the designer has deemed them to be so.\183\ Another commentator 
was concerned that the proposed rules did not provide any guidance as 
to either the phrase ``necessary to the functionality or production'' 
or the term ``product.'' \184\ As such, this commentator noted that the 
proposed rules could apply to financial products that are backed by 
gold or other mineral commodities, such as futures contracts for gold 
bullion, shares in mutual funds that invest in gold mining stocks, or 
gold bullion storage agreements with vault services providers.
---------------------------------------------------------------------------

    \180\ See, e.g., letters from CRS I, Davis Polk, Earthworks, 
Enough Project I, FRS, Howland, ICAR et al. I, MSG I, NRF I, PCP, 
Give Peace A Deadline (Jan. 21, 2011) (``Peace''), SEMI, SIF I, TIC, 
Tiffany, TriQuint I, and US Steel.
    \181\ See, e.g., letters from Cleary Gottlieb, Global Witness I, 
ITIC I, State II, and WGC II.
    \182\ See, e.g., letters from AAEI, AAFA, Bario-Neal, Brilliant 
Earth, CRS I, Davis Polk, Earthworks, Enough Project I, Hacker 
Jewelers, Hoover & Strong, Howland, MSG I, NAM I, Niotan I, NMA II, 
NRF I, PCP, Peace, SEMI, Sen. Durbin/Rep. McDermott, SIF I, TIAA-
CREF, TIC, TriQuint I, and US Steel.
    \183\ See letter from Matheson II.
    \184\ See letter from Tiffany.
---------------------------------------------------------------------------

i. ``Necessary to the Functionality''
    A number of different commentators indicated that a conflict 
mineral should be considered ``necessary to the functionality'' of a 
product if that conflict mineral is intentionally added to the 
product.\185\ Of these commentators, however, many were open to other 
potential requirements. For example, many commentators

[[Page 56294]]

suggested further requirements in addition to, or instead of, being 
intentionally added before a conflict mineral should be considered 
``necessary to the functionality'' of a product. Many of these 
commentators indicated that a conflict mineral must be intentionally 
added and/or necessary either for the product's use, purpose, or 
marketability, financial success, or some combination thereof.\186\ A 
few commentators asserted that a conflict mineral must be intentionally 
added and essential to the product's function.\187\ One commentator 
stated that a conflict mineral must be intentionally added and have a 
concentration in the product that exceeds 1,000 ppm per homogeneous 
material.\188\
---------------------------------------------------------------------------

    \185\ See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth, 
Hacker Jewelers, Hoover & Strong, Howland, ITIC I, NRF I, NYCBar II, 
SEMI, Sen. Durbin/Rep. McDermott, TIAA-CREF, and WGC II.
    \186\ See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth, 
Earthworks, Enough Project I, Hacker Jewelers, Hoover & Strong, MSG 
I, Peace, and SIF I, and TIAA-CREF.
    \187\ See, e.g., letters from Howland, NAM I, and NRF I.
    \188\ See letter from TriQuint I.
---------------------------------------------------------------------------

    Only a few commentators proposed guidance as to when a conflict 
mineral would be considered ``intentionally added'' to a product, and 
they differed on when a conflict mineral should be considered 
``intentionally added.'' One commentator stated that a conflict mineral 
should not be considered intentionally added if it was unilaterally 
included in a sub-component acquired by the issuer from a sub-
contractor.\189\ Two of the co-sponsors of the Conflict Minerals 
Statutory Provision, however, took the opposite position and stated 
that a conflict mineral should be considered intentionally added if it 
is intentionally added in sub-components that an issuer contracts to 
manufacture through third parties or subsidiaries.\190\ Several 
commentators agreed that a conflict mineral occurring naturally in a 
product should not be considered intentionally added to that 
product.\191\
---------------------------------------------------------------------------

    \189\ See letter from SEMI.
    \190\ See letter from Sen. Durbin/Rep. McDermott.
    \191\ See letters from ITIC I, PCP, and Sen. Durbin/Rep. 
McDermott.
---------------------------------------------------------------------------

    Instead of being intentionally added to a product, some 
commentators provided other bases for concluding that a conflict 
mineral is ``necessary to the functionality'' of a product. Some 
commentators indicated that a conflict mineral should be considered 
``necessary to the functionality'' of a product if that conflict 
mineral is necessary for the product's basic function.\192\ Other 
commentators stated that the basic function test would be unworkable 
because there is no meaningful distinction between a product's basic 
and auxiliary functions.\193\ Some commentators stated that a conflict 
mineral should be considered ``necessary to the functionality'' of a 
product if that conflict mineral is required either for the financial 
success or marketability of the product.\194\ One commentator noted 
that ``necessary to the functionality'' should be defined broadly 
enough that it encompasses uses necessary to the product's economic 
utility,\195\ while others disagreed due to the subjective nature of 
what provides economic utility to a product.\196\ In this regard, one 
commentator asserted that a conflict mineral should be considered 
``necessary to the functionality'' of a product if the issuer ``uses'' 
conflict minerals in any manner in a product, regardless of how those 
conflict minerals relate to the product's function, because any other 
test would be too subjective.\197\
---------------------------------------------------------------------------

    \192\ See letters from AAFA, NYCBar I, and WGC II. See also 
letter from NYCBar II (stating that a ``component in a product 
necessary to its functionality if it is needed for either its basic 
function or another commercially valuable function of that 
product,'' and stating that it does not ``believe that `basic 
function' in this regard needs to be defined since it will differ 
for each product'').
    \193\ See letters from NEI, SEMI, and TIC.
    \194\ See, e.g., letters from Enough Project I, MSG I, Peace, 
and TIAA-CREF.
    \195\ See letter from CRS I (suggesting ``that `necessary to the 
functionality or production of a product' be defined broadly enough 
that it encompasses uses necessary to the economic utility and/or 
marketability of that product'').
    \196\ See, e.g., letters from NRF I and SEMI.
    \197\ See letter from Kemet.
---------------------------------------------------------------------------

ii. ``Necessary to the Production''
    Many commentators agreed that a conflict mineral should be 
considered ``necessary to the production'' of a product if it is 
intentionally added to the production process, and should not be 
considered ``necessary to the production'' of a product if it is 
unintentionally added to a product or naturally occurring in a 
product.\198\ Some commentators agreed with the proposal to consider 
such conflict minerals ``necessary to the production'' of a product 
even if the minerals are washed away or consumed in the production 
process and do not end up in the product, such as with a catalyst.\199\ 
As one of these commentators suggested as an example, a ``catalyst used 
to make a substance or a die containing [conflict mineral] metals used 
to make a part'' should be considered ``necessary to the production'' 
of the product using that part because the ``part is made with direct 
involvements of the [conflict mineral] metal and then the part/material 
is used in the product,'' even if the conflict mineral does not end up 
in the product.\200\ Other commentators, however, did not believe that 
conflict minerals used in the production of a product should be 
considered necessary to that production process if they are washed away 
or consumed in the process.\201\ As one of these commentators pointed 
out, it would be ``impossible for a retailer to know whether his 
supplier's supplier's supplier used and washed away a conflict 
mineral'' because ``there is no meaningful measurement capability or 
audit trail, especially as a product moves through dozens of suppliers 
in a supply chain.'' \202\
---------------------------------------------------------------------------

    \198\ See, e.g., letters from ITIC I, Global Witness I, Japanese 
Trade Associations, NYCBar I, PCP, SEMI, Sen. Durbin/Rep. McDermott, 
and TIC.
    \199\ See, e.g., letters from Howland, MSG I, Niotan I, PCP, 
SEMI, and TriQuint I.
    \200\ See letter from Howland.
    \201\ See, e.g., letters from Industry Group Coalition I, IPC 
II, NAM I, Griffin Teggeman (Dec. 16, 2010) (``Teggeman''), and WGC 
II.
    \202\ See letter from Teggeman.
---------------------------------------------------------------------------

    A number of commentators addressed whether a conflict mineral 
necessary to the production of the tools, machines, or similar 
equipment that are used to produce an issuer's product should be 
considered ``necessary to the production'' of the issuer's 
product.\203\ The large majority of these commentators, including those 
from industry associations,\204\ a multi-stakeholder group representing 
both human rights organizations and industry,\205\ and institutional 
investors,\206\ agreed with the proposed rules that such tools, 
machines, and other production equipment should not be considered 
necessary to the production of the issuer's products.\207\ A small 
number of commentators disagreed and stated that such tools, machines, 
or similar equipment should be considered necessary to the production 
of an issuer's product.\208\ One of these commentators specified

[[Page 56295]]

that tools, machines, or similar equipment purchased going forward 
should be considered necessary to the production of the issuer's 
product, although an issuer's existing production equipment should not 
be deemed necessary to production.\209\ Another commentator stated that 
production equipment should not be considered necessary to the 
production of an issuer's products unless the issuer intentionally and 
explicitly required the producer of the tools, machines, or other 
production equipment to include conflict minerals.\210\
---------------------------------------------------------------------------

    \203\ See, e.g., letters from AAFA, Industry Group Coalition I, 
IPC I, ITIC I, Japanese Trade Associations, NAM I, NEI, Niotan I, 
Refractory Metals Association (Feb. 28, 2011) (``RMA''), SEMI, SIF 
I, TIAA-CREF, TIC, and TriQuint I.
    \204\ See, e.g., letters from AAFA, Industry Group Coalition I, 
IPC I, ITIC I, Japanese Trade Associations, NAM I, RMA, SEMI, and 
TIC.
    \205\ See letter from MSG I (stating that ``when conflict 
minerals are present in tooling or other production machinery, they 
should not be considered to be necessary to production of the 
product''). The letter from MSG was signed by a number of human 
rights groups, including Enough Project, Free the Slaves, and 
Friends of the Congo, among others.
    \206\ See, e.g., letters from NEI, SIF I, and TIAA-CREF.
    \207\ See, e.g., letters from AAFA, Industry Group Coalition I, 
IPC I, ITIC I, Japanese Trade Associations, NAM I, NEI, RMA, SEMI, 
SIF I, TIAA-CREF, and TIC.
    \208\ See letters from Niotan I and TriQuint I.
    \209\ See letter from TriQuint I.
    \210\ See letter from SEMI.
---------------------------------------------------------------------------

    In this regard, one commentator stated that the final rule should 
not consider any indirect equipment, such as computers or power lines, 
as necessary to production.\211\ Another commentator indicated that 
conflict minerals used in products that are ``not intended to be sold 
into commerce,'' such as those utilized solely for research and 
development purposes, components provided at cost on a business-to-
business basis, or products or components used only for engineering or 
testing purposes, should not be considered necessary to the production 
of the product that is ultimately placed in the stream of 
commerce.\212\
---------------------------------------------------------------------------

    \211\ See letter from Howland.
    \212\ See letter from ITIC I. See also letter from TechAmerica 
(Nov. 1, 2011) (``Industry Group Coalition II'') (suggesting that 
the final rule should exclude ``research and development equipment 
made available on a business-to-business basis from the scope of the 
rule'').
---------------------------------------------------------------------------

iii. De Minimis Threshold
    We received mixed comments regarding whether the final rule should 
have a de minimis threshold exception, with some commentators opposed 
to a de minimis exception,\213\ and other commentators supporting 
it.\214\ Some commentators provided a legal basis for including a de 
minimis exception despite the lack of a de minimis exception in the 
Conflict Minerals Statutory Provision.\215\ Generally, these 
commentators asserted that, as long as legislation does not forbid 
establishing a de minimis threshold, an agency's regulations may allow 
for one. Also, one commentator noted that we have ``inherent authority 
to employ de minimis exceptions to avoid unreasonable and absurd 
results in crafting [the] final rule,'' which is ``inherent and clearly 
established by precedent.'' \216\
---------------------------------------------------------------------------

    \213\ See, e.g., letters from Calvert, Earthworks, Episcopal 
Conference of Catholic Bishops of the DRC (Nov. 8, 2011) (``CENCO 
II''), Global Witness I, Howland, Matheson II, NEI, NYCBar I, NYCBar 
II, Rep. Berman et al., SIF I, State II, and Trott.
    \214\ See, e.g., letters from AAFA, AdvaMed I, AngloGold, 
Chamber I, Davis Polk, IPC I, IPC II, IPMI I, NAM I, NRF I, PCP, 
Rep. Bachus et al., Roundtable, SEMI, Teggeman, TIC, and WGC II.
    \215\ See letters from Materion, NAM I, and NRF I.
    \216\ See letter from Materion.
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    Some commentators provided recommendations on possible de minimis 
thresholds. Two commentators suggested that there should be a de 
minimis exception if the cost of the conflict minerals in an issuer's 
products make up less than 1% of the issuer's consolidated total 
production costs.\217\ Other commentators recommended a de minimis 
exception for trace, nominal, or insignificant amounts of conflict 
minerals in an issuer's products.\218\ One commentator suggested a de 
minimis exception when the end product derived from conflict minerals 
reflects less than a certain percentage of the value of the product, 
such as if the value was 5% or less of the total manufacturing 
costs.\219\ Another commentator recommended a de minimis exception 
relating to the inability of an issuer to determine the origin of its 
minerals, such as allowing that issuer's product to be considered ``DRC 
conflict free'' where the issuer is unable to determine the origin of 
only 5% of the product's minerals.\220\ One commentator noted that the 
final rule should permit a de minimis exception, but indicated that the 
value used for the de minimis exception should be based on how the 
phrase ``necessary to the functionality or production'' of a product is 
to be defined in the final rule.\221\ Another commentator recommended 
that the final rule permit a de minimis exception for products 
containing less that 0.1% by weight of a conflict mineral.\222\ One 
commentator provided three possible de minimis scenarios in which an 
issuer would be excepted from reporting, specifically: If an issuer's 
conflict minerals comprised less than 0.1% of a component or product, 
if an issuer's global usage of conflict minerals comprised less than 
0.01% of its materials, or if an issuer comprised the bottom 20% of its 
industry's conflict minerals use.\223\
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    \217\ See letters from AngloGold and WGC II.
    \218\ See letters from Davis Polk, NRF I, and Roundtable.
    \219\ See letter from TIC.
    \220\ See letter from IPMI I.
    \221\ See letter from SEMI (stating that, if the phrase was 
limited to materials explicitly or intentionally added to a product 
or caused to be added to a product, the de minimis threshold should 
be one gram per year of necessary minerals, but if the final rule 
included a ``more conservative'' meaning of the phrase, a higher de 
minimis should be used, such as 0.1% of the weight of any particular 
component acquired as a whole by the issuer).
    \222\ See letter from IPC I.
    \223\ See letter from NAM I.
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c. Final Rule
    After considering the comments, we are adopting a final rule that, 
like the proposed rules, does not define when a conflict mineral is 
``necessary to the functionality'' of a product or when it is 
``necessary to the production'' of a product.\224\ However, as we did 
in the Proposing Release, we are providing guidance regarding the 
interpretation of these phrases. The guidance is modified to a degree 
from the guidance in the Proposing Release based on comments we 
received. Whether a conflict mineral is deemed ``necessary to the 
functionality'' of a product or ``necessary to the production'' of 
product depends on the issuer's particular facts and circumstances, but 
there are certain factors we believe issuers should consider in making 
their determinations.
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    \224\ As a threshold matter, we believe that the Conflict 
Minerals Statutory Provision requires separate consideration as to 
whether a conflict mineral is ``necessary to the production'' of a 
product from whether a conflict mineral is ``necessary to the 
functionality'' of the product, because the Conflict Minerals 
Statutory Provision includes both phrases. See infra Part 
II.B.4.c.iii. See also Exchange Act Sections 13(p)(1)(A) and 
13(p)(2).
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    As described below, in determining whether its conflict minerals 
are ``necessary to the functionality'' of a product, an issuer should 
consider: (a) Whether a conflict mineral is contained in and 
intentionally added to the product or any component of the product and 
is not a naturally-occurring by-product; (b) whether a conflict mineral 
is necessary to the product's generally expected function, use, or 
purpose; or (c) if a conflict mineral is incorporated for purposes of 
ornamentation, decoration or embellishment, whether the primary purpose 
of the product is ornamentation or decoration. Based on the applicable 
facts and circumstances, any of these factors, either individually or 
in the aggregate, may be determinative as to whether conflict minerals 
are ``necessary to the functionality'' of a given product. In 
determining whether its conflict minerals are ``necessary to the 
production'' of a product, an issuer should consider whether a conflict 
mineral is contained in the product and intentionally added in the 
product's production process, including the production process of any 
component of the product; and whether the conflict mineral is necessary 
to produce the product. We describe changes to our guidance regarding 
``necessary to the functionality'' and ``necessary to the production'' 
below.

[[Page 56296]]

i. Contained in the Product
    After considering the comments and reviewing the Conflict Minerals 
Statutory Provision, as described below, we are persuaded that only a 
conflict mineral that is contained in the product should be considered 
``necessary to the functionality or production'' of that product. We 
believe this approach is appropriate in light of the Conflict Minerals 
Statutory Provision's statutory construction. As discussed above, the 
Conflict Minerals Statutory Provision requires issuers with conflict 
minerals ``necessary to the functionality or production'' of a product 
manufactured or contracted by the issuer to be manufactured that 
originated in the Covered Countries to provide a Conflict Minerals 
Report.\225\ The provision includes two distinct subsections, Exchange 
Act Section 13(p)(1)(A)(i) and Exchange Act Section 13(p)(1)(A)(ii), 
regarding the information required in that Conflict Minerals Report. 
Generally, Exchange Act Section 13(p)(1)(A)(i) deals with an issuer's 
description of its due diligence measures on the source and chain of 
custody of its conflict minerals, including the independent private 
sector audit, and Exchange Act Section 13(p)(1)(A)(ii) requires the 
issuer's description of its products that have not been found to be 
``DRC conflict free.'' The Conflict Minerals Statutory Provision 
defines ``DRC conflict free'' to mean ``products that do not contain 
minerals that directly or indirectly finance or benefit armed groups'' 
in the Covered Countries.\226\ The use of the term ``contain'' 
indicates that the disclosures required under Exchange Act Section 
13(p)(1)(A)(ii) are limited to issuers with conflict minerals actually 
contained in their products.\227\ We believe it is appropriate to 
include this limitation in interpreting when a conflict mineral is 
necessary to the functionality or production of a product.
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    \225\ See Exchange Act Section 13(p)(1)(A).
    \226\ Id. (emphasis added). See also Section 1502(e)(4) of the 
Act (defining the phrase in the same manner as Exchange Act Section 
13(p)(1)(A)(ii), except that Section 1502(e)(4) of the Act refers to 
``conflict minerals'' instead of just ``minerals'').
    \227\ We note that the Second Edition of the Random House 
Webster's Dictionary defines ``contain'' to include the ``to hold 
within a volume or area.'' Random House Webster's Dictionary, 142 
(2d ed. 1996).
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    We note that Exchange Act Section 13(p)(1)(A)(i) does not include a 
similar limitation that the product must ``contain'' the necessary 
conflict minerals. As a result, it is possible to interpret the 
Conflict Minerals Statutory Provision such that the term ``contain'' in 
Exchange Act Section 13(p)(1)(A)(ii) does not mean that a conflict 
mineral must be included in the product for it to be ``necessary to the 
functionality or production'' of the product. However, we do not 
believe that such an interpretation would be the proper construction. 
Following that approach, the provision could be interpreted to require 
issuers with conflict minerals that are ``necessary to the 
functionality or production'' of a product but are not included in that 
product to submit an audited Conflict Minerals Report describing their 
due diligence, as required under Exchange Act Section 13(p)(1)(A)(i), 
but not describing any products produced using those minerals that 
directly or indirectly financed or benefited armed groups in the 
Covered Countries as having not been found to be ``DRC conflict free'' 
because the conflict minerals are not ``contained'' in the product.
    We do not believe, however, that such an interpretation is the 
better construction. It would mean that the Conflict Minerals Statutory 
Provision envisions a situation in which an issuer with a conflict 
mineral that is ``necessary to the functionality or production'' of its 
product originated in the Covered Countries and benefited armed groups 
in those countries would be required to submit a Conflict Minerals 
Report describing its due diligence on the source and chain of custody 
of that mineral but would not have to describe its products as having 
not been found to be ``DRC conflict free.'' We believe the better 
interpretation that gives meaning to the term ``contain'' is that only 
conflict minerals contained in the product would be considered 
``necessary'' to that product, so only those minerals trigger the 
requirement to conduct a reasonable country of origin inquiry.
    Additionally, we do not believe the final rule should include 
conflict minerals ``necessary to the functionality or production'' of a 
product that are not contained in the product because we appreciate 
commentators' concerns that the application of the provision to 
minerals that do not end up in the product is especially challenging. 
As noted above, commentators were mixed in their views regarding how 
the rule should treat catalysts and other conflict minerals necessary 
to the production of a product that do not appear in the product. 
However, we note that there are products where a catalyst is used and 
is not completely washed away.\228\ In those situations, the product 
contains a necessary conflict mineral that is necessary to its 
production and is subject to the final rule.
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    \228\ See letters from Industry Group Coalition I and NAM I 
(referring specifically to situations in which catalysts are used to 
chemically react with and produce products, and trace levels of the 
catalyst are found in the reacted manufactured product, but the 
catalysts do not contribute to the performance of the product).
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ii. Intentionally Added
    Although commentators did not agree on an exact definition, most 
commentators from across the spectrum agreed that a conflict mineral 
should be considered ``necessary to the functionality or production'' 
of a product for the purposes of the Conflict Minerals Statutory 
Provision if, at a minimum, it was intentionally added to the product 
or production process.\229\ While we are not defining the phrase, we 
agree that being intentionally added, rather than being a naturally-
occurring by-product, is a significant factor in determining whether a 
conflict mineral is ``necessary to the functionality or production'' of 
a product. This is true regardless of who intentionally added the 
conflict mineral to the product so long as it is contained in the 
product.
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    \229\ See, e.g., letters from AAEI, Bario-Neal, Brilliant Earth, 
Earthworks, Enough Project I, Global Witness I, Hacker Jewelers, 
Hoover & Strong, Howland, ITIC I, Japanese Trade Associations, MSG 
I, Niotan I, NRF I, Peace, PCP, SEMI, Sen. Durbin/Rep. McDermott, 
SIF I, TIAA-CREF, TriQuint I, and WGC II.
---------------------------------------------------------------------------

    In this regard, we note that one commentator asserted that a 
conflict mineral should not be considered ``intentionally added'' by an 
issuer ``if it is present in a sub-component acquired by the issuer 
based on a unilateral decision of the supplier or a sub-contractor, or 
a party further upstream in the supply chain.'' \230\ We disagree. As 
two of the co-sponsors of the provision asserted, determining whether a 
conflict mineral is considered ``necessary'' to a product should not 
depend on whether the conflict mineral is added directly to the product 
by the issuer or whether it is added to a component of the product that 
the issuer receives from a third party. Instead, the issuer should 
``report on the totality of the product and work with suppliers to 
comply with the requirements.'' \231\ Therefore, in determining whether 
a conflict mineral is ``necessary'' to a product, an issuer must 
consider any conflict mineral contained in its product, even if that 
conflict mineral is only in the product because it was included as part 
of a component of the product that was

[[Page 56297]]

manufactured originally by a third party.
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    \230\ See letter from SEMI.
    \231\ See letter from Sen. Durbin/Rep. McDermott (indicating 
that a car manufacturer must report on any conflict minerals in the 
car's radio, even if there are no conflict minerals elsewhere in the 
car).
---------------------------------------------------------------------------

iii. ``Necessary to the Functionality''
    In addition to being contained in the product and intentionally 
added, another factor in determining whether its conflict minerals are 
``necessary to the functionality'' of a product is whether the conflict 
mineral is necessary to the product's generally expected function, use, 
or purpose. Some commentators suggested that we limit an issuer's 
consideration of whether its conflict minerals are ``necessary to the 
functionality'' of a product to the ``basic function'' or ``economic 
utility'' tests. However, we believe limiting a determination to those 
tests would not provide greater certainty or clarity to issuers 
required to make such determinations. As one commentator noted, ``the 
distinction between a `basic function' and an ancillary function is 
murky and undefinable.'' \232\ Similarly, as another commentator noted, 
``[e]conomic utility is very subjective and it can be the unforeseen 
consequence of a derivative buried deep within a sub-component.'' \233\ 
Therefore, we believe these tests are so subjective as to be mostly 
unworkable. We believe it is more appropriate instead to focus on a 
product's generally expected function, use, or purpose, recognizing 
that there are situations in which a product has multiple generally 
expected functions, uses, and purposes. In such situations, a conflict 
mineral need only be necessary for one such function, use, or purpose 
to be necessary to the product as a whole. For example, a smart phone 
has multiple generally expected functions, uses, and purposes, such as 
making and receiving phone calls, accessing the internet, and listening 
to stored music. If a conflict mineral is necessary to the function, 
use, or purpose of any one of these, it is necessary to the 
functionality of the phone.
---------------------------------------------------------------------------

    \232\ See letter from TIC.
    \233\ See letter from SEMI.
---------------------------------------------------------------------------

    Another factor in determining whether its conflict minerals are 
``necessary to the functionality'' of a product is whether the conflict 
mineral is incorporated for purposes of ornamentation, decoration, or 
embellishment. If a primary purpose of the product is mainly 
ornamentation or decoration, it is more likely that a conflict mineral 
added for purposes of ornamentation, decoration or embellishment is 
``necessary to the functionality'' of the product. For example, the 
gold in a gold pendant hanging on a necklace is necessary to the 
functionality of the pendant because it is incorporated for purposes of 
ornamentation, decoration, or embellishment, and a primary purpose of 
the pendant is ornamentation or decoration. Conversely, if a conflict 
mineral is incorporated into a product for purposes of ornamentation, 
decoration, or embellishment, and the primary purpose of the product is 
not ornamentation or decoration, it is less likely to be ``necessary to 
the functionality'' of the product. As one commentator noted, ``if, for 
example, gold is used in an article as an ancillary feature [of a 
product] strictly for purposes of ornamentation, then it is unrelated 
to the functionality of the product and would be exempt from the 
reporting requirements of the statute.'' \234\ We would agree that 
these facts would tend to indicate that the conflict mineral is not 
necessary to the functionality of the product, provided that the 
primary purpose of the product is not for ornamentation or decoration. 
Even so, this would only be one factor among all the facts and 
circumstances in the issuer's overall determination as to whether the 
conflict mineral is necessary to the functionality of the product.
---------------------------------------------------------------------------

    \234\ See letter from NRF I.
---------------------------------------------------------------------------

iv. ``Necessary to the Production''
    As with determining whether a conflict mineral is ``necessary to 
the functionality'' of a product, determining whether a conflict 
mineral is ``necessary to the production'' of a product involves 
consideration of an issuer's particular facts and circumstances. As 
noted above, the conflict mineral must be contained in the product to 
trigger the determination of whether the conflict mineral is 
``necessary to the production'' of the product. Consistent with this 
approach, we do not consider a conflict mineral used as a catalyst or 
in another manner in the production process of a product to be 
``necessary to the production'' of the product if that conflict mineral 
is not contained in the product, even though, based on the facts and 
circumstances, the conflict mineral would have otherwise been 
considered ``necessary to the production'' of the product had the 
conflict mineral been included in the product. As one commentator noted 
for gold, and we believe this is applicable for the other conflict 
minerals as well, the ``use of gold as a catalyst in producing products 
which do not in themselves contain gold will broaden the reach of the 
regulations beyond what Section 1502 envisaged.'' \235\ We do, however, 
consider a conflict mineral used as a catalyst or in another manner in 
the production process of a product to be ``necessary to the 
production'' of the product if that conflict mineral otherwise is 
necessary to the production of the product and is contained in any 
amount, including trace amounts, in the product.\236\
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    \235\ See WGC II.
    \236\ We note that this interpretation continues to bring 
catalysts within the scope of the reporting requirements when they 
are necessary to the production of the product. We understand that 
not all catalysts are washed away in the production process, and the 
remaining minerals may not be ``necessary to the functionality'' of 
the product. See letters from Industry Group Coalition I and NAM I 
(referring specifically to situations in which catalysts are used to 
chemically react with and produce products, and trace levels of the 
catalyst are found in the reacted manufactured product, but the 
catalysts do not contribute to the performance of the product).
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    As we indicated in the Proposing Release, we continue to believe 
that a conflict mineral in a physical tool or machine used to produce a 
product does not fall under the ``necessary to the production'' 
language in the Conflict Minerals Statutory Provision.\237\ One 
commentator asserted that the language in the Conflict Minerals 
Statutory Provision is intended to cover conflict minerals in tools or 
machines that are necessary for the production of a product and, ``[i]n 
the absence of such specificity, the rule will fail to ensure reporting 
on the use of such tools or catalysts, thus leaving out a significant 
market for the minerals and undermining the purpose of the law.'' \238\ 
We do not believe that a conflict mineral in a tool or machine is 
captured by the Conflict Minerals Statutory Provision because, although 
the conflict mineral may be included in the tool or machine, it is the 
tool or machine and not the conflict mineral that is necessary to the 
production.\239\ Additionally, the tool or machine is

[[Page 56298]]

unlikely to be contained in the final product.
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    \237\ However, the issuer that manufactures or contracts to 
manufacture the tool or machine would likely come within the 
``necessary to the production'' or ``necessary to functionality'' 
language.
    \238\ See letter from Niotan I.
    \239\ As described above, we consider a conflict mineral that is 
``necessary to the functionality'' of a component product also to be 
``necessary to the functionality'' of any subsequent product that 
incorporates the component product. We recognize that this could be 
seen as a two-step analysis, and thus it could be asserted that the 
conflict mineral in the component product is not necessary to the 
functionality of the subsequent product. We disagree with this view, 
however, because a component added to a subsequent product becomes 
part of that subsequent product, which removes any segregation from 
the component and the subsequent product and makes the conflict 
mineral directly necessary to the functionality of the subsequent 
product.
---------------------------------------------------------------------------

    Like tools and machines, indirect equipment used to produce a 
product, such as computers and power lines, does not bring the product 
that is produced with the equipment into the ``necessary to the 
production'' language.\240\ We do not consider a conflict mineral 
necessary to the functionality or production of such indirect equipment 
to be necessary to the production of the product because that conflict 
mineral is only tangentially necessary for production of the product. 
Similarly, we do not require issuers to report on the conflict minerals 
in materials, prototypes, and other demonstration devices containing or 
produced using conflict minerals that are necessary to the 
functionality or production of those items because we do not consider 
those items to be products. Once an issuer enters those items in the 
stream of commerce by offering them to third parties for consideration, 
the issuer will be required to report on any conflict minerals 
necessary to the functionality or production of those products.
---------------------------------------------------------------------------

    \240\ However, the issuer that manufactures or contracts to 
manufacture the indirect equipment would likely come within the 
definition of either ``necessary to the functionality'' or 
``necessary to the production'' for the indirect equipment.
---------------------------------------------------------------------------

v. De Minimis Threshold
    Finally, after considering the comments, the final rule does not 
include a de minimis exception. The statute itself does not contain a 
de minimis exception, and for several reasons we believe it would be 
contrary to the Conflict Minerals Statutory Provision and Congressional 
purpose to include one in the final rule. First, we note that the 
Conflict Minerals Statutory Provision does include an express limiting 
factor--namely that a conflict mineral must be ``necessary to the 
functionality or production'' of an issuer's product to trigger any 
disclosure regarding those conflict minerals.\241\ As discussed above, 
this standard focuses on whether the conflict mineral is ``necessary'' 
to a product's functionality or production; it does not focus on the 
amount of a conflict mineral contained in the product. We believe that 
Congress understood, in selecting the standard it did, that a conflict 
mineral used in even a very small amount could be ``necessary'' to the 
product's functionality or production. If it had intended that the 
provision be limited further, so as not to apply to a de minimis use of 
conflict minerals, we think Congress would have done so explicitly. In 
this regard, we note that in Section 1504 of the Act, which adds 
Exchange Act Section 13(q) as part of the same title (Title XV) of the 
Act (``Miscellaneous Provisions''), Congress did explicitly include a 
de minimis threshold for the requirement to disclose certain payments 
by resource extraction issuers.\242\
---------------------------------------------------------------------------

    \241\ See Exchange Act Sections 13(p)(1)(A) and 13(p)(2)(B).
    \242\ See Section 1504 of the Act and Exchange Act Section 
13(q). Exchange Act Section 13(q)(1)(C) states that ``the term 
`payment,' means a payment that is made to further the commercial 
development of oil, natural gas, or minerals; and not de minimis.''
---------------------------------------------------------------------------

    In addition, we believe that the purpose of the Conflict Minerals 
Statutory Provision would not be properly implemented if we included a 
de minimis exception in our final rule. As the State Department noted 
in its comment letter, ``[i]n light of the nature'' of the conflict 
minerals, they are often used in products ``in very limited 
quantities,'' so including a de minimis threshold ``could have a 
significant impact on'' the final rule.\243\ Consistent with the views 
of the State Department, we believe Congress intended the disclosure 
provisions to apply to the use of even small amounts of conflict 
minerals originating in the Covered Countries.
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    \243\ See State II (``In light of the nature in which the 
covered minerals are often used in products, i.e. often in very 
limited quantities, such a change could have a significant impact on 
the proposed regulations. A de minimis threshold should not be 
considered under current circumstances.'').
---------------------------------------------------------------------------

    We are cognizant of the fact that, by not including a de minimis 
exception, even minute or trace amounts of a conflict mineral could 
trigger disclosure obligations.\244\ However, a de minimis amount of 
conflict minerals triggers disclosure obligations only if those 
conflict minerals are necessary for the functionality or production of 
a product, and we understand that there are instances in which only a 
minute amount of conflict minerals is necessary for the functionality 
or production of a product. Therefore, consistent with the proposal, 
our final rule applies to issuers for which any conflict minerals are 
necessary to the functionality or production of a product manufactured 
or contracted by the issuer to be manufactured regardless of the amount 
of the conflict mineral.
---------------------------------------------------------------------------

    \244\ See letters from Chamber I and NRF I.
---------------------------------------------------------------------------

    We recognize that not including a de minimis exception in the final 
rule will be more costly for issuers than if we included one. As 
described above, however, we are of the view that Congress intended not 
to provide for a de minimis exception, and including one in the final 
rule would therefore thwart, rather than advance, the provision's 
purpose. Further, we believe focusing on whether the mineral was 
intentionally added addresses some of the concerns regarding de minimis 
amounts of minerals. For example, according to one commentator, a 
number of metal alloys, including the high volume materials of cold 
rolled steel, hot rolled steel, and stainless steel, contain tin only 
as a contaminant, such that it is not part of the specification of 
these alloys.\245\ Therefore, the tin in these alloys is not 
intentionally added, and we do not consider the tin ``necessary to the 
functionality or production'' of any product containing those alloys.
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    \245\ See letter from Claigan Environmental Inc. (Dec. 16, 2011) 
(``Claigan III'').
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C. Location, Status, and Timing of Conflict Minerals Information

    Once it is determined that conflict minerals are necessary to the 
functionality or production of a product manufactured or contracted by 
the issuer to be manufactured, the issuer will have to submit conflict 
minerals information in accordance with the final rule.
1. Location of Conflict Minerals Information
a. Proposed Rules
    Our proposed rules would have required issuers to provide their 
disclosure about conflict minerals in their annual reports on Form 10-K 
for a domestic issuer,\246\ Form 20-F for a foreign private 
issuer,\247\ and Form 40-F for a Canadian issuer that files under the 
Multijurisdictional Disclosure System,\248\ with their Conflict 
Minerals Reports as an exhibit to their annual report.\249\ 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 have required this 
disclosure in the existing Form 10-K, Form 20-F, or Form 40-F annual 
report because issuers were already required to file these reports so 
we believed this approach would be less burdensome than requiring a 
separate annual report.

[[Page 56299]]

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 have required issuers to include brief conflict 
minerals disclosure under a separate heading entitled ``Conflict 
Minerals Disclosure'' and more extensive information in a separate 
exhibit to the annual report.
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    \246\ 17 CFR 249.310.
    \247\ 17 CFR 249.220f.
    \248\ 17 CFR 249.240f.
    \249\ In the Proposing Release, we indicated that, by requiring 
an issuer to provide its Conflict Minerals Report as an exhibit to 
its annual report, the proposed rules would enable anyone accessing 
the Commission's Electronic Data Gathering, Analysis, and Retrieval 
system (the ``EDGAR'' system) to determine quickly whether an issuer 
furnished a Conflict Minerals Report with its annual report.
---------------------------------------------------------------------------

    We proposed to 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 Covered Countries, based on its reasonable country of origin 
inquiry, and, for its conflict minerals that did not originate in the 
Covered Countries, a brief description of the reasonable country of 
origin inquiry it conducted in making such a determination. The 
proposed rules would not have required an issuer that determined that 
its conflict minerals did not originate in the Covered Countries, based 
on its reasonable country of origin inquiry, to provide any further 
disclosures. We also proposed that an issuer include brief additional 
disclosure in the body of the annual report if the issuer's conflict 
minerals originated in the Covered Countries or if the issuer could not 
determine that its conflict minerals did not originate in the Covered 
Countries, based on its reasonable country of origin inquiry. As 
proposed, these rules would have required an issuer to disclose that 
its conflict minerals originated in the Covered Countries, or that it 
was unable to conclude that its conflict minerals did not originate in 
the Covered Countries, that its Conflict Minerals Report had been 
furnished as an exhibit to the annual report, that the Conflict 
Minerals Report, including the certified independent private sector 
audit, was publicly available on the issuer's Internet Web site, and 
the issuer's Internet address on which the Conflict Minerals Report and 
audit report were located.
    The Conflict Minerals Statutory Provision requires that each issuer 
make its Conflict Minerals Report available to the public on the 
issuer's Internet Web site.\250\ Consistent with the statute, we 
proposed rules to 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. As proposed, the rules would 
require that the text of the Conflict Minerals Report remain on the 
issuer's Web site at least until it filed its subsequent annual report. 
Although the proposed rules would have required an issuer that 
furnished a Conflict Minerals Report to provide some disclosures in the 
body of its annual report regarding that report, we would not have 
required that an issuer post this disclosure on its Web site. We 
believed this was appropriate because any information disclosed in the 
body of the annual report would also be included in the Conflict 
Minerals Report, which would have been required to be posted on the 
issuer's Internet Web site.
---------------------------------------------------------------------------

    \250\ 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).''
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    We received mixed comments on the proposal. While many commentators 
believed that the final rule should not require an issuer's conflict 
minerals information to be provided in that issuer's annual 
report,\251\ other commentators believed that an issuer's conflict 
minerals information should be provided in that issuer's annual report, 
as proposed.\252\ Commentators that did not want the conflict minerals 
information included in the annual report generally agreed that the 
information should be provided either in a newly created report or 
form, or in a current report on Form 8-K \253\ or Form 6-K,\254\ 
instead.\255\ A small number of commentators stated that an issuer's 
conflict minerals information should be provided solely on its Internet 
Web site.\256\ Some commentators suggested that the final rule should 
allow issuers to submit their conflict minerals information on a 
separate form or in a current report, noting that the Conflict Minerals 
Statutory Provision does not require explicitly that the information be 
submitted in a Form 10-K, Form 20-F, or Form 40-F annual report.\257\ 
As one commentator noted, this requirement contrasts with the one in 
Section 1503 of the Act,\258\ which states that mine safety disclosure 
be provided in ``each periodic report filed with the Commission under 
the securities laws.'' \259\ Therefore, these commentators reasoned 
that if Congress intended the Conflict Minerals Statutory Provision to 
require an issuer to provide the conflict minerals information in the 
annual report on Forms 10-K, 20-F, or 40-F, Congress would have used 
language similar to that in Section 1503.
---------------------------------------------------------------------------

    \251\ See, e.g., letters from AdvaMed I, AngloGold, Barrick 
Gold, Cleary Gottlieb, Corporate Secretaries I, CTIA, Davis Polk, 
Ford Motor Company (Mar. 2, 2011) (``Ford''), Industry Group 
Coalition I, ITIC I, Japanese Trade Associations, JVC et al. II, NAM 
I, NAM III, NCTA, NMA II, NY State Bar, Roundtable, SEMI, Taiwan 
Semi, and Tiffany.
    \252\ See, e.g., letters from Earthworks, Enough Project I, 
Global Witness I, Methodist Pension, Peace, and TIAA-CREF.
    \253\ 17 CFR 249.308.
    \254\ 17 CFR 249.306.
    \255\ See, e.g., letters from AdvaMed I, AngloGold, Barrick 
Gold, Cleary Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. II, NAM 
I, NMA II, NY State Bar, and Taiwan Semi.
    \256\ See letters from Corporate Secretaries I, CTIA, NCTA, and 
Tiffany.
    \257\ See, e.g., letters from AngloGold, ITIC I, JVC et al. II, 
and NAM I. Exchange Act Section 13(p)(1)(A) requires only that 
issuers ``disclose annually'' their conflict minerals information.
    \258\ Section 1503 of the Act.
    \259\ See letter from AngloGold.
---------------------------------------------------------------------------

    Certain commentators asserted that the subject matter underlying 
the conflict minerals information is both very specialized and 
substantively different from the financial and business information in 
the annual report on Forms 10-K, 20-F, or 40-F.\260\ Some of these 
commentators stated that the existing Exchange Act reporting system is 
designed to provide investors with material information from a 
financial perspective, whereas the Conflict Minerals Statutory 
Provision uses the securities disclosure laws to provide conflict 
mineral supply chain information for the purpose of stopping the 
humanitarian crisis in the Covered Countries.\261\ Commentators 
suggested that the processes with which to obtain and provide conflict 
minerals information should be different from those processes developed 
for current year-end reporting.\262\
---------------------------------------------------------------------------

    \260\ See, e.g., letters from Barrick Gold, CEI I, Cleary 
Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. II, NAM I, NMA II, NY 
State Bar, PCP, Taiwan Semi, and SEMI.
    \261\ See, e.g., letters from CEI I, NY State Bar, and Taiwan 
Semi.
    \262\ See letters from Davis Polk and NAM I.
---------------------------------------------------------------------------

    Other commentators argued that the disclosures required by the 
final rule should be treated no differently than other disclosures 
required by the Exchange Act.\263\ In this regard, one such commentator 
agreed that the final rule should require that an issuer's conflict 
minerals information be included in the issuer's annual report because 
such a requirement is inherent in the policy goals underlying the 
Conflict Minerals Statutory Provision and would foster consistency in 
the form, location, and timing of the information.\264\ Similarly, 
another such commentator stated that not requiring

[[Page 56300]]

conflict minerals information in the annual report on Forms 10-K, 20-F, 
or 40-F would inhibit the public's ability to monitor an issuer's use 
of conflict minerals and allow issuers to hide their conflict minerals 
information.\265\ In this regard, a number of commentators believed 
that there is little or no difference in the purposes of the Conflict 
Minerals Statutory Provision and the rest of the Exchange Act, in that 
both require the disclosure of meaningful supply chain and reputational 
information about an issuer for the benefit of investors.\266\ For 
example, the co-sponsors of the legislation stated explicitly that the 
purposes of the Conflict Minerals Statutory Provision and the rest of 
the Exchange Act are ``very much the same'' because they both ```assure 
a stream of current information about an issuer for the benefit of 
purchasers * * * and for the public.''' \267\ As another example, a 
commentator asserted that ``conflict minerals disclosures are material 
to investors and will inform and improve an investor's ability to 
assess social (i.e., human rights) and reputational risks in an 
issuer's supply chain.'' \268\
---------------------------------------------------------------------------

    \263\ See letters from CRS I, Global Witness I, Methodist 
Pension, Sen. Durbin/Rep. McDermott, and SIF I.
    \264\ See letter from Global Witness I.
    \265\ See letter from Peace.
    \266\ See, e.g., letters from CRS I, FRS, Global Witness I, 
Methodist Pension, Sen. Durbin/Rep. McDermott, Sen. Leahy et al., 
SIF I, and SIF II.
    \267\ See letter from Sen. Durbin/Rep. McDermott.
    \268\ See letter from SIF I.
---------------------------------------------------------------------------

    Some commentators were concerned about providing conflict minerals 
information in the annual report on Forms 10-K, 20-F, or 40-F due to 
the timing of filing an annual report.\269\ These commentators noted 
that the increased burden on issuers in collecting and reporting 
conflict minerals information could cause those issuers to be unable to 
file their annual reports in a timely manner. Some commentators offered 
an alternative scheme in which an issuer would be permitted to provide 
its conflict mineral information on either a new report or form, an 
amended annual report, or a current report on Form 8-K or Form 6-K 
within a certain number of days following the end of the issuer's 
fiscal year.\270\ A few of these commentators \271\ pointed out that 
the Commission permits delays in providing certain information on an 
annual report, such as with prospective incorporation by reference of 
information from an issuer's proxy statement under General Instruction 
G.(3) of Form 10-K \272\ and prospective incorporation by reference of 
separate financial statements of unconsolidated entities under Item 3-
09 of Regulation S-X.\273\ Commentators proposed a variety of time 
periods, including 120, 150, and 180 days after an issuer's fiscal 
year-end, in which an issuer could be required to provide its conflict 
minerals information as part of its annual report.\274\ Similarly, as 
discussed in greater detail below, some commentators suggested that the 
final rule should consider a single start and end date for the 
reporting period for all companies, regardless of their particular 
fiscal year,\275\ and one of these commentators recommended that this 
one year period coincide with the calendar year.\276\
---------------------------------------------------------------------------

    \269\ See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA, 
Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI.
    \270\ See letters from AngloGold, Cleary Gottlieb, CTIA, IPC I, 
ITIC I, JVC et al. II, NAM I, NY State Bar, Roundtable, and SEMI.
    \271\ See letters from Cleary Gottlieb and NY State Bar.
    \272\ General Instruction G.(3) of Form 10-K [17 CFR 249.310].
    \273\ Item 3-09 of Regulation S-X [17 CFR 210.3-09].
    \274\ See letters from AngloGold, CTIA, ITIC I, NAM I, 
Roundtable, and SEMI.
    \275\ See letters from Advanced Micro Devices, Inc., Africa 
Faith and Justice Network, Boston Common Asset Management, LLC, 
Calvert Asset Management Co., Inc., Congo Global Action, Enough 
Project, Falling Whistles, Free the Slaves, Future 500, General 
Electric Company, Global Witness, Hewlett-Packard Company, 
Interfaith Center on Corporate Responsibility, Jantzi-
Sustainalytics, Jesuit Conference, Jewish World Watch, Mercy 
Investment Services, Inc., Microsoft Corporation, Royal Philips 
Electronics, Trillium Asset Management, Unity Minerals, US SIF: The 
Forum for Sustainable and Responsible Investment (Aug. 22, 2011) 
(``MSG II'') and State II.
    \276\ See letter from MSG II (``We respectfully request that the 
SEC rule synchronize the timing for the information contained in the 
Conflict Minerals Reports from all issuers on a calendar year basis. 
The MSG recommends that all issuers begin exercising and reporting 
due diligence on the source and chain of custody for the subject 
minerals used in their products on a common calendar date.'').
---------------------------------------------------------------------------

    Additionally, some commentators were concerned about the liability 
of the principal executive offers, principal financial officers, and 
auditors who must certify an annual report under Sections 302 \277\ and 
906 \278\ of the Sarbanes-Oxley Act if the rule requires that an issuer 
provide its conflict minerals information in its filed annual 
report.\279\ In this regard, one commentator stated that, if the final 
rule requires an issuer to provide conflict minerals information in its 
annual report, the Commission should amend rules 13a-14(a) and (b) 
\280\ and 15d-14(a) and (b) \281\ under the Exchange Act to acknowledge 
that the various officer certifications required by those rules do not 
extend to any conflict minerals information provided either in or as an 
exhibit to the annual report.\282\ Another commentator stated that, if 
we required conflict minerals disclosure in the existing annual 
reports, we should include ``a clear statement in the rules or the 
adopting release that the officer certifications required to be 
included as exhibits to the existing annual reports would not apply to 
the conflict minerals disclosure.'' \283\ Also, some commentators were 
concerned about the negative effects that providing the information in 
the annual report on Forms 10-K, 20-F, or 40-F would have on form or 
other eligibility, incorporation by reference into Securities Act 
filings, and home country reporting in the case of foreign private 
issuers.\284\
---------------------------------------------------------------------------

    \277\ Public Law 107-204, 116 Stat. 745, Sec. 302 (2002).
    \278\ Public Law 107-204, 116 Stat. 745, Sec. 906 (2002).
    \279\ See, e.g., letters from ITIC I, NMA II, and Taiwan Semi.
    \280\ Rule 13a-14(a) [17 CFR 240.13a-14(a)] and Rule 13a-14(b) 
[17 CFR 240.13a-14(b)].
    \281\ Rule 15d-14(a) [17 CFR 240.15d-14(a)] and Rule 15d-14(b) 
[17 CFR 240.15d-14(b)].
    \282\ See letter from NY State Bar.
    \283\ See letter from Cleary Gottlieb.
    \284\ See, e.g., letters from Barrick Gold, Cleary Gottlieb, 
Corporate Secretaries I, Davis Polk, ITIC I, NMA II, NY State Bar, 
and WGC II. But see letter from Global Witness I (stating that 
conflict minerals information should be incorporated by reference 
into Securities Act filings).
---------------------------------------------------------------------------

    Some commentators indicated that, regardless of where the 
information was provided, they wanted the conflict minerals information 
in a location that was easily available to the public,\285\ or on the 
Web sites of both the issuer and the Commission.\286\ In this regard, 
certain commentators recommended that the final rule require an issuer 
to post its Conflict Minerals Reports and/or its audit reports on its 
Internet Web site, as we proposed.\287\ However, some of these 
commentators suggested that the final rule should require an issuer to 
keep that information on its Internet Web site longer than until the 
issuer filed its subsequent annual report.\288\ Other commentators 
noted that the final rule should not require an issuer to post its 
audit report online \289\ because, as one of the commentators 
noted,\290\ such

[[Page 56301]]

a requirement would increase costs without increasing benefits.
---------------------------------------------------------------------------

    \285\ See, e.g., letters from Episcopal Conference of Catholic 
Bishops of the DRC (Apr. 5, 2011) (``CENCO I'') and Good Shepherd.
    \286\ See, e.g., letter from Catholic Charities.
    \287\ See letters from CRS I, Douglas Hileman Consulting LLC 
(Oct. 31, 2011) (``Hileman Consulting''), Howland, NEI, SEMI, SIF I, 
and TriQuint I.
    \288\ See letters from Hileman Consulting (suggesting ``more 
than the proposed one year''), NEI (suggesting ``issuers to post 
several years worth of reports on their Web sites''), SIF I 
(suggesting that an ``issuer should be required to keep posted its 
Conflict Minerals Report and audit reports on its Internet Web site 
for five years''), and TriQuint I (suggesting that an issuer's 
Conflict Minerals Reports should be posted on its Web site ``for 10 
years after the issuer's products were last sold on the open 
market'').
    \289\ See letters from AngloGold and NMA II.
    \290\ See letter from AngloGold.
---------------------------------------------------------------------------

    Finally, some commentators suggested that the final rule should 
address how an issuer must handle a situation in which it acquires or 
otherwise obtains control over a company that manufactures or contracts 
to manufacture products with conflict minerals necessary to the 
functionality or production of products that previously had not been 
obligated to provide conflict minerals information to us.\291\ These 
commentators noted that the acquired company may not have any processes 
in place to determine the origin of conflict minerals in its products 
and, therefore, the acquiring issuer would most likely need a 
``reasonable amount of time'' \292\ to establish those processes before 
it could provide an accurate specialized disclosure report that 
included the acquired company's supply chain. Some commentators 
recommended that the issuer not be required to report on the products 
manufactured by the acquired company until the end of the first 
reporting period that begins no sooner than eight months after the 
effective date of the acquisition.\293\ One commentator suggested that 
the issuer not be required to report on the products manufactured by 
the acquired company until the end of the first reporting period that 
begins no sooner than 18 months from the date of the acquisition.\294\ 
Another commentator recommended that the issuer not be obligated to 
report with respect to the products manufactured by or for the acquired 
entity ``until the first fiscal year beginning after the fiscal year in 
which the acquisition is consummated.''\295\
---------------------------------------------------------------------------

    \291\ See, e.g., letters from ABA, Industry Group Coalition I, 
Industry Group Coalition II, NAM I, and Semiconductor.
    \292\ Letter from Semiconductor.
    \293\ See letters from Industry Group Coalition I (suggesting an 
eight month lead-in period because it is similar to the time that 
will elapse between the adoption of final rules implementing the Act 
and the commencement of the reporting period applicable to calendar-
year filers, and that time period is necessary to allow sufficient 
time for the acquiring issuer to implement its conflict minerals 
reasonable inquiry and due diligence processes throughout the supply 
chain of the acquired firm), NAM I (same), and Semiconductor (same).
    \294\ See letter from Industry Group Coalition II. See also 
letters from Industry Group Coalition I, NAM I, and Semiconductor.
    \295\ See letter from ABA.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are revising the proposed rules 
to require that an issuer provide its conflict minerals information in 
a new report on a new Exchange Act form. As proposed, however, the 
final rule requires an issuer to provide its Conflict Minerals Report 
as an exhibit, and not in the body of the new report. In this regard, 
we continue to believe that providing the Conflict Minerals Report as 
an exhibit to the specialized disclosure report will enable anyone 
accessing the EDGAR system to determine quickly whether an issuer 
provided a Conflict Minerals Report with its specialized disclosure 
report.
    We proposed requiring disclosure regarding conflict minerals in an 
issuer's annual report because we believed that this approach would be 
less burdensome than requiring that an issuer provide a separate 
report. Based on the comments we received, however, it appears that 
issuers will find it less burdensome to provide their conflict minerals 
information on a new report that is separate from the annual report and 
due later than the annual report. For example, one commentator 
explained that ``between an issuer's fiscal year end and the date the 
issuer is required to file its audited annual financial statements, the 
issuer's accounting and financial reporting teams focus their resources 
on preparing the issuer's annual report,'' so ``[r]equiring the 
conflict minerals disclosure to be furnished at the same time as the 
issuer's Exchange Act annual report would put further strain on these 
resources at a time when they are likely already to be operating near 
full capacity.'' \296\ Another commentator noted that issuers are going 
to be required to utilize ``significantly different processes to comply 
with the new reporting requirement that are outside the scope of 
processes developed for regular year-end reporting, and it may be a 
burden to complete the necessary inquiry and due diligence pertaining 
to conflict minerals on the same timetable as'' an annual report.\297\
---------------------------------------------------------------------------

    \296\ Letter from AngloGold.
    \297\ Letter from NAM I.
---------------------------------------------------------------------------

    We considered commentators' arguments that it would be easier for 
investors to locate the information in Forms 10-K, 20-F, and 40-F. We 
believe, however, that new Form SD should provide ready access to the 
information. Indeed, it may be easier for investors to find the 
information when it is included in the new Form SD, rather than as one 
of potentially dozens of exhibits in a voluminous Form 10-K, Form 20-F, 
or Form 40-K.\298\ Therefore, the final rule requires an issuer with 
conflict minerals necessary to the functionality or production of a 
product it manufactures or contracts to be manufactured to provide us a 
specialized disclosure report on Form SD by May 31 of each year, 
reporting on the preceding calendar year. The specialized disclosure 
report is due later than when an annual report is due for calendar year 
end issuers so as not to interfere with such issuer's preparation of 
its Exchange Act annual report, as requested by a number of 
commentators.\299\ Also, as discussed in greater detail below, the 
final rule requires each issuer to provide its conflict minerals 
information for each calendar year, rather than its fiscal year.
---------------------------------------------------------------------------

    \298\ Under the proposed rules, an issuer would have been 
required to furnish its conflict minerals information in its annual 
report on Form 10-K, Form 20-F or Form 40-F. As such, investment 
companies that are registered under the Investment Company Act of 
1940 [15 U.S.C. 80a et seq.] (``registered investment companies'') 
would not have been subject to the disclosure requirement because 
those companies are not required to file Form 10-K, Form 20-F or 
Form 40-F. Our decision to require this disclosure in a new form is 
not intended to change the scope of companies subject to the 
disclosure requirement. Therefore, consistent with the proposal, 
registered investment companies that are required to file reports on 
Form N-CSR or Form N-SAR pursuant to Rule 30d-1 under the Investment 
Company Act (17 CFR 270.30d-1) will not be subject to the final 
rule.
    \299\ See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA, 
Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI.
---------------------------------------------------------------------------

    We agree with the comments we received that a reasonable amount of 
additional time to submit the conflict minerals information is 
appropriate where an issuer acquires or otherwise obtains control over 
a company that manufactures or contracts to manufacture products with 
conflict minerals necessary to the functionality or production of those 
products that previously had not been obligated to provide conflict 
minerals information to us. We have added an instruction to the final 
rule to reflect this delay. Therefore, the final rule allows an issuer 
to delay the initial reporting period on the products manufactured by 
the acquired company until the first calendar year beginning no sooner 
than eight months after the effective date of the acquisition. This 
option appears to be a reasonable approach based on some of the 
comments we received.\300\ We note that a shorter period, such as 
requiring an issuer to report with respect to the products manufactured 
by or for the acquired entity during the first fiscal year beginning 
after the fiscal year in which the acquisition is consummated, may 
leave an issuer that acquires a company late in the year with an 
insufficient amount of time to establish

[[Page 56302]]

systems to gather and report on the conflict minerals information.
---------------------------------------------------------------------------

    \300\ See, e.g., letters from Industry Group Coalition I, 
Industry Group Coalition II, NAM I, and Semiconductor.
---------------------------------------------------------------------------

    Additionally, we are modifying the proposed rules regarding how 
long an issuer must keep its conflict minerals disclosure or its 
Conflict Minerals Report available on the issuer's Internet Web site to 
reflect that the information is not to be included in an issuer's 
annual report on Form 10-K, Form 20-F, or Form 40-K. The proposed rules 
would have required an issuer to keep its conflict minerals information 
on its Internet Web site until its subsequent annual report was filed. 
We intended this period to last only one year because, whether or not 
the issuer had any conflict minerals information to provide in its 
subsequent annual report, the issuer had to file the subsequent annual 
report one year after its prior annual report or cease to be a 
reporting issuer. However, with the final rule requiring an issuer to 
provide its conflict minerals information in a specialized disclosure 
report on Form SD, the period between specialized disclosure reports 
may be more than one year if an issuer has no reportable conflict 
minerals in its subsequent calendar year. If we did not modify the 
proposed rules, such an issuer may have been required to keep its 
conflict minerals information on its Internet Web site for more than 
one year, possibly indefinitely. Therefore, the final rule specifies 
that an issuer must make its conflict minerals disclosure or its 
Conflict Minerals Report available on the issuer's Internet Web site 
for one year. In response to concerns expressed by commentators that 
the information should be required to be mandated longer, we note that 
the issuer's Form SD with the Conflict Minerals Report will be 
available on EDGAR indefinitely, so the information will continue to be 
widely available.
    In another release we are issuing today, we are requiring issuers 
to disclose certain resource extraction payment information on Form 
SD.\301\ Because of the order of the releases, we are adopting the form 
in this release and amending it in the resource extraction release. We 
intend, however, for the form to be used equally for these two separate 
disclosure requirements.
---------------------------------------------------------------------------

    \301\ Disclosure of Payments by Resource Extraction Issuers, 
Release No. 34-67717 (Aug. 22, 2012).
---------------------------------------------------------------------------

2. ``Filing'' of Conflict Minerals Information
a. Proposed Rules
    The proposed rules would have required an issuer's conflict 
minerals information to be provided in the issuer's annual report on 
Form 10-K, Form 20-F, or Form 40-F, as applicable, and the Conflict 
Minerals Report to be included as an exhibit to the issuer's annual 
report. Certain proposed item requirements would have instructed an 
issuer to furnish its Conflict Minerals Report as an exhibit to its 
annual report. Additionally, as proposed, an issuer's Conflict Minerals 
Report, which would have included the independent private sector audit 
report, would not be ``filed'' for purposes of Section 18 of the 
Exchange Act and thus would not be subject to potential liability of 
that section of the Exchange Act, unless the issuer stated explicitly 
that the Conflict Minerals Report and the independent private sector 
audit report were filed under the Exchange Act. Instead, these 
documents would only have been furnished to the Commission. Similarly, 
as proposed, the rules would not have considered the Conflict Minerals 
Report and the independent private sector audit report to be 
incorporated by reference into any filing under the Securities Act or 
the Exchange Act, except to the extent that the issuer specifically 
incorporated them by reference into the documents. As noted above and 
in the Proposing Release, furnishing the Conflict Minerals Report would 
not have subjected the issuer to Section 18 liability,\302\ but the 
issuer would still have had liability for its conflict minerals 
information. Under Exchange Act Section 13(p)(1)(C), a failure to 
comply with the Conflict Minerals Statutory Provision would have 
rendered the issuer's due diligence process ``unreliable,'' and, 
therefore, the Conflict Minerals Report would ``not satisfy'' the 
proposed rules.\303\ In this regard, as proposed, an issuer that failed 
to comply with the proposed rules would have been subject to liability 
for violations of Exchange Act Sections 13(a) or 15(d), as 
applicable.\304\
---------------------------------------------------------------------------

    \302\ 15 U.S.C. 78r.
    \303\ See Exchange Act Section 13(p)(1)(C).
    \304\ 15 U.S.C. 78m(a) and 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    A number of commentators stated specifically that the final rule 
should, as proposed, require an issuer to ``furnish'' rather than 
``file'' its conflict minerals information.\305\ Many of these 
commentators believed that the nature and purpose of the conflict 
minerals disclosure is qualitatively different from the other 
disclosure required under Exchange Act Section 13 and the conflict 
minerals information is not material to investors.\306\ As one 
commentator explained, ``[n]othing in the statute itself suggests that 
the `reasonable' investor would find this information to be important 
in deciding whether to buy or sell'' an issuer's securities, which is 
``the touchstone of materiality under the federal securities laws.'' 
\307\ However, this commentator acknowledged that ``socially conscious 
investors might well factor this information into an investment 
decision.'' \308\ Some commentators asserted that the conflict minerals 
information is different from other information in required filings, so 
the conflict minerals information should be ``furnished.'' \309\ Other 
commentators noted that, if the conflict minerals information is 
material to a reasonable person's investment decision, it would have to 
be disclosed in an issuer's filings even without the Conflict Minerals 
Statutory Provision, so any other information regarding conflict 
minerals should be ``furnished.'' \310\ Another commentator recommended 
that the conflict minerals information should be ``furnished'' because, 
whereas the data used to generate the financial statements in issuers' 
``filed'' periodic reports are generally within their control and 
subject to internal controls, issuers would be required to rely on 
third parties (suppliers, smelters, etc.) for their conflict minerals 
data that are mostly beyond the issuer's control.\311\
---------------------------------------------------------------------------

    \305\ See, e.g., letters from AngloGold, Barrick Gold, Cleary 
Gottlieb, Corporate Secretaries I, Deloitte & Touche LLP (Mar. 2, 
2011) (``Deloitte''), Ford, ITIC I, JVC et al. II, NAM III, NMA II, 
NY State Bar, Taiwan Semi, and WGC II.
    \306\ See, e.g., letters from AngloGold, Barrick Gold, Cleary 
Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and 
Taiwan Semi.
    \307\ See letter from JVC et al. II.
    \308\ See id.
    \309\ See, e.g., letters from AngloGold, Barrick Gold, Cleary 
Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and 
Taiwan Semi.
    \310\ See letter from AngloGold and NMA II.
    \311\ See letter from Ford.
---------------------------------------------------------------------------

    Some commentators argued that the conflict minerals information 
should be ``furnished'' so that Exchange Act Section 18 liability would 
not attach to the conflict minerals information.\312\ One of these 
commentators asserted that Section 18 liability should not be available 
because there is no indication that Congress intended for an issuer's 
conflict minerals information to be subject to such liability.\313\ In 
this regard, some commentators contended that, if ``furnished,'' 
issuers' conflict minerals information would still receive significant 
attention and scrutiny, and the issuers' disclosures regarding this 
information will still be subject to liability sufficient enough to 
deter

[[Page 56303]]

abuse.\314\ The commentators pointed out that issuers would still be 
liable for any materially false or misleading statements under the 
antifraud provisions of the federal securities laws, including, Section 
10(b) of the Exchange Act and Rule 10b-5 there under.\315\ They 
indicated further that failure to comply with the Conflict Minerals 
Statutory Provision would render the issuer's due diligence 
``unreliable'' and, therefore, the Conflict Minerals Report would not 
satisfy the final rule, which would subject the issuer to liability for 
violations of Exchange Act Sections 13(a) or 15(d), as applicable.\316\
---------------------------------------------------------------------------

    \312\ See letters from Barrick Gold, Cleary Gottlieb, NMA II, 
Society of Corporate Secretaries and Governance Professionals (Aug. 
16, 2011) (``Corporate Secretaries III''), and WGC II.
    \313\ See letter from the WGC II.
    \314\ See letters from Barrick Gold, Ford, and JVC et al. II.
    \315\ See letters from Barrick Gold and JVC et al. II.
    \316\ See letters from Ford and JVC et al. II.
---------------------------------------------------------------------------

    Conversely, other commentators indicated that the final rule should 
require an issuer to ``file'' its conflict minerals information.\317\ 
Two of the co-sponsors of the statutory provision noted that Congress 
intended for an issuer's conflict minerals information, particularly 
the Conflict Minerals Report, to be ``filed'' rather than ``furnished'' 
so that the information would be subject to the liability provisions in 
Section 18 of the Exchange Act and, thereby, allow for private sector 
remedies for false and misleading statements.\318\ These co-sponsors 
asserted that, in the Proposing Release, we incorrectly reasoned that 
the Conflict Minerals Statutory Provision's requirement that an issuer 
``submit'' its Conflict Minerals Report means that Congress intended 
that the information be ``furnished'' instead of ``filed.'' They noted 
that the term ``furnish'' is included throughout the Act 41 times, but 
that term is ``expressly not used in Section 1502,'' which demonstrates 
that ``Congress intended for the word `submit' to be synonymous with 
`filed,' not `furnished.''' \319\
---------------------------------------------------------------------------

    \317\ See, e.g., letters from Bario-Neal, Brilliant Earth, 
Columban Center et al., Earthworks, Enough Project I, Global Witness 
I, Hacker Jewelers, Hoover & Strong, Metalsmiths, Sen. Durbin/Rep. 
McDermott, SIF II, TakeBack, TIAA-CREF, and World Vision US and 
World Vision DRC (Feb. 21, 2012) (``World Vision II'').
    \318\ See letter from Sen. Durbin/Rep. McDermott.
    \319\ See id.
---------------------------------------------------------------------------

    Similarly, another comment letter written by other members of 
Congress also emphasized that it was Congress's legislative intent to 
the Conflict Minerals Report be ``filed'' not ``furnished.'' \320\ The 
letter stated that it was made clear ``during the legislative process, 
meetings with the SEC, and in written comments to the Commission that 
Section 1502 was designed as a transparency measure to provide 
investors and the public the information needed to make informed 
choices.'' \321\ Therefore, according to the letter, ``[p]rotecting 
investor interests by making companies liable for fraudulent or false 
reporting of conflict minerals is critical--so the reports must be 
`filed,' not `furnished.''' \322\
---------------------------------------------------------------------------

    \320\ See letter from Sen. Leahy et al.
    \321\ Id.
    \322\ Id.
---------------------------------------------------------------------------

    Further commentators asserted that a plain reading of the Conflict 
Minerals Statutory Provision demonstrates that Congress intended that 
the term ``submit'' to mean ``file.'' \323\ The commentators argued 
that ``submit'' means ``file'' in the provision because new Exchange 
Act Section 13(p)(2)(A) states that conflict minerals disclosure is 
required if conflict minerals are necessary to the functionality or 
production of a product manufactured by a person described and the 
person described is required to ``file'' reports with us pursuant to 
the Conflict Minerals Statutory Provision. Also, one of the 
commentators noted that the term ``furnish'' is not in the text of the 
provision.\324\
---------------------------------------------------------------------------

    \323\ See letters from Global Witness I and Enough Project I.
    \324\ See letter from Global Witness I.
---------------------------------------------------------------------------

    Additionally, some commentators asserted that requiring the 
conflict minerals information be ``filed'' would benefit investors by 
making an issuer's conflict minerals information more transparent, 
accessible, accurate, and complete. In this regard, one of these 
commentators suggested that requiring the conflict minerals information 
to be ``filed'' would allow for private rights of action, which would 
permit investors to seek remedies for material misstatements regarding 
conflict minerals disclosures, and provide an incentive for issuers and 
others to conduct an appropriate due diligence.\325\ Another 
commentator noted that requiring issuers to ``file'' their conflict 
minerals information ``promotes greater transparency, makes Section 
1502 more effective,'' and helps ``facilitate access to this 
information.''\326\ In a further comment letter, a group of investors 
indicated that requiring issuers to ``file'' their conflict minerals 
information would ``allow investors greater assurance that conflict 
minerals disclosure is as comprehensive, transparent and accurate as 
possible.''\327\
---------------------------------------------------------------------------

    \325\ See id.
    \326\ See letter from Enough Project I.
    \327\ See letter from SIF II.
---------------------------------------------------------------------------

    Finally, some commentators argued that the conflict minerals 
information is material and, therefore, should be ``filed.'' \328\ A 
group of investors in one comment letter noted that the conflict 
minerals information is material to an investor in evaluating its 
investment decision, so the information should be ``filed.'' \329\ 
Specifically, the letter stated that ``[g]iven the materiality of the 
data in evaluating a company's risk, we urge the Commission to require 
all information outlined in the proposed rule to be filed in the body 
of the annual report rather than furnished as an exhibit.'' \330\ Also, 
in another comment letter, an institutional investor indicated that the 
conflict minerals information is material to an investment decision 
and, therefore, ``as material information[,] this report should be 
filed, not furnished as proposed by the Commission.'' \331\ Moreover, 
one commentator argued that allowing the conflict minerals information 
to be ``furnished'' instead of ``filed'' would ``send a regrettable 
signal that the Commission believes these disclosures to be of lesser 
importance at the very moment that issuers, regulators, investors, and 
governments around the world are looking to the Commission to help 
establish the way forward,'' which would ``scale back the vigor of 
issuer compliance and undermine the entire purpose of the statute'' and 
``undermine the goals of ending the resource-related violence in the 
DRC and providing meaningful and reliable disclosures to the American 
consumer and investor.'' \332\
---------------------------------------------------------------------------

    \328\ See letters from Global Witness I, SIF II, and TIAA-CREFF.
    \329\ See letter from SIF II.
    \330\ Id.
    \331\ See letter from TIAA-CREF.
    \332\ See letter from Global Witness I.
---------------------------------------------------------------------------

c. Final Rule
    Although the proposal would have required the conflict minerals 
information to be ``furnished,'' after considering the comments, the 
final rule we are adopting requires issuers with necessary conflict 
minerals to ``file'' the conflict minerals information provided in 
their specialized disclosure reports, including any Conflict Minerals 
Reports and independent private sector audit reports.\333\ As discussed 
above, commentators disagreed as to whether the required information 
should be ``furnished'' or ``filed,'' \334\ and in our

[[Page 56304]]

view the Conflict Minerals Provision is ambiguous on this question. In 
reaching our conclusion that the information should be ``filed'' 
instead of ``furnished,'' we note particularly that although Section 
13(p)(1)(a) states that a Conflict Minerals Report should be 
``submitted'' to the Commission, the definition of a ``person 
described,'' who is required to submit a report, uses the term 
``file.'' This reference in the statute indicates that the reports 
should be filed.
---------------------------------------------------------------------------

    \333\ 15 U.S.C. 78r.
    \334\ Compare letters from AngloGold, Barrick Gold, Cleary 
Gottlieb, Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et 
al. II, NAM III, NMA II, NY State Bar, Taiwan Semi, and WGC II 
(supporting a requirement to ``furnish'' the disclose), with letters 
from Bario-Neal, Brilliant Earth, Columban Center et al., 
Earthworks, Enough Project I, Global Witness I, Hacker Jewelers, 
Hoover & Strong, Metalsmiths, Sen. Durbin/Rep. McDermott, SIF II, 
TakeBack, TIAA-CREF, and World Vision II (supporting a requirement 
to ``file'' the disclosure).
---------------------------------------------------------------------------

    Additionally, commentators asserted that allowing the information 
to be ``furnished'' would diminish the importance of the 
information,\335\ and that requiring the information to be ``filed'' 
would enhance the quality of the disclosures.\336\ Some commentators 
argued that the conflict minerals information should not be treated as 
of lesser importance than other required disclosures,\337\ and another 
commentator indicated specifically that the conflict minerals 
information is qualitatively similar to disclosures that are required 
to be ``filed.'' \338\
---------------------------------------------------------------------------

    \335\ See letter from Global Witness I.
    \336\ See letters from Enough Project I and SIF II.
    \337\ See letter from Global Witness I.
    \338\ See Sen. Durbin/Rep. McDermott.
---------------------------------------------------------------------------

    Other commentators supporting the proposal that the disclosure be 
``furnished'' argued that the information is not material to 
investors,\339\ while some argued that it was.\340\ Given the 
disagreement, and that materiality is a fact-specific inquiry, we are 
not persuaded that this is a reason to provide that the information 
should be ``furnished.'' Additionally, we appreciate the comments that 
the conflict minerals information should be ``furnished'' because 
issuers should not be held liable for the information when they are 
required to rely on third parties for their conflict minerals data and 
direct knowledge of relevant facts may not be available to them.\341\ 
We note, however, that section 18 does not create strict liability for 
filed information. Rather, it states that a person shall not be liable 
for misleading statements in a filed document if it can establish that 
it acted in good faith and had no knowledge that the statement was 
false or misleading.\342\
---------------------------------------------------------------------------

    \339\ See letters from AngloGold, Barrick Gold, Cleary Gottlieb, 
Corporate Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM 
III, NMA II, NY State Bar, Taiwan Semi, and WGC II.
    \340\ See letters from Sen. Leahy et al., SIF I, SIF II, and 
TIAA-CREF.
    \341\ See letter from Ford.
    \342\ Exchange Act Section 18(a) provides: ``Any person who 
shall make or cause to be made any statement in any application, 
report, or document filed pursuant to this title or any rule or 
regulation thereunder or any undertaking contained in a registration 
statement as provided in subsection (d) of section 15 of this title, 
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 was false or 
misleading. A person seeking to enforce such liability may sue at 
law or in equity in any court of competent jurisdiction. In any such 
suit the court may, in its discretion, require an undertaking for 
the payment of the costs of such suit, and assess reasonable costs, 
including reasonable attorneys' fees, against either party 
litigant.'' A plaintiff asserting a claim under Section 18 would 
need to meet the elements of the statute to establish a claim, 
including reliance and damages. In addition, we note that issuers 
that fail to comply with the final rule could also be violating 
Exchange Act Sections 13(a) and (p) and 15(d), as applicable. 
Issuers would also be subject to potential liability under Exchange 
Act Section 10(b) [15 U.S.C. 78j] and Rule 10b-5 [17 CFR 240.10b-5], 
promulgated thereunder, for any false or misleading material 
statements in the information disclosed pursuant to the rule.
---------------------------------------------------------------------------

    Moreover, as discussed below, the final rule will include a 
transition period in which issuers that are required to perform due 
diligence and are unable to determine that their conflict minerals did 
not originate in the Covered Countries or unable to determine that 
their conflict minerals that originated in the Covered Countries did 
not directly or indirectly finance or benefit armed groups in the 
Covered Countries may describe their products with such conflict 
minerals as ``DRC conflict undeterminable.'' We believe this period 
will allow issuers sufficient time to obtain more data on, and control 
over, their supply chain through revised contracts with suppliers and 
smelter verification confirmations, thereby mitigating this liability 
concern.\343\
---------------------------------------------------------------------------

    \343\ As discussed above, requiring the disclosure in a new 
form, rather than in issuers' Exchange Act annual reports, should 
alleviate some commentators' concerns about the disclosure being 
subject to the officer certifications required by Rules 13a-14 and 
15d-14 under the Exchange Act.
---------------------------------------------------------------------------

3. Uniform Reporting Period
a. Proposed Rules
    The Conflict Minerals Statutory Provision requires, and we proposed 
to require, that issuers provide their initial conflict minerals 
disclosure and, if necessary, their initial Conflict Minerals Report 
after their first full fiscal year following the adoption of our final 
rule.\344\ The report would be required to cover that first full fiscal 
year.
---------------------------------------------------------------------------

    \344\ 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'').
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    We included a request for comment asking whether our rules should 
allow individual issuers to establish their own criteria for 
determining which reporting period to cover in any required conflict 
minerals disclosure or Conflict Minerals Report, provided that the 
issuers are consistent and clear with their criteria from year-to-year. 
Some commentators agreed that the final rule should allow individual 
issuers flexibility in choosing the appropriate criteria for 
determining the reporting period in which conflict minerals disclosures 
are made, provided that the issuer's methodology is clear.\345\ Other 
commentators, however, asserted that the final rule should require that 
the conflict minerals reporting period correspond to the issuer's 
fiscal year in its annual report.\346\
---------------------------------------------------------------------------

    \345\ See letters from Howland, IPC I, and NMA II.
    \346\ See letters from AngloGold and TIC.
---------------------------------------------------------------------------

    We did not request comment specifically on whether an issuer's 
conflict minerals reporting period should correspond to an issuer's 
fiscal year. Even so, some commentators indicated that an issuer's 
annual reporting period for conflict minerals disclosure should not be 
based on its fiscal year but, instead, should be based on a one-year 
period that is the same for all issuers.\347\ One of these commentators 
recognized that ``synchronizing the timing for the information* * *from 
all issuers on a calendar year basis* * *would offer integrity and 
consistency throughout the various supply chains'' and because 
``component manufacturers and others through the supply chain provide 
products for many customers who have different fiscal years, it would 
be more efficient and more accurate if the whole supply chain worked 
towards a common deadline.'' \348\ Another commentator noted that a 
uniform calendar year reporting period ``would clarify the reporting 
obligations, level the playing field among the various companies, and 
provide a clearer date of implementation for due diligence and related 
initiatives in the region.'' \349\ A further commentator asserted that 
a ``single reporting date will allow for

[[Page 56305]]

increased efficiency and thus lower costs, without reducing the 
effectiveness of the regulations.'' \350\
---------------------------------------------------------------------------

    \347\ See letters from IPC II; Matheson II; MSG II; Multi-
Stakeholder Group comprised of 29 issuers, non-governmental 
organizations, and investors (Nov. 10, 2011) (``MSG III''); and 
State II.
    \348\ Letter from MSG II. See also letter from MSG III.
    \349\ Letter from State II.
    \350\ Letter from IPC II.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, the final rule will require each 
issuer to provide its conflict minerals information on a calendar year 
basis regardless of any particular issuer's fiscal year end.\351\ The 
final rule requires an issuer to provide its annual conflict minerals 
information in its specialized disclosure report on Form SD for every 
calendar year from January 1 to December 31 and the specialized 
disclosure report will be due to the Commission on May 31 of the 
following year. In this regard, the first reporting period for all 
issuers will be from January 1, 2013 to December 31, 2013, and the 
first specialized disclosure report must be filed on or before May 31, 
2014.
---------------------------------------------------------------------------

    \351\ We are aware that Exchange Act Section 13(p)(1)(A) 
requires that we promulgate regulations requiring any ``person 
described'' to disclose annually its conflict minerals information, 
``beginning with the person's first full fiscal year that begins 
after the date of promulgation of such regulations.'' The Conflict 
Minerals Statutory Provision does not tie any required conflict 
minerals information to an issuer's annual report or its audited 
financial statements. Therefore, although the provision requires an 
issuer to begin reporting after an issuer's full fiscal year has 
cycled through, there is no requirement for the final rule's 
reporting period to correspond to an issuer's fiscal year.
---------------------------------------------------------------------------

    We agree with the commentators that explained that burdens on 
participants in the supply chain could be reduced if our final rule 
adopted a uniform reporting period. This requirement allows component 
suppliers that are part of a manufacturer's supply chain to provide 
reports to their upstream purchasers regarding the conflict minerals in 
their components only once a year. Otherwise, if the due date of the 
Conflict Minerals Report was tied to an issuer's fiscal year end, as 
proposed, component suppliers could have to provide reports regarding 
the conflict minerals in their components on a continuous basis 
throughout the year because their customers may have different fiscal 
year ends. If a component supplier has numerous purchasers, it might 
have to provide separate reports regarding the conflict minerals in its 
components every month, or even more often, which could be very 
burdensome and costly.\352\
---------------------------------------------------------------------------

    \352\ See letter from MSG II.
---------------------------------------------------------------------------

    Additionally, requiring a uniform May 31 due date for the 
specialized disclosure report responds to concerns raised by certain 
industry commentators that there would not be sufficient time in the 
period between the end of an issuer's fiscal year until its annual 
report is due to gather, report on, and have audited their conflict 
minerals information, as discussed above.\353\ The specialized 
disclosure report will be due later than an Exchange Act annual report 
is due for calendar year end issuers so as not to interfere with an 
issuer's preparation of its Exchange Act annual report, as requested by 
commentators. Also, the final rule will require each issuer to provide 
its conflict minerals information for each calendar year, rather than 
its fiscal year. The May 31 due date is approximately 150 days after 
the calendar year end, which is consistent with a commentator's 
suggested due date for an issuer to provide us with its conflict 
minerals information.\354\
---------------------------------------------------------------------------

    \353\ See, e.g., letters from AngloGold, Cleary Gottlieb, CTIA, 
Ford, ITIC I, NAM I, NY State Bar, Roundtable, and SEMI.
    \354\ See letter from AngloGold (suggesting that an issuer be 
required to provide its conflict minerals information on a Form 8-K 
or Form 6-K ``within 150 calendar days after the issuer's fiscal 
year-end'').
---------------------------------------------------------------------------

4. Time Period for Providing Conflict Minerals Information
a. Proposed Rules
    The Conflict Minerals Statutory Provision requires issuers to 
provide the specified disclosure with respect to necessary conflict 
minerals ``in the year for which such reporting is required.'' \355\ We 
proposed that the date an issuer takes possession of a conflict mineral 
would determine which reporting year that issuer would have to provide 
its required conflict minerals information. Also, if an issuer 
contracted the manufacturing of a product in which a conflict mineral 
is necessary to the production of that product, but the conflict 
mineral would not be included in the product, the issuer would, under 
the proposal, have used the date it takes possession of the product to 
determine which reporting year the issuer would have to provide the 
required conflict minerals information.
---------------------------------------------------------------------------

    \355\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Some commentators suggested that, as proposed, an issuer should be 
required to provide its conflict minerals information in the reporting 
period during which the issuer took possession of its conflict 
minerals.\356\ Other commentators recommended, however, that the final 
rule should use some other determining factor.\357\ Some commentators 
did not provide alternative factors to consider in determining for 
which annual reporting period an issuer must report its conflict 
minerals information, but stated only that an issuer should be allowed 
the flexibility to establish its own criteria for determining when an 
issuer would be required to provide information on the conflict 
minerals it obtained.\358\ Other commentators provided alternative 
factors, such as the year in which the mineral is purchased, the year 
the issuer takes possession and ownership of the mineral, the year the 
mineral is processed, or the year the product containing conflict 
minerals is produced or placed on the market.\359\
---------------------------------------------------------------------------

    \356\ See, e.g., letters from Cleary Gottlieb, ITIC I, and WGC 
II.
    \357\ See, e.g., letters from AngloGold, NAM I, RJC, and TIC.
    \358\ See, e.g., letters from Howland, IPC I, and NMA II.
    \359\ See, e.g., letters from AngloGold, NAM I, RJC, and TIC.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, the final rule is revised from the 
proposal such that possession is not the determining factor for 
deciding for which reporting year an issuer has to provide its required 
conflict minerals information. We are making this revision because we 
agree, as one commentator noted, that the ``statutory requirement to 
report is triggered not by acquisition or possession of conflict 
minerals.'' \360\ Instead, the final rule provides that an issuer must 
provide its required conflict minerals information for the calendar 
year in which the manufacture of a product that contains any conflict 
minerals is completed, irrespective of whether the issuer manufactures 
the product or contracts to have the product manufactured.\361\ We 
believe this approach is appropriate because it should be relatively 
easy for an issuer to identify when the manufacture of a product is 
completed, as the issuer has a certain amount of control over this 
decision. Thus, this approach also allows issuers some flexibility in 
determining the reporting period. For example, if an issuer completes 
the manufacture of a product with conflict minerals necessary to the 
functionality or production of that product on December 30, 2018, the 
issuer must provide a specialized disclosure report regarding the 
conflict minerals in that product for the 2018 calendar year. However, 
if that issuer completes the manufacture of that same product on 
January 2, 2019, the issuer must provide a specialized disclosure

[[Page 56306]]

report regarding the conflict minerals in that product for the 2019 
calendar year.
---------------------------------------------------------------------------

    \360\ See letter from NAM I.
    \361\ See id. (recommending that, ``[i]f the rule specifies a 
reporting trigger, it should be producing or placing on the market a 
product containing conflict minerals'').
---------------------------------------------------------------------------

    This timeframe is the same for an issuer that contracts the 
manufacturing of its products. An issuer that contracts the 
manufacturing of a product must provide its required conflict minerals 
information for the calendar year in which the issuer's contract 
manufacturer completes the manufacturing of product. For example, if an 
issuer's contractor completes the manufacturing of the product with 
conflict minerals necessary to the functionality or production of that 
product on December 30, 2018, the issuer must provide a specialized 
disclosure report regarding the conflict minerals in that product for 
the 2018 calendar year, even if the issuer does not receive the product 
until January 2, 2019. However, if that issuer's contractor completes 
the manufacturing of that same product on January 2, 2019, the issuer 
must provide a specialized disclosure report regarding the conflict 
minerals in that product for the 2019 calendar year.
    This outcome is the same for an issuer that manufactures the 
product using a component product with conflict minerals necessary to 
the functionality of the product that is manufactured by an independent 
third party. If the manufacturer of the product completes the product 
that incorporates the component product with necessary conflict 
minerals on December 30, 2018, the issuer that manufactured the product 
must provide a specialized disclosure report regarding the conflict 
minerals in that product for the 2018 calendar year. However, the 
reporting period of the independent third party manufacturer of the 
component product, if it is a reporting issuer, is not determined by 
when the manufacturing of the subsequent product containing its 
component product is completed. Instead, the reporting period for that 
component product manufacturing issuer is determined by when it 
completes the manufacturing of the component product. Therefore, an 
issuer that completes the manufacture of a component product on 
December 30, 2018, must provide a specialized disclosure report 
regarding the conflict minerals in that completed component product for 
the 2018 calendar year.
5. Conflict Minerals Already in the Supply Chain
a. Proposed Rules
    The proposed rules did not discuss specifically how an issuer would 
handle any conflict minerals already in the supply chain at the time 
our final rule takes effect, including existing stockpiles of conflict 
minerals. The Proposing Release, however, requested comment on this 
point.
b. Comments on the Proposed Rules
    Almost all commentators that discussed the topic recommended that 
an issuer's existing stockpile of conflict minerals should be exempt 
from the final rule.\362\ One commentator explained, that 
``[c]ategorizing existing stock as `conflict' simply because the 
mineral was mined before SEC rules have been agreed and published 
serves no purpose in furthering the aims of the legislation and would 
cause serious financial loss to the holders of that stock[pile].'' 
\363\ In this regard, one commentator asserted that ``[s]tockpiled 
minerals may have originated in mines that support the conflict; 
however, it would be impractical to ask companies to trace the origin 
of these minerals.'' \364\ Another commentator argued specifically 
that, if the final rule causes owners to dispose of their existing 
conflict minerals inventory because they are unable to determine that 
they are ``DCR conflict free,'' the cost of the rule would increase 
``dramatically.'' \365\
---------------------------------------------------------------------------

    \362\ See, e.g., letters from AAEI; AngloGold; ArcelorMittal; 
Arkema; Cleary Gottlieb; CTIA; Davis Polk; Earthworks; Enough 
Project I; Enough Project IV; Global Tungsten I; Global Tungsten & 
Powders Corp. (Oct. 13, 2011) (``Global Tungsten II''); Howland; 
Industry Group Coalition I; ICAR et al. II; IPC I; IPMI I; ITIC I; 
ITRI I; ITRI Ltd. (Oct. 19, 2011) (``ITRI III''); ITRI Ltd. (Oct. 
31, 2011) (``ITRI IV''); Japanese Trade Associations; Jean 
Goldschmidt International SA (Feb. 14, 2011) (``JGI''); JVC et al. 
II; Jewelers Vigilance Committee, American Gem Society, 
Manufacturing Jewelers & Suppliers of America, Jewelers of America, 
and Fashion Jewelry & Accessories Trade Association (Nov. 1, 2011) 
(``JVC et al. III''); Kemet; Kuala Lumpur Tin Market (Jan. 17, 2011) 
(``Kuala Tin''); LBMA I; Metal Solutions Corporation (Dec. 28, 2010) 
(``Solutions''); MSG III; NAM I; NEI; NMA II; NMA III; Pact II; PCP; 
Responsible Jewellery Council (Feb. 25, 2011) (``RJC I''); RMA; 
SEMI; Signet Jewelers Ltd. (Nov. 1, 2011) (``Signet''); Somima; 
TIAA-CREF; SIF I; and WGC II.
    \363\ Letter from ITRI I.
    \364\ Letter from Enough Project I.
    \365\ See letter from Claigan Environmental Inc. (Oct. 28, 2011) 
(``Claigan I'').
---------------------------------------------------------------------------

    Panelists discussed this issue further at the SEC Roundtable. Some 
panelists explained that there are stocks of metals and other materials 
stored throughout the world in warehouses and vaults by many 
individuals and institutions that are already past the point in the 
supply chain at which they could contribute to conflict.\366\ One 
panelist representing a human rights group appeared to acknowledge that 
stockpiled conflict minerals stored outside the Covered Countries would 
not contribute to conflict in the Covered Countries.\367\ Another 
panelist asserted that a stockpile ``exemption is essential for both 
existing unsmelted mineral and refined metal stocks held by industry, 
metal warehouses, investors and even in US Government stockpile,'' 
because the ``value of current tin stocks is probably around 
US$7billion, generally with non-specific mine origin,'' so not 
exempting such minerals would lead to ``market disruption and financial 
losses on this potentially unsaleable material.'' \368\
---------------------------------------------------------------------------

    \366\ See Transcript of SEC Roundtable on Conflict Minerals, 
Sections 0171-0174 (Oct. 18, 2011), available athttps://www.sec.gov/spotlight/conflictminerals/conflictmineralsroundtable101811-transcript.txt.
    \367\ See id. at Section 0172 lines 19-23 (stating that 
``there's a truth to the fact that if something is stockpiled out of 
the region, and it's being held somewhere else, does it really get 
at what the intent of the law is'').
    \368\ See id. at Section 0118 lines 8-15. See also letter from 
ITRI III.
---------------------------------------------------------------------------

    Many commentators suggested different requirements for when a 
conflict mineral should be considered stockpiled and, therefore, 
excluded from the final rule. A number of commentators recommended that 
the final rule should exempt any conflict minerals mined prior to the 
adoption of the final rule.\369\ One commentator noted, however, that 
``the date of extraction is not generally recorded or known for 
minerals purchased from artisanal miners.'' \370\ Some commentators 
asserted that the final rule should exempt any conflict minerals 
smelted or refined by a certain date \371\ because, as one of these 
commentators indicated, ``[e]ach metal batch produced by a smelter will 
possess a dated certificate of analysis which may be considered as the 
production date.''\372\ Similarly, another commentator recommended that 
stockpiled gold that ``has been fully refined before the effective 
date'' of the final rule be exempted.\373\ In this regard, one 
commentator suggested that the final rule exclude ``inventory produced 
before the date on which Dodd-Frank 1502 will first apply to the 
issuer.'' \374\ Another commentator ``proposed that the effective date 
of disclosure requirement on metal should be for ingot produced [one] 
year after the effective date'' of the final rule.\375\
---------------------------------------------------------------------------

    \369\ See, e.g., letters from AAEI, Davis Polk, ITIC I, Kemet, 
MSG III, RJC I, RMA, and WGC II.
    \370\ See letter from ITRI I.
    \371\ See letters from ITRI I, LBMA I, and Signet.
    \372\ See letter from ITRI I.
    \373\ See letter from LBMA I.
    \374\ See letter from ArcelorMittal.
    \375\ See letter from ITRI III.
---------------------------------------------------------------------------

    A few commentators urged that the final rule exempt any conflict 
minerals outside the Covered Countries by July 15, 2010.\376\ One 
commentator suggested

[[Page 56307]]

that conflict minerals should be exempt if, by January 1, 2013, those 
minerals are included in components or products already incorporated in 
finished goods in a supplier's inventory or are included in parts or 
components included in the repair or maintenance of products.\377\ One 
commentator recommended that the final rule should exempt gold in the 
issuer's possession by, or extracted before, the effective date of the 
final rule.\378\ Another commentator asserted that the final rule 
should exempt any conflict mineral that an issuer took possession of 
before the first full fiscal year following the adoption of the final 
rule.\379\ This commentator suggested also that the final rule should 
not require reporting on conflict minerals in an issuer's supply chain 
that have been manufactured prior to the beginning of the issuer's 
first reporting year. One commentator asserted that the final rule 
should exclude, as of the date of the effectiveness of the final rule, 
``gold bars in storage at the central banks,'' ``bars marked with the 
London Bullion Marketers Association (LBMA) stamp,'' and ``gold coins 
issued by governments or other entities.'' \380\ One commentator 
recommended that the final rule include a 24-month ``grace period'' 
that would permit the ``sale of existing stockpiles of minerals that 
have already been mined and have been sitting in warehouses'' in the 
DRC.\381\
---------------------------------------------------------------------------

    \376\ See letters from Earthworks and SIF I.
    \377\ See letter from NAM I.
    \378\ See letter from AngloGold.
    \379\ See letter from SEMI.
    \380\ See letter from NMA III.
    \381\ See letter from Charles F. Blakeman (Mar. 15, 2012) 
(``Blakeman III'') (arguing overall that no final rule should be 
adopted, but seeking a 24-month grace period for the sale of 
existing stockpiles of conflict minerals, in the alternative, should 
the Commission adopt a final rule). See also letter from Charles 
Blakeman (Nov. 17, 2011) (``Blakeman II'') (recommending a grace 
period for conflict minerals already, but not specifying a length of 
time for the grace period).
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, the final rule excludes any 
conflict minerals that are ``outside the supply chain'' prior to 
January 31, 2013. The final rule considers conflict minerals to be 
``outside the supply chain'' only in the following instances: After any 
columbite-tantalite, cassiterite, and wolframite minerals have been 
smelted; after gold has been fully refined; or after any conflict 
mineral, or its derivatives, that have not been smelted or fully 
refined are located outside of the Covered Countries.
    We are aware that these existing stockpiles could have financed or 
benefited armed groups in the Covered Countries. However, once those 
minerals are smelted, refined, or outside of the Covered Countries, it 
appears unlikely that they could further finance or benefit armed 
groups. Therefore, applying the final rule to these already-stockpiled 
minerals would not further the purpose of the Conflict Minerals 
Statutory Provision because those minerals would not contribute to 
further conflict. Similarly, requiring issuers to determine the origin 
and chain of custody of these minerals that may have been extracted 
prior to the passage of the Conflict Minerals Statutory Provision, 
could result in undue costs if the minerals could not be sold, as 
suggested by one commentator.\382\
---------------------------------------------------------------------------

    \382\ See letter from Claigan I.
---------------------------------------------------------------------------

    We considered exempting stockpiled conflict minerals that were 
extracted before a date certain, as one commentator recommended.\383\ 
We decided not to do so, however, because, as another commentator 
noted, the date of extraction is not generally recorded or known for 
minerals from artisanal miners.\384\ Further, if the final rule exempts 
conflict minerals extracted at a date certain, the rule would not 
necessarily account for payments illegally demanded by armed groups of 
those that transport conflict minerals through remote areas of the DRC. 
Instead, we believe that the proper point to use for ensuring that a 
conflict mineral is truly stockpiled is the smelting or primary 
refining date because the dates of these actions are more likely to be 
reliably recorded.\385\ Similarly, as is true with smelted or refined 
conflict minerals, conflict minerals stockpiled outside the Covered 
Countries would not contribute to conflict in the Covered 
Countries.\386\ Therefore, the final rule exempts any conflict minerals 
outside the Covered Countries as well.
---------------------------------------------------------------------------

    \383\ See letter from ITIC I.
    \384\ See letter from ITRI I.
    \385\ Id.
    \386\ See Transcript of SEC Roundtable on Conflict Minerals, at 
Section 0172 lines 19-23.
---------------------------------------------------------------------------

    We recognize that there may be situations in which conflict 
minerals are past the point in the supply chain where they are able to 
be used to finance or benefit armed groups, but these minerals have yet 
to be stored outside the Covered Countries,\387\ smelted, or refined. 
Even so, we believe that smelting, refining, or being outside the 
Covered Countries marks the first opportunity in the supply chain that 
offers reliable proof that the conflict minerals will no longer benefit 
or finance armed groups. We note, however, that market participants may 
need additional time to move their stockpiles outside the Covered 
Countries or have those stockpiles smelted or refined. Therefore, to 
accommodate this timing constraint, the final rule provides transition 
relief to permit market participants sometime after the final rule 
becomes effective to move, smelt, or refine any existing stocks of 
conflict minerals without having to comply with the rule's 
requirements.
---------------------------------------------------------------------------

    \387\ For example, a stockpile of conflict minerals could be 
stored in a warehouse in a DRC country that is insulated from and is 
beyond the reach of any armed group, so these conflict minerals 
would not contribute to conflict.
---------------------------------------------------------------------------

6. Timing of Implementation
a. Proposed Rules
    The Conflict Minerals Statutory Provision states that issuers must 
disclose their conflict minerals information annually beginning with 
the issuer's first full fiscal year that begins after the date of 
promulgation of our final rule.\388\ Therefore, the proposed rules 
would have included neither a transition period for issuers unable to 
determine that their conflict minerals did not originate in the Covered 
Countries or unable to determine that their conflict minerals that 
originated in the Covered Countries did not directly or indirectly 
finance or benefit armed groups, nor a general delay of the rules. We 
requested comment, however, regarding whether we should provide a 
transition period or a delay.
---------------------------------------------------------------------------

    \388\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    In response to our request for comment, a number of commentators 
stated that the final rule should not permit any general delay or 
specific phase-in period for issuers to provide their conflict minerals 
information.\389\ A number of other commentators, however, indicated 
that the final rule should allow for some type of delay or

[[Page 56308]]

phase-in period.\390\ Some of the commentators specified that there 
should be a phase-in for only certain categories of issuers, such as 
foreign private issuers, accelerated filers, and smaller reporting 
companies.\391\ Other commentators recommended that the final rule 
should include a phase-in period but did not provide any details for 
implementing such a mechanism.\392\
---------------------------------------------------------------------------

    \389\ See, e.g., letters from Catholic Charities; Earthworks; 
Global Witness I; Good Shepherd; ICAR et al. II; Larry Cox of 
Amnesty International, Lisa Shannon of A Thousand Sisters, John 
Bradshaw of Enough Project, Karen Stauss of Free the Slaves, Corinna 
Gilfillan of Global Witness, Arvind Ganesan of Human Rights Watch, 
Tzivia Schwartz Getzug of Jewish World Watch, Morton Halperin of 
Open Society Policy Center, Rabbi David Saperstein of Religious 
Action Center of Reform Judaism, Kent Hill of World Vision (Mar. 1, 
2011) (``Amnesty et al.''); Rep. Berman et al.; Sen. Boxer et al. I; 
Senators Barbara Boxer, Frank R. Lautenberg, Barbara A. Mikulski, 
Sheldon Whitehouse and Ron Wyden (Feb. 16, 2012) (``Sen. Boxer et 
al. II''); Sen. Durbin/Rep. McDermott; Delly Mawazo Sesete (Dec. 19, 
2011) (``Sesete''); State II; Synergie des Femmes Pour les Victimes 
des Violences Sexuelles (Mar. 7, 2011) (``Synergie''); World Vision 
US (Jul. 8, 2011) (``World Vision I''); and World Vision II.
    \390\ See, e.g., letters from AAEI; AAFA; AdvaMed I; AngloGold; 
Arkema; Barrick Gold; BEST II; Boeing Company (Oct. 18, 2011) 
(``Boeing''); Bureau d'Etudes Scientifiques et Techiques (Mar. 10, 
2011) (``BEST I''); Chamber I; Corporate Secretaries I; CTIA; Davis 
Polk; F[eacute]d[eacute]ration des Enterprises du Congo (Feb. 25, 
2011) (``FEC I''); Howland; Industry Group Coalition I; IPC I; ITIC 
I; ITRI I; ITRI II; ITRI IV; JGI; JVC et al. II; JVC et al. III; 
Medtronic, Inc. (Mar. 2, 2011) (``Medtronic''); Malaysia Smelting 
Corporation (Oct. 25, 2011) (``MSC II''); NAM I; National 
Association of Manufacturers (Jul. 26, 2011) (``NAM II''); NEI; NRF 
I; Pact I; PCP; Plexus (Feb. 25, 2011) (``Plexus''); Representative 
Mark S. Critz (Feb. 29, 2012) (``Rep. Critz''); RILA; RMA; 
Roundtable; Solutions; Somima; Taiwan Semi; TechAmerica, 
Professional Services Council, National Defense Industrial 
Association, American Council of Engineering Companies, Aerospace 
Industries Association, and U.S. Chamber of Commerce (Nov. 28, 2011) 
(``CODSIA''); TIC; TriQuint I; TriQuint Semiconductor Manufacturing 
Company, Ltd. (Mar. 2. 2011) (``TriQuint II''); and WGC II.
    \391\ See letters from AngloGold, Howland, and Taiwan Semi.
    \392\ See, e.g., letters from AAEI, AAFA, Arkema, BEST I, 
Chamber I, Davis Polk, FEC I, ITRI I, JGI, Medtronic, Solutions, MSC 
I, NEI, Pact I, Rep. Critz, and RMA.
---------------------------------------------------------------------------

    Some commentators asserted that the effectiveness of the final rule 
should be delayed for all issuers until either the Comptroller General 
has established auditing standards and/or the State Department has 
developed its conflict minerals map and its strategy to address 
linkages between human rights abuses and conflict minerals.\393\ Other 
commentators stated that the final rule's effectiveness for all issuers 
should be delayed for two to five years after promulgation for issuers 
to set up traceability systems in the Covered Countries and clear 
mineral stockpiles from the supply chain.\394\ One commentator stated 
that we should establish a general reporting delay for one year 
following promulgation of the final rule to allow issuers the 
opportunity to eliminate conflict minerals from their products and, 
during this time, issuers would not be required to provide conflict 
minerals information.\395\ Another commentator recommended a one-year 
general phase-in of the final rule ``so that a thorough and reliable 
traceability process can be instituted.'' \396\ In this regard, one 
commentator indicated that the ``private sector is moving forward on 
this issue,'' and that one company ``aims to have built the first 
verifiably conflict free microprocessor'' by 2013.\397\ Another 
commentator suggested that the final rule ``set clear and specific 
dates for when company reporting will take effect,'' because ``using 
benchmarks or trigger points will prolong the uncertainty that is 
causing so much trouble and suffering.'' \398\
---------------------------------------------------------------------------

    \393\ See letters from Barrick Gold, Corporate Secretaries I, 
NRF I, Roundtable, and WGC II.
    \394\ See, e.g., letters from AdvaMed I, Arkema, BEST II, FEC I, 
IPC I, ITRI I, ITRI II, ITRI IV, JVC et al. II, NAM I, Plexus, and 
TriQuint II.
    \395\ See letter from PCP.
    \396\ See also letter from Somima.
    \397\ See letter from Senator Jeff Merkley and Representatives 
Peter DeFazio, Earl Blumenauer, Kurt Schrader, and Suzanne Bonamici 
(May 17, 2012) (``Sen. Merkley et al.''). See also letter from 
Enough Project (Aug. 10, 2011) (``Enough Project III'') (providing a 
link to an article that ``details current efforts on the ground in 
response to Section 1502'').
    \398\ See letter from BEST II.
---------------------------------------------------------------------------

    A number of commentators recommended and described specific phase-
in periods that focused on issuers unable to determine the origins of 
their conflict minerals.\399\ Although each of these approaches varied 
to some degree, they all provided that, for a certain number of years 
after adoption of the final rule, an issuer unable to determine its 
conflict minerals' origins must disclose this fact, but would not be 
required to describe the products containing these conflict minerals as 
not ``DRC conflict free.'' Some of these commentators recommended that 
we require an issuer, during a phase-in period, to describe its 
conflict minerals policy, its reasonable country of origin inquiry, the 
conflict minerals in its supply chains, and/or certain other 
information.\400\ A few commentators indicated that we should phase-in 
the final rule for particular issuers based on the issuer's position in 
supply chain, so that an issuer closer in position to the mine or 
smelter would have to disclose more information regarding its conflict 
minerals.\401\ One commentator recommended that the final rule permit a 
three-year phase-in period in which all issuers would be required only 
to receive certifications from their first-tier suppliers during the 
first year after promulgation, identify the smelters used to process 
their conflict minerals in the second year, and fully implement the 
rules in the third year.\402\
---------------------------------------------------------------------------

    \399\ See, e.g., letters from AdvaMed I, CTIA, Industry Group 
Coalition I, IPC I, ITIC I, JVC et al. II, and NAM I.
    \400\ See letters from AdvaMed I, Industry Group Coalition I, 
and NAM I.
    \401\ See letters from NRF I and Teggeman.
    \402\ See letter from TriQuint II.
---------------------------------------------------------------------------

    Many commentators, including industry associations, corporations, 
human rights groups, institutional investors, members of Congress, and 
individuals, agreed that all conflict minerals should be treated 
equally, as proposed.\403\ Some commentators asserted that gold should 
be treated differently than the other three conflict minerals because 
of its unique qualities, and the OECD had not approved the supplement 
to its due diligence guidance specifically for gold,\404\ which at the 
time of the Proposing Release was scheduled to be published by the end 
of 2011. Subsequent commentators noted that the OECD's gold supplement 
would not be finalized until sometime in 2012,\405\ and some 
commentators suggested that the final rule's application to gold be 
delayed until the OECD has adopted its gold supplement.\406\ At 
present, the final gold supplement has been approved by the OECD.\407\ 
One of the commentators suggested that the final rule be delayed for 
gold until the beginning of an issuer's first full fiscal year 
following adoption and issuance of the OECD's gold supplement.\408\ 
Another one of the commentators argued that any ``effort to establish 
credible and effective due diligence systems in the absence of OECD 
guidance will be stymied by the lack of a widely accepted base for 
responsible sourcing.''\409\ One commentator, however, asserted that 
the final rule should not be delayed for gold regardless of whether the 
OECD's gold supplement has been completed.\410\ This commentator argued 
that, even if the OECD's gold supplement has not been completed when an 
issuer's reporting period begins, the issuer

[[Page 56309]]

would still be able to apply the OECD's core due diligence framework to 
gold.
---------------------------------------------------------------------------

    \403\ See, e.g., letters from Bario-Neal, Brilliant Earth, 
Calvert, Catholic Charities, CRS I, Earthworks, Enough Project I, 
Metalsmiths, Good Shepherd, Hacker Jewelers, Hoover & Strong, 
Howland, IPC I, ITRI I, NAM I, Niotan I, Peace, Rep. Berman et al., 
Sen. Durbin/Rep. McDermott, SIF I, State II, TakeBack, and TIAA-
CREF.
    \404\ See, e.g., letters from AngloGold, IPMI I, JVC et al. II, 
LBMA II, NMA II, Tiffany, TriQuint I, and WGC II.
    \405\ See letters from Government of Canada, Foreign Affairs and 
International Trade (Dec. 23, 2011) (``Canada''); JVC et al. III; 
Signet; World Gold Council, London Bullion Market Association, and 
Responsible Jewellery Council (Oct. 28, 2011) (``WGC et al. I''); 
and World Gold Council, London Bullion Market Association, and 
Responsible Jewellery Council (Dec. 9, 2011) (``WGC et al. II'').
    \406\ See, e.g., letters from Boeing, JVC et al. III, Signet, 
World Gold Council (Jun. 20, 2011) (``WGC III''), WGC et al. I, and 
WGC et al. II.
    \407\ See OECD, Due Diligence Guidance for Responsible Supply 
Chains of Minerals from Conflict-Affected and High-Risk Areas: 
Supplement on Gold (2012), available at https://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.
    \408\ See letter from WGC et al. II.
    \409\ See letter from JVC et al. III.
    \410\ See letter from ICAR et al. II.
---------------------------------------------------------------------------

    The commentators that advocated treating gold differently from the 
other conflict minerals comprise mostly gold, mining, and jewelry 
companies or associations. Of these commentators, only one indicated 
that the final rule should initially be more stringent with issuers 
using gold because 80% of the funds generated by conflict minerals for 
armed groups come from gold.\411\ The other commentators indicated that 
the final rule should be more lenient for gold and that we should defer 
full incorporation of gold into the final rule because such a large 
percentage of gold coming from the DRC is illegally exported that it 
will require greater time and effort to make the gold supply chain 
transparent than it will for the other conflict minerals.\412\ One 
commentator was concerned that, until a more transparent supply chain 
is developed, the final rule would stigmatize gold and thereby harm 
that mineral's ability to be used as a hedge and damage the global 
financial economy because so many companies would not be able to 
determine the origin of their gold.\413\ Finally, a few commentators 
stated that the final rule should permit issuers to exclude certain 
information from public dissemination regarding the storage and 
transportation routes of gold for security reasons.\414\
---------------------------------------------------------------------------

    \411\ See letter from TriQuint I.
    \412\ See letters from AngloGold, IPMI I, JVC et al. II, NMA II, 
and WGC II.
    \413\ See letter from WGC II.
    \414\ See letters from NMA II, NAM III, and WGC II.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, the final rule will not provide a 
general delay of effectiveness, nor will the proposal be withdrawn and 
re-proposed. Although many commentators advocated that the final rule 
include an extended general delay of the rule's effectiveness, we do 
not believe this approach would appropriately implement Congress's 
directive in the Conflict Minerals Statutory Provision. The provision 
states when an issuer must begin to report on its conflict minerals. 
Congress directed us to promulgate regulations requiring any ``person 
described'' to disclose annually ``beginning with the person's first 
full fiscal year that begins after the date of promulgation of such 
regulations.'' \415\ Additionally, it is not clear that a general delay 
of the final rule is necessary or appropriate. As noted by two of the 
co-sponsors of the statutory provision, conflict minerals legislation 
was first considered in 2008, the Conflict Minerals Statutory Provision 
was over a year old at the time of the letter, and many issuers have 
been working with various groups in developing supply chain tracing for 
years.\416\ Therefore, under the final rule, most issuers with 
necessary conflict minerals will be required to file a specialized 
disclosure report on or before May 31, 2014 containing conflict 
minerals disclosure for the initial reporting period that will extend 
from January 1, 2013 to December 31, 2013.
---------------------------------------------------------------------------

    \415\ See Exchange Act Section 13(p)(1)(A).
    \416\ See letter from Sen. Durbin/Rep. McDermott.
---------------------------------------------------------------------------

    Since Congress adopted the Conflict Minerals Statutory Provision in 
July 2010, we have sought comment on our implementation of the 
provision, including our proposal, and have provided opportunities for 
commentators to provide their input, both before and after the rules 
were proposed. As noted above, we extended the comment period for the 
rule proposal and convened an October 2011 roundtable at the request of 
commentators. We have continued to receive comment letters through 
August 2012, all of which we have considered. Some commentators have 
provided responses to other commentators, particularly on the Economic 
Analysis. This robust, public, and interactive debate has allowed us to 
more fully consider how to develop our final rule. Additionally, as 
discussed further in the Economic Analysis section, below, we have 
considered and analyzed the numerous comments received regarding the 
costs and complexities of the statute and proposed rule, and have taken 
them into account in the final rule. Overall, we believe interested 
parties have had sufficent opportunity to review the proposed rules, as 
well as the comment letters, and to provide views on the proposal, 
other comment letters, including data to inform our consideration of 
the final rule. Accordingly, we do not believe that withdrawal of the 
proposed rule and re-proposal is necessary.
    While the final rule does not include a general delay for the 
reasons noted, we acknowledge that there are legitimate concerns about 
the feasibility of preparing the required disclosure in the near term 
because of the stage of development of the supply chain tracing 
mechanisms. In order to address these concerns, rather than providing 
an extended general delay of effectiveness, the final rule includes a 
targeted and temporary provision intended to help issuers address some 
of the burdens and costs of compliance with the final rule. For all 
issuers, this period will last two years, including issuers' 2013 and 
2014 reporting periods, but will not be permitted for the reporting 
period beginning January 1, 2015. For smaller reporting companies, this 
period will last four years, including issuers' 2013 through 2016 
reporting periods, but will not be permitted for the reporting period 
beginning January 1, 2017. We note that, although some commentators 
recommended that there be no such transition period and other 
commentators recommended that such a transition period be permitted for 
either a shorter or longer amount of time, a number of commentators 
appeared to suggest that a transition period through 2014 would be 
appropriate to allow the necessary traceability systems in the Covered 
Countries to be established.\417\ Issuers taking advantage of this 
temporary category are still be required to conduct due diligence and 
prepare and file a Conflict Minerals Report, and are required to 
disclose in their Conflict Mineral Report all steps taken by such 
issuer, if any, since the issuer's last such report to mitigate the 
risk that its necessary conflict minerals benefit armed groups, 
including any steps to improve its due diligence.
---------------------------------------------------------------------------

    \417\ See, e.g., letters from AdvaMed I (recommending an 
``unknown determination'' transition period at least through 2014), 
FEC I (``Disclosure of minerals mined could be mainly conflict free 
for 2014 and finally the companies could successfully report to the 
Securities and Exchange Commission in 2015.''), JVC et al. II 
(urging ``the Commission to adopt a calibrated `phase-in' disclosure 
approach spanning the period from April 15, 2011 (the statutorily-
prescribed effective date of the Commission's implementing rules) 
through at least early 2014, to afford all affected issuers a 
minimum two-year transition period before becoming obligated to 
furnish an audited CMR''), Plexus (suggesting that a ``phase in 
compliance schedule of at least 2 years is needed in order to 
provide time for the due diligence systems to be set-up, most 
importantly on the ground in the DRC,'' but even ``this would be a 
significant challenge''), Verizon (recommending ``delaying the full 
applicability of the due diligence requirements of the Conflict 
Minerals Report until after fiscal 2014, to allow the DRC Zone 
countries to develop the traceability protocols and related 
infrastructure required in order to supply Conflict Free 
Smelters''), and WilmerHale (``After fiscal year 2014, when 
sufficient infrastructure is expected to have been developed to 
permit companies to determine the source of all their conflict 
minerals, the `indeterminate source' category would no longer be 
available.'').
---------------------------------------------------------------------------

    As discussed in greater detail below, the final rule provides a 
temporary ``DRC conflict undeterminable'' category for a two-year 
period for all issuers and a four-year period for smaller reporting 
companies. This category is available for issuers that proceed to step 
three but are unable to determine, after exercising their required due 
diligence,\418\ whether

[[Page 56310]]

their conflict minerals originated in the Covered Countries or whether 
their conflict minerals that originated in the Covered Countries 
directly or indirectly finance or benefit armed groups in the Covered 
Countries.
---------------------------------------------------------------------------

    \418\ As discussed in greater detail below, issuers are required 
to exercise due diligence on the source and chain of custody of 
their conflict minerals and potentially provide a Conflict Minerals 
Report if, following their reasonable country of origin inquiry, 
they know they have conflict minerals from the Covered Countries and 
not from recycled or scrap sources, or they have reason to believe 
that their conflict minerals may have originated in the Covered 
Countries and may not have come from recycled or scrap sources. Only 
after these issuers have exercised their required due diligence may 
they use the ``DRC conflict undeterminable'' alternative if they are 
still unable to determine that their conflict minerals originated in 
the Covered Countries or, if they determine that their minerals did 
originate in the Covered Countries, but they are unable to determine 
that their conflict minerals directly or indirectly financed or 
benefited armed groups in the Covered Countries.
---------------------------------------------------------------------------

    The final rule permits any such issuer for purposes of the conflict 
minerals disclosure to describe its products with such conflict 
minerals as ``DRC conflict undeterminable,'' unless those products also 
include other conflict minerals that directly or indirectly financed or 
benefited armed groups in the Covered Countries. Further, although 
issuers with ``DRC conflict undeterminable'' products are required to 
provide a Conflict Minerals Report that describes, among other matters, 
the measures taken by the issuer to exercise due diligence on the 
source and chain of custody of the conflict minerals, during the 
temporary period they will not have to provide an independent private 
sector audit of that report. We believe that not requiring an 
independent private sector audit of the Conflict Minerals Report during 
the temporary period is appropriate because an audit of the design of 
an issuer's due diligence that results in an undeterminable conclusion 
would not appear to have a meaningful incremental benefit.

D. Step Two--Determining Whether Conflict Minerals Originated in the 
Democratic Republic of the Congo or Adjoining Countries and the 
Resulting Disclosure

    Once an issuer determines that conflict minerals are necessary to 
the functionality or production of a product manufactured or contracted 
to be manufactured by the issuer, the Conflict Minerals Statutory 
Provision requires the issuer to determine whether those conflict 
minerals originated in the Covered Countries.\419\ If so, the issuer 
must submit a Conflict Minerals Report concerning those conflict 
minerals that originated in the Covered Countries,\420\ and make that 
report available on its Internet Web site.\421\ To determine whether 
their conflict minerals originated in the Covered Countries, so as to 
determine whether they must exercise due diligence on the source and 
chain of custody of those minerals and provide a Conflict Minerals 
Report, the final rule requires issuers with necessary conflict 
minerals to conduct a reasonable country of origin inquiry.
---------------------------------------------------------------------------

    \419\ See Exchange Act Section 13(p)(1)(A).
    \420\ See id.
    \421\ See Exchange Act Section 13(p)(1)(D).
---------------------------------------------------------------------------

1. Reasonable Country of Origin Inquiry
a. Proposed Rules
    We proposed that an issuer would be required to disclose whether it 
has necessary conflict minerals that originated in the Covered 
Countries based on its ``reasonable country of origin inquiry.'' Our 
proposed rules did not specify, however, what constituted a reasonable 
country of origin inquiry. Rather than describing what a reasonable 
country of origin inquiry would entail, we indicated that such a 
determination would depend on each issuer's particular facts and 
circumstances. In this regard, we noted that the reasonable country of 
origin inquiry requirement was not meant to suggest that issuers would 
have to determine with absolute certainty whether their conflict 
minerals originated in the Covered Countries as we have often stated 
that a reasonableness standard is not the same as an absolute 
standard.\422\
---------------------------------------------------------------------------

    \422\ Cf. 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.' ''
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    One commentator indicated that the final rule should not include a 
reasonable country of origin inquiry for determining whether an 
issuer's conflict minerals originated in the Covered Countries.\423\ 
This commentator objected to the use of a reasonable country of origin 
inquiry because it believed that the origin of a product should be 
determined based on where the product is produced rather than where the 
minerals in the product were mined. Another commentator recommended 
that the final rule not require issuers to make any reasonable country 
of origin inquiry at all if they determine, based on whatever means 
they believe appropriate, that their conflict minerals did not 
originate in the Covered Countries, provided they disclose this 
fact.\424\ Many other commentators on this subject agreed that the 
proposed rules' reasonable country of origin inquiry approach is 
appropriate.\425\ Some of these commentators disagreed, however, on the 
meaning and application of the standard. Some such commentators 
asserted that a reasonable country of origin standard should be 
equivalent to the due diligence standard required for the Conflict 
Minerals Report.\426\ Others suggested that the reasonable country of 
origin standard should conform, at least in part, to international 
standards,\427\ such as the ``preliminary review'' in the OECD 
guidance.\428\
---------------------------------------------------------------------------

    \423\ See letter from Teggeman.
    \424\ See letter from Roundtable (stating that the ``Conflict 
Minerals Statutory Provision requires issuers to disclose `whether' 
their conflict minerals originated in the Covered Countries, and, in 
the case of a positive determination, to provide a Conflict Minerals 
Report,'' and it ``does not impose any obligation on an issuer who 
determines that the conflict minerals did not originate in the 
Covered Countries to make any disclosure beyond that fact, nor does 
it specify how the issuer is to determine that the conflict minerals 
did not originate in the Covered Countries'').
    \425\ See, e.g., letters from AAFA, AngloGold, ArcelorMittal, 
Barrick Gold, Boeing, Chamber I, Cleary Gottlieb, CRS I, Enough 
Project I, Evangelical Alliance, Evangelicals, Global Witness I, 
Howland, ICGLR, Industry Group Coalition I, IPC I, IPMI I, ITIC I, 
JVC et al. II, LBMA I, Metalsmiths, Methodist Board, MSG I, NAM I, 
NEI, NMA II, NYCBar I, NYCBar II, RILA-CERC, SEMI, Semiconductor, 
SIF I, SIF II, PCP, Presbyterian Church II, Sen. Durbin/Rep. 
McDermott, State II, TIAA-CREF, TIC, TriQuint I, and WGC II.
    \426\ See letters from Metalsmiths and Sen. Durbin/Rep. 
McDermott.
    \427\ See letters from CRS I and IPMI I.
    \428\ See letter from IPMI I (stating that ``the OECD advocates 
an initial determination of origin inquiry''). See also OECD, OECD 
Due Diligence Guidance for Responsible Supply Chains of Minerals 
from Conflict-Affected and High-Risk Areas, 33 (2011), available at 
https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf. (``This Guidance 
applies to actors operating in a conflict-affected and high-risk 
area, or potentially supplying or using tin (cassiterite), tantalum 
(tantalite) or tungsten (wolframite), or their smelted derivates, 
from a conflict-affected and high-risk area. Companies should 
preliminarily review their mineral or metal sourcing practices to 
determine if the Guidance applies to them.'').
---------------------------------------------------------------------------

    Many commentators agreed that the final rule should not define the 
reasonable country of origin standard, or should provide only general 
guidance regarding the standard, so that the rules would allow for 
greater flexibility to evolve as processes improved.\429\ Some of these 
commentators provided examples of the general guidance that

[[Page 56311]]

the final rule could include while still allowing flexibility.\430\ For 
example, some commentators suggested that we indicate that the 
reasonable country of origin inquiry could differ among issuers based 
on their size, products, and relationships with suppliers.\431\ In 
addition, one commentator recommended that the final rule should 
clarify that a ``reasonable person'' standard applies to the reasonable 
country of origin standard.\432\ As a further example, some 
commentators sought flexibility for the reasonable country of origin 
standard that permits some combination of reasonable supplier 
declarations, contractual obligations, risk-based follow-up, and/or 
smelter validations.\433\ One commentator asserted that an issuer's 
reasonable country of origin inquiry should be conducted under a 
reasonable care standard that requires ``more than a passive acceptance 
by the filer of information provided by their suppliers,'' which does 
not ``mandate that an issuer always reach the legally correct 
conclusion, but does require sufficient investigation by an issuer to 
support reasonable cause to believe in the conclusion.'' \434\
---------------------------------------------------------------------------

    \429\ See, e.g., letters from AAFA, AngloGold, ArcelorMittal, 
Industry Group Coalition I, IPC I, IPMI I, ITIC I, JVC et al. II, 
NAM I, RILA-CERC, Semiconductor, SIF I, TriQuint I, and WGC II.
    \430\ See, e.g., letters from Industry Group Coalition I, IPC I, 
ITIC I, NAM I, RILA-CERC, and SIF I.
    \431\ See letters from IPC I and ITIC I.
    \432\ See letter from RILA-CERC.
    \433\ See, e.g., letters from Industry Group Coalition I and NAM 
I.
    \434\ See letter from Enough Project IV.
---------------------------------------------------------------------------

    Some commentators asserted that the final rule should define or 
provide specific guidance on what constitutes a ``reasonable country of 
origin inquiry,'' although many of these commentators did not provide 
suggested definitions or guidance.\435\ A few commentators argued, 
however, that any definition or guidance in the final rule should make 
clear that a reasonable country of origin standard should not be an 
absolute standard.\436\ One commentator suggested that the reasonable 
country of origin inquiry standard should require an issuer to take 
``sufficient steps to accurately determine and disclose whether its 
conflict minerals originate from the DRC,'' and the commentator, 
therefore, recommended that an issuer should disclose the steps it 
undertook to complete its inquiry.\437\
---------------------------------------------------------------------------

    \435\ See, e.g., letters from CRS I, Earthworks, Enough Project 
I, Evangelical Alliance, Evangelicals, Global Witness I, Howland, 
ICGLR, IPC I, IPMI I, Metalsmiths, Methodist Board, MSG I, NYCBar I, 
NYCBar II, PCP, Presbyterian Church II, Roundtable, SEMI, Sen. 
Durbin/Rep. McDermott, State II, and TIC.
    \436\ See letters from Chamber I, Cleary Gottlieb, and NAM I.
    \437\ See letter from SIF II.
---------------------------------------------------------------------------

    A large number of commentators suggested that, as part of a 
reasonable country of origin standard, the final rule should permit an 
issuer to rely on reasonable representations from suppliers and/or 
smelters.\438\ Other commentators recommended, however, that written 
representations could provide only some evidence in making a reasonable 
country of origin inquiry but should not, by themselves, satisfy the 
reasonable country of origin inquiry standard.\439\ Some of these 
commentators provided examples of other evidence an issuer could use in 
addition to written representations in satisfying a reasonable country 
of origin standard, including contractually obligating suppliers to 
source only from conflict-free smelters, conducting spot checks of 
suppliers and smelters to verify they are obtaining conflict minerals 
from only conflict-free sources, disclosing publicly the smelters used 
and the processes undertaken to ensure that only conflict-free minerals 
are used, and/or determining that there is no contrary evidence or 
``red flags'' that would cast doubt on the minerals' origins.\440\ Some 
commentators suggested that an issuer should be able to rely on 
representations from smelters only if the smelter was designated 
``compliant'' by nationally or internationally recognized 
standards.\441\ A few commentators, however, asserted that smelters and 
refiners are unable to verify the country of origin of the minerals 
they process at the present time.\442\ One commentator argued that an 
issuer should be able to rely on reasonable representations ``one or 
two steps up the supply chain,'' but that these representations should 
be made public.\443\
---------------------------------------------------------------------------

    \438\ See, e.g., letters from AngloGold, Arkema, Cleary 
Gottlieb, Global Tungsten I, Global Tungsten II, Howland, ICGLR, IPC 
I, IPC II, NAM I, NEI, NMA II, PCP, RILA, Roundtable, SEMI, Taiwan 
Semi, TIAA-CREF, TIC, TriQuint I, US Telecom, and WGC II.
    \439\ See, e.g., letters from CTIA, Enough Project I, Global 
Witness I, Howland, IPMI I, ITIC I, MSG I, NYCBar II, Sen. Durbin/
Rep. McDermott, SIF I, and TIC.
    \440\ See, e.g., letters from Enough Project I, Global Witness 
I, IPMI I, and MSG I.
    \441\ See letters from Howland, Enough Project I, ITIC I, MJB 
Consulting (May 30, 2011) (``MJB III''), MSG III, NYCBar II, SIF I, 
and TIC.
    \442\ See letters from Nordic Sun Worldwide Ltd. (Mar. 17, 2012) 
(``Nordic Sun'') (stating that, before smelter verification schemes 
can be relied upon, ``a more scientific component must be added,'' 
and that only ``the addition of a low acquisition cost mineral 
analyzer with a reasonably detailed geologic mineralization 
fingerprinting capability that include GPS location data and 
certification tag data in a tamper-proof format will add the 
necessary missing step to all the 3T minerals and smelter 
certification systems'') and Southern Africa Resource Watch (Apr. 4, 
2012) (``SARW'') (stating that any scheme that ``essentially depends 
on assurances from refining and smelting facilities will not be 
helpful''). But see letter from iTSCi Programme Governance Committee 
(Apr. 14, 2012) (``iTSCi'') (refuting the letter from Nordic Sun).
    \443\ See letter from Hileman Consulting.
---------------------------------------------------------------------------

    Commentators were almost evenly split about whether the final rule 
should allow an issuer to use qualifying or explanatory language in 
concluding whether its conflict minerals originated in the Covered 
Countries.\444\ Some of the commentators that believed the final rule 
should permit some qualification or explanation, however, qualified 
their recommendations.\445\
---------------------------------------------------------------------------

    \444\ Some commentators asserted that such language should be 
permitted. See letters from AngloGold, Cleary Gottlieb, Howland, NAM 
I, NMA II, and WGC II. Others took the opposite view. See letters 
from CRS I, Earthworks, Global Witness I, NEI, and State II.
    \445\ See letters from Howland (stating that an issuer should be 
able to use qualifying language only if it knows that 80% or more of 
its conflict minerals did not originate from the Covered Countries), 
MSG I (stating that qualifying language is not relevant as long as 
an issuer discloses the manner in which it determined its reasonable 
country of origin inquiry), NAM I (stating that qualifying language 
should be permitted only when there is appropriate information to 
support the conclusion), NMA II (same), and TriQuint I (stating that 
the final rule should allow qualifying language when an issuer 
concludes that its conflict minerals are not ``DRC conflict free,'' 
but should not allow such a qualification if it states that its 
conflict minerals are, in fact, ``DRC conflict free'').
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are adopting the final rule 
regarding the reasonable country of origin inquiry substantially as 
proposed, but with some modification. The final rule does not specify 
what steps and outcomes are necessary to satisfy the reasonable country 
of origin inquiry requirement because, as stated in the Proposing 
Release, such a determination depends on each issuer's particular facts 
and circumstances. A reasonable country of origin inquiry can differ 
among issuers based on the issuer's size, products, relationships with 
suppliers, or other factors.\446\ Further, as we stated in the 
Proposing Release, we continue to believe that the steps necessary to 
constitute a reasonable country of origin inquiry depend on the 
available infrastructure at a given time. As commentators noted, such 
an approach

[[Page 56312]]

allows the final rule to be flexible and evolve with available tracing 
processes.
---------------------------------------------------------------------------

    \446\ As we indicated in the Proposing Release, although a 
reasonable country of origin inquiry may be based on a particular 
issuer's size, products, relationships with suppliers, or another 
factor, an issuer may not conclude that, because of the large (or 
small) amount of conflict minerals it uses in its products or the 
large (or small) number of products that include conflict minerals, 
it is unreasonable for that issuer to conduct any inquiry into the 
origin of its conflict minerals. Instead, that issuer must make some 
inquiry into the origin of its conflict minerals.
---------------------------------------------------------------------------

    Even though the final rule does not specify the steps necessary to 
satisfy the reasonable country of origin inquiry requirement, the final 
rule includes general standards governing the inquiry and the steps 
required as a result of the inquiry. First, the final rule provides 
that, to satisfy the reasonable country of origin inquiry requirement, 
an issuer's reasonable country of origin inquiry must be reasonably 
designed to determine whether the issuer's conflict minerals did 
originate in the Covered Countries, or did come from recycled or scrap 
sources, and it must be performed in good faith. The proposed rules did 
not discuss the design of an issuer's reasonable country of origin 
inquiry or an issuer's performance in carrying out its reasonable 
country of origin inquiry. We believe providing these standards in the 
rule will facilitate compliance with the rule by providing guidance to 
issuers about what is required to satisfy the reasonable country of 
origin inquiry. In this regard, we note that one commentator stated 
that ``[i]t is essential, in order to make the implementation of 1502 
practical and cost effective, that the concept of reasonableness, and 
good faith efforts'' be recognized in the final rule.\447\ Further, we 
believe the notion of good faith performance is important so that an 
issuer will not be able to establish a reasonably designed inquiry but 
subsequently fail to undertake the steps necessary to carry out the 
actual inquiry.
---------------------------------------------------------------------------

    \447\ See letter from ITRI IV (emphasis in original).
---------------------------------------------------------------------------

    Although we do not prescribe the steps constituting a reasonable 
country of origin inquiry, we do view an issuer as satisfying the 
reasonable country of origin inquiry standard if it seeks and obtains 
reasonably reliable representations indicating the facility at which 
its conflict minerals were processed and demonstrating that those 
conflict minerals did not originate in the Covered Countries or came 
from recycled or scrap sources. These representations could come either 
directly from that facility or indirectly through the issuer's 
immediate suppliers, but the issuer must have a reason to believe these 
representations are true given the facts and circumstances surrounding 
those representations. An issuer must also take into account any 
applicable warning signs or other circumstances indicating that its 
conflict minerals may have originated in the Covered Countries or did 
not come from recycled or scrap sources.\448\ An issuer would have 
reason to believe representations were true if a processing facility 
received a ``conflict-free'' designation by a recognized industry group 
that requires an independent private sector audit of the smelter, or an 
individual processing facility, while it may not be part of the 
industry group's ``conflict-free'' designation process, obtained an 
independent private sector audit that is made publicly available. An 
issuer's policies with respect to the sourcing of conflict minerals 
will generally form a part of the issuer's reasonable country of origin 
inquiry, and therefore would generally be required to be disclosed in 
the issuer's Form SD.
---------------------------------------------------------------------------

    \448\ As discussed below, this approach is consistent with the 
OECD's due diligence guidance, which states that issuers should 
preliminarily review their sourcing practices to determine if their 
due diligence guidance applies, and provides non-exclusive examples 
of situations that it states should trigger the guidance. See OECD, 
OECD Due Diligence Guidance for Responsible Supply Chains of 
Minerals from Conflict-Affected and High-Risk Areas (2011), 
available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf. See also OECD, 
Due Diligence Guidance for Responsible Supply Chains of Minerals 
from Conflict-Affected and High-Risk Areas: Supplement on Gold 
(2012), available at https://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf.
---------------------------------------------------------------------------

    Moreover, the issuer is not required to receive representations 
from all of its suppliers. The standard focuses on reasonable design 
and good faith inquiry. Therefore, if an issuer reasonably designs an 
inquiry and performs the inquiry in good faith, and in doing so 
receives representations indicating that its conflict minerals did not 
originate in the Covered Countries, the issuer may conclude that its 
conflict minerals did not originate in the Covered Countries, even 
though it does not hear from all of its suppliers, as long as it does 
not ignore warning signs or other circumstances indicating that the 
remaining amount of its conflict minerals originated or may have 
originated in the Covered Countries. For example, we would agree that, 
``if reasonable inquiry has been made, and if no evidence of [Covered 
Country] origin has arisen, and if the origin of only a small amount of 
gold were still unknown, a manufacturer should be allowed to declare 
that its gold is not from the [Covered Countries] and is DRC conflict 
free.'' \449\
---------------------------------------------------------------------------

    \449\ See letter from IPMI I. Commentators opining on whether 
the statutory language requiring due diligence and a Conflict 
Minerals Report applies only to issuers that know that their 
conflict minerals originated in the Covered Countries or whether 
that statutory language applies also to issuers that are unable to 
determine that their conflict minerals did not originate in the 
Covered Countries did not necessarily discuss this topic in relation 
to conflict minerals from recycled or scrap sources.
---------------------------------------------------------------------------

    The reasonable country of origin inquiry is consistent with the 
supplier engagement approach in the OECD guidance where issuers use a 
range of tools and methods to engage with their suppliers.\450\ The 
results of the inquiry may or may not trigger due diligence. This is 
the first step issuers take under the OECD guidance to determine if the 
further work outlined in the OECD guidance--due diligence--is 
necessary. The Conflict Minerals Statutory Provision specifically 
contemplates due diligence, which goes beyond inquiry and involves 
further steps to establish the truth or accuracy of relevant 
information, by requiring a description of the measures the issuer took 
to exercise due diligence on the source and chain of custody of the 
minerals. The Conflict Minerals Statutory Provision specifically notes 
that due diligence includes the audit discussed below.
---------------------------------------------------------------------------

    \450\ In June 2012, the OECD issued a report regarding 
implementation of the OECD guidance. See OECD, Downstream 
Implementation of the OECD Due Diligence Guidance for Responsible 
Supply Chains of Minerals from Conflict-Affected and High-Risk 
Areas, Cycle 2 Interim Progress Report on the Supplement on Tin, 
Tantalum, and Tungsten Final Draft (June 2012), available at https://www.oecd.org/investment/guidelinesformultinationalenterprises/Downstream%20cycle%202%20report%20-%20Edited%20Final%20-%201%20June.pdf. This additional guidance includes sample letters to 
suppliers and customers regarding the use of conflict minerals.
---------------------------------------------------------------------------

    Second, the final rule establishes a different standard from that 
included in the proposal for determining whether due diligence on the 
conflict minerals' source and chain of custody and a Conflict Minerals 
Report is required after the reasonable country of origin inquiry. The 
proposed rules would have required an issuer to conduct due diligence 
and provide a Conflict Minerals Report if, based on its reasonable 
country of origin inquiry, the issuer determined that its conflict 
minerals originated in the Covered Countries, the issuer was unable to 
determine that its conflict minerals did not originate in the Covered 
Countries, or the issuer determined that its conflict minerals came 
from recycled or scrap sources. Under the proposal, issuers could only 
avoid providing a Conflict Minerals Report if they could prove a 
negative--that their conflict minerals did not originate in the Covered 
Countries. This approach would arguably be more burdensome than 
necessary to accomplish the purpose of the statutory provision. The 
reasonable country of origin inquiry standard does not require an 
issuer to determine to a

[[Page 56313]]

certainty that all its conflict minerals did not originate in the 
Covered Countries because the standard required is a reasonable 
inquiry, and requiring a certainty in this setting would not be 
reasonable and may impose undue costs.\451\
---------------------------------------------------------------------------

    \451\ As discussed below, certainty also is not required for the 
due diligence inquiry.
---------------------------------------------------------------------------

    Under the final rule, if (i) an issuer determines that, based on 
its reasonable country of origin inquiry, its necessary conflict 
minerals did not originate in the Covered Countries or did come from 
recycled or scrap sources, or (ii) based on its reasonable country of 
origin inquiry, the issuer has no reason to believe that its conflict 
minerals may have originated in the Covered Countries or the issuer 
reasonably believes that its conflict minerals are from recycled or 
scrap sources, the issuer is not required to exercise due diligence on 
its conflict minerals' source or chain of custody or file a Conflict 
Minerals Report with respect to such conflict minerals. Instead, the 
issuer only is required, in the body of its specialized disclosure 
report, to disclose its determination and briefly describe the 
reasonable country of origin inquiry it undertook in making its 
determination and the results of the inquiry it performed.
    Conversely, an issuer must exercise due diligence on its conflict 
minerals' source and chain of custody and provide a Conflict Minerals 
Report if the issuer knows that it has necessary conflict minerals that 
originated in the Covered Countries and did not come from recycled or 
scrap sources. In addition, if, based on its reasonable country of 
origin inquiry, the issuer has reason to believe that its necessary 
conflict minerals may have originated in the Covered Countries (and may 
not have come from recycled or scrap sources), the issuer must also 
exercise due diligence on the source and chain of custody of its 
conflict minerals. If, however, as a result of that due diligence, such 
an issuer determines that its conflict minerals did not originate in 
the Covered Countries or that its conflict minerals did come from 
recycled or scrap sources, no Conflict Minerals Report is required, but 
the issuer is required, in the body of its specialized disclosure 
report, to disclose its determination and briefly describe its due 
diligence and the results of the due diligence. If, based on its due 
diligence, the issuer determines that its conflict minerals did 
originate in the Covered Countries, and did not come from recycled or 
scrap sources, the issuer is required to submit a Conflict Minerals 
Report. If, based on its due diligence, the issue cannot determine the 
source of its conflict minerals, it is also required to submit a 
Conflict Minerals Report.
    This revised approach does not require an issuer to prove a 
negative to avoid moving to step three, but it also does not allow an 
issuer to ignore or be willfully blind to warning signs or other 
circumstances indicating that its conflict minerals may have originated 
in the Covered Countries. This approach appears consistent with the 
``reason-to-believe approach'' provided by one commentator.\452\ Also, 
as some commentators noted,\453\ this approach is consistent with the 
OECD's due diligence guidance, which states that issuers ``should 
preliminarily review their mineral or metal sourcing practices to 
determine if the [due diligence] Guidance applies to them.'' \454\ In 
its due diligence guidance, the OECD provides non-exclusive examples of 
circumstances, or red flags, that it states should trigger its 
guidance.\455\ One example of a circumstance that, absent other 
information, should provide an issuer with reason to believe that its 
conflict minerals may have originated in the Covered Countries is if an 
issuer becomes aware that some of its conflict minerals were processed 
by smelters that sourced from many countries, including the Covered 
Countries, but the issuer is unable to determine whether the particular 
minerals it received from such a ``mixed smelter'' were from the 
Covered Countries.\456\
---------------------------------------------------------------------------

    \452\ See letter from Tiffany (``A better way to address this 
issue would be to impose the obligation to submit a conflict 
minerals report on only those companies that actually have a reason 
to believe that they use gold (or some other `conflict mineral') 
that does, in fact, originate in the DRC or surrounding countries 
(the `reason-to-believe approach').'').
    \453\ See letters from Enough Project I (stating that, through 
its reasonable country of origin inquiry, ``an issuer should 
identify red flags that would alert it to the possibility that the 
minerals in its products support conflict in the DRC and adjoining 
countries,'' and citing to the OECD's due diligence guidance), 
Global Witness I (stating that an issuer should ``[r]eview for and 
consider `red flags' indicating possible sourcing from Covered 
Countries,'' and citing to the OECD's due diligence guidance), and 
IPMI I (``The OECD's new international standard for an initial 
inquiry is a specific point where harmonization will be particularly 
advantageous, while conforming well to the direction of Congress for 
a reasonable country of origin inquiry. Like Congress, the OECD 
advocates an initial determination of origin inquiry: `Companies 
should preliminarily review their mineral or metal sourcing 
practices to determine if the Guidance applies to them.''').
    \454\ See OECD, OECD Due Diligence Guidance for Responsible 
Supply Chains of Minerals from Conflict-Affected and High-Risk 
Areas, 33 (2011), available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
    \455\ See id. (providing a number of examples, including whether 
conflict minerals are claimed to originate from a country that has 
limited known reserves of the conflict mineral in question) and 
OECD, Due Diligence Guidance for Responsible Supply Chains of 
Minerals from Conflict-Affected and High-Risk Areas: Supplement on 
Gold (2012), available at https://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf. The gold supplement also 
addresses circumstances triggering due diligence for gold claimed to 
have come from recycled or scrap sources.
    \456\ This scenario is consistent with the OECD due diligence 
framework's statement that ``tracing minerals in a company's 
possession are generally unfeasible after smelting, with refined 
metals entering the consumer market as small parts of various 
components in end products.'' See OECD, OECD Due Diligence Guidance 
for Responsible Supply Chains of Minerals from Conflict-Affected and 
High-Risk Areas, 33 (2011), available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
---------------------------------------------------------------------------

    We appreciate that commentators differ in their views as to when 
due diligence and, potentially, a Conflict Minerals Report is required 
under the language of the Conflict Minerals Statutory Provision. The 
provision requires issuers to provide a Conflict Minerals Report if 
their conflict minerals ``did originate'' in the Covered Countries but 
does not address how to determine whether the minerals ``did 
originate'' in those countries.\457\ The final rule adopts the 
reasonable country of origin inquiry as the procedure for making this 
determination. Some commentators argued that the statutory language 
should be read to require that only an issuer that knows, after 
conducting its reasonable country of origin inquiry, that its conflict 
minerals originated in the Covered Countries must perform due diligence 
and provide a Conflict Minerals Report.\458\ Alternatively, other 
commentators argued that the provision should be read to require 
issuers that are unable to determine that their conflict minerals did 
not originate in the Covered Countries to perform due diligence and 
potentially submit a Conflict Minerals Report.\459\ We believe the 
approach that is most consistent with the statutory language and its 
purposes, however, is to require any issuer that, after the reasonable 
country of origin inquiry, knows that its minerals originated in the 
Covered Countries and did not come from recycled or scrap sources to 
perform due diligence regarding those

[[Page 56314]]

minerals and submit a Conflict Minerals Report. In addition, any issuer 
that, after conducting its reasonable country of origin inquiry, has 
reason to believe that its minerals may have originated in the Covered 
Countries, and may not have come from recycled or scrap sources must 
perform due diligence. If, as a result of that due diligence, such an 
issuer determines that its conflict minerals did not originate in the 
Covered Countries or did come from recycled or scrap sources, no 
Conflict Minerals Report is required (although, as discussed below, 
such due diligence, and the results thereof, must be disclosed in the 
body of such issuer's specialized disclosure report, together with the 
description of such issuer's reasonable country of origin inquiry). 
Otherwise, such an issuer must submit a Conflict Minerals Report. We 
are adopting this approach in the final rule.
---------------------------------------------------------------------------

    \457\ See Exchange Act Section 13(p)(1)(A) (stating that ``in 
cases in which such conflict minerals did originate in the'' Covered 
Countries (emphasis added), the issuer must ``submit to the 
Commission'' a Conflict Minerals Report).
    \458\ See, e.g., letters from AngloGold, Clearly Gottlieb, NAM 
I, and Tiffany.
    \459\ See, e.g., letters from NEI, NYCBar I, and NYCBar II.
---------------------------------------------------------------------------

    Interpreting the Conflict Minerals Statutory Provision to require 
due diligence only if an issuer has affirmatively determined that its 
conflict minerals originated in the Covered Countries and does not come 
from recycled or scrap sources would undermine the goals of the 
statute. For instance, if we allowed an issuer to stop its inquiry 
after learning that its necessary conflict minerals came from a smelter 
that includes minerals from the Covered Countries and other sources 
without knowing if its particular minerals came from the Covered 
Countries, there would be an incentive for issuers to avoid learning 
the ultimate source of the minerals. Thus, although we realize our 
approach will be more costly than only requiring due diligence and, 
potentially, a Conflict Minerals Report if the issuer has affirmative 
knowledge that its minerals came from the Covered Countries, in our 
view, requiring further steps by issuers that have reason to believe 
that they have necessary conflict minerals that may have originated in 
the Covered Countries is necessary to carry out the requirements 
contemplated by the statute. Moreover, this approach strikes a more 
appropriate balance than requiring an issuer to prove a negative--that 
their necessary conflict minerals did not originate in the Covered 
Countries--which would be even more costly.
    Alternatively, the Conflict Minerals Statutory Provision could be 
interpreted to require all issuers to determine whether their conflict 
minerals originated in the Covered Countries through the exercise of 
due diligence. This inquiry could be quite costly, especially in a 
situation in which an issuer is unable to determine that a very small 
amount of its overall conflict minerals did not originate in the 
Covered Countries or come from recycled or scrap sources. While such an 
interpretation of the provision is plausible and, in fact, was 
suggested by two of the co-sponsors of the provision as the accurate 
interpretation of the Conflict Minerals Statutory Provision,\460\ we do 
not believe that approach is necessary to achieve Congress's goal. 
Instead, we believe the reasonable country of origin inquiry standard 
provides a clearer way for issuers to make the necessary determination 
and does so in a manner that significantly reduces burdens and is more 
cost-effective. Although the reasonable country of origin inquiry will 
impose costs on issuers, we believe the costs are lower than those that 
would be incurred if issuers were always required to perform due 
diligence.
---------------------------------------------------------------------------

    \460\ See letter from Sen. Durbin/Rep. McDermott (``The proposed 
rule differentiates between the country of origin inquiry and the 
due diligence involved in determining the source and chain of 
custody of conflict minerals, indicating that the former could be 
`less exhaustive.' This is a misreading of our intent--we see no 
difference in the effort that should be exercised in each case.'').
---------------------------------------------------------------------------

    Finally, we note that an issuer conducting an appropriate 
reasonable country of origin inquiry may not be able to determine to a 
certainty the origin of all its conflict minerals or whether they came 
from recycled or scrap sources. A certainty is not required to satisfy 
the reasonable country of origin inquiry standard. Disclosure 
indicating that the determination is uncertain is unnecessary. 
Consistent with this approach, issuers may explicitly state that, if 
true, their reasonable country of origin inquiry was reasonably 
designed to determine whether the conflict minerals did originate in 
the Covered Countries or did not come from recycled or scrap sources 
and was performed in good faith, and the issuer's conclusion that the 
conflict minerals did not originate in the Covered Countries or came 
from recycled or scrap sources was made at that reasonableness level.
2. Disclosures in the Body of the Specialized Disclosure Report
a. Proposed Rules
    Under the proposed rules, an issuer would have been required to 
make a reasonable country of origin inquiry as to whether its conflict 
minerals originated in the Covered Countries. After the reasonable 
country of origin inquiry, if an issuer concluded that its conflict 
minerals did not originate in the Covered Countries, the issuer would 
have been required to disclose its conclusion in the body of its annual 
report and on its Internet Web site.\461\ Also, the proposed rules 
would have required that such an issuer disclose in the body of its 
annual report and on its Internet Web site the reasonable country of 
origin inquiry it used in making that determination. The proposed rules 
would not, however, have required an issuer that, after its reasonable 
country of origin inquiry, determined that its conflict minerals did 
not originate in the Covered Countries to disclose the actual countries 
from which the conflict minerals originated. The issuer would have been 
required to provide in the body of the annual report the Internet 
address on which the disclosure was posted and retain the information 
on the Web site at least until the issuer's subsequent annual report 
was filed. Finally, the issuer would have been required to maintain 
reviewable business records in support of its negative determination. 
The issuer, however, would not have been required to make any other 
disclosures with regard to the conflict minerals that did not originate 
in the Covered Countries.
---------------------------------------------------------------------------

    \461\ 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 its subsequent annual report.
---------------------------------------------------------------------------

    Alternatively, if an issuer determined through its reasonable 
country of origin inquiry that any of its conflict minerals originated 
in the Covered Countries, or if the issuer was unable to determine 
after a reasonable country of origin inquiry that its conflict minerals 
did not originate in the Covered Countries, the proposed rules would 
have required the issuer to disclose this result in the body of its 
annual report and disclose that the Conflict Minerals Report was 
furnished as an exhibit to its annual report. Additionally, the issuer 
would have been required to make available its Conflict Minerals Report 
on its Internet Web site until its subsequent annual report was filed, 
disclose in the body of its annual report that the Conflict Minerals 
Report was posted on its Internet Web site, and provide the Internet 
address on which the Conflict Minerals Report was located.\462\ Under 
the proposed rules, such an issuer would have been required to post the 
Conflict Minerals Report on its Internet Web site, but the issuer would 
not have had to post any of the disclosures it provided in the body of 
its annual report on its Web site.
---------------------------------------------------------------------------

    \462\ See Exchange Act Section 13(p)(1)(E).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Almost all of those that commented on this point believed that the 
final rule should require some very brief

[[Page 56315]]

discussion of the conflict minerals information in the body of the 
annual report.\463\ Some commentators indicated, however, that an 
issuer should not have to provide any disclosure in the body of the 
annual report,\464\ and one commentator stated that an issuer should 
not have to describe the findings of its Conflict Minerals Report in 
the body of the annual report.\465\ Other commentators remarked that 
the full text of the Conflict Minerals Report could be provided as an 
exhibit to an issuer's annual report.\466\ In contrast, a few 
commentators asserted that an issuer should be required to include its 
full country of origin disclosure and the full text of its Conflict 
Minerals Report in the body of the annual report.\467\
---------------------------------------------------------------------------

    \463\ See, e.g., letters from AngloGold, Howland, NEI, NY State 
Bar, SEMI, SIF I, and TriQuint I.
    \464\ See letters from ITIC I and WGC II.
    \465\ See letter from NY State Bar.
    \466\ See letters from Ford, NEI, and WGC II.
    \467\ See letters from CRS I and Earthworks.
---------------------------------------------------------------------------

    A number of commentators agreed that, as proposed, an issuer with 
conflict minerals that did not originate in the Covered Countries 
should be required to disclose its reasonable country of inquiry 
because not requiring such disclosure would undercut the essential 
purpose of the Conflict Minerals Statutory Provision.\468\ A number of 
other commentators, however, disagreed,\469\ and some of these 
commentators justified their position by noting that the Conflict 
Minerals Statutory Provision does not require such disclosure and 
asserted that such disclosure would not serve any constructive 
purpose.\470\ Also, of the many commentators that discussed this 
topic,\471\ one asserted that an issuer with no conflict minerals from 
the Covered Countries should be required to disclose the name of the 
country from which its conflict minerals' originated so that investors 
could determine the veracity of the conclusion.\472\
---------------------------------------------------------------------------

    \468\ See, e.g., letters from CRS I, Earthworks, Hileman 
Consulting, Methodist Pension, MSG I, NEI, TIC, Tiffany, and 
TriQuint I.
    \469\ See, e.g., letters from AngloGold, Cleary Gottlieb, 
Howland, NMA II, NY State Bar, SEMI, and WGC II.
    \470\ See letters from Cleary Gottlieb, NY State Bar, and SEMI.
    \471\ See, e.g., letters from AngloGold, Global Tungsten I, 
Howland, IPC I, ITRI I, JVC et al. II, NAM I, NEI, NMA II, RMA, 
SEMI, State II, TIC, TriQuint I, and WGC II.
    \472\ See letter from SIF I. See also letter from State II 
(noting that such a requirement would encourage issuers to establish 
due diligence procedures across their conflict mineral supply chains 
regardless of the minerals' country of origin).
---------------------------------------------------------------------------

    Most of the commentators that discussed the topic agreed that, as 
proposed, an issuer should be required to maintain reviewable business 
records when it determines that its conflict minerals did not originate 
in the Covered Countries.\473\ These commentators disagreed, however, 
about the length of time that the final rule should require the records 
be kept. The suggested durations ranged from one year to a period 
covering the duration of the law.\474\ In addition, some commentators 
recommended that the final rule clarify the meaning of ``reviewable 
business records.'' \475\ There were a few commentators, however, that 
did not believe that the final rule should require an issuer to retain 
reviewable business records at all because such a requirement is not in 
the Conflict Minerals Statutory Provision, an issuer should be 
permitted to create its own records as it does for the financial and 
other information in its annual reports, and such a rule would provide 
an independent books and records requirement that goes beyond the 
Conflict Minerals Statutory Provision.\476\
---------------------------------------------------------------------------

    \473\ See, e.g., letters from AngloGold, Columban Center et al., 
CRS I, Hileman Consulting, Earthworks, Global Witness I, Howland, 
ICGLR, JVC et al. II, Kemet, MSG I, NEI, NMA II, Sen. Durbin/Rep. 
McDermott, SIF I, State II, TIAA-CREF, TIC, TriQuint I, and WGC II.
    \474\ Suggested durations included, ``multiple years,'' ``a 
sufficiently long period of time,'' ``as long as their home 
jurisdictions (of foreign private issuers) require,'' ``for the 
duration of the law,'' one year, two years, three years, five years, 
seven years, and 10 years. See, e.g., letters from AngloGold, 
Columban Center et al., CRS I, Earthworks, Global Witness I, Hileman 
Consulting, Howland, ICGLR, Kemet, MSG I, NEI, NMA II, Sen. Durbin/
Rep. McDermott, SIF I, State II, TIC, TriQuint I, Trott, and WGC II.
    \475\ See letters from JVC et al. II and TIC.
    \476\ See letters from Cleary Gottlieb, NAM I, SEMI, and 
Tiffany.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are modifying the proposal 
regarding the substantive disclosures in the body of the specialized 
disclosure report, in part. An issuer that determines that, following 
its reasonable country of origin inquiry, its conflict minerals did not 
originate in the Covered Countries or came from recycled or scrap 
sources or has no reason to believe that its necessary conflict 
minerals may have originated in the Covered Countries or may not be 
from recycled or scrap sources, is required to make certain disclosures 
in the body of its specialized disclosure report on Form SD,\477\ under 
the ``Conflict Minerals Disclosure'' heading. This requirement is 
generally consistent with the proposal, except that the proposal 
required due diligence regarding conflict minerals from recycled or 
scrap sources. An issuer determining that its conflict minerals that 
did not originate in the Covered Countries or that came from recycled 
or scrap sources or that has no reason to believe that its necessary 
conflict minerals may have originated in the Covered Countries or may 
not be from recycled or scrap sources must disclose its determination 
and results and provide a brief description of the inquiry it undertook 
and the results and provide a link to its Internet Web site where the 
disclosure is publicly available. However, in a change from the 
proposal, the final rule requires such an issuer to provide a brief 
description of the results of the inquiry it performed to demonstrate 
the basis for concluding that it is not required to submit a Conflict 
Minerals Report.
---------------------------------------------------------------------------

    \477\ As discussed above, the final rule will require that all 
disclosure be in the body of the issuer's specialized disclosure 
report on new Form SD instead of its annual report.
---------------------------------------------------------------------------

    As discussed above, we note that there may be instances in which an 
issuer determines, based on its reasonable country of origin inquiry, 
that it has reason to believe it has conflict minerals that may have 
originated in the Covered Countries and may not be from recycled or 
scrap sources and, therefore, must exercise due diligence on the source 
and chain of custody of the conflict minerals. If, at any point during 
the exercise of that due diligence, the issuer determines that its 
conflict minerals did not originate in the Covered Countries or came 
from recycled or scrap sources, the issuer is not required to submit a 
Conflict Minerals Report. The issuer, however, is still required to 
submit a specialized disclosure report disclosing its determination and 
briefly describing the reasonable country of origin inquiry and the due 
diligence efforts it exercised and the results of the inquiry and due 
diligence efforts to demonstrate why the issuer believes that the 
conflict minerals did not originate in the Covered Countries or came 
from recycled or scrap sources.
    We note the views of some commentators that requiring issuers to 
describe their reasonable country of origin inquiry would impose costs 
neither justified nor required by the provision. Also, we note that the 
Conflict Minerals Statutory Provision requires only that a ``person 
described'' disclose annually ``whether conflict minerals that are 
necessary * * * did originate in the Democratic Republic of the Congo 
or an adjoining country and, in cases in which such conflict minerals 
did originate in any such country,

[[Page 56316]]

submit to the Commission a report.'' \478\ Therefore, the Conflict 
Minerals Statutory Provision only explicitly requires an issuer to 
provide additional disclosure if the issuer determines that its 
conflict minerals did originate in the Covered Countries.\479\
---------------------------------------------------------------------------

    \478\ See Exchange Act Section 13(p)(1)(A).
    \479\ See, e.g., letter from Cleary Gottlieb. This commentator 
argued ``an issuer that concludes it has necessary conflict minerals 
that did not (emphasis in original) originate in the Covered 
Countries must only disclose that conclusion--there is no 
requirement in the Dodd-Frank Act for disclosure of the inquiry 
process the issuer undertook in coming to that conclusion,'' because 
the provision ``only provides for increased disclosure requirements 
* * * once an issuer has affirmatively determined that its necessary 
conflict minerals originated in a DRC country.'' Id.
---------------------------------------------------------------------------

    We believe, however, that requiring an issuer to provide a brief 
description of the reasonable country of origin inquiry it undertook is 
appropriate despite the additional costs associated with providing such 
a description. As discussed above, the reasonable country of origin 
inquiry is not a prescriptive standard and does not require certainty. 
As a result, there will likely be variation in the approaches taken by 
issuers. Consequently, we believe it is appropriate to require 
disclosure regarding the reasonable country of origin inquiry so that 
interested parties can evaluate ``the degree of care'' the issuer used 
in making its negative determination,\480\ and it will ``help ensure 
credibility of issuer disclosure.'' \481\ Also, although the Conflict 
Minerals Statutory Provision does not explicitly require an issuer to 
provide further disclosure if the issuer determines that its conflict 
minerals did not originate in the Covered Countries, the provision does 
not provide that such disclosures cannot be required. Therefore, we 
believe that requiring this disclosure is permitted as well as 
appropriate.
---------------------------------------------------------------------------

    \480\ See letter from MSG I.
    \481\ See letter from NEI.
---------------------------------------------------------------------------

    As described above, the final rule does not prescribe particular 
steps or require an issuer to establish to a certainty that its 
minerals did not originate in the Covered Countries or come from 
recycled or scrap sources. Instead, the final rule relies on a 
reasonable design and good faith execution approach. Requiring an 
issuer to briefly describe the results of the inquiry it performed is 
intended to enable stakeholders to assess the issuer's reasonable 
country of origin design and its efforts in carrying out that design. 
Also, this disclosure is intended to allow stakeholders to form their 
own views on the reasonableness of the issuer's efforts. Based on this 
information, stakeholders could advocate for different processes for 
individual issuers if they believe it is necessary.\482\ In addition, 
it is expected that reasonable country of origin inquiry processes will 
change over time based both on improved supply chain visibility and the 
results of an issuer's prior year inquiry. Requiring an issuer to 
provide a brief description of the results of its inquiry, therefore, 
will allow stakeholders to track that progress and advocate for 
different procedures if they think it is necessary.
---------------------------------------------------------------------------

    \482\ In this regard, an issuer's description of the results of 
the reasonable country of origin inquiry should make clear why it 
determined that its conflict minerals did not originate in the 
Covered Countries. This is also the case for issuers that must 
disclose their reasonable country of origin inquiry and due 
diligence efforts if they determine, following their due diligence, 
that their conflict minerals did not originate in the Covered 
Countries or did come from recycled or scrap sources.
---------------------------------------------------------------------------

    We have decided, however, not to adopt the proposed requirement for 
an issuer to maintain reviewable business records supporting its 
conclusion that its conflict minerals did not originate in the Covered 
Countries based on its reasonable country of origin. The Conflict 
Minerals Statutory Provision does not require an issuer to maintain 
reviewable business records to support its determination of the source 
of its conflict minerals. In addition, there does not appear to be a 
need for the rule to require that an issuer maintain such records. As 
one commentator noted, issuers ``provide vast amounts of material 
information in, for example, Management's Discussion and Analysis in 
periodic reports, for which the SEC does not impose specific record 
retention requirements for maintaining the source materials used to 
generate the disclosures.'' \483\ Therefore, we believe that it is 
unnecessary for us to require an issuer to maintain reviewable business 
records, although maintenance of appropriate records may be useful in 
demonstrating compliance with the final rule, and may be required by 
any nationally or internationally recognized due diligence framework 
applied by an issuer.
---------------------------------------------------------------------------

    \483\ See letter from NAM I.
---------------------------------------------------------------------------

    Also, in contrast to the proposal, we are not requiring an issuer 
to disclose in either its specialized disclosure report or its annual 
report, under a separate heading entitled ``Conflict Minerals 
Disclosure,'' whether any of its necessary conflict minerals originated 
in the Covered Countries or did not come from recycled or scrap sources 
or that the issuer was unable to determine that its conflict minerals 
did not originate in the Covered Countries or come from recycled or 
scrap sources. Under the proposal, an issuer required to provide a 
Conflict Minerals Report, including an issuer required to provide a 
Conflict Minerals Report because its conflict minerals came from the 
recycled or scrap sources, would have been required to disclose in the 
body of its annual report that it furnished a Conflict Minerals Report 
as an exhibit to its annual report, that the Conflict Minerals Report 
and certified independent private sector audit report were available on 
its Internet Web site, and the Internet address where the Conflict 
Minerals Report and audit report were located. Instead, to reduce some 
costs and burdens to issuers, the final rule only requires an issuer 
required to provide a Conflict Minerals Report to disclose in its 
specialized disclosure report, under a separate heading entitled 
``Conflict Minerals Disclosure,'' that a Conflict Minerals Report is 
provided as an exhibit to its specialized disclosure report and to 
disclose a link to its Internet Web site where the Conflict Minerals 
Report is publicly available.
    The final rule does not require an issuer to disclose in the body 
of its specialized disclosure report the reason that the issuer is 
providing a Conflict Minerals Report because that information will be 
disclosed by the issuer in the Conflict Minerals Report. Requiring that 
information also in the body of the specialized disclosure report would 
be redundant and unnecessary. Similarly, the final rule does not 
require an issuer to disclose in its specialized disclosure report that 
it has provided an audit report or a certification of the audit, if 
applicable, because the audit report and certification would be part of 
the Conflict Minerals Report already, so specifically mentioning the 
audit report or certification here is not necessary and may be 
confusing.

E. Step Three--Conflict Minerals Report's Content and Supply Chain Due 
Diligence

    The Conflict Minerals Statutory Provision requires an issuer that 
determines that its necessary conflict minerals originated in the 
Covered Countries to submit a Conflict Minerals Report.\484\ The 
Conflict Minerals Report must include, 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.\485\ In this regard, the Conflict 
Minerals Statutory Provision states also

[[Page 56317]]

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.'' \486\ 
Also, the Conflict Minerals Statutory Provision requires that the 
Conflict Minerals Report must provide a description of the products 
``manufactured or contracted to be manufactured that are not `DRC 
conflict free,' '' the entity that conducted the independent private 
sector audit, 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.\487\
---------------------------------------------------------------------------

    \484\ See Exchange Act Section 13(p)(1)(A).
    \485\ See Exchange Act Section 13(p)(1)(A)(i).
    \486\ See Exchange Act Section 13(p)(1)(B).
    \487\ See Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------

1. Content of the Conflict Minerals Report
a. Proposed Rules
    The proposed rules would have required an issuer to exercise due 
diligence on the source and chain of custody of its conflict minerals 
that it was unable to determine, based on its reasonable country of 
origin inquiry, did not originate in the Covered Countries and to 
describe those due diligence measures in its Conflict Minerals Report. 
Consistent with the Conflict Minerals Statutory Provision,\488\ we 
proposed to require that the description of the measures taken by an 
issuer to exercise due diligence on the source and chain of custody of 
its conflict minerals would include a certified independent private 
sector audit conducted in accordance with the standards established by 
the Comptroller General of the United States.\489\ The proposed rules 
also stated that the audit would constitute a critical component of due 
diligence.\490\ To implement the Conflict Minerals Statutory 
Provision's requirement that an issuer ``certify the audit,'' \491\ we 
proposed that an issuer would be required to certify that it obtained 
an independent private sector audit of its Conflict Minerals 
Report,\492\ and we proposed that an issuer would provide this 
certification in that report. Further, as required by the Conflict 
Minerals Statutory Provision,\493\ we proposed that the rules would 
require descriptions, in the Conflict Minerals Report, of an issuer's 
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.
---------------------------------------------------------------------------

    \488\ See Exchange Act Sections 13(p)(1)(A)(i) and 13(p)(1)(B).
    \489\ See Exchange Act Section 13(p)(1)(A).
    \490\ See Exchange Act Section 13(p)(1)(B).
    \491\ See id.
    \492\ As discussed in the Proposing Release, 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 
did not propose this approach.
    \493\ See Exchange Act Section 13(p)(1)(A)(ii).
---------------------------------------------------------------------------

    The Conflict Minerals Statutory Provision uses the phrase 
``facilities used to process the conflict minerals,'' which we noted in 
the Proposing Release would appear to refer to the smelter or refinery 
through which the issuer's minerals passed. We noted also that the 
Conflict Minerals Statutory 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.\494\ The 
Proposing Release also noted that 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,'' \495\ as they relate to the 
Covered Countries (``Country Reports'').\496\ Our proposed rules 
included a cross reference to that definition to provide guidance.
---------------------------------------------------------------------------

    \494\ See Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D).
    \495\ 22 U.S.C. 2151n(d) and 2304(b).
    \496\ Section 1502(e)(3) of the Act.
---------------------------------------------------------------------------

    Under the proposed rules, an issuer that was unable to determine 
that its conflict minerals did not originate in the Covered Countries 
would have been required to furnish a Conflict Minerals Report to the 
same extent as an issuer with conflict minerals that originated in the 
Covered Countries. We recognized that an issuer unable to determine 
that its conflict minerals did not originate in the Covered Countries 
may not be able to determine to a certainty whether any of its products 
are or are not ``DRC conflict free,'' insofar as its initial effort to 
determine the origin of the conflict minerals in those products under 
the reasonable country of origin inquiry was inconclusive and its 
subsequent due diligence on the source and chain of custody of such 
minerals was also inconclusive. Consistent with Exchange Act Section 
13(p)(1)(A)(ii), we proposed that an issuer unable to determine that 
its conflict minerals did not originate in the Covered Countries would 
be required to describe all of its products that contain such conflict 
minerals and identify these products as ``not DRC conflict free'' \497\ 
because the issuer would not have determined that the products 
satisfied the statutory definition of ``DRC conflict free''--that the 
products do ``not contain conflict minerals that directly or indirectly 
finance or benefit armed groups in the'' Covered Countries. The 
proposed rules would have allowed an issuer to provide additional 
disclosure explaining, for example, that although these products were 
categorized as not ``DRC conflict free'' in compliance with the 
proposed rules implementing the Conflict Minerals Statutory Provision 
and the statutory definition of ``DRC conflict free,'' the issuer had 
been unable to determine the source of the conflict minerals, including 
whether the conflict minerals in these products actually benefited or 
financed armed groups in the Covered Countries. Also, such an issuer 
would have been 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.\498\
---------------------------------------------------------------------------

    \497\ If any products contained both conflict minerals that did 
not originate in the Covered Countries and conflict minerals that 
the issuer was unable to determine did not originate in the Covered 
Countries, the issuer, under the proposal, would be required to 
classify those products as not ``DRC conflict free.'' Similarly, if 
any of an issuer's products contained conflict minerals that did not 
originate in the Covered Countries, that the issuer was unable to 
determine did not originate in the Covered Countries, or that 
originated in the Covered Countries but did not directly or 
indirectly finance or benefit armed groups in the Covered Countries, 
and also contained conflict minerals that originated in the Covered 
Countries and that directly or indirectly financed or benefited 
armed groups in the Covered Countries, the issuer would be required 
to classify those products as not ``DRC conflict free.''
    \498\ We recognized that such an issuer would not be able to 
provide the country of origin of those minerals, so the proposed 
rules would not require this information.
---------------------------------------------------------------------------

    Any issuer with products considered not ``DRC conflict free'' would 
have been required to provide a description of those products in its 
Conflict Minerals Report. That description would have been based on the 
issuer's individual facts and circumstances so that the description 
sufficiently identified the products or categories of products. For 
example, an issuer could disclose each model of a product containing 
conflict minerals that directly or indirectly financed or benefited 
armed groups in the Covered Countries, each category of a product 
containing such conflict minerals, the specific products containing 
such conflict minerals that were produced during a specific time 
period, that all its

[[Page 56318]]

products contain such conflict minerals, or another such description 
depending on the issuer's facts and circumstances.
    As proposed, our rules would have required an issuer to furnish, as 
part of its Conflict Minerals Report, the audit report prepared by the 
independent private sector auditor and the identity of the 
auditor.\499\ We noted that, 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 believed that approach was not the better reading of the 
Conflict Minerals Statutory Provision. As noted above, the Conflict 
Minerals Statutory Provision emphasizes that the independent audit is a 
``critical component of due diligence.'' In light of the importance of 
this audit report to the proposed reporting requirements and the 
statutory language, we proposed to require that the audit report be 
furnished with the Conflict Minerals Report.
---------------------------------------------------------------------------

    \499\ Our proposal to 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).''
---------------------------------------------------------------------------

    Proposed Item 4(a) of Form 10-K (referring to proposed Instruction 
2 to Item 104 of Regulation S-K), proposed Instruction 3 to Item 16 of 
Form 20-F, and proposed Instruction 3 to General Instruction B(16) of 
Form 40-F would have provided 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 incorporated it 
by reference. For example, if an issuer incorporated by reference its 
annual report into a Securities Act registration statement, that issuer 
would not also automatically incorporate the Conflict Minerals Report 
into that Securities Act document. Also, in such a situation, the 
independent private sector auditor would not have assumed expert 
liability and the issuer would not,\500\ therefore, have been required 
to file a consent from that auditor unless the issuer specifically 
incorporated by reference the Conflict Minerals Report into the 
Securities Act registration statement.
---------------------------------------------------------------------------

    \500\ See Rule 436 of Regulation C [17 CFR 230.436].
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    A number of commentators agreed with the proposed rules' 
requirement that an issuer unable to determine that its conflict 
minerals did not originate in the Covered Countries be required to 
describe its products as not ``DRC conflict free'' in its Conflict 
Minerals Report.\501\ In one comment letter, five senators stated that 
Congress did not intend for the Conflict Minerals Statutory Provision 
to allow issuers to report that the origins of their conflict minerals 
was undeterminable.\502\ Instead, the letter argued that Congress 
``intended and directed'' the final rule to require that, if an issuer 
``cannot affirm that the minerals are `conflict-free,' the only other 
conclusion that could be reported would be that the product may contain 
materials that directly or indirectly finance armed groups in the 
DRC.'' \503\ In another comment letter, members of Congress asserted 
that conflict minerals information that does ``not clearly list a 
company's activities and rules allowing a category of `indeterminate' 
would undermine congressional intent.'' \504\
---------------------------------------------------------------------------

    \501\ See, e.g., letters from CRS I, Earthworks, Evangelical 
Alliance, Evangelicals, Howland, Methodist Board, NEI, Presbyterian 
Church II, Rep. Berman et al., Sen. Boxer et al. II, Sen. Durbin/
Rep. McDermott, State II, and World Vision II.
    \502\ See letter from Sen. Boxer et al. II.
    \503\ Id.
    \504\ See letter from Sen. Leahy et al.
---------------------------------------------------------------------------

    Other commentators indicated, however, that the final rule should 
not require an issuer unable to determine that its conflict minerals 
did not originate in the Covered Countries to state that its conflict 
minerals are not ``DRC conflict free'' either on a temporary or 
permanent basis.\505\ Some commentators who are members of Congress 
requested that we consider, as an alternative to the proposed rules, 
``phasing-in implementation to allow for materials of indeterminate 
origin currently in the supply chain to be properly classified.'' \506\ 
In another letter, members of Congress suggested that the final rule 
create a temporary classification for minerals of an indeterminate 
origin that would exempt companies with such minerals from the 
requirement to provide a Conflict Minerals Report.\507\ Some 
commentators suggested that such issuers should be required to state 
that its products with such conflict minerals are not ``DRC conflict 
free'' after a certain number of years.\508\ Some commentators asserted 
that the proposed rules would violate the First Amendment because, 
among other reasons, the rules would compel speech that is not of a 
commercial nature, which is different from other corporate disclosures, 
and would require some issuers, such as those unable to determine that 
their conflict minerals did not originate in the Covered Countries, to 
provide false, stigmatizing information.\509\
---------------------------------------------------------------------------

    \505\ See, e.g., letters from AdvaMed I, Cleary Gottlieb, IPC I, 
ITRI I, JVC et al. II, NAM I, NAM III, Rep. Bachus et al., Rep. 
Critz, Rep. Ellmers, Rep. Murphy, TIAA-CREF, Tiffany, TriQuint I, 
and WGC II.
    \506\ See letters from Rep. Critz, Rep. Ellmers, and Rep. 
Murphy.
    \507\ See letter from Rep. Bachus et al.
    \508\ See letters from IPC I, SIF I, TIAA-CREF, and TriQuint I.
    \509\ See letters from Taiwan Semi, Tiffany, and WLF.
---------------------------------------------------------------------------

    Some commentators urged that an issuer unable to determine that its 
conflict minerals did not originate in the Covered Countries should not 
be required to submit a Conflict Minerals Report that is audited by an 
independent private sector auditor.\510\ As one commentator asserted, 
the provision ``does not require an issuer that has been unable to 
determine (after proper inquiry) the source of its conflict minerals * 
* * to provide a Conflict Minerals Report,'' because the ``statute uses 
the phrase `in cases in which such conflict minerals did originate in 
[a DRC country],' as the trigger for providing a Conflict Minerals 
Report'' (emphasis and bracket in original).\511\
---------------------------------------------------------------------------

    \510\ See, e.g., letters from AngloGold, Cleary Gottlieb, NAM I, 
and Tiffany.
    \511\ See letter from Cleary Gottlieb.
---------------------------------------------------------------------------

    One commentator, in two separate letters, disagreed with this 
position, however, and stated that any issuer that is unable to 
determine that its conflict minerals did not originate in the Covered 
Countries must be required to submit an audited Conflict Minerals 
Report to support its conclusion.\512\ Another commentator recommended 
that the final rule allow issuers to provide annual, unaudited conflict 
minerals disclosure that would identify the issuer's products that the 
issuer ``reasonably believes may contain `conflict minerals;' '' 
indicate that the origin of these minerals is indeterminate and explain 
why the minerals origin is indeterminate; identify and disclose the 
issuer's involvement in any governmental, semi-governmental, and 
private sector diligence initiatives; and describe the measures the 
issuer has undertaken to develop a management

[[Page 56319]]

due diligence system covering its supply chain for each conflict 
mineral.\513\ One commentator asserted that investors would have 
``insufficient material information to evaluate a company's supply 
chain risk'' if the final rule allowed issuers to declare their 
conflict minerals from an indeterminate origin ``without describing the 
steps they have taken to make their determination,'' and recommended 
that the final rule ``require reporting to be sufficiently detailed to 
inform investors of the steps an issuer has taken to determine whether 
the minerals the issuer purchases come from the DRC or an adjoining 
country.'' \514\
---------------------------------------------------------------------------

    \512\ See letters from NYCBar I (``We also believe the rules 
should require reporting firms that cannot, after due diligence, 
determine the origin of the materials used in their products to 
submit a Conflict Minerals Report and an independent audit of such 
report to ensure such issuers cannot easily avoid their obligations 
and disclosure requirements prescribed by these rules.'') and NYCBar 
II (``The rules should require reporting firms that cannot, after 
due diligence, determine the origin of the materials used in their 
products to submit a Conflict Minerals Report and an independent 
audit of such report to ensure such issuers cannot easily avoid 
their obligations and disclosure requirements prescribed by the 
rules.'').
    \513\ See letter from Signet.
    \514\ See letter from SIF II.
---------------------------------------------------------------------------

    Although we did not propose to require any type of physical label 
on a product, one commentator stated that it is essential for the final 
rule to mandate that an issuer with products containing conflict 
minerals that did not finance or benefit an armed group label those 
products as ``DRC conflict free.'' \515\ Many commentators, however, 
remarked that an issuer should not be required to physically label its 
products.\516\ Some commentators asserted that an issuer should be 
permitted to describe its products as ``DRC conflict free'' only if the 
issuer sources its conflict minerals in those products from the Covered 
Countries and those conflict minerals did not finance or benefit armed 
groups.\517\ Another commentator added specifically that products 
should be labeled as ``DRC conflict free'' only if either they are not 
from the Covered Countries or do not directly or indirectly support 
armed groups in the Covered Countries.\518\ Also, all commentators that 
discussed the subject agreed that the final rule should, as proposed, 
allow issuers to provide additional disclosure in describing any of 
their products that have not been found to be ``DRC conflict free'' 
\519\
---------------------------------------------------------------------------

    \515\ See, e.g., letter from Catholic Relief Services of St. 
Cloud, Minnesota (Apr. 14, 2011) (``CRS I--St. Cloud'').
    \516\ See, e.g., letters from Columban Center et al., Howland, 
Industry Group Coalition I, ITIC I, Japanese Trade Associations, MSG 
I, NAM I, and SIF I.
    \517\ See letters from ITRI III, MSG I, and SIF I.
    \518\ See letter from State II.
    \519\ See letters from Howland, IPC I, NMA II, SEMI, TriQuint I, 
and WGC II.
---------------------------------------------------------------------------

    A number of commentators mentioned that the final rule should, as 
proposed, require an issuer to disclose the facilities, countries of 
origin, and efforts to determine the mine or location of origin only 
for its conflict minerals that directly or indirectly financed or 
benefited armed groups in the Covered Countries.\520\ A few 
commentators suggested that all issuers with conflict minerals 
originating in the Covered Countries, including issuers with conflict 
minerals that did not directly or indirectly finance or benefit armed 
groups in the Covered Countries and issuers with conflict minerals that 
did directly or indirectly finance or benefit armed groups in the 
Covered Countries, should be required to disclose the facilities, 
countries of origin, and efforts to determine the mine or location of 
origin of those conflict minerals.\521\ Two commentators further 
recommended that all issuers with conflict minerals, regardless of 
whether the minerals originated within or without of the Covered 
Countries, should be required to disclose the facilities, countries of 
origin, and efforts to determine the mine or location of origin of 
those conflict minerals.\522\
---------------------------------------------------------------------------

    \520\ See, e.g., letter from AngloGold, Barrick Gold, Cleary 
Gottlieb, Howland, IPC I, JVC et al. II, NAM I, NMA II, and WGC II.
    \521\ See letters from MSG I, NEI, SIF I, and TriQuint I.
    \522\ See letters from Earthworks and Trott.
---------------------------------------------------------------------------

    Some commentators agreed that the final rule should, as proposed, 
require an issuer to disclose only the efforts to determine the 
conflict minerals' mine or location of origin with the greatest 
possible specificity.\523\ Other commentators suggested going further 
and requiring an issuer to disclose the actual mine or location of 
origin with the greatest possible specificity.\524\ Still other 
commentators argued that the final rule should not require issuers to 
include specific supply chain information, such as conflict mineral 
sources, quantities, transit routes, or store houses because such 
disclosures could hurt an issuer's competitive advantage or subject the 
issuer or its employees to violence.\525\ Alternatively, these 
commentators recommended that the rule allow for generic descriptions 
or approximate geographic locations or permit an issuer to redact 
sensitive or secure information.\526\
---------------------------------------------------------------------------

    \523\ See, e.g., letters from AngloGold, Barrick Gold, JVC et 
al. II, NAM I, TriQuint I, and WGC II.
    \524\ See, e.g., letters from CRS I, Howland, ICGLR, NEI, State 
II (acknowledging that, as a best practices approach, an issuer 
should make every effort to include specific information regarding 
the mine), TakeBack, and Trott (stating that the final rule should 
require an issuer to provide as much information as possible 
regarding its conflict minerals' mine or location of origin).
    \525\ See letters from Barrick Gold, Global Tungsten II, IPMI I, 
NMA II, NMA III, and TIC.
    \526\ See letters from Barrick Gold, NMA II, and TIC.
---------------------------------------------------------------------------

    A number of commentators indicated that an issuer should, as 
proposed, ``certify the audit'' by certifying that it obtained an 
independent private sector audit.\527\ Many of these commentators, plus 
some others, remarked that these certifications should either not be 
signed or, if they are required to be signed, be signed by the issuer 
or by an individual on behalf of the issuer and not in any individual 
capacity.\528\ In contrast, one commentator recommended that an 
issuer's senior management or executive officers in some manner certify 
the independent private sector audit,\529\ another commentator asserted 
that it is ``essential that there be CEO level involvement in the 
filing of the disclosures in order to make sure that companies do not 
simply `game the system,' '' \530\ and a further commentator argued 
that the ``certification of an audit will make little sense unless the 
signatories verify on a quarterly basis that certain minimal standards 
have been maintained by the auditors.'' \531\ One commentator asserted 
that certifying the audit is unnecessary because the audit report will 
be submitted to the Commission in the Conflict Minerals Report.\532\ 
This commentator and another stated that requiring an issuer to certify 
the audit would prevent an issuer from stating that its products are 
``DRC conflict free'' because no issuer could be so certain of that 
conclusion that its officers would certify the audit.\533\ One 
commentator suggested that no liability should be assigned to 
individuals that may sign the certifications ``unless the situation 
involves a knowing and willful intent to mislead.'' \534\
---------------------------------------------------------------------------

    \527\ See, e.g., letters from Barrick Gold, Cleary Gottlieb, 
Ford, ICGLR, ITIC I, NAM I, NY State Bar, and WGC II.
    \528\ See, e.g., letters from AngloGold, Barrick Gold, Cleary 
Gottlieb, Ford, Howland, JVC et al. II, NAM I, NEI, and WGC II.
    \529\ See letter from Grant Thornton LLP (Mar. 2, 2011) (``Grant 
Thornton'').
    \530\ See letter from TakeBack.
    \531\ See letter from SARW.
    \532\ See letter from TIC.
    \533\ See letters from Teggeman and TIC.
    \534\ See letters from Cleary Gottlieb and NMA II.
---------------------------------------------------------------------------

    Some commentators agreed that the audit report should, as proposed, 
be included as part of the Conflict Minerals Report.\535\ Other 
commentators recommended that an issuer's audit report should not be 
submitted as part of the Conflict Minerals Report because such a 
requirement would increase audit costs without providing comparable 
benefits.\536\ Certain commentators opposed having to make the audit 
report public and suggested instead that issuers provide the audit

[[Page 56320]]

report to the Commission confidentially, allow for sensitive portions 
to be redacted, or provide it to the Commission with the Commission 
making it available to the public only in hardcopy form at the 
Commission's headquarters.\537\ Similarly, one commentator objected to 
requiring an issuer to post the audit report on the issuer's Internet 
Web site as long as the Conflict Minerals Report describes the audit 
report,\538\ whereas another commentator argued that the final rule 
should require an issuer to post the audit report on an issuer's Web 
site.\539\
---------------------------------------------------------------------------

    \535\ See, e.g., letters from Howland, NEI, and Sen. Durbin/Rep. 
McDermott.
    \536\ See letters from AngloGold and WGC II.
    \537\ See, e.g., letters from Barrick Gold, Materials Management 
Corporation (Jan. 13, 2011) (``Materials I''), NAM I, and NMA II.
    \538\ See letter from ITIC I.
    \539\ See letter from Columban Center et al.
---------------------------------------------------------------------------

    Some commentators indicated that, as proposed, an audit report 
should not be deemed incorporated by reference into any filing under 
the Securities Act or Exchange Act unless the issuer specifically 
incorporates the audit into such a filing.\540\ A few commentators 
further suggested that an auditor should not be considered an 
``expert'' under Rule 436 of the Securities Act and recommended that 
audit reports submitted in subsequent years be able to build off prior 
audit reports to eliminate duplicative work and, thereby, reduce 
costs.\541\ One commentator went further and suggested that any issuer 
with a recognized supply chain tracking process should not be required 
to obtain an audit of its Conflict Minerals Report.\542\
---------------------------------------------------------------------------

    \540\ See, e.g., letters from Barrick Gold, Cleary Gottlieb, 
Corporate Secretaries I, NY State Bar, and WGC II.
    \541\ See letters from NY State Bar and WGC II.
    \542\ See letter from TIC.
---------------------------------------------------------------------------

    Some commentators requested that the final rule define how an 
issuer would ``directly or indirectly finance or benefit an armed 
group.'' \543\ Some of these commentators and others recommended that 
the Country Reports not be the basis for the Commission's final rule 
because those reports are not sufficiently specific with respect to 
which groups it labels as ``armed groups'' such that it is unclear 
whether the DRC army would be considered an ``armed group.'' \544\ For 
example, one commentator submitted an article arguing that the Conflict 
Minerals Statutory Provision ``targets units of the Congolese army as 
much as it does militias precisely because the army is comprised 
largely of ex-rebels, is the major player in the conflict minerals 
trade and regularly commits appalling crimes against the civilian 
population.'' \545\ Another commentator, however, stated that if the 
final rule defined ``armed group'' using the Country Reports, it would 
exclude the ex-militia groups that joined the DRC armed forces but 
continue to contribute to conflict and commit human rights 
violations.\546\ One commentator recommended that the final rule define 
``armed group'' using the OECD's definition for that term.\547\ Another 
commentator suggested that the final rule apply only to issuers that 
are ``directly funding the conflict (or who knowingly indirectly fund 
the conflict).'' \548\ One commentator recommended that the final rule 
define ``indirect financing'' of an armed group to include ``[a]ny way 
in which an illegitimate armed group profits from the mining, sale, 
transportation or taxation of minerals or mineral derivatives.'' \549\ 
Some commentators asserted that the final rule should clarify the 
definition of an ``armed group'' or disclose the steps issuers must 
take to verify whether their conflict minerals benefited armed 
groups.\550\ Other commentators suggested that the definition of 
``armed group'' in the final rule should not refer to the ``most 
recently issued'' version of the Country Reports ``for the year the 
annual report is due'' because the most recently issued version of the 
Country Reports may not be published for the year the annual report is 
due.\551\
---------------------------------------------------------------------------

    \543\ See, e.g., letters from NMA II, Peace, and WGC II.
    \544\ See letters from ITRI I, NMA II, NYCBar I, and Peace. See 
also letter from NYCBar II (stating specifically that the final rule 
should include ``the Congolese military (FARDC) in its definition of 
`armed group''').
    \545\ See letter from ICAR II.
    \546\ See letter from Save.
    \547\ See letter from Pact II.
    \548\ See letter from CEI I.
    \549\ See letter from Peace.
    \550\ See, e.g., letters from CRS I--St. Cloud, ITRI I, NMA II, 
NYCBar I, Peace, and TIC.
    \551\ See, e.g., letters from ITRI I and TIC.
---------------------------------------------------------------------------

c. Final Rule
    The final rule requires any issuer that, after its reasonable 
country of origin inquiry, knows that its conflict minerals originated 
in the Covered Countries and did not come from recycled or scrap 
sources to provide a Conflict Minerals Report that includes a 
description of the measures the issuer has taken to exercise due 
diligence on the source and chain of custody of those conflict 
minerals. It also requires an issuer that, after its reasonable country 
of origin inquiry, had reason to believe that its minerals may have 
originated in the Covered Countries and may not have come from recycled 
or scrap sources and, after the exercise of due diligence, still has 
reason to believe that its minerals may have originated in the Covered 
Countries and may not have come from recycled or scrap sources, to 
provide a Conflict Minerals Report that includes a description of the 
measures the issuer has taken to exercise due diligence on the source 
and chain of custody of those conflict minerals.
    Additionally, in circumstances in which an independent private 
sector audit is required, the final rule requires, as proposed, that an 
issuer include a certified independent private sector audit conducted 
in accordance with the standards established by the Comptroller General 
of the United States as part of its due diligence on the source and 
chain of custody of its conflict minerals. Further, the final rule 
states that, as proposed, the audit constitutes a critical component of 
due diligence. To implement the Conflict Minerals Statutory Provision's 
requirement that issuers ``certify the audit,'' \552\ as proposed, an 
issuer must certify that it obtained an independent private sector 
audit of its Conflict Minerals Report and include that certification in 
the Conflict Minerals Report.\553\ While we did not specify this in the 
Proposing Release or proposed rules, in response to commentators' 
concerns, the final rule clarifies that the issuer's audit 
certification need not be signed by an officer. Instead, the 
certification takes the form of a statement in the Conflict Minerals 
Report that the issuer obtained an independent private sector audit.
---------------------------------------------------------------------------

    \552\ Exchange Act Section 13(p)(1)(B).
    \553\ We are not adopting the alternative interpretation of the 
Conflict Minerals Statutory Provision that an issuer must ensure 
that the audit it obtained is accurate. The Conflict Minerals Report 
contains management's assertions related to compliance with this 
rule; the third-party audit is designed to attest to certain of 
those assertions. Given this relationship, there does not appear to 
be a need to have management assert to the accuracy of the audit.
---------------------------------------------------------------------------

    The final rule also requires, unless an issuer's products are ``DRC 
conflict free,'' the Conflict Minerals Report to include a description 
of 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. As 
noted in the Proposing Release, we believe that the phrase in the 
Conflict Minerals Statutory Provision, ``facilities used to process the 
conflict minerals,'' refers to the smelter or refinery through which 
the issuer's minerals pass. One commentator pointed out that smelting 
and refining processes are not similar.\554\ Smelting refers to the

[[Page 56321]]

conversion of the mineral ore into its metal form, but the metal still 
contains many impurities that must be removed by refining the metal. 
Columbite-tantalite, cassiterite, and wolframite are mined only as ores 
and are smelted into their metal derivatives. Gold, however, is mined 
in its metallic form because it is found that way naturally. Therefore, 
gold does not have to be smelted into a metal, but does have to be 
refined to remove any impurities. In both instances, however, we 
recognize that as a practical matter it is very difficult, if not 
impossible, to trace conflict minerals to their mine or other location 
of origin after columbite-tantalite, cassiterite, and wolframite have 
been smelted initially and after gold has been refined initially other 
than through the smelter or refinery.
---------------------------------------------------------------------------

    \554\ Letter from ITRI I. In the Proposing Release, we stated 
that columbite-tantalite, cassiterite, and wolframite are smelted 
into their component metals whereas gold is refined, and we 
indicated that both processes are substantially similar such that, 
when we would refer to smelting a conflict mineral, those references 
were intended to include the refining of gold.
---------------------------------------------------------------------------

    Exchange Act Section 13(p)(1)(A)(ii) also requires an issuer with 
conflict minerals originating in the Covered Countries to submit a 
Conflict Minerals Report that includes a description of the issuer's 
products ``that are not DRC conflict free.'' \555\ The Conflict 
Minerals Statutory Provision does not define ``not DRC conflict free,'' 
but instead defines ``DRC conflict free.'' \556\ Products are 
considered ``DRC conflict free'' under Exchange Act Section 
13(p)(1)(A)(ii) if they ``do not contain minerals that directly or 
indirectly finance or benefit armed groups in the'' Covered Countries. 
(Emphasis added).\557\ As discussed above, under the proposed rules' 
approach, an issuer with a product containing conflict minerals of an 
undeterminable origin cannot know that its product is ``DRC conflict 
free;'' that is, the issuer cannot know that its product ``do[es] not 
contain conflict minerals that directly or indirectly finance or 
benefit armed groups in the'' Covered Countries, so the issuer would 
have to describe the product as ``not `DRC conflict free.' ''
---------------------------------------------------------------------------

    \555\ See Exchange Act Section 13(p)(1)(A)(ii).
    \556\ See id. and Exchange Act Section 13(p)(1)(D).
    \557\ Exchange Act Section 13(p)(1)(A)(ii). Also, although 
similar, the definition of ``DRC conflict free'' under Exchange Act 
Section 13(p)(1)(D) is slightly different than the definition under 
Exchange Act Section 13(p)(1)(A)(ii). Exchange Act Section 
13(p)(1)(D) states that ``a product may be labeled as `DRC conflict 
free' if the product does not contain minerals that directly or 
indirectly finance or benefit armed groups in the'' Covered 
Countries.
---------------------------------------------------------------------------

    A commentator raised concerns that this approach could lead to 
incorrect and misleading disclosures and could unfairly punish 
companies that lack complete visibility into their supply chains.\558\ 
The commentator noted that it could turn out that, upon further 
investigation of the minerals' origins, the minerals were not from the 
Covered Countries or did not finance or benefit armed groups, in which 
case the products made with solely those minerals would be ``DRC 
conflict free.'' Of course, we are concerned that any disclosure 
requirement results in accurate disclosure. At the same time, we are 
cognizant of our responsibility to fulfill Congress's directive in 
Section 1502 and to remain faithful to the language of the statute, and 
promulgating rules that provide an incentive for issuers to avoid 
determining the origins of the conflict minerals that they use could 
undermine the reporting system that Congress has established in Section 
13(p) of the Exchange Act. Accordingly, we have modified the final rule 
to address the commentator's concerns while remaining faithful to the 
language and intent of the statute.
---------------------------------------------------------------------------

    \558\ See letter from Tiffany.
---------------------------------------------------------------------------

    As described above, during a temporary period, instead of requiring 
issuers that have proceeded to step three that are unable to determine 
that their conflict minerals did not originate in the Covered 
Countries, that their conflict minerals that originated in the Covered 
Countries did not directly or indirectly finance or benefit armed 
groups, or that their conflict minerals came from recycled or scrap 
sources to describe their products as ``not `DRC conflict free,' '' the 
final rule permits such issuers to describe products containing those 
conflict minerals as ``DRC conflict undeterminable.'' An issuer with 
products that are ``DRC conflict undeterminable'' is required to 
exercise due diligence on the source and chain of custody of its 
conflict minerals and submit a Conflict Minerals Report describing its 
due diligence; the steps it has taken or will take, if any, since the 
end of the period covered in its most recent prior Conflict Minerals 
Report to mitigate the risk that its necessary conflict minerals 
benefit armed groups, including any steps to improve its due diligence; 
the country of origin of the conflict minerals, if known; the 
facilities used to process the conflict minerals, if known; and the 
efforts to determine the mine or location of origin with the greatest 
possible specificity, if applicable.\559\ Such an issuer is not, 
however, required to obtain an independent private sector audit of that 
Conflict Minerals Report. We are permitting this temporary category to 
address concerns of many industry commentators that supply chain due 
diligence mechanisms have not yet been established; \560\ and, 
therefore, many issuers will not be able to readily determine whether 
their conflict minerals did not originate in the Covered Countries, did 
not finance or benefit armed groups, or did come from recycled or scrap 
sources. This temporary category should allow issuers time to establish 
supply chain due diligence mechanisms to determine whether their 
minerals originated in the Covered Countries, directly or indirectly 
financed or benefited armed groups in the Covered Countries, or came 
from recycled or scrap sources.
---------------------------------------------------------------------------

    \559\ We recognize that an issuer that is unable to determine 
the origin of its conflict minerals, or unable to determine whether 
its conflict minerals came from recycled or scrap sources, may not 
also be able to determine the processing facility of those conflict 
minerals and will not be able to determine the minerals' country of 
origin. Therefore, these issuers only have to describe the 
processing facilities if they are known to the issuer and do not 
have to disclose the country of origin. Also, an issuer that is 
unable to determine whether its conflict minerals came from recycled 
or scrap sources does not have to describe its efforts to determine 
the mine or location of origin with the greatest possible 
specificity because issuers with conflict minerals from recycled or 
scrap sources are not required to determine the mine or location of 
origin.
    \560\ See, e.g., letters from CTIA, FEC I, JVC et al. II, NAM 
III, NRF I, Roundtable, and WilmerHale.
---------------------------------------------------------------------------

    This additional time should also decrease the possibility that 
issuers that might ultimately be able to determine that their necessary 
minerals did not originate in the Covered Countries, did not finance or 
benefit armed groups, or came from recycled or scrap sources would 
initially be required to report that their products have not been found 
to be ``DRC conflict free'' simply because they had not yet been able 
to determine the minerals' origins or whether they were from recycled 
or scrap sources. By decreasing this possibility, the temporary 
category will lead to more accurate disclosure. We believe this 
approach will allow the final rule to more appropriately target the 
population of issuers from which Congress intended to require this 
disclosure and will allow time for processes to be put in place so that 
issuers may be able to determine the origin of their conflict minerals.
    The ``undeterminable'' reporting alternative, however, is only 
permitted temporarily. For all issuers, this alternative will be 
permitted during the first two reporting cycles following the 
effectiveness of the final rule, which includes the specialized 
disclosure reports for 2013 through 2014. For smaller reporting 
companies, this alternative will be permitted during the first four 
reporting cycles following the

[[Page 56322]]

effectiveness of the final rule, which includes the specialized 
disclosure reports for 2013 through 2016. Beginning with the third 
reporting period, from January 1, 2015 to December 31, 2015, for all 
issuers and the fifth reporting period, from January 1, 2017 to 
December 31, 2017, for smaller reporting companies, every such issuer 
will have to describe products in its Conflict Minerals Report as 
having ``not been found to be `DRC conflict free.''' Also, issuers will 
be required to make such a disclosure even if they proceed to step 
three and are unable to determine that their conflict minerals did not 
originate in the Covered Countries, that their conflict minerals that 
originated in the Covered Countries did not directly or indirectly 
finance or benefit armed groups, or that their conflict minerals came 
from recycled or scrap sources. These issuers will also be required to 
provide an independent private sector audit of their Conflict Minerals 
Report.\561\
---------------------------------------------------------------------------

    \561\ As noted below, an issuer exercising due diligence to 
determine whether a conflict mineral is from a recycled or scrap 
source is not required to obtain an independent private sector audit 
of its Conflict Minerals Report, regarding that conflict mineral, if 
there is no nationally or internationally recognized due diligence 
framework for that recycled or scrap conflict mineral.
---------------------------------------------------------------------------

    While this disclosure is required after the temporary period, even 
when issuers are unable to determine the origin of their conflict 
minerals, we have changed the language of the disclosure from the 
proposal to address concerns raised about the accuracy of the 
disclosure required in these circumstances. In our view, it is accurate 
to describe such products as having ``not been found to be `DRC 
conflict free.' '' ``DRC conflict free'' is a defined term in the 
statute, meaning that the product ``do[es] not contain conflict 
minerals that directly or indirectly finance or benefit armed groups in 
the'' Covered Countries. An issuer that does not know that its conflict 
minerals did not originate in the Covered Countries, that its conflict 
minerals that originated in the Covered Countries did not finance or 
benefit armed groups, or that the minerals came from recycled or scrap 
sources cannot accurately state that its conflict minerals have been 
found to meet this definition; therefore, its products have not been 
found to be ``DRC conflict free'' as defined in the statute.
    Additionally, under the final rule, as proposed, issuers can add 
disclosure or clarification. This allows issuers to include the 
statutory definition of ``DRC conflict free'' in the disclosure to make 
clear that ``DRC conflict free'' has a very specific meaning, or to 
otherwise address their particular situation.\562\ We also believe that 
the revised disclosure that the products ``have not been found to be 
`DRC conflict free' '' mitigates concerns expressed by some 
commentators that the Proposing Release's specific required language, 
``are not `DRC conflict free,' '' would impose an unfair stigma, 
particularly on issuers that did not know whether their minerals 
directly or indirectly financed or benefited armed groups in the 
Covered Countries.
---------------------------------------------------------------------------

    \562\ For example, in addition to the disclosure in the Conflict 
Minerals Report, the issuer could state: ``The following is a 
description of our products that have not been found to be ``DRC 
conflict free'' (where `DRC conflict free' is defined under the 
federal securities laws to mean that a product does not contain 
conflict minerals necessary to the functionality or production of 
that product that directly or indirectly finance or benefit armed 
groups in the Democratic Republic of the Congo or an adjoining 
country).'' Alternatively, an issuer that is still unable to 
determine the origin of some of its conflict minerals after the two-
year or four-year period, might state: ``We have been unable to 
determine the origins of some of our conflict minerals. Because we 
cannot determine the origins of the minerals, we are not able to 
state that products containing such minerals do not contain conflict 
minerals that directly or indirectly finance or benefit armed groups 
in the Democratic Republic of the Congo or an adjoining country. 
Therefore, under the federal securities laws we must describe the 
products containing such minerals as having not been found to be 
`DRC conflict free.' Those products are listed below.''
---------------------------------------------------------------------------

    Although it does not appear that any individual commentator 
suggested the exact approach we are adopting, this approach 
incorporates suggestions from various commentators. One commentator 
recommended that we adopt a ``phase-in or transitional approach in 
order to address the substantial practical difficulties issuers 
currently face in seeking to trace the origins of conflict minerals 
included in their products and to determine if these minerals are or 
are not `DRC conflict free.' '' \563\ This commentator's recommendation 
was for the final rule to include a phase-in period through 2014 in 
which any issuer with conflict minerals for which the issuer was unable 
to determine their origin would describe the conflict minerals as from 
an ``indeterminate source'' and would be permitted, instead of 
providing a Conflict Minerals Report, to disclose its conflict minerals 
policy and provide a statement that, due to the lack of current 
infrastructure, it is not possible to determine the origin of its 
conflict minerals. The commentator recommended that the ``indeterminate 
source'' category would be available only through 2014. Another 
commentator recommended that the final rule allow a similar phase-in 
period through 2014 in which issuers would be permitted to use an 
``unknown determination'' category in which such issuers would be 
required only to disclose their conflict minerals policy, reasonable 
country of origin inquiry, and the conflict minerals used in their 
supply chain.\564\
---------------------------------------------------------------------------

    \563\ See letter from WilmerHale.
    \564\ See letter from AdvaMed I.
---------------------------------------------------------------------------

    Other commentators recommended similar temporary approaches for 
conflict minerals when an issuer could not determine the origin of its 
conflict minerals.\565\ In this regard, one commentator noted that, 
``requiring issuers that are unable to determine that the conflict 
mineral in their products did not originate in the Covered Countries to 
submit a Conflict Minerals Report providing the required information 
that is available to them, is reasonable.'' \566\ Also, one commentator 
recognized that, during the initial period after the rule is finalized, 
it expected that some conflict minerals would be of unknown origin, and 
issuers with those conflict minerals should, among other information, 
disclose ``any progress made in the reporting year toward determination 
of origin.'' \567\ Finally, some commentators suggested that smaller 
reporting companies should be allowed to phase-in or that the 
implementation of the final rule should be deferred for them.\568\
---------------------------------------------------------------------------

    \565\ See, e.g., letters from TIAA-CREF (``Where the source of 
minerals cannot be confirmed, we believe it would be most accurate 
to allow companies to use indeterminate language such as `may not be 
DRC conflict free,' but not language that would suggest a 
presumption that minerals would be conflict free absent specific 
evidence to the contrary. Moreover, over time the information 
systems necessary to trace these minerals will likely improve. We 
suggest that, after a reasonable time interval, the SEC consider 
reviewing whether a higher standard might be warranted.'') and 
TriQuint I (recommending that the final rule ``allow companies to 
label their products as `May Not Be DRC Conflict Free' until such a 
time when it is expected that companies will be able to purchase 
processed conflict minerals from smelters that have been validated 
as `DRC conflict free' '').
    \566\ See letter from ABA.
    \567\ See letter from SIF I.
    \568\ See, e.g., letters from Howland and JVC et al. II.
---------------------------------------------------------------------------

    Based on the comments we have received, we believe that permitting 
all issuers to describe their products as ``DRC conflict 
undeterminable'' for a two-year period is appropriate to allow viable 
tracking systems to be put in place in the Covered Countries and 
throughout supply chains and avoid a de-facto embargo on conflict 
minerals from the Covered Countries. We also believe that allowing this 
category for a two-year period will avoid a situation in which 
virtually all issuers would describe their products as having not

[[Page 56323]]

been found to be ``DRC conflict free,'' simply because they could not 
determine the origin of their conflict minerals, which would render 
that disclosure less meaningful.\569\ Similarly, we believe that 
allowing smaller reporting companies four years to describe their 
products as ``DRC conflict undeterminable'' is appropriate because 
these issuers may lack the leverage to obtain detailed information 
regarding the source of a particular conflict mineral.\570\
---------------------------------------------------------------------------

    \569\ See, e.g., letters from AdvaMed I, ITIC I, and ITRI II.
    \570\ See letters from ABA, Corporate Secretaries I, and JVC et 
al. II. But see letter from Green II (arguing that, although smaller 
reporting companies may lack leverage, this disadvantage may be 
reduced through the influence exerted over their suppliers by larger 
issuers that use the same supplier base and that have more leverage 
to request such information.).
---------------------------------------------------------------------------

    We do not, however, believe that a permanent ``DRC conflict 
undeterminable'' category would be consistent with the language in the 
statute, and we believe it would undermine the overall goals of Section 
1502. Such an approach might create incentives for issuers not to 
exercise care in identifying the origins of their necessary conflict 
minerals. Also, we do not believe that, after the temporary reporting 
period, the number of issuers that would describe their products as 
having not been found to be ``DRC conflict free'' would be so 
substantial as to render the disclosure meaningless because, based on 
our review of the comments, it appears that there should be systems in 
place at that time on which issuers could rely to determine whether 
their conflict minerals originated in the Covered Countries and, if so, 
whether they contributed to conflict. Overall, we believe that the 
change from ``not `DRC conflict free' '' to having ``not been found to 
be `DRC conflict free,' '' the ability to add additional explanation 
and disclosure, and the periods for the ``DRC conflict undeterminable'' 
category will provide issuers who are initially unable to determine 
that their conflict minerals did not originate in the Covered Countries 
or unable to determine that their conflict minerals that originated in 
the Covered Countries did not directly or indirectly finance or benefit 
armed groups in the Covered Countries means to make their disclosure 
while still accomplishing the goals that Congress intended when it 
required the disclosure of products that are not ``DRC conflict free.''
    We believe that this approach also responds to the First Amendment 
concerns raised by the commentators. As to the concern that the rule 
impermissibly compels speech that is not of a commercial nature, we 
presume that Congress acted constitutionally when it passed the 
statute.\571\ And, as discussed above, we believe that the changes made 
in the final rule mitigate the concern that the rule compels speech 
that may be false or unfairly stigmatizing for some issuers. The 
requirement that issuers that know or have reason to believe that their 
conflict minerals may have originated in the Covered Countries but that 
cannot determine the origin or cannot determine whether they financed 
or benefited armed groups state that their products have not been found 
to be ``DRC conflict free'' compels an accurate disclosure in light of 
the statutory definition of ``DRC conflict free.'' Moreover, the use of 
this revised language, the ability of issuers to add additional 
explanation and disclosure, and the provision of a temporary 
``undeterminable'' period all represent accommodations to ensure that 
the rule is appropriately tailored to lessen the impact on First 
Amendment interests while still accomplishing Congress's objective.
---------------------------------------------------------------------------

    \571\ See Nebraska v. EPA, 331 F.3d 995, 997 (DC Cir. 2003) 
(``Agencies do not ordinarily have jurisdiction to pass on the 
constitutionality of federal statutes.'') (citing Thunder Basin Coal 
Co. v. Reich, 510 U.S. 200, 215 (1994)); Todd v. SEC, 137 F.2d 475, 
478 (6th Cir. 1943) (same); William J. Haberman, 53 SE.C. 1024, 1029 
n.14 (1998) (``[W]e have no power to invalidate the very statutes 
that Congress has directed us to enforce.'') (citing Milton J. 
Wallace, 45 SE.C. 694, 697 (1975); Walston & Co., 5 SE.C. 112, 113 
(1939)).
---------------------------------------------------------------------------

    We note that many commentators appeared to believe that the 
proposed rules would require that an issuer physically label its 
products as ``DRC conflict free'' or not ``DRC conflict free.'' \572\ 
Although we used the term ``label'' in the Proposing Release, we did so 
in the context of the disclosure required in the annual report. The 
final rule does not require a physical label on any product. Instead, 
the final rule requires that an issuer describe in its Conflict 
Minerals Reports any products that have not been found to be ``DRC 
conflict free,'' as defined in the final rule. Also, consistent with 
the proposal, the final rule permits issuers the flexibility to 
describe their products based on each issuer's individual facts and 
circumstances. We believe this flexibility is important because, as one 
commentator noted, an issuer is in the best position to know its 
products and to describe them in terms commonly understood within its 
industry.\573\ Also, to remedy any confusion in the Proposing Release, 
an issuer with products that are ``DRC conflict free'' does not have to 
describe those products in the Conflict Minerals Report in any manner. 
An issuer with such products may describe them in its specialized 
disclosure report as ``DRC conflict free'' if it chooses to do so, 
provided, the products do not contain any conflict minerals that 
directly or indirectly financed or benefited armed groups in the 
Covered Countries.
---------------------------------------------------------------------------

    \572\ See, e.g., letters from Howland, Industry Group Coalition 
I, Japanese Trade Associations, MSG I, NAM I, and SIF I.
    \573\ See letter from WGC II.
---------------------------------------------------------------------------

    The Conflict Minerals Statutory Provision requires the State 
Department to ``produce a map of mineral-rich zones, trade routes, and 
areas under the control of armed groups'' in the Covered 
Countries.\574\ Also, the Conflict Minerals Statutory Provision 
requires the State Department to submit to Congress a strategy to 
address the linkages between human rights abuses, armed groups, mining 
of conflict minerals, and commercial products that contains a ``plan to 
provide guidance to commercial entities seeking to exercise due 
diligence on and formalize the origin and chain of custody of conflict 
minerals used in their products and on their suppliers to ensure that 
conflict minerals used in the products of such suppliers do not 
directly or indirectly finance armed conflict or result in labor or 
human rights violations.'' \575\ Some commentators have suggested that 
we delay the implementation of the final rule until the State 
Department's map and/or strategy have been published,\576\ or that we 
should allow an issuer to rely on the State Department's map for its 
conflict minerals information.\577\
---------------------------------------------------------------------------

    \574\ Section 1502(c)(2) of the Act.
    \575\ Section 1502(c)(1) of the Act.
    \576\ See, e.g., letters from Barrick Gold, Corporate 
Secretaries I, NRF I, and WGC II.
    \577\ See, e.g., letters from AngloGold and NRF I.
---------------------------------------------------------------------------

    The State Department has published a conflict minerals map 
already.\578\ Also, we understand that the State Department has 
developed guidance for commercial entities seeking to exercise due 
diligence on and formalize the origin and chain of custody of conflict 
minerals used in their products and on their suppliers.\579\ Even so, 
it does not

[[Page 56324]]

appear that either the State Department's map or guidance is necessary 
for complying with the final rule. First, it does not appear that 
Congress intended that they be necessary to comply with our rule. The 
map and guidance requirements are located in a part of Section 1502 
that is not incorporated into the Exchange Act and that part of Section 
1502 is directed solely to agencies other than the Commission.\580\ 
Therefore, although they may be related to our final rule, it does not 
appear that the map and guidance were intended to have direct impact on 
the rule.
---------------------------------------------------------------------------

    \578\ See State Department, Humanitarian Information Unit, 
Democratic Republic of the Congo Mineral Exploitation by Armed 
Groups Map (Jun. 14, 2011), available at https://hiu.state.gov/Products/DRC_MineralExploitation_2010Jun28_HIU_U182.pdf.
    \579\ See State Department, Bureau of Economic, Energy, and 
Business Affairs, Statement Concerning Implementation of Section 
1502 of the Dodd-Frank Legislation Concerning Conflict Minerals Due 
Diligence (July 15, 2011), available at https://www.state.gov/e/eb/diamonds/docs/168632.htm.
    \580\ The map and guidance requirements are in Section 1502(c) 
of the Act, but only Section 1502(b) of the Act actually amends the 
Exchange Act and directs the Commission to promulgate rules.
---------------------------------------------------------------------------

    Also, we do not believe that an issuer must rely solely on the 
State Department's map or guidance for determining whether its conflict 
minerals contributed to conflict in the Covered Countries because other 
resources are available. For example, as discussed above, the OECD has 
developed an internationally recognized system of due diligence that an 
issuer can use as guidance in exercising its due diligence. The OECD's 
due diligence guidance does not rely on or incorporate the State 
Department map and guidance referenced in the Conflict Minerals 
Statutory Provision in determining the steps an issuer must take to 
exercise due diligence. However, as discussed above, due to the stage 
of development of the supply chain tracing mechanisms, we recognize 
that there are concerns about obtaining this information reliably in 
the near term. Therefore, we are providing this targeted and temporary 
period in the final rule.
    The final rule requires, as proposed, an issuer with conflict 
minerals that originated in the Covered Countries to determine whether 
those minerals directly or indirectly financed or benefited armed 
groups in the Covered Countries. The Conflict Minerals Statutory 
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'' in the Covered Countries.\581\ 
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,'' 
\582\ as they relate to the Covered Countries.\583\ The final rule 
includes, as proposed, a cross reference to that definition to provide 
guidance to issuers. This cross reference, however, removes the phrases 
``most recently issued'' and ``for the year the annual report is due'' 
to address the concerns of commentators.\584\ The final rule mirrors 
the Conflict Minerals Statutory Provision in its definition of ``armed 
group'' and does not include any extraneous phrases that were included 
in the proposal.
---------------------------------------------------------------------------

    \581\ See Exchange Act Sections 13(p)(1)(A)(ii) and 13(p)(1)(D).
    \582\ 22 U.S.C. 2151n(d) and 2304(b).
    \583\ Section 1502(e)(3) of the Act.
    \584\ See, e.g., letters from ITRI I and TIC.
---------------------------------------------------------------------------

    The Conflict Minerals Statutory Provision assigns to the State 
Department the authority to identify perpetrators of serious human 
rights abuses in that agency's annual Country Reports, and we lack the 
authority and expertise to provide further guidance or qualify the 
State Department's conclusions in this area. We note that some 
commentators indicated that we should consider products containing 
conflict minerals obtained from mines not controlled by armed groups 
when purchased to be considered ``DRC conflict free'' even if those 
mines subsequently come under the control of armed groups.\585\ We 
agree and consider products ``DRC conflict free'' if, when the conflict 
minerals contained in those products are purchased and transported 
through the supply chain from the mine to the issuer, those conflict 
minerals do not directly or indirectly finance or benefit armed groups 
in the Covered Countries, even if some point in that supply chain 
subsequently becomes controlled by an armed group. For example, if an 
issuer's conflict minerals are purchased from a mine that does not 
directly or indirectly finance or benefit armed groups in the Covered 
Countries when they are purchased, but the next day that mine is taken 
over by an armed group and the armed group takes the money previously 
provided to the miner from the issuer to purchase the conflict minerals 
that already left the mine, the products containing those conflict 
minerals may be considered ``DRC conflict free,'' even though the money 
used to purchase the conflict minerals does, in fact, benefit that 
armed group subsequently.
---------------------------------------------------------------------------

    \585\ See, e.g., letters from AAEI, IPC I, and NRF I.
---------------------------------------------------------------------------

2. Due Diligence Standard in the Conflict Minerals Report
    We have interpreted the Conflict Minerals Statutory Provision as 
requiring an issuer to exercise due diligence based on the provision's 
requirement that an issuer describe the due diligence it exercised on 
the source and chain of custody of its conflict minerals.\586\ In 
addition, the provision requires that an issuer include an independent 
private sector audit of the Conflict Minerals Report as a ``critical 
component of due diligence.'' \587\ 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 any Conflict Minerals Report that relies on such unreliable due 
diligence process would not satisfy the statute's reporting 
requirement.\588\
---------------------------------------------------------------------------

    \586\ Exchange Act Section 13(p)(1)(A)(i).
    \587\ Exchange Act Section 13(p)(1)(B).
    \588\ Exchange Act Section 13(p)(1)(C).
---------------------------------------------------------------------------

a. Proposed Rules
    The proposed rules would have required an issuer to use due 
diligence regarding the supply chain determinations \589\ in its 
Conflict Minerals Report. Other than requiring that the due diligence 
be reliable, the proposed rules would not have dictated the standard 
for, or otherwise provided guidance concerning, the due diligence that 
an issuer would be required to use in making such determinations. 
Instead, the proposed rules would have required an issuer to disclose 
the due diligence it used in making its determinations, such as whether 
it used any nationally or internationally recognized standards or 
guidance for supply chain due diligence.
---------------------------------------------------------------------------

    \589\ We refer to the ``supply chain determinations'' as an 
issuer's determinations regarding the source and chain of custody of 
its conflict minerals, the facilities used to process those 
minerals, the country of origin of those minerals, and the efforts 
to determine the mine or location of origin with the greatest 
possible specificity.
---------------------------------------------------------------------------

    In the Proposing Release, we noted our belief that the statutory 
provision contemplates that an issuer must use due diligence in its 
supply chain determinations. Although we did not propose to establish 
any particular conduct requirements, we believed that due diligence 
would be required to be exercised and information about what conduct 
the issuer exercised in its due diligence regarding its supply chain 
determinations was relevant to determine the extent of the issuer's due 
diligence. As proposed, the rules, therefore, would require issuers to 
describe the due diligence used in making these determinations. In 
particular, we noted that we would have expected that an issuer whose 
conduct conformed to a nationally or internationally recognized set of 
standards of, or guidance for, due diligence regarding its conflict 
minerals supply chain determinations would provide evidence that it 
used due

[[Page 56325]]

diligence in making those determinations.
b. Comments on the Proposed Rules
    Some commentators believed that the Conflict Minerals Statutory 
Provision expressly requires an issuer to exercise due diligence on the 
source and chain of custody of its conflict minerals.\590\ One 
commentator noted that nothing in the statute gives us explicit 
authority to develop due diligence guidance.\591\ Another commentator 
asserted that Congress intended the Conflict Minerals Statutory 
Provision to require due diligence only on the source and chain of 
custody of conflict minerals mined in the DRC and on the transportation 
routes through which such minerals pass in countries adjoining the 
DRC.\592\ This commentator claimed that Congress did not intend for the 
Conflict Minerals Statutory Provision to require due diligence on the 
source and chain of custody of minerals mined in the adjoining 
countries and recommended that the final rule not require such due 
diligence.
---------------------------------------------------------------------------

    \590\ See, e.g., letters from NEI (``We agree that issuers 
should be required to use due diligence, as proposed.''), 
Presbyterian Church USA (Feb. 15, 2012) (``Presbyterian Church I'') 
(stating that the Conflict Minerals Statutory Provision ``requires 
due diligence''), Sen. Durbin/Rep. McDermott (stating that ``Section 
1502 requires companies to exercise strict due diligence to 
determine the source of conflict minerals in their products''), and 
State II (``It is unclear how a reasonable conflict minerals 
determination can be made without due diligence given the complexity 
of the region and the risk of fraud.'').
    \591\ See letter from TriQuint I. This commentator suggested 
that the Commission work with other government agencies to establish 
rules that govern what due diligence processes are reliable.
    \592\ See letter from Minister of Energy and Minerals of the 
United Republic of Tanzania (May 23, 2011) (``Tanzania II'').
---------------------------------------------------------------------------

    Many commentators supported our proposal to not prescribe any 
specific due diligence requirements and allow an issuer to have 
flexibility in developing its due diligence measures based on the 
issuer's own facts and circumstances.\593\ A number of these 
commentators, however, suggested that the final rule provide guidance 
as to what would be considered acceptable due diligence.\594\ Many 
other commentators recommended that the final rule provide a definition 
of or prescribe specific guidance for any required due diligence.\595\ 
Some of these commentators reasoned that the final rule should 
prescribe a specific due diligence standard so that an issuer will be 
unable to ``engage in a type of `forum shopping''' for the least 
burdensome standard and so that each issuer's due diligence measures 
will be consistent, accurate, and reliable.\596\ Other commentators 
suggested that the final rule should prescribe a safe harbor for an 
issuer's conduct allowing an issuer to avoid any undue or impractical 
requirements set forth by independent private sector auditors.\597\ 
While we did not propose to require satisfaction of a particular set of 
standards, we requested comment on whether we should.
---------------------------------------------------------------------------

    \593\ See, e.g., letters from AAEI, AngloGold, Cleary Gottlieb, 
Industry Group Coalition Group I, IPC I, ITIC I, ITRI I, Japanese 
Trade Associations, NAM I, NEI, Niotan II, NMA II, NRF I, RILA, 
RILA-CERC, RMA, Roundtable, Sen. Durbin/Rep. McDermott, TriQuint I, 
and WGC II.
    \594\ See, e.g., letters from AAEI, Cleary Gottlieb, Earthworks, 
Howland, IPC I, ITIC I, ITRI I, NAM I, NEI, NMA II, NRF I, RILA, 
Sen. Durbin/Rep. McDermott, and WGC II.
    \595\ See, e.g., letters from Arkema, Earthworks, Enough Project 
I, CENCO I, CODSIA, Global Witness I, Howland, ICAR et al. II, 
Materials I, Andrew Matheson (Mar. 2, 2011) (``Matheson I''), MSG I, 
NYCBar I, Rep. Berman et al., SEMI, SIF I, State I, State II, and 
WGC et al. I.
    \596\ See letters from Global Witness I and ICAR et al. II.
    \597\ See, e.g., letters from ArcelorMittal, Chamber I, ITIC I, 
Materials I, NAM I, NRF I, and RILA.
---------------------------------------------------------------------------

    A number of commentators suggested that the final rule should refer 
to, incorporate, or require the use of national or international 
standards or guidance in some manner, such as accepting an issuer's due 
diligence as reliable if that issuer used a national or international 
standard or guidance, considering national or international due 
diligence standards or guidance when developing the final rule, or 
requiring an issuer to use a national or international due diligence 
framework for that due diligence to be considered reliable.\598\ Some 
commentators did not believe the final rule should require that an 
issuer use any particular national or international due diligence 
standard.\599\ Other commentators recommended against incorporating 
voluntary international standards, such as the OECD due diligence 
framework, into the final rule or suggested that we identify and assess 
the potential latent risks and/or impacts to industry and auditors 
related to codifying voluntary industry standards, such as the OECD due 
diligence framework, into the final rule.\600\ Some commentators 
specifically referenced the due diligence framework developed by the 
OECD in discussing what they believed the final rule should consider as 
acceptable due diligence.\601\ One commentator recommended that the 
final rule not only refer to the OECD due diligence framework, but also 
should require issuers to disclose the steps that they took to complete 
the OECD due diligence.\602\
---------------------------------------------------------------------------

    \598\ See, e.g., letters from Arkema, CODSIA, Earthworks, Enough 
Project I, Global Witness I, Howland, ICAR et al. II, IPC I, ITIC I, 
ITRI I, Matheson I, MSG I, NEI, NYCBar I, Rep. Berman et al., SEMI, 
Sen. Durbin/Rep. McDermott, SIF I, State I, State II, WGC II, and 
WGC et al. I.
    \599\ See, e.g., letters from Cleary Gottlieb, NAM I, NMA II, 
and WGC II.
    \600\ See letters from Auditing Roundtable, Inc. (Oct. 31, 2011) 
(``ARI'') and Board of Environmental, Health & Safety Auditor 
Certifications (Oct. 31, 2011) (``BEAC'').
    \601\ See, e.g., letters from Arkema, Boeing, CODSIA, 
Earthworks, Enough Project I, Evangelical Alliance, Evangelicals, 
Global Witness I, ICAR et al. II, ITRI I, ITRI IV, Matheson I, 
Methodist Board, MSG I, NEI, NYCBar I, NYCBar II, Presbyterian 
Church II, Rep. Berman et al., Sen. Durbin/Rep. McDermott, SEMI, SIF 
I, SIF II, State I, State II, and WGC II, and WGC et al. I.
    \602\ See letter from SIF II.
---------------------------------------------------------------------------

    Some commentators recommended that a due diligence standard should 
not require an absolute standard of care.\603\ Instead, these 
commentators suggested either a ``reasonable care'' or a ``commercially 
practicable efforts'' standard that would encompass contractual 
obligations, risk-based programs, and industry-wide processes, but not 
necessarily include the identification of all the parties in the supply 
chain or the determination of every mineral used for manufactured 
items. Some commentators recommended that an issuer's due diligence 
should be presumed reliable if the issuer performs some or all of the 
following steps: uses information from an industry-wide process, 
creates a conflict minerals policy that requires conflict-mineral free 
provisions in all contracts, conducts supply chain risk assessments, 
requires suppliers to push policies upstream and transmit information 
downstream, establishes policies and procedures to remediate instances 
of non-conformity of policy, obtains independent third party audits, 
and publishes its supply chain findings.\604\ Similarly, other 
commentators indicated that due diligence should be presumed reliable 
if these conditions are met, but only if the issuer requires upstream 
and downstream due diligence and describes that due diligence.\605\ 
Other commentators suggested that the due diligence standard in the 
final rule should be commensurate with the issuer's position in the 
supply chain such that the due diligence requirement for an issuer 
would be less rigorous the

[[Page 56326]]

farther that issuer's position in the supply chain is from the mine or 
other location of origin.\606\
---------------------------------------------------------------------------

    \603\ See, e.g., letters from AAEI, Chamber I, CRS I, Industry 
Group Coalition I, ITIC I, and NAM I.
    \604\ See, e.g., letters from AAEI, Global Witness I, Industry 
Coalition Group II, NAM I, and NRF I. These steps are similar to the 
steps in the Annex I of the OECD's due diligence guidance.
    \605\ See, e.g., letters from Earthworks, Enough Project I, MSG 
I, and SIF I. The upstream and downstream due diligence that would 
be required by these commentators is similar to the upstream and 
downstream due diligence described in the Supplement on Tin, 
Tantalum, and Tungsten to the OECD's due diligence guidance.
    \606\ See letters from CERC, Chamber I, ITIC I, NRF I, and RILA.
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment as to whether the 
final rule should prescribe different due diligence measures for gold 
because of any unique characteristics of the gold supply chain. In 
response, most commentators that discussed this point agreed that the 
due diligence required for gold should be the same as the due diligence 
required for the other three conflict minerals.\607\ Two commentators, 
however, stated that gold is unique among the four conflict minerals so 
the due diligence requirements for it should be different than for the 
other minerals.\608\ As discussed above, a few commentators further 
recommended that the final rule permit issuers to exclude certain 
information from public dissemination regarding the storage and 
transportation routes of gold for security reasons.\609\
---------------------------------------------------------------------------

    \607\ See, e.g., letters from Earthworks, Global Witness I, ITRI 
I, SIF I, and State II.
    \608\ See letters from AngloGold and WGC II.
    \609\ See letters from NMA II, NAM III, and WGC II.
---------------------------------------------------------------------------

    In the Proposing Release, we also requested comment as to whether 
the final rule should state that an issuer is permitted to rely on the 
reasonable representations of its smelters or any other actor in the 
supply chain, provided there is a reasonable basis to believe the 
representations of the smelters or other parities. A number of 
commentators suggested, in response, that the final rule should allow 
an issuer to rely on reasonable representations from suppliers and/or 
smelters in satisfying their due diligence requirement.\610\ Some of 
these commentators, however, explained that such written 
representations must be accompanied by additional processes, such as 
industry-wide smelter verification programs, before they could be 
relied upon.\611\ One commentator recommended that the final rule 
should allow due diligence to be satisfied if an issuer includes 
obligations in its supply contracts and receives reasonable 
representations from its suppliers regarding the conflict-free nature 
of the minerals.\612\
---------------------------------------------------------------------------

    \610\ See, e.g., letters from AngloGold, Global Witness I, 
Howland, IPC I, ITIC I, Japanese Trade Associations, JVC et al. II, 
Kemet, NEI, NMA II, RILA-CERC, RMA, Roundtable, SEMI, Sen. Durbin/
Rep. McDermott, State II, Taiwan Semi, and WGC II.
    \611\ See letters from Global Witness I, Howland, ITIC I, JVC et 
al. II (stating that written representations would not have to be 
accompanied by additional processes ``until such time as reliable 
smelter/refiner certification and due diligence systems can be 
implemented''), Kemet, NMA II, RMA, Sen. Durbin/Rep. McDermott, and 
State II.
    \612\ See letter from Roundtable.
---------------------------------------------------------------------------

c. Final Rule
    After considering the comments, we are revising the final rule. The 
final rule requires that an issuer describe the due diligence it 
exercised in determining the source and chain of custody of its 
conflict minerals. The final rule requires that an issuer's due 
diligence follow a nationally or internationally recognized due 
diligence framework. We are persuaded by commentators that requiring an 
issuer to use a nationally or internationally recognized due diligence 
framework that is relevant to the audit objectives and permits 
consistent assessment of the subject matter will provide an independent 
private sector auditor with a structure by which to assess an issuer's 
due diligence, which we believe should make the rule more workable and 
less costly than if no framework was specified. We are also persuaded 
by commentators that requiring the use of nationally or internationally 
recognized due diligence framework will enhance the quality of an 
issuer's due diligence and will promote comparability of the Conflict 
Minerals Reports of different issuers. Also, we believe that requiring 
such due diligence will provide issuers with a degree of certainty and, 
as one commentator noted, ``ameliorate the risk that a due diligence 
process will later be judged to be unreliable.'' \613\
---------------------------------------------------------------------------

    \613\ See letter from NAM I.
---------------------------------------------------------------------------

    The OECD's ``Due Diligence Guidance for Responsible Supply Chains 
of Minerals from Conflict-Affected and High-Risk Areas'' \614\ 
satisfies our criteria and may be used as a framework for purposes of 
satisfying the final rule's requirement that an issuer exercise due 
diligence in determining the source and chain of custody of its 
conflict minerals. As one commentator noted, the OECD is an 
international organization with 34 member countries, including the 
United States, that works internationally with governments and 
businesses and approved its due diligence guidance as the ``the result 
of a collaborative initiative among governments, international 
organizations, civil society organizations, and industry participants 
to promote accountability and transparency in the supply chain of 
minerals from conflict-affected and high-risk areas.'' \615\ A comment 
letter submitted by the OECD in conjunction with the United Nations 
Group of Experts on the Democratic Republic of the Congo (``Group of 
Experts'') and the International Conference on the Great Lakes Region 
(``ICGLR'') indicated that the OECD due diligence guidance was 
``adopted as an OECD Recommendation by forty one OECD and non-OECD 
countries meeting at ministerial level on 25 May 2011 under the 
chairmanship of U.S. Secretary of State Hillary Rodham Clinton.'' \616\ 
The final rule does not mandate that an issuer use any particular 
nationally or internationally recognized due diligence framework, such 
as the OECD's due diligence guidance, in recognition of the fact that 
other evaluation standards may develop that satisfy the intent of the 
Conflict Minerals Statutory Provision. However, to satisfy the 
requirements of the final rule, the nationally or internationally 
recognized due diligence framework used by the issuer must have been 
established by a body or group that has followed due-process 
procedures, including the broad distribution of the framework for 
public comment, and be consistent with the criteria standards in GAGAS 
established by the GAO.
---------------------------------------------------------------------------

    \614\ OECD, Due Diligence Guidance for Responsible Supply Chains 
of Minerals from Conflict-Affected and High-Risk Areas (2011), 
available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf.
    \615\ See letter from Global Witness I.
    \616\ See letter from OECD I.
---------------------------------------------------------------------------

    As a related matter, one commentator stated that the final rule 
should clarify whether an issuer has to describe generally its due 
diligence processes or whether issuers have to describe specifically 
purchase contracts associated with particular conflict minerals in 
their products.\617\ We believe an issuer's description of its due 
diligence should be based on the individual issuer's facts and 
circumstances. In this regard, if an issuer's due diligence process is 
relatively consistent throughout its supply chain, the issuer could 
satisfy the requirements by generally describing its due diligence. We 
recognize, however, that an issuer may use different due diligence 
processes for different aspects of its supply chain. For example, an 
issuer using the OECD due diligence guidance may use different due 
diligence processes for tin, tantalum, and tungsten as compared with 
that for gold. If an issuer exercises significantly different due 
diligence processes for different aspects of its supply chain, such as 
with separate conflict minerals or products, that issuer should 
describe how they are different.
---------------------------------------------------------------------------

    \617\ See letter from ITIC I.
---------------------------------------------------------------------------

    As we note above, a number of commentators recommended that the 
final rule allow an issuer to rely on

[[Page 56327]]

reasonable representations from suppliers and/or smelters in satisfying 
their due diligence requirement,\618\ whereas other commentators argued 
that written representations should not be able to satisfy due 
diligence by themselves.\619\ The final rule requires that an issuer's 
due diligence follow a nationally or internationally recognized due 
diligence framework. Therefore, whether an issuer may rely on 
reasonable representations from suppliers and/or smelters in satisfying 
its due diligence requirement will be dependent on the nationally or 
internationally recognized due diligence framework.
---------------------------------------------------------------------------

    \618\ See, e.g., letters from AngloGold, Global Witness I, 
Howland, IPC I, ITIC I, Japanese Trade Associations, JVC et al. II, 
NEI, NMA II, RILA-CERC, RMA, SEMI, State II, Taiwan Semi, and WGC 
II.
    \619\ See letters from Global Witness I, Howland, ITIC I, and 
RMA.
---------------------------------------------------------------------------

3. Independent Private Sector Audit Requirements
a. Proposed Rules
    Consistent with the Conflict Minerals Statutory Provision, we 
proposed that the description of the measures taken by an issuer to 
exercise due diligence on the source and chain of custody of its 
conflict minerals include a certified independent private sector audit 
conducted in accordance with the standards established by the 
Comptroller General of the United States.\620\ Under the Conflict 
Minerals Statutory Provision, the GAO is to establish the appropriate 
standards for the independent private sector audit. Therefore, we did 
not include any auditing standards in the proposed rules or discuss 
such standards in the Proposing Release.
---------------------------------------------------------------------------

    \620\ See Exchange Act Section 13(p)(1)(A)(i).
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    A number of commentators indicated that the final rule must clarify 
the independent private sector audit's criteria, objectives, and 
standards.\621\ One commentator was concerned that, if neither the 
Comptroller General nor the Commission required uniform objectives and 
standards, the audits would not be useful because they would lack any 
comparability.\622\ Some commentators remarked that the Comptroller 
General or the Commission must delineate suitable criteria for the 
measurement and presentation of the information in the Conflict 
Minerals Report, including the elements of the Conflict Minerals Report 
subject to the audit, so as to provide an audit framework that would 
aid both issuers and auditors.\623\ Such criteria would provide the 
basis for the auditor to measure the information provided by the 
issuer, and this criteria should be objective, measurable, complete, 
and relevant.\624\ Commentators noted, however, that the criteria would 
differ based on the objective of the audit. For example, the criteria 
for evaluating whether an issuer is correct in concluding that its 
products are ``DRC conflict free'' are different from the criteria for 
determining whether the issuer's process for determining whether its 
products are ``DRC conflict free'' is sufficient.\625\
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    \621\ See, e.g., letters from American Institute of Certified 
Public Accountants (Mar. 1, 2011) (``AICPA I''), American Institute 
of Certified Public Accountants (Nov. 17, 2011) (``AICPA II''), 
Barrick Gold, BEAC, Calvert, Deloitte, The Elm Consulting Group 
International LLC (Mar. 1, 2011) (``Elm''), Ernst & Young LLP (Mar. 
2, 2011) (``E&Y''), Grant Thornton (recommending that the Commission 
establish a ``working group to support the Comptroller General in 
the development of the appropriate form of engagement, including the 
criteria to be used to evaluate the subject matter and the opinion 
(or conclusion) to be expressed thereon''), Hileman Consulting, 
ICGLR, IPC II, KPMG LLP (Mar. 2, 2011) (``KPMG''), MSG III, NEI, 
NYCBar I, WGC II.
    \622\ See letter from WGC II.
    \623\ See, e.g., letters from Deloitte and KPMG.
    \624\ See letters from Deloitte and Grant Thornton.
    \625\ See letters from AICPA I and Grant Thornton.
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    Commentators from the accounting profession and others recommended 
that the final rule clearly state the objective of the audit and the 
subject matter to be audited.\626\ Some of these commentators 
identified possible audit objectives, including: whether management's 
description of the procedures and controls performed in an issuer's due 
diligence process are fairly described in the Conflict Minerals Report; 
\627\ whether the design of an issuer's due diligence process described 
in the Conflict Minerals Report conforms to a recognized standard of 
due diligence; \628\ whether management's description of an issuer's 
due diligence process in its Conflict Minerals Report is accurate, the 
results of that process are fairly stated, and the issuer has 
evaluated/identified the upstream and downstream due diligence 
processes; \629\ whether the design of the due diligence process 
described in the Conflict Minerals Report conforms to a recognized a 
standard and whether the process was sufficiently effective; \630\ 
whether the issuer's conclusion regarding the source and chain of 
custody of its conflict minerals is accurate; \631\ and whether the 
issuer appropriately included in the report all its products described 
as not ``DRC conflict free.'' \632\ Generally, commentators recommended 
that the final rule not require an audit objective to include a 
determination as to whether an issuer's due diligence process was 
effective or that any conclusion based on that due diligence process 
was accurate, because that would be very challenging and expensive to 
undertake.\633\
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    \626\ See letters from AICPA I, AICPA II, Barrick Gold, Grant 
Thornton, IPC II, KPMG, MSG III, and SIF II.
    \627\ See letters from AICPA I, AICPA II, Grant Thornton, and 
KPMG.
    \628\ See letters from AICPA I, AICPA II, IPC II, and KPMG. 
Commentators also observed that this second objective would require 
the final rule to provide a clear due diligence standard against 
which an auditor could compare the issuer's due diligence process.
    \629\ See letter from MSG III (noting, however, that the audit 
scope should not include verification of the ultimate conclusions of 
the Conflict Minerals Report, only that the process was applied as 
described). See also letter from SIF II (stating that the audit of 
the Conflict Minerals Report should include a ``review of management 
systems and processes, and of conclusions reached'').
    \630\ See letter from AICPA I.
    \631\ See letters from AICPA I and KPMG.
    \632\ See id.
    \633\ See, e.g., letters from AICPA I, AICPA II, Deloitte, ITIC 
I, KPMG, MSG III, and Roundtable.
---------------------------------------------------------------------------

    Additionally, some commentators indicated that the Comptroller 
General or the Commission must identify the acceptable auditing 
standards for firms to use when auditing an issuer's Conflict Minerals 
Report.\634\ In this regard, as some commentators noted,\635\ the 
Proposing Release stated that the staff of the GAO informed our staff 
of its preliminary view that no new audit standards need to be 
promulgated. Therefore, the audit of the Conflict Minerals Report would 
be performed under GAGAS, and auditors could use either the provisions 
for Attestation Engagements or Performance Audits in GAGAS.\636\ 
However, as commentators noted, in addition to certain substantive 
differences between the two standards in GAGAS, only a licensed 
certified public accountant or person working with a certified public 
accounting firm or governmental auditing organization may perform an 
Attestation Engagement.\637\ Similarly, commentators noted that 
Performance Audits are not required to be conducted by certified public 
accountants, but auditors using the Performance Audit standard would 
still need to satisfy certain qualification requirements under GAGAS, 
such as continuing professional education requirements, quality control 
measures, and

[[Page 56328]]

independent peer reviews.\638\ In this regard, to increase the pool of 
auditors and thereby reduce costs, some commentators recommended that 
the final rule allow auditors to use the Performance Audit standard 
under GAGAS.\639\ Some of these commentators recommended that auditors 
that are not certified public accountants could satisfy GAGAS's 
Performance Audit qualification requirements by receiving a 
professional certification relating to environmental, health, and 
safety auditing from organizations that certify auditors by requiring 
that an auditor meet certain standards, such as having a code of 
conduct, committing to a code of ethics and rigorous practices, 
engaging in continuing professional development and education, being 
subjected to review, and other provisions to maintain a high caliber of 
expertise.\640\ One commentator suggested that the final rule should 
allow any auditor to perform the audit as long as it was knowledgeable 
and able to meet the requirements of the OECD's criteria for the 
competence of auditors.\641\ Other commentators noted, however, that 
the OECD's criteria for the competence of auditors are inadequate 
because they fail to provide any guidance as to how this would be 
assured.\642\ Another commentator recommended that the final rule 
should delineate specific requirements for the accreditation and 
selection of auditors but did not provide any suggested 
requirements.\643\
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    \634\ See letters from AICPA I, Deloitte, E&Y, Elm, and KPMG.
    \635\ See, e.g., letters from Barrick Gold and E&Y.
    \636\ See letters from AICPA I, AICPA II, BEAC, Deloitte, E&Y, 
Elm, Grant Thornton, and MSG III.
    \637\ See, e.g., letters from AICPA I and BEAC.
    \638\ See letter from Deloitte and BEAC.
    \639\ See, e.g., letters from ArcelorMittal, ARI, BEAC, Hileman 
Consulting, IPC II, and MSG III.
    \640\ See letters from BEAC and Hileman Consulting.
    \641\ See letter from NYCBar I.
    \642\ See letter from ARI and BEAC.
    \643\ See letter from ICGLR.
---------------------------------------------------------------------------

    Several commentators asserted that the final rule should clarify 
the independence standards for auditors.\644\ Some of these 
commentators \645\ recommended that the final rule state that 
performing the independent private sector audit of the Conflict 
Minerals Report is not inconsistent with the Commission's auditor 
independence requirements in Rule 2-01 of Regulation S-X.\646\ One 
commentator noted, however, that the OECD's independence requirements 
prohibit a Conflict Minerals Report auditor from having provided any 
other service for the issuer within a 24-month period.\647\ Similarly, 
two other commentators asserted that the statement in the proposed 
rules and the Conflict Minerals Statutory Provision that the 
independent private sector audit would be considered a ``critical 
component of due diligence'' could create confusion regarding the 
application of our auditor independence requirements in Rule 2-01 of 
Regulation S-X.\648\
---------------------------------------------------------------------------

    \644\ See, e.g., letters from AICPA I, Deloitte, E&Y, Grant 
Thornton, Hileman Consulting, and KPMG.
    \645\ See letters from AICPA I, Deloitte, and E&Y.
    \646\ 17 CFR 210.2-01.
    \647\ See letter from KPMG.
    \648\ See letters from E&Y and Grant Thornton.
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c. Final Rule
i. Auditing Standards
    As noted above, the GAO staff has indicated to our staff that the 
GAO does not intend to develop new standards for the independent 
private sector audit of the Conflict Minerals Report. As we noted in 
the Proposing Release, GAO staff informed our staff that existing GAGAS 
standards,\649\ such as the standards for Attestation Engagements or 
the standards for Performance Audits will be applicable.\650\ The GAO 
staff has also indicated to our staff that the GAGAS Performance 
Standards could be used by the auditor to express a conclusion as to 
whether the design of the issuer's due diligence measures are in 
conformity with the criteria set forth in a nationally or 
internationally recognized due diligence framework used by the issuer, 
such as the OECD's ``Due Diligence Guidance for Responsible Supply 
Chains of Minerals from Conflict-Affected and High-Risk Areas,'' and 
whether the issuer's description of the due diligence measures it 
performed, as set forth in the Conflict Minerals Report, with respect 
to the period covered by the report, is consistent with the due 
diligence process that the issuer undertook. Therefore, unless the GAO 
makes some formal pronouncement, it appears that any auditor of the 
Conflict Minerals Report will need to conduct the audit using the 
standards set forth in GAGAS. Because the Conflict Minerals Statutory 
Provision provides that the audit standards are to be established by 
the GAO, the GAO is responsible for matters pertaining to the audit 
standards, including questions or concerns about the application of 
such standards.
---------------------------------------------------------------------------

    \649\ See U.S. Gov't Accountability Office, GAO-12-331G, 
Government Auditing Standards 2011 Revision (Dec. 2011), available 
at https://www.gao.gov/assets/590/587281.pdf.
    \650\ The GAGAS Attestation Engagement standards, in Chapter 
3.75, require that auditors be ``licensed certified public 
accountants, persons working for a licensed certified public 
accounting firm or for a government auditing organization, or 
licensed accountants in states that have multi-class licensing 
systems that recognize licensed accountants other than certified 
public accountants.'' Unlike the GAGAS Attestation Engagement 
standards, the GAGAS Performance Audit standards allow auditors 
other than certified public accountants to perform a Performance 
Audit.
---------------------------------------------------------------------------

ii. Auditor Independence
    Similarly, entities performing an independent private sector audit 
of the Conflict Minerals Report must comply with any independence 
standards established by the GAO, and any questions regarding 
applicability of GAGAS on this point should be directed to the GAO. We 
are not adopting any additional independence requirements. Also, the 
independence required for the independent private sector audit of the 
Conflict Minerals Report is not the same as the OECD's independence 
requirement for auditors conducting audits of conflict mineral 
smelters.
    We acknowledge commentators' requests to clarify how our own 
independence requirements would apply to an accountant that performed 
both the independent private sector audit of the Conflict Minerals 
Report and an engagement (e.g., the audit of the financial statements 
of an issuer) subject to the independence requirements in Rule 2-01 of 
Regulation S-X.\651\ The independent private sector audit of the 
Conflict Minerals Report is specifically described in the Act as 
constituting a ``critical component'' of the registrant's due diligence 
process,\652\ which commentators were concerned may suggest the auditor 
would perform work that would impair independence. Despite this 
language, the Conflict Minerals Statutory Provision only requires an 
audit and no other functions that may imperil independence, such as 
``management functions'' described in Rule 2-01(c)(4)(vi) of Regulation 
S-X. Therefore, we do not believe that it would be inconsistent with 
the independence requirements in Rule 2-01 of Regulation S-X if the 
independent public accountant also performs the independent private 
sector audit of the Conflict Minerals Report. The engagement to perform 
the independent private sector audit of the Conflict Minerals Report 
would nevertheless be considered a ``non-audit service'' subject to the 
pre-approval requirements

[[Page 56329]]

of Rule 2-01(c)(7) of Regulation S-X. In addition, the fees related to 
the independent private sector audit of the Conflict Minerals Report 
would need to be included in the ``All Other Fees'' category of the 
principal accountant fee disclosures.\653\ If the accountant were to 
provide services that extended beyond the scope of the independent 
private sector audit of the Conflict Minerals Report, the accountant 
would need to consider whether those services were inconsistent with 
Rule 2-01 of Regulation S-X.
---------------------------------------------------------------------------

    \651\ Rule 2-01 of Regulation S-X [17 CFR 210.2-01].
    \652\ Exchange Act Section 13(p)(1)(A)(i), as added by Section 
1502 of the Act, states that the independent private sector audit of 
the conflict minerals report is included in the ``measures taken by 
the [issuer] to exercise due diligence on the source and chain of 
custody of such minerals.'' Exchange Act Section 13(p)(1)(B) further 
provides that the audit must be certified by the issuer and states 
that the certified audit ``is a critical component of due diligence 
in establishing the source and chain of custody of such minerals.'' 
These provisions make clear that the independent private sector 
audit is one step in management's due diligence process.
    \653\ See Item 9(e)(4) of Schedule 14A [17 CFR 240.14a-101]. 
Registrants also are required to describe the nature of the services 
comprising the fees disclosed under the ``All Other Fees'' category. 
As such, the independent private sector audit of the Conflict 
Mineral Report should be included in that description.
---------------------------------------------------------------------------

iii. Audit Objective
    We agree with commentators that the final rule should clearly state 
the objective of the Conflict Minerals Statutory Provision's 
independent private sector audit and the subject matter to be audited 
to provide a basis for the auditor to measure the information provided 
by the issuer. Therefore, the final rule specifies an audit objective. 
The final rule states that the audit's objective is to express an 
opinion or conclusion as to whether the design of the issuer's due 
diligence framework as set forth in the Conflict Minerals Report, with 
respect to the period covered by the report, is in conformity with, in 
all material respects, the criteria set forth in the nationally or 
internationally recognized due diligence framework used by the issuer, 
and whether the issuer's description of the due diligence measures it 
performed as set forth in the Conflict Minerals Report, with respect to 
the period covered by the report, is consistent with the due diligence 
process that the issuer undertook.
    The Conflict Minerals Statutory Provision requires an issuer to 
submit a Conflict Mineral Report that includes ``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 measurers shall 
include an independent private sector audit of such report,'' \654\ and 
``a description of the products manufactured or contracted to be 
manufactured that are not DRC conflict free.'' \655\ We recognize that 
the final rule does not require an audit of the entire Conflict 
Minerals Report. We believe, however, that it is appropriate for the 
final rule to limit the audit only to the sections of the Conflict 
Minerals Report that discuss the design of the issuer's due diligence 
framework and the due diligence measures the issuer performed because 
the provision's requirement for an issuer to obtain an independent 
private sector audit is located in the provision's subsection relating 
to due diligence.\656\
---------------------------------------------------------------------------

    \654\ Exchange Act Section 13(p)(1)(A)(i).
    \655\ Exchange Act Section 13(p)(1)(A)(ii).
    \656\ See Exchange Act Section 13(p)(1)(A)(i).
---------------------------------------------------------------------------

    The audit requirement is not discussed in the subsequent subsection 
that requires a description in the Conflict Minerals Report of the 
issuer's products manufactured or contracted to be manufactured that 
are ``not DRC conflict free,'' \657\ and the final rule does not 
require an audit of that information. We note that the objective we are 
adopting differs significantly from the objectives of other audits 
required by our rules.\658\ Nonetheless, in light of the statutory 
structure, as well as concerns about the costs that could arise from a 
requirement to audit the conclusion about the conflict minerals' status 
or take other approaches,\659\ we have concluded that the audit 
objective should be limited in this manner. We recognize that an audit 
objective requiring an auditor to express an opinion or conclusion as 
to whether the design of the issuer's due diligence measures as set 
forth in the Conflict Minerals Report, with respect to the period 
covered by the report, is in conformity with, in all material respects, 
the criteria set forth in the nationally or internationally recognized 
due diligence framework used by the issuer, and whether the issuer's 
description of the due diligence measures it performed as set forth in 
the Conflict Minerals Report, with respect to the period covered by the 
report, is consistent with the due diligence process that the issuer 
undertook, is not as comprehensive as an audit objective requiring an 
auditor to express an opinion or conclusion as to whether the due 
diligence measures were effective, or to express an opinion or 
conclusion as to whether or not the issuer's necessary conflict 
minerals are ``DRC conflict free,'' which are more similar to audit 
objectives in our other rules. However, we believe that the audit is 
still meaningful because investors and other users will have some 
assurance from an independent third party that the issuer's due 
diligence framework, as set forth in the Conflict Minerals Report, is 
designed in conformity with the relevant nationally or internationally 
recognized due diligence framework. Further, we believe it is necessary 
and appropriate to require the audit to address whether the issuer 
actually performed the due diligence measures that it represents that 
it performed in the Conflict Minerals Report, so that the audit also 
addresses, in a cost efficient manner, the actual performance of the 
due diligence and not just the design, as well as provides independent 
third party confirmation that the work described was performed.
---------------------------------------------------------------------------

    \657\ See Exchange Act Section 13(p)(1)(A)(ii).
    \658\ The objective of the ordinary audit of financial 
statements by the independent auditor is the expression of an 
opinion on the fairness with which they present, in all material 
respects, financial position, results of operations, and its cash 
flows in conformity with generally accepted accounting principles. 
See paragraph .01 of AU sec. 110, Responsibilities and Functions of 
the Independent Auditor. The auditor's objective in an audit of 
internal control over financial reporting is to express an opinion 
on the effectiveness of the company's internal control over 
financial reporting, as a part of which the auditor should test the 
design effectiveness of controls, as well as the operating 
effectiveness of controls. See paragraphs 3, 42, and 44 of Auditing 
Standard No. 5, An Audit of Internal Control over Financial 
Reporting That Is Integrated With An Audit of Financial Statements.
    \659\ See, e.g., letters from AICPA I, Deloitte, and KPMG.
---------------------------------------------------------------------------

4. Recycled and Scrap Minerals
a. Proposed Rules
    As proposed, the rules would allow for different treatment of 
conflict minerals from recycled and scrap sources than from original 
sources due to the difficulty of looking through the recycling or scrap 
process to determine the mine or other location of origin of the 
minerals. Given this difficulty, we expected that an issuer generally 
would not know the origins of its recycled or scrap conflict minerals, 
so we believed it would be appropriate for the proposed rules to 
require that an issuer using recycled or scrap conflict minerals 
furnish a Conflict Minerals Report subject to special rules. Under the 
proposed rules, if an issuer obtained conflict minerals from a recycled 
or scrap source, it would have been required to consider the products 
containing or produced with those conflict minerals to be ``DRC 
conflict free.'' \660\
---------------------------------------------------------------------------

    \660\ Because the proposed rules would have automatically 
classified recycled or scrap conflict minerals as ``DRC conflict 
free,'' issuers with products containing such minerals would not 
have needed 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 have been required to describe 
their efforts to determine the mine or location of origin with the 
greatest possible specificity.
---------------------------------------------------------------------------

    As proposed, an issuer with conflict minerals that originated from 
recycled or scrap sources would have been required to disclose in its 
annual report, under the ``Conflict Minerals Disclosure'' heading, that 
its conflict minerals were obtained from recycled or

[[Page 56330]]

scrap sources and that it furnished a Conflict Minerals Report 
regarding those recycled or scrap minerals. Also, under the proposed 
rules, an issuer would have been required to state that its products 
containing or produced with recycled or scrap minerals in the Conflict 
Minerals Report were considered ``DRC conflict free.'' In addition, 
such an issuer would have described the measures taken to exercise due 
diligence in determining that its conflict minerals were recycled or 
scrap and obtain an independent private sector audit of that report.
    We did not propose to define when a conflict mineral is from 
recycled or scrap sources. Instead, any issuer seeking to use this 
alternative approach would describe the measures it took to exercise 
due diligence in determining that the conflict minerals came from 
recycled or scrap sources. The Proposing Release stated, however, that 
we would consider conflict minerals to be ``recycled'' if they 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.\661\
---------------------------------------------------------------------------

    \661\ As we noted in the Proposing Release, the proposed rules 
regarding recycled and scrap conflict minerals would apply to all 
conflict minerals equally. If recycled or scrap minerals were mixed 
with new minerals, the recycled and scrap alternative approach would 
apply to only the portion of the minerals that were 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 
Covered Countries, that Conflict Minerals Report would contain only 
information regarding the recycled or scrap minerals. If, however, 
the new conflict minerals originated in the Covered Countries, or 
the issuer was unable to determine that its new conflict minerals 
did not originate in the Covered Countries, the Conflict Minerals 
Report would include information regarding both the new conflict 
minerals and the recycled or scrap conflict minerals.
---------------------------------------------------------------------------

b. Comments on the Proposed Rules
    Commentators offered a wide variety of views on the appropriate 
approach to conflict minerals from recycled or scrap sources. A number 
of commentators stated that they either agreed with the recycled and 
scrap alternative reporting requirements, as proposed, or agreed with 
some type of recycled and scrap alternative reporting requirements or 
exemption, although some of these commentators did not necessarily 
discuss the mechanics of such reporting alternatives.\662\ Some 
commentators indicated that they supported, as proposed, alternative 
recycled or scrap reporting that requires an issuer to perform due 
diligence in determining that the conflict minerals were, in fact, from 
recycled and scrap sources and to submit a Conflict Minerals Report 
describing the due diligence exercised that includes an audit of the 
report.\663\ A number of commentators believed that the final rule 
should require that an issuer only conduct the equivalent of a 
reasonable country of origin inquiry, instead of due diligence, to 
determine whether its conflict minerals were from recycled or scrap 
sources.\664\ Also, some of these and other commentators stated 
explicitly that an issuer should not be required to submit a Conflict 
Minerals Report and/or an audit of its recycled or scrap conflict 
minerals.\665\ Other commentators, including a number of members of 
Congress, recommended that the final rule exempt conflict minerals from 
recycled or scrap sources.\666\
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    \662\ See, e.g., letters from AAEI, AAFA, CRS I, Global Tungsten 
I, Global Witness I, Japanese Trade Associations, MSC I, NRF I, Ohio 
Precious Metals (Mar. 2, 2011) (``OPM''), PCP, Representative Jason 
Altmire (Mar. 23, 2012) (``Rep. Altmire''), Rep. Amodei, Rep. Bachus 
et al., Rep. Critz, Rep. Ellmers, Representative Steven LaTourette 
(Jun. 13, 2012) (``Rep. LaTourette''), Representative Robert E. 
Latta (May 16, 2012) (``Rep. Latta''), Rep. Murphy, Representatives 
Tim Murphy and Peter J. Visclosky (Aug. 2, 2012) (``Reps. Murphy and 
Visclosky''), Representative James B. Renacci (Mar. 6, 2012) (``Rep. 
Renacci''), Representative Bill Shuster (Mar. 12, 2012) (``Rep. 
Shuster''), Representative Patrick J. Toomey (Apr. 12, 2012) (``Rep. 
Toomey''), Representative Stephen A. Womack (Dec. 23, 2011) (``Rep. 
Womack''), RMA, SEMI, Senator Mark Pryor (Mar. 19, 2012) (``Sen. 
Pryor''), and US Steel.
    \663\ See, e.g., letters from Bario-Neal, Brilliant Earth, 
Earthworks, Enough Project I, Enough Project IV, Hacker Jewelers, 
ICAR et al. II, Howland, SIF I, and TIAA-CREF.
    \664\ See, e.g., letters from AdvaMed I, Advanced Medical 
Technology Association (Nov. 1, 2011) (``AdvaMed II''), AngloGold, 
Global Tungsten II, Industry Group Coalition I, ITIC I, ITRI I, ITRI 
IV, JVC et al. II, LBMA I, Metalor Technologies USA (Feb. 25, 2011) 
(``Metalor''), NMA I, RJC I, United States Chamber of Commerce (Nov. 
29, 2011) (``Chamber III''), and WGC II.
    \665\ See, e.g., letters from AdvaMed I, AdvaMed II, 
ArcelorMittal, Copper & Brass Fabricators Council, Inc. (Mar. 2, 
2011) (``Copper & Brass''), Global Tungsten II, IPC I, IPC II, ITIC 
I, ITRI I, ITRI III, ITRI IV, JVC et al. II, JVC et al. III, 
Materials I, NAM I, Rep. Altmire, Rep. Amodei, Rep. Bachus et al., 
Rep. Ellmers, Rep. Murphy, Rep. Shuster, Sen. Pryor, Specialty Steel 
Industry of North America (Mar. 2, 2011) (``SSINA''), Tiffany, and 
WGC II. See also letter from Rep. Critz (stating that we should 
consider ``reconfiguring the auditing requirement as it relates to 
recycled scrap materials'').
    \666\ See, e.g., letters from Rep. Altmire, Rep. Murphy, Reps. 
Murphy and Visclosky (recommending exempting recycled or scrap steel 
that contains conflict minerals), Rep. Renacci, Rep. Shuster, Rep. 
Toomey, Rep. Womack, and Sen. Pryor.
---------------------------------------------------------------------------

    Other commentators stated that the final rule should require due 
diligence but not a Conflict Minerals Report, not require a Conflict 
Minerals Report but require an audit of the inquiry into whether the 
conflict minerals are from recycled or scrap sources, require a 
``reliable process'' to determine whether the conflict minerals are 
from recycled or scrap sources, or not require that an issuer provide 
any information other than a statement that the conflict minerals are 
from recycled or scrap sources.\667\ Some commentators agreed that 
products with conflict minerals from recycled and scrap sources should 
be considered ``DRC conflict free,'' as proposed.\668\ Other 
commentators indicated that the final rule should require an issuer 
with products containing conflict minerals from recycled or scrap 
sources to label those products with a name other than ``DRC conflict 
free,'' such as ``recycled'' or ``scrap'' products.\669\
---------------------------------------------------------------------------

    \667\ See, e.g., letters from Cleary Gottlieb, JVC et al. II, 
MSG I, and NEI.
    \668\ See, e.g., letters from Copper & Brass, JVC et al. II, MSG 
I, NEI, NMA II, SIF I, SSINA, TIAA-CREF, and WGC II.
    \669\ See, e.g., letters from CRS I, Global Witness I, and State 
II.
---------------------------------------------------------------------------

    Some commentators stated that the more the alternative reporting 
approach for conflict minerals from recycled or scrap sources resembles 
our approach for newly mined conflict minerals the greater the risk of 
creating a disincentive for a manufacturers to use conflict minerals 
from recycled or scrap sources.\670\ As one of these commentators 
asserted, without certain alternative reporting requirements for 
issuers with conflict minerals from recycled or scrap sources, such 
minerals ``would be doomed for burial in a land fill until mined anew 
under a different authority having jurisdiction,'' which would be a 
``clear waste'' of conflict minerals that ``cannot contribute to new 
suffering in the DRC even though its disposition regarding past 
suffering may not be clear.'' \671\ According to this commentator, ``it 
is possible that dishonest people may find a way to pass new material 
off as recycled,'' but this possibility ``does not outweigh the very 
obvious benefit of using recycled products and materials.'' \672\ In 
this regard, other commentators argued that requiring issuers to 
provide the reason they determined that their conflict minerals came 
from recycled or scrap sources, including the due diligence processes 
they used in making their determination, would offset the reduced 
burden provided by the exemption.\673\
---------------------------------------------------------------------------

    \670\ See, e.g., letters from Copper & Bass, Global Tungsten I, 
RMA, SEMI, and SSINA.
    \671\ See letter from SEMI.
    \672\ See id.
    \673\ See letters from Rep. LaTourette and Rep. Latta.
---------------------------------------------------------------------------

    One commentator suggested that an issuer should be able to describe 
a product as using recycled or scrap minerals if a majority of the 
minerals used in the product are from recycled or

[[Page 56331]]

scrap sources or a combination of recycled, scrap, and newly mined 
conflict minerals because it would be impossible to determine whether 
all the minerals in a product were from recycled or scrap sources.\674\ 
Another commentator recommended that the final rule should allow an 
issuer to describe its products as ``DRC conflict free'' if a majority 
of the conflict minerals in those products are from recycled or scrap 
sources.\675\ One commentator asserted that tolled material (scrap, 
second life-cycle materials, or ores processed into raw materials 
suitable for use in the manufacture of products) received from 
processing facilities or suppliers should be treated as conflict free 
if the original material supplied was conflict free.\676\ A number of 
other commentators suggested that the final rule allow an issuer to 
designate the origin of any recycled or scrap conflict minerals as the 
country in which those minerals were generated and collected or 
otherwise initially submitted into the recycling or scrap supply chain, 
which is consistent with the United States customs law.\677\ Also, 
commentators agreed that the alternative reporting requirements for 
recycled and scrap minerals should apply to all conflict minerals and 
issuers equally.\678\
---------------------------------------------------------------------------

    \674\ See letter from AngloGold.
    \675\ See letter from WGC II.
    \676\ See letter from Global Tungsten II.
    \677\ See, e.g., letters from IPMI I, LBMA I, Metalor, NMA II, 
and RJC I.
    \678\ See, e.g., letters from Howland, IPC I, ITRI I, and NEI.
---------------------------------------------------------------------------

    Many commentators discussed the Proposing Release's statement that 
we would consider conflict minerals to be from a recycled or scrap 
sources if those minerals are reclaimed end-user or post-consumer 
products but would not consider those minerals ``recycled'' if they are 
partially processed, unprocessed, or a byproduct from another ore. Some 
of these commentators recommended that the final rule expand this 
statement to match the OECD's definition of recycled and scrap minerals 
or explicitly adopt the OECD's definition in the final rule.\679\ 
Likewise, certain commentators recommended that the final rule clarify 
that we would consider conflict minerals from recycled or scrap sources 
to include scrap processed metals created during product manufacturing, 
which is part of the OECD definition.\680\ These commentators, however, 
were concerned that the Proposing Release did not consider partially 
processed materials as being recycled, because they believed that such 
a definition would exclude industrial scrap, sometimes referred to as 
``new'' scrap, generated by downstream manufacturers from the treatment 
given to recycled minerals.\681\
---------------------------------------------------------------------------

    \679\ See, e.g., letters from Global Witness I, MSG I, and SIF 
I.
    \680\ See, e.g., letters from Copper & Brass and SSINA.
    \681\ Id.
---------------------------------------------------------------------------

    Some commentators provided alternative definitions for recycled and 
scrap minerals. One commentator stated that the final rule should 
define a recycled or scrap conflict mineral as ``a conflict mineral or 
a conflict mineral derivative that is within, or has been reclaimed 
from, a used product that was collected directly from the last product 
end user, or that was collected from a municipal waste stream.'' \682\ 
Other commentators indicated that conflict minerals should be 
considered recycled or scrap only if they have been through a cycle of 
production and application.\683\ A further commentator suggested that 
the final rule adopt, in substantial part, the Environmental Protection 
Agency's definition of solid waste for our definition of conflict 
minerals from recycled or scrap sources, with the related exclusions 
and definitions of various scrap materials.\684\ One commentator 
recommended that we incorporate the Electronic Industry Citizenship 
Coalition's (``EICC'') definition of ``scrap'' for tantalum as the 
definition for scrap in the final rule.\685\ Certain commentators 
sought to limit the definition of recycled and scrap minerals to 100% 
post-consumer metals.\686\ Some commentators suggested a definition 
that would include reclaimed materials from the manufacture of 
downstream products that incorporate those metals, processes utilizing 
those metals, or end-user or post-consumer products, which would not 
include minerals partially processed, materials from the partially 
processed minerals, or materials from intermediate stages of the 
smelting and refining process.\687\ One commentator recommended that 
the final rule consider as conflict minerals from recycled or scrap 
sources, ``not only * * * post-consumer scrap, but also * * * scrap 
that is the result of an industrial process.'' \688\
---------------------------------------------------------------------------

    \682\ See letter from SEMI (defining a ``used product'' as ``a 
product that, prior to recycling or disposal, is commercially sold 
or otherwise distributed to a buyer not in the commercial chain of 
distribution and used for some period of time'').
    \683\ See letters from Global Tungsten I and RMA.
    \684\ See letter from Elm.
    \685\ See letter from H.C. Starck GmbH (Jul. 27, 2011) 
(``Starck'').
    \686\ See, e.g., letters from Bario-Neal, Brilliant Earth, 
Earthworks, Metalsmiths, Hacker Jewelers, and TakeBack.
    \687\ See letters from ITRI I, JGI, and Solutions.
    \688\ See letter from ArcelorMittal.
---------------------------------------------------------------------------

    Additionally, some commentators provided recommendations 
specifically for treating conflict minerals in jewelry, coins, and bars 
as recycled or scrap. One such commentator stated that conflict 
minerals from discarded consumer jewelry should be considered recycled 
or scrap.\689\ Another commentator argued that any definition of 
recycled and scrap gold should grandfather gold bars and gold coins 
produced before the effective date of the final rule and exclude 
sludges, slimes, flue dust, carbon fines, slag, and other by-products 
from consideration as conflict minerals.\690\ Conversely, other 
commentators stated that the definition of conflict minerals from 
recycled or scrap sources should include only those conflict minerals 
from post-consumer products and not include any jewelry unsold or not 
previously owned as end-use products by consumers.\691\ Also, some of 
these commentators indicated that gold coins and bars should not be 
classified as recycled or scrap \692\ because, as some of these 
commentators stated, they do not represent a clear consumer end-of-life 
product and are less identifiable as not newly-mined gold.\693\
---------------------------------------------------------------------------

    \689\ See letter from JVC et al. II.
    \690\ See letter from NMA II.
    \691\ See, e.g., letters from Brilliant Earth, Bario-Neal, 
Earthworks, Enough Project I, Hacker Jewelers, ICAR et al. II, and 
TakeBack
    \692\ See, e.g., letters from Brilliant Earth, Bario-Neal, 
Enough Project I, Hacker Jewelers, ICAR et al. II, and TakeBack.
    \693\ See letter from Enough Project I and ICAR et al. II.
---------------------------------------------------------------------------

c. Final Rule
    We are revising the proposal's treatment of conflict minerals from 
recycled and scrap sources in the final rule. We agree with 
commentators that it is appropriate to provide alternative treatment 
for such conflict minerals so that the final rule does not provide a 
disincentive for using conflict minerals from recycled and scrap 
sources. However, we also want to include safeguards to prevent issuers 
from claiming to use conflict minerals from recycled and scrap sources 
when that is not the case. We believe, as certain commentators 
noted,\694\ requiring an issuer with necessary conflict minerals to 
conduct an inquiry similar to the reasonable country of origin inquiry 
to determine whether its minerals are from

[[Page 56332]]

recycled or scrap sources is an appropriate way to balance these 
concerns.\695\ Under the final rule, if an issuer has reason to 
believe, as a result of its reasonable country of origin inquiry, that 
its conflict minerals may not have been from recycled or scrap sources, 
it must exercise due diligence. The issuer would then be required to 
provide a Conflict Minerals Report if it is unable to determine that 
the conflict minerals came from recycled or scrap sources.
---------------------------------------------------------------------------

    \694\ See, e.g., letters from AdvaMed I, AdvaMed II, AngloGold, 
Global Tungsten II, Industry Group Coalition I, ITIC I, ITRI I, ITRI 
IV, JVC et al. II, LBMA I, Metalor, NMA I, RJC I, Chamber III, and 
WGC II.
    \695\ Because we envision these inquiries to be similar, we use 
the term ``reasonable country of origin inquiry'' to refer to an 
issuer's inquiry into both the conflict minerals' country of origin 
and whether the minerals are from recycled or scrap sources.
---------------------------------------------------------------------------

    We believe this approach for any issuer with conflict minerals from 
recycled or scrap sources is consistent with the Conflict Minerals 
Statutory Provision. The provision was intended to affect the 
``exploitation and trade of conflict minerals originating in the 
Democratic Republic of the Congo [that] is helping to finance conflict 
characterized by extreme levels of violence in the eastern Democratic 
Republic of the Congo.'' \696\ As noted by some commentators, however, 
armed groups in the Covered Countries are financed and benefit from the 
extraction and illegal taxation of newly mined conflict minerals and 
their transport, not the use of recycled or scrap conflict 
minerals.\697\ No further revenue or other benefit will be provided to 
the armed groups from any transaction involving the conflict minerals 
from recycled or scrap sources because the armed groups ``have already 
extracted their revenue and do not stand to gain with [their] use or 
sale.'' \698\
---------------------------------------------------------------------------

    \696\ See Section 1502(a) of the Act.
    \697\ See letters from AAEI and Global Tungsten I.
    \698\ See letter from AAEI. See also OECD, OECD Due Diligence 
Guidance for Responsible Supply Chains of Minerals from Conflict-
Affected and High-Risk Areas, 7 n.2 (2011), available at https://www.oecd.org/daf/internationalinvestment/guidelinesformultinationalenterprises/46740847.pdf (stating that 
metals ``reasonably assumed to be recycled are excluded from the 
scope of this'' guidance) and OECD, Due Diligence Guidance for 
Responsible Supply Chains of Minerals from Conflict-Affected and 
High-Risk Areas: Supplement on Gold, 28 n.34 (2012), available at 
https://www.oecd.org/corporate/guidelinesformultinationalenterprises/FINAL%20Supplement%20on%20Gold.pdf (stating that ``[r]ecycled 
material is not itself a concern for contributing to conflict, 
however, recycled material is a potential means of laundering gold 
that has been mined in conflict-affected and high-risk areas in 
order to hide its origin'').
---------------------------------------------------------------------------

    In this regard, we believe it is appropriate, as proposed, to allow 
an issuer, if it wishes, to describe its products containing conflict 
minerals from recycled or scrap sources as ``DRC conflict free.'' As 
one commentator explained, the ``intent of the statute is to provide 
investors with information about whether minerals used in manufacturing 
processes may contribute to the ongoing conflict in the DRC,'' \699\ 
and it is ``comfortable that legitimate recycled post-consumer or scrap 
minerals do not contribute to the crisis and can be therefore 
identified as `DRC conflict free.' '' \700\ We are aware that the 
underlying conflict minerals that were recycled or from scrap sources 
may have once directly or indirectly financed or benefited armed groups 
in the Covered Countries. However, because the purpose of the provision 
is to provide information about whether minerals used in manufacturing 
directly or indirectly financed or benefited armed groups in the 
Covered Countries, and conflict minerals from recycled or scrap sources 
no longer do so, we believe it is appropriate to deem all products with 
conflict minerals from recycled or scrap source as ``DRC conflict 
free.'' \701\ This prevents the final rule from providing a 
disincentive to use conflict minerals from recycled or scrap sources.
---------------------------------------------------------------------------

    \699\ See letter from TIAA-CREF.
    \700\ See id.
    \701\ We also note that, going forward, newly mined minerals, 
even if they are eventually recycled, will be covered under the 
final rule when they are first used.
---------------------------------------------------------------------------

i. Definition of ``Recycled and Scrap Sources''
    We are revising the proposed rules to adopt a definition of 
conflict minerals from recycled or scrap sources, which mirrors the 
OECD definition of recycled metals.\702\ We are persuaded by 
commentators that argued that it is important for us to prescribe clear 
definitions regarding conflict minerals from recycled or scrap sources 
so that an issuer does not use this alternative reporting scheme as a 
means to avoid the requirement to exercise due diligence on the source 
and chain of custody of its conflict minerals in order to describe its 
products as ``DRC conflict free.'' \703\ Also, we agree with one of 
these commentators that the definition should be included in the body 
of the final rule and not just included as guidance in the 
release.\704\
---------------------------------------------------------------------------

    \702\ See OECD, Due Diligence Guidance for Responsible Supply 
Chains of Minerals from Conflict-Affected and High-Risk Areas, 12 
n.2 (2011), available at https://www.oecd.org/dataoecd/62/30/46740847.pdf. (``Recycled metals are reclaimed end-user or post-
consumer products, or scrap processed metals created during product 
manufacturing. Recycled metal includes excess, obsolete, defective, 
and scrap metal materials which contain refined or processed metals 
that are appropriate to recycle in the production of tin, tantalum, 
tungsten and/or gold. Minerals partially processed, unprocessed or a 
bi-product from another ore are not recycled metals.'').
    \703\ See, e.g., letters from Global Witness I, MSG I, and SIF 
I.
    \704\ See letter from Global Witness I.
---------------------------------------------------------------------------

    Further, we are persuaded by commentators that we should use the 
OECD definition to provide certainty and prevent an issuer from using 
an alternative definition that would allow the issuer to classify it 
minerals as recycled or scrap when they were not.\705\ Therefore, the 
final rule states that conflict minerals are considered to be from 
recycled or scrap sources if they are from recycled metals, which are 
reclaimed end-user or post-consumer products, or scrap processed metals 
created during product manufacturing. Also, based on the OECD 
definition, the final rule states that recycled metal includes excess, 
obsolete, defective, and scrap metal materials that contain refined or 
processed metals that are appropriate to recycle in the production of 
tin, tantalum, tungsten and/or gold. The final rule states further, 
however, that minerals partially processed, unprocessed, or a byproduct 
from another ore will not be included in the definition of recycled 
metal.
---------------------------------------------------------------------------

    \705\ See, e.g., letters from Global Witness I, MSG I, and SIF 
I.
---------------------------------------------------------------------------

    The definition included in the final rule should alleviate certain 
commentators' concern that the Proposing Release would limit the 
definition of conflict minerals from recycled or scrap sources to only 
end-user or post-consumer scrap and not include scrap processed metals 
created during product manufacturing.\706\ The final rule's definition, 
which is consistent with the OECD definition, includes scrap processed 
metals created during product manufacturing.
---------------------------------------------------------------------------

    \706\ See letters from Copper & Brass and SSINA.
---------------------------------------------------------------------------

ii. Due Diligence for Conflict Minerals That May Not Be From ``Recycled 
and Scrap Sources''
    In a change from the proposal, the final rule only requires an 
issuer with conflict minerals from recycled or scrap sources to 
exercise due diligence if it has reason to believe, following its 
reasonable country of origin inquiry, that its conflict minerals that 
it thought were from recycled or scrap sources may not be from such 
sources. If so, as is true for issuers with conflict minerals from 
newly mined sources, the issuer must exercise due diligence that 
conforms to a nationally or internationally recognized due diligence 
framework, if such a framework is available. The proposed rules would 
have required issuers with conflict minerals from recycled or scrap 
sources to exercise due diligence in determining

[[Page 56333]]

that their conflict minerals were from recycled or scrap sources 
without requiring adherence to any due diligence framework. Presently, 
it appears that the OECD's supplement for gold is the only nationally 
or internationally recognized due diligence framework for any conflict 
mineral from recycled or scrap sources. Therefore, we anticipate that 
issuers would use the gold supplement to conduct their due diligence 
for gold that issuer has reason to believe may not come from recycled 
or scrap sources.
    However, neither the OECD nor any other body has a similar due 
diligence framework for cassiterite, columbite-tantalite, or 
wolframite. Therefore, until such a framework is developed, the 
required due diligence for issuers who may have those recycled or scrap 
conflict minerals is the same as proposed. Those issuers are required 
to exercise due diligence in determining that their conflict minerals 
were from recycled or scrap sources without the benefit of a due 
diligence framework. If, however, a nationally or internationally 
recognized due diligence framework becomes available for any of the 
remaining conflict minerals, issuers will be required to utilize that 
framework for that mineral. Specifically, if due diligence guidance for 
a particular conflict mineral under a nationally or internationally 
recognized due diligence framework becomes available prior to June 30 
of a calendar year, the first reporting period in which issuers must 
use the framework for that conflict mineral will be the subsequent 
calendar year. However, if the due diligence guidance is not approved 
until after June 30 of a calendar year, issuers are not required to use 
that framework for that conflict mineral until the second calendar year 
after approval to provide a full year before implementation.
    For example, if the OECD or another body adopts a nationally or 
internationally recognized due diligence framework for cassiterite, 
columbite-tantalite, or wolframite from recycled or scrap sources prior 
to June 30, 2013, the initial reporting period in which issuers with 
those conflict minerals from recycled or scrap sources must use the due 
diligence framework will begin on January 1, 2014 and their specialized 
disclosure reports that discuss their exercise of such due diligence 
will be due on May 31, 2015. If, however, the OECD or another body 
adopts such a due diligence framework on or after July 1, 2013, but 
before June 30, 2014, the initial reporting period for issuers with 
those conflict minerals to use the framework will begin on January 1, 
2015 and their specialized disclosure reports with respect to those 
minerals will be due on May 31, 2016. Issuers with gold from recycled 
or scrap sources, however, are required to submit a specialized 
disclosure report for that mineral using the OECD's due diligence for 
recycled or scrap gold for the reporting period beginning January 1, 
2013, which will be due on May 31, 2014.
    Further, consistent with the proposal, because our final rule 
considers products with conflict minerals from recycled or scrap 
sources to be ``DRC conflict free,'' the final rule does not require a 
discussion of processing facilities, countries of origin, or efforts to 
determine the mine or location of origin with the greatest possible 
specificity. Therefore, we believe that our approach is consistent with 
comments that indicated that the final rule should not require an 
issuer with conflict minerals from recycled or scrap sources to provide 
a Conflict Minerals Report, but should require such issuers to 
``disclose how they have determined that sources are genuine scrap 
recycled.'' \707\ Without this disclosure, such issuers ``might 
otherwise be encouraged to `launder' new DRC conflict minerals through 
their operations--misleading consumers and other stakeholders, and 
undermining the value of the disclosure exercise.'' \708\
---------------------------------------------------------------------------

    \707\ See letter from NEI.
    \708\ See id. (recommending also that ``[i]ssuers should use due 
diligence in determining whether conflict minerals are from scrap/
recycled sources'').
---------------------------------------------------------------------------

F. Other Matters

    If any provision of this rule, or the application thereof to any 
person or circumstance, is held to be invalid, such invalidity shall 
not affect other provisions or application of such provisions to other 
persons or circumstances that can be given effect without the invalid 
provision or application. Moreover, if any portion of Form SD not 
related to conflict minerals disclosure is held to be invalid, such 
invalidity shall not affect the use of the form for purposes of 
disclosure pursuant to Exchange Act Section 13(p).

III. Economic Analysis

A. Introduction

    As discussed in greater detail above,\709\ Section 1502 amended the 
Exchange Act by adding new Section 13(p), which requires us to 
promulgate disclosure and reporting regulations regarding the use of 
conflict minerals from the Covered Countries. Section 13(p) mandates 
that the Commission promulgate regulations requiring that a person 
described disclose annually whether any conflict minerals that are 
necessary to the functionality or production of a product manufactured 
by such person originated in the Covered Countries, and make that 
disclosure publicly available on the issuer's Internet Web site. If a 
person concludes that the person's conflict minerals originated in the 
Covered Countries, that person must submit a Conflict Minerals Report, 
which must be posted on the person's Internet Web site, that includes a 
description of the measures taken by the person to exercise due 
diligence on the minerals' source and chain of custody, which must 
include an independent private sector audit of the Conflict Minerals 
Report that is conducted according to standards established by the GAO. 
The person submitting the Conflict Minerals Report must also identify 
the independent private sector auditor and certify the independent 
private sector audit. Further, the 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.
---------------------------------------------------------------------------

    \709\ We are incorporating Sections I and II of this release, 
which fully describe the statutory requirements of Section 1502 of 
the Act and the final rule in detail, into Section III of the 
release and providing only a short summary of the statutory 
requirements and final rule in this section.
---------------------------------------------------------------------------

    We are adopting amendments to our rules to implement the Conflict 
Minerals Statutory Provision. The final rule requires any reporting 
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 annually in a separate 
specialized disclosure report on a new form the results of its 
reasonable inquiry into whether its conflict minerals originated in the 
Covered Countries or came from recycled or scrap sources. Under the 
final rule, following its reasonable country of origin inquiry, if (a) 
The issuer knows that its conflict minerals did not originate in the 
Covered Countries or knows that they came from recycled or scrap 
sources, or (b) the issuer has no reason to believe its conflict 
minerals may have originated in the Covered Countries, or (c) the 
issuer reasonably believes its conflict minerals came from recycled or 
scrap sources, then in all such cases the issuer must, in the body of 
Form SD, disclose its determination and describe briefly the reasonable 
country of origin

[[Page 56334]]

inquiry it undertook and the results of the inquiry. On the other hand, 
following its reasonable country of origin inquiry, if (a) the issuer 
knows that its conflict minerals originated in the Covered Countries 
and knows that they did not come from recycled or scrap sources, or the 
issuer has reason to believe that its conflict minerals may have 
originated in the Covered Countries, and (b) the issuer knows that its 
conflict minerals did not come from recycled or scrap sources or has 
reason to believe that its conflict minerals may not have come from 
recycled or scrap sources, then the issuer must exercise due diligence 
on the source and chain of custody of its conflict minerals that 
conforms to a nationally or internationally recognized due diligence 
framework, if one is available. Following that due diligence, unless 
the issuer determines, based on that due diligence, that its conflict 
minerals did not originate in the Covered Countries or that its 
conflict minerals did come from recycled or scrap sources, the issuer 
must file a Conflict Minerals Report.
    In most circumstances, the issuer must obtain an independent 
private sector audit of its Conflict Minerals Report. The issuer must 
also describe in its Conflict Minerals Report, among other information, 
its products manufactured or contracted to be manufactured that have 
not been found to be ``DRC conflict free.'' For a temporary two-year 
period for all issuers, and for a temporary four-year period for 
smaller reporting issuers, an issuer that must perform due diligence 
and is unable to determine that the conflict minerals in its products 
originated in the Covered Countries or came from recycled or scrap 
sources, or unable to determine that the conflict minerals in those 
products that originated in the Covered Countries financed or benefited 
armed groups, may consider those products ``DRC conflict 
undeterminable.'' In that case, the issuer must describe, among other 
information, its products manufactured or contracted to be manufactured 
that are ``DRC conflict undeterminable'' and the steps it has taken or 
will take, if any, since the end of the period covered in its most 
recent prior Conflict Minerals Report to mitigate the risk that its 
necessary conflict minerals benefit armed groups, including any steps 
to improve its due diligence. An issuer with products that are ``DRC 
conflict undeterminable'' is not required to obtain an independent 
private sector audit of the Conflict Minerals Report regarding the 
conflict minerals in those products.
    Finally, after its reasonable country of origin inquiry, an issuer 
that determines that its conflict minerals it thought were from 
recycled or scrap sources might instead be from newly mined sources 
must exercise due diligence that conforms to a nationally or 
internationally recognized due diligence framework developed 
specifically for conflict minerals from recycled sources to determine 
that its conflict minerals are from recycled or scrap sources. The 
issuer must also describe its due diligence in its Conflict Minerals 
Report. Currently, gold is the only conflict mineral with a nationally 
or internationally recognized due diligence framework for recycled or 
scrap conflict minerals. If no nationally or internationally recognized 
due diligence framework for a particular recycled or scrap conflict 
mineral is available, which is the case for the other three minerals, 
until such a framework is developed, the issuer must exercise due 
diligence in determining that its conflict minerals are from recycled 
or scrap sources and describe the due diligence measures it exercised 
in its Conflict Minerals Report.
    As we considered how to implement the requirements of Section 1502, 
we considered the costs and benefits imposed by the new rule and form 
we are adopting, as well as their effects on efficiency, competition, 
and capital formation. Many of the economic effects of the rule stem 
from the statutory mandate, and the discussion below addresses the 
costs and benefits resulting from both the statute and from our 
exercise of discretion, and the comments we received about these 
matters.
    The Proposing Release cited some pre-proposal letters we received 
from commentators indicating the potential impact of the proposed rules 
on competition and capital formation. In addition to requesting comment 
throughout the release on the proposal and on potential alternatives to 
the proposal, we also solicited comment in the Proposing Release on 
whether the proposal, if adopted, would promote efficiency, 
competition, or capital formation, or have an impact or burden on 
competition. We also requested comment on the potential effect on 
efficiency, competition, or capital formation should we not adopt 
certain exceptions or accommodations. As discussed throughout this 
release, we received many comments addressing the potential economic 
and competitive impact of the proposed rules.
    We note, however, that one commentator recommended that the 
proposed rules be withdrawn because the commentator did not believe we 
fully analyzed the potential costs, supply chain complexities, and 
other practical obstacles to implementing the final rule.\710\ We 
disagree. As discussed above, members of the public interested in 
making their views known were invited to submit comment letters in 
advance of the official comment period for the proposed rules. In 
addition, in response to the suggestion by some commentators that we 
extend the comment period to allow the public additional time to 
thoroughly consider the matters addressed in the Proposing Release and 
to submit comprehensive responses, we extended the comment period for 
an additional 30 days and have continued to receive comment letters 
through August 2012, which we have considered. In addition, we convened 
an October 2011 roundtable at the request of commentators. Some 
commentators have provided responses to other commentators, 
particularly on the Economic Analysis. This robust, public, and 
interactive debate has allowed us to more fully consider how to develop 
our final rules. Additionally, as discussed further in the Economic 
Analysis section, below, we have considered and analyzed the numerous 
comments received regarding the costs and complexities of the statute 
and proposed rule, and have taken them into account in the final rule. 
Overall, we believe interested parties have had sufficient opportunity 
to review the proposed rules, as well as the comment letters, and to 
provide views on the proposals and on the other comment letters and 
data to inform our consideration of the final rules. Accordingly, we do 
not believe that withdrawal of the proposed rule and re-proposal is 
necessary.
---------------------------------------------------------------------------

    \710\ See letter from Chamber I.
---------------------------------------------------------------------------

    After analyzing the comments and taking into account additional 
data and information, we believe it is likely that the initial cost of 
compliance is approximately $3 billion to $4 billion, while the annual 
cost of ongoing compliance will be between $207 million and $609 
million. As discussed in detail below, we reach this estimate by taking 
into account the many comments we received on potential costs, relying 
particularly on those comment letters that provided quantification and 
were transparent about their methodologies. As will be discussed in 
more detail below, after thoroughly considering each comment letter, we 
determined that it was

[[Page 56335]]

appropriate to modify and/or expand upon some of the submitted 
estimates and methodologies to reflect data and information submitted 
by other commentators, as well as our own judgment and experience. Our 
considered estimate of the total costs thus reflects these synthesized 
data and analyses. We consider the full range of these costs in the 
following sections, although where it is possible to discuss separately 
the costs and benefits related to our discretionary choices in the 
rule, we attempt to do so.\711\
---------------------------------------------------------------------------

    \711\ As discussed above, our discretionary choices are informed 
by the statutory mandate and thus, discussion of the benefits and 
costs of those choices will necessarily involve the benefits and 
costs of the underlying statute.
---------------------------------------------------------------------------

    Exchange Act Section 23(a)(2) \712\ also requires us, when adopting 
rules under the Exchange Act, to consider the impact that any new rule 
would have on competition, and Exchange Act Section 23(a)(2) prohibits 
us from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In addition, Exchange Act Section 3(f) \713\ requires us, when 
engaging in rulemaking where we are required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to also consider whether the action will promote efficiency, 
competition, and capital formation. Accordingly, as we considered how 
to implement the requirements of Section 1502, we considered the impact 
on the economy, burden on competition, and promotion of efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    \712\ 15 U.S.C. 78w(a)(2).
    \713\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Given the specific language of the statute and our understanding of 
Congress's objectives, we believe it is appropriate for the final rule 
generally to track the statutory provision. Our discretionary authority 
to implement Section 13(p) is limited, and we are committed to 
executing the Congressional mandate. Throughout this release, and in 
the following Economic Analysis, we discuss the benefits and costs 
arising from the new mandatory reporting requirement, those choices in 
which we have exercised our discretion, and the comments we received 
about these matters. Sections III.B and III.C below provide a narrative 
discussion of the costs and benefits resulting from the mandatory 
reporting requirement and our exercise of discretion, respectively. In 
Section III.D below, based on commentators' estimates and our 
estimates, we provide a quantitative discussion of the costs associated 
with the final rule as adopted.\714\
---------------------------------------------------------------------------

    \714\ As noted below, Congress's goals of reducing violence and 
promoting peace and security in the Covered Countries, as well as 
enhanced transparency through Section 13(p) and this rulemaking is 
intended to result in benefits that cannot be readily quantified 
with any precision, and therefore, our quantitative analysis focuses 
on the costs.
---------------------------------------------------------------------------

B. Benefits and Costs Resulting From the Mandatory Reporting 
Requirement

1. Benefits
    Congress intended for the rule issued pursuant to Section 1502 to 
decrease the conflict and violence in the DRC, particularly sexual- and 
gender-based violence.\715\ We note also that the Congressional object 
is to promote peace and security in the Covered Countries.\716\ As a 
means to address the humanitarian situation in the DRC, new Section 
13(p) requires issuers to understand and report on their use and source 
of certain minerals from the Covered Countries. By mandating the 
additional disclosure requirements of Exchange Act Section 13(p), we 
understand that Congress likely sought to reduce the amount of money 
provided to armed groups engaged in conflict in the DRC,\717\ thereby 
achieving the stated objective of the statute.\718\ Some commentators 
have argued that the Conflict Minerals Statutory Provision has already 
made progress in this area.\719\ For example, some commentators have 
argued that the Conflict Minerals Statutory Provision has already 
pressured DRC authorities to begin to demilitarize some mining areas 
and to increase mining oversight.\720\ Congress provided that the 
disclosure requirements of Exchange Act Section 13(p) shall remain in 
effect until the President determines and certifies that ``no armed 
groups continue to be directly involved in and benefitting from 
commercial activity involving conflict minerals.'' \721\
---------------------------------------------------------------------------

    \715\ Section 1502(a) of the Act (``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).'').
    \716\ See Exchange Act Section 1502(c)(1)(B)(i) (stating that 
the Secretary of State, in consultation with the Administrator of 
the United States Agency for International Development, shall submit 
to Congress a plan to ``promote peace and security'' in the Covered 
Countries). See also Section 1502(d)(2)(A) of the Act (directing the 
GAO to assess the effectiveness of Exchange Act Section 13(p) in 
promoting peace and security in the Covered Countries).
    \717\ Cf. Exchange Act Section 1502(c)(1) requiring the 
Secretary of State in consultation with the Administrator of the 
United States Agency for International Development to submit a 
report to Congress discussing a strategy to address the linkages 
between human rights abuses, armed groups, mining of conflict 
minerals, and commercial products that includes a plan to promote 
peace, a plan to provide guidance to commercial entities seeking to 
exercise due diligence, and a description of possible punitive 
measures.
    \718\ As discussed above, some commentators, including co-
sponsors of the legislation and other members of Congress, indicated 
that the Conflict Minerals Statutory Provision also materially 
informs an investor's understanding of the risks in an issuer's 
reputation and supply chain. See, e.g., letters from CRS I, FRS, 
Global Witness I, Methodist Pension, Sen. Durbin/Rep. McDermott, 
Sen. Leahy et al., SIF I, and SIF II.
    \719\ See, e.g., letters from International Corporate 
Accountability Roundtable (Jul. 29, 2011) (``ICAR I''), Sen. Boxer 
et al. I, Sen. Leahy et al., and United Nations Group of Experts on 
the Democratic Republic of Congo (Oct. 21, 2011) (``UN Group of 
Experts''). Other commentators, however, have argued that the 
Conflict Minerals Statutory Provision has hurt the general economy 
and population of the DRC. See, e.g., letters from BEST II (``Though 
[the Conflict Minerals Statutory Provision] seeks to provide a 
mechanism for combating the corruption and violence crippling the 
DRC, its impact on the upstream mining industry has been devastating 
to the mining communities and the broader economy of Eastern 
DRC.''), CEI II (``There are already indications that Dodd-Frank has 
had damaging consequences for the artisanal miners. In a recently 
published New York Times op-ed, freelance reporter David Aronson 
observed that the law is harming the very people it is aimed at 
protecting, and that the sole beneficiaries are those perpetrating 
the violence.''), and FEC II (stating that, ``we can confirm today 
that as expected there is more smuggling activities, very big 
decrease in revenue of the Government of DRC, huge impact on the 
live hoods of thousands of Congolese, there is no more formal 
business in the Kivus due to this interpretation of consumers which 
is far more than the requirements of the law and does not give 
chance for the improvements that had already begun to work'').
    \720\ See, e.g., Sen. Boxer et al. I, Sen. Leahy et al., and 
United Nations Group of Experts on the Democratic Republic of Congo 
(Oct. 21, 2011) (``UN Group of Experts''). Other commentators, 
however, have argued that the Conflict Minerals Statutory Provision 
has hurt the general economy and population of the DRC. See, e.g., 
letters from BEST II, CEI II, and FEC II.
    \721\ Exchange Act Section 13(p)(4).
---------------------------------------------------------------------------

    The statute therefore aims to achieve compelling social benefits, 
which we are unable to readily quantify with any precision, both 
because we do not have the data to quantify the benefits and because we 
are not able to assess how effective Section 1502 will be in achieving 
those benefits. Additionally, the social benefits are quite different 
from the economic or investor protection benefits that our rules 
ordinarily strive to achieve.
    We also note that these objectives of Section 1502 do not appear to 
be those that will necessarily generate measurable, direct economic 
benefits to investors or issuers. Some commentators urged, however, 
that conflict minerals information is material

[[Page 56336]]

to an investment decision and, therefore, similar to other disclosures 
required to be filed by issuers.\722\ For example, one commentator 
noted that, ``[a]s a sustainable and responsible investor,'' this 
commentator ``values companies' prudent management of risk in their 
global supply chains and has been particularly concerned in recent 
years by the use of certain minerals to fund the continuing bloody 
conflict in the'' DRC.\723\ As another example, a different commentator 
stated that, ``[a]s sustainable and responsible investors, we carefully 
assess the prudent management of risk in companies' global supply 
chains and we have been particularly concerned in recent years by the 
use of certain minerals, namely tin, tantalum, tungsten and gold, to 
fund the continuing bloody conflict in the'' DRC.\724\
---------------------------------------------------------------------------

    \722\ See letters from Calvert, Global Witness I, Sen. Durbin/
Rep. McDermott Sen. Leahy et al., SIF I, SIF II, and TIAA-CREFF. But 
see letters from AngloGold, Barrick Gold, Cleary Gottlieb, Corporate 
Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, NAM III, NMA 
II, NY State Bar, Taiwan Semi, and WGC II.
    \723\ See letter from Calvert.
    \724\ See letter from SIF II.
---------------------------------------------------------------------------

2. Cost Estimates in the Comment Letters
    In the Proposing Release, we included our estimates of the costs of 
the disclosure requirements.\725\ A number of commentators indicated 
that we underestimated the costs.\726\ One commentator, however, 
asserted that Economic Analysis was both ``thorough and accurate.'' 
\727\ In this regard, another commentator stated that the cost 
estimates in comment letters from industry ``seem[ed] significantly 
inflated.'' \728\ Some commentators discussed the costs in a more 
specific manner. In the Specific Comments section below, we discuss the 
comments we consider to be the most useful regarding the costs of the 
disclosure requirements. In both the general and specific comments, 
commentators did not typically distinguish between the costs and 
benefits of the statutory mandate and the costs and benefits of the 
specific aspects of the rule for which we exercised discretion. The 
overall specific cost range provided by commentators, as discussed in 
greater detail below, was between $387,650,000 \729\ and $16 
billion.\730\ In analyzing the comments, we believe it is more likely 
that the initial cost of complying with the statutory requirement is 
approximately $3 billion to $4 billion. We explain why as we consider 
and describe the full range of these costs below, although where it is 
possible to discuss separately the costs and benefits related to our 
discretionary choices in the rule, we attempt to do so.
---------------------------------------------------------------------------

    \725\ In the Proposing Release, we estimated solely for the 
purposes of the Paperwork Reduction Act 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 hours of company personnel time and to be approximately 
$71,243,000 for the services of outside professionals. Also, we 
estimated that the PRA burden for the audit and due diligence 
requirements to the industry would be approximately $46,475,000. 
These cost estimates were calculated based on the effect that the 
proposed 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.
    \726\ See, e.g., letters from Barrick Gold, CEI II, Chamber I, 
Ford, Howland, IPC I, ITRI I, ITRI II, NAM I, NRF I, PCP, Rep. Lee, 
RILA, TriQuint I, Tulane University Payson Center for International 
Development (Oct. 25, 2011) (``Tulane''), and WGC II.
    \727\ See letter from ICAR et al. I.
    \728\ See letter from Enough Project IV.
    \729\ See letter from Claigan III.
    \730\ See letter from NAM I.
---------------------------------------------------------------------------

a. General Comments
    Most commentators stated that they fully support the humanitarian 
goals of the Conflict Minerals Statutory Provision of reducing the 
levels of violence in the DRC,\731\ but some commentators argued that 
the Proposing Release did not adequately demonstrate any benefits to 
investors.\732\ As noted above, the purpose of Section 1502 is 
furthering the humanitarian goals of reducing violence and advancing 
peace and security in the DRC and the benefits Congress intended are 
derived directly from the statute. Other commentators, including two of 
the co-sponsors of the provision and other members of Congress, have 
indicated in comment letters that the provision also serves important 
investor protection objectives, such as additional disclosure on a 
company's supply chain,\733\ although the legislative history and 
statutory language do not generally reference investor protection. 
Therefore, we have designed a final rule to help achieve the intended 
humanitarian benefits in the way that Congress directed, even though we 
recognize that the final rule will impose significant compliance costs 
on companies who use or supply conflict minerals. Although, as one 
commentator noted, it would be difficult to determine a realistic cost 
approximation,\734\ most of these commentators believed that compliance 
costs would be high.
---------------------------------------------------------------------------

    \731\ See, e.g., letters from ABA, Chamber I, Industry Group 
Coalition I, NAM I, and WGC II.
    \732\ See, e.g., letters from Chamber I and PCP. These 
commentators stated also that the Proposing Release did not 
demonstrate adequately the proposed rules' efficiencies for the 
market place or any promotion of capital formation, as discussed 
below.
    \733\ See, e.g., letter from Senator Leahy et al. (``[I]t seems 
abundantly clear that when a publicly traded company relies on an 
unstable black market for inputs essential to manufacturing its 
products it is of deep material interest to investors.'').
    \734\ See letter from Howland.
---------------------------------------------------------------------------

b. Specific Comments
    Four commentators in particular attempted to catalogue the expense 
of complying with the new reporting requirements. The commentators 
generally focused on three categories of costs as the most significant: 
Due diligence for both suppliers and issuers, information technology 
(``IT'') costs, and audit costs. Although there is a general consensus 
among these four commentators as to the broadest categories of 
significant costs, in several cases they provided divergent cost 
estimates as well as supplying differing levels of detail as to how 
they developed these estimates. The following section is intended to 
lay out the cost estimates as submitted by the commentators.
i. Manufacturing Industry Association Comments
    In its comment letter, a manufacturing industry association \735\ 
stated that, based on its research, of the 5,994 issuers that the 
Proposing Release stated could be affected by the final rule, the 
average issuer would have between 2,000 and 10,000 first-tier 
suppliers, which would result in the total initial costs to issuers of 
complying with the final rule being anywhere from approximately $8 
billion to $16 billion.\736\
---------------------------------------------------------------------------

    \735\ See letter from NAM I. The manufacturing industry 
association indicated that, in developing its cost estimates, it 
consulted with its manufacturing members and relied on research by 
The Global Research Center for Strategic Supply Management at the 
W.P. Carey School of Business at Arizona State University.
    \736\ But see letter from the Fafo Institute for Applied 
International Studies (Oct. 17, 2011) (``Fafo''). This commentator 
asserted that the manufacturing industry association's cost estimate 
was too high because of some incorrect assumptions regarding an 
issuer's costs of changing legal obligations, obtaining an 
independent private sector audit, monitoring of the supply chain, 
administering procurement and contracts, implementing remediation 
recommendations, conducting internal audits of its due diligence 
system, and reporting to the Commission.
---------------------------------------------------------------------------

    The industry association noted that ``a large portion of America's 
278 thousand small and medium-sized manufacturers could be affected by 
the requirement to provide information on the origin of the minerals in 
the parts and components they supply to companies subject to the SEC.'' 
It estimated, however, that ``only one in five smaller companies would 
be in one or more issuer's supply

[[Page 56337]]

chains,'' \737\ and these smaller companies' only costs regarding the 
proposed rules would be a $25,000 audit cost. Therefore, the proposed 
rules would cost smaller companies, which are not required to report 
with us under Exchange Act Sections 13(a) or 15(d), approximately $1.4 
billion.\738\
---------------------------------------------------------------------------

    \737\ 278,000 x .20 = 55,600.
    \738\ 278,000 x .20 x $25,000 = $1,390,000,000.
---------------------------------------------------------------------------

    Further, the commentator remarked that our $25,000 estimate \739\ 
of the cost of the independent private sector audit ``would only cover 
the initiation of an audit for a small company with a simple supply 
chain,'' and argued that, at a minimum, an independent private sector 
audit of a company with a more complex supply chain would cost at least 
$100,000.\740\ Additionally, the manufacturing industry association 
``conservatively estimate[d]'' that approximately 75% of the issuers 
that would be required to provide conflict minerals information also 
would be required to provide a Conflict Minerals Report and an audit 
rather than the 20% that we estimated in the Proposing Release, which 
would equate to approximately 4,500 issuers out of the 5,994 issuers we 
estimated would be affect by the final rule.\741\ Taking into 
consideration the higher estimated number of affected issuers, the 
industry association estimated that the total cost to all affected 
issuers to obtain an independent private sector audit of their Conflict 
Minerals Report would be $450 million.
---------------------------------------------------------------------------

    \739\ As discussed in the Proposing Release, we indicated that 
each independent private sector audit of the Conflict Minerals 
Report would cost approximately $25,000 on average based on the 
preliminarily estimates of one industry group.
    \740\ See letter from NAM I.
    \741\ See id. The manufacturing industry association commentator 
estimated that 75% of affected issuers would be required to submit a 
Conflict Minerals Report because, according to the commentator, the 
majority of issuers would not be able to determine the origin of 
their conflict minerals.
---------------------------------------------------------------------------

    In addition, the commentator estimated that, to implement their new 
due diligence policies, it would cost $1.2 billion for the 5,994 
affected issuers to change their legal obligations with each issuer's 
estimated 2,000 first-tier suppliers, and an additional $300 million 
for issuers to implement risk-based programs that use control processes 
to verify that suppliers are providing them with credible information 
and pushing legal obligations upstream. Also, the commentator estimated 
that affected issuers would need to expend a collective total of $6 
billion to develop new information technology systems to collect 
information on each issuer's first-tier suppliers.\742\ Therefore, the 
sum of the costs to affected issuers would total approximately $8 
billion. Below is a summary of the manufacturing industry association's 
cost estimates in tabular      form:
---------------------------------------------------------------------------

    \742\ See letter from NAM I.
    \743\ The manufacturing industry association commentator refers 
to this as ``changes to corporate compliance policies.''
    \744\ The manufacturing industry association commentator refers 
to this as IT system development or revision.
    \745\ We are using the rounded estimate (4,500) that was used by 
the university group and manufacturing industry association 
commentators in their calculations even though a more exact number 
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note 
869.
    \746\ The manufacturing industry association commentator refers 
to this as the cost of ``provid[ing] proper information regarding 
the source of minerals.''
    \747\ Supplier compliance cost in the manufacturing industry 
association commentator's proposal is considered an audit cost and 
is not limited to smaller suppliers that are issuers.

----------------------------------------------------------------------------------------------------------------
                                                                                          Calculation
----------------------------------------------------------------------------------------------------------------
Manufacturing Industry Association Commentator Estimate
    Issuers affected.....................................              5,994
    Average Number of 1st tier suppliers.................              2,000
Issuer Due Diligence Reform \743\
    Number of compliance hours per issuer................                  2
    Cost per hour........................................                $50
                                                          ------------------------------------------------------
        Total compliance cost............................     $1,198,800,000                    5,994*2000*2*$50
                                                          ------------------------------------------------------
IT Systems Modification \744\
    Cost per issuer......................................         $1,000,000
                                                          ------------------------------------------------------
        Total cost.......................................     $5,994,000,000                    5,994*$1,000,000
                                                          ------------------------------------------------------
Conflict Minerals Report Audits
    Issuers affected \745\...............................              4,500                           5,994*75%
    Audit cost...........................................           $100,000
                                                          ------------------------------------------------------
        Total cost.......................................       $450,000,000                       4,500*100,000
                                                          ------------------------------------------------------
Issuer Verification of Supplier Information
    Number of hours......................................                0.5
    Cost per hour........................................                $50
                                                          ------------------------------------------------------
        Total cost.......................................       $299,700,000                  5,994*2000*0.5*$50
                                                          ------------------------------------------------------
Smaller Supplier Due Diligence \746\
    Suppliers affected (only 20% to conduct) \747\.......             55,600                        278,000 * .2
    Due diligence cost...................................            $25,000
                                                          ------------------------------------------------------
        Total cost.......................................     $1,390,000,000                  278,000*.2*$25,000
                                                          ------------------------------------------------------
            Total........................................     $9,332,500,000
                                                          ------------------------------------------------------
            Total for affected issuers...................     $7,942,500,000     $9,332,500,000 - $1,390,000,000
----------------------------------------------------------------------------------------------------------------


[[Page 56338]]

    Additionally, this commentator calculated that the costs of the 
final rule could be ``as high as $16 billion'' by ``extrapolating from 
the recent experience of company costs in complying with the European 
Union's hazardous waste directive (``RoHS''), and estimated on that 
basis the economic impact of the SEC's proposed regulations.'' \748\ In 
fact, this commentator postulated that ``Section 1502 may be broader in 
scope because'' it ``covers more products and sectors than RoHS,'' it 
``discriminates against origin,'' and it ``does not include a de 
minimis or weight-based exception.'' \749\ The commentator stated that, 
according to Technology Forecasters, Inc., the RoHS directive cost the 
electronics industry $2,640,000 per company to achieve initial RoHS 
compliance and another $482,000 annually to maintain compliance. 
Therefore, based on these per company figures, the commentator 
calculated that initial compliance of all 5,994 issuers would be 
approximately $16 billion.
---------------------------------------------------------------------------

    \748\ See letter from NAM I. This commentator estimated that 
each issuer affected by RoHS had an initial compliance cost of 
$2,640,000. For the 5,994 issuers that we estimate may be affected 
by the final rule, the estimated total cost to comply with RoHS 
would be $15,824,160,000 ($2,640,000 x 5,994 = $15,824,160,000).
    \749\ See id.
---------------------------------------------------------------------------

ii. Electronic Interconnect Industry Association Comments
    Another commentator, an electronic interconnect industry 
association,\750\ estimated that the electronic interconnection 
industry suppliers would incur compliance costs of approximately $279 
million in the first year and approximately $165 million in ongoing 
annual costs.\751\ Additionally, this commentator stated that there 
could be additional hidden costs for companies that varied widely from 
no additional costs to more than $2 million in such costs.\752\ This 
commentator did not provide an estimate of the costs to all potentially 
affected issuers, but focused on the electronic interconnect industry.
---------------------------------------------------------------------------

    \750\ See letter from IPC I.
    \751\ See id. The letter includes an Appendix A, which consists 
of a published survey produced by Market Research Service of the 
electronic interconnect industry association commentator entitled, 
``Results of an IPC Survey on the Impact of U.S. Conflict Minerals 
Reporting Requirements'' (Feb. 2011) (``electronic interconnect 
industry group survey''). Much of the information cited from this 
commentator is located in the published survey. For the survey, the 
commentator surveyed 3,839 of its members in the electronic 
interconnection industry with a total of 60 separate companies 
actually participating in the survey. Of these 60 companies, 30% 
were public issuers while the remaining 70% were private companies. 
Despite acknowledging that the survey was not intended ``to produce 
statistical significant data,'' the commentator argued that the 
survey respondents do ``make up a representative sample of the U.S. 
electronic interconnect supply chain.'' See id.
    \752\ See id.
---------------------------------------------------------------------------

    The electronic interconnect industry association also argued that 
more than 20% of the 5,994 affected issuers would have to provide an 
independent private sector audit.\753\ The commentator noted that, 
although the Covered Countries may, at most, supply 20% of the world's 
supply of conflict minerals, this 20% could be distributed to 100% of 
the issuers. Therefore, all issuers could be required to file a 
Conflict Minerals Report and obtain an independent private sector 
audit, and the electronic interconnect industry group ``expected that 
nearly 100% of affected issuers will need to complete a [Conflict 
Minerals Report], especially in the initial years of the regulation.'' 
\754\ In this regard, the commentator noted that respondents to its 
survey stated that ``[s]upplier verification and auditing was a 
frequently cited anticipated cost,'' and the respondents ``estimated 
direct costs of [$]10,000 to [$]100,000 for the third party due 
diligence audits.'' \755\ The commentator also indicated that the 
average number of suppliers in the supply chain for those companies 
responding to their survey was 163.
---------------------------------------------------------------------------

    \753\ Id.
    \754\ See id. This commentator noted as well that ``the vast 
majority of users will be unable to identify the origin of their 
conflict minerals * * * and therefore will need to complete'' a 
Conflict Minerals Report.
    \755\ See id.
---------------------------------------------------------------------------

iii. University Group Comments
    Another commentator, a university group, provided its own cost 
figures regarding the proposed rules in its comment letter.\756\ The 
university group contended that our model underestimated the costs of 
the proposed rules due to, among other reasons, our failure to consider 
the costs incurred by all actors, especially first-tier private company 
suppliers, that are required to modify their management systems to 
provide critical information to its customers that are the issuers. In 
contrast, the university group found that the manufacturing industry 
group's economic model overstated the costs by overestimating the 
number of suppliers and failing to account for cost efficiencies.
---------------------------------------------------------------------------

    \756\ See letter from Tulane. The staff of Senator Richard J. 
Durbin, one of the co-sponsors of the Conflict Minerals Statutory 
Provision, contacted this commentator ``with a specific request for 
help in providing a detailed estimate of what it would cost 
companies to implement the Congo Conflict Mineral Act.'' Id.
---------------------------------------------------------------------------

    The university group contended that all affected companies, both 
issuers and private companies, would need to carry out three principal 
actions to implement Section 1502. These actions consisted of 
strengthening internal management systems in view of performing due 
diligence, instituting necessary information technology systems, and 
obtaining independent private sector audits. The university group's 
model indicated that the largest driving cost factor was strengthening 
companies' management systems, which would total approximately $5.17 
billion for both issuers and private companies, with issuers' costs 
being approximately $26 million and private companies' costs being 
approximately $5.14 billion. The other costs would be borne only by 
issuers. These other costs included instituting the necessary 
information technology systems, which would cost approximately $2.56 
billion, and obtaining an independent private sector audit, which would 
cost companies approximately $207 million. Ultimately, according to the 
university group, the proposed rules would cost all affected companies, 
both issuers and private companies involved in the conflict minerals 
supply chain, approximately $7.93 billion initially and approximately 
$207 million annually thereafter.
    As noted, the university group commentator estimated the due 
diligence costs to both issuers and their private company suppliers. 
The total initial labor costs, including both laborers and consultants, 
to all 5,994 issuers would be approximately $26 million. For the costs 
to private company suppliers, the university group estimated the total 
number of small private company suppliers to be 148,459, and the number 
of large private company suppliers to be 711,607.\757\ The total 
initial labor costs, including both laborers and consultants, to all 
860,066 private company suppliers would be approximately $5.14 billion. 
In sum, the total initial labor costs for due diligence to both the 
5,994 issuers and the 860,066 private company suppliers would be 
approximately $5.17 billion.
---------------------------------------------------------------------------

    \757\ The university group commentator developed these estimates 
by multiplying the number of issuers by the company size factor 
(large or small) and multiplying the number of relevant first tier 
supplier contracts by an overlap factor of 0.40. This factor 
attempts to differentiate and correct for the number of estimated 
material supply contracts versus the number of unique businesses 
impacted. Tulane estimated a 60% overlap factor meaning that only 
40% (100% - 60% = 40%) of the supply contracts corresponded to non-
overlapping suppliers. See letter from Tulane.
---------------------------------------------------------------------------

    Also, the university group disagreed with the manufacturing 
industry group's estimate that the costs for modifying

[[Page 56339]]

each issuer's information technology systems would be $1 million. The 
university group agreed that these costs would be borne solely by 
issuers because they would be responsible for creating tracking systems 
for the supplier-furnished supply chain information, and that large 
issuers that use complex information technology systems to manage their 
supply chains would have costs of $1 million per company. However, the 
university group argued that the unit costs for small companies, based 
on the data from the 2011 electronic interconnect industry association 
commentator survey, would be $205,000 per company. The university group 
estimated that the information technology costs for the affected small 
issuers would be approximately $885 million, and the cost for the 
affected large issuers would be approximately $1.68 billion. Therefore, 
the total costs to the 5,994 affected issuers of changing information 
technology systems would be approximately $2.56 billion.
    Finally, the university group discussed the costs associated with 
the independent private sector audit. The university group disagreed 
with the manufacturing industry group's assertion that private company 
suppliers would be required to obtain a private sector audit to 
demonstrate to their issuer customers that they performed sufficient 
due diligence. The university group noted that there is no requirement 
that private company suppliers obtain such an audit, so the burden and 
cost for a private company supplier to obtain an audit is voluntary in 
the context of the proposed rules. Further, the university group noted 
that the impetus for issuers to demand such audits would be reduced if 
issuers are allowed to use ``reasonably reliable representations'' from 
suppliers. For these reasons, the university group excluded any costs 
for independent private sector audits for private company suppliers 
from their cost estimates. The university group, however, agreed with 
the manufacturing industry group's cost estimates and indicated that 
the cost for an audit of a small issuer would be $25,000 and the cost 
to a large issuer would be $100,000. Based on these assumptions, the 
university group estimated that the audit costs for small issuers would 
be $81 million,\758\ and those costs for large issuers would be 
approximately $126 million.\759\ Therefore, the total audit cost for 
all issuers would be approximately $207 million per year.\760\ Below is 
a summary of the university group commentator's estimates in tabular 
form:
---------------------------------------------------------------------------

    \758\ 5,994 issuers x 75% of issuers requiring an audit x 72% 
for number of small issuers x $25,000 per audit = $80,919,000.
    \759\ 5,994 issuers x 75% of issuers requiring an audit x 28% 
for number of large issuers x $100,000 per audit = $125,874,000.
    \760\ $80,919,000 + $125,874,000 = $206,793,000.

------------------------------------------------------------------------
                                                       Calculation
------------------------------------------------------------------------
University Group Commentator
 Estimate:
    Issuers affected........              5,994
    Large issuer (28% of                  1,678               5,994*0.28
     issuers)...............
    Small issuer (72% of                  4,316               5,994*0.72
     issuers)...............
    Average number of 1st                 1,060               2,000*0.53
     tier suppliers (53% of
     manufacturing industry
     association
     commentator)...........
Issuer Due Diligence Reform:
    Number of compliance                    100
     hours for large issuer.
    Number of compliance                     40
     hours for small issuer.
    Internal cost per hour..                $50
    Internal costs for large         $7,551,000        1,678*0.9*100*$50
     issuer (90% of total
     work load).............
    Internal costs for small         $6,473,520        4,316*0.75*40*$50
     issuer (75% of total
     work load).............
    Consulting cost per hour               $200
    Consulting costs for             $3,356,000       1,678*0.1*100*$200
     large issuer (10% of
     total work load).......
    Consulting costs for             $8,632,000       4,316*0.25*40*$200
     small issuer (25% of
     total work load).......
                             -------------------------------------------
        Total cost..........        $26,013,000
                             -------------------------------------------
IT Systems Modification:
    Cost per large issuer...         $1,000,000  .......................
    Cost per small issuer...           $205,000  .......................
    Total large issuer cost.     $1,678,000,000         1,678*$1,000,000
    Total small issuer cost.       $884,780,000           4,316*$205,000
                             -------------------------------------------
        Total costs.........     $2,562,780,000
                             -------------------------------------------
Conflict Minerals Report
 Audits:
    Issuers affected \761\..              4,500
    Number of large issuers.              1,260               4,500*0.72
    Number of small issuers.              3,240               4,500*0.28
    Large issuer cost.......           $100,000  .......................
    Small issuer cost.......            $25,000  .......................
    Total costs for large          $126,000,000           1,260*$100,000
     issuers................
    Total costs for small           $81,000,000            3,240*$25,000
     issuers................
                             -------------------------------------------
        Total costs.........       $207,000,000  .......................
                             -------------------------------------------
Supplier Due Diligence
 Reform:
    Average number of 1st                 1,060
     tier supply contracts
     per large issuer.......
    Average number of 1st                    86
     tier supply contracts
     per small issuer.......
    Overlap factor (percent                 0.4  .......................
     of suppliers affected).
    Total large suppliers...            711,472          1,678*1,060*0.4
    Total small suppliers...            148,470             4,316*86*0.4
    Number of compliance                    100  .......................
     hours for large
     supplier...............

[[Page 56340]]

 
    Number of compliance                     40  .......................
     hours for small
     supplier...............
    Internal cost per hour..                $50  .......................
    Internal costs for large     $3,201,624,000      711,472*100*0.9*$50
     supplier (90% of total
     work load).............
    Internal costs for small       $222,705,000      148,470*40*0.75*$50
     supplier (75% of total
     work load).............
    Consulting cost per hour               $200  .......................
    Consulting costs for         $1,422,944,000     711,472*100*0.1*$200
     large supplier (10% of
     total work load).......
    Consulting costs for           $296,940,000     148,470*40*0.25*$200
     small supplier (25% of
     total work load).......
------------------------------------------------------------------------
        Total cost..........     $5,144,213,000
------------------------------------------------------------------------
            Total...........     $7,940,006,000
------------------------------------------------------------------------

iv. Environmental Consultancy Company Comments
    An additional commentator, an environmental consultancy company, 
provided cost figures regarding the proposed rules.\762\ The 
environmental consultancy company asserted that the models provided by 
the manufacturing industry group and the university group significantly 
overestimated the costs of the proposed rules, whereas our PRA section 
underestimated the paperwork costs. Specifically, the commentator 
stated that the manufacturing industry association group's and the 
university group's ``estimates provide cost projections that do not 
reflect current industry practice in compliance programs by the vast 
majority of affected issuers,'' so it ``would be inadvisable to use'' 
their ``data as the basis for an accurate cost estimate for 
implementation of Section 1502.'' \763\
---------------------------------------------------------------------------

    \761\ We are using the rounded estimate (4,500) that was used by 
the university group and manufacturing industry association 
commentators in their calculations even though a more exact number 
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note 
869.
    \762\ See letter from Claigan I. In this letter, the commentator 
stated that it submitted its letter because it was asked ``by 
Congress and others'' to comment on the potential costs of 
implementing the final rule.
    \763\ See letter from Claigan Environmental Inc. (Jan. 17, 2012) 
(``Claigan IV''). But see letters from IPC--Association Connecting 
Electronics Industries (Feb. 14, 2012) (``IPC III'') and National 
Association of Manufacturers (Feb. 10, 2012) (``NAM IV'') 
(challenging certain of the assumptions made by the environmental 
consultancy company in its comment letters).
---------------------------------------------------------------------------

    Also, the environmental consultancy company argued that we 
underestimated the costs of the proposed rules primarily because we 
overestimated issuers' knowledge of the origin of materials in their 
products. According to the commentator, most of the compliance costs 
for the proposed rules would be derived from identifying where an 
issuer's materials are sourced. Further, the commentator suggested that 
our estimate of the percentage of affected issuers was too low, we did 
not recognize that issuers needed to expend greater internal efforts in 
communicating requirements throughout their companies, we failed to 
account for the costs of issuers' software changes, and we did not 
acknowledge that ``many companies'' may work to a higher standard than 
the rules would require due to public sensitivity of this issue.
    Conversely, the commentator asserted that the manufacturing 
industry group's $8 billion and the university group's $7.93 billion 
cost estimates were too high. The environmental consultancy company 
argued that the manufacturing industry group's estimate regarding the 
cost for issuers to modify legal responsibilities should be only $300 
million, instead of the manufacturing industry group's estimated $1.2 
billion.\764\ Similarly, the environmental consultancy company 
maintained that the university group's $5.17 billion estimate to 
strengthen internal management systems was too high because of 
incorrect assumptions, and that the actual cost should be only $600 
million.\765\
---------------------------------------------------------------------------

    \764\ According to the environmental consultancy company, the 
manufacturing industry group's assumption that every issuer would 
have to amend every legal obligation with its suppliers was 
incorrect because ``[a]ll standard contracts with suppliers of 
public companies contain standard provisions requiring suppliers to 
comply with relevant laws.'' Letter from Claigan I. As a result, it 
would be unlikely that many contracts would need to be modified to 
enable compliance. Also, the environmental consultancy company 
asserted that the manufacturing industry group overestimated the 
cost of modifying legal responsibilities because the manufacturing 
industry group assumed that every supplier supplies components or 
products containing conflict minerals to an issuer, which the 
environmental consultancy company claimed was ``very unlikely.'' 
Instead, a more reasonable estimate of the numbers of suppliers 
affected that would require a modification to its legal obligations 
``would be closer to 50% of suppliers.'' This commentator asserted 
that number, however, should be further reduced by an additional 50% 
due to duplicative and overlapping relationships within and among 
suppliers.
    \765\ The environmental consultancy company commentator noted 
that the university group commentator estimated that there were 
860,066 first tier suppliers. However, a 2008 study by the Consumer 
Electronics Association (``CEA'') on RoHS that identified only 
90,000 total electronic suppliers. In this regard, the environmental 
consultancy company noted that, although conflict minerals 
disclosure is required by more than just electronics industry 
issuers, ``the total number of affected first-tier suppliers being 
over 100,000 seems unrealistic based on this more substantiated 
information.'' Also, the environmental consultancy company noted 
that, in many cases, first-tier suppliers may not be supplying 
products or components containing conflict minerals, or these 
products or components will represent only a small fraction of their 
business.
---------------------------------------------------------------------------

    Further, the environmental consultancy company suggested that the 
manufacturing industry group's cost estimate regarding issuers' 
information technology systems should be adjusted from $6 billion to 
$350 million and that the university group's estimate should be 
adjusted from $2.56 billion to $360 million.\766\ Additionally, the 
environmental consultancy company asserted that the $100,000 per 
company audit costs provided by both the manufacturing industry group 
and the university group were too high because companies' financial 
statement audits represent only 0.2 to 0.25% of a company's annual 
revenue, which would mean that a $100,000 cost for a Conflict Minerals 
Report audit would represent 5% of the total audit costs for a company 
with a $1 billion per year revenue. Instead, the commentator argued 
that it would be more accurate to assume that the Conflict Minerals 
Report audit would represent 1% to 2% of the total audit costs for such 
a company.\767\ Also, the environmental consultancy company contended 
that only 50% of all reporting issuers would be required to provide a 
Conflict Minerals Report because the ``majority of Energy sector, 
finance and utilities

[[Page 56341]]

will not have to create'' a Conflict Minerals Report, and ``[n]o more 
than half of the consumer discretionary, consumer staples, and 
materials sectors is expected'' to provide a Conflict Minerals 
Report.\768\
---------------------------------------------------------------------------

    \766\ The environmental consultancy company commentator noted 
that the CEA study found that the average cost for information 
technology systems changes for RoHS was $120,000 per company, and it 
discovered that the most expensive conflict minerals software was 
$40,000 by conferring with a provider of conflict minerals 
compliance software to confirm that their most expensive software 
for conflict minerals compliance was $40,000 for the first year.
    \767\ In its second letter, however, the environmental 
consultancy company commentator acknowledged that it had limited 
expertise regarding estimates of the cost of third party audits. See 
letter from Claigan Environmental Inc. (Dec. 1, 2011) (``Claigan 
II'').
    \768\ See letter from Claigan I.
---------------------------------------------------------------------------

    Finally, the environmental consultancy company developed its own 
cost model,\769\ which was based on current service quotations in the 
industry and past costs for RoHS compliance based on the 2008 CEA 
study. In this regard, the commentator provided its estimate of the 
typical initial costs for affected issuers with revenue of $1 billion 
per year. Initially, in its first comment letter, the environmental 
consultancy company concluded that the proposal's compliance cost for a 
typical affected issuer with $1 billion of revenue would be 
approximately $315,000 per year.\770\
---------------------------------------------------------------------------

    \769\ Id.
    \770\ The environmental consultancy company commentator noted 
that the $315,000 per year cost would equate to approximately 0.03% 
of an issuer's revenue, but argued that, based on certain 
variations, the cost range could be anywhere between 0.02% and 0.05% 
of revenue. Id. The commentator stated further that the average cost 
of initial compliance with RoHS for a company with annual revenue of 
$1 billion was close to 0.8% of revenue. However, the commentator 
indicated that the data gathering and the software costs for RoHS 
was approximately 0.08% of the initial RoHS compliance costs, which 
the commentator argued was ``the same order of magnitude'' of its 
0.03% calculation. This commentator suggested that its ``slightly 
lower'' cost projections were due to less expensive conflict 
minerals software packages, as compared to RoHS, and the large data 
gathering cost for RoHS, the need to gather data for every part and 
create new part numbers for compliant parts, are not required for 
conflict minerals. The commentator noted also that, if the final 
rule would cause issuers to dispose of their current conflict 
mineral inventories because the conflict minerals were of 
indeterminate origin or our rule would not exempt conflict minerals 
from recycled or scrap sources, the expected costs of compliance 
would be closer to 0.5% of revenue.1 Finally, the commentator 
claimed that this initial cost of compliance is expected to increase 
by a factor of 2.5 for an issuer having ten times the annual revenue 
($10 billion) and decrease by a factor of 2.5 for an issuer with 10% 
of revenue ($100 million). Id.
---------------------------------------------------------------------------

    In a subsequent letter to us, the environmental consultancy company 
lowered its cost estimate.\771\ Instead of the $315,000 per issuer 
estimate in its initial letter, the environmental consultancy company 
argued that the cost per issuer for compliance would be closer to 
$213,000 per issuer because of ``more recent information on corporate 
budgeting and expenditures'' that ``better reflect current corporate 
implementation strategies.'' \772\ Further, in another letter, the 
environmental consultancy company lowered its cost estimate again to 
approximately $64,673 per issuer.\773\
---------------------------------------------------------------------------

    \771\ See letter from Claigan II.
    \772\ Id.
    \773\ See letter from Claigan III. In this letter, the 
environmental consultancy group commentator broke down the number of 
affected issuers by size and cost per issuer based on that size. The 
commentator determined that the total cost to 6,000 affected issuers 
would be $387,650,000, which would be $64,608 per issuer. However, 
because we estimated that there would be 5,994 affected issuers, we 
divided the $387,650,000 by 5,994 issuer to come up with $64,673 per 
issuer. See also letter from Assent Compliance (Dec. 19, 2011) 
(``Assent'') (discussing the software costs to issuers for 
implementing Section 1502, which apparently was included as part of 
the overall cost calculation in the letter from Claigan III). 
Further, the environmental consultancy company commentator provided 
an additional comment letter that did not revise its cost estimate, 
but expanded upon differences between costing estimates it submitted 
and previous costing estimates submitted by the manufacturing 
industry association and university group commentators. See letter 
from Claigan IV.
---------------------------------------------------------------------------

v. Other Specific Comments
    One commentator, an environmental research company, discussed some 
of the specific cost estimates above and discussed some cost estimates 
it gathered through interviews with potentially affected issuers.\774\ 
This commentator conducted a study, sponsored by Global Witness, based 
on interviews with executives at more than 20 global companies that 
ranged in size from $500 million per year in revenue to over $120 
billion in annual revenue, including companies engaged in electronic 
components, computers, consumer health care, automotive, and retail. 
Also, the commentator spoke with industry associations, consulting 
firms, and software providers.
---------------------------------------------------------------------------

    \774\ See letter from Green II. At the end of the letter, the 
commentator describes itself as a ``research, advisory and 
consulting firm focusing on clean tech, alternative energy and 
corporate sustainability.''
---------------------------------------------------------------------------

    Generally, the commentator found that, based on its interviews, 
costs for complying with the provision ``will vary widely with the size 
and complexity of companies' supply chains but seem to be manageable 
for all company sizes.'' \775\ In this regard, the commentator also 
found that the better informed executives were regarding the Conflict 
Minerals Statutory Provision and its impacts on their company, the more 
likely they thought the costs of compliance would be manageable. The 
commentator stated that the largest companies with annual revenues over 
$50 billion would have one-time costs ranging from $500,000 to $2 
million, but the companies with well-developed responsible sourcing 
systems may only need to spend half as much. Also, the commentator 
found that many smaller companies ``should be able to meet their 
obligations for less than the cost of a full-time employee in the first 
year with costs declining over time.'' \776\
---------------------------------------------------------------------------

    \775\ See id.
    \776\ See id.
---------------------------------------------------------------------------

    Regarding the above cost estimates by other commentators, the 
commentator argued that the manufacturing industry association 
commentator's cost estimate ``significantly overstates the costs most 
companies will incur, especially those of updating IT systems.'' \777\ 
Also, the commentator noted that the electronic interconnect industry 
commentator's cost estimate was overstated because the estimate 
included electronics manufacturing services companies, and that 
industry is ``dominated by very large companies,'' which ``probably 
account[ed] for the higher median cost estimates.'' \778\ Further, the 
commentator noted of the environmental consultancy company 
commentator's letter that the ``relative magnitude of the costs shown 
by the [environmental consultancy company commentator] estimate are 
aligned with what [environmental research company commentator] found in 
[its] interviews: that the effort to gather reliable data from supply 
chain partners is likely to be more costly initially than any systems 
changes required.'' \779\
---------------------------------------------------------------------------

    \777\ See id.
    \778\ See id.
    \779\ See id.
---------------------------------------------------------------------------

    Another commentator that is attempting to establish a due diligence 
``bag-and-tag'' monitoring system in the Covered Countries asserted 
that the total costs incurred by local governments and industry as a 
whole just for the on-the-ground set-up and implementation of this 
system in the Covered Countries would be $52 million for the first 
year.\780\ This commentator noted that this $52 million estimate is 
much higher than our $8 to $10 million estimated cost for setting up a 
mineral source validation scheme in the Proposing Release. Similarly, 
another commentator provided the February 2011 five-year plan of the 
organization that administers the bag-and-tag scheme.\781\ The 
commentator noted that, according to the five-year plan, ``the cost of 
cleanly bagged-and-tagged minerals, including taxes, will remain below 
the world market price.'' \782\ Also, according to the document 
provided, it appears that the funding requirements for the bag-and-tag 
scheme, including a 10% contingency, in Eastern DRC and

[[Page 56342]]

Rwanda will be approximately $38,971,000 from 2011 through 2015.
---------------------------------------------------------------------------

    \780\ See letter from ITRI II.
    \781\ Representative Jim McDermott (Oct. 12, 2011) (``Rep. 
McDermott'') (providing the five-year plan authored by iTSCi, the 
International Tin Research Institute's Tin Supply Chain Initiative, 
in February 2011).
    \782\ Id.
---------------------------------------------------------------------------

    Also, this commentator stated that trading companies, transporters, 
and concentrate treatment facilities that continue to trade with the 
Covered Countries would incur additional costs in relation to the 
greatly increased levels of administration and auditing that ``may 
amount to an additional man year,'' which is ``approximately US$100,000 
per year'' per trading company, transporter, and concentrate treatment 
facility going forward.\783\ The costs to trading companies, 
transporters, and concentrate treatment facilities that stop treating 
minerals from the Covered Countries would be less ``but still of 
significance.'' The commentator estimated that these companies' costs 
could ``perhaps be an additional half a man year,'' which would be 
approximately $50,000 per year per company. Further, this commentator 
indicated that smelters and processing facilities may be requested to 
perform an independent audit every six months or every year, which 
would cost these smelters and processing facilities approximately 
$60,000 per audit. Finally, the commentator argued that the ``sum cost 
of new auditing requirements and increasing burden of documentation in 
the international supply chain may amount to a total of US$7 million 
per year.''
---------------------------------------------------------------------------

    \783\ See letter from ITRI II.
---------------------------------------------------------------------------

    A few commentators provided other, less specific cost estimates. 
One commentator indicated that it would require 1,400 hours in the 
first year working with its suppliers to implement the proposed rules 
and an additional 700 hours in each subsequent year to comply with the 
proposed rules.\784\ The commentator calculated this figure by using 
the 450 different materials the commentator would have to research, and 
estimated that it would require three hours per material, which would 
equate to approximately 1,400 hours.\785\ The commentator stated that 
this estimate did ``not take into account the days and weeks that will 
be required to write any required reports and work with auditors.'' 
Although the commentator provided an estimate of the number of hours 
required to comply with the rules, it did not disclose the costs 
associated with its number of estimated hours. The commentator noted, 
however, that it is ``a relatively small company, [and] these costs 
will be multiplied many times throughout the entire economy.''
---------------------------------------------------------------------------

    \784\ See letter from TriQuint I.
    \785\ Id. The commentator did not provide a similar breakdown of 
its calculation regarding its 700 hour per subsequent year estimate.
---------------------------------------------------------------------------

    Another commentator indicated that ``the initial cost for 
establishing record keeping processes, staffing, and identifying the 
contacts throughout the supply chain will run approximately [four 
times] the on-going annual staffing [and] cost for certification.'' 
\786\ In addition, this commentator asserted that the ``software to 
track and retain these records for [five to ten] years could add 
another [two times] the annual cost for certification.'' \787\ 
Ultimately, although the commentator did not disclose the actual costs 
associated with its estimates, it concluded that complying with the 
proposed rules would be ``very expensive'' for even one year.
---------------------------------------------------------------------------

    \786\ See letter from Teggeman.
    \787\ See id.
---------------------------------------------------------------------------

    Another commentator argued that the costs of the proposed rules to 
implement the statute would be expensive even for an issuer with 
existing systems in place to track inputs in the supply chain because 
such an issuer would still have to add capability to its existing 
systems, provide additional supplier training, and revise its existing 
information technology systems.\788\ A few commentators noted Apple 
Inc.'s Supplier Responsibility 2011 Progress Report.\789\ As one of 
these commentators noted, Apple investigated the use of extractives at 
all levels of its supply base and mapped its supply chain to the 
smelter level to know which of its suppliers are using tantalum, tin, 
tungsten, or gold and from where they are receiving the metal.\790\ 
Accordingly, Apple determined that it has a total of 142 suppliers of 
conflict minerals.\791\ Some commentators asserted that the costs of 
the proposed rules could be disproportionally higher to smaller 
issuers.\792\ Other commentators asserted that the Proposing Release 
failed to account for the costs to non-issuers, which would be 
significant.\793\
---------------------------------------------------------------------------

    \788\ See letter from Ford.
    \789\ See, e.g., letters from Enough Project I (citing to Apple 
Inc.'s Supplier Responsibility 2011 Progress Report at https://images.apple.com/supplierresponsibility/pdf/Apple_SR_2011_Progress_Report.pdf), Enough Project IV, and Fafo (citing to https://images.apple.com/supplierresponsibility/pdf/Apple_SR_2011_Progress_Report.pdf).
    \790\ See letter from Enough Project I.
    \791\ See letters from Enough Project IV and Fafo.
    \792\ See letter from Howland.
    \793\ See letters from NAM I and WGC II.
---------------------------------------------------------------------------

    Other commentators asserted also that the $25,000 estimated audit 
cost is not the correct cost for the type of audit that would be 
required.\794\ One such commentator noted that the ``cost of an 
independent audit [sic] of $25,000 is also not specifically for the 
type of audits that would be required either on the upstream supply 
chain, or at the smelters.'' \795\ Another commentator stated that we 
``did not specify the scope of the independent private sector audit of 
the Conflict Minerals Report'' in the Proposing Release, and our 
$25,000 estimate would correspond only to an audit of whether the 
issuer's Conflict Minerals Report accurately describes the due 
diligence the issuer exercised.\796\ According to this commentator, 
this cost estimate, however, could be far higher depending on the audit 
scope to be outlined in the final rule. A further commentator indicated 
that our assumptions about the scope and objective of the audit in the 
Proposing Release were not clear, but it appeared that the estimate 
``may depend on a company relying on an industry-wide due diligence 
process and that company being able to conclude that its conflict 
minerals did not originate in a DRC country.'' \797\ This commentator 
stated that it was not aware of any such industry-wide due diligence 
process in place.
---------------------------------------------------------------------------

    \794\ See letters from CTIA, ITRI I, and KPMG.
    \795\ See letter from ITRI I.
    \796\ See letter from CTIA.
    \797\ See letter from KPMG.
---------------------------------------------------------------------------

C. Benefits and Costs Resulting From Commission's Exercise of 
Discretion

    As discussed in detail in Section II, we have revised the rules 
from the Proposing Release to address comments we received while 
remaining faithful to the language and intent of the statute as adopted 
by Congress. In addition to the statutory benefits and costs noted 
above, we believe that the use of our discretion in implementing the 
statutory requirements will result in a number of benefits and costs to 
issuers and users of the conflict minerals information. Below, we 
discuss the most significant choices we made in implementing the 
statute and the associated benefits and costs. We are unable to 
quantify the impact of each of the decisions we discuss below with any 
precision because reliable, empirical evidence regarding the effects is 
not readily available to the Commission, and commentators did not 
provide sufficient information to allow us to do so. Thus, in this 
section, our discussion on the costs and benefits of our individual 
discretionary choices is qualitative. Later in the release, we present 
a quantified analysis on the overall costs and benefits of the final 
rule that includes all aspects of the implementation of the statute.

[[Page 56343]]

1. Reasonable Country of Origin Inquiry
    The Conflict Minerals Statutory Provision requires any issuer with 
necessary conflict minerals that ``did originate'' in the Covered 
Countries to provide a Conflict Minerals Report.\798\ The provision, 
however, does not specify how an issuer is to determine whether its 
conflict minerals originated in the Covered Countries. The provision 
states only that any issuer with such conflict minerals must submit a 
report to us that describes, among other matters, the measures taken by 
the issuer to determine the source and chain of custody of those 
conflict minerals.
---------------------------------------------------------------------------

    \798\ Exchange Act Section 13(p)(1)(A).
---------------------------------------------------------------------------

    We used our discretion in the final rule to require that issuers 
covered by Section 1502 of the Act conduct a good faith ``reasonable 
country of origin inquiry'' that is reasonably designed to determine 
whether their conflict minerals originated in the Covered Countries or 
are from recycled or scrap sources. We do not specify what would 
constitute a ``reasonable country of origin inquiry.'' We believe that 
this decision to employ a performance standard rather than a design 
standard should benefit issuers by allowing them the flexibility to use 
the reasonable country of origin inquiry standard that is best suited 
to their circumstances.
    Although the final rule does not specify what would constitute a 
reasonable country of origin inquiry, it requires that the issuer 
conduct in good faith an inquiry that is reasonably designed to 
determine whether any of its conflict minerals originated in the 
Covered Countries or came from recycled or scrap sources. Although the 
proposal did not state explicitly that an issuer must reasonably design 
its inquiry and conduct it in good faith, we believe that this is not a 
change from the proposal, but a clarification of the proposal's intent. 
We believe providing this clarification will facilitate compliance with 
the rule by providing further guidance to issuers about what is 
required to satisfy the reasonable country of origin inquiry. Other 
than being reasonably designed and performed in good faith, however, 
the final rule does not require issuers to conduct an exhaustive 
inquiry to establish to a certainty whether their conflict minerals 
originated in Covered Countries or came from recycled or scrap sources. 
We believe this is appropriate because, under the Conflict Minerals 
Statutory Provision, issuers are required to ascertain whether their 
conflict minerals did originate in the Covered Countries to know 
whether they must submit a Conflict Minerals Report. Therefore, some 
inquiry is necessary.
    We could have required an issuer to exercise due diligence in 
determining whether its conflict minerals originated in the Covered 
Countries or came from recycled or scrap sources. We also could have 
required an exhaustive inquiry in which an issuer would be required to 
determine to a certainty whether each mineral originated in the Covered 
Countries. However, while these would be plausible alternatives, such 
inquiries likely would be more costly, and we do not believe those 
approaches are necessary. Instead, we believe the reasonable country of 
origin inquiry standard provides a clear way for issuers to make the 
necessary determination and does so in a more cost-effective manner. 
The reasonable country of origin inquiry is consistent with the 
supplier engagement approach in the OECD guidance where issuers use a 
range of tools and methods to engage with their suppliers.\799\ The 
results of the inquiry may or may not trigger due diligence. This is 
the first step issuers take under the OECD guidance to determine if the 
further work outlined in the OECD guidance--due diligence--is 
necessary. The Conflict Minerals Statutory Provision specifically 
contemplates due diligence, which goes beyond inquiry and involves 
further steps to establish the truth or accuracy of relevant 
information, by requiring a description of the measures the issuer took 
to exercise due diligence on the source and chain of custody of the 
minerals. The Conflict Minerals Statutory Provision specifically notes 
that due diligence includes the audit discussed below.
---------------------------------------------------------------------------

    \799\ In June 2012, the OECD issued a report regarding 
implementation of the OECD guidance. See OECD, Downstream 
Implementation of the OECD Due Diligence Guidance for Responsible 
Supply Chains of Minerals from Conflict-Affected and High-Risk 
Areas, Cycle 2 Interim Progress Report on the Supplement on Tin, 
Tantalum, and Tungsten Final Draft (June 2012), available at https://www.oecd.org/investment/guidelinesformultinationalenterprises/Downstream%20cycle%202%20report%20-%20Edited%20Final%20-%201%20June.pdf. This additional guidance includes sample letters to 
suppliers and customers regarding the use of conflict minerals.
---------------------------------------------------------------------------

    We recognize that our reasonable country of origin approach is 
broad enough that some issuers might perform an insufficiently rigorous 
inquiry and some issuers might perform an overly rigorous inquiry. An 
insufficiently rigorous inquiry could result in an erroneous 
determination that the issuer is not required to submit a Conflict 
Minerals Report, thus reducing the utility of the disclosure with 
respect to the issuer's use of conflict minerals. An overly rigorous 
inquiry, on the other hand, could cause issuers to incur greater costs 
than they would otherwise. We believe, however, that the requirement 
that issuers make certain disclosures about the particular reasonable 
country of origin inquiry they undertook mitigates concerns about an 
insufficiently rigorous inquiry. Similarly, we believe our guidance 
that issuers need only conduct an inquiry reasonably designed to 
determine whether conflict minerals originated in the Covered Countries 
mitigates concerns about an overly rigorous inquiry. Overall, we 
believe that the benefit of mitigating issuer compliance costs 
justifies the ``reasonable country of origin'' approach we have chosen.
    Also, in a change from the proposal, the final rule establishes a 
different standard for the issuer in determining, based on its 
reasonable country of origin inquiry, whether due diligence on the 
conflict minerals' source and chain of custody and a Conflict Minerals 
Report is required. The proposed rules would have required an issuer to 
conduct due diligence and provide a Conflict Minerals Report, based on 
its reasonable country of origin inquiry, if, among other conclusions, 
the issuer was unable to determine that its conflict minerals did not 
originate in the Covered Countries or came from recycled or scrap 
sources. Under the proposal, issuers could only avoid providing a 
Conflict Minerals Report if they could prove a negative--that their 
conflict minerals did not originate in the Covered Countries. That 
approach would arguably have been more burdensome than necessary to 
accomplish the purpose of the statutory provision.
    Under the final rule, however, an issuer must exercise due 
diligence on its conflict minerals' source and chain of custody and 
potentially provide a Conflict Minerals Report if the issuer knows that 
its necessary conflict minerals originated in the Covered Countries and 
did not come from recycled or scrap sources, or has reason to believe 
that its necessary conflict minerals may have originated in the Covered 
Countries and may not have come from recycled or scrap sources. This 
new approach does not require an issuer to prove a negative to avoid 
performing due diligence, but it also does not allow an issuer to 
ignore warning signs or circumstances reasonably indicating that its 
conflict minerals may have originated in the Covered Countries or may 
not have been from recycled or scrap sources. This approach should 
reduce the total costs

[[Page 56344]]

of the final rule, by enabling an issuer that, following a reasonable 
country of origin inquiry, is unable to determine that its conflict 
minerals did not originate in the Covered Countries or come from 
recycled or scrap sources, but has no reason to believe that its 
necessary conflict minerals may have originated in the Covered 
Countries or do not come from recycled or scrap sources, to fully 
comply with the rule without conducting due diligence, obtaining an 
audit, or preparing and filing a Conflicts Mineral Report.
    We realize that requiring a Conflict Minerals Report if, after 
exercising a reasonable country of origin inquiry, the issuer has 
reason to believe that it has necessary conflict minerals that may have 
originated in the Covered Countries and may not have come from recycled 
or scrap sources will be more costly than only requiring a report if 
the issuer has affirmatively determined that its minerals did come from 
the Covered Countries. However, as already discussed, we believe that 
such an approach is required to achieve the benefits intended by the 
statute. Moreover, this approach provides an appropriate balance 
compared to the more costly possible approach of requiring an issuer to 
submit a Conflict Minerals Report unless it determines to a certainty 
that its necessary conflict minerals did not originate in the Covered 
Countries.
    This approach regarding when an issuer must exercise due diligence 
as to the source and chain of custody of its conflict minerals and 
provide a Conflict Minerals Report could increase costs of the final 
rule. Some issuers may expend more resources than necessary to satisfy 
the standard in order to assure themselves that their minerals did not 
originate in the Covered Countries. On the other hand, other issuers 
may expend insufficient resources which could lead to inadequate 
inquiries. However, we anticipate that overall this approach will 
result in fewer issuers engaging in due diligence and providing a 
Conflict Minerals Report because, although an issuer may not be able to 
determine to a certainty, even after a reasonable country of origin 
inquiry, that its conflict minerals did not originate in the Covered 
Countries or are from recycled and scrap sources, that issuer may have 
no reason to believe that its necessary conflict minerals may have 
originated in the Covered Countries and not come from recycled or scrap 
sources. This situation will reduce costs to such issuers because those 
issuers are not required to exercise due diligence and provide a 
Conflict Minerals Report.
    In a further change from the proposal, the final rule requires an 
issuer that determines that, following its reasonable country of origin 
inquiry, its conflict minerals did not originate in the Covered 
Countries or come from recycled or scrap sources or has no reason to 
believe that its necessary conflict minerals may have originated in the 
Covered Countries or did not come from recycled or scrap sources to 
provide a brief description of the results of that inquiry. The 
proposal required issuers to disclose their reasonable country of 
origin inquiry and their determination based on that inquiry. Compared 
to an alternative that does not require such description, this 
requirement will increase the disclosure costs to issuers. However, the 
disclosure will enable users of the information to assess more 
thoroughly the issuer's reasonable country of origin design and its 
efforts in carrying out that design. This information will allow 
stakeholders to form their own views on the reasonableness of the 
issuer's efforts and track those efforts over a number of years. Based 
on this information, stakeholders could advocate for different 
processes for individual issuers if they believe it is necessary, 
thereby maximizing the potential benefits of the performance-based 
approach we are adopting.
    Additionally, we revised the final rule from the proposal so that, 
following its reasonable country of origin inquiry, an issuer that 
determines its conflict mineral did not originate in the Covered 
Countries is not required to keep reviewable records for five years. We 
believe this decision should benefit issuers by allowing them greater 
flexibility and by reducing their compliance costs because they no 
longer have a record retention cost, which should reduce the overall 
costs involved as compared to the other possible methods of 
implementing the statute.
2. Information in the Specialized Disclosure Report
    We revised the final rule from the proposal so that an issuer that 
must file a Conflict Minerals Report is not required to disclose, in 
its specialized disclosure report under a separate ``Conflict Minerals 
Disclosure'' heading, the reason it is filing its Conflict Minerals 
Report. Similarly, the final rule does not require an issuer to 
disclose in its specialized disclosure report that it has provided an 
audit report or a certification of the audit because the audit report 
and certification are part of the Conflict Minerals Report already, so 
specifically mentioning the audit report or certification here is not 
necessary and may be confusing. Instead, the issuer must only disclose 
that a Conflict Minerals Report is provided as an exhibit to its 
specialized disclosure report and a link to its Internet Web site where 
the Conflict Minerals Report is publicly available. We believe these 
decisions should benefit issuers by not requiring them to provide as 
much disclosure in the specialized disclosure report, which should 
reduce the costs involved as compared to the other possible methods of 
implementing the statute. However, we do not believe that such 
decisions will reduce the benefits to be achieved by the final rule, 
because the information that the proposal required to be disclosed in 
the specialized disclosure report is already provided in the Conflict 
Minerals Report, which is required to be filed as an exhibit to Form 
SD.
3. ``DRC Conflict Undeterminable'' Determination
    The final rule temporarily permits issuers to describe their 
products as ``DRC conflict undeterminable'' if they are required to 
file a Conflict Minerals Report and are either unable to determine that 
their conflict minerals did not originate in the Covered Countries or 
are unable to determine that their conflict minerals that originated or 
may have originated in the Covered Countries did not directly or 
indirectly benefit or finance armed groups in the Covered Countries. An 
issuer with products that are ``DRC conflict undeterminable'' is 
required to exercise due diligence on the source and chain of custody 
of its conflict minerals and submit a Conflict Minerals Report 
describing the due diligence, the country of origin of the conflict 
minerals, if known, the facilities used to process the conflict 
minerals, if known, and the efforts to determine the mine or location 
of origin with the greatest possible specificity. Also, such an issuer 
is required to describe its products containing these conflict minerals 
as ``DRC conflict undeterminable,'' rather than stating that they have 
not been found to be ``DRC conflict free.'' An issuer with such 
conflict minerals, however, is not required to obtain an independent 
private sector audit of that Conflict Minerals Report. This reporting 
alternative is temporary and will be available only during the first 
two reporting cycles following the effectiveness of the final rule for 
all issuers, which includes the specialized disclosure reports for 2013 
and 2014, and the first four reporting cycles following the 
effectiveness of the final rule for smaller reporting companies,

[[Page 56345]]

which includes the specialized disclosure reports for 2013 through 
2016. After these times, an issuer unable to determine that its 
conflict minerals did not originate in the Covered Countries or unable 
to determine that its conflict minerals that originated or may have 
originated in the Covered Countries did not directly or indirectly 
finance or benefit armed groups in the Covered Countries must describe 
its products containing those minerals as having not been found to be 
``DRC conflict free'' and provide an independent private sector audit 
of its Conflict Minerals Report.
    This temporary provision will have the benefit of lowering the 
initial costs of the rule both because an audit will not be required 
and because, to the extent issuers suffer negative consequences from 
disclosure that their products have not been found to be ``DRC conflict 
free,'' those consequences would likely not be as significant for an 
issuer that is able to disclose that it has conducted due diligence on 
its conflict minerals and not found a connection to armed groups. We 
believe that not requiring an independent private sector audit of the 
Conflict Minerals Report during this temporary period is appropriate 
because an audit of the design of an issuer's due diligence that 
results in an undeterminable conclusion would not appear to have a 
meaningful incremental benefit. Also, we recognize the concerns about 
the feasibility of preparing the required disclosure in the near term 
because of the stage of development of the supply chain tracing 
mechanisms. We adopted this temporary provision to allow sufficient 
time for more comprehensive tracking systems to be developed by 
industry and trade groups. The development and use of such 
comprehensive tracking systems should improve due diligence performance 
and lower the cost of compliance with the statute by reducing 
duplication and taking advantage of economies of scale. We believe that 
a two-year period for issuers with an indeterminate conclusion is 
appropriate because this appeared to be the approximate amount of time 
that many commentators stated would be necessary to establish 
traceability systems in the Covered Countries.\800\ Also, we believe 
that a four-year period for smaller reporting companies with an 
indeterminate conclusion is appropriate because they may have fewer 
resources to implement the final rule and may lack the leverage to 
obtain detailed information regarding the source of a particular 
conflict mineral.\801\
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    \800\ See, e.g., letters from AdvaMed I, FEC I, JVC et al. II, 
Plexus, Verizon, and WilmerHale.
    \801\ Using the cost of audit estimates provided by the 
university group and the manufacturing industry group commentators, 
which we also use below, we estimate that this exercise of 
discretion by the Commission would reduce the initial compliance 
cost of a small issuer by approximately $25,000 and the initial 
compliance cost of a large issuer by approximately $100,000 per year 
for each year of the applicable temporary period based upon the 
analysis of the university group commentator.
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    Issuers that are unable to determine, following their exercise of 
due diligence, that their conflict minerals did not originate in the 
Covered Countries; that their conflict minerals that originated in the 
Covered Countries did not directly or indirectly finance or benefit 
armed groups in the Covered Countries; or, after their exercise of due 
diligence, are unable to determine that their conflict minerals came 
from recycled or scrap sources are required to file a Conflicts 
Minerals Report describing, among other matters, the due diligence they 
exercised and the steps they have taken or will take, if any, since the 
end of the period covered in their most recent prior Conflict Minerals 
Report to mitigate the risk that their necessary conflict minerals 
benefit armed groups, including any steps to improve their due 
diligence. After the transition period, such issuers will be required 
to include an independent private sector audit of their Conflict 
Minerals Reports with respect to those minerals, which is likely to 
increase costs for those issuers. One commentator argued that ``Section 
1502 does not require an issuer that has been unable to determine 
(after a proper inquiry) the source of its conflict minerals * * * to 
provide a Conflict Minerals Report.'' \802\ As discussed above, we 
believe the process that better reflects the statutory intent is as 
follows:
---------------------------------------------------------------------------

    \802\ See letter from Cleary Gottlieb.
---------------------------------------------------------------------------

     An issuer that, following a reasonable country of origin 
inquiry, has reason to believe that its necessary conflict minerals may 
have originated in the Covered Countries, and may not be from recycled 
or scrap sources, must conduct due diligence on the source and custody 
of such conflict minerals, in accordance with a nationally or 
internationally recognized due diligence framework, and
     If, following such due diligence, such issuer is unable to 
determine that such conflict minerals did not originate in the Covered 
Countries (and is unable to determine that such conflict minerals are 
from recycled or scrap sources), then such issuer is required to submit 
a Conflict Minerals Report.
    While this approach may add to the overall costs of compliance, we 
do not believe the alternative reading suggested by commentators is 
consistent with the purposes of the statute. The final rule's temporary 
provision for ``DRC conflict undeterminable'' products, however, is 
designed to reduce compliance costs during the transition period.
4. ``Contract To Manufacture''
    As discussed above, the final rule applies to issuers that contract 
to manufacture products. This requirement is based on our 
interpretation of the statute in light of our understanding of the 
statutory intent and a reading of the statute's text. We recognize that 
this approach affects the overall compliance costs and burdens, in 
particular, on the subset of issuers that contract to manufacture 
products. However, we have sought to mitigate these costs by not 
defining the term ``contract to manufacture'' in the final rule, and 
instead letting issuers determine based on their own facts and 
circumstances which of their products have conflict minerals that may 
trigger a reporting obligation.
    Compared to the alternative approach of defining this term, our 
decision not to define the term provides issuers with significant 
flexibility to use a definition that applies best to their particular 
circumstances. Such flexibility may lower issuers' compliance costs to 
the extent any definition could have been overbroad. But, we also 
recognize that our decision not to define this phrase could increase 
uncertainty for issuers on how the phrase should be implemented and may 
result in additional costs to some issuers. For example, the 
uncertainty associated with leaving the phrase undefined could lead 
some issuers to interpret the definitions in a manner that is more 
expansive than if the phrase was defined, thus incurring a higher 
compliance cost than is necessary. In this regard, some issuers may 
decide to use more internal or external resources than if this phrase 
was defined to make sure they are compliant with the rule, which would 
also increase compliance costs. The lack of a clear definition could 
also result in a diminishment of the benefit if some issuers are less 
rigorous in determining and reporting on their products that have 
conflict minerals, which would reduce the utility of their disclosure. 
Overall, however, we believe the potential benefit of flexibility 
outweighs the potential increases in costs.
    In the proposal, we expressed our view that an issuer that does not 
manufacture a product itself but that has ``any'' influence over the 
product's manufacturing should be considered to be contracting to 
manufacture that

[[Page 56346]]

product. Also, we expressed our view that an issuer that offers a 
generic product under its own brand name or a separate brand name 
should be considered to be contracting to manufacture that product so 
long as the issuer had contracted to have the product manufactured 
specifically for itself. As noted in the Proposing Release, we had 
believed that these issuers should have been considered to be 
contracting those products to be manufactured because the issuers would 
implicitly influence the manufacturing of the products. However, we are 
persuaded by commentators that this level of control set forth in the 
Proposing Release was ``overbroad'' and ``confusing'' and would impose 
on such an issuer ``significant,'' ``unrealistic,'' and ``costly'' 
burdens.\803\ Therefore, we provide guidance indicating that an issuer 
is considered to be contracting to manufacture a product depending on 
the degree of influence it exercises over the materials, parts, 
ingredients, or components to be included in any product as well as 
examples. We believe that this guidance may decrease issuers' 
flexibility for some issuers, but it will provide more certainty for 
others.
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    \803\ See, e.g., letters from ABA, AT&T, Corporate Secretaries 
I, Davis Polk, and Verizon. See also letter from NRF I (stating that 
our proposed approach would be ``draconian'').
---------------------------------------------------------------------------

5. Nationally or Internationally Recognized Due Diligence Framework 
(Including Gold)
    Although Exchange Act Section 13(p)(1)(A)(i) requires issuers to 
describe the measures taken to exercise due diligence, the provision 
does not indicate the due diligence required. The final rule's 
requirement that issuers use a nationally or internationally recognized 
due diligence framework in their Conflict Minerals Reports may result 
in a certain degree of standardization in the preparation of the 
disclosure and may reduce audit costs by focusing the audit. To the 
extent issuers tend to use the same due diligence framework, this 
standardization will benefit users of the information by making the 
Conflict Minerals Reports easier to compare, thus reducing costs for 
users of comparing information across issuers.
    Also, requiring a nationally or internationally recognized due 
diligence framework allows us to provide a clear audit objective that 
includes whether the design of an issuer's due diligence measures is in 
conformity with the criteria set forth in the nationally or 
internationally recognized due diligence framework and whether an 
issuer's description of the due diligence measures it performed is 
consistent with the due diligence process it undertook. As discussed 
below, having a clear audit objective based on the design of an 
issuer's due diligence framework lowers audit costs compared with a 
rule that does not require a specified framework because it focuses the 
scope of the audit that must be performed and, therefore, makes the 
audit less time-consuming and less costly.
    Further, the final rule requires that an issuer's due diligence 
follow a nationally or internationally recognized due diligence 
framework that is established by a body or group that has followed due-
process procedures, including the broad distribution of the framework 
for public comment, and is consistent with the criteria standards in 
GAGAS established by the GAO. This requirement improves the credibility 
and usefulness of the reports. Also, requiring adherence to a 
nationally or internationally recognized due diligence framework will 
provide issuers with a degree of certainty that their due diligence 
process is reliable and will pass a regulatory review. However, this 
requirement also will limit the issuer's flexibility in determining the 
source of origin and chain of custody of their conflict minerals. If 
the established requirement is more burdensome than what the issuer 
might have otherwise considered sufficient due diligence, it might make 
it more costly for issuers compared to using a due diligence process 
based on their own facts and circumstances.
6. Liability for the Audit and Audit Certifications
    Exchange Act Section 13(p)(1)(A)(i) requires the independent 
private sector audit to be conducted in accordance with the standards 
established by the GAO. Exchange Act Section 13(p)(1)(B) states that 
the issuer must certify the audit and that certified audit constitutes 
a critical component of due diligence.\804\ Under the final rule, an 
issuer's audit certification is in the form of a statement in the 
Conflict Minerals Report that the issuer obtained an independent 
private sector audit. This should benefit issuers by not subjecting 
individuals employed by the issuer to liability for the information in 
the Conflict Minerals Report or the audit. Additionally, the final rule 
does not require an auditor to assume expert liability regarding the 
audit because the audit report would not be incorporated by reference 
or otherwise included in Securities Act filings. Therefore, depending 
on the state of competition in the market for independent private 
sector audits, not requiring the assumption of such liability may 
result in lower audit fees, which in turn should decrease conflict 
minerals-reporting companies' cost of compliance with the statute. 
However, not requiring the certification to be signed by an officer and 
not requiring an auditor to assume expert liability could decrease the 
benefits of the rule if it results in issuers taking less care in their 
certifications and auditors conducting less thorough audits.
---------------------------------------------------------------------------

    \804\ As noted elsewhere in this release, the staff of the GAO 
has indicated to our staff that the GAO does not intend to publish 
standards for the independent private sector audit and that GAGAS' 
Performance Audit or Attestation Engagement standards can be used 
for these audits. See U.S. Gov't Accountability Office, GAO-12-331G, 
Government Auditing Standards 2011 Revision (Dec. 2011), available 
at https://www.gao.gov/assets/590/587281.pdf. Therefore, to conduct 
an independent private sector audit, an auditor must comply with 
certain quality control procedures and peer reviews, which are 
required under the GAGAS Performance Audit and Attestation 
Engagement standards. The GAGAS Attestation Engagement standards, in 
Chapter 3.75, require that auditors be ``licensed certified public 
accountants, persons working for a licensed certified public 
accounting firm or for a government auditing organization, or 
licensed accountants in states that have multi-class licensing 
systems that recognize licensed accountants other than certified 
public accountants.'' Unlike the GAGAS Attestation Engagement 
standard, the GAGAS Performance Audit standard allows auditors other 
than certified public accountants to perform a Performance Audit, 
provided the auditor complies with the applicable qualification 
requirements under GAGAS, which will increase the number of firms 
eligible to conduct the private sector audits. Increasing the number 
of firms that are eligible to conduct the independent private sector 
audits should increase competition, which should make it less costly 
for an issuer to obtain such an audit.
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7. Audit Objective
    The final rule provides a clear audit objective. We believe that 
the audit is meaningful because investors and other users will have 
some assurance from an independent third party that the issuer's due 
diligence framework, as set forth in the Conflict Minerals Report, is 
designed in conformity with the relevant nationally or internationally 
recognized due diligence framework, and that the issuer actually 
performed the due diligence measures that it represents that it 
performed in the Conflict Minerals Report. We recognize that an audit 
objective requiring an auditor to express an opinion or conclusion as 
to the design and description of an issuer's due diligence measures is 
not as comprehensive as an audit objective requiring an auditor to 
express an opinion or conclusion as to the effectiveness of due 
diligence measures or the accuracy of conclusions in the Conflict 
Minerals Report. However, we believe that the audit will

[[Page 56347]]

still be meaningful because it will provide some assurance from an 
independent third party that the issuer's due diligence framework is 
designed in conformity with the relevant nationally or internationally 
recognized due diligence framework and that the issuer actually 
performed the due diligence measures as they were described.
    With respect to what audit objective is appropriate, we considered 
the following possible audit objective alternatives from commentators: 
whether management's description of procedures and controls performed 
in their due diligence process are fairly described in the report; 
whether an issuer's design of its due diligence process described in 
the report conformed to a recognized standard of due diligence; whether 
management's description of an issuer's due diligence process in its 
report is accurate, the results of that process are fairly stated, and 
the issuer has evaluated/identified the upstream and downstream due 
diligence processes; whether the design of the due diligence process 
described in the report conformed to a recognized standard and whether 
the process was effective; whether the issuer's conclusion regarding 
the source and chain of custody of its conflict minerals is accurate; 
and whether the issuer appropriately included in the report all its 
products described as having not been found to be ``DRC conflict 
free.'' We used our discretion to make the audit objective in the final 
rule similar to the first and second alternatives with some 
modification. The final rule states that the objective of the 
independent private sector audit is for the auditor to express an 
opinion or conclusion as to whether the design of the issuer's due 
diligence measures as set forth in the Conflict Minerals Report, with 
respect to the period covered by the report, is in conformity with, in 
all material respects, the criteria set forth in the nationally or 
internationally recognized due diligence framework used by the issuer, 
and whether the issuer's description of the due diligence measures it 
performed as set forth in the Conflict Minerals Report, with respect to 
the period covered by the report, is consistent with the due diligence 
process that the issuer undertook.
    We believe that our choice of audit objective in the final rule 
will reduce the costs and burdens more than certain other alternatives. 
However, we recognize that the audit objective will not reduce the 
costs and burdens as much as if the audit objective required only an 
opinion or conclusion as to whether the design of the issuer's due 
diligence measures is in conformity with the criteria set forth in the 
nationally or internationally recognized due diligence framework. We 
believe an audit related to whether the issuer actually performed the 
due diligence measures that it represents that it performed in the 
Conflict Minerals Report is necessary and appropriate so that the audit 
also addresses, in a cost effective manner, the actual performance of 
the due diligence and not just the design as well as provide 
independent third party confirmation that the work described was 
performed. Based on the comments we received, however, an audit 
objective based on any of the alternatives other than just the design 
of the issuer's due diligence measures and the issuer's description of 
the due diligence measures it performed would be very costly and 
burdensome to undertake due to the breadth of those alternatives and 
the fact that most of the evidence required for those alternatives 
would be held by third party suppliers and smelters.
8. Conflict Minerals From Recycled or Scrap Sources
    The Conflict Minerals Statutory Provision is silent as to the 
treatment of conflict minerals from recycled or scrap sources. In the 
final rule, however, we provided for alternative treatment for conflict 
minerals from recycled or scrap sources. The alternative reporting 
requirements for conflict minerals from recycled or scrap sources 
should benefit issuers by reducing issuers' compliance costs with the 
disclosure requirements in Section 1502 because those issuers will 
conduct a reasonable inquiry regarding whether those minerals are from 
recycled or scrap sources instead of having to exercise due diligence 
and provide a Conflict Minerals Report in all cases. Also, issuers 
that, following a reasonable inquiry conducted in good faith, 
reasonably believe their minerals are from recycled or scrap sources 
will not have to obtain an independent private sector audit. A 
reduction in costs of not having to exercise due to diligence or obtain 
an independent private sector audit is likely to be significant for 
those industries that use a high concentration of conflict minerals 
that are from recycled or scrap sources.\805\
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    \805\ We are unable to estimate the total magnitude of these 
cost savings because we do not have empirical evidence regarding the 
scope of the use of conflict minerals that are from recycled or 
scrap sources. See below Section D for a further analysis of the 
potential costs of this provision.
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    The final rule requires issuers with conflict minerals that have 
reason to believe their conflict minerals may not come from recycled or 
scrap sources to exercise due diligence in determining whether the 
minerals are, in fact, from recycled or scrap sources. That due 
diligence must follow a nationally or internationally recognized due 
diligence framework, if such framework is available. While providing a 
higher degree of certainty that those conflict minerals came from 
recycled or scrap sources, the requirement will also increase the costs 
to issuers, compared to an alternative that would allow issuers to rely 
on their own due diligence approach to verify that these minerals are 
from recycled or scrap sources. Eliminating the requirement of an 
independent private sector audit of their Conflict Minerals Report, 
however, could potentially decrease costs to issuers.
    We believe that the magnitude of the cost savings for issuers with 
conflict minerals from recycle or scrap sources will be greatest for 
companies that use exclusively scrap and recycled materials. Although 
we did not receive any information from commentators as to the number 
of companies that may fall into this category, a number of commentators 
stated that the use of conflict minerals from recycled or scrap sources 
is significant. For example, some commentators noted that China 
controls approximately 85% of the world's tungsten supply, but China is 
cutting back on tungsten exports, which is causing the price of 
tungsten to increase by 130%.\806\ According to these commentators, 
this development has caused American manufactures to move to recycled 
tungsten, which represented approximately 55% of apparent consumption 
of tungsten in all forms. Also, as another example, one commentator 
noted that up to 40% of the world's gold supply is from recycled or 
scrap sources.\807\ Even so, issuers that use both conflict minerals 
from recycled or scrap sources and newly mined minerals may still need 
to exercise due diligence and obtain an audit regarding the conflict 
minerals that are not from recycled or scrap sources and thus, may not 
have significant additional cost savings. Overall, however, even with 
these requirements, we believe that providing an alternative treatment 
for conflict minerals from recycled or scrap sources should benefit 
issuers by reducing their compliance costs for those minerals as 
compared with the costs applicable to newly mined conflict minerals. 
Moreover, an indirect consequence of our differential

[[Page 56348]]

treatment of scrap and recycling materials may be to increase the 
extent to which these materials are recycled. Finally, the reasonable 
country of origin inquiry requirements are likely to improve the 
disclosures regarding conflict materials from recycled or scrap 
sources.
---------------------------------------------------------------------------

    \806\ See, e.g., letters from Rep. Altmire, Rep. Murphy, Rep. 
Renacci, Rep. Shuster, Rep. Toomey, Rep. Womack, and Sen. Pryor.
    \807\ See letter from WGC II.
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9. Conflict Minerals ``Outside the Supply Chain''
    Like conflict minerals from recycled and scrap sources, the 
Conflict Minerals Statutory Provision is silent as to the treatment of 
conflict minerals ``outside the supply chain'' at the time our final 
rule takes effect, including existing stockpiles of conflict minerals. 
However, in the final rule we have determined to exclude any conflict 
minerals that are ``outside the supply chain'' prior to January 31, 
2013. The final rule considers conflict minerals to be ``outside the 
supply chain'' after such conflict minerals have been smelted (in the 
case of tantalum, tin, or tungsten) or refined (in the case of gold), 
or, if not smelted or refined, are physically located outside of the 
Covered Countries.
    We are aware of the concern that these existing stockpiles could 
have come from activities that financed or benefited armed groups in 
the Covered Countries. However, once those minerals have been smelted, 
refined, or transported out of the Covered Countries, it seems unlikely 
that they could further finance or benefit armed groups. Therefore, we 
believe excluding these stockpiled minerals would be consistent with 
the statutory intent of the Conflict Minerals Statutory Provision and 
does not significantly impair the benefits sought by the statute. 
Moreover, the approach we have chosen may substantially reduce 
compliance costs for some issuers by not requiring them to determine 
the origin and chain of custody of these stockpiled minerals. An 
alternative approach that requires issuers to determine the origin and 
chain of custody of their stockpiled minerals would greatly increase 
costs, particularly for conflict minerals that were extracted prior to 
the contemplation of the Conflict Minerals Statutory Provision because 
issuers would not have known they were expected to determine the origin 
of those minerals at the time of their extraction. Further, if 
stockpiled minerals were not excluded, issuers might not be able to 
sell those minerals and could be forced to dispose of their existing 
conflict minerals inventory at below market prices, or at a loss. If 
such a situation occurred, as one commentator noted, the cost of the 
final rule would increase ``dramatically.'' \808\
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    \808\ See letter from Claigan I.
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10. Conflict Mineral Derivatives
    The Conflict Minerals Statutory 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 Covered Countries.\809\ The Proposing Release provided 
the same definition of the term ``conflict mineral'' as well. In the 
final rule, however, we used our discretion to limit the term 
``conflict mineral'' to include only cassiterite, columbite-tantalite, 
gold, wolframite, and their derivatives, which are limited to only the 
3Ts, unless the Secretary of State determines that additional 
derivatives are financing conflict in the Covered Countries, in which 
case they are also considered ``conflict minerals.'' By using our 
discretion to limit the covered mineral derivatives, we could be 
limiting the usefulness of the information of the conflict minerals 
disclosure. This potential disadvantage is mitigated, however, by the 
fact that tantalum, tin, and tungsten are by far the most common 
derivatives of these minerals.\810\ A different approach would increase 
costs to issuers by increasing the number of derivatives that they 
would have to determine are in their products.
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    \809\ 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.
    \810\ See letters from AAFA, ITIC I, and PCP.
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11. Method and Timing of Disclosure on Form SD
    Exchange Act Section 13(p)(1)(A) requires issuers to ``disclose 
annually'' their conflict minerals information, but does not specify 
how issuers should disclose this information or at what time during the 
year the disclosure must be provided. The final rule requires issuers 
to provide this information annually in a new specialized disclosure 
report on new Form SD that covers a calendar year, regardless of the 
issuer's fiscal year end, and is due on May 31 of the subsequent year. 
Our decision to provide through rulemaking that issuers use the new 
form for the disclosure of conflict minerals' origin and the Conflict 
Minerals Report makes it easier for those interested in the disclosed 
information to locate the form. In addition, the final rule requires 
that issuers present the information in a standardized manner. Users 
that find the information about an issuer's conflict minerals relevant 
to their decision making will benefit from the standardization and 
simplification of the disclosure.
    Further, requiring issuers to use a new form with a uniform filing 
date rather than submitting conflict minerals information in their 
annual reports would benefit most issuers by allowing them to have 
sufficient time to prepare and file their conflict minerals information 
independent from the due dates for annual reports.\811\ Moreover, we 
believe that this staggered filing date will benefit issuers because 
they could, if they choose to do so, use the same personnel to handle 
this filing as their annual reports. Another benefit for issuers of 
requiring issuers to provide their conflict minerals information on a 
new form, instead of an annual report on Form 10-K, Form 20-F, or Form 
40-F, is to remove the conflict minerals information from the 
disclosure that principal executive and financial officers must certify 
under Sections 302 and 906 of Sarbanes-Oxley, which could reduce costs 
to issuers. Also, requiring a uniform reporting period for all issuers 
will benefit companies that supply products or components with conflict 
minerals by allowing them to provide reports once per year for all 
their customers, rather than having to prepare reports throughout the 
year for customers with different reporting periods, which will reduce 
such companies' costs.
---------------------------------------------------------------------------

    \811\ We estimate that almost 58% of total number of affected 
issuers uses December 31 as a fiscal year end.
---------------------------------------------------------------------------

    Our decision to require a new form will result in costs related to 
the preparation of this form, as we discuss below in the Paperwork 
Reduction Act section. Also, our decision to require an issuer to 
provide its Conflict Minerals Report and its independent private sector 
audit report as an exhibit to its specialized disclosure report on Form 
SD will result in costs related to the preparation of such an exhibit.
    Requiring covered issuers to file, instead of furnish, their 
Conflict Minerals Reports gives investors the ability to bring suit if 
issuers fail to comply with the new disclosure requirements, for 
instance under Exchange Act Section 18. This may, therefore, 
potentially improve the avenues of redress available to investors. 
This, in turn, may provide benefits to investors to the extent they 
rely on the information to make investment decisions. Because this 
could improve investors' ability to seek

[[Page 56349]]

redress, it is possible that covered issuers could be found liable for 
the disclosure. Our decision to require issuers to ``file,'' rather 
than ``furnish,'' the information will potentially subject issuers to 
litigation under Section 18 and may ``incentivize issuers (and auditors 
and underwriters) to conduct an appropriate level of diligence'' in 
preparing the disclosures,\812\ thereby increasing issuers' cost of 
complying with the final rule.\813\ In addition, our decision to 
require a uniform reporting period could further increase costs to 
issuers that do not have calendar year fiscal years by requiring 
separate reporting outside of the issuer's normal reporting period.
---------------------------------------------------------------------------

    \812\ See letter from Global Witness I.
    \813\ While the increased potential for litigation may increase 
costs, we note that Section 18 claims have not been prevalent in 
recent years and a plaintiff asserting a claim under Section 18 
would need to meet the elements of the statute, including 
materiality, reliance, and damages. See Louis Loss and Joel 
Seligman, Ch. 11 ``Civil Liability,'' Subsect. c ``False Filings 
[Sec.  18],'' Fundamentals of Securities Regulation (3rd Ed. 2005). 
We are unable to estimate the magnitude of this potential cost 
increase because we cannot predict at this time whether Section 18 
claims will increase (and if so, by how much) and how costly it may 
be to ultimately prove the required elements or defend such a case.
---------------------------------------------------------------------------

12. ``Necessary to the Functionality or Production''
    Exchange Act Section 13(p)(2)(B) 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.'' The Conflict 
Minerals Statutory Provision, however, provides no additional 
explanation or guidance as to the meaning of ``necessary to the 
functionality or production of a product.'' We use our discretion not 
to define this phrase in the final rule.
    Compared to an alternative of the rule, which would define this 
phrase, our decision not to provide a definition gives issuers 
significant flexibility to use a definition that applies best to their 
particular circumstances. Such flexibility generally lowers issuers' 
compliance costs as issuers can determine whether the phrase is 
applicable based upon their specific facts and circumstances. But we 
also recognize that our decision not to define this phrase could 
increase uncertainty for issuers on how the phrase should be 
implemented and may therefore result in additional costs to some 
issuers. For example, the uncertainty associated with leaving the 
phrase undefined could lead some issuers to interpret the definitions 
in a manner that is more expansive than if these terms were defined, 
thus incurring a higher compliance cost than is necessary. In this 
regard, some issuers may decide to use more internal or external 
resources than if this phrase was defined to make sure they are 
compliant with the rule, which would also increase compliance costs. 
The lack of a clear definition could also result in a diminishment of 
the benefit of the rule if some issuers are less rigorous in 
determining and reporting on their products that have conflict 
minerals, which would reduce the informativeness of their disclosure.
    We have attempted to mitigate the potential cost of leaving the 
phrase undefined by the guidance we provide in the release. Our 
guidance provides issuers with contributing factors that they should 
use in their determination of ``necessary to the functionality or 
production,'' which will reduce the possibility that some issuers may 
interpret the phrase in either an over or underinclusive manner. Also, 
we noted concerns that there is ambiguity in the application of the 
provision to conflict minerals that do not end up in the product, and, 
as noted above, commentators were mixed in their views regarding how 
the rule should treat catalysts and other conflict minerals necessary 
to the production of a product that do not appear in the product. After 
considering the comments, we agree that it would be very difficult for 
any manufacturer of products that do not themselves contain conflict 
minerals to know every conflict mineral used in the production process. 
Therefore, we used our discretion to decide that, for a conflict 
mineral to be considered ``necessary to the production'' of the 
product, the conflict mineral must be contained in the product--and be 
necessary to the product's production. Therefore, although this 
requirement may decrease the number of issuers that are covered under 
the final rule, we believe this is a reasonable approach that reduces 
costs to issuers by eliminating an especially challenging aspect from 
the proposal.
13. Categories of Issuers
    We do not read the statute as making any distinction among issuers 
based on the issuer's size or domesticity. As discussed above, although 
not specifically in the context of smaller reporting companies or 
foreign private issuers, some commentators suggested that we exempt 
certain classes of companies from full and immediate compliance with 
the disclosures required by the Conflict Minerals Statutory 
Provision.\814\ We are concerned that any broad categories of 
exemptions would undermine the statutory objectives discussed above. 
For the provision to have the effect we understand Congress intended, 
we are not exempting any class of issuer from its application. We 
recognize that this imposes a cost burden on those issuers who are not 
exempted, but conclude that this burden is required by the statute.
---------------------------------------------------------------------------

    \814\ See, e.g., letters from Davis Polk, NCTA, Verizon, and 
WilmerHale.
---------------------------------------------------------------------------

    Additionally, as one commentator noted, it is unclear whether 
exempting smaller reporting companies would significantly reduce their 
burdens because smaller reporting companies could still be required to 
track and provide their conflict minerals information for larger 
issuers.\815\ Moreover, as other commentators noted, to the extent 
there are benefits to smaller companies from an exemption, such an 
exemption could increase the burden on larger companies that rely on 
smaller reporting company suppliers to provide conflict minerals 
information needed by the larger reporting companies.\816\ Further, the 
temporary availability of the ``DRC conflict undeterminable'' category 
is likely to reduce the compliance burden for all companies, including 
smaller reporting companies. In this regard, not including private 
companies and individuals in the final rule may not unduly burden 
reporting issuers because the commercial pressure on private companies 
from issuers that need this information for their reports and from the 
public in general demanding that issuers make this information 
available could be sufficient for the private companies to provide 
voluntarily their conflict minerals information as standard 
practice.\817\ Further, the extension of the availability of the ``DRC 
conflict undeterminable'' category for an additional two years is 
likely to reduce the compliance burden even more for some smaller 
reporting companies.
---------------------------------------------------------------------------

    \815\ See letters from IPC I.
    \816\ See, e.g., letters from IPC I and TriQuint I.
    \817\ See letter from Howland and TIC.
---------------------------------------------------------------------------

    Similarly, exempting foreign private issuers from the final rule 
could increase domestic issuers' burdens by making it very difficult 
for them to compel their foreign private issuer suppliers to provide 
conflict minerals information. In addition, exempting foreign private 
issuers from the final rule could result in a competitive disadvantage 
for domestic issuers because foreign private issuers would not be 
subject to the final rule.\818\ Overall, we are not exempting foreign

[[Page 56350]]

private issuers because we believe that doing so would not give effect 
to Congressional intent.
---------------------------------------------------------------------------

    \818\ See letter from CEI II, Rep. Amodei, Rep. Ellmers, Rep. 
Murphy, and TriQuint I.
---------------------------------------------------------------------------

14. Not Including Mining Issuers as Manufacturing Issuers
    The Conflict Minerals Statutory Provision does not state whether 
issuers that mine conflict minerals should be considered to be 
manufacturing those minerals and be included under the provision. We do 
not consider an issuer that mines or contracts to mine conflict 
minerals to be manufacturing or contracting to manufacture those 
minerals unless the issuer also engages in manufacturing, whether 
directly or through contract, in addition to mining. In this regard, we 
do not believe that mining is ``manufacturing'' based on a plain 
reading of the provision. Excluding such mining issuers from the 
universe of covered companies could create a competitive advantage for 
those companies over covered companies to the extent that they are 
competitors, but this advantage should be diminished for mining 
companies that are suppliers of conflict minerals to covered companies 
because the covered companies would require the conflict minerals 
information from the mining company. Also, excluding such mining 
issuers from the final rule could increase costs to other issuers along 
the supply chain because, without being covered, such mining issuers 
may not have the incentive to share origin and chain of custody 
information about the conflict minerals they mined. However, not 
including such mining issuers may decrease certain costs for mining 
issuers, since such issuers will not have to comply with the Conflict 
Minerals Statutory Provision with respect to conflict minerals mined by 
such issuers (unless necessary to the production or functionality of a 
product manufactured, or contracted to be manufactured, by such 
issuer). However, we expect that such mining issuers will incur costs 
to provide information on the source and custody of conflict minerals 
mined by such issuers to their customers, and other participants in 
their supply chain, who are subject to the Conflict Minerals Statutory 
Provision.

D. Quantified Assessment of Overall Economic Effects

    As noted above, Congress intended for the rule issued pursuant to 
Section 1502 to decrease the conflict and violence in the DRC, 
particularly sexual and gender based violence.\819\ A related goal of 
the statute is the promotion of peace and security in the Congo.\820\ 
These are compelling social benefits, which we are unable to readily 
quantify with any precision, both because we do not have the data to 
quantify the benefits and because we are not able to assess how 
effective Section 1502 will be in achieving those benefits.\821\ We 
also note that these objectives of Section 1502 appear to be directed 
at achieving overall social benefits and are not necessarily intended 
to generate measurable, direct economic benefits to investors or 
issuers specifically. Additionally, the social benefits are quite 
different from the economic or investor protection benefits that our 
rules ordinarily strive to achieve. We therefore have not attempted to 
quantify the benefits of the final rule.
---------------------------------------------------------------------------

    \819\ Section 1502(a) of the Act (``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).'').
    \820\ See Section 1502(d)(2)(A) of the Act (directing the GAO to 
assess the effectiveness of Exchange Act Section 13(p) in promoting 
peace and security in the Covered Countries).
    \821\ Some commentators argued, however, that the Conflict 
Minerals Statutory Provision has already pressured DRC authorities 
to begin to demilitarize some mining areas and to increase mining 
oversight. See, e.g., letters from International Corporate 
Accountability Roundtable (Jul. 29, 2011) (``ICAR I''), Sen. Boxer 
et al. I, Sen. Leahy et al., and United Nations Group of Experts on 
the Democratic Republic of Congo (Oct. 21, 2011) (``UN Group of 
Experts'').
---------------------------------------------------------------------------

    Based on comments and our analysis, we do expect that the statute 
will result in significant economic effects. We have noted the views of 
commentators on direct compliance costs, and we acknowledge that these 
costs are substantial. In addition, issuers with a reporting obligation 
under the Conflict Minerals Statutory Provision could be put at a 
competitive disadvantage with respect to private companies that do not 
have such an obligation.\822\ We note, however, that non-reporting 
companies are part of the supply chain of reporting issuers and will 
bear many of the compliance costs of determining whether their minerals 
are conflict-free.\823\ We also expect that the implementation of the 
statute may provide significant advantage to foreign companies that are 
not reporting in the United States--and thus need not comply--but do 
compete directly with reporting issuers in the United States. In 
requiring the Commission to promulgate this rule, however, Congress 
determined that its costs were necessary and appropriate in furthering 
the goals of helping end the conflict in the DRC and promoting peace 
and security in the DRC. To the extent the final rule implementing the 
statute imposes a burden on competition in the industries of affected 
issuers, therefore, we believe the burden is necessary and appropriate 
in furtherance of the purposes of Section 13(p). Also, if foreign 
jurisdictions implement similar laws or regulations similar to Section 
1502 or the final rule,\824\ any advantages available to foreign 
companies listed in such jurisdictions but not listed in the United 
States may be diminished.
---------------------------------------------------------------------------

    \822\ In our Economic Analysis, we use the term ``competition'' 
to mean competition in the industries of the affected issuers, not 
competition in all of the markets that the Commission is charged 
with regulating, which are the United States securities markets. We 
do not expect any effects of the rule on the competition in the 
United States securities markets.
    \823\ See, e.g., letters from Japanese Trade Associations and 
NAM I.
    \824\ See cf. letters from Member of the European Parliament 
(Nov. 17, 2011) (``European Parliament'') (stating that in ``2010 
the European Parliament adopted a resolution welcoming the adoption 
of the new US `Conflict Minerals' Law and asked the Commission and 
the Council to examine a legislative initiative along these lines'') 
and NEI (stating that ``[s]imilar action can be expected in other 
countries in response to the SEC's leadership, and as global 
awareness of the conflict minerals issue increases,'' that 
``conflict minerals legislation [in Canada] has already been 
tabled,'' and ``the Canadian Securities Administrators (CSA) pay[s] 
close attention to SEC rule-making developments'').
---------------------------------------------------------------------------

    As we have observed, unlike in most of the securities laws, 
Congress intended the Conflicts Mineral Provision to serve a 
humanitarian purpose, which is to prevent armed groups from benefiting 
from the trade of conflict minerals. There may also be a benefit to 
investors given the view expressed by some commentators that the 
provision also protects investors by requiring disclosure of 
information that may be material to their understanding of the risks of 
investing in an issuer or its supply chain. To the extent that the 
required disclosure will help investors in pricing the securities of 
the issuers subject to the Conflict Minerals Statutory Provision, the 
rule could improve informational efficiency. Because, however, the cost 
of compliance for this provision will be borne by the shareholders of 
the company, which could potentially divert capital away from other 
productive opportunities, the rule may result in a loss of allocative 
efficiency. The reduction in allocative efficiency could be offset, 
somewhat, by increased demand for the firm's products and/or shares by 
socially conscious consumers and investors. We do not expect that the 
rule would negatively impact prospects of the affected industries to an 
extent

[[Page 56351]]

that would result in withdrawal of capital from these industries. Thus, 
we do not expect the rule to have a significant impact on capital 
formation.
    There may, however, be several indirect economic effects that could 
be significant. The high cost of compliance provides an incentive for 
issuers to choose only suppliers that obtain their minerals exclusively 
from outside the Covered Countries, thereby avoiding the need to 
prepare a Conflict Minerals Report. To the extent that Covered 
Countries are the lowest cost suppliers of the minerals affected by the 
statute, issuers preferring to find substitutes or other suppliers of 
non-DRC minerals would have to increase the costs of their products to 
recoup the higher costs. Reducing the viable supply of such minerals 
may have the indirect effect of increasing the cost of acquiring these 
minerals.
    As mentioned above, the overall specific range of costs for 
compliance with the rule provided by commentators was between 
$387,650,000 and $16 billion. The wide divergence of the cost estimates 
among the four separate analyses submitted by a manufacturing industry 
association,\825\ an electronic interconnect industry association,\826\ 
a university group,\827\ and an environmental consultancy company \828\ 
illustrates to us the difficulty of ascertaining the estimated costs of 
implementing the statute and our discretionary choices. We have 
reviewed the proposal and the comments received and have used the 
information provided by commentators to inform our Economic Analysis of 
the final rule. In the remaining part of this section we attempt to 
quantify, to the extent possible, the compliance costs resulting from 
the final rule by relying on and critically evaluating the estimates 
and the analyses that commentators provided. Rather than using a single 
analysis, a combination of the analyses can provide a useful framework 
for understanding various cost components of our implementing the rule. 
Our approach strives to achieve a balanced and reasonable analysis 
based on the data and assumptions provided by all commentators, as well 
as our own analysis and assumptions. When it is deemed prudent, we have 
chosen to make conservative assumptions that may, in some cases, lead 
to an overestimation of the costs. Overall, after performing our 
analysis we conclude that the costs of the statute will be substantial. 
Thus, we have revised our own prior estimate of the cost of complying 
with the rule. Based on our analysis of the data, we provide a range of 
the costs of both initial compliance and the annual cost of ongoing 
compliance. In our view, because of the potential variations in the 
manner in which issuers will undertake compliance, providing such a 
range is more appropriate than providing a precise cost estimate. Our 
revised estimate is that the initial cost of compliance is between 
approximately $3 billion to $4 billion, while the annual cost of 
ongoing compliance will be between $207 million and $609 million.
---------------------------------------------------------------------------

    \825\ See Section III.B.2.b.i.
    \826\ See Section III.B.2.b.ii.
    \827\ See Section III.B.2.b.iii.
    \828\ See Section III.B.2.b.iv.
---------------------------------------------------------------------------

    We start our analysis of the cost of compliance by incorporating 
all of the comments that provide quantified data on the aggregate 
potential costs of the proposed rule. So, while our overarching 
consideration of the costs of the rule we are adopting today takes into 
account the information provided by a broad range of commentators, the 
most useful frameworks for considering costs were provided by the 
manufacturing industry association and university group commentators. 
Other comments, while also providing certain valuable insights into how 
our rules would be implemented, were either not as transparent in their 
analytical frameworks or not easily generalizable in terms of 
aggregating the costs across multiple industries.\829\
---------------------------------------------------------------------------

    \829\ As shown below, while we draw on the quantified analyses 
supplied by the electronic interconnect industry association and the 
environmental consultancy company commentators, these letters did 
not provide as broad a range of quantified cost estimates as those 
provided by the manufacturing industry association and university 
group commentators.
---------------------------------------------------------------------------

    We also found it significant that the two analyses by the 
manufacturing industry association and university group commentators 
take into account the categories of costs most often identified as 
significant by commentators and that we agree are likely to be deemed 
as such. Moreover, we did not find the assumptions underlying their 
frameworks to be qualitatively different from the discussions of costs 
provided by other commentators.
    At the same time, in our view, even these two studies did not 
provide sufficiently documented evidence to support all of their 
assumptions and assertions and consequently, commentators differed on 
the quantification of these costs. We have therefore taken into account 
the views expressed in other comment letters, and made modifications to 
the analyses provided by the manufacturing industry association and 
university group commentators accordingly. What follows is a modified 
analysis of the manufacturing industry association and university group 
commentators' estimates that we believe better synthesizes the 
information provided to us in the comment process.
    First, in both of these estimates, an important consideration is 
the cost of upgrading or implementing changes to IT systems. Based on 
the letters submitted as well as estimates from other commentators, we 
believe the manufacturing industry association and university group 
commentators may have been over-inclusive in their estimates. For 
example, the environmental consultancy company commentator estimates a 
much smaller number of $25,000 for the IT system and $10,000 for IT 
support.\830\ The commentator then states that, ``a cost of $6B is 10 
times the total annual sales for all restricted materials software (of 
which conflict minerals is a small part) and does not seem realistic * 
* * [p]articularly since conflict minerals software for small companies 
can be downloaded for free.'' The environmental consultancy company 
commentator further states that ``[t]he systems quoted by [the 
manufacturing industry association and university group commentators] 
are the most expensive systems on the market,'' and that ``[m]ost 
companies we interviewed said they would not need to invest in new 
software solely for conflict minerals * * * .'' \831\
---------------------------------------------------------------------------

    \830\ See letter from Claigan III. See also letter from Assent 
(critiquing the cost estimates of both the manufacturing industry 
association commentator and the university group commentator).
    \831\ Letter from Claigan III.
---------------------------------------------------------------------------

    While we are persuaded by the argument that an average issuer 
should not expect to spend $1,000,000 to invest in a new IT system, we 
do not accept the environmental consultancy company commentator's own 
estimate of $35,000 because it does not provide a factual basis for the 
assertion. In modifying the estimates of the manufacturing industry 
association and university group commentators, we do not intend to 
replace the manufacturing industry association and university group 
commentators' cost estimates with the smaller estimate provided; 
rather, for purposes of our cost estimate, the appropriate estimate 
lies somewhere in between those two estimates.
    Based on the university group commentator's analysis, we assumed 
$205,000 for small company computer costs rather than $1,000,000. 
Further, we assumed that the computer costs for

[[Page 56352]]

large issuers would be twice those for smaller issuers, or $410,000, 
and not four times those for a smaller issuer as assumed by the 
university group commentator.\832\ In order to make the IT cost 
analysis consistent between the university group and the manufacturing 
group's revised analysis, we averaged the total IT cost per company in 
the university analysis and divided it by the total number of issuers 
for an average IT cost for all companies (irrespective of size) of 
approximately $250,000 and apply it to the manufacturing group's 
analysis.\833\ This respectively changes the manufacturing industry 
association and university group commentators' estimates of the total 
IT cost from $5.9 billion and $2.6 billion, respectively, to 
approximately $1.5 billion.
---------------------------------------------------------------------------

    \832\ The environmental consultancy company commentator 
estimates the IT costs for a company with $1 billion in revenue to 
be $35,000. Our estimate of IT costs attempts to incorporate these 
two widely varying viewpoints. See letter from Claigan III.
    \833\ Approximately $1.5 billion/5,994 issuers.
---------------------------------------------------------------------------

    Second, another important cost assumption is that the manufacturing 
industry association commentator assumes that each issuer has an 
average of 2000 first-tier suppliers. They arrive at this number based 
on their ``consultations with a number of large manufacturers, and 
based on research by'' others. This estimate of the average number of 
first-tier suppliers is, however, not supported by other estimates, and 
is in fact difficult to reconcile with figures reported by other 
commentators. For example, the average number of suppliers per company 
in the electronic interconnect industry association commentator study 
is only 163.\834\ The environmental consultancy company commentator 
also believes the supply chain would be much simpler than the 
manufacturing industry association commentator predicts, based on the 
EICC/GeSI process. The manufacturing industry association commentator 
maintains, however, that many of its members have well over 2,000 
suppliers. We do think a prudent reduction in the manufacturing 
industry association commentator's estimate is warranted, but here 
again, we do not know that 163 is any more representative of an average 
company's experience. Thus, we use the university group commentator's 
estimate of 1,060 suppliers while employing the manufacturing industry 
association commentator's analysis. Revising the manufacturing industry 
association commentator's number of suppliers in the supply chain 
lowers their estimate of compliance costs from $1.2 billion to $635 
million.
---------------------------------------------------------------------------

    \834\ See letter from IPC I.
---------------------------------------------------------------------------

    In addition, we are not convinced that the estimate of cost to 
suppliers is appropriately generated by a top-down approach (number of 
supplier relationships). Indeed, we think a top-down approach may not 
reflect how our rule may be implemented because it is not clear how the 
market may react in placing the various burdens of traces on the 
countless entities in the supply chains. In this top-down approach 
(which is the approach used by many commentators) each firm using these 
minerals will need to track backwards through each supplier. If many 
firms share the same supplier, the underlying assumption is there are 
few economies of scale in determining whether the minerals are 
conflict-free. Under this approach, each firm pays an independent cost 
of finding out from each of their suppliers where the minerals 
originate.\835\
---------------------------------------------------------------------------

    \835\ The university group commentator states that there are 
``overlap'' or ``mutuality'' cost efficiencies that will emerge on 
the supplier side, as the same supplier may have supply contracts 
with more than one issuer thus allowing them to use any management 
systems changes to meet the needs of multiple issuers. This 
commentator estimates that supplier efforts will be reduced by 60% 
because of this supplier-issuer overlap and modifies the number of 
suppliers accordingly. See letter from Tulane.
---------------------------------------------------------------------------

    We believe, however, that due diligence on the part of suppliers 
likely will be a bottom-up approach in which materials are tagged at 
the mine and certified at the smelter and then are introduced into the 
supply chain. Given this bottom-up approach, each supplier will then 
track whether the mineral is conflict-free and to whom it will be sold. 
While the system for tracking the sales of these minerals may increase 
in magnitude with the number of companies the supplier supplies, we 
believe the better approach to estimating costs of the supply chain 
would be to estimate the total number of affected suppliers (bottom-up) 
rather than the total number of supplier relations (top-down).
    A bottom-up approach places more emphasis on the number of 
suppliers and assumes that there are economies of scale in the cost 
because suppliers need only determine the source of their minerals once 
and then spread the cost of determining the source across many issuing 
firms. For example, if issuers have many suppliers to choose from, they 
may find it easier to deal with--and hence more valuable to employ--
only those suppliers who can fully attest that they are conflict-free. 
Therefore, if all first-tier suppliers bear the burden of certifying 
and providing conflict reports, then the relative burden on the issuers 
will be very small. All of this will, however, depend in turn on the 
comparative bargaining power between the issuers and the suppliers at 
every level. Ultimately, none of the studies have provided compelling 
explanations for the precise dynamics that will govern the issuer-
supplier or first-tier supplier-second-tier supplier relationships. On 
the whole, we think it would be much more reasonable to believe that 
suppliers at all levels will expend some effort individually in 
providing information to some of their customers regarding the source 
of their minerals, but each supplier's effort in turn will most likely 
reduce the cost of its customers to comply with our rules.
    Few commentators provided an estimate of the total number of 
suppliers affected. In the university group commentator's estimate, 
even after adjusting for potential overlap, the total number of 
suppliers to be affected totals over 860,000, which is based on the 
total supply chain. Using the total supply chain to estimate the 
affected suppliers will create redundancies because a supplier may be 
in more than one supply chain and therefore, be counted multiple times. 
Thus, we believe the total number of suppliers affected in the 
university group commentator's analysis is likely to be too high. The 
manufacturing industry association commentator, on the other hand, 
estimated the total number of small and medium-sized manufacturing 
businesses to be affected at 278,000 and states that many of these 
small businesses are likely to be suppliers. The 2009 Statistics of 
U.S. Businesses from the U.S. Census estimates the total number of 
manufacturing businesses at 266,175, and the number of small 
manufacturing businesses (those with fewer than 500 employees) at 
262,524.\836\ Both of these numbers are

[[Page 56353]]

similar to the number provided by the manufacturing industry 
association commentator. We therefore have revised the university group 
commentator's analysis on the number of affected suppliers to be 
consistent with the manufacturing industry association commentator at 
278,000 to reflect this judgment. In addition, consistent with the 
university group commentator framework, we assumed that the same 
percentage of suppliers as issuers would be considered large (28%) and 
small (72%). Thus, in our revised university group commentator's 
analysis, the total number of large suppliers is 77,840 while the total 
number of small suppliers is 200,160. This changes the total compliance 
cost for suppliers from $5.1 billion in the university group 
commentator's analysis to $1.2 billion in our revised analysis.
---------------------------------------------------------------------------

    \836\ See U.S. Census Bureau, Statistics of U.S. Business 
(2009), available at https://www.census.gov/econ/susb/. We recognize 
that the U.S. Census Bureau uses the NAICS definitions, including 
the definition of ``manufacturing.'' As discussed above, we did not 
adopt that definition for the final rule because it appears to 
exclude any issuer that manufactures a product by assembling that 
product out of materials, substances, or components that are not in 
raw material form, which would exclude large categories of issuers 
that manufacture products through assembly. However, we believe it 
is not inappropriate to use the Census Bureau's data regarding the 
total number of manufacturing businesses and the number of small 
manufacturing businesses in determining whether to use the number of 
suppliers provided by the university group commentator or the number 
provided by the manufacturing industry association commentator. 
Because we only have two real choices in the number of suppliers to 
use for our calculations, we need some way to determine which figure 
is a more viable estimate. Despite the fact that the Census Bureau 
uses the NAICS definition of ``manufacturing,'' which may exclude 
certain manufacturers, it would need to exclude almost 600,000 
manufacturers for the university group commentator's figure to be 
more accurate than the manufacturing industry association 
commentator's figure. This appears to be too high. Therefore, 
because the manufacturing industry association commentator's figure 
is so much closer to the Census Bureau's figures, we decided it 
would not be inappropriate to use the manufacturing industry 
association commentator's figure even though our reasoning was based 
on the NAICS definition of ``manufacturing.''
---------------------------------------------------------------------------

    The overall impact of these changes to the analysis, a reduction in 
IT costs (to both the manufacturing industry association and university 
group commentators), a modification in the number of suppliers in the 
supply chain (to the manufacturing industry association commentator) 
and a decrease in the number of suppliers affected (to the university 
group commentator) changes the total estimated cost of compliance 
substantially. The manufacturing industry association commentator's 
estimate declines from $9.3 billion to $4.1 billion while the 
university group commentator's estimate drops from $7.94 billion to 
$3.0 billion.
    The combination of these modifications in the two analyses leads us 
to estimate that initial compliance costs could be between $3.0 and 
$4.0 billion for all companies to comply with the statutory 
requirements. Below are the two revised analyses in tabular form with 
the revised estimates highlighted in bold:
---------------------------------------------------------------------------

    \837\ The manufacturing industry association commentator refers 
to this as ``changes to their corporate compliance policies.'' See 
letter from NAM I.
    \838\ The manufacturing industry association commentator refers 
to this as IT system development or revision. See id.
    \839\ We are using the rounded estimate (4,500) that was used by 
the university group and manufacturing industry association 
commentators in their calculations even though a more exact number 
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note 
869.
    \840\ The manufacturing industry association commentator refers 
to this as the cost of providing ``proper information regarding the 
source of minerals.'' Id.

------------------------------------------------------------------------
           Revised                                     Calculation
------------------------------------------------------------------------
Manufacturing Industry
 Association Commentator
 Estimate:
    Issuers affected........              5,994  .......................
    Average number of 1st                 1,060                 2000*.53
     tier suppliers.........
Issuer Due Diligence Reform:
 \837\
    Number of compliance                      2  .......................
     hours per supplier.....
    Cost per hour...........                $50  .......................
                             -------------------------------------------
        Total compliance           $635,364,000        5,994*1,060*2*$50
         cost...............
                             -------------------------------------------
IT Systems Modification:
 \838\
    Cost per issuer.........           $250,000  .......................
        Total cost..........     $1,498,500,000           5,994*$250,000
                             -------------------------------------------
Conflict Minerals Report
 Audits:
    Issuers to do audit                   4,500                5,994*75%
     \839\..................
    Audit cost for issuers..           $100,000  .......................
                             -------------------------------------------
        Total cost..........       $450,000,000            4,500*100,000
                             -------------------------------------------
Issuer Verification of
 Supplier Information:
    Number of hours.........                0.5  .......................
    Cost per hour...........                $50  .......................
                             -------------------------------------------
        Total cost..........       $158,841,000      5,994*1,060*0.5*$50
                             -------------------------------------------
Smaller Supplier Due
 Diligence: \840\
    Suppliers affected (only             55,600               278,000*.2
     20% to conduct)........
    Due diligence cost......            $25,000  .......................
                             -------------------------------------------
        Total cost..........     $1,390,000,000       278,000*.2*$25,000
                             -------------------------------------------
            Total...........     $4,132,705,000  .......................
------------------------------------------------------------------------


------------------------------------------------------------------------
           Revised                                     Calculation
------------------------------------------------------------------------
University Group Commentator
 Estimate:
    Issuers affected........              5,994  .......................
    Large issuer (28% of                  1,678               5,994*0.28
     issuers)...............
    Small issuer (72% of                  4,316               5,994*0.72
     issuers)...............
    Number of 1st tier                    1,060               2,000*0.53
     suppliers (53% of NAM).
Issuer Due Diligence Reform:  .................  .......................
    Number of compliance                    100  .......................
     hours for large issuer.
    Number of compliance                     40  .......................
     hours for small issuer.
    Internal cost per hour..                $50  .......................

[[Page 56354]]

 
    Internal costs for large         $7,551,000        1,678*0.9*100*$50
     issuer (90% of total
     work load).............
    Internal costs for small         $6,474,000        4,316*0.75*40*$50
     issuer (75% of total
     work load).............
    Consulting cost per hour               $200  .......................
    Consulting costs for             $3,356,000       1,678*0.1*100*$200
     large issuer (10% of
     total work load).......
    Consulting costs for             $8,632,000       4,316*0.25*40*$200
     small issuer (25% of
     total work load).......
                             -------------------------------------------
        Total cost..........        $26,013,000  .......................
                             -------------------------------------------
IT Systems Modification:
    Cost per large issuer...           $410,000  .......................
    Cost per small issuer...           $205,000  .......................
    Total large issuer cost.       $687,980,000           1,678*$410,000
    Total small issuer cost.       $884,780,000           4,316*$205,000
                             -------------------------------------------
        Total costs.........     $1,572,760,000  .......................
                             -------------------------------------------
Conflict Minerals Report
 Audits:
    Issuers affected \841\..              4,500  .......................
    Number of large issuers.              1,260               4,500*0.72
    Number of small issuers.              3,240               4,500*0.28
    Large issuer cost.......           $100,000  .......................
    Small issuer cost.......            $25,000  .......................
    Total costs for large          $126,000,000           1,260*$100,000
     issuers................
    Total costs for small           $81,000,000            3,240*$25,000
     issuers................
                             -------------------------------------------
        Total costs.........       $207,000,000  .......................
                             -------------------------------------------
Supplier Due Diligence
 Reform:
    Total large suppliers...             77,840              278,000*.28
    Total small suppliers...            200,160              278,000*.72
    Number of compliance                    100  .......................
     hours for large
     supplier...............
    Number of compliance                     40  .......................
     hours for small
     supplier...............
    Internal cost per hour..                $50  .......................
    Internal costs for large       $350,280,000       77,840*100*0.9*$50
     supplier (90% of total
     work load).............
    Internal costs for small       $300,240,000      200,160*40*0.75*$50
     supplier (75% of total
     work load).............
    Consulting cost per hour               $200  .......................
    Consulting costs for           $155,680,000      77,840*100*0.1*$200
     large supplier (10% of
     total work load).......
    Consulting costs for           $400,320,000     200,160*40*0.25*$200
     small supplier (25% of
     total work load).......
                             -------------------------------------------
        Total cost..........     $1,206,520,000  .......................
                             -------------------------------------------
            Total...........     $3,012,293,000  .......................
------------------------------------------------------------------------

    The manufacturing industry association and the university group 
commentators also provided estimates of ongoing compliance costs. As 
discussed above, we consider the framework provided by these 
commentators to be the most useful for estimating costs. The only other 
commentator to provide an estimate of ongoing costs was the electronic 
interconnect industry association commentator, but its analysis only 
included companies in that industry. The analyses provided by the 
manufacturing industry association and university group commentators 
yield costs estimates across multiple industries. The manufacturing 
industry association group commentator estimated an ongoing audit cost 
of $450 million and an ongoing cost estimate of approximately $300 
million for issuer verification of supplier information.\842\ In our 
table above, however, we revised the estimate for issuer verification 
of supplier information to approximately $159 million.\843\ We did not 
modify the approximately $450 million cost estimate of the audit, which 
was based on its estimate that the cost of such an audit for these 
issuers would be $100,000 per issuer, and not the $25,000 we estimated 
it to be in the Proposing Release. The total estimate of ongoing 
compliance costs based on our revisions to the manufacturing industry 
association commentator's analysis is therefore approximately $609 
million.\844\ We believe that the university group commentator's only 
significant recurring costs are the approximately $207 million audit 
costs.\845\ As with the manufacturing industry association commentator, 
we did not modify the approximately $207 million cost estimate of the 
audit. Therefore, we believe that the ongoing compliance cost estimate 
is likely to be in the range of $207 million to $609 million.\846\
---------------------------------------------------------------------------

    \841\ We are using the rounded estimate (4,500) that was used by 
the university group and manufacturing industry association 
commentators in their calculations even though a more exact number 
of issuers would be 4,496 (.75 x 5,994 = 4,495.5). See infra note 
869.
    \842\ See letter from NAM I.
    \843\ 5,994*1,060 *0.5 *$50 = $158,841,000
    \844\ $450,000,000 + $158,841,000 = $608,841,000
    \845\ The university group commentator noted that ``there would 
be some internal operations costs associated with performing ongoing 
due diligence and maintaining the necessary [information technology] 
systems on a company-to-company basis over the years,'' but that the 
``recurring costs of operating same is very low compared with the 
initial implementation.'' See letter from Tulane.
    \846\ The manufacturing industry association commentator also 
quotes compliance costs by Technology Forecasters, Inc on the RoHS 
directive. Using the RoHS directive, they estimate total compliance 
costs of $32 billion and $3 billion annually for maintenance. See 
letter from NAM I. One potential method to estimate ongoing costs is 
to apply the ratio of initial compliance costs to ongoing compliance 
costs (9.375%) in the submitted RoHS analysis ($3 billion/$32 
billion or 9.375%) and apply it to our revised estimates of the 
analyses of the manufacturing industry association and university 
group commentators. This results in total ongoing estimated 
compliance costs of $400 million ($4.1 billion * 9.375%) and $281 
million ($3.0 billion * 9.375%), respectively. However, because the 
manufacturing industry association commentator does not specify the 
composition of these maintenance costs (e.g., it is not stated 
whether this includes audit costs), nor does it provide the 
underlying RoHS study for verification, we are unable to confirm the 
accuracy of this ratio.

---------------------------------------------------------------------------

[[Page 56355]]

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the final rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (the ``PRA'').\847\ We published a notice 
requesting comment on the collection of information requirements in the 
Proposing Release for the proposed rules and amendments. The proposed 
rules and amendments would have amended one regulation and three forms. 
In response to comments received from the public, the Commission has 
decided to adopt a new disclosure form, rather than amend existing 
rules and forms. We have submitted the new collection of information 
requirements to the Office of Management and Budget (the ``OMB'') for 
review in accordance with the PRA.\848\
---------------------------------------------------------------------------

    \847\ 44 U.S.C. 3501 et seq.
    \848\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    The title for the collection of information is: ``Form SD'' (a new 
collection of information).
    The form is adopted under the Exchange Act and sets forth the 
disclosure requirements for reports filed by certain issuers regarding 
their use of conflict minerals from the Covered Countries. The hours 
and costs associated with preparing and submitting the form constitute 
the reporting and cost burdens imposed by the 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. Compliance with the rule is 
mandatory. Responses to the information collection will not be kept 
confidential and there is no mandatory retention period for the 
information disclosed.

B. Summary of the Comment Letters

    In the Proposing Release, we requested comment on the PRA analysis. 
We received only one comment letter that addressed the PRA 
explicitly,\849\ but we received a number of other comment letters and 
submissions that discussed the costs and burdens to issuers generally 
that would have an effect on the PRA analysis.\850\ A detailed 
discussion of these comments is included in the section III above 
regarding the Economic Analysis of the statute. In the Proposing 
Release, we estimated that approximately 5,994 of the approximately 
14,600 annual reports are filed by issuers that would be affected by 
the proposed rules and form amendments.
---------------------------------------------------------------------------

    \849\ See letter from NAM I.
    \850\ See, e.g., letters from Assent, Barrick Gold, CEI I, CEI 
II, Chamber I, Chamber III, Claigan I, Claigan II, Claigan III, 
CTIA, Ford, Howland, IPC I, ITRI I, ITRI II, ITRI III, Japanese 
Trade Associations, NAM I, NRF I, PCP, Rep. Lee, Roundtable, Society 
of Corporate Secretaries and Governance Professionals (Jun. 21, 
2011) (``Corporate Secretaries II''), TriQuint I, Tulane, United 
States Chamber of Commerce (Jul. 18, 2011) (``Chamber II''), and WGC 
I.
---------------------------------------------------------------------------

    The letter discussing the PRA specifically was from the 
manufacturing industry association commentator.\851\ The commentator 
concluded that, of the 5,994 issuers that the Proposing Release stated 
could be affected by the final rule, the average issuer would have 
between 2,000 to 10,000 first-tier suppliers. The commentator agreed, 
therefore, with our statement in the Proposing Release that the 
paperwork costs could be significant because the disclosure requirement 
in the proposed rules ``drastically increases the amount of paperwork 
issuers will have to collect and provide to the SEC to make the 
required disclosures.'' \852\ The amount calculated by the commentator 
was $9.4 billion, which included approximately ``$8 billion for issuers 
and $1.4 billion from smaller companies that are not issuers.'' \853\
---------------------------------------------------------------------------

    \851\ See letter from NAM I.
    \852\ Id.
    \853\ See id. In response to our estimate in the Proposing 
Release, of 793 reporting companies that would qualify as ``small 
entities'' for purposes of the Initial Regulatory Flexibility Act 
and that have conflict minerals necessary to the functionality or 
production of products they manufacture or contract to manufacture, 
the manufacturing industry association commentator noted that ``a 
large portion of America's 278 thousand small and medium-sized 
manufacturers could be affected by the requirement to provide 
information on the origin of the minerals in the parts and 
components they supply to companies subject to the SEC.'' Id. The 
commentator estimated, however, that ``only one in five smaller 
companies would be in one or more issuer's supply chains,'' and 
these smaller companies' only costs regarding the proposed rules 
would be a $25,000 audit cost. Id. Therefore, the proposed rules 
would cost smaller companies that are not required to report with us 
under Exchange Act Sections 13(a) or 15(d) approximately $1.4 
billion. Id.
---------------------------------------------------------------------------

    Our PRA analysis pertains solely to the paperwork burdens of 
issuers that file reports with us, although we discuss the burdens and 
costs of the final rule to both reporting issuers and non-reporting 
companies in our Economic Analysis section above. Therefore, for the 
purpose of the PRA analysis, we do not take into account the 
commentator's $1.4 billion figure because it relates solely to non-
reporting companies. As a result, the commentator's paperwork burden 
estimate appears to be approximately $8 billion, which is much higher 
than our estimate of $46,475,000 in the Proposing Release. Also, as we 
note above, other commentators provided costs estimates. These 
commentators did not specifically discuss the costs of the statute or 
the rule as they relate to the PRA. However, as discussed in greater 
detail below, we have attempted to extrapolate the paperwork costs from 
the overall cost estimates of these commentators.\854\
---------------------------------------------------------------------------

    \854\ See letters from Claigan I, Claigan II, Claigan III, 
Claigan IV, IPC I, and Tulane.
---------------------------------------------------------------------------

C. Revisions to PRA Reporting and Cost Burden Estimates

    For purposes of the PRA, in the Proposing Release, we estimated 
that the total annual increase in the paperwork burden for all 
companies to prepare the disclosure that would be required under the 
proposed rules would be approximately 153,864 hours of company 
personnel time and a cost of approximately $71,243,000 for the services 
of outside professionals. These figures reflected our estimated costs 
for issuers to satisfy the due diligence and audit requirements of the 
proposed rules, which we estimated would be $46,475,000. As discussed 
in more detail below, we are revising our PRA burden and cost estimates 
in light of the comments we received.
    For purposes of the PRA for the final rule, we estimate the total 
annual increase in the paperwork burden for all affected companies to 
comply with the collection of information requirements in our final 
rule is approximately 2,225,273 hours of company personnel time and 
approximately $1,178,378,167 for the services of outside 
professionals.\855\ These estimates include the time and cost of 
collecting the information, preparing and reviewing disclosure, and 
submitting documents. In this regard, we include due diligence, which 
includes updating information technology systems and obtaining an 
independent private sector audit, as part of collecting information. We 
estimate that the total cost for issuers to satisfy their due diligence 
is $1,030,026,667. We added this estimate to our estimate of the cost 
to issuers to hire outside professionals to prepare and review 
disclosure, submit

[[Page 56356]]

documents, and retain records, which is $148,351,500.\856\
---------------------------------------------------------------------------

    \855\ $1,030,026,667 + $148,351,500 = $1,178,378,167.
    \856\ We note that commentators rounded many of the calculations 
they made and used. However, for clarity in the body of the release, 
we refer to many rounded figures, but we have included the more 
exact figures and our calculations in the footnotes. Regardless, it 
does not appear that the rounded numbers vary significantly from the 
more exact calculations to make them meaningfully different.
---------------------------------------------------------------------------

    Consistent with our methodology in the Proposing Release, in 
deriving our estimates for the final rule, 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, 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 final rule and some issuers may 
experience less than these average costs. We base our revised estimates 
of the effect that the final rule will have on the collection of 
information as a result of the required reasonable country of origin 
inquiry, due diligence process, and independent private sector audit of 
the Conflict Minerals Report primarily on information that we have 
obtained from comment letters.
    In the Proposing Release, we noted that the DRC accounts for 
approximately 15% to 20% of the world's tantalum, and accounts for a 
considerably smaller percentage of the other three conflict 
minerals.\857\ Therefore, for the purposes of the PRA, we assumed in 
the Proposing Release that only 20% of the 5,994 affected issuers would 
have to provide an audited Conflict Minerals Report, which would have 
been 1,199 issuers. Both the manufacturing industry association 
commentator and the university group commentator, however, estimated in 
their comment letters that 75% of issuers would have to submit a 
Conflict Minerals Report.\858\ Also, the electronic interconnect 
industry association commentator indicated that it expected ``nearly 
100% of affected issuers will need to complete'' a Conflict Minerals 
Report because ``the vast majority of [issuers] will be unable to 
identify the origin of their conflict minerals.'' \859\ However, 
because of the reasonable country of origin inquiry requirement, the 
fact that only issuers who know or have reason to believe that their 
conflict minerals may have originated in the Covered Countries and may 
not have come from recycled or scrap sources are required to proceed to 
step three, and the ``DRC conflict undeterminable'' temporary 
provision, we believe it is appropriate to estimate that some 
percentage of issuers will not be required to submit a Conflict 
Minerals Report, an independent private sector audit, or both. 
Therefore, for the final rule, we estimate that 75% of all the 5,994 
issuers, which is approximately 4,496 issuers,\860\ will have to submit 
a Conflict Minerals Report and provide an independent private sector 
audit of that report for the first two years after implementation. We 
note that, under the final rule, issuers that proceed to step three but 
are unable to determine whether their conflict minerals originated in 
the Covered Countries, came from recycled or scrap sources, or financed 
or benefited armed groups in those countries are required to provide a 
Conflict Minerals Report, but that report does not have to be audited 
for the first two years following the rule's adoption for all issuers 
and the first four years for smaller reporting issuers. This change 
from the proposal could cause the actual costs to issuers for the first 
two years after implementation, for all issuers and four years after 
implementation for smaller issuers, to be lower than the commentators' 
cost estimates. We believe, however, that our assumption that 75% of 
affected issuers will have to submit a Conflict Minerals Report and 
provide an independent private sector audit of that report will balance 
some of the cost estimate discrepancies because 75% was lower than the 
100% estimate of the number of affected issuers.\861\
---------------------------------------------------------------------------

    \857\ See Proposing Release. See also Jessica Holzer, Retailers 
Fight to Escape `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 JVC et al. II (citing to GFMS Gold 
Survey 2010).
    \858\ See letters from NAM I and Tulane.
    \859\ See letter from IPC I.
    \860\ 5,994 issuers x 75% = 4,495.5.
    \861\ See letters from IPC I (stating that nearly 100% of 
affected issuers would have to complete a Conflict Minerals Report) 
and NAM I (stating that it ``conservatively'' estimated that 75% of 
affected issuers would have to provide an audited Conflict Minerals 
Report).
---------------------------------------------------------------------------

1. Estimate of Conducting Due Diligence, Including the Audit
    We received a number of comments regarding the estimated costs of 
the proposed rules, particularly setting up the overall supply chain 
tracking systems and conducting an audit. The cost estimates provided 
by the manufacturing industry association commentator and the 
university group commentator were the most comprehensive because they 
discussed the costs to all companies, including issuers and private 
company suppliers.\862\ We note that the electronic interconnect 
industry association commentator provided an extensive discussion of 
the costs of the proposed rules.\863\ Its discussion and cost 
estimates, however, were limited to the electronic interconnect 
industry, which is only one segment of affected issuers. Also, although 
the tin industry association commentator's estimates were useful, they 
were limited to the costs of its bag-and-tag system, which covers only 
the costs of due diligence for the portion of the supply chain from the 
mine to the smelter.\864\ For the PRA estimate of the due diligence 
costs, we relied primarily on the cost estimates from the manufacturing 
industry association and the university group commentators and, to a 
lesser extent, we also relied on the electronic interconnect industry 
association commentator's estimates.\865\
---------------------------------------------------------------------------

    \862\ See letters from NAM I and Tulane.
    \863\ See letter from IPC I.
    \864\ See letter from ITRI II.
    \865\ We note that in the Economic Analysis above, we provided a 
range to estimate the ongoing compliance costs. For purposes of the 
PRA, however, which calls for a specific estimate of the total 
annual paperwork burden imposed by the rule, we are using two of the 
data points within that range based on the more comprehensive 
comment letters we received and are then averaging the results to 
yield a final PRA estimate.
---------------------------------------------------------------------------

    The manufacturing industry association commentator estimated that 
the initial costs to affected issuers would be approximately $8 
billion.\866\ This commentator's only two recurring costs in its $8 
billion estimate were the approximately $300 million cost for risk-
based programs needed to verify the credibility of suppliers' 
information, which the commentator indicated would be incurred ``on an 
annual basis,'' \867\ and the approximately $450 million cost for the 
annual audit of the Conflict Minerals Report, which together total $750 
million.\868\
---------------------------------------------------------------------------

    \866\ We calculate the exact amount, based on the commentator's 
estimates and assumptions, to be $7,941,250,000. The commentator 
stated that this cost would include changing legal obligations, 
changing IT systems, obtaining an independent private sector audit, 
and implementing risk-based programs. Changing legal obligations 
would entail 2 hours for each affected issuer's 2,000 suppliers at 
$50 per hour [2 x $50 x 2,000 x 5,994 = $1,198,800,000.]. Changing 
IT systems would entail a cost of $1 million per affected issuer [$1 
million x 5,994 = $5,994,000,000]. Obtaining an audit would entail a 
cost of $100,000 for 75% of all affected issuers [$100,000 x 75% x 
5,994 = $449,550,000]. Implementing risk-based programs would entail 
1,000 hours at a cost of $50 per hour for all affected issuers 
[1,000 x $50 x 5,994 = $299,700,000].
    \867\ See letter from NAM I.
    \868\ The actual cost would be $749,250,000 [$449,550,000 + 
$299,700,000 = $749,250,000].
---------------------------------------------------------------------------

    The university group commentator estimated that the initial costs 
to affected issuers would be approximately

[[Page 56357]]

$2.8 billion,\869\ and the cost to affected issuers in subsequent years 
would consist primarily of the approximately $207 million portion of 
that amount that would be used for the annual audit of the Conflict 
Minerals Report.\870\
---------------------------------------------------------------------------

    \869\ The actual estimated cost was $2,795,793,000. This cost 
estimate included a $2,562,780,000 cost for instituting the 
necessary IT systems [$1,678,000,000 for large issuers plus 
$884,780,000 for small issuers], a $26,013,000 cost for 
strengthening internal management systems in view of performing due 
diligence, and a $207,000,000 cost for the independent private 
sector audit. The university group commentator estimated the audit 
cost to be exactly $207 million by using the manufacturing industry 
association commentator's estimate that 4,500 of the 5,994 affected 
issuers (75%) would be required to obtain an audit of their Conflict 
Minerals Report. The 4,500 figure, however, is rounded up from a 
more exact calculation of 75% of 5,994. The more exact calculation 
for 75% of 5,994 is 4,496 [5,994 x .75 = 4,459.5], and not 4,500, 
but both the university group commentator and the manufacturing 
industry association commentator rounded to 4,500. Using the 
electronic interconnect industry association commentator's estimates 
that 72% of all affected issuers are small and medium-sized issuers 
(under $99 million in annual sales) and 28% are large issuers, the 
university group estimated that, of the 4,500 affected issuers, 
3,240 were small and medium-sized issuers and 1,260 were large 
issuers. The university group commentator assumed that, based on the 
manufacturing industry association commentator's estimates, an audit 
for small and medium-sized issuers would cost $25,000 per audit and 
an audit for large issuers would cost $100,000 per audit. Using 
these estimates, the university group determined that the total 
audit cost amount for affected issuers would be $207 million 
exactly.
    \870\ See letter from Tulane.
---------------------------------------------------------------------------

    As discussed above in section III, however, we adjusted the cost 
estimates provided to us by the manufacturing industry association and 
the university group commentators. Therefore, our overall estimate 
regarding the costs of conducting due diligence, including the audit, 
is based on the modified cost figures. Although the manufacturing 
industry association commentator estimated that the initial costs to 
affected issuers would be approximately $8 billion, we modified that 
figure to be approximately $2.7 billion for affected issuers.\871\ In 
this regard, we modified that commentator's approximately $300 million 
cost estimate for risk-based programs to be approximately $159 
million.\872\ We did not, however, modify the commentator's 
approximately $450 million cost estimate of the independent private 
sector audit for affected issuers, which was based on its estimate that 
the cost of such an audit for these issuers would be $100,000 per 
issuer, and not the $25,000 we estimated it to be in the Proposing 
Release.\873\ We note that the electronic interconnect industry 
association commentator agreed that the costs for an independent 
private sector audit could be as much as $100,000.\874\ The 
manufacturing industry association commentator noted, however, that 
$25,000 would cover the audit for a small company with a simple supply 
chain.\875\
---------------------------------------------------------------------------

    \871\ Our estimate of the cost is $2,742,705,000. This cost 
estimate included a $635,364,000 cost for issuer due diligence 
reform, a $1,498,500,000 cost for IT system modifications, a 
$450,000,000 cost for the independent private sector audit, and a 
$158,841,000 cost of risk-based programs needed to verify the 
credibility of suppliers' information.
    \872\ Our estimate of the cost is $158,841,000.
    \873\ See letter from NAM I.
    \874\ See letter from IPC I.
    \875\ See letter from NAM I. We note that the manufacturing 
industry association commentator separately indicated that costs of 
the final rule could be $16 billion or more by extrapolating from 
the costs of compliance with the RoHS. We did not use this estimate 
in our analysis because, despite the fact that this commentator 
claimed that both directives require companies to trace materials 
used in their products, the commentator did not discuss how RoHS 
compares to the requirements in the final rule.
---------------------------------------------------------------------------

    From the approximately $159 million cost estimate for the risk-
based programs needed to verify the credibility of suppliers' 
information, based on our revised calculations of the manufacturing 
industry association commentator's figures, and that commentator's 
approximately $450 million cost estimate for the audit, we derive an 
approximate estimate of $609 million for annual recurring costs.\876\ 
We note that the initial approximately $2.7 billion burden is much 
greater than the subsequent approximately $609 million annual burden, 
and we averaged the burdens over the first three years. Over a three-
year period, the average annual cost to affected issuers would be 
approximately $1.32 billion using the manufacturing industry 
association commentator's figures.\877\
---------------------------------------------------------------------------

    \876\ $450,000,000 + $158,841,000 = $608,841,000.
    \877\ ($2,742,705,000 + $608,841,000 + $608,841,000)/3 = 
$1,320,129,000.
---------------------------------------------------------------------------

    Additionally, although the university group commentator estimated 
that the initial costs to affected issuers would be approximately $2.8 
billion, we modify that figure to be approximately $1.8 billion.\878\ 
We did not, however, modify the university group commentator's 
approximately $207 million cost estimate of the independent private 
sector audit for affected issuers. Therefore, we do not modify the 
estimate of the cost to affected issuers in subsequent years, which 
would still be approximately $207 million. Again, the initial 
approximately $1.8 billion burden is much greater than the subsequent 
approximately $207 million annual burden, and we also averaged the 
burdens over the first three years. Over a three-year period, the 
average annual cost to affected issuers would be approximately $740 
million using the university group commentator's figures.\879\
---------------------------------------------------------------------------

    \878\ The estimated cost was $1,805,773,000. This cost estimate 
for issuers included the modified $1,572,760,000 cost for 
instituting the necessary IT systems, the $207,000,000 cost for the 
independent private sector audit, and the $26,013,000 cost for 
strengthening internal management systems in view of performing due 
diligence.
    \879\ ($1,805,773,000 + $207,000,000 + $207,000,000)/3 = 
$739,924,333.
---------------------------------------------------------------------------

    To estimate the overall costs of conducting due diligence, 
including the audit, we averaged the modified estimates from the 
manufacturing industry association and the university group 
commentators discussed above. The average of these two costs is 
approximately $1.03 billion.\880\
---------------------------------------------------------------------------

    \880\ ($1,320,129,000 + $739,924,333)/2 = $1,030,026,667.
---------------------------------------------------------------------------

2. Estimate of Preparing the Disclosure
    The few estimates that we received from commentators regarding the 
number of hours it would take issuers to prepare and review the 
proposed disclosure requirements varied widely. One commentator, a 
semiconductor company, asserted that it would require 1,400 hours 
initially to implement the proposed rules and 700 hours in subsequent 
years.\881\ The university group commentator suggested that a small 
issuer would require 40 man-hours to comply with the proposed rules and 
a large issuer would require 100 man-hours,\882\ and it appears that 
these costs would be recurring.\883\ The manufacturing industry 
association commentator concluded that changing legal obligations to 
reflect a company's new due diligence would require ``at a minimum'' 
two hours of employee time,

[[Page 56358]]

``and considerably more than two hours is a distinct possibility.'' 
\884\
---------------------------------------------------------------------------

    \881\ See letter from TriQuint I.
    \882\ See letter from Tulane. This commentator stated that an 
issuer's compliance could be ``facilitated'' by using third parties. 
The commentator assumed that large issuers would use third parties 
for 10% of their compliance needs and small companies would use 
third parties for 25% of their compliance needs. In our calculations 
for the number of hours issuers would require in complying with our 
proposed rules, we did not include third parties because it appears 
that the use of third parties would not affect the number of hours 
required for compliance, but would only affect the cost.
    \883\ Id. This commentator stated that the 100 hours or 40 hours 
needed to comply with the proposed rules would involve multiple 
tasks, including: Initial reviews of the issuer's policies, 
procedures, and controls; developing a gap analysis and compliance 
plan, and modifying that plan as needed; developing draft revised 
policies, procedures, and controls; conducting initial testing on 
those revised policies, procedures, and controls; and implementing 
the revised policies, procedures, and controls, training personnel 
on them, and communicating them to suppliers. Although many of these 
are described as ``initial'' actions, issuers will need to review 
and modify many of them as well. For example, it is likely that each 
year issuers may need to review and test their policies, procedures, 
and controls, modify them as needed, and implement any new further 
revised policies, procedures, and controls.
    \884\ See letter from NAM I.
---------------------------------------------------------------------------

    In calculating the number of hours necessary to prepare and review 
the disclosure required by the final rule, we derived an average based 
on the estimates provided by the semiconductor company and university 
group commentators.\885\ For the semiconductor company commentator 
estimate, we multiplied its initial 1,400 hour estimate by the 5,994 
affected issuers, so the first year's burden for all affected issuers 
would be approximately 8.4 million hours,\886\ and the 700 hour 
subsequent year estimate also by the 5,994 affected issuers, which 
resulted in approximately 4.2 million hours for each subsequent 
year.\887\ Averaging the burden hours over the first three years 
resulted in an average burden hour estimate of approximately 5.6 
million hours per year.\888\ To determine the estimated number of hours 
per year per issuer, we divided the 5.6 million hours by 5,994 affected 
issuers, which resulted in 933 hours per year per affected issuer to 
comply with the proposed rules.\889\
---------------------------------------------------------------------------

    \885\ We did not include the two-hour figure from the 
manufacturing industry association commentator in our estimate 
because it was so much lower than the other two estimates and did 
not appear to include all the necessary steps to comply with the 
proposed rules. Instead, this estimate was based only on the time 
required to make changes to an issuer's corporate compliance 
policies and supply chain operating procedures. Also, the university 
group commentator specifically disagreed with this estimate and the 
manufacturing industry association commentator acknowledged that 
these actions may take ``considerably more than two hours.''
    \886\ 1,400 hours x 5,994 affected issuers = 8,391,600 hours.
    \887\ 700 hours x 5,994 affected issuers = 4,195,800 hours.
    \888\ [8,391,600 hours + (4,195,800 hours x 2)]/3 = 5,594,400 
hours average per year.
    \889\ 5,594,400 hours/5,994 affected issuers = 933 hours.
---------------------------------------------------------------------------

    The university group commentator separated its estimated hours 
between small and large issuers using the estimated breakdown between 
the number of affected large and small companies provided by the 
electronic interconnect industry association in its comment 
letter.\890\ Because we recognized that companies of varying sizes may 
incur different burdens, we also differentiated between large and small 
companies in our estimate of burden hours. Therefore, we multiplied the 
university group commentator's 100 hour estimate for large issuers by 
the electronic interconnect industry association commentator's 
estimated 28% for large affected issuers, so the burden for large 
affected issuers would be 167,832 hours,\891\ and multiplied the 40 
hour estimate for small issuers by the electronic interconnect industry 
association commentator's 72% for small affected issuers, which 
resulted in 172,627 hours for small affected issuers.\892\ To determine 
the estimated number of hours per year per issuer, we added the 
estimated hours for the small and large companies, which would be 
340,459 hours,\893\ and divided that number by all the 5,994 affected 
issuers. Therefore, the average amount of hours per year for each 
issuer, both large and small, to prepare and review the disclosure 
required by our rule would be approximately 57 hours.\894\ Although not 
explicit in its comment letter, it appears that the burden hours for 
the university group commentator's estimates would be incurred 
annually, so we did not average these hours over the first three years 
as we did for the semiconductor company commentator's estimate.
---------------------------------------------------------------------------

    \890\ See letter from Tulane.
    \891\ 100 hours x 5,994 affected issuers x 28% large affected 
issuers = 167,832 hours.
    \892\ 40 hours x 5,994 affected issuers x 72% small affected 
issuers = 172,627 hours.
    \893\ 167,832 hours + 172,627 hours = 340,459 hours.
    \894\ 340,459 hours/5,994 affected issuers = 56.80 hours.
---------------------------------------------------------------------------

    Next, we averaged the two burden hour estimates by adding the 933 
hour estimate to the 57 hour estimate (and by dividing by two) and 
determined that each affected issuer, on average, would spend 495 
burden hours preparing and reviewing the disclosure.\895\ We assumed 
that 75% of the burden of preparation would have been carried by the 
company internally and that 25% of the burden of the preparation would 
have been carried by outside professionals retained by the company at 
an average cost of $200 per hour.\896\ The portion of the burden 
carried by outside professionals would have been reflected as a cost, 
while the portion of the burden carried by the company internally would 
have been reflected in hours. Therefore, the total number of internal 
preparation hours for affected issuers would be 2,225,273 hours.\897\ 
Similarly, the total cost for external preparation for affected issuers 
would be $148,351,500.\898\
---------------------------------------------------------------------------

    \895\ 933 hours + 57 hours/2 = 495 hours.
    \896\ The university group commentator estimated that outside 
professionals would cost $200 per hour because it believed that ``a 
substantial portion'' of required consulting work will be done by 
``lower cost environmental and sustainability consulting firms'' 
instead of large accounting firms that would be more expensive. We 
frequently use a $400 per hour estimate in our PRA analysis on the 
assumption that attorneys will be involved in the preparation of the 
securities law disclosures required by our rules. The disclosure 
required by the final rule may likely involve work by other types of 
professionals, so that the $200 per hour estimate may be more 
appropriate in this circumstance.
    \897\ 495 hours x 75% internal preparation x 5,994 affected 
issuers = 2,225,272.50 hours.
    \898\ 495 hours x 25% external preparation x $200 per hour for 
outside consultants x 5,994 affected issuers = $148,351,500.
---------------------------------------------------------------------------

3. Revised PRA Estimate
    The following table illustrates the estimated changes in annual 
compliance burden in the collection of information in hours and costs 
for the new Exchange Act specialized disclosure report that will result 
from the final rule. The burden hours figure is the 2,225,273 internal 
burden hours estimate for preparing the disclosure. We are adding the 
$148,351,500 estimate of external professional costs for preparing the 
disclosure to the $1,030,026,667 estimate of conducting due diligence, 
including the audit, to determine the $1,178,378,167 professional costs 
in the below table.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                     Final
                                                                    Current       Final       Current      Increase in      Final burden       Current         Increase in        professional
                              Form                                   annual       annual       burden      burden hours   hours (C) = (A)    professional      professional    costs (F) = (D) +
                                                                   responses    responses    hours (A)         (B)             + (B)          costs (D)         costs (E)             (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-D.............................................................  ...........       5,994   ...........       2,225,273        2,225,273   ...............    $1,178,378,167     $1,178,378,167
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

V. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Act Analysis (``FRFA'') \899\ 
relates to new rule 13p-1 and new Form SD, which implement Section 
13(p) of the Exchange Act. Section 13(p) concerns certain disclosure 
and reporting obligations of issuers with conflict minerals necessary 
to the functionality or production of any product manufactured or 
contracted by those

[[Page 56359]]

issuers to be manufactured. An Initial Regulatory Flexibility Act 
Analysis was prepared in accordance with the Regulatory Flexibility Act 
and included in the Proposing Release.
---------------------------------------------------------------------------

    \899\ This analysis has been prepared in accordance with 5 
U.S.C. 601.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Final Action

    The final rule is designed to implement the requirements of Section 
1502 of the Act. Specifically, we are adopting amendments to our rules 
to implement the Conflict Minerals Statutory Provision. The final rule 
requires any reporting 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 annually in a 
separate specialized disclosure report on a new form the results of its 
reasonable country of origin inquiry into whether its conflict minerals 
originated in the Covered Countries or came from recycled or scrap 
sources. Under the final rule, following its reasonable country of 
origin inquiry, if (a) The issuer knows that its conflict minerals did 
not originate in the Covered Countries or knows that they came from 
recycled or scrap sources, or (b) the issuer has no reason to believe 
its conflict minerals may have originated in the Covered Countries, or 
(c) the issuer reasonably believes its conflict minerals came from 
recycled or scrap sources, then in all such cases the issuer must 
disclose its determination and describe briefly in the body of Form SD, 
the reasonable country of origin inquiry it undertook and the results 
of the inquiry. On the other hand, following its reasonable country of 
origin inquiry, if (a) the issuer knows that its conflict minerals 
originated in the Covered Countries and knows that they did not come 
from recycled or scrap sources, or the issuer has reason to believe 
that its conflict minerals may have originated in the Covered 
Countries, and (b) the issuer knows that its conflict minerals did not 
come from recycled or scrap sources or has reason to believe that its 
conflict minerals may not have come from recycled or scrap sources, 
then the issuer must exercise due diligence on the source and chain of 
custody of its conflict minerals that conforms to a nationally or 
internationally recognized due diligence framework, if one is 
available. If one is not available, the issuer must exercise due 
diligence without the benefit of such a framework. Following its due 
diligence, unless the issuer determines, based on that due diligence, 
that its conflict minerals did not originate in the Covered Countries 
or that its conflict minerals did come from recycled or scrap sources, 
the issuer must file a Conflict Minerals Report.
    In most circumstances, the issuer must obtain an independent 
private sector audit of its Conflict Minerals Report. The issuer must 
also describe in its Conflict Minerals Report, among other information, 
its products manufactured or contracted to be manufactured that have 
not been found to be ``DRC conflict free.'' For a temporary two-year 
period for all issuers, and for a temporary four-year period for 
smaller reporting issuers, an issuer that must perform due diligence 
and is unable to determine that the conflict minerals in its products 
originated in the Covered Countries or came from recycled or scrap 
sources, or unable to determine that the conflict minerals in those 
products that originated in the Covered Countries financed or benefited 
armed groups in those countries, may consider those products ``DRC 
conflict undeterminable.'' In that case, the issuer must describe, 
among other information, its products manufactured or contracted to be 
manufactured that are ``DRC conflict undeterminable'' and the steps it 
has taken or will take, if any, since the end of the period covered in 
its most recent prior Conflict Minerals Report to mitigate the risk 
that its necessary conflict minerals benefit armed groups, including 
any steps to improve its due diligence. An issuer with products that 
are ``DRC conflict undeterminable'' is not required to obtain an 
independent private sector audit of the Conflict Minerals Report 
regarding the conflict minerals in those products.
    Finally, after its reasonable country of origin inquiry, an issuer 
that has reason to believe that its conflict minerals may not have been 
from recycled or scrap sources must exercise due diligence that 
conforms to a nationally or internationally recognized due diligence 
framework developed specifically for conflict minerals from recycled 
sources to determine that its conflict minerals are from recycled or 
scrap sources. The issuer must also describe its due diligence in its 
Conflict Minerals Report. Currently, gold is the only conflict mineral 
with a nationally or internationally recognized due diligence framework 
for recycled or scrap conflict minerals. If no nationally or 
internationally recognized due diligence framework for a particular 
recycled or scrap conflict mineral is available, which is the case for 
the other three minerals, until such a framework is developed, the 
issuer must exercise due diligence in determining that its conflict 
minerals are from recycled or scrap sources and describe the due 
diligence measures it exercised in its Conflict Minerals Report.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on any aspect of the 
IRFA, including the number of small entities that would be affected by 
the proposed rules, the nature of the impact, how to quantify the 
number of small entities that would be affected, and how to quantify 
the impact of the proposed rules. We received some comments that 
specifically referenced the Regulatory Flexibility Analysis 
(``RFA'').\900\ Some of these commentators claimed that we 
underestimated the number of small entities that would be impacted by 
the proposal because our estimate did not account for the number of 
small businesses that do not report with us but participate in a 
reporting issuer's supply chain.\901\ In this regard, the SBA 
recommended that we publish an amended IFRA for the proposed rules to 
``more accurately reflect the costs of the proposed rule and the number 
of small businesses that it will affect.'' \902\ Another commentator 
noted specifically that we must look beyond the 793 reporting issuers 
that are also small entities because, when an issuer seeks to establish 
whether its supply chain is free of conflict minerals, it will have to 
turn to its first-tier suppliers and require due diligence.\903\ This 
commentator indicated, therefore, that ``a large portion of America's 
278 thousand small and medium-sized manufacturers could be affected 
by'' the final rule. Moreover, for purposes of determining the cost of 
the independent private sector audit on smaller companies, the 
commentator estimated that one in five smaller companies would be in an 
issuer's supply chain. As discussed in the Economic Analysis section 
above, we acknowledge that the statute and the final rule will affect 
many companies, including both companies that are directly subject to 
the rule's requirements and those that are not reporting companies but 
are part of a reporting issuer's supply chain.\904\ For

[[Page 56360]]

purposes of the RFA, however, the focus is the impact on entities on 
which our rules impose direct requirements.\905\ Therefore, although we 
do acknowledge the rule's impact on non-reporting small entities, they 
were not included in our RFA estimate of the 793 small entities that 
would be directly subject to the final rule.
---------------------------------------------------------------------------

    \900\ See, e.g., letters from Industry Group Coalition II; IPC 
I; NAM I; Senator Olympia J. Snowe, Representative Sam Graves, 
Senator Scott P. Brown, Representative Roscoe Barlett, 
Representative Scott Tipton, and Representative Joe Walsh (Nov. 17, 
2011) (``Sen. Snowe et al.''); and the Small Business 
Administration's Office of Advocacy (Oct. 25, 2011) (``SBA'').
    \901\ See, e.g., letters from NAM I, SBA, Sen. Snowe et al., and 
WGC II.
    \902\ See letter from SBA.
    \903\ See letter from NAM I.
    \904\ Id.
    \905\ See, e.g., Mid-Tex Electric Cooperative v. FERC, 773 F.2d 
327 (D.C. Cir. 1985) and White Eagle Cooperative Ass'n v. Conner, 
553 F.3d 467 (7th Cir. 2009). See also Small Bus. Admin., Office of 
Advocacy, A Guide for Government Agencies: How to Comply with the 
Regulatory Flexibility Act (June 2010) (``SBA Guidance''), available 
at https://archive.sba.gov/advo/laws/rfaguide.pdf.
---------------------------------------------------------------------------

    Additionally, several commentators addressed aspects of the 
proposed rules that could potentially affect smaller reporting 
companies or small companies generally.\906\ These commentators did not 
clarify whether they were referring to ``small entities'' as that term 
is defined under Exchange Act Rule 0-10(a).\907\ In particular, certain 
commentators argued that the costs of the rules could be 
disproportionally higher to smaller issuers.\908\ One commentator 
suggested that the Conflict Minerals Statutory Provision ``does create 
a burden on small businesses, but not as high or disproportionate to 
revenue as has been reported'' by other commentators.\909\ Also, as 
discussed above, one commentator argued that the final rule should 
exempt smaller reporting companies.\910\ Many other commentators 
argued, however, that final rule should not exempt smaller reporting 
companies.\911\ Many commentators indicated that exempting smaller 
reporting companies would not reduce significantly their burdens \912\ 
because, among other reasons, many of these smaller companies are part 
of larger companies' supply chains and these larger companies would 
require the smaller companies to provide conflict minerals information 
so that the larger companies could meet their obligations under the 
rule.\913\ Two commentators agreed that smaller reporting companies 
should not be exempt from the rule, but stated that they should be 
allowed to phase-in the rules to mitigate their costs and not drain 
their resources.\914\
---------------------------------------------------------------------------

    \906\ See, e.g., letters from BCIMC, Corporate Secretaries I, 
CRS I, Earthworks, Global Witness I, Howland, IPC I, JVC et al. II, 
NAM I, Rep. Bachus et al., Rockefeller, Sen. Durbin/Rep. McDermott, 
SIF I, State II, TIAA-CREF, TIC, TriQuint I, and WGC II.
    \907\ 17 CFR 240.0-10(a) (defining 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).
    \908\ See, e.g., letters from Howland, NAM I, and WGC II.
    \909\ See letter from Claigan IV.
    \910\ See letter from Corporate Secretaries I.
    \911\ See, e.g., letters from BCIMC, CRS I, Earthworks, Global 
Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen. Durbin/
Rep. McDermott, SIF I, State II, TIAA-CREF, TIC, and TriQuint I.
    \912\ See, e.g., letters from IPC I and TriQuint I.
    \913\ See letter from IPC I.
    \914\ See letters from Howland and JVC et al. II.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Rule

    The final rule will affect some reporting issuers that are small 
entities. Exchange Act Rule 0-10(a) \915\ 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 
final rule would affect small entities with necessary conflict minerals 
as defined under Exchange Act Section 13(p). In the Proposing Release, 
we estimated that there were approximately 793 issuers to which 
conflict minerals are necessary and that may be considered small 
entities. As discussed above some commentators indicated that we 
underestimated the number of small entities that would be impacted by 
the rule, but that was based on the assertion that we consider small 
entities that are not directly subject to the requirements of the final 
rule.\916\ We note that no commentator provided any other number of 
small entities or disagreed that 793 is the number that will be 
directly subject to the final rule. We continue to believe that there 
are 793 small entities that file reports with us under Exchange Act 
Sections 13(a) and 15(d) and that will be directly subject to the final 
rule because they likely have conflict minerals necessary to the 
functionality or production of products they manufacture or contract to 
manufacture.
---------------------------------------------------------------------------

    \915\ 17 CFR 240.0-10(a).
    \916\ See, e.g., letters from NAM I, SBA, and WGC II.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The final rule will add to the annual disclosure requirements of 
issuers 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 
new specialized disclosure reports on Form SD that certain issuers will 
be required to file annually. Among other matters, that information 
must include, as applicable:
     Disclosure in the body of the specialized disclosure 
report as to whether such issuer knows or has reason to believe that 
conflict minerals necessary to the functionality or production of a 
product manufactured or contracted by an issuer to be manufactured 
originated in the Covered Countries or may have originated in the 
Covered Countries and may not have come from recycled or scrap sources;
     If not, or if the issuer knows or has reason to believe 
that its necessary conflict minerals came from recycled or scrap 
sources, disclosure in the body of the specialized disclosure report 
and on the issuer's Internet Web site of that determination and a brief 
description of the reasonable country of origin inquiry used in making 
that determination and the results of the inquiry it performed, and 
disclosure in the body of the specialized disclosure report of the 
address of the issuer's Internet Web site where that information is 
publicly available;
     If so, and the issuer is able to determine whether its 
conflict minerals directly or indirectly financed or benefited armed 
groups in the Covered Countries,
    [cir] A Conflict Minerals Report filed as an exhibit to the 
specialized disclosure report, which includes a certified independent 
private sector audit report, a description of the nationally or 
internationally recognized due diligence framework the issuer used to 
determine the source and chain of custody of its conflict minerals, a 
description of the issuer's products that have not been found to be 
``DRC conflict free,'' and a description of the facilities used to 
process the necessary conflict minerals in those products, the country 
of origin of the necessary conflict minerals in those products, and the 
efforts to determine the mine or location of origin with the greatest 
possible specificity;
    [cir] Disclosure in the body of the specialized disclosure report 
that a Conflict Minerals Report is filed as an exhibit to the 
specialized disclosure report and is publicly available on the issuer's 
Internet Web site, and disclosure within the body of the specialized 
disclosure report of the address of the issuer's Internet Web site on 
which the Conflict Minerals Report is publicly available;
    [cir] Posting of the Conflict Minerals Report on the issuer's 
publicly available Internet Web site.
     If so, but the issuer is unable to determine that its 
conflict minerals did not directly or indirectly finance or benefit 
armed groups in the Covered Countries, if the issuer has reason to 
believe that its conflict minerals may have originated in the Covered 
Countries but is unable to determine the origin,

[[Page 56361]]

    [cir] A Conflict Minerals Report filed as an exhibit to the 
specialized disclosure report that includes a description of the 
nationally or internationally recognized due diligence framework the 
issuer used to determine the source and chain of custody of its 
conflict minerals, a description of the facilities used to process the 
necessary conflict minerals in those products, if known, the country of 
origin of the necessary conflict minerals in those products, if known, 
and the efforts to determine the mine or location of origin with the 
greatest possible specificity, and, for a temporary period, a 
description of the issuer's products that are ``DRC conflict 
undeterminable'' (for the temporary period, such issuers are not 
required to have their Conflict Minerals Report audited regarding such 
minerals);
    [cir] Disclosure in the body of the specialized disclosure report 
that a Conflict Minerals Report is filed as an exhibit to the 
specialized disclosure report and is publicly available on the issuer's 
Internet Web site and the address of the issuer's Internet Web site on 
which the Conflict Minerals Report is publicly available;
    [cir] Posting of the Conflict Minerals Report on the issuer's 
publicly available Internet Web site.
     If there is reason to believe that the conflict minerals 
may not be from recycled or scrap sources and there is a nationally or 
internationally recognized due diligence framework for those particular 
conflict minerals,
    [cir] A Conflict Minerals Report filed as an exhibit to the 
specialized disclosure report, which includes a description of the 
nationally or internationally recognized due diligence framework the 
issuer used to determine that those conflict minerals were or has 
reason to believe may have been from recycled or scrap sources, which 
includes a certified independent private sector audit report regarding 
those minerals;
    [cir] Disclosure in the body of the specialized disclosure report 
that a Conflict Minerals Report is filed as an exhibit to the 
specialized disclosure report and is publicly available on the issuer's 
Internet Web site and the address of the issuer's Internet Web site on 
which the Conflict Minerals Report is publicly available.
     If there is reason to believe that the conflict minerals 
may not be from recycled or scrap sources but there is no nationally or 
internationally recognized due diligence framework for those particular 
conflict minerals,
    [cir] A Conflict Minerals Report filed as an exhibit to the 
specialized disclosure report, which includes a description of the due 
diligence the issuer used to determine that those conflict minerals 
were or has reason to believe may have been from recycled or scrap 
(until a nationally or internationally recognized due diligence 
framework is available for those conflict minerals from recycled or 
scrap sources, such issuers are not required to have their Conflict 
Minerals Report audited regarding such minerals);
    [cir] Disclosure in the body of the specialized disclosure report 
that a Conflict Minerals Report is filed as an exhibit to the 
specialized disclosure report and is publicly available on the issuer's 
Internet Web site and the address of the issuer's Internet Web site on 
which the Conflict Minerals Report is publicly available.
    The same disclosure and reporting requirements apply to U.S. and 
foreign issuers. However, under the final rule, issuers that proceed to 
step three but are unable to identify the origin of their conflict 
minerals or whether their conflict minerals came from recycled or scrap 
sources are required to provide a Conflict Minerals Report, but that 
report does not have to be audited for the first four years following 
the rule's adoption for smaller reporting companies. We are creating 
new Form SD that requires every issuer to file its conflict minerals 
information for each applicable calendar year on May 31 of the 
following year.

E. Agency Action To Minimize Effect on Small Entities

    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 final rule, we considered the following 
alternatives:
    (1) Establishing different compliance or reporting requirements 
which take into account the resources available to small entities;
    (2) Exempting small entities from coverage of the disclosure 
requirements, or any part thereof;
    (3) Clarification, consolidation, or simplification of the rules 
compliance and reporting requirements for small entities; and
    (4) Use of performance standards rather than design standards.
    We considered but did not establish different compliance 
requirements for small entities. As discussed above in response to 
commentators' suggestions that we exempt smaller reporting companies, 
we similarly believe that separate disclosure requirements for small 
entities that would differ from the final reporting requirements for 
other issuers, or exempting them from those requirements, would not 
achieve Congress's objectives of Section 13(p). The final rule is 
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. In any 
case, as several commentators noted, many smaller companies are part of 
larger companies' supply chains and would need to provide conflict 
minerals information so that the larger companies could meet their 
obligations under the rule.\917\ However, under the final rule, issuers 
that proceed to step three but are unable to determine their conflict 
minerals originated in the Covered Countries or came from recycled or 
scrap sources, or unable to determine that the conflict minerals that 
originated in the Covered Countries financed or benefited armed groups 
in those countries are required to provide a Conflict Minerals Report, 
but that report does not have to be audited for the first four years 
following the rule's adoption for smaller reporting companies and the 
issuers may describe the product with known origin as ``DRC conflict 
undeterminable.''
---------------------------------------------------------------------------

    \917\ See, e.g., letters from NAM I, SBA, Sen. Snowe et al., and 
WGC II.
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    We clarified and simplified aspects of the final rule for all 
issuers, including small entities. For example, the final rule 
specifies and clarifies the objective for the audit of a Conflict 
Minerals Report for newly-mined conflict minerals. The final rule also 
requires an issuer to disclose the information in the body of and as an 
exhibit to its specialized disclosure report, which may simplify the 
process of submitting the conflict minerals disclosure and Conflict 
Minerals Report as compared with requiring disclosure in an issuer's 
annual report on Form 10-K, Form 20-F, or Form 40-F.
    We have generally used design rather than performance standards in 
connection with the final rule because we believe design standards will 
better accomplish Congress's objectives. The reasonable country of 
origin inquiry is the performance standard. In addition, the specific 
disclosure requirements in the final rule will promote consistent and 
comparable disclosure among all issuers with necessary conflict 
minerals. However, we are providing guidance regarding ``contract to 
manufacture,'' and ``necessary to the functionality and production,'' 
which we believe will allow issuers to comply with the statutory 
requirements in a manner more tailored to their individual 
circumstances.

[[Page 56362]]

VI. Statutory Authority and Text of the Final Rule

    We are adopting the rule amendments contained in this document 
under the authority set forth in Sections 3(b), 12, 13, 15(d), 23(a), 
and 36 of the Exchange Act, as amended.

List of Subjects in 17 CFR Parts 240 and 249b

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, we are amending Title 17, Chapter 
II of the Code of Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 is amended by adding an 
authority for Sec.  240.13p-1 in numerical order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77jjj, 77kkk, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-8, 78p, 78q, 78s, 78u-5, 78w, 78x, 78dd(b), 78dd(c), 78 ll, 
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et 
seq., and 8302; 18 U.S.C. 1350; 12 U.S.C. 5221(e)(3), and Pub. L. 
111-203, Sec. 712, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
    Section 240.13p-1 is also issued under sec. 1502, Pub. L. 111-
203, 124 Stat. 1376.
* * * * *

0
2. Add Sec.  240. 13p-1 to read as follows:


Sec.  240.13p-1  Requirement of report regarding disclosure of 
registrant's supply chain information regarding conflict minerals.

    Every 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, having conflict minerals that are necessary to the 
functionality or production of a product manufactured or contracted by 
that registrant to be manufactured, shall file a report on Form SD 
within the period specified in that Form disclosing the information 
required by the applicable items of Form SD as specified in that Form 
(17 CFR 249b.400).

PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934

0
3. The authority citation for part 249b is amended by adding an 
authority for Sec.  249b.400 to read as follows:

    Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
* * * * *
    Section 249b.400 is also issued under secs. 1502, Pub. L. 111-
203, 124 Stat. 2213.


0
4. Add Sec.  249b.400 to read as follows:


Sec.  249b.400  Form SD, specialized disclosure report.

    This Form shall be filed pursuant to Sec.  240.13p-1 of this 
chapter by registrants that file reports with the Commission pursuant 
to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 and 
are required to disclose the information required by Section 13(p) 
under the Securities Exchange Act of 1934 and Rule 13p-1 (Sec.  
240.13p-1) of this chapter.

0
5. Add Form SD (referenced in Sec.  249b.400) to read as follows:

    Note: The text of Form SD does not appear in the Code of Federal 
Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM SD

Specialized Disclosure report

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(Exact name of the registrant as specified in its charter)

-----------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)

-----------------------------------------------------------------------
(Commission File Number)

-----------------------------------------------------------------------
(IRS Employer Identification No.)

-----------------------------------------------------------------------
(Address of principal executive offices) (Zip code)

-----------------------------------------------------------------------
(Name and telephone number, including area code, of the person to 
contact in connection with this report.)

Check the appropriate box to indicate the rule pursuant to which this 
form is being filed, and provide the period to which the information in 
this form applies:

---- Rule 13p-1 under the Securities Exchange Act (17 CFR 240.13p-1) 
for the reporting period from January 1 to December 31, --------.

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GENERAL INSTRUCTIONS

A. Rule as to Use of Form SD.

    This form shall be used for a report pursuant to Rule 13p-1 (17 CFR 
240.13p-1) under the Exchange Act.

B. Information to be Reported and Time for Filing of Reports.

    1. Form filed under Rule 13p-1. A report on this Form shall be 
filed on EDGAR no later than May 31 after the end of the issuer's most 
recent calendar year.
    2. If the deadline for filing this form occurs on a Saturday, 
Sunday or holiday on which the Commission is not open for business, 
then the deadline shall be the next business day.

C. Inapplicability to Registered Investment Companies.

    The disclosures required in Form SD shall not apply to investment 
companies required to file reports pursuant to Rule 30d-1 (17 CFR 
270.30d-1) under the Investment Company Act of 1940.

D. Preparation of Report.

    This form is not to be used as a blank form to be filled in, but 
only as a guide in the preparation of the report meeting the 
requirements of Rule 12b-12 (17 CFR 240.12b-12). The report shall 
contain the number and caption of the applicable item, but the text of 
such item may be omitted, provided the answers thereto are prepared in 
the manner specified in Rule 12b-13 (17 CFR 240.12b-13). All items that 
are not required to be answered in a particular report may be omitted 
and no reference thereto need be made in the report. All instructions 
should also be omitted.

E. Application of General Rules and Regulations.

    The General Rules and Regulations under the Act (17 CFR Part 240) 
contain certain general requirements which are applicable to reports on 
any form. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this form.

F. Signature and Filing of Report.

    The report must be signed by the registrant on behalf of the 
registrant by an executive officer.

INFORMATION TO BE INCLUDED IN THE REPORT

Section 1--Conflict Minerals Disclosure

Item 1.01 Conflict Minerals Disclosure and Report

    (a) If any conflict minerals, as defined by paragraph (d)(3) of 
this item, are necessary to the functionality or production of a 
product manufactured by the registrant or contracted by the registrant 
to be manufactured and are required to be reported in the calendar year 
covered by the specialized disclosure report, the registrant must 
conduct in good faith a reasonable country of origin inquiry regarding 
those conflict minerals that is reasonably designed to determine 
whether any of the conflict minerals originated in the Democratic 
Republic of the Congo or an adjoining country, as

[[Page 56363]]

defined by paragraph (d)(1) of this item, or are from recycled or scrap 
sources, as defined by paragraph (d)(6) of this item.
    (b) Based on its reasonable country of origin inquiry, if the 
registrant determines that its necessary conflict minerals did not 
originate in the Democratic Republic of the Congo or an adjoining 
country or did come from recycled or scrap sources, or if it has no 
reason to believe that its necessary conflict minerals may have 
originated in the Democratic Republic of the Congo or an adjoining 
country, or if based on its reasonable country of origin inquiry the 
registrant reasonably believes that its necessary conflict minerals did 
come from recycled or scrap sources, the registrant must, in the body 
of its specialized disclosure report under a separate heading entitled 
``Conflict Minerals Disclosure,'' disclose its determination and 
briefly describe the reasonable country of origin inquiry it undertook 
in making its determination and the results of the inquiry it 
performed. Also, the registrant must disclose this information on its 
publicly available Internet Web site and, under a separate heading in 
its specialized disclosure report entitled ``Conflict Minerals 
Disclosure,'' provide a link to that Web site.
    (c) Alternatively, based on its reasonable country of origin 
inquiry, if the registrant knows that any of its necessary conflict 
minerals originated in the Democratic Republic of the Congo or an 
adjoining country and are not from recycled or scrap sources, or has 
reason to believe that its necessary conflict minerals may have 
originated in the Democratic Republic of the Congo or an adjoining 
country and has reason to believe that they may not be from recycled or 
scrap sources, the registrant must exercise due diligence on the source 
and chain of custody of its conflict mineral, as discussed in paragraph 
(c)(1) of this item, that conforms to a nationally or internationally 
recognized due diligence framework, if such a framework is available 
for the conflict mineral. If, as a result of that due diligence, the 
registrant determines that its conflict minerals did not originate in 
the Democratic Republic of the Congo or an adjoining country or the 
registrant determines that its conflict minerals did come from recycled 
or scrap sources, a Conflict Minerals Report is not required, but the 
registrant must disclose its determination and briefly describe, in the 
body of its specialized disclosure report under a separate heading 
entitled ``Conflict Minerals Disclosure,'' the reasonable country of 
origin inquiry and the due diligence efforts it undertook in making its 
determination and the results of the inquiry and due diligence efforts 
it performed. Also, the registrant must disclose this information on 
its publicly available Internet Web site and, under a separate heading 
in its specialized disclosure report entitled ``Conflict Minerals 
Disclosure,'' provide a link to that Web site. Otherwise, the 
registrant must file a Conflict Minerals Report as an exhibit to its 
specialized disclosure report and provide that report on its publicly 
available Internet Web site. Under a separate heading in its 
specialized disclosure report entitled ``Conflict Minerals 
Disclosure,'' the registrant must disclose that it has filed a Conflict 
Minerals Report and provide the link to its Internet Web site where the 
Conflict Minerals Report is publicly available.
    The Conflict Minerals Report must include the following 
information:
    (1) Due Diligence: A description of the measures the registrant has 
taken to exercise due diligence on the source and chain of custody of 
those conflict minerals;
    (i) The registrant's due diligence must conform to a nationally or 
internationally recognized due diligence framework, if such a framework 
is available for the conflict mineral;
    (ii) Except as provided in paragraphs (c)(1)(iv), (c)(1)(v), and 
(c)(1)(vi) of this item, the due diligence measures shall include but 
not be limited to an independent private sector audit of the Conflict 
Minerals Report that is conducted in accordance with standards 
established by the Comptroller General of the United States and 
certified pursuant to paragraph (c)(1)(ii)(B) of this item, which shall 
constitute a critical component of the registrant's due diligence in 
establishing the source and chain of custody of the necessary conflict 
minerals.
    (A) The objective of the audit of the Conflict Minerals Report is 
to express an opinion or conclusion as to whether the design of the 
registrant's due diligence measures as set forth in, and with respect 
to the period covered by, the registrant's Conflict Minerals Report, is 
in conformity with, in all material respects, the criteria set forth in 
the nationally or internationally recognized due diligence framework 
used by the registrant, and whether the registrant's description of the 
due diligence measures it performed as set forth in the Conflict 
Minerals Report, with respect to the period covered by the report, is 
consistent with the due diligence process that the registrant 
undertook.
    (B) The registrant's Conflict Minerals Report must include a 
statement that the registrant has obtained an independent private 
sector audit of the Conflict Minerals Report, which shall constitute an 
audit certification;
    (C) As part of the Conflict Minerals Report, the registrant must 
identify the independent private sector auditor of the report, if the 
auditor is not identified in the audit report, and provide the audit 
report prepared by the auditor in accordance with standards established 
by the Comptroller General of the United States;
    (iii) Any registrant that manufactures products or contracts for 
products to be manufactured that are ``DRC conflict undeterminable,'' 
as defined in paragraph (d)(5) of this item, must disclose the steps it 
has taken or will take, if any, since the end of the period covered in 
its most recent prior Conflict Minerals Report to mitigate the risk 
that its necessary conflict minerals benefit armed groups, including 
any steps to improve its due diligence.
    (iv) For the temporary period specified in Instruction 2 to Item 
1.01, following its exercise of appropriate due diligence, a registrant 
with products that are ``DRC conflict undeterminable'' is not required 
to obtain an independent private sector audit of its Conflict Minerals 
Report regarding the conflict minerals that the registrant is unable to 
determine did not originate in the Democratic Republic of the Congo or 
an adjoining country, or that the registrant is unable to determine did 
not directly or indirectly finance or benefit armed groups in the 
Democratic Republic of the Congo or an adjoining country.
    (v) If a nationally or internationally recognized due diligence 
framework does not exist for a necessary conflict mineral, until such a 
framework is developed, the registrant is required to exercise 
appropriate due diligence in determining the source and chain of 
custody of the necessary conflict mineral, including whether the 
conflict mineral is from recycled or scrap sources, without the benefit 
of a due diligence framework. If a nationally or internationally 
recognized due diligence framework becomes available for the necessary 
conflict mineral prior to June 30 of a calendar year, the registrant 
must use that framework in the subsequent calendar year. If the due 
diligence guidance does not become available until after June 30 of a 
calendar year, the registrant is not required to use that framework 
until the second calendar year after the framework becomes available to 
provide a full calendar year before implementation. If no nationally or 
internationally recognized due diligence framework is available for a 
particular conflict mineral from recycled or scrap sources, the due

[[Page 56364]]

diligence inquiry regarding the conflict mineral focuses on whether the 
conflict mineral is from recycled or scrap sources. In addition, an 
independent private sector audit will not be required for the section 
of the Conflict Minerals Report pertaining to the registrant's due 
diligence on that recycled or scrap conflict mineral.
    (vi) If the registrant performs due diligence because it has a 
reason to believe that its conflict minerals originated in the 
Democratic Republic of the Congo or an adjoining country, and as a 
result of that due diligence it determines that its conflict minerals 
did not originate in the Democratic Republic of the Congo or an 
adjoining country (or it determines as a result of that due diligence 
that its necessary conflict minerals did come from recycled or scrap 
sources), a Conflict Minerals Report and an audit is not required.
    (2) Product Description: Any registrant that manufactures products 
or contracts for products to be manufactured that have not been found 
to be ``DRC conflict free,'' as defined in paragraph (d)(4) of this 
item, must provide a description of those products, the facilities used 
to process the necessary conflict minerals in those products, the 
country of origin of the necessary conflict minerals in those products, 
and the efforts to determine the mine or location of origin with the 
greatest possible specificity.
    (i) For the temporary period specified in Instruction 2 to Item 
1.01, following its exercise of appropriate due diligence, any 
registrant that manufactures products or contracts for products to be 
manufactured that are ``DRC conflict undeterminable'' must provide a 
description of those products, the facilities used to process the 
necessary conflict minerals in those products, if known, the country of 
origin of the necessary conflict minerals in those products, if known, 
and the efforts to determine the mine or location of origin with the 
greatest possible specificity;
    (ii) A registrant is not required to provide the information in 
paragraph (c)(2) of this item if the necessary conflict minerals in its 
product are solely from recycled or scrap sources because those 
products are considered ``DRC conflict free.''
    (d) For the purposes of this item, 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 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.
    (3) Conflict mineral. The term conflict mineral means:
    (i) Columbite-tantalite (coltan), cassiterite, gold, wolframite, or 
their derivatives, which are limited to tantalum, tin, and tungsten, 
unless the Secretary of State determines that additional derivatives 
are financing conflict in the Democratic Republic of the Congo or an 
adjoining country; 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 necessary to the 
functionality or production of that product that directly or indirectly 
finance or benefit armed groups, as defined in paragraph (d)(2) of this 
item, in the Democratic Republic of the Congo or an adjoining country. 
Conflict minerals that a registrant obtains from recycled or scrap 
sources, as defined in paragraph (d)(6) of this item, are considered 
DRC conflict free.
    (5) DRC conflict undeterminable. The term DRC conflict 
undeterminable means, with respect to any product manufactured or 
contracted to be manufactured by a registrant, that the registrant is 
unable to determine, after exercising due diligence as required by 
paragraph (c)(1) of this item, whether or not such product qualifies as 
DRC conflict free.
    (6) Conflict Minerals from Recycled or Scrap Sources. Conflict 
minerals are considered to be from recycled or scrap sources if they 
are from recycled metals, which are reclaimed end-user or post-consumer 
products, or scrap processed metals created during product 
manufacturing. Recycled metal includes excess, obsolete, defective, and 
scrap metal materials that contain refined or processed metals that are 
appropriate to recycle in the production of tin, tantalum, tungsten 
and/or gold. Minerals partially processed, unprocessed, or a bi-product 
from another ore will not be included in the definition of recycled 
metal.
    (7) Outside the Supply Chain. A conflict mineral is considered 
outside the supply chain after any columbite-tantalite, cassiterite, 
and wolframite minerals, or their derivatives, have been smelted; any 
gold has been fully refined; or any conflict mineral, or its 
derivatives, that have not been smelted or fully refined are located 
outside of the Democratic Republic of the Congo or an adjoining 
country.
    (8) Nationally or internationally recognized due diligence 
framework. The term ``nationally or internationally recognized due 
diligence framework'' means a nationally or internationally recognized 
due diligence framework established following due-process procedures, 
including the broad distribution of the framework for public comment, 
and is consistent with the criteria standards in the Government 
Auditing Standards established by the Comptroller General of the United 
States.

Item 1.02 Exhibit

    Registrants shall file, as an exhibit to this Form SD, the Conflict 
Minerals Report required by Item 1.01.

Instructions to Item 1.01

    (1) A registrant that mines conflict minerals would not be 
considered to be manufacturing those minerals for the purpose of this 
item. The specialized disclosure report on Form SD shall cover a 
calendar year, regardless of the registrant's fiscal year, and be due 
annually on May 31 for the prior calendar year.
    (2) During the first two calendar years following November 13, 2012 
for all registrants and the first four calendar years for any smaller 
reporting company, a registrant will not be required to submit an audit 
report of its Conflict Minerals Report prepared by an independent 
private sector auditor with respect to the conflict minerals in any of 
its products that are ``DRC conflict undeterminable.'' Beginning with 
the third or fifth reporting calendar year, as applicable, a registrant 
with products manufactured or contracted to be manufactured that are 
``DRC conflict undeterminable,'' must describe those products as having 
not been found to be ``DRC conflict free'' and must provide the 
information required in paragraph (c) of this item including the audit 
report.
    (3) A registrant that acquires or otherwise obtains control over a 
company that manufactures or contracts to manufacture products with 
conflict minerals necessary to the functionality or production of those 
products that previously had not been obligated to provide a 
specialized disclosure report with respect to its conflict minerals 
will be permitted to delay reporting on the products manufactured by 
the acquired company until the end of the first reporting calendar year 
that begins no

[[Page 56365]]

sooner than eight months after the effective date of the acquisition.
    (4) A registrant is not required to provide any information 
regarding its conflict minerals that, prior to January 31, 2013, are 
located outside of the supply chain, as defined by paragraph (d)(7) of 
this item.
    (5) A registrant must provide its required conflict minerals 
information for the calendar year in which the manufacture of a product 
that contains any conflict minerals necessary to the functionality or 
production of that product is completed, irrespective of whether the 
registrant manufactures the product or contracts to have the product 
manufactured.

Section 2--Exhibits

Item 2.01 Exhibits

    List below the following exhibit filed as part of this report.

Exhibit 1.01--Conflict Minerals Report as required by Items 1.01 and 
1.02 of this Form.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, 
the registrant has duly caused this report to be signed on its behalf 
by the duly authorized undersigned.

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(Registrant)

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By (Signature and Title)*

-----------------------------------------------------------------------
(Date)

* Print name and title of the registrant's signing executive officer 
under his or her signature.
* * * * *

     Dated: August 22, 2012.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-21153 Filed 9-11-12; 8:45 am]
BILLING CODE 8011-01-P

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