Securities and Exchange Commission, Conflict Minerals, Final rule (17 CFR Parts 240 and 249b), Release No. 34-67716

3. Uniform Reporting Period iii. University Group Comments FOR FURTHER INFORMATION CONTACT: John a. Proposed Rules iv. Environmental Consultancy Company Fieldsend, Special Counsel in the Office Comments of Rulemaking, Division of Corporation 1 17 CFR 240.13p–1. v. Other Specific Comments Finance, at (202) 551–3430, 100 F Street 2 17 CFR 249.448. C. Benefits and Costs Resulting From NE., Washington, DC 20549–3628. 3 15 U.S.C. 78a et seq. Commission’s Exercise of Discretion VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56275

1. Reasonable Country of Origin Inquiry adjoining country 7 (together with the Minerals Statutory Provision also point

2. Information in the Specialized DRC, the ‘‘Covered Countries’’).8 to the fact that Congress intended to Disclosure Report Section 1502 amended the Exchange promote peace and security.13 For

3. ‘‘DRC Conflict Undeterminable’’ Act by adding new Section 13(p).9 New example, the Conflict Minerals Statutory

4. ‘‘Contract To Manufacture’’

5. Nationally or Internationally Recognized Exchange Act Section 13(p) requires us Provision states that once armed groups Due Diligence Framework (Including to promulgate disclosure and reporting no longer continue to be directly Gold) regulations regarding the use of conflict involved and benefiting from

6. Liability for the Audit and Audit minerals from the Covered Countries.10 commercial activity involving conflict Certifications As reflected in the title of Section minerals, the President may take action

7. Audit Objective 1502(a), which states the ‘‘Sense of the to terminate the provision.14 To

8. Conflict Minerals From Recycled and Congress on Exploitation and Trade of accomplish the goal of helping end the Scrap Sources Conflict Minerals Originating in the human rights abuses in the DRC caused

9. Conflict Minerals ‘‘Outside the Supply Democratic Republic of the Congo,’’ in by the conflict, Congress chose to use Chain’’ enacting the Conflict Minerals Statutory the securities laws disclosure 10. Conflict Mineral Derivatives

11. Method and Timing of Disclosure on Provision, Congress intended to further requirements to bring greater public Form SD the humanitarian goal of ending the awareness of the source of issuers’

12. ‘‘Necessary to the Functionality or extremely violent conflict in the DRC, conflict minerals and to promote the Production’’ which has been partially financed by exercise of due diligence on conflict

13. Categories of Issuers the exploitation and trade of conflict mineral supply chains. By doing so, we

14. Not Including Mining Issuers as minerals originating in the DRC. This Manufacturing Issuers section explains that the exploitation (Dec. 22, 2006) (stating that the National Security D. Quantified Assessment of Overall and trade of conflict minerals by armed Strategy of the United States, dated September 17, Economic Effects groups is helping to finance the conflict 2002, concludes that disease, war, and desperate IV. Paperwork Reduction Act poverty in Africa threatens the United States’ core and that the emergency humanitarian value of preserving human dignity and threatens A. Background B. Summary of the Comment Letters crisis in the region warrants the the United States’ strategic priority of combating C. Revisions to PRA Reporting and Cost disclosure requirements established by global terror). The legislation committed the United Exchange Act Section 13(p).11 States to work toward peace, prosperity, and good Burden Estimates governance in the Congo. As another example, in

1. Estimate of Conducting Due Diligence, Similarly, the legislative history the 110th Congress, then-Senator Brownback and Including the Audit surrounding the Conflict Minerals Senator Durbin introduced S. 3058, the Conflict

2. Estimate of Preparing the Disclosure Statutory Provision, and earlier Coltan and Cassiterite Act, which would have

3. Revised PRA Estimate legislation addressing the trade in prohibited the importation of certain products V. Final Regulatory Flexibility Act Analysis containing columbite-tantalite or cassiterite that conflict minerals, reflects Congress’s was mined or extracted in the DRC by groups that A. Reasons for, and Objectives of, the Final motivation to help end the human rights committed serious human rights and other Action abuses in the DRC caused by the violations. See S. 3058, 110th Cong. (2008). As a B. Significant Issues Raised by Public further example, in the 111th Congress, then- Comments conflict.12 Other parts of the Conflict Senator Brownback introduced S. 891, the Congo C. Small Entities Subject to the Final Rule 7 The term ‘‘adjoining country’’ is defined in Conflict Minerals Act of 2009. See S. 891, 111th D. Reporting, Recordkeeping, and Other Cong. (2009). This bill would have required U.S.- Section 1502(e)(1) of the Act as a country that registered companies selling products using conflict Compliance Requirements shares an internationally recognized border with E. Agency Action To Minimize Effect on minerals to disclose annually to the Commission the DRC, which presently includes Angola, the country of origin of these minerals and, if the Small Entities Burundi, Central African Republic, the Republic of country of origin was one of the Covered Countries, VI. Statutory Authority and Text of the Final the Congo, Rwanda, South Sudan, Tanzania, to disclose the mine of origin. Additionally, later in Rule Uganda, and Zambia. the 111th Congress, then-Senator Brownback 8 In the Proposing Release, we referred to the DRC sponsored S.A. 2707, which was similar to S. 891. I. Background and Summary and its adjoining countries as the ‘‘DRC Countries.’’ See S.A. 2707, 111th Cong. (2009). We note also In this release, we use the term ‘‘Covered that the Democratic Republic of Congo Relief, A. Statutory Provision Countries’’ instead. Both terms have the same Security, and Democracy Promotion Act of 2006 On December 15, 2010, we proposed meaning. For consistency within this release, there states that the National Security Strategy of the are instances when we refer to the text of the United States, dated September 17, 2002, concludes a number of amendments to our rules 4 Proposing Release and use the term ‘‘Covered that disease, war, and desperate poverty in Africa to implement the requirements of Countries’’ instead of ‘‘DRC Countries,’’ which was threatens the United States’ core value of preserving Section 1502 (‘‘Conflict Minerals used in the Proposing Release. human dignity and threatens the United States’ 9 15 U.S.C. 78m(p). Statutory Provision’’) of the Dodd-Frank strategic priority of combating global terror. See 10 See Exchange Act Section 13(p)(1)(A). This Pub. L. 109–456 (Dec. 22, 2006). See also U.S. Gov’t Wall Street Reform and Consumer Exchange Act Section requires that the Commission Accountability Office, GAO–12–763, Conflict Protection Act (‘‘Act’’),5 relating to new promulgate rules no later than 270 days after the Minerals Disclosure rule: SEC’s Actions and disclosure and reporting obligations by date of enactment. Stakeholder-Developed Initiatives (Jul. 2012) issuers concerning ‘‘conflict minerals’’ 6 11 See Section 1502(a) of the Act (‘‘It is the sense (discussing the Democratic Republic of Congo that originated in the Democratic of the Congress that the exploitation and trade of Relief, Security, and Democracy Promotion Act of conflict minerals originating in the Democratic 2006), available at http://www.gao.gov/products/ Republic of the Congo (‘‘DRC’’) or an Republic of the Congo is helping to finance conflict GAO–12–763. characterized by extreme levels of violence in the 13 See Section 1502(d)(2)(A) of the Act (stating 4 Conflict Minerals, Release No. 34–63547 (Dec. eastern Democratic Republic of the Congo, that two years after enactment of the Act and 15, 2010) [75 FR 80948] (the ‘‘Proposing Release’’). particularly sexual- and gender-based violence, and annually thereafter, ‘‘the Comptroller General of the 5 Public Law 111–203, 124 Stat. 1376 (July 21, contributing to an emergency humanitarian United States shall submit to the appropriate 2010). situation therein, warranting the provisions of congressional committees a report that includes’’ an 6 The term ‘‘conflict mineral’’ is defined in section 13(p) of the Securities Exchange Act of ‘‘assessment of the effectiveness’’ of the Conflict Section 1502(e)(4) of the Act as (A) columbite- 1934, as added by subsection (b).’’). Minerals Statutory Provision ‘‘in promoting peace sroberts on DSK5SPTVN1PROD with RULES tantalite, also known as coltan (the metal ore from 12 The Congo conflict has been an issue raised in and security’’ in the Covered Countries). which tantalum is extracted); cassiterite (the metal the United States Congress for a number of years. 14 See Exchange Act Section 13(p)(4) (stating that ore from which tin is extracted); gold; wolframite For example, in the 109th Congress, then-Senator the provision ‘‘shall terminate on the date on which (the metal ore from which tungsten is extracted); or Sam Brownback, along with Senator Richard J. the President determines and certifies to the their derivatives; or (B) any other mineral or its Durbin and then-Senator Barack Obama, among appropriate congressional committees * * * that no derivatives determined by the Secretary of State to others, co-sponsored S. 2125, the Democratic armed groups continue to be directly involved and be financing conflict in the Democratic Republic of Republic of Congo Relief, Security, and Democracy benefitting from commercial activity involving the Congo or an adjoining country. Promotion Act of 2006. See Public Law 109–456 conflict minerals’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56276 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations understand Congress’s main purpose to Exchange Act Section 13(p) mandates submitting the Conflict Minerals Report have been to attempt to inhibit the that we promulgate regulations must also identify the independent ability of armed groups in the Covered requiring that a ‘‘person described’’ 18 private sector auditor 23 and certify the Countries to fund their activities by disclose annually whether any ‘‘conflict independent private sector audit.24 exploiting the trade in conflict minerals. minerals’’ that are ‘‘necessary to the Further, according to Exchange Act Reducing the use of such conflict functionality or production of a product Section 13(p), the Conflict Minerals minerals is intended to help reduce manufactured by such person’’ 19 Report must include ‘‘a description of funding for the armed groups originated in the Covered Countries, and the products manufactured or contributing to the conflict and thereby make that disclosure publicly available contracted to be manufactured that are put pressure on such groups to end the on the issuer’s Internet Web site.20 If not DRC conflict free,’’ 25 the facilities conflict. The Congressional object is to such a person’s conflict minerals used to process the conflict minerals, promote peace and security in the originated in the Covered Countries, the country of origin of the conflict Covered Countries.15 that person must submit a report minerals, and ‘‘the efforts to determine Congress chose to use the securities (‘‘Conflict Minerals Report’’) to us that the mine or location of origin with the laws disclosure requirements to includes a description of the measures greatest possible specificity.’’ 26 Also, accomplish its goals. In addition, one of taken by the person to exercise due Exchange Act Section 13(p) dictates that the co-sponsors of the provision noted diligence on the minerals’ source and each person described ‘‘shall make in a floor statement that the provision chain of custody.21 Under Exchange Act available to the public on the Internet will ‘‘enhance transparency’’ and ‘‘also Section 13(p), the measures taken to Web site of such person’’ the conflict help American consumers and investors exercise due diligence ‘‘shall include an minerals information required by make more informed decisions.’’ 16 independent private sector audit’’ of the Exchange Act Section 13(p)(1)(A).27 Also, as discussed throughout the Conflict Minerals Report that is B. Summary of the Proposed Rules release, a number of commentators on conducted according to standards our rule proposal, including co-sponsors established by the Comptroller General We proposed rules to apply to certain of the legislation and other members of of the United States, in accordance with issuers that file reports with us under Congress, have indicated that the our promulgated rules, in consultation Exchange Act Sections 13(a) 28 or Conflict Minerals Statutory Provision with the Secretary of State.22 The person 15(d).29 Based on the Conflict Minerals will provide information that is material Statutory Provision, we proposed a to an investor’s understanding of the reflect both their social and their financial disclosure requirement for conflict risks in an issuer’s reputation and concerns.’’); Enough Project (Mar. 31, 2011) minerals that would divide into three (‘‘Enough Project II’’) (stating that advancing the supply chain.17 ‘‘goal of resolving a humanitarian crisis that staff of these other agencies in developing our continues to cause countless deaths and 15 See Exchange Act Section 1502(c)(1)(B)(i) unimaginable suffering’’ is ‘‘of great interest to proposed rules. These agencies include, including many, including investors’’); Senator Richard J. the Government Accountability Office (the ‘‘GAO’’), (stating that the Secretary of State, in consultation which is headed by the Comptroller General of the with the Administrator of the United States Agency Durbin and Representative Jim McDermott (Feb. 28, 2011) (‘‘Sen. Durbin/Rep. McDermott’’) (suggesting United States, and the United States Department of for International Development, shall submit to State. Congress a plan to ‘‘promote peace and security’’ in that the provision’s purposes were both to end 23 See Exchange Act Section 13(p)(1)(A)(ii) the Covered Countries). conflict in the DRC and to provide current 16 See 156 Cong. Rec. S3976 (daily ed. May 19, information for investors, and the latter purpose is (stating that the issuer must provide a description identical to the purpose of requiring the disclosure of the ‘‘entity that conducted the independent 2010) (statement of Sen. Feingold) (‘‘Mr. President, private sector audit in accordance with’’ Exchange I am pleased to be an original cosponsor of two of other information in an issuer’s the periodic reports) and Senator Patrick Leahy, Senator Act Section 13(p)(1)(A)(i)’’). amendments to the Restoring American Financial 24 As noted in Exchange Act Section 13(p)(1)(B), Christopher Coons, Congressman Howard Berman, Stability Act that seek to ensure there is greater Congressman Jim McDermott, Congressman Donald if an issuer is required to provide a Conflict transparency around how international companies Payne, Congressman Gregory Meeks, and Minerals Report that includes an independent are addressing issues of foreign corruption and Congressmember Karen Bass (Feb. 16, 2012) (‘‘Sen. private sector audit, that issuer ‘‘shall certify the violent conflict that relate to their business. Leahy et al.’’) (asserting that an issuer’s conflict audit’’ and that certified audit ‘‘shall constitute a Creating these mechanisms to enhance transparency minerals information is ‘‘critical to both investors critical component of due diligence in establishing will help the United States and our allies more and to capital formation’’ because ‘‘when a publicly the source and chain of custody of such minerals.’’ effectively deal with these complex problems, at the traded company relies on an unstable black market 25 The term ‘‘DRC conflict free’’ is defined in same time that they will also help American for inputs essential to manufacturing its products it Exchange Act Section 13(p)(1)(A)(ii) and Exchange consumers and investors make more informed is of deep material interest to investors’’). Act Section 13(p)(1)(D). Exchange Act Section decisions.’’). 18 The term ‘‘person described’’ is defined in 17 See, e.g., letters from Aditi Mohapatra of 13(p)(1)(A)(ii) defines ‘‘DRC conflict free’’ as ‘‘the Exchange Act Section 13(p)(2) as one who is products that do not contain minerals that directly Calvert Asset Management Company, Inc. on behalf required to file reports under Exchange Act Section or indirectly finance or benefit armed groups in of 49 investors, including the Social Investment 13(p)(1)(A), and for whom the conflict minerals are the’’ Covered Countries. Similarly, Exchange Act Forum and Interfaith Center of Corporate necessary to the functionality or production of a Section 13(p)(1)(D) defines ‘‘DRC conflict free’’ as Responsibility (Mar. 2, 2011) (‘‘SIF I’’); Boston product manufactured by such person. Exchange products that do ‘‘not contain conflict minerals that Common Asset Management, LLC, Calvert Asset Act Section 13(p)(1)(A) does not provide a directly or indirectly finance or benefit armed Management Co., Inc., Interfaith Center on definition but refers back to Exchange Act Section groups in the’’ Covered Countries. We note that the Corporate Responsibility, Jesuit Conference of the 13(p)(2). definitions in the two sections are slightly different United States, Marianist Province of the US, Mercy 19 Exchange Act Section 13(p)(2)(B). in that Exchange Act Section 13(p)(1)(A)(ii) refers Investment Services, Inc., Missionary Oblates of 20 See Exchange Act Section 13(p)(1)(E) (stating to ‘‘minerals’’ without any limitation, whereas Mary Immaculate, Responsible Sourcing Network, that each issuer ‘‘shall make available to the public Exchange Act Section 13(p)(1)(D) refers specifically Sustainalytics, Trillium Asset Management, and on the Internet Web site of such [issuer] the to ‘‘conflict minerals.’’ We believe, based on the Tri-State Coalition for Responsible Investment (Feb. information disclosed under’’ Exchange Act Section totality of the Conflict Minerals Statutory Provision, 1, 2012) (‘‘SIF II’’); Calvert Investments (Oct. 18, 13(p)(1)(A)). that ‘‘DRC conflict free’’ is meant to refer only to 2011) (‘‘Calvert’’); General Board of Pension and 21 See Exchange Act Section 13(p)(1)(A)(i). ‘‘conflict minerals,’’ as that term is defined in Health Benefits of The United Methodist Church 22 See id. (requiring in the Conflict Minerals Section 1502(e)(4) of the Act, that directly or (Mar. 7, 2011) (‘‘Methodist Pension’’); State Board sroberts on DSK5SPTVN1PROD with RULES indirectly finance or benefit armed groups in the of Administration of Florida (Feb. 3, 2011) (‘‘FRS’’); Report ‘‘a description of the measures taken by the Covered Countries, and not to all minerals that and Teachers Insurance and Annuity Association person to exercise due diligence on the source and directly or indirectly finance or benefit armed and College Retirement Equities Fund (Mar. 2, chain of custody of such [conflict] minerals, which groups in the Covered Countries. 2011) (‘‘TIAA–CREF’’). See also letters from measures shall include an independent private 26 See Exchange Act Section 13(p)(1)(A)(ii). Catholic Relief Services (Feb. 8, 2011) (‘‘CRS I’’) sector audit of such report’’). The Conflict Minerals 27 See Exchange Act Section 13(p)(1)(E). (‘‘We submit these comments with the hope the Statutory Provision assigns certain responsibilities 28 15 U.S.C. 78m(a). SEC will consider the need of investors to access to other federal agencies. In developing our information to make sound business decisions that proposed rules, our staff has consulted with the 29 15 U.S.C. 78o(d). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56277 steps. The first step would have would then have moved to the third C. Summary of Comments on the required an issuer to determine whether step. Proposed Rules it was subject to the Conflict Minerals Finally, the third step would have The Proposing Release requested Statutory Provision. An issuer would required an issuer with conflict comment on a variety of significant have only been subject to the Conflict minerals that originated in the Covered aspects of the proposed rules. The Minerals Statutory Provision if it was a Countries, or an issuer that was unable original comment period in the reporting issuer for which conflict to conclude that its conflict minerals Proposing Release was to end on minerals were ‘‘necessary to the did not originate in the Covered January 31, 2011. Prior to that date, functionality or production of a product Countries, to furnish a Conflict Minerals however, we received requests for an manufactured’’ 30 or contracted to be Report. The proposed rules would have extension of time for public comment manufactured by such person. If an required an issuer to provide, in its on the proposal to allow for, among issuer did not meet that definition, the Conflict Minerals Report, a description other matters, the collection of issuer was not required to take any of the measures it had taken to exercise information and to improve the quality action, make any disclosures, or submit due diligence on the source and chain of responses.32 On January 28, 2011, we any reports. If, however, an issuer met of custody of its conflict minerals, extended the comment period for the this definition, that issuer would move which would have included a certified to the second step. proposal from January 31, 2011 to independent private sector audit of the March 2, 2011.33 Additionally, in The second step would have required Conflict Minerals Report that identified response to suggestions from the issuer to determine after a the auditor and was furnished as part of commentators,34 we held a public reasonable country of origin inquiry the Conflict Minerals Report. Further, roundtable on October 18, 2011 (‘‘SEC whether its conflict minerals originated the issuer would have been required to Roundtable’’) at which invited in the Covered Countries. If the issuer include in the Conflict Minerals Report participants, including investors, determined that its conflict minerals did a description of its products affected issuers, human rights not originate in the Covered Countries, the issuer was to disclose this manufactured or contracted to be organizations, and other stakeholders, determination and the reasonable manufactured containing conflict discussed their views and provided country of origin inquiry it used in minerals that it was unable to determine input on issues related to our required reaching this determination in the body did not ‘‘directly or indirectly finance or rulemaking.35 In conjunction with the of its annual report. The issuer also benefit armed groups’’ in the Covered SEC Roundtable, we requested further would have been required to provide on Countries. The issuer would identify comment.36 We received approximately its Internet Web site its determination such products by describing them in the 420 individual comment letters in that its conflict minerals did not Conflict Mineral Report as not ‘‘DRC response to the proposed rules, with originate in the Covered Countries, conflict free.’’ 31 If any of its products approximately 145 of those letters being disclose in its annual report that the contained conflict minerals that did not received after the SEC Roundtable, and disclosure was posted on its Internet ‘‘directly or indirectly finance or over 40 letters regarding the Conflict Web site, and disclose the Internet benefit’’ these armed groups, the issuer Minerals Statutory Provision prior to the address on which this disclosure was would be permitted to describe such posted. It would further have been products in the Conflict Mineral Report 32 See letters from Advanced Medical Technology required to maintain records as ‘‘DRC conflict free’’ whether or not Association, Aerospace Industries Association, the minerals originated in the Covered American Association of Exporters and Importers, demonstrating that its conflict minerals American Automotive Policy Council, Business did not originate in the Covered Countries. In addition, the issuer would Alliance for Customs Modernization, IPC— Countries. Such an issuer would not have been required to disclose in the Association Connecting Electronics Industries Joint have any further disclosure or reporting Conflict Minerals Report the facilities Industry Group, National Association of used to process those conflict minerals, Manufacturers, National Electrical Manufacturers obligations with regard to its conflict Association, National Foreign Trade Council, minerals. those conflict minerals’ country of National Retail Federation, Retail Industry Leaders If, however, the issuer determined origin, and the efforts to determine the Association, Semiconductor Equipment and that its conflict minerals did originate in mine or location of origin with the Materials International, TechAmerica, greatest possible specificity. USA*ENGAGE, and U.S. Chamber of Commerce the Covered Countries, if it was unable (Dec. 16, 2010) (‘‘Advanced Medical Technology to conclude that its conflict minerals The proposed rules would have Association et al.’’); Jewelers Vigilance Committee, did not originate in the Covered allowed for different treatment of American Gem Society, Manufacturing Jewelers & Countries, or if it determined that its conflict minerals from recycled and Suppliers of America, Jewelers of America, and Fashion Jewelry & Accessories Trade Association conflict minerals were from recycled or scrap sources. An issuer with such (Jan. 10, 2011) (‘‘JVC et al. I’’); National Mining scrap sources, the issuer would have conflict minerals would have been Association (Jan. 3, 2011) (‘‘NMA I’’); National been required to disclose this required to furnish a Conflict Minerals Stone, Sand Gravel Association (Jan. 13, 2011) conclusion in its annual report. Also, Report that described the measures (‘‘NSSGA’’); Representative Spencer Bachus (Jan. the issuer would have been required to 25, 2011) (‘‘Rep. Bachus’’); Robert D. Hormats, taken to exercise due diligence in Under Secretary of State for Economic, Energy, and note that the Conflict Minerals Report, determining that its conflict minerals Agricultural Affairs, and Maria Otero, Democracy which included the certified were from recycled or scrap sources and and Global Affairs (Jan. 25, 2011) (‘‘State I’’); and independent private sector audit report, to provide the reasons for believing, World Gold Council (Jan. 7, 2011) (‘‘WGC I’’). 33 Conflict Minerals, Release No. 34–63793 (Jan. was furnished as an exhibit to the based on its due diligence, that its 28, 2011) [76 FR 6110]. annual report; furnish the Conflict conflict minerals were from recycled or 34 See, e.g., letter from United States Chamber of Minerals Report; make available the scrap sources. Such an issuer would Commerce (Feb. 28, 2011) (‘‘Chamber I’’). sroberts on DSK5SPTVN1PROD with RULES Conflict Minerals Report on its Internet also have been required to obtain a 35 See Press Release, Securities and Exchange Web site; disclose that the Conflict certified independent private sector Commission, SEC Announces Agenda and Panelists Minerals Report was posted on its for Roundtable on Conflict Minerals (Oct. 14, 2011), audit of the Conflict Minerals Report. available at http://www.sec.gov/news/press/2011/ Internet Web site; and provide the 2011-210.htm. Internet address of that site. This issuer 31 The definition of the term ‘‘DRC conflict free’’ 36 Roundtable on Issues Relating to Conflict in our proposed rules would be identical to the Minerals, Release No. 34–65508 (Oct. 7, 2011) [76 30 Exchange Act Section 13(p)(2). definition in Exchange Act Section 13(p)(1)(D). FR 63573]. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56278 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations proposed rules.37 We also received officials,40 and other interested parties Also, although they may have offered approximately 13,400 form letters from and stakeholders. In general, most their support of the human rights those supporting ‘‘promptly’’ commentators supported the human concerns underlying the Conflict implementing a ‘‘strong’’ final rule rights objectives of the Conflict Minerals Minerals Statutory Provision and the regarding the Conflict Minerals Statutory Provision and the proposed proposed rules, some commentators Statutory Provision,38 with rules.41 As discussed in greater detail were concerned about potentially approximately 9,700 of those letters throughout this release, however, many negative effects of the Conflict Minerals requesting some specific requirements of these commentators provided Statutory Provision and the resulting in the final rule,39 and two petitions recommendations for revising the rule. In this regard, some of those supporting the proposed amendments proposed rules and suggested commentators argued that the provision with an aggregate of over 25,000 modifications or alternatives to the and/or rule could lead to a de facto signatures. proposal. Only a few commentators boycott or embargo on conflict minerals The comment letters came from generally opposed the Conflict Minerals from the Covered Countries,44 other of corporations, professional associations, Statutory Provision and/or our adoption these commentators suggested that the human rights and public policy groups, of any rule based on the provision.42 bar associations, auditors, institutional One commentator recommended that rules), Chamber III (requesting that we allow companies additional time for commenting on the investors, investment firms, United the proposed rules be withdrawn proposed rules), and United States Chamber of States and foreign government entirely ‘‘and that the potential costs, Commerce (Jul. 11, 2012) (‘‘Chamber IV’’) supply chain complexities, and other (requesting that we re-propose the rule and re-open 37 To facilitate public input on rulemaking practical obstacles to implementation be the comment period). 44 See, e.g., letters from AngloGold Ashanti required by the Act, the Commission provided a more fully analyzed before new rules series of email links, organized by topic, on its Web Limited (Jan. 31, 2011) (‘‘AngloGold’’), Bureau site at http://www.sec.gov/spotlight/ are proposed.’’ 43 d’Etudes Scientifiques et Techiques (Dec. 26, 2011) regreformcomments.shtml. The comments relating (‘‘BEST II’’), Competitive Enterprise Institute (Mar. to the Conflict Minerals Statutory Provision are 40 Among the foreign officials to provide 2, 2011) (‘‘CEI I’’), Competitive Enterprise Institute located at http://www.sec.gov/comments/df-title-xv/ comment letters was the DRC’s Minister of Mines. (Aug. 22, 2011) (‘‘CEI II,’’), Fédération des specialized-disclosures/specialized- See letters from Martin Kabwelulu, Minister of Enterprises du Congo (Oct. 28, 2011) (‘‘FEC II’’), disclosures.shtml (‘‘Pre-Proposing Release Web Mines, Democratic Republic of the Congo (July 15, Générale des Coopératives Minières du Sud Kivu site’’). These comments were received before we 2011) (‘‘DRC Ministry of Mines I’’); Martin (Apr. 8, 2011) (‘‘Gecomiski’’), IPC—Association made public the Proposing Release or proposed Kabwelulu, Minister of Mines, Democratic Republic Connecting Electronics Industries (Mar. 2, 2011) rules and are separate from the comments we of the Congo (Oct. 15, 2011) (‘‘DRC Ministry of (‘‘IPC I’’), ITRI Ltd. (Feb. 25, 2011) (‘‘ITRI II’’), received after we published the Proposing Release Mines II’’); and Martin Kabwelulu, Minister of London Bullion Market Association (Mar. 2, 2011) and proposed rules, which are located at http:// Mines, Democratic Republic of the Congo (Nov. 8, (‘‘LBMA I’’), London Bullion Market Association www.sec.gov/comments/s7-40-10/s74010.shtml 2011) (‘‘DRC Ministry of Mines III’’). (Aug. 5, 2011) (‘‘LBMA II’’), Minister of Energy and (‘‘Post-Proposing Release Web site’’). Many 41 See, e.g., letters from Advanced Medical Minerals of the United Republic of Tanzania (May commentators provided comments on both the pre- Technology Association, American Apparel & 23, 2011) (‘‘Tanzania I’’), Ministry of Mines and and post-Proposing Release Web sites. Generally, Footwear Association, American Association of Energy of the Republic of Burundi (May 12, 2011) our references to comment letters refer to the Exporters and Importers, Consumer Electronics (‘‘Burundi’’), North Kivu Artisanal Mining comments on the post-Proposing Release Web site. Association, Consumer Electronics Retailers Cooperatives Representative (Mar. 1, 2011) When we refer to a comment letter from the Pre- Coalition, Emergency Committee for American (‘‘Comimpa’’), Pact Inc. (Mar. 2, 2011) (‘‘Pact I’’), Proposing Release Web site, however, we make that Trade, IPC-Association Connecting Electronics Pact Inc. (Oct. 13, 2011) (‘‘Pact II’’), Representative clear in the footnote. Industries, Joint Industry Group, National Christopher J. Lee (Feb. 3, 2011) (‘‘Rep. Lee’’), Société Minière du Maniema SPRL (Mar. 21, 2012) 38 See form letters A (urging us to institute Association of Manufacturers, National Foreign (‘‘Somima’’), Verizon Communications (Jun. 24, ‘‘strong rules’’), B (urging that the final rule not Trade Council, National Retail Federation, Retail 2011) (‘‘Verizon’’), and WGC II. But see letters from allow the legislation’s intent to be compromised Industry Leaders Association, TechAmerica, and Enough Project (Mar. 2, 2011) (‘‘Enough Project I’’) and to keep the ‘‘LEGISLATION STRONG’’ USA Engage (Mar. 2, 2011) (‘‘Industry Group (‘‘Enough notes that critics of the legislation are (emphasis in original)), E (indicating ‘‘deep Coalition I’’) (stating its ‘‘support [for] the quick to predict that private sector investors and disappointment and concern’’ that the final rule underlying goal of Sec. 1502 to prevent the companies may walk away from the Congo if faced had not been adopted, and urging us to ‘‘release a atrocities occurring’’ in the Covered Countries); with meaningful due diligence and reporting strong, final rule’’), F (urging us to ‘‘promptly issue American Bar Association (Jun. 20, 2011) (‘‘ABA’’) requirements. On the contrary, Congo’s mineral strong final regulations’’), G (stating that delays in (stating that it ‘‘supports and endorses the reserves are too great for world markets to ignore.’’), adopting a final rule will ‘‘significantly hinder humanitarian efforts to end the armed conflict in International Corporate Accountability Roundtable progress toward a legitimate mining sector in the eastern Democratic Republic of the Congo’’); (Aug. 24, 2011) (‘‘ICAR II’’) (recognizing that eastern’’ DRC, and urging us to ‘‘urgently release Chamber I (stating that it ‘‘supports the ‘‘[c]ritics of the law are arguing that whatever its final regulations on conflict minerals’’), H (calling fundamental goal, as embodied in Section 1502 of intentions, it will in practice end the trade in on us to ‘‘release a strong, final rule as soon as the Dodd-Frank Wall Street Reform and Consumer minerals mined in the east of Congo,’’ and that, possible’’), and I (urging us to ‘‘issue strong final Protection Act (‘Dodd-Frank Act’), of preventing the although ‘‘mineral exports from the region have rules as soon as possible’’). exploitation of conflict minerals for the purpose of dropped significantly in recent months, and that 39 See form letters A (stating that the final rule financing human rights violations within the this has forced many artisanal miners to seek should, among other requirements, include gold Democratic Republic of Congo’’); National alternative livelihoods,’’ which ‘‘has serious and metals mining companies, apply to all possible Association of Manufacturers (Mar. 2, 2011) (‘‘NAM implications for miners and their families,’’ the companies, require that conflict minerals I’’) (stating its ‘‘support the underlying goal of Sec. ‘‘downturn stems from a six month suspension of disclosures be filed, include strong and defined due 1502 to address the atrocities occurring in the’’ mining and trading activities imposed by the diligence, and define recycled metals as 100% post- Covered Countries); and World Gold Council (Feb. Congolese government and an overly restrictive consumer metals), G (stating that the final rule 28, 2011) (‘‘WGC II’’) (stating that it ‘‘believes it is interpretation of Dodd Frank by industry should ‘‘incorporate the UN Group of Experts and important to state [its] support for the humanitarian associations’’ and the ‘‘idea that the current hiatus OECD due diligence guidelines’ concept of goals of Section 1502’’). is a permanent shut-down of the trade is misplaced, 42 See, e.g., letters from Michael Beggs (Jan. 12, mitigation’’), H (stating that the final rule should, however.’’), Andrew Matheson (Oct. 26, 2011) among other requirements, reject any delays or 2012) (‘‘Beggs’’), Charles Blakeman (Oct. 9, 2011) (‘‘Matheson II’’) (‘‘No such embargo exists, nor is an phased-in implementation, adopt the ‘‘OECD due (‘‘Blakeman I’’), Gary P. Bradley (Sept. 19, 2011) embargo contemplated by the multi-stakeholder diligence standard,’’ have equal reporting for all (‘‘Bradley’’), Joseph Cummins (Dec. 20, 2011) group, the EICC/GeSI initiative, or ITRI. Import conflict minerals, include all companies regardless (‘‘Cummins’’), Walter Grail (Oct. 1, 2011) (‘‘Grail’’), statistics show that minerals continue to be sourced sroberts on DSK5SPTVN1PROD with RULES of size, define terms narrowly, define the reasonable Kirtland C. Griffin (Jun. 16, 2011) (‘‘Griffin’’), Clark in substantial volumes from the DRC, for example country of origin inquiry, have issuers file reports, Grey Howell (Sep. 20, 2011) (‘‘Howell’’), Edward tantalum ores going into China.’’), and Sen. Durbin/ and not include a de minimis category for conflict Lynch (Dec. 16, 2011) (‘‘Lynch’’), and Melanie Rep. McDermott (‘‘NGO experts in Congo note that minerals), and I (stating that the final rule must, Matthews (Sep. 19, 2011) (‘‘Matthews’’). only approximately one percent of the Congolese among other requirements, reject an indeterminate 43 See letter from Chamber I. See also letters from workforce depends on mining, so even if a de facto origin category, define the reasonable country of Chamber II (reiterating the withdrawal request from ban came to pass—which we doubt—the economic origin standard, and adopt the ‘‘OECD Due its initial comment letter and requesting we open impact would not be as great as commonly Diligence standard’’). a second comment period regarding the proposed assumed.’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56279 provision and/or rule could compel tried to reduce the burden of included in any product that contains speech in a manner that violates the compliance in areas in which we have conflict minerals or their derivatives. First Amendment,45 and at least one discretion while remaining faithful to An issuer will not be considered to such commentator indicated that the the language and intent of the Conflict ‘‘contract to manufacture’’ a product if final rule would adversely affect Minerals Statutory Provision that it does no more than take the following employment in the United States.46 One Congress adopted. A flowchart actions: (1) The issuer specifies or commentator, however, suggested that presenting a general overview of the negotiates contractual terms with a there could be some ‘‘business benefits’’ conflict minerals rule that we are manufacturer that do not directly relate from complying with the final rule adopting is included following the end to the manufacturing of the product beyond the humanitarian benefits of this section. The chart is intended (unless it specifies or negotiates taking discussed by Congress.47 This merely as a guide, however, and issuers these actions so as to exercise a degree commentator argued that such benefits should refer to the rule text and the of influence over the manufacturing of could include eliminating any preamble’s more complete narrative the product that is practically competitive disadvantage to companies description for the requirements of the equivalent to contracting on terms that already engaged in ensuring their rule. directly relate to the manufacturing of conflict mineral purchases do not fund The first step continues to be for an the product); (2) the issuer affixes its conflict in the DRC, providing an issuer to determine whether it is subject brand, marks, logo, or label to a generic opportunity to improve a company’s to the requirements of the Conflict product manufactured by a third party; existing risk management and supply Minerals Statutory Provision. Pursuant or (3) the issuer services, maintains, or chain management, stimulating to the Conflict Minerals Statutory repairs a product manufactured by a innovation, supporting companies’ Provision, the Commission is required third party. requests for conflict minerals to promulgate regulations requiring Similarly, the determination of information from suppliers through certain conflict minerals disclosures by whether a conflict mineral is deemed legal mandate, and preparing companies any ‘‘person described,’’ which, under ‘‘necessary to the functionality’’ or to meet a new generation of the Conflict Minerals Statutory ‘‘necessary to the production’’ of a expectations for greater supply chain Provision, includes one for whom product depends on the issuer’s transparency and accountability.48 ‘‘conflict minerals are necessary to the particular facts and circumstances, as We have reviewed and considered all functionality or production of a product discussed in more detail below. But to of the comments that we received manufactured by such person’’.49 As in assist issuers in making their relating to the rulemaking. The final our proposal, under the final rule this determination, we provide guidance for rule reflects changes from the proposed includes issuers whose conflict minerals issuers. In determining whether a rules made in response to many of these are necessary to the functionality or conflict mineral is ‘‘necessary to the comments. As discussed throughout this production of a product manufactured functionality’’ of a product, an issuer release, we are adopting final rules or contracted by that issuer to be should consider: (1) Whether the designed to provide flexibility to issuers manufactured.50 If an issuer does not conflict mineral is intentionally added to reduce their compliance costs. At the meet this definition, the issuer is not to the product or any component of the same time, our final rules retain the required to take any action, make any product and is not a naturally-occurring requirements from our proposed rules disclosures, or submit any reports under by-product; (2) whether the conflict that create the disclosure regime the final rule. If, however, an issuer mineral is necessary to the product’s mandated by Congress by means of meets this definition, that issuer moves generally expected function, use, or Exchange Act reporting requirements. to the second step. purpose; and (3) if conflict mineral is In the final rule, some aspects of the incorporated for purposes of We discuss our revisions with respect to first step differ from the proposed rules ornamentation, decoration or each proposed rule amendment in more based on comments we received. embellishment, whether the primary detail throughout this release. Consistent with the proposal, the final purpose of the product is ornamentation D. Summary of Changes to the Final rule does not define the phrases or decoration. Rule ‘‘contract to manufacture,’’ ‘‘necessary In determining whether a conflict We are adopting a three-step process, to the functionality’’ of a product, and mineral is ‘‘necessary to the as proposed, but some of the ‘‘necessary to the production’’ of a production’’ of a product, an issuer mechanisms within the three steps have product. In response to comments, should consider: (1) Whether the been modified in response to comments. however, we provide additional conflict mineral is intentionally We recognize that the final rule will guidance for issuers to consider included in the product’s production impose significant compliance costs on regarding whether those phrases apply process, other than if it is included in companies who use or supply conflict to them.51 The guidance states that a tool, machine, or equipment used to minerals, and in modifying the rule we whether an issuer will be considered to produce the product (such as computers ‘‘contract to manufacture’’ a product or power lines); (2) whether the conflict 45 See, e.g., letters from Taiwan Semiconductor depends on the degree of influence it mineral is included in the product; and Manufacturing Company Ltd. (Jan. 27, 2011) exercises over the materials, parts, (3) whether the conflict mineral is (‘‘Taiwan Semi’’), Tiffany & Co. (Feb. 22, 2011) ingredients, or components to be necessary to produce the product. In (‘‘Tiffany’’), and Washington Legal Fund (Mar. 30, this regard, we are modifying our 2011) (‘‘WLF’’). 46 See letter from Rep. Lee (‘‘Ultimately, these 49 Exchange Act Section 13(p)(2). guidance from the proposal such that, 50 See Exchange Act Section 13(p)(1)(ii) (requiring new regulations may cost U.S. jobs and send them for a conflict mineral to be considered a person described to include a description of sroberts on DSK5SPTVN1PROD with RULES overseas.’’). certain of the person’s products that were ‘‘necessary to the production’’ of a 47 See letter from Green Research (Jan. 27, 2012) manufactured by the person, or were contracted by product, the mineral must be both (‘‘Green II’’). See also letter from Green Research the person to be manufactured). contained in the product and necessary (Oct. 29, 2011) (‘‘Green I’’) (stating that, although 51 In the Proposing Release, although we did not to the product’s production. We do not ‘‘[i]t seems clear that, by most accounting, there are provide guidance for the other phrases, we costs of compliance’’ of the Conflict Minerals provided some guidance for the phrase ‘‘necessary consider a conflict mineral ‘‘necessary Statutory Provision, ‘‘there are benefits as well’’). to the production’’ of a product. As discussed to the production’’ of a product if the 48 See id. below, we are revising the guidance for this phrase. conflict mineral is used as a catalyst, or VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56280 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations in a similar manner in another process, The second step continues to require minerals did not originate in the that is necessary to produce the product an issuer to conduct a reasonable Covered Countries or did come from but is not contained in that product. country of origin inquiry regarding the recycled or scrap sources to disclose in Further, in a change from the proposal origin of its conflict minerals. its specialized disclosure report its and in response to comments suggesting Consistent with the proposal, and the determination and in its specialized that including mining would expand the position of certain commentators,52 the disclosure report briefly describe the statutory mandate, the final rule does final rule does not prescribe the actions reasonable country of origin inquiry it not treat an issuer that mines conflict for a reasonable country of origin used in reaching the determination and minerals as manufacturing those inquiry that are required, as the required the results of the inquiry. The minerals unless the issuer also engages inquiry depends on each issuer’s facts requirement for an issuer to briefly in manufacturing. Additionally, the and circumstances. However, in a describe its inquiry and the results of final rule exempts any conflict minerals change from the proposed rules, to the inquiry is a change from the that are ‘‘outside the supply chain’’ clarify the scope of the required inquiry disclosure required in the proposed prior to January 31, 2013. Under the as requested by certain other rules. final rule, conflict minerals are ‘‘outside commentators,53 the final rule provides Also, in a change from the proposal, the supply chain’’ if they have been general standards applicable to the the final rule modifies the trigger for smelted or fully refined or, if they have inquiry. Specifically, the final rule determining whether or not an issuer is not been smelted or fully refined, they provides that, to satisfy the reasonable required to proceed to step three under are outside the Covered Countries. In country of origin inquiry requirement, the rule. The proposed rules would have response to comments, the final rule an issuer must conduct an inquiry required an issuer to conduct due allows issuers that obtain control over a regarding the origin of its conflict diligence on the source and chain of company that manufactures or contracts minerals that is reasonably designed to custody of its conflict minerals and for the manufacturing of products with determine whether any of its conflict provide a Conflict Minerals Report if, necessary conflict minerals that minerals originated in the Covered based on its reasonable country of origin previously had not been obligated to Countries or are from recycled or scrap inquiry, it determined that its conflict provide a specialized disclosure report sources, and must perform the inquiry minerals originated in the Covered for those minerals to delay reporting on in good faith. The final rule requires an Countries or was unable to determine the acquired company’s products until issuer that determines that its conflict that its conflict minerals did not the end of the first reporting calendar originate in the Covered Countries, or if 52 Some commentators agreed that, to allow for its conflict minerals came from recycled year that begins no sooner than eight greater flexibility, the reasonable country of origin or scrap sources. Under the final rule, months after the effective date of the inquiry standard should either not be defined or an issuer must exercise due diligence on acquisition. that only general guidance should be provided. See, e.g., letters from Apparel & Footwear Association the source and chain of custody of its As suggested by commentators, the conflict minerals and provide a Conflict (Mar. 2, 2011) (‘‘AAFA’’); AngloGold; ArcelorMittal final rule modifies the proposal as to the (Oct. 31, 2011) (‘‘ArcelorMittal’’); Industry Group Minerals Report if, based on its location, timing, and status of any Coalition I; IPC I; Information Technology Industry reasonable country of origin inquiry, the conflict minerals disclosures and any Council (Feb. 24, 2011) (‘‘ITIC I’’); International issuer knows that it has necessary Conflict Minerals Report. The final rule Precious Metals Institute (Jan. 19, 2011) (‘‘IPMI I’’); Jewelers Vigilance Committee, American Gem conflict minerals that originated in the requires an issuer to provide the conflict Society, Manufacturing Jewelers & Suppliers of Covered Countries and did not come minerals disclosures that would have America, Jewelers of America, and Fashion Jewelry from recycled or scrap sources, or if the been in the body of the annual report in & Accessories Trade Association (Mar. 2, 2011) issuer has reason to believe that its the body of a new specialized disclosure (‘‘JVC et al. II’’); NAM I, Retail Industry Leaders Association and Consumer Electronics Retailers necessary conflict minerals may have report on a new form, Form SD. An Coalition (Mar. 2, 2011) (‘‘RILA–CERC’’); originated in the Covered Countries and issuer required to provide a Conflict Semiconductor Industry Association (Mar. 2, 2011) may not have come from recycled or Minerals Report will provide that report (‘‘Semiconductor’’); SIF I; TriQuint Semiconductor, scrap sources. as an exhibit to the specialized Inc. (Jan. 26, 2011) (‘‘TriQuint I’’); and WGC II. 53 Some commentators argued that either the As an exception to this requirement, disclosure report. Additionally, based reasonable country of origin inquiry standard however, an issuer that must conduct on comments that it will reduce the should be defined or that there should specific due diligence because, based on its burdens on supply chain participants, guidance regarding the standard. See, e.g., letters reasonable country of origin inquiry, it the final rule requires that the conflict from Business Roundtable (Mar. 2, 2011) (‘‘Roundtable’’), CRS I, Department of State (Mar. has reason to believe that its necessary minerals information in the specialized 24, 2011) (‘‘State II’’), EARTHWORKS’ No Dirty conflict minerals may have originated in disclosure report and/or in the Conflict Gold Campaign (Mar. 2, 2011) (‘‘Earthworks’’), the Covered Countries and may not have Minerals Report cover the calendar year Enough Project I, Ethical Metalsmiths (Feb. 28, come from recycled or scrap sources is from January 1 to December 31 2011) (‘‘Metalsmiths’’), General Board of Church not required to submit a Conflict and Society of the United Methodist Church (Apr. regardless of the issuer’s fiscal year end, 19, 2012) (‘‘Methodist Board’’), Global Witness (Feb. Minerals Report if, during the exercise and the specialized disclosure report 28, 2011) (‘‘Global Witness I’’), Howland Greene of its due diligence, it determines that covering the prior year must be Consultants LLC (Jan. 28, 2011) (‘‘Howland’’), its conflict minerals did not, in fact, provided each year by May 31. Further, International Conference of the Great Lakes Region originate in the Covered Countries, or it (Jan. 31, 2011) (‘‘ICGLR’’), National Association of in a change from the proposal, urged by Evangelicals (Feb. 17, 2012) (‘‘Evangelicals’’), New determines that its conflict minerals multiple commentators, the final rule York City Bar Association (Jan. 31, 2011) (‘‘NYCBar did, in fact, come from recycled or scrap requires Form SD, including the conflict I’’), New York City Bar Association (Feb. 8, 2012) sources. Such an issuer is still required minerals information therein and any (‘‘NYCBar II’’), Personal Care Products Council to submit a specialized disclosure report (Mar. 1, 2011) (‘‘PCP’’), Presbyterian Church USA Conflict Minerals Report submitted as sroberts on DSK5SPTVN1PROD with RULES (Feb. 23, 2012) (‘‘Presbyterian Church II’’), disclosing its determination and briefly an exhibit to the form, to be ‘‘filed’’ Semiconductor Equipment and Materials describing its inquiry and its due under the Exchange Act and thereby International (Feb. 15, 2011) (‘‘SEMI’’), Sen. Durbin/ diligence efforts and the results of that subject to potential Exchange Act Rep. McDermott, Tantalum-Niobium International inquiry and due diligence efforts, which Study Center (Jan. 27, 2011) (‘‘TIC’’), Twenty-four Section 18 liability. The proposal would organizations of the Multi-Stakeholder Group (Mar. should demonstrate why the issuer have required the information to be 2, 2011) (‘‘MSG I’’), and World Evangelical Alliance believes that the conflict minerals did ‘‘furnished.’’ (Feb. 17, 2012) (‘‘Evangelical Alliance’’). not originate in the Covered Countries VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56281 or that they did come from recycled or should make the rule more workable free.’’’ We believe this change will lead scrap sources. On the other hand, if, and less costly than if no framework to more accurate disclosure. based on its reasonable country of origin was specified. Presently, it appears that As suggested by a number of inquiry, an issuer has no reason to the only nationally or internationally commentators, the final rule also believe that its conflict minerals may recognized due diligence framework modifies the proposal by providing a have originated in the Covered available is the due diligence guidance temporary transition period for two Countries, or, based on its reasonable approved by the Organisation for years for all issuers and four years for country of origin inquiry, an issuer Economic Co-operation and smaller reporting companies.57 During reasonably believes that its conflict Development (‘‘OECD’’).55 this period, issuers may describe their minerals are from recycled or scrap As proposed, the final rule requires an products as ‘‘DRC conflict sources, the issuer is not required to independent private sector audit of an undeterminable’’ if they are unable to move to step three. In another change issuer’s Conflict Minerals Report. determine that their minerals meet the from the proposal, the final rule does However, in response to comments, we statutory definition of ‘‘DRC conflict not require an issuer to retain modified the proposal such that the free’’ for either of two reasons: First, reviewable business records to support they proceeded to step three based upon final rule specifies an audit objective. its reasonable country of origin the conclusion, after their reasonable The audit’s objective is to express an conclusion, although maintenance of country of origin inquiry, that they had opinion or conclusion as to whether the appropriate records may be useful in conflict minerals that originated in the design of the issuer’s due diligence demonstrating compliance with the Covered Countries and, after the measures as set forth in the Conflict final rule, and may be required by any exercise of due diligence, they are Minerals Report, with respect to the nationally or internationally recognized unable to determine if their conflict period covered by the report, is in due diligence framework applied by an minerals financed or benefited armed conformity with, in all material issuer. groups in the Covered Countries; or respects, the criteria set forth in the As noted above, if the issuer knows second, they proceeded to step three that it has necessary conflict minerals nationally or internationally recognized based upon the conclusion, after their that originated in the Covered due diligence framework used by the reasonable country of origin inquiry, Countries, or if the issuer has reason to issuer, and whether the issuer’s that they had a reason to believe that believe that its necessary conflict description of the due diligence their necessary conflict minerals may minerals may have originated in the measures it performed as set forth in the have originated in the Covered Covered Countries and may not have Conflict Minerals Report, with respect Countries and may not have come from come from recycled or scrap sources, to the period covered by the report, is recycled or scrap sources and the the issuer must move to the third step. consistent with the due diligence information they gathered as a result of The third step, consistent with the process that the issuer undertook. Also, their subsequently required exercise of proposal, requires such an issuer to consistent with the proposal, the final due diligence failed to clarify the exercise due diligence on the source and rule refers to the audit standards conflict minerals’ country of origin, chain of custody of its conflict minerals established by the GAO. The GAO staff whether the conflict minerals financed and provide a Conflict Minerals Report has indicated to our staff that the GAO or benefited armed groups in those describing its due diligence measures, does not intend to establish new countries, or whether the conflict among other matters. As noted above, standards for the Conflict Minerals minerals came from recycled or scrap however, the final rule requires an Report audit. Instead, the GAO plans to sources. These issuers will have already issuer to provide its Conflict Minerals look to its existing Government conducted a reasonable country of Report as an exhibit to its specialized Auditing Standards (‘‘GAGAS’’), which origin inquiry, and their undeterminable disclosure report on Form SD, instead of is commonly referred to as ‘‘the Yellow status would be based on the as an exhibit to its annual report on Book.’’56 information they were able to gather Form 10–K, Form 20–F, or Form 40–F, Unlike the proposed rule, which from their exercise of due diligence. as proposed. would have required descriptions in the However, if these products also contain Generally, the content of the Conflict Conflict Minerals Report of an issuer’s conflict minerals that the issuer knows Minerals Report is substantially similar products that ‘‘are not ‘DRC conflict directly or indirectly financed or to the proposal. One modification from free,’’’ where ‘‘DRC conflict free’’ means benefited armed groups in the Covered the proposal, based on comments we that they ‘‘do not contain minerals that Countries, the issuer may not describe received, is that the final rule requires directly or indirectly finance or benefit those products as ‘‘DRC conflict an issuer to use a nationally or armed groups in the’’ Covered undeterminable.’’ Also, during the internationally recognized due diligence Countries, the final rule requires transition period, issuers with products framework, if such a framework is descriptions in the Conflict Minerals that may be described as ‘‘DRC conflict available for the specific conflict Report of an issuer’s products ‘‘that undeterminable’’ are not required to mineral. We are persuaded by have not been found to be ‘DRC conflict have their Conflict Minerals Report commentators that doing so will audited. Such issuers, however, must enhance the quality of an issuer’s due minerals supply chain would provide evidence that still file a Conflict Minerals Report diligence, promote comparability of the the issuer used due diligence in its Conflict describing their due diligence, and must Conflict Minerals Reports of different Minerals Report. additionally describe the steps they 55 See OECD, OECD Due Diligence Guidance for issuers, and provide a framework by have taken or will take, if any, since the Responsible Supply Chains of Minerals from which auditors can assess an issuer’s Conflict-Affected and High-Risk Areas (2011), end of the period covered in their most sroberts on DSK5SPTVN1PROD with RULES due diligence.54 This requirement available at http://www.oecd.org/daf/ recent prior Conflict Minerals Report, to internationalinvestment/ 54 The proposed rules would not have required guidelinesformultinationalenterprises/ mitigate the risk that their necessary the use of a particular due diligence framework, but 46740847.pdf. conflict minerals benefit armed groups, the Proposing Release indicated that an issuer 56 See U.S. Gov’t Accountability Office, GAO–12– whose conduct conformed to a nationally or 331G, Government Auditing Standards 2011 57 ‘‘Smaller reporting company’’ is defined in internationally recognized set of standards of, or Revision (Dec. 2011), available at http:// Rule 12b-2 [17 CFR 240.12b-2] under the Exchange guidance for, due diligence regarding its conflict www.gao.gov/assets/590/587281.pdf. Act. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56282 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations including any steps to improve their Covered Countries or are unable to sources of which we are aware. due diligence. determine that their conflict minerals Therefore, we anticipate that issuers This temporary provision will apply that originated in the Covered Countries will use the OECD gold supplement to for the first two reporting calendar years did not directly or indirectly finance or conduct their due diligence for recycled after effectiveness of the final rule for all benefit armed groups must describe or scrap gold. We are not aware that the issuers that are not smaller reporting their products containing those conflict OECD or any other body has a similar companies, and for the first four minerals as not having been found to be recycled or scrap due diligence reporting calendar years after ‘‘DRC conflict free.’’ framework for the other conflict effectiveness of the final rule for smaller Unlike the proposed rules, the final minerals. Issuers with conflict minerals reporting companies. We believe it is rule requires issuers with necessary without a nationally or internationally appropriate to allow a two-year conflict minerals exercising due recognized due diligence framework are temporary period, in recognition that, as diligence regarding whether their still required to exercise due diligence commentators noted, the processes for conflict minerals are from recycled or in determining that their conflict tracing conflict minerals through the scrap sources to conform the due minerals were from recycled or scrap supply chain must develop further to diligence to a nationally or sources. The due diligence that must be make such determinations for the issuer internationally recognized due diligence exercised regarding such conflict community at large. Also, we believe it framework, if one is available for a minerals focuses only on whether those is appropriate to allow an additional particular recycled or scrap conflict conflict minerals are from recycled or two years to this temporary period for mineral. A gold supplement to the scrap sources. In such circumstances smaller reporting companies because, as OECD’s due diligence guidance has commentators noted, smaller companies been approved by the OECD.58 This gold where a nationally or internationally may face disproportionally higher supplement is presently the only recognized due diligence framework burdens than larger companies and a nationally or internationally recognized becomes available for any such conflict longer temporary period may help due diligence framework for any mineral, issuers will be required to alleviate some of those burdens. After conflict mineral from recycled or scrap utilize that framework in exercising due the four-year period for smaller diligence to determine that conflict reporting companies and two-year 58 See OECD, Due Diligence Guidance for minerals are from recycled or scrap period for all other issuers, issuers that Responsible Supply Chains of Minerals from sources. Conflict-Affected and High-Risk Areas: Supplement have proceeded to step three but are on Gold (2012), available at http://www.oecd.org/ E. Flowchart Summary of the Final Rule unable to determine that their conflict corporate/guidelinesformultinationalenterprises/ minerals did not originate in the FINAL%20Supplement%20on%20Gold.pdf. BILLING CODE 8011–01–P sroberts on DSK5SPTVN1PROD with RULES VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56283 BILLING CODE 8011–01–C mobile telephones, computers, used the same definition of this term in II. Discussion of the Final Rule the proposed rules. As we discussed in videogame consoles, and digital the Proposing Release, cassiterite is the cameras, and as an alloy for making A. ‘‘Conflict Minerals’’ Definition metal ore that is most commonly used carbide tools and jet engine

1. Proposed Rules to produce tin, which is used in alloys, components.61 Gold is used for making tin plating, and solders for joining pipes jewelry and is used in electronic, The Conflict Minerals Statutory and electronic circuits.60 Columbite- communications, and aerospace Provision defines the term ‘‘conflict tantalite is the metal ore from which equipment.62 Finally, wolframite is the mineral’’ as cassiterite, columbite- tantalum is extracted. Tantalum is used metal ore that is used to produce tantalite, gold, wolframite, or their in electronic components, including sroberts on DSK5SPTVN1PROD with RULES derivatives, or any other minerals or 61 Niobium (Columbium) and Tantalum Statistics their derivatives determined by the and Information, U.S. Geological Survey, available mineral as a conflict mineral. Therefore, the conflict Secretary of State to be financing minerals include only cassiterite, columbite- at http://minerals.usgs.gov/minerals/pubs/ conflict in the Covered Countries.59 We tantalite, gold, wolframite, or their derivatives. commodity/niobium. 60 Tin Statistics and Information, U.S. Geological 62 Gold Statistics and Information, U.S. 59 Section 1502(e)(4) of the Act. Presently, the Survey, available at http://minerals.usgs.gov/ Geological Survey, available at http://minerals.usgs. ER12SE12.000</GPH> Secretary of State has not designated any other minerals/pubs/commodity/tin/. gov/minerals/pubs/commodity/gold. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56284 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations tungsten, which is used for metal wires, One commentator recommended that provides no clear distinction between electrodes, and contacts in lighting, the definition of ‘‘conflict mineral’’ not the four named minerals and their electronic, electrical, heating, and include organic metal compounds derivatives that did not benefit or welding applications.63 Based on the formed from a conflict mineral metal finance armed groups, and those that many uses of these minerals, we expect derivative, such as tin and tungsten, did finance or benefit armed groups. the Conflict Minerals Statutory because these substances are no longer Specifically, one of these commentators Provision to apply to many companies metals or alloys and ‘‘use of these noted, ‘‘refer[ring] to all cassiterite, and industries and, thereby, the final chemical compounds is too attenuated wolframite, gold, and tantalum in the rule to apply to many issuers. from the original source of the world, regardless of its origin and mineral.’’ 71 According to the relationship to conflict actors’’ as

2. Comments on the Proposed Rules commentator, these organometallic ‘‘conflict minerals,’’ imposes ‘‘a compounds, which include catalysts, reputational taint on these entire Several commentators requested that stabilizers, and polymerization aids, are industries,’’ and ‘‘makes it highly the final rule set forth the specific commodity chemicals used in the challenging for companies in these conflict derivatives that would trigger production of raw materials such as industries to communicate effectively the rule’s disclosure and reporting silicones, polyurethanes, vinyls, and with investors and the public.’’ 73 obligations.64 Many of these polyesters. For example, the commentators recommended that the Commentators suggested that we limit commentator noted that tin is used in a the final rule’s definition of ‘‘conflict final rule limit the derivatives of reaction with chlorine gas, after which columbite-tantalite, cassiterite, and minerals’’ only to minerals that financed the intermediate tin tetrachloride or benefited armed groups and that the wolframite to tantalum, tin, and compound undergoes further chemical tungsten, respectively,65 unless the final rule use another name to describe reactions with any number of organic minerals that did not finance or benefit State Department determines substrates to produce an organotin subsequently that additional specific armed groups, such as ‘‘potential compound with the final compounds conflict minerals,’’ ‘‘suspect conflict minerals or their derivatives are becoming substances such as stannous financing or benefitting armed groups.66 minerals,’’ ‘‘subject minerals,’’ or octoate, monobutyl tin trichloride, and ‘‘covered minerals.’’ 74 Additionally, for One of these commentators pointed out dioctyltin dilaurate. These substances that such a limit is appropriate because, the same reasons, some commentators contain tin but have several organic indicated that the final rule should although conflict minerals have other groups chemically bound to the tin derivatives, tantalum, tin, and tungsten change the names of the required nucleus and are compounds that are headings from ‘‘Conflict Minerals are the only economically significant materially and chemically distinct from derivatives of the conflict minerals.67 Disclosure’’ to ‘‘Country of Origin metallic tin. According to the Disclosure’’ and change the name of the For example, one commentator noted commentator, the use of organotin in that oxygen and iron are derivatives of Conflict Minerals Report to ‘‘Report on many manufacturing sectors has not yet Minerals Sourced from Central wolframite that could be subject to the been recognized by manufacturers, final rule, but wolframite is not Africa.’’ 75 supply chains, or regulators, which may currently a significant commercial increase costs of the final rule if organic 3. Final Rule source for oxygen or iron.68 Another tin compounds are included in the After considering the comments, we commentator noted that niobium is a definition of ‘‘conflict minerals.’’ are revising the proposal in the final derivative of columbite-tantalite that, In addition, a number of rule. We are clarifying our position as to absent clarification to the contrary, commentators recommended that the which derivatives are conflict minerals, could be subject to the final rule as final rule selectively use the term which appears consistent with the well.69 Some commentators, however, ‘‘conflict mineral’’ because not doing so views of various stakeholders,76 asserted that the final rule should not would unfairly stigmatize the four solely be limited to tantalum, tin, minerals and unjustifiably hurt some 73 See letter from Niotan II. tungsten, or gold.70 companies’ reputations.72 These 74 See letters from Cleary Gottlieb, Niotan II, SEMI, and TIC. commentators noted that the term 75 See letters from Barrick Gold and Niotan I. 63 Tungsten Statistics and Information, U.S. ‘‘conflict mineral’’ in the proposed rules 76 See, e.g., letter from H.E. Ambassador Liberata Geological Survey, available at http://minerals.usgs. gov/minerals/pubs/commodity/tungsten. Mulamula, International Conference on the Great 71 See letter from SPI. 64 See, e.g., letters from American AAFA, Global Lakes Region, Angel Gurrı́a, Secretary-General, 72 See, e.g., letters from Advanced Medical Organisation for Economic Co-operation and Tungsten & Powders Corp. (Mar. 1, 2011) (‘‘Global Tungsten I’’), Industry Group Coalition I, IPC I, Technology Association (Feb. 28, 2011) (‘‘AdvaMed Development, and Fred Robarts, Coordinator, IPC—Association Connecting Electronics Industries I’’), Barrick Gold Corporation (Feb. 28, 2011) United Nations Group of Experts on the Democratic (Nov. 1, 2011) (‘‘IPC II’’), Materion Corporation (‘‘Barrick Gold’’), Cleary Gottlieb Steen & Hamilton Republic of the Congo (Jul. 29, 2011) (‘‘OECD I’’) (Nov. 1, 2011) (‘‘Materion’’), National Retail LLP (Mar. 2, 2011) (‘‘Cleary Gottlieb’’), Global (‘‘We consider that the OECD and UN GoE due Federation (Nov. 1, 2011) (‘‘NRF II’’), PCP, Robert Tungsten I, JVC et al. II, Malaysia Smelting diligence recommendations, as integrated into the W. Row (Jan. 18, 2011) (‘‘Row’’), SEMI, and Society Corporation (Jan. 26, 2011) (‘‘MSC I’’), National framework of the ICGLR Regional Initiative against of the Plastics Industry Inc. (Nov. 9, 2011) (‘‘SPI’’). Association of Manufacturers (Nov. 1, 2011) (‘‘NAM the Illegal Exploitation of Natural Resources and the 65 Gold is produced in its metallic form and has III’’), Niotan Inc. (Jan. 30, 2011) (‘‘Niotan I’’), Niotan Regional Certification Mechanism, can be used by no derivatives. Inc. (Mar. 21, 2011) (‘‘Niotan II’’), National Mining persons subject to Section 1502 of the Dodd-Frank 66 See, e.g., letters from AAFA, IPC II, NRF II, Association (Mar. 2, 2011) (‘‘NMA II’’), SEMI, Act (‘‘issuers’’) to reliably determine whether the Tanzania I, TIC, and WGC II. See also MJB tin, tantalum, tungsten or gold in their products PCP, and SPI. 67 See letters from IPC II and NRF II. See also Consulting (Apr. 28, 2011) (‘‘MJB I’’) (arguing that originate from the DRC or adjoining countries, and the Conflict Minerals Statutory Provision is unclear if so, to determine the facilities used to process Transcript of SEC Roundtable, Section 0039 Lines as to whether the definition of ‘‘conflict minerals’’ those minerals, the country of origin, and the mine sroberts on DSK5SPTVN1PROD with RULES 9–10 (‘‘MR. MATHESON: The economic interest is refers to columbite-tantalite (coltan), cassiterite, or location of origin with the greatest possible in the three Ts plus gold.’’). gold, wolframite, or their derivatives, per se, specificity, and describe the products manufactured 68 See letter from SEMI. originating from the Covered Countries, or or contracted to be manufactured that are not DRC 69 See letter from Row. columbite-tantalite (coltan), cassiterite, gold, conflict free.’’); OECD, Due Diligence Guidance for 70 See, e.g., letters from BC Investment wolframite, or their derivatives originating from the Responsible Supply Chains of Minerals from Management Corporation (Mar. 28, 2011) Covered Countries and that do not directly or Conflict-Affected and High-Risk Areas, 12 (2011), (‘‘BCIMC’’) and Save the Congo (Nov. 1, 2011) indirectly finance or benefit armed groups in the available at http://www.oecd.org/daf/ (‘‘Save’’). Covered Countries). internationalinvestment/ VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56285 including at least one co-sponsor of the suggested, our failure in the proposal to B. Step One—Issuers Covered by the legislation and other members of specify the 3T derivatives (tantalum, tin, Conflict Mineral Provision Congress.77 As a commentator and tungsten, which are known as the

1. Issuers That File Reports Under the ‘‘3Ts’’) would have introduced too guidelinesformultinationalenterprises/46740847. Exchange Act much ambiguity in our rule,78 which pdf (discussing due diligence as a basis for responsible global supply chain management of would have expanded the Conflict a. Proposed Rules ‘‘tin, tantalum, tungsten, their ores and mineral Mineral Provision’s reach, cost, and derivates, and gold’’); Final Report of the United complexity without increasing its As we discussed in the Proposing Nations Group of Experts on the Democratic effectiveness.79 The term ‘‘conflict Release, we recognize there is some Republic of the Congo, Nov. 29, 2010 [S/2010/596] ambiguity as to whom the Conflict (stating that relevant individuals and entities mineral’’ in the final rule is defined to should establish effective systems of control and include cassiterite, columbite-tantalite, Minerals Statutory Provision applies transparency over the mineral supply chain, the gold, wolframite, and their derivatives, given that the provision states that the nature of which will vary according to the mineral Commission shall promulgate being traded, with the gold supply chain exhibiting which are limited to the 3Ts, unless the characteristics different to those for tin, tantalum, Secretary of State determines that regulations for any ‘‘person and tungsten, and according to the position of the additional derivatives are financing described’’ 80 and that a ‘‘person is individual or entity in the supply chain); Enough conflict in the Covered Countries, in described’’ if ‘‘conflict minerals are Project, From Mine to Mobile Phone: The Conflict necessary to the functionality or Minerals Supply Chain (Nov. 10, 2009) available at which case they are also considered http://www.enoughproject.org/files/publications/ ‘‘conflict minerals;’’ or any other production of a product manufactured minetomobile.pdf (indicating its desire to increase minerals or their derivatives determined by such person.’’ 81 Therefore, the transparency in the supply chains for tin, tantalum, Conflict Minerals Statutory Provision and tungsten, or the 3Ts, as well as gold, which are by the Secretary of State to be financing key elements of electronics products including cell conflict in the Covered Countries. could be interpreted to apply to a wide phones and personal computers and are the range of private companies not principal source of revenue for armed groups and Additionally, despite the suggestion previously subject to our disclosure and military units that prey on civilians in eastern by certain commentators that we limit reporting rules. Given the provision’s Congo, and the 3Ts are produced from mineral ores, the definition of the term ‘‘conflict including tin from cassiterite, tungsten from legislative background, its statutory wolframite, and tantalum from columbite-tantalite, mineral’’ to minerals that financed or location, and the absence of known throughout Congo as coltan); and Global benefited armed groups, the final rule Congressional direction to apply the Witness, Do No Harm: Excluding conflict minerals continues to use the term ‘‘conflict from the supply chain, 2 (July 2010), available at provision to companies not previously http://www.globalwitness.org/sites/default/files/ mineral’’ to refer to columbite-tantalite, subject to those rules,82 however, we pdfs/do_no_harm_global_witness.pdf (stating that cassiterite, gold, wolframite, and their believe the more appropriate ‘‘the warring parties [in the DRC] finance derivatives, and any other mineral or its interpretation is that the rules apply themselves via control of most of the mines in [eastern DRC] that produce tin, tantalum and derivatives determined by the Secretary only to issuers that file reports with the tungsten ores and gold’’). See also State of State to be financing conflict in the Commission under Section 13(a) or Department, Statement Concerning Implementation Covered Countries whether or not they Section 15(d) of the Exchange Act, and of Section 1502 of the Dodd-Frank Legislation actually financed or benefited armed Concerning Conflict Minerals Due Diligence, 1 (July that is what we proposed.83 Also, 15, 2011), available at http://www.state.gov/ groups. We believe this approach is consistent with the statutory language, documents/organization/168851.pdf (noting that appropriate because it is consistent with our proposed rules would have applied the State Department ‘‘is undertaking a number of the use of that term in the Conflict actions to address the problem of conflict equally to domestic companies, foreign minerals—or the exploitation and trade of gold, Minerals Statutory Provision and to private issuers, and smaller reporting columbite-tantalite (coltan), cassiterite (tin), change the definition of the term for the companies. wolframite (tungsten), or their derivatives—sourced final rule could cause confusion among from the eastern’’ DRC that have ‘‘helped to fuel the conflict in the eastern DRC’’). interested parties between the use of the 77 See letters from Representative Mark E. term in the statutory provision and the Amodei (Dec. 20, 2011) (‘‘Rep. Amodei’’) (referring use of the term in the final rule. 80 See Exchange Act Section 13(p)(1)(A). to ‘‘tungsten’’); Representatives Howard L. Berman, However, issuers whose conflict 81 See Exchange Act Section 13(p)(2)(B). Donald M. Payne, and Christopher H. Smith (Nov. 8, 2010) (Pre-Proposing Release Web site) (‘‘Rep. minerals did not finance or benefit 82 See H.R. Rep. No. 111–517, Joint Explanatory Berman et al. pre-proposing’’) (‘‘Section 1502 was armed groups may describe their Statement of the Committee of Conference, Title XV, ‘‘Conflict Minerals,’’ at 879 (Conf. Rep.) (June designed to limit the ability of armed groups in the products containing those minerals as Democratic Republic of Congo (DRC) to profit from 29, 2010) (‘‘The conference report requires the illicit mining of tin ore, coltan, gold, and other ‘‘DRC conflict free’’ in their specialized disclosure to the SEC by all persons otherwise mineral resources that eventually end up in disclosure report, provided that the required to file with the SEC for whom minerals computers, cell phones, and other products.’’); issuer is able to determine on the basis originating in the Democratic Republic of Congo Representatives Howard L. Berman, Donald M. of due diligence conducted in and adjoining countries are necessary to the Payne, Jim McDermott, Karen Bass, and Barney functionality or production of a product Frank (Sep. 23, 2011) (‘‘Rep. Berman et al.’’); accordance with a nationally or manufactured by such person.’’). Representative Renee L. Ellmers (Dec. 13, 2011) internationally recognized due diligence 83 Exchange Act Section 13(a) requires issuers (‘‘Rep. Ellmers’’) (referring to ‘‘tungsten’’); Rep. Lee framework that such products are ‘‘DRC (referring to gold, tin, tantalum, and tungsten as with classes of securities registered under Exchange ‘‘conflict minerals,’’ by stating that ‘‘[f]or years, conflict free’’ as defined in the final Act Section 12 [15 U.S.C. 78l] to file periodic and minerals such as gold and other raw materials rule. other reports. See 15 U.S.C. 78m. Exchange Act commonly used to produce tin, tantalum, and Section 15(d) requires issuers with effective tungsten have been mined and sold illegally by registration statements under the Securities Act of rebel groups in parts of the Democratic Republic of 1933 (the ‘‘Securities Act’’) to file reports similar to the Congo (DRC) and neighboring countries,’’ and Exchange Act Section 13(a) for the fiscal year sroberts on DSK5SPTVN1PROD with RULES that ‘‘[t]hese ‘conflict minerals’ have fueled decades is to create transparency and accountability in the within which such registration statement became of fighting in central Africa.’’); Representative Tim mineral supply chain in the DRC. Minerals from the effective. See 15 U.S.C. 78n. Therefore, if our Murphy (Dec. 29, 2011) (‘‘Rep. Murphy’’) (referring DRC—which include tin, tantalum, tungsten and to ‘‘tungsten’’); and Senator Barbara Boxer, Senator proposed rules did not include issuers required to gold—are commonly used in products such as file reports under Exchange Act Section 15(d), some John Boozman, Senator Christopher A. Coons, cellphones, laptops and jewelry.’’). issuers who file annual reports may not otherwise Senator Patrick J. Leahy, Senator Frank R. 78 See letter from SEMI. Lautenberg, and Senator Jeff Merkley (Oct. 18, 201) be required to comply with our proposed conflict (‘‘Sen. Boxer et al. I’’) (‘‘The purpose of Sec. 1502 79 See letters from IPC II and NRF II. minerals rules. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56286 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations b. Comments on the Proposed Rules traded company by a significant ii. Smaller Reporting Companies i. Issuers That File Reports Under percentage’’ and that being able to Many commentators agreed that the Sections 13(a) and 15(d) of the Exchange declare a company’s products as ‘‘DRC final rule, as we proposed, should not Act conflict free’’ could become a exempt smaller reporting companies.97 competitive advantage.88 Further, in In this regard, one commentator noted Many commentators addressing the response to our request for comment in that, although there would be additional issue agreed with the proposal that the final rule should apply to issuers that the Proposing Release, all four costs for smaller reporting companies to file reports under Sections 13(a) and commentators that discussed the issue comply with the rules, the increased 15(d) of the Exchange Act and not to agreed that an issuer with a class of costs will apply also to larger private companies or individuals.84 securities exempt from Exchange Act companies.98 Another commentator Some of these and other commentators registration pursuant to Exchange Act asserted that compliance costs for small acknowledged, however, that not Rule 12g3–2(b) 89 should not be subject issuers ‘‘will be relatively modest’’ due including individuals and private to the final rule.90 One commentator to their smaller scale and lower companies in the final rule could recommended ‘‘that entities with Over- complexity of their businesses.99 One unfairly burden Sections 13(a) and 15(d) The-Counter American Depository commentator did not believe that the issuers and put them at a competitive Receipts (OTC ADRS) that file an annual proposed rules would impose higher disadvantage by increasing their costs.85 costs on smaller companies significant report with the SEC should also be On the other hand, some of these enough to justify an exemption because required to file a ‘Conflict Minerals commentators noted that not including smaller reporting companies would Disclosure’ report.’’ 91 have fewer products to track than a private companies and individuals in Some commentators stated that the larger company, which would decrease the final rule may not unduly burden Sections 13(a) and 15(d) issuers because final rule should not necessarily require their compliance costs.100 The the commercial pressure on private private companies to submit to us their commentator based its belief on the fact companies by issuers that need this conflict minerals information, but the that, although it was a small human information for their reports and by the final rule should provide mechanisms rights group with a modest budget, it public in general demanding that that allow private companies to report regularly undertakes field investigations issuers make this information available voluntarily on their conflict minerals in and supply chain research that is very could be sufficient enough for the a manner similar to Sections 13(a) and similar to the due diligence measures it private companies to provide 15(d) issuers,92 which could include recommended the Commission adopt. voluntarily their conflict minerals working with other agencies that According to this commentator, if it is information as standard practice.86 regulate non-reporting companies to able to perform due diligence with a Another commentator argued that the small staff, so too can a smaller have those agencies require their filers effects of the final rule on competition reporting company. to provide similar conflict minerals Some commentators noted that ‘‘are likely to be benign.’’ 87 This information.93 Moreover, the State exempting smaller reporting companies commentator asserted that ‘‘conflict Department commented that it would from the final rule could increase the minerals disclosure costs will not encourage private companies not subject burdens on larger reporting companies increase the cost of being a publicly to the final rule to disclose voluntarily because the larger reporting companies 84 See, e.g., letters from AngloGold; Arkema, Inc. conflict minerals information.94 Other may be less able to require their smaller (Mar. 1, 2011) (‘‘Arkema’’); Calvert; Cleary Gottlieb; commentators disagreed with the reporting company suppliers to provide Communications and Information Network proposed rules and indicated that the the conflict minerals information Association of Japan, Japan Auto Parts Industries final rule should apply to more than just needed by the larger reporting Association, Japan Business Machine and Information System Industries Association, Japan issuers that file reports under Sections companies.101 One of these Electronics and Information Technology Industries 13(a) and 15(d) of the Exchange Act.95 commentators noted also that permitting Association, The Japan Electrical Manufacturers’ A comment letter submitted jointly by limited disclosure and reporting Association, Japan Machinery Center for Trade and obligations for smaller companies is Investment (Mar. 2, 2011) (‘‘Japanese Trade two of the co-sponsors of the legislation Associations’’); CRS I; Earthworks; Howland; IPC I; stated that their ‘‘intent was for the unlikely to reduce significantly their JVC et al. II; KEMET Corporation (Nov. 1, 2011) requirements of Section 1502 to apply to burdens because larger companies (‘‘Kemet’’); PCP; Rockefeller Financial Asset all companies that fall under the would likely impose contractual Management (Mar. 1, 2011) (‘‘Rockefeller’’); SIF I; obligations on them to track and provide State II; TIC; and TriQuint I. jurisdiction of the SEC, including those 85 See, e.g., letters from Howland, IPC I, ITIC I, who issue classes of securities otherwise their conflict minerals information for NMA II, National Retail Federation (Mar. 2, 2011) the larger companies.102 exempt from reporting.’’ 96 Other commentators supported (‘‘NRF I’’); TIC; and TriQuint I. 86 Letter from Howland (noting that ‘‘private exempting smaller reporting companies 88 Id. companies (non reporters) will likely need to 89 17 CFR 240.12g3–2(b). because these companies would be less provide the same [conflict minerals] information to their customers who will need the information for 90 See Cleary Gottlieb, JVC et al. II, New York 97 See, e.g., letters from BCIMC, Calvert, CRS I, their reports,’’ and that providing conflict minerals State Bar Association (Mar. 1, 2011) (‘‘NY State information is ‘‘likely’’ to ‘‘become a de facto Earthworks, Global Witness I, Howland, IPC I, JVC Bar’’), and SIF I. standard similar to RoHS (EU Restriction of et al. II, Rockefeller, Sen. Durbin/Rep. McDermott, 91 See letter from Calvert. hazardous Substances) for electronics’’) and TIC SIF I, State II, TIAA–CREF, TIC, and TriQuint I. 92 See letters from Earthworks and TriQuint I. 98 See letter from Howland. (‘‘Further, provided that the regulations apply to 93 See letter from TriQuint I. 99 See letter from Green II. See also letter from large and small issuers, they will form a critical 94 See letter from State II. ICAR et al. II (stating that ‘‘because these issuers are mass which will, in practice, create sufficient sroberts on DSK5SPTVN1PROD with RULES commercial pressure on private companies and 95 See, e.g., letters from Catholic Charities Diocese smaller, it stands to reason that they will have fewer individuals who manufacture products involving of Houma-Thibodaux (Apr. 21, 2011) (‘‘Catholic products that contain conflict minerals, thus potential conflict materials. Noncompliant Charities’’), International Corporate Accountability reducing the amount of products that must undergo companies will be unable to withstand the political Roundtable and Global Witness (Nov. 1, 2011) a reasonable country of origin inquiry and supply and consumer pressures. Accordingly, there is no (‘‘ICAR et al. II’’), ITIC I, NRF I, Sen. Durbin/Rep. chain due diligence’’). 100 See letter from Global Witness I. need for the SEC to seek to expand its McDermott, Sisters of Good Shepherd (Apr. 8, 2011) jurisdiction.’’). (‘‘Good Shepherd’’), TIC, and Tiffany. 101 See, e.g., letters from IPC I and TriQuint I. 87 See letter from Green II. 96 See letter from Sen. Durbin/Rep. McDermott. 102 See letters from IPC I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56287 able to compel their suppliers to from the final rule.110 This commentator location of the statute adopted by provide conflict minerals information argued that any Congressional intent to Congress in the section of the Exchange due to their lack of leverage,103 and give laws extraterritorial effect must be Act dealing with reporting issuers because it would be more expensive for clearly expressed and stated, which the reflects a more limited scope, as well.115 smaller reporting companies to comply Conflict Minerals Statutory Provision The statute is silent with respect to with the rule relative to their revenues fails to do. Also, the commentator noted any distinction among issuers based on than for other companies.104 However, that the proposed rules would violate the issuer’s size or domesticity. one commentator argued that, although international principles of diplomatic Although not specifically in the context such issuers may lack leverage, this comity and could put diplomats from of smaller reporting companies or disadvantage may be reduced through countries with foreign private issuers in foreign private issuers, some the influence exerted over their jeopardy. Another commentator commentators suggested that we use our suppliers by larger issuers that use the suggested that, if the final rule would general exemptive authority under same supplier base and that have more cause ‘‘more than an insignificant Exchange Act Section 36(a) 116 to leverage to request such information.105 number of foreign private issuers to exempt certain classes of companies Some commentators argued that smaller leave the U.S. markets or not to enter from full and immediate compliance reporting companies should be allowed the U.S. markets,’’ we should consider with the disclosures required by the to phase-in the rules or that the exempting all or some foreign private Conflict Minerals Statutory implementation date of the final rule issuers from the final rule.111 A further Provision.117 The only limiting factor in should be deferred for them.106 commentator stated that, although it the Conflict Minerals Statutory recommended that the final rule not Provision itself as to the type of issuer iii. Foreign Private Issuers to which it applies is based on whether exempt foreign private issuers, it A number of commentators believed expects that the final rule ‘‘will conflict minerals are ‘‘necessary to the that the final rule should not exempt represent just one more strong functionality or production’’ of products foreign private issuers.107 As one disincentive for such issuers to access manufactured or contracted by the commentator noted,108 exempting the U.S. markets.’’ 112 issuer to be manufactured.118 Moreover, foreign private issuers from the final Congress included a specific provision rule could increase domestic issuers’ c. Final Rule for Commission revisions and waivers burdens by making it very difficult for After considering the comments, we to the reporting obligation that requires them to compel their foreign private are adopting the final rule as proposed. the President to determine such waiver issuer suppliers to provide conflict Therefore, the final rule applies to any or revision to be in the national security minerals information. As another issuer that files reports with the interest and limits such a Commission commentator noted,109 exempting Commission under Section 13(a) or exemption to two years. In our view, the foreign private issuers from the final Section 15(d) of the Exchange Act, high standard set for this statutory rule could also result in a competitive including domestic companies, foreign waiver, as well as its limited duration, disadvantage for domestic issuers private issuers, and smaller reporting evinces a congressional intent for the because foreign private issuers would companies. We believe the statutory Conflict Minerals Statutory Provision to not be subject to the final rule. Further, language is clear on this point and apply broadly and exempting large this commentator indicated that not believe that it only applies to issuers categories of issuers would be exempting foreign private issuers could that file reports with the Commission inconsistent with this intent. We also actually motivate foreign companies to under Section 13(a) or Section 15(d) of recognize that section 1502 is not advocate for similar conflict minerals the Exchange Act. There is no clear simply a disclosure obligation for regulations in their home jurisdictions indication that Congress intended to issuers, but a comprehensive legislative to reduce any competitive disadvantages cover issuers other than those that file scheme that contemplates coordinated they may have with companies from such reports. Although we appreciate their jurisdictions that do not register the views expressed in the comment Statutory Provision ‘‘is a narrow SEC reporting with us. Finally, the commentator letter submitted jointly by two of the co- requirement’’ and referring only to ‘‘SEC reporting requirements’’ in discussing the provision); and 156 suggested that exempting foreign private sponsors of the legislation,113 the Cong. Rec. S3816–17 (daily ed. May 17, 2010) issuers may hurt conflict minerals legislative history only refers to (statement of Sen. Durbin) (stating that the supply chain transparency, which companies that file with or report to the provision ‘‘would require companies listed on the would be contrary to the intent of Commission or that are listed on a New York Stock Exchange to disclose in their SEC filings’’). Congress. United States stock exchange.114 The 115 See Exchange Act Section 13 entitled Only one commentator, a foreign ‘‘Periodical and Other Reports.’’ private issuer, stated specifically that 110 See letter from Taiwan Semi. 116 15 U.S.C. 78mm(a) (‘‘[T]he Commission, by 111 See letter from ABA. foreign private issuers should be exempt rule, regulation, or order, may conditionally or 112 See letter from NY State Bar. unconditionally exempt any person, security, or 103 See, e.g., letters from ABA, JVC et al. II, and 113 See letter from Sen. Durbin/Rep. McDermott. transaction, or any class or classes of persons, 114 See H.R. Rep. No. 111–517, Joint Explanatory securities, or transactions, from any provision or Society of Corporate Secretaries and Governance Statement of the Committee of Conference, Title provisions of this chapter or of any rule or Professionals (Mar. 3, 2011) (‘‘Corporate Secretaries XV, ‘‘Conflict Minerals,’’ at 879 (Conf. Rep.) (June regulation thereunder, to the extent that such I’’). 104 See letter from Corporate Secretaries I and 29, 2010) (‘‘The conference report requires exemption is necessary or appropriate in the public disclosure to the SEC by all persons otherwise interest, and is consistent with the protection of Howland. investors.’’). 105 See letter from Green II. required to file with the SEC for whom minerals 117 See, e.g., letters from Davis Polk & Wardwell 106 See, e.g., letters from ABA, Howland, and JVC originating in the Democratic Republic of Congo and adjoining countries are necessary to the LLP (Mar. 2, 2011) (‘‘Davis Polk’’); National Cable sroberts on DSK5SPTVN1PROD with RULES et al. II. functionality or production of a product & Telecommunications Association (Oct. 31, 2011) 107 See, e.g., letters from AngloGold, BCIMC, manufactured by such person.’’); 156 Cong. Rec. (‘‘NCTA’’); Representatives Spencer Bachus, Gary Calvert, CRS I, Earthworks, Global Witness I, S3976 (daily ed. May 19, 2010) (statement of Sen. G. Miller, Chairman, Robert J. Dold, and Steve Howland, JVC et al. II, NEI Investments (Mar. 2, Feingold) (stating that the ‘‘Brownback amendment Stivers (Jul. 28, 2011) (‘‘Rep. Bachus et al.’’) 2011) (‘‘NEI’’), NY State Bar, SIF I, State II, TIAA– was narrowly crafted’’ and, in discussing the Verizon; and Wilmer Cutler Pickering Hale and CREF, TriQuint I, WGC II, and WLF. provision, referring only to ‘‘companies on the U.S. Dorr LLP Hale on behalf of IPC (Jun. 2, 2011) 108 See letter from TriQuint I. (‘‘WilmerHale’’). stock exchanges’’); 156 Cong. Rec. S3865–66 (daily 109 See letter from NEI. ed. May 18, 2010) (stating that the Conflict Minerals 118 Exchange Act Section 13(p)(2)(B). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56288 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations action by a number of federal agencies permit all issuers that are unable to whom conflict minerals are necessary to aimed at making public information determine that their conflict minerals the functionality or production of a about conflict minerals from the did not originate in the Covered product manufactured by that person. Covered Countries.119 We are concerned Countries or that are unable to The proposed rules would likewise have that any broad categories of exemptions determine that their conflict minerals applied to reporting persons for whom would be inconsistent with this scheme that originated in the Covered Countries conflict minerals are necessary to the and the statutory objective of reducing did not directly or indirectly finance or functionality or production of products the use of conflict minerals from the benefit armed groups to describe their they manufacture. We did not define the Covered Countries that contribute to products as ‘‘DRC conflict term ‘‘manufacture’’ in the proposed conflict.120 Congress chose to pursue undeterminable,’’ and temporarily will rules, because we believed the term to this goal through the implementation of not require such issuers to obtain an be generally understood.124 a comprehensive disclosure regime. In independent private sector audit of their In addition, based on the text of the order to allow the provision to have the Conflict Minerals Report with respect to Conflict Minerals Statutory Provision as effect we understand Congress intended, those minerals. This temporary well as statutory intent, the proposed we believe our rules must be consistent accommodation will be available to all rules would also have applied to issuers with the statutory language and not issuers for the first two years of that contract to manufacture products. exempt broad categories of issuers from reporting under the final rule. The final As discussed in the Proposing Release, its application. Thus, we are not rule extends that period for smaller one section of the Conflict Minerals exempting smaller reporting companies reporting companies for an additional Statutory Provision defines a ‘‘person or foreign private issuers. two years, providing a temporary four- described’’ as one for which conflict Additionally, it is unclear whether year provision for smaller reporting minerals are ‘‘necessary to the exempting smaller reporting companies companies. This approach is consistent functionality or production of a product in particular would significantly reduce with some commentators’ manufactured by such a person,’’ 125 their burdens because smaller reporting recommendations as to the applicability while another section of the provision companies could still be required to of the reporting requirement to smaller requires an issuer to describe ‘‘the track and provide their conflict minerals reporting companies.122 products manufactured or contracted to information for larger issuers.121 Similarly, we are not exempting be manufactured that are not DRC Moreover, to the extent there are foreign private issuers because we do conflict free’’ [emphasis added] in its benefits to smaller companies from an not believe that it would give effect to Conflict Mineral Report.126 The absence exemption, such an exemption could Congressional intent of the provision. of the phrase ‘‘contract to manufacture’’ increase the burden on larger companies As commentators noted, exempting from the ‘‘person described’’ definition that rely on smaller reporting company foreign private issuers could make it raised some question as to whether the suppliers to provide conflict minerals difficult for issuers to compel their requirements apply equally to those information needed by the larger foreign private issuer suppliers to who manufacture products themselves reporting companies. provide conflict minerals information, and those who contract to have their Further, as discussed in greater detail result in a competitive disadvantage for products manufactured by others. Based below, the final rule temporarily will domestic issuers, and hurt conflict on the totality of the provision, minerals supply chain transparency.123 however, we expressed in the Proposing 119 Sections 1502(c) and (d) of the Act. We Also, we note that including foreign Release our belief that the legislative recognize that Congress also required the Comptroller General to periodically report on, private issuers in the final rule does not intent was for the provision to apply among other things, publicly available information give the Conflict Minerals Statutory both to issuers that directly manufacture regarding persons who are ‘‘not required to file Provision an extraterritorial effect products and to issuers that contract the reports * * * pursuant to Section 13(p)(1)(A)’’ and because it applies only to foreign private manufacturing of their products for who manufacture products for which ‘‘conflict minerals are necessary to the functionality or issuers that enter the securities markets which conflict minerals are necessary to production.’’ Section 1502(d)(2)(C). We interpret of the United States. the functionality or production of those this provision to require reporting by the products. The proposed rules, therefore, Comptroller General on persons—such as private 2. ‘‘Manufacture’’ and ‘‘Contract to would have applied equally to issuers companies not subject to our disclosure and Manufacture’’ Products reporting rules—who are not subject to the that manufacture products and to requirements of the Conflict Minerals Statutory a. Proposed Rules issuers that ‘‘contract to manufacture’’ Provision even though conflict minerals may be their products. We noted that this necessary to the functionality or production of their The Conflict Minerals Statutory products. Any issuers that receive waivers or Provision applies to any person for approach would allow the ‘‘contracted revisions pursuant to Section 13(p)(3) would also be to be manufactured’’ language to have included. 122 See letter from Howland (stating that, although effect in the Conflict Minerals Report. 120 See letters from Global Witness I and State II ‘‘[t]here will be additional costs that may be In the Proposing Release, we and Transcript of SEC Roundtable on Conflict proportionally higher for small companies, but explained that the proposed rules would Minerals, Section 141 (Oct. 18, 2011) (Statement of increased costs will also apply to large firms,’’ a Tim Mohin), available at http://www.sec.gov/ way that the final rule can ‘‘mitigate the cost is to apply to issuers that contract for the spotlight/conflictminerals/ phase in the acceptable level of rigor for due manufacturing of products over which conflictmineralsroundtable101811-transcript.txt diligence over several years and based on company they had any influence regarding the (stating that although no single company working size’’). See also letter from JVC et al. II (stating that, manufacturing of those products. As alone can determine whether minerals in its ‘‘[w]ith respect to smaller reporting companies, it is products supported armed groups, large and small reasonable to assume that the costs of compliance proposed, they also would have applied companies working together can make such a may disproportionately harm them by comparison to issuers selling generic products under determination), id. at 22 (Statement of Bennett with any concomitant benefit in achieving the their own brand name or a separate Freeman) (arguing that all companies across the statutory goals, since these companies lack the sroberts on DSK5SPTVN1PROD with RULES value and supply chain should be covered by the leverage to pressure suppliers and smelters to 124 For example, the Second Edition of the rule because disclosures by all companies are certify regarding the source of a particular conflict important to investors). See also id. at 62, 92, and mineral,’’ so ‘‘we believe it would be appropriate Random House Webster’s Dictionary defines the 103 (Statements of Andrew Matheson, Benedict S. to allow smaller reporting companies even more term to include the ‘‘making goods or wares by Cohen, and Representative James McDermott, time in which to adapt the results of these broader hand or machinery, esp. on a large scale.’’ Random respectively) (assuming that small issuers would be global initiatives to their individual facts and House Webster’s Dictionary 403 (2d ed. 1996). covered by the rule). circumstances’’). 125 Exchange Act Section 13(p)(2)(B). 121 See letters from IPC I. 123 See letters from NEI and TriQuint I. 126 Exchange Act Section 13(p)(1)(A)(ii). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56289 brand name that they had established, manufacturing issuers downstream in process before the final rule considers regardless of whether those issuers had the supply chain to comply with the that issuer to be contracting to any influence over the manufacturing final rule.130 One commentator manufacture a product.137 A number of specifications of those products, as long indicated that the term should include commentators suggested the level of as an issuer had contracted with another all steps from mining, refining, and control necessary to be considered party to have the product manufactured production to the importing, exporting, contracting to manufacture a product specifically for that issuer. We did not, or sale of ingredients, materials, and/or under the final rule. In this regard, some however, propose that the rules would processes.131 A few commentators commentators suggested that only an apply to retail issuers that sell only the indicated that the final rule should issuer with direct, close, active, and/or products of third parties if those provide a definition consistent with the substantial involvement or control in retailers had no contract or other U.S. Controlled Substances Act, which the sourcing of materials, parts, involvement regarding the includes the production, preparation, ingredients, or components to be manufacturing of those products, or if assembling, propagation, combination, included in its products or in the those retailers did not sell those compounding, or processing of a drug or manufacturing of those products should products under their brand name or a other substance, either directly or meet the minimum control threshold separate brand they had established and indirectly or by extraction from necessary to be considered contracting did not have those products substances of natural origin.132 One of to manufacture a product.138 One manufactured specifically for them. these commentators stated that such a commentator recommended that an consistent definition would include the issuer should be considered to be b. Comments on the Proposed Rules ‘‘production, preparation, assembling, contracting to manufacture a product i. ‘‘Manufacture’’ combination, compounding, or only if it exercises ‘‘a sufficient level of Many commentators agreed with the processing of ingredients, materials, influence, involvement or control over proposed rules that the final rule should and/or processes such that the final the process to be able to control, in a not define the term ‘‘manufacture’’ product has a name, character, and use, meaningful manner, the use of conflict because that term is generally distinct from the original ingredients, minerals, or to evaluate and influence understood.127 Many other materials, and/or processes.’’ 133 One the use of conflict minerals.’’139 Some commentators, however, believed that commentator asserted that the definition commentators asserted that the the final rule should define the term,128 should include any entity ‘‘involved in minimum control threshold should be and most of these commentators the process of changing a product * * * met only if the issuer explicitly specifies provided their recommendations for the from one form to another.’’ 134 One the inclusion of conflict minerals in the definition. A number of commentators commentator suggested that the product.140 Another commentator indicated that the definition should definition ‘‘should be tailored only to advised that the contracting activities mirror the North American Industry include OEM’s and those who design that should trigger conflict minerals Classification System (‘‘NAICS’’),129 and specify bills of materials for reporting should include designing the which classifies entities as products with control over the product, controlling the approved manufacturers if they engage in the procurement or fabrication of the same materials or vendor lists for the product, mechanical, physical, or chemical products’ bill of materials and and including the issuer’s name on the transformation of materials, substances, specification of the constituent product.141 or components into new products from materials of the components.’’ 135 One raw materials that are products of commentator urged us to provide clear Some of these commentators, as well agriculture, forestry, fishing, mining, or guidance indicating that real estate as others, asserted that an issuer should quarrying. development does not constitute not be considered to meet the control Some commentators stated that the manufacturing.136 threshold to the extent that the product final rule should define the term is not manufactured to meet an issuer’s ii. ‘‘Contract to Manufacture’’ custom specifications, but rather is inclusively or broadly so as to include all steps in the supply chain, from Not all commentators agreed on manufactured to meet industry-standard mining to manufacturing the product, whether the final rule should include an specifications common to the issuer’s because otherwise it would become issuer that contracts to manufacture a competitors generally.142 For example, a exponentially more difficult for product. However, many commentators group of jewelry industry commentators that agreed that the final rule should argued in one letter that a jewelry retail 127 See, e.g., letters from ABA, Global Witness I, include an issuer that contracts to issuer ordering products from jewelry Howland, NYCBar I, NYCBar II, State II, TIC, and manufacture a product, or did not agree manufacturers should not be considered United States Steel Corporation (Mar. 4, 2011) (‘‘US but argued in the alternative, contracting to manufacture for those Steel’’). recommended that an issuer should be 128 See, e.g., letters from American Association of products if the retail issuer specifies Exporters and Importers (Jan. 21, 2011) (‘‘AAEI’’); required to have some amount of control only weight, karat, or other indicators of AngloGold; Columban Center for Advocacy and or influence over the manufacturing Outreach, Leadership Conference of Women 137 See, e.g., letters from AdvaMed I, AT&T Inc. Religious, Sisters of Mercy of the Americas— 130 See letters from Columban Center et al., (Mar. 9, 2011) (‘‘AT&T’’), Chamber I, Cleary Institute Justice Team, Missionary Oblates, and Metalsmiths, and TriQuint I. Gottlieb, Consumer Electronics Retailers Coalition Maryknoll Office for Global Concerns (Mar. 2, 2011) 131 See letter from Earthworks. (Nov. 1, 2011) (‘‘CERC’’), Industry Group Coalition (‘‘Columban Center et al.’’); CTIA—The Wireless 132 See letters from Enough Project I and SIF I. I, IPC I, IPC II, JVC et al. II, NAM I, NCTA, Niotan Association (Mar. 1, 2011) (‘‘CTIA’’); Earthworks; 133 See letter from Enough Project I (citing to its I, NMA II, NRF I, NRF II, PCP, RILA, Roundtable, Enough Project I; International Corporate SEMI, TIAA–CREF, and TriQuint I. Accountability Roundtable, Enough Project, and earlier letter submitted Sep. 24, 2010 on the Pre- sroberts on DSK5SPTVN1PROD with RULES 138 See letters from AT&T, CERC, Corporate Global Witness (Sep. 23, 2011) (‘‘ICAR et al. I’’); Proposing Release Web site). 134 See letter from Jeffrey Trott (Jan. 31, 2011) Secretaries I, CTIA, JVC et al. II, NCTA, NRF I, Metalsmiths; NAM I; NEI; NMA II; RILA–CERC; SIF (‘‘Trott’’). RILA, and Verizon. I; TriQuint I; and WGC II. 135 See letter from Retail Industry Leaders 139 See letter from ABA. 129 See letters from AAEI, AngloGold, BCE Inc. 140 See letters from NAM I and SEMI. (Oct. 31, 2011) (‘‘BCE’’), Canadian Wireless Association (Nov. 1, 2011) (‘‘RILA’’). 136 See letter from National Association of Real 141 See letter from TriQuint I. Telecommunications Association (Oct. 28, 2011) (‘‘CWTA’’), CTIA, NAM I, NCTA, NMA II, RILA– Estate Investment Trusts (Nov. 23, 2011) 142 See letters from AngloGold, AT&T, BCE, JVC CERC, and WGC II. (‘‘NAREIT’’). et al. II, NCTA, and RILA–CERC. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56290 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations quality.143 As another example, a and the product will be sold by the product; 153 this interpretation is not a mobile phone service provider asserted issuer under its own brand name or a change from the Proposing Release, but that it should not be considered brand name owned by the issuer or a clarification in response to contracting to manufacture its mobile exclusively licensed to the issuer by the comments.154 phones even though it specifies to its owner of the brand.149 One of these We believe narrowing or expanding manufacturers that the phones must be commentators went on to assert that an the definition of ‘‘manufacture’’ as compatible with their networks and issuer should not be considered to be suggested by some commentators would have certain cosmetic design exerting ‘‘substantial control’’ over be inconsistent with the language and requirements.144 manufacturing by ‘‘merely attaching a framework of Section 1502. For Some commentators suggested that brand label to a generic good, example, the NAICS definition, which a the final rule should not consider an contracting for the exclusive number of commentators suggested, issuer to be contracting to manufacture distribution of goods, or specifying the appears to exclude any issuer that products if the issuer is selling products form, fit or function of a product,’’ and manufactures a product by assembling under its own brands, labels, should not be considered to be that product out of materials, trademarks, or licenses if it had little or contracting to manufacture a product substances, or components that are not no influence in manufacturing those solely by ‘‘attaching a brand label to a in raw material form. Such a definition products.145 Other commentators generic good, contracting for the would exclude large categories of recommended that the final rule should exclusive distribution of goods, or issuers that manufacture products consider such issuers to be contracting specifying the form, fit or function of a through assembly, such as certain auto to manufacture those products.146 One product.’’ 150 and electronics manufacturers, whom commentator asserted that generic Other commentators stressed that the we believe are intended to be covered products should be held to the same final rule should not apply to any issuer by the Conflict Minerals Statutory standard as branded products and that contracting to manufacture its Provision. As another example, the the final rule should avoid using any products.151 These commentators manufacturing definition put forth by definitions that create a perverse argued generally that the statute does one commentator appears to include incentive for an issuer to work with not include an issuer that contracts to ‘‘importing, exporting, or sale of conflict special purpose entities designed to manufacture its products because the minerals,’’ 155 which would expand the follow the technical requirements of the phrase does not appear in the definition to include issuers that clearly law but evade its intent.147 Another subsection of the Conflict Minerals do not manufacture products. Also, commentator suggested that the final Statutory Provision discussing a many of the other suggested definitions rule should apply to issuers selling ‘‘person described.’’ Instead, the phrase simply expound upon the generally generic products under their own name appears only in the subsection that understood meaning of the term, which or a separate brand name, but not to describes the disclosures required in a we do not believe we need to define. retailers who do not do so and have no Conflict Minerals Report. Therefore, ii. ‘‘Contract to Manufacture’’ influence over the manufacturing of Congress’s intent in including the products they sell.148 phrase was only to ensure that a Consistent with the proposal, the final Some commentators recommended manufacturer otherwise subject to the rule applies to any issuer for which that an issuer should be considered to Conflict Minerals Statutory Provision conflict minerals are necessary to the be contracting to manufacture a product could not intentionally evade its functionality or production of a product only if the issuer has a direct reporting obligation merely by contracted by that issuer to be contractual relationship with the distancing itself, through contracting, manufactured, including conflict manufacturer of the product to be sold from the manufacturing process.152 minerals in a component of a product. by the issuer, the issuer has substantial In general, the question of whether an control over the manufacturer and the c. Final Rule issuer contracts to manufacture a material specifications of the product i. ‘‘Manufacture’’ product will depend on the degree of and specifies the conflict minerals to be After considering the comments, we influence exercised by the issuer on the used in the product, the product will be are modifying the proposed rules, in manufacturing of the product based on manufactured exclusively for the issuer, part. The final rule, as proposed, applies the individual facts and circumstances to any issuer for which conflict minerals surrounding an issuer’s business and 143 See letter from JVC et al. II. are necessary to the functionality or industry. The final rule does not define 144 See letter from AT&T. See also letter from BCE production of a product manufactured when an issuer contracts to manufacture (stating that the commentator, a distributor of a a product because, although we believe wide range of telecommunications and electronic or contracted by that issuer to be products supplied by hundreds of manufacturers, manufactured. The final rule does not this concept is intuitive at a basic level, ‘‘exerts no substantial control over the design or the define the term ‘‘manufacture’’ because after considering comments and technical features of those products or any control, we continue to believe, as discussed in attempting to develop a precise direct or indirect, over the supply chains, which definition, we concluded that, for may be quite complex, of such manufacturers,’’ and the Proposing Release, that the term is its ‘‘sole input into the manufacturing process generally understood. We note, ‘‘contract to manufacture’’ to cover relates to providing brand name manufacturers with however, that we do not consider an issuers operating in the wide variety of certain technical specifications to ensure issuer that only services, maintains, or the impacted industries and structured compliance with applicable Canadian regulatory standards or to requesting special product features, repairs a product containing conflict 153 See letter from JVC et al. II (commenting that cosmetic in nature, to meet Canadian consumer minerals to be ‘‘manufacturing’’ a ‘‘certain assembly and repair functions commonly market demands’’). performed by jewelry retailers’’ should not be sroberts on DSK5SPTVN1PROD with RULES 145 See letters from AT&T, BCE, Cleary Gottlieb, 149 See letters from CERC and RILA. defined as manufacturing). CTIA, Industry Group Coalition I, JVC et al. II, NAM 150 See letter from RILA. 154 See, e.g., letter from ABA (commenting that I, NCTA, and NRF I. 151 See, e.g., letters from BCE, CERC, CTIA, Davis the Commission ‘‘should, either in the final rule or 146 See letters from Enough Project I, Howland, Polk, NCTA, RILA–CERC, TIC, and United States in the corresponding adopting release, provide NEI, SIF I, State II, and TriQuint I. Telecom Association (Mar. 2, 2011) (‘‘US additional guidance as to activities that will not be 147 See letter from AxamTrade (Feb. 10, 2011) Telecom’’). considered to be the manufacturing of a product for (‘‘Axam’’). 152 See letters from AT&T, CTIA, and RILA– the purposes of the rule’’). 148 See letter from NYCBar II. CERC. 155 See letter from Earthworks. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56291 in various manners, any definition of Provision, be viewed as responsible for components to be included in any that term would be so complicated as to the conflict minerals in those products product that contains conflict minerals be unworkable. We do, however, to the same extent as if they or their derivatives. The degree of provide guidance below on some manufactured the components influence necessary for an issuer to be general principles that we believe are themselves. We believe it is inconsistent considered to be contracting to relevant in determining whether an with the Conflict Minerals Statutory manufacture a product is based on each issuer should be considered to be Provision to allow these manufacturers issuer’s individual facts and contracting to manufacture a product. to avoid the final rule’s requirements by circumstances. However, based on As a threshold matter, consistent with contracting out the manufacture of comments we received, we believe an the proposal, we believe the statutory components in their products that issuer should not be viewed for the intent to include issuers that contract to contain conflict minerals. As two of the purposes of the Conflict Minerals manufacture their products is clear co-sponsors of the Conflict Minerals Statutory Provision as contracting to based on the statutory obligation for Statutory Provision noted, ‘‘[m]any manufacture a product if its actions issuers to describe in their Conflict companies use component parts from involve no more than: Minerals Reports products that are any one of several suppliers when (a) Specifying or negotiating manufactured and contracted to be assembling their products’’ to ‘‘help contractual terms with a manufacturer manufactured that do not meet the drive down the price for parts through that do not directly relate to the definition of ‘‘DRC conflict free.’’ 156 We competition,’’ but ‘‘[i]t is of paramount manufacturing of the product, such as recognize that commentators asserted importance that this business model training or technical support, price, that the statute does not include an choice not be used as a rationale to insurance, indemnity, intellectual issuer that contracts to manufacture its avoid reporting and transparency.’’ 157 property rights, dispute resolution, or products and that the sole intent behind In the proposal, we expressed our other like terms or conditions including the phrase in the provision belief that an issuer that does not concerning the product, unless the was to keep manufacturers from manufacture a product itself but that has issuer specifies or negotiates taking intentionally evading reporting ‘‘any’’ influence over the product’s these actions so as to exercise a degree requirements by contracting the manufacturing should be considered to of influence over the manufacturing of manufacturing of their products to third be contracting to manufacture that the product that is practically parties. Nonetheless, Exchange Act product. Also, we expressed our belief equivalent to contracting on terms that Section 13(p)(1)(A)(ii) requires issuers that an issuer that offers a generic directly relate to the manufacturing of that must file a Conflict Minerals Report product under its own brand name or a the product; or to describe their ‘‘products separate brand name should be (b) Affixing its brand, marks, logo, or manufactured or contracted to be considered to be contracting to label to a generic product manufactured manufactured that are not DRC conflict manufacture that product so long as the by a third party; or free’’ (emphasis added). In our view, the issuer had contracted to have the (c) Servicing, maintaining, or inclusion of products that are product manufactured specifically for repairing a product manufactured by a ‘‘contracted to be manufactured’’ in this itself. We had believed that these issuers third party. requirement indicates that Congress should have been considered to be For example, we agree with intended the Conflict Mineral Statutory contracting those products to be commentators that an issuer that is a Provision to apply to such products, and manufactured because the issuers would service provider that specifies to a including issuers who contract to implicitly influence the manufacturing manufacturer that a cell phone it will manufacture their products in the scope of the products. However, we are purchase from that manufacturer to sell of the rule effectuates this intent. We persuaded by commentators that this at retail must be able to function on a believe our reading is more consistent level of control set forth in the certain network does not in-and-of-itself with the statute than the alternative Proposing Release was ‘‘overbroad’’ and exert sufficient influence to ‘‘contract to reading—that Congress required a ‘‘confusing’’ and would impose on such manufacture’’ the phone for purposes of description of products that were an issuer ‘‘significant,’’ ‘‘unrealistic,’’ the final rule. Under the proposed rules, ‘‘contracted to be manufactured’’ and and ‘‘costly’’ burdens.158 however, such an issuer may have were not ‘‘DRC conflict free,’’ but did Consistent with our approach in the reached the ‘‘any’’ influence threshold. not require issuers that contracted to Proposing Release, we believe that Conversely, we do not agree with manufacture products to determine ‘‘contract to manufacture’’ is intended to commentators that an issuer must have whether a Conflict Minerals Report was include issuers that have some actual ‘‘substantial’’ influence or control over required to be filed. This would be influence over the manufacturing of the manufacturing of a product before internally inconsistent. It would their products. However, we have the issuer is considered to be significantly undermine the purpose of modified our view as to the contracting to manufacture that the statutory provision to fail to apply circumstances under which an issuer is product.159 Such a standard would it to issuers that contract to manufacture considered to be contracting to significantly limit the coverage of the their products. manufacture a product. An issuer is Conflict Minerals Statutory Provision As another threshold matter, we considered to be contracting to for issuers that contract to manufacture believe the phrase ‘‘contract to manufacture a product depending on products, and we do not believe that manufacture’’ captures manufacturers the degree of influence it exercises over such a narrow scope is consistent with that contract the manufacturing of the materials, parts, ingredients, or the intent of the Conflict Minerals components of their products. Statutory Provision. For example, if sroberts on DSK5SPTVN1PROD with RULES Generally, we believe that 157 See letter from Senator Richard J. Durbin and there are specifications made by an manufacturing issuers that contract the Representative Jim McDermott (Oct. 4, 2010) (Pre- issuer to a manufacturer that it contracts manufacturing of certain components of Proposing Release Web site) (‘‘Sen. Durbin/Rep. McDermott pre-proposing’’). with for the inclusion of a particular their products should, for purposes of 158 See, e.g., letters from ABA, AT&T, Corporate conflict mineral in the product, the the Conflict Minerals Statutory Secretaries I, Davis Polk, and Verizon. See also letter from NRF I (stating that our proposed 159 See, e.g., letters from AT&T, Corporate 156 See Exchange Act Section 13(p)(1)(A)(ii). approach would be ‘‘draconian’’). Secretaries I, CTIA, JVC et al. II, NRF I, and Verizon. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56292 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations issuer might not be viewed as exerting involvement in the product’s commentators argued that the final rule ‘‘substantial’’ influence on the overall manufacturing beyond only including should incorporate the NAICS manufacturing of the product. However, such brand name would need to definition of ‘‘manufacturing,’’ which we would view such an issuer as consider all of the facts and they noted does not include mining as covered under the final rule as circumstances in determining whether a type of manufacturing activity.168 contracting to manufacture the product. its influence reaches such a degree so as Certain commentators noted that mining In addition, we disagree with to be considered contracting to of conflict minerals, especially gold, commentators that suggested that the manufacture that product. shares no characteristics with the final rule should apply only to issuers manufacturing of products.169 Finally,

3. Mining Issuers as ‘‘Manufacturing’’ that explicitly specify that conflict some commentators asserted that Issuers minerals be included in their Congress did not intend to include products.160 We believe this is too a. Proposed Rules mining issuers as manufacturers based narrow an interpretation of the statutory Under the proposed rules, we would on previous versions of the Conflict provision and, read in this manner, the have considered an issuer that mines Minerals Statutory Provision, legislative statute would be illogical. For example, conflict minerals to be manufacturing statements, and a plain reading of the as commentators argued, Congress those minerals and an issuer contracting statute.170 As some of these inserted ‘‘contract to manufacture’’ in for the mining of conflict minerals to be commentators noted, the Conflict the disclosure of products to prevent contracting for the manufacture of those Minerals Statutory Provision was manufacturers from skirting the minerals. In this regard, we proposed in preceded by other legislative proposals disclosure requirements by contracting an instruction to the rules that mining that were drafted to include mining to manufacture certain products. issuers be considered to be issuers, but the Conflict Minerals However, if ‘‘contract to manufacture’’ manufacturing conflict minerals when Statutory Provision was not drafted in is not included in the definition of they extract those minerals.163 We did, such a manner.171 One such ‘‘person described,’’ an issuer may however, request comment on this commentator indicated that these evade the statute by contracting its point. previous bills ‘‘explicitly applied not manufacturing to a third party. only to companies using covered Therefore, an issuer would never be b. Comments on the Proposed Rules minerals in their manufacturing required to disclose its minerals because A number of commentators stated processes, but also to persons engaged the issuer would not qualify for steps specifically that the final rule should in ‘the commercial exploration, two and three. consider any issuer that mines conflict extraction, importation, exportation, or Moreover, in contrast to our approach minerals as ‘‘manufacturing’’ those sale’ of the covered minerals.’’172 in the Proposing Release, we do not conflict minerals as ‘‘products.’’ 164 A According to the commentator, the fact consider an issuer to be contracting to few commentators noted that mining that Congress chose not to include manufacture a product for the purposes issuers should be included as extraction activities in the Conflict of our rule solely if it offers a generic manufacturers because they begin the Minerals Statutory Provision product under its own brand name or a conflict minerals supply chain and demonstrates that Congress’s intent was separate brand name without additional other reporting issuers must rely on not to have the Conflict Minerals involvement by the issuer. We are them for information.165 As such, Statutory Provision include mining as persuaded by commentators that such without the final rule including mining manufacturing. an issuer would not necessarily exert a issuers, other issuers would have a very sufficient degree of influence on the c. Final Rule difficult time complying with the rules, manufacturer to be considered as which would eliminate transparency After considering the comments, we contracting to manufacture the product from the supply chain and undermine are modifying the proposal. We do not for purposes of the Conflict Minerals the provision.166 consider an issuer that mines or Statutory Provision. As one Other commentators indicated that contracts to mine conflict minerals to be commentator noted, it seems that such the final rule should not treat mining manufacturing or contracting to a relationship between an issuer and issuers as manufacturers of the conflict manufacture those minerals unless the manufacturer is better characterized as minerals they extract.167 Some of these issuer also engages in manufacturing, one in which the manufacturer is using whether directly or indirectly through the issuer as a ‘‘sales channel’’ as 163 See Industry Guide 7 [17 CFR 229.802(g)] contract, in addition to mining. In this opposed to one in which the issuer is (implying that companies may ‘‘produce’’ minerals regard, we do not believe that mining is from a mining reserve). ‘‘manufacturing’’ based on a plain ‘‘outsourcing manufacturing to’’ the 164 See, e.g., letters from Bario-Neal Jewelry (Mar. manufacturer.161 Such a relationship 1, 2011) (‘‘Bario-Neal’’); Brilliant Earth, Inc. (Feb. reading of the provision. We agree with limits the issuer’s influence on the 28, 2011) (‘‘Brilliant Earth’’); CRS I; Earthworks; the commentators concerned that the product’s manufacturing to the extent Electronics TakeBack Coalition (Mar. 2, 2011) statutory language does not explicitly (‘‘TakeBack’’); Enough Project I; Enough Project include mining anywhere in the that it puts the issuer in a similar (Nov. 2, 2011) (‘‘Enough Project IV’’); Global position to that of a pure retailer. One Tungsten I; Hacker Jewelers, Designers & Conflict Minerals Statutory Provision commentator noted that the purposes of Goldsmiths, Inc. (Mar. 1, 2011) (‘‘Hacker Jewelers’’); and including mining would expand the the Conflict Minerals Statutory Hoover & Strong, Inc. (Mar. 1, 2011) (‘‘Hoover & statutory mandate. The Conflict Strong’’); ICAR et al. I; NEI; Niotan I; NYCBar I; SIF Minerals Statutory Provision does not Provision are not served by classifying I; State II; TIAA–CREF; TriQuint I; and U.S. Steel. such an issuer as contracting to 165 See letters from Global Witness I and TriQuint specifically refer to mining and, as one manufacture a product.162 We agree. I (noting that mining companies do, in fact, engage sroberts on DSK5SPTVN1PROD with RULES 168 See letters from AngloGold and WGC II. However, an issuer with generic in a transformative process such that they transform 169 See letters from AngloGold and Barrick Gold. products that include its brand name or natural resources into ores, which should be considered ‘‘manufacturing’’). 170 See letters from AngloGold, NMA II, National a separate brand name and that has 166 See letter from Enough Project I. Mining Association (Nov. 1, 2011) (‘‘NMA III’’), and 167 See, e.g., letters from ABA, AngloGold, Barrick Vale. 160 See, e.g., letters from NAM I and SEMI. 171 See, e.g., letters from AngloGold and NMA II. Gold, Cleary Gottlieb, ITRI Ltd. (Jan. 27, 2011) 161 See letter from AT&T. (‘‘ITRI I’’), NAM III, NMA II, Vale S.A. (Mar. 3, 172 Letter from NMA II (referring to S. 891 and 162 See letter from Cleary Gottlieb. 2011) (‘‘Vale’’), and WGC II. S.A. 2707 (2009)). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56293 commentator noted, ‘‘[t]o extend the minerals are necessary to the should be a de minimis threshold in our terms ‘manufacture’ of a ‘product’ to functionality or production of a product rules based on the amount of conflict include the mining of conflict minerals manufactured by such person.’’ 178 The minerals used by an issuer in a contorts the plain meaning of those provision, however, provides no particular product or in its overall terms.’’ 173 additional explanation or guidance as to enterprise and, if so, whether such a As discussed by commentators, the meaning of ‘‘necessary to the threshold would be consistent with the legislative history demonstrates that functionality or production of a Conflict Minerals Statutory Provision. Congress did not intend to include product.’’ Likewise, we did not propose issuers that solely mine conflict b. Comments on the Proposed Rules to define when a conflict mineral is minerals in the Conflict Minerals necessary to the functionality or Many commentators suggested that provision because it removed references production of a product. We did, the final rule explicitly define the to such activities from prior versions of however, request comment on whether phrase, ‘‘necessary to the functionality the provision. For example, one and how our rules should define this or production of a product,’’ 180 while commentator in two comment letters phrase and we provided some guidance other commentators indicated that the noted that prior versions of the Conflict as to the meaning of ‘‘necessary to the final rule should not define the Minerals Statutory Provision explicitly production of a product.’’ phrase.181 Several commentators applied to anyone either using covered suggested possible definitions.182 One minerals in their manufacturing a. Proposed Rules commentator noted that manufacturers processes or engaging in ‘‘the Although we did not propose to make certain deliberate choices about commercial exploration, extraction, define ‘‘necessary to the functionality or products, such as how they look, importation, exportation or sale of the production’’ in the rules, we noted in function, perform, cost, or are supplied, covered minerals.’’ 174 However, the the Proposing Release that, if a mineral so when there has been a choice to final version of the Conflict Minerals is necessary, the product was included incorporate conflict minerals into a Statutory Provision omits any reference within the scope of the rules without product, the final rule should consider to extraction-related activities and refers regard to the amount of the mineral the conflict minerals ‘‘necessary’’ to the solely to manufacturing.175 As this involved. Further, we indicated in the product because the designer has commentator stated, Congress’s Proposing Release that a conflict deemed them to be so.183 Another omission of mining activities evidences mineral would be considered necessary commentator was concerned that the its intent ‘‘to address the manufacturing to the production of a product if the proposed rules did not provide any of goods which use or contain, as conflict mineral was intentionally guidance as to either the phrase opposed to the extracting and included in a product’s production ‘‘necessary to the functionality or processing of, the covered minerals.’’ 176 process and was necessary to that production’’ or the term ‘‘product.’’ 184 Therefore, based on both the plain process, even if that conflict mineral As such, this commentator noted that reading of the provision and the was not ultimately included anywhere the proposed rules could apply to legislative history of the provision, we in the product. On the other hand, as financial products that are backed by are persuaded that it would be proposed, a conflict mineral necessary gold or other mineral commodities, such inconsistent with the language in the to the functionality or production of a as futures contracts for gold bullion, Conflict Minerals Statutory Provision to physical tool or machine used to shares in mutual funds that invest in include mining issuers as produce a product would not be gold mining stocks, or gold bullion manufacturing issuers under the final considered necessary to the production storage agreements with vault services rule unless the mining issuer engages in of that product, even if that tool or providers. manufacturing, either directly or machine was necessary to producing the product. For example, if an automobile i. ‘‘Necessary to the Functionality’’ through contract, in addition to mining. containing no conflict minerals was A number of different commentators

4. When Conflict Minerals Are produced using a wrench that contains indicated that a conflict mineral should ‘‘Necessary’’ to a Product or was itself produced using conflict be considered ‘‘necessary to the The Conflict Minerals Statutory minerals necessary to the functionality functionality’’ of a product if that Provision requires us to promulgate or production of that wrench, the conflict mineral is intentionally added regulations requiring that any ‘‘person proposed rules would not consider the to the product.185 Of these described’’ disclose annually whether conflict minerals in that wrench commentators, however, many were conflict minerals that are ‘‘necessary’’ necessary to the production of the open to other potential requirements. originated in the Covered Countries and, automobile. For example, many commentators if so, submit to us a Conflict Minerals That the conflict minerals must be Report.177 The provision further states ‘‘necessary to the functionality or 180 See, e.g., letters from CRS I, Davis Polk, that a ‘‘person is described’’ if ‘‘conflict production’’ of an issuer’s products is Earthworks, Enough Project I, FRS, Howland, ICAR et al. I, MSG I, NRF I, PCP, Give Peace A Deadline the only limiting factor in the Conflict (Jan. 21, 2011) (‘‘Peace’’), SEMI, SIF I, TIC, Tiffany, 173 See letter from AngloGold. 174 See letters from NMA II and NMA III. These Minerals Statutory Provision.179 The TriQuint I, and US Steel. letters discuss two legislative proposals introduced provision has no materiality thresholds 181 See, e.g., letters from Cleary Gottlieb, Global in the Senate in 2009 that were similar to the for disclosure based on the amount of Witness I, ITIC I, State II, and WGC II. 182 See, e.g., letters from AAEI, AAFA, Bario-Neal, Conflict Minerals Statutory Provision. See Congo conflict minerals an issuer uses in its Conflict Minerals Act of 2009, S. 891, 111th Cong. Brilliant Earth, CRS I, Davis Polk, Earthworks, manufacturing processes. Therefore, we Enough Project I, Hacker Jewelers, Hoover & Strong, (2009) and S.A. 2707, 111th Cong. (2009). Both of these earlier conflict minerals proposals explicitly did not propose to include a materiality Howland, MSG I, NAM I, Niotan I, NMA II, NRF sroberts on DSK5SPTVN1PROD with RULES applied to companies using conflict minerals in threshold for the disclosure or reporting I, PCP, Peace, SEMI, Sen. Durbin/Rep. McDermott, their manufacturing processes and also to persons requirements in the proposed rules. We SIF I, TIAA–CREF, TIC, TriQuint I, and US Steel. engaged in ‘‘the commercial exploration, extraction, 183 See letter from Matheson II. importation, exportation, or sale’’ of conflict did, however, request comment in the 184 See letter from Tiffany. minerals. Proposing Release as to whether there 185 See, e.g., letters from AAEI, Bario-Neal, 175 See letters from NMA II. Brilliant Earth, Hacker Jewelers, Hoover & Strong, 176 Id. 178 Exchange Act Section 13(p)(2)(B). Howland, ITIC I, NRF I, NYCBar II, SEMI, Sen. 177 Exchange Act Section 13(p)(1)(A). 179 Exchange Act Section 13(p)(2)(B). Durbin/Rep. McDermott, TIAA–CREF, and WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56294 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations suggested further requirements in that the basic function test would be direct involvements of the [conflict addition to, or instead of, being unworkable because there is no mineral] metal and then the part/ intentionally added before a conflict meaningful distinction between a material is used in the product,’’ even mineral should be considered product’s basic and auxiliary if the conflict mineral does not end up ‘‘necessary to the functionality’’ of a functions.193 Some commentators stated in the product.200 Other commentators, product. Many of these commentators that a conflict mineral should be however, did not believe that conflict indicated that a conflict mineral must be considered ‘‘necessary to the minerals used in the production of a intentionally added and/or necessary functionality’’ of a product if that product should be considered necessary either for the product’s use, purpose, or conflict mineral is required either for to that production process if they are marketability, financial success, or some the financial success or marketability of washed away or consumed in the combination thereof.186 A few the product.194 One commentator noted process.201 As one of these commentators asserted that a conflict that ‘‘necessary to the functionality’’ commentators pointed out, it would be mineral must be intentionally added should be defined broadly enough that ‘‘impossible for a retailer to know and essential to the product’s it encompasses uses necessary to the whether his supplier’s supplier’s function.187 One commentator stated product’s economic utility,195 while supplier used and washed away a that a conflict mineral must be others disagreed due to the subjective conflict mineral’’ because ‘‘there is no intentionally added and have a nature of what provides economic meaningful measurement capability or concentration in the product that utility to a product.196 In this regard, audit trail, especially as a product exceeds 1,000 ppm per homogeneous one commentator asserted that a conflict moves through dozens of suppliers in a material.188 mineral should be considered supply chain.’’ 202 Only a few commentators proposed ‘‘necessary to the functionality’’ of a A number of commentators addressed guidance as to when a conflict mineral product if the issuer ‘‘uses’’ conflict whether a conflict mineral necessary to would be considered ‘‘intentionally minerals in any manner in a product, the production of the tools, machines, or added’’ to a product, and they differed regardless of how those conflict similar equipment that are used to on when a conflict mineral should be minerals relate to the product’s produce an issuer’s product should be considered ‘‘intentionally added.’’ One function, because any other test would considered ‘‘necessary to the commentator stated that a conflict be too subjective.197 production’’ of the issuer’s product.203 mineral should not be considered ii. ‘‘Necessary to the Production’’ The large majority of these intentionally added if it was unilaterally commentators, including those from included in a sub-component acquired Many commentators agreed that a industry associations,204 a multi- by the issuer from a sub-contractor.189 conflict mineral should be considered stakeholder group representing both Two of the co-sponsors of the Conflict ‘‘necessary to the production’’ of a human rights organizations and Minerals Statutory Provision, however, product if it is intentionally added to industry,205 and institutional took the opposite position and stated the production process, and should not investors,206 agreed with the proposed that a conflict mineral should be be considered ‘‘necessary to the rules that such tools, machines, and considered intentionally added if it is production’’ of a product if it is other production equipment should not intentionally added in sub-components unintentionally added to a product or be considered necessary to the that an issuer contracts to manufacture naturally occurring in a product.198 production of the issuer’s products.207 A through third parties or subsidiaries.190 Some commentators agreed with the small number of commentators Several commentators agreed that a proposal to consider such conflict disagreed and stated that such tools, conflict mineral occurring naturally in a minerals ‘‘necessary to the production’’ machines, or similar equipment should product should not be considered of a product even if the minerals are be considered necessary to the intentionally added to that product.191 washed away or consumed in the production of an issuer’s product.208 Instead of being intentionally added production process and do not end up One of these commentators specified to a product, some commentators in the product, such as with a provided other bases for concluding that catalyst.199 As one of these 200 See letter from Howland. a conflict mineral is ‘‘necessary to the commentators suggested as an example, 201 See, e.g., letters from Industry Group Coalition functionality’’ of a product. Some a ‘‘catalyst used to make a substance or I, IPC II, NAM I, Griffin Teggeman (Dec. 16, 2010) commentators indicated that a conflict a die containing [conflict mineral] (‘‘Teggeman’’), and WGC II. mineral should be considered metals used to make a part’’ should be 202 See letter from Teggeman. 203 See, e.g., letters from AAFA, Industry Group ‘‘necessary to the functionality’’ of a considered ‘‘necessary to the Coalition I, IPC I, ITIC I, Japanese Trade product if that conflict mineral is production’’ of the product using that Associations, NAM I, NEI, Niotan I, Refractory necessary for the product’s basic part because the ‘‘part is made with Metals Association (Feb. 28, 2011) (‘‘RMA’’), SEMI, SIF I, TIAA–CREF, TIC, and TriQuint I. function.192 Other commentators stated 204 See, e.g., letters from AAFA, Industry Group of that product,’’ and stating that it does not ‘‘believe that ‘basic function’ in this regard needs Coalition I, IPC I, ITIC I, Japanese Trade 186 See, e.g., letters from AAEI, Bario-Neal, to be defined since it will differ for each product’’). Associations, NAM I, RMA, SEMI, and TIC. Brilliant Earth, Earthworks, Enough Project I, 193 See letters from NEI, SEMI, and TIC. 205 See letter from MSG I (stating that ‘‘when Hacker Jewelers, Hoover & Strong, MSG I, Peace, 194 See, e.g., letters from Enough Project I, MSG conflict minerals are present in tooling or other and SIF I, and TIAA–CREF. I, Peace, and TIAA–CREF. production machinery, they should not be 187 See, e.g., letters from Howland, NAM I, and 195 See letter from CRS I (suggesting ‘‘that considered to be necessary to production of the NRF I. ‘necessary to the functionality or production of a product’’). The letter from MSG was signed by a 188 See letter from TriQuint I. product’ be defined broadly enough that it number of human rights groups, including Enough 189 See letter from SEMI. Project, Free the Slaves, and Friends of the Congo, encompasses uses necessary to the economic utility sroberts on DSK5SPTVN1PROD with RULES 190 See letter from Sen. Durbin/Rep. McDermott. and/or marketability of that product’’). among others. 191 See letters from ITIC I, PCP, and Sen. Durbin/ 196 See, e.g., letters from NRF I and SEMI. 206 See, e.g., letters from NEI, SIF I, and TIAA– Rep. McDermott. 197 See letter from Kemet. CREF. 192 See letters from AAFA, NYCBar I, and WGC 198 See, e.g., letters from ITIC I, Global Witness I, 207 See, e.g., letters from AAFA, Industry Group II. See also letter from NYCBar II (stating that a Japanese Trade Associations, NYCBar I, PCP, SEMI, Coalition I, IPC I, ITIC I, Japanese Trade ‘‘component in a product necessary to its Sen. Durbin/Rep. McDermott, and TIC. Associations, NAM I, NEI, RMA, SEMI, SIF I, functionality if it is needed for either its basic 199 See, e.g., letters from Howland, MSG I, Niotan TIAA–CREF, and TIC. function or another commercially valuable function I, PCP, SEMI, and TriQuint I. 208 See letters from Niotan I and TriQuint I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56295 that tools, machines, or similar unreasonable and absurd results in c. Final Rule equipment purchased going forward crafting [the] final rule,’’ which is should be considered necessary to the ‘‘inherent and clearly established by After considering the comments, we production of the issuer’s product, precedent.’’ 216 are adopting a final rule that, like the although an issuer’s existing production Some commentators provided proposed rules, does not define when a equipment should not be deemed recommendations on possible de conflict mineral is ‘‘necessary to the necessary to production.209 Another minimis thresholds. Two commentators functionality’’ of a product or when it is commentator stated that production suggested that there should be a de ‘‘necessary to the production’’ of a equipment should not be considered minimis exception if the cost of the product.224 However, as we did in the necessary to the production of an conflict minerals in an issuer’s products Proposing Release, we are providing issuer’s products unless the issuer make up less than 1% of the issuer’s guidance regarding the interpretation of intentionally and explicitly required the consolidated total production costs.217 these phrases. The guidance is modified producer of the tools, machines, or other Other commentators recommended a de to a degree from the guidance in the production equipment to include minimis exception for trace, nominal, or Proposing Release based on comments conflict minerals.210 insignificant amounts of conflict we received. Whether a conflict mineral In this regard, one commentator stated minerals in an issuer’s products.218 One is deemed ‘‘necessary to the that the final rule should not consider commentator suggested a de minimis functionality’’ of a product or any indirect equipment, such as exception when the end product ‘‘necessary to the production’’ of computers or power lines, as necessary derived from conflict minerals reflects product depends on the issuer’s to production.211 Another commentator less than a certain percentage of the particular facts and circumstances, but indicated that conflict minerals used in value of the product, such as if the value there are certain factors we believe products that are ‘‘not intended to be was 5% or less of the total issuers should consider in making their sold into commerce,’’ such as those manufacturing costs.219 Another determinations. utilized solely for research and commentator recommended a de As described below, in determining development purposes, components minimis exception relating to the whether its conflict minerals are provided at cost on a business-to- inability of an issuer to determine the ‘‘necessary to the functionality’’ of a business basis, or products or origin of its minerals, such as allowing product, an issuer should consider: (a) components used only for engineering that issuer’s product to be considered Whether a conflict mineral is contained or testing purposes, should not be ‘‘DRC conflict free’’ where the issuer is in and intentionally added to the considered necessary to the production unable to determine the origin of only product or any component of the of the product that is ultimately placed 5% of the product’s minerals.220 One product and is not a naturally-occurring in the stream of commerce.212 commentator noted that the final rule by-product; (b) whether a conflict iii. De Minimis Threshold should permit a de minimis exception, mineral is necessary to the product’s but indicated that the value used for the generally expected function, use, or We received mixed comments de minimis exception should be based purpose; or (c) if a conflict mineral is regarding whether the final rule should on how the phrase ‘‘necessary to the incorporated for purposes of have a de minimis threshold exception, functionality or production’’ of a ornamentation, decoration or with some commentators opposed to a product is to be defined in the final embellishment, whether the primary de minimis exception,213 and other rule.221 Another commentator purpose of the product is ornamentation commentators supporting it.214 Some recommended that the final rule permit or decoration. Based on the applicable commentators provided a legal basis for a de minimis exception for products facts and circumstances, any of these including a de minimis exception containing less that 0.1% by weight of despite the lack of a de minimis factors, either individually or in the a conflict mineral.222 One commentator aggregate, may be determinative as to exception in the Conflict Minerals provided three possible de minimis Statutory Provision.215 Generally, these whether conflict minerals are scenarios in which an issuer would be ‘‘necessary to the functionality’’ of a commentators asserted that, as long as excepted from reporting, specifically: If legislation does not forbid establishing a given product. In determining whether an issuer’s conflict minerals comprised its conflict minerals are ‘‘necessary to de minimis threshold, an agency’s less than 0.1% of a component or the production’’ of a product, an issuer regulations may allow for one. Also, one product, if an issuer’s global usage of should consider whether a conflict commentator noted that we have conflict minerals comprised less than mineral is contained in the product and ‘‘inherent authority to employ de 0.01% of its materials, or if an issuer intentionally added in the product’s minimis exceptions to avoid comprised the bottom 20% of its production process, including the 209 See letter from TriQuint I. industry’s conflict minerals use.223 production process of any component of 210 See letter from SEMI. the product; and whether the conflict 216 See letter from Materion. 211 See letter from Howland. mineral is necessary to produce the 217 See letters from AngloGold and WGC II. 212 See letter from ITIC I. See also letter from 218 See letters from Davis Polk, NRF I, and product. We describe changes to our TechAmerica (Nov. 1, 2011) (‘‘Industry Group guidance regarding ‘‘necessary to the Coalition II’’) (suggesting that the final rule should Roundtable. exclude ‘‘research and development equipment 219 See letter from TIC. functionality’’ and ‘‘necessary to the made available on a business-to-business basis from 220 See letter from IPMI I. production’’ below. the scope of the rule’’). 221 See letter from SEMI (stating that, if the phrase 213 See, e.g., letters from Calvert, Earthworks, was limited to materials explicitly or intentionally 224 As a threshold matter, we believe that the Episcopal Conference of Catholic Bishops of the added to a product or caused to be added to a Conflict Minerals Statutory Provision requires sroberts on DSK5SPTVN1PROD with RULES DRC (Nov. 8, 2011) (‘‘CENCO II’’), Global Witness product, the de minimis threshold should be one separate consideration as to whether a conflict I, Howland, Matheson II, NEI, NYCBar I, NYCBar gram per year of necessary minerals, but if the final mineral is ‘‘necessary to the production’’ of a II, Rep. Berman et al., SIF I, State II, and Trott. rule included a ‘‘more conservative’’ meaning of the product from whether a conflict mineral is 214 See, e.g., letters from AAFA, AdvaMed I, phrase, a higher de minimis should be used, such ‘‘necessary to the functionality’’ of the product, AngloGold, Chamber I, Davis Polk, IPC I, IPC II, as 0.1% of the weight of any particular component because the Conflict Minerals Statutory Provision IPMI I, NAM I, NRF I, PCP, Rep. Bachus et al., acquired as a whole by the issuer). includes both phrases. See infra Part II.B.4.c.iii. See Roundtable, SEMI, Teggeman, TIC, and WGC II. 222 See letter from IPC I. also Exchange Act Sections 13(p)(1)(A) and 215 See letters from Materion, NAM I, and NRF I. 223 See letter from NAM I. 13(p)(2). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56296 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations i. Contained in the Product does not mean that a conflict mineral In those situations, the product contains After considering the comments and must be included in the product for it a necessary conflict mineral that is reviewing the Conflict Minerals to be ‘‘necessary to the functionality or necessary to its production and is Statutory Provision, as described below, production’’ of the product. However, subject to the final rule. we are persuaded that only a conflict we do not believe that such an ii. Intentionally Added mineral that is contained in the product interpretation would be the proper construction. Following that approach, Although commentators did not agree should be considered ‘‘necessary to the the provision could be interpreted to on an exact definition, most functionality or production’’ of that require issuers with conflict minerals commentators from across the spectrum product. We believe this approach is that are ‘‘necessary to the functionality agreed that a conflict mineral should be appropriate in light of the Conflict or production’’ of a product but are not considered ‘‘necessary to the Minerals Statutory Provision’s statutory included in that product to submit an functionality or production’’ of a construction. As discussed above, the audited Conflict Minerals Report product for the purposes of the Conflict Conflict Minerals Statutory Provision describing their due diligence, as Minerals Statutory Provision if, at a requires issuers with conflict minerals required under Exchange Act Section minimum, it was intentionally added to ‘‘necessary to the functionality or 13(p)(1)(A)(i), but not describing any the product or production process.229 production’’ of a product manufactured products produced using those minerals While we are not defining the phrase, or contracted by the issuer to be that directly or indirectly financed or we agree that being intentionally added, manufactured that originated in the benefited armed groups in the Covered rather than being a naturally-occurring Covered Countries to provide a Conflict Countries as having not been found to by-product, is a significant factor in Minerals Report.225 The provision be ‘‘DRC conflict free’’ because the determining whether a conflict mineral includes two distinct subsections, conflict minerals are not ‘‘contained’’ in is ‘‘necessary to the functionality or Exchange Act Section 13(p)(1)(A)(i) and the product. production’’ of a product. This is true Exchange Act Section 13(p)(1)(A)(ii), We do not believe, however, that such regardless of who intentionally added regarding the information required in an interpretation is the better the conflict mineral to the product so that Conflict Minerals Report. Generally, construction. It would mean that the long as it is contained in the product. Exchange Act Section 13(p)(1)(A)(i) In this regard, we note that one deals with an issuer’s description of its Conflict Minerals Statutory Provision envisions a situation in which an issuer commentator asserted that a conflict due diligence measures on the source mineral should not be considered and chain of custody of its conflict with a conflict mineral that is ‘‘necessary to the functionality or ‘‘intentionally added’’ by an issuer ‘‘if it minerals, including the independent is present in a sub-component acquired private sector audit, and Exchange Act production’’ of its product originated in the Covered Countries and benefited by the issuer based on a unilateral Section 13(p)(1)(A)(ii) requires the decision of the supplier or a sub- issuer’s description of its products that armed groups in those countries would be required to submit a Conflict contractor, or a party further upstream have not been found to be ‘‘DRC conflict in the supply chain.’’ 230 We disagree. free.’’ The Conflict Minerals Statutory Minerals Report describing its due diligence on the source and chain of As two of the co-sponsors of the Provision defines ‘‘DRC conflict free’’ to provision asserted, determining whether mean ‘‘products that do not contain custody of that mineral but would not have to describe its products as having a conflict mineral is considered minerals that directly or indirectly ‘‘necessary’’ to a product should not finance or benefit armed groups’’ in the not been found to be ‘‘DRC conflict free.’’ We believe the better depend on whether the conflict mineral Covered Countries.226 The use of the is added directly to the product by the term ‘‘contain’’ indicates that the interpretation that gives meaning to the term ‘‘contain’’ is that only conflict issuer or whether it is added to a disclosures required under Exchange component of the product that the Act Section 13(p)(1)(A)(ii) are limited to minerals contained in the product would be considered ‘‘necessary’’ to that issuer receives from a third party. issuers with conflict minerals actually Instead, the issuer should ‘‘report on the contained in their products.227 We product, so only those minerals trigger the requirement to conduct a reasonable totality of the product and work with believe it is appropriate to include this suppliers to comply with the limitation in interpreting when a country of origin inquiry. Additionally, we do not believe the requirements.’’ 231 Therefore, in conflict mineral is necessary to the determining whether a conflict mineral functionality or production of a product. final rule should include conflict minerals ‘‘necessary to the functionality is ‘‘necessary’’ to a product, an issuer We note that Exchange Act Section or production’’ of a product that are not must consider any conflict mineral 13(p)(1)(A)(i) does not include a similar contained in the product because we contained in its product, even if that limitation that the product must appreciate commentators’ concerns that conflict mineral is only in the product ‘‘contain’’ the necessary conflict the application of the provision to because it was included as part of a minerals. As a result, it is possible to minerals that do not end up in the component of the product that was interpret the Conflict Minerals Statutory Provision such that the term ‘‘contain’’ product is especially challenging. As noted above, commentators were mixed catalyst are found in the reacted manufactured in Exchange Act Section 13(p)(1)(A)(ii) product, but the catalysts do not contribute to the in their views regarding how the rule performance of the product). 225 See Exchange Act Section 13(p)(1)(A). should treat catalysts and other conflict 229 See, e.g., letters from AAEI, Bario-Neal, 226 Id. (emphasis added). See also Section minerals necessary to the production of Brilliant Earth, Earthworks, Enough Project I, Global 1502(e)(4) of the Act (defining the phrase in the a product that do not appear in the Witness I, Hacker Jewelers, Hoover & Strong, same manner as Exchange Act Section product. However, we note that there Howland, ITIC I, Japanese Trade Associations, MSG sroberts on DSK5SPTVN1PROD with RULES 13(p)(1)(A)(ii), except that Section 1502(e)(4) of the I, Niotan I, NRF I, Peace, PCP, SEMI, Sen. Durbin/ Act refers to ‘‘conflict minerals’’ instead of just are products where a catalyst is used Rep. McDermott, SIF I, TIAA–CREF, TriQuint I, and ‘‘minerals’’). and is not completely washed away.228 WGC II. 227 We note that the Second Edition of the 230 See letter from SEMI. Random House Webster’s Dictionary defines 228 See letters from Industry Group Coalition I 231 See letter from Sen. Durbin/Rep. McDermott ‘‘contain’’ to include the ‘‘to hold within a volume and NAM I (referring specifically to situations in (indicating that a car manufacturer must report on or area.’’ Random House Webster’s Dictionary, 142 which catalysts are used to chemically react with any conflict minerals in the car’s radio, even if there (2d ed. 1996). and produce products, and trace levels of the are no conflict minerals elsewhere in the car). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56297 manufactured originally by a third hanging on a necklace is necessary to envisaged.’’ 235 We do, however, party. the functionality of the pendant because consider a conflict mineral used as a it is incorporated for purposes of catalyst or in another manner in the iii. ‘‘Necessary to the Functionality’’ ornamentation, decoration, or production process of a product to be In addition to being contained in the embellishment, and a primary purpose ‘‘necessary to the production’’ of the product and intentionally added, of the pendant is ornamentation or product if that conflict mineral another factor in determining whether decoration. Conversely, if a conflict otherwise is necessary to the production its conflict minerals are ‘‘necessary to mineral is incorporated into a product of the product and is contained in any the functionality’’ of a product is for purposes of ornamentation, amount, including trace amounts, in the whether the conflict mineral is decoration, or embellishment, and the product.236 necessary to the product’s generally primary purpose of the product is not As we indicated in the Proposing expected function, use, or purpose. ornamentation or decoration, it is less Release, we continue to believe that a Some commentators suggested that we likely to be ‘‘necessary to the conflict mineral in a physical tool or limit an issuer’s consideration of functionality’’ of the product. As one machine used to produce a product does whether its conflict minerals are commentator noted, ‘‘if, for example, not fall under the ‘‘necessary to the ‘‘necessary to the functionality’’ of a gold is used in an article as an ancillary production’’ language in the Conflict product to the ‘‘basic function’’ or feature [of a product] strictly for Minerals Statutory Provision.237 One ‘‘economic utility’’ tests. However, we purposes of ornamentation, then it is commentator asserted that the language believe limiting a determination to those unrelated to the functionality of the in the Conflict Minerals Statutory tests would not provide greater certainty product and would be exempt from the Provision is intended to cover conflict or clarity to issuers required to make reporting requirements of the minerals in tools or machines that are such determinations. As one statute.’’ 234 We would agree that these necessary for the production of a commentator noted, ‘‘the distinction facts would tend to indicate that the product and, ‘‘[i]n the absence of such between a ‘basic function’ and an conflict mineral is not necessary to the specificity, the rule will fail to ensure ancillary function is murky and functionality of the product, provided reporting on the use of such tools or undefinable.’’ 232 Similarly, as another that the primary purpose of the product catalysts, thus leaving out a significant commentator noted, ‘‘[e]conomic utility is not for ornamentation or decoration. market for the minerals and is very subjective and it can be the Even so, this would only be one factor undermining the purpose of the unforeseen consequence of a derivative among all the facts and circumstances in law.’’ 238 We do not believe that a buried deep within a sub- the issuer’s overall determination as to conflict mineral in a tool or machine is component.’’ 233 Therefore, we believe whether the conflict mineral is captured by the Conflict Minerals these tests are so subjective as to be necessary to the functionality of the Statutory Provision because, although mostly unworkable. We believe it is product. the conflict mineral may be included in more appropriate instead to focus on a the tool or machine, it is the tool or product’s generally expected function, iv. ‘‘Necessary to the Production’’ machine and not the conflict mineral use, or purpose, recognizing that there As with determining whether a that is necessary to the production.239 are situations in which a product has conflict mineral is ‘‘necessary to the Additionally, the tool or machine is multiple generally expected functions, uses, and purposes. In such situations, functionality’’ of a product, determining a conflict mineral need only be whether a conflict mineral is ‘‘necessary 235 See WGC II. 236 We note that this interpretation continues to necessary for one such function, use, or to the production’’ of a product involves bring catalysts within the scope of the reporting purpose to be necessary to the product consideration of an issuer’s particular requirements when they are necessary to the as a whole. For example, a smart phone facts and circumstances. As noted production of the product. We understand that not has multiple generally expected above, the conflict mineral must be all catalysts are washed away in the production contained in the product to trigger the process, and the remaining minerals may not be functions, uses, and purposes, such as ‘‘necessary to the functionality’’ of the product. See making and receiving phone calls, determination of whether the conflict letters from Industry Group Coalition I and NAM accessing the internet, and listening to mineral is ‘‘necessary to the I (referring specifically to situations in which stored music. If a conflict mineral is production’’ of the product. Consistent catalysts are used to chemically react with and with this approach, we do not consider produce products, and trace levels of the catalyst necessary to the function, use, or are found in the reacted manufactured product, but purpose of any one of these, it is a conflict mineral used as a catalyst or the catalysts do not contribute to the performance necessary to the functionality of the in another manner in the production of the product). phone. process of a product to be ‘‘necessary to 237 However, the issuer that manufactures or Another factor in determining the production’’ of the product if that contracts to manufacture the tool or machine would conflict mineral is not contained in the likely come within the ‘‘necessary to the whether its conflict minerals are production’’ or ‘‘necessary to functionality’’ ‘‘necessary to the functionality’’ of a product, even though, based on the facts language. product is whether the conflict mineral and circumstances, the conflict mineral 238 See letter from Niotan I. is incorporated for purposes of would have otherwise been considered 239 As described above, we consider a conflict ornamentation, decoration, or ‘‘necessary to the production’’ of the mineral that is ‘‘necessary to the functionality’’ of product had the conflict mineral been a component product also to be ‘‘necessary to the embellishment. If a primary purpose of functionality’’ of any subsequent product that the product is mainly ornamentation or included in the product. As one incorporates the component product. We recognize decoration, it is more likely that a commentator noted for gold, and we that this could be seen as a two-step analysis, and conflict mineral added for purposes of believe this is applicable for the other thus it could be asserted that the conflict mineral conflict minerals as well, the ‘‘use of in the component product is not necessary to the sroberts on DSK5SPTVN1PROD with RULES ornamentation, decoration or functionality of the subsequent product. We embellishment is ‘‘necessary to the gold as a catalyst in producing products disagree with this view, however, because a functionality’’ of the product. For which do not in themselves contain component added to a subsequent product becomes example, the gold in a gold pendant gold will broaden the reach of the part of that subsequent product, which removes any regulations beyond what Section 1502 segregation from the component and the subsequent product and makes the conflict mineral directly 232 See letter from TIC. necessary to the functionality of the subsequent 233 See letter from SEMI. 234 See letter from NRF I. product. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56298 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations unlikely to be contained in the final think Congress would have done so thwart, rather than advance, the product. explicitly. In this regard, we note that in provision’s purpose. Further, we believe Like tools and machines, indirect Section 1504 of the Act, which adds focusing on whether the mineral was equipment used to produce a product, Exchange Act Section 13(q) as part of intentionally added addresses some of such as computers and power lines, the same title (Title XV) of the Act the concerns regarding de minimis does not bring the product that is (‘‘Miscellaneous Provisions’’), Congress amounts of minerals. For example, produced with the equipment into the did explicitly include a de minimis according to one commentator, a ‘‘necessary to the production’’ threshold for the requirement to number of metal alloys, including the language.240 We do not consider a disclose certain payments by resource high volume materials of cold rolled conflict mineral necessary to the extraction issuers.242 steel, hot rolled steel, and stainless functionality or production of such In addition, we believe that the steel, contain tin only as a contaminant, indirect equipment to be necessary to purpose of the Conflict Minerals such that it is not part of the the production of the product because Statutory Provision would not be specification of these alloys.245 that conflict mineral is only tangentially properly implemented if we included a Therefore, the tin in these alloys is not necessary for production of the product. de minimis exception in our final rule. intentionally added, and we do not Similarly, we do not require issuers to As the State Department noted in its consider the tin ‘‘necessary to the report on the conflict minerals in comment letter, ‘‘[i]n light of the functionality or production’’ of any materials, prototypes, and other nature’’ of the conflict minerals, they are product containing those alloys. demonstration devices containing or often used in products ‘‘in very limited produced using conflict minerals that quantities,’’ so including a de minimis C. Location, Status, and Timing of are necessary to the functionality or threshold ‘‘could have a significant Conflict Minerals Information production of those items because we impact on’’ the final rule.243 Consistent Once it is determined that conflict do not consider those items to be with the views of the State Department, minerals are necessary to the products. Once an issuer enters those we believe Congress intended the functionality or production of a product items in the stream of commerce by disclosure provisions to apply to the use manufactured or contracted by the offering them to third parties for of even small amounts of conflict issuer to be manufactured, the issuer consideration, the issuer will be minerals originating in the Covered will have to submit conflict minerals required to report on any conflict Countries. information in accordance with the final minerals necessary to the functionality We are cognizant of the fact that, by rule. or production of those products. not including a de minimis exception,

1. Location of Conflict Minerals even minute or trace amounts of a v. De Minimis Threshold Information conflict mineral could trigger disclosure Finally, after considering the obligations.244 However, a de minimis a. Proposed Rules comments, the final rule does not amount of conflict minerals triggers Our proposed rules would have include a de minimis exception. The disclosure obligations only if those required issuers to provide their statute itself does not contain a de conflict minerals are necessary for the disclosure about conflict minerals in minimis exception, and for several functionality or production of a product, their annual reports on Form 10–K for reasons we believe it would be contrary and we understand that there are a domestic issuer,246 Form 20–F for a to the Conflict Minerals Statutory instances in which only a minute foreign private issuer,247 and Form 40– Provision and Congressional purpose to amount of conflict minerals is necessary F for a Canadian issuer that files under include one in the final rule. First, we for the functionality or production of a the Multijurisdictional Disclosure note that the Conflict Minerals Statutory product. Therefore, consistent with the System,248 with their Conflict Minerals Provision does include an express proposal, our final rule applies to Reports as an exhibit to their annual limiting factor—namely that a conflict issuers for which any conflict minerals report.249 Section 1502 requires issuers mineral must be ‘‘necessary to the are necessary to the functionality or to disclose information about their functionality or production’’ of an production of a product manufactured conflict minerals annually, but does not issuer’s product to trigger any disclosure or contracted by the issuer to be otherwise specify where this disclosure regarding those conflict minerals.241 As manufactured regardless of the amount must be located, either in terms of discussed above, this standard focuses of the conflict mineral. which form or in terms of where within on whether the conflict mineral is We recognize that not including a de a particular form. Our proposed rules ‘‘necessary’’ to a product’s functionality minimis exception in the final rule will would have required this disclosure in or production; it does not focus on the be more costly for issuers than if we the existing Form 10–K, Form 20–F, or amount of a conflict mineral contained included one. As described above, Form 40–F annual report because in the product. We believe that Congress however, we are of the view that issuers were already required to file understood, in selecting the standard it Congress intended not to provide for a these reports so we believed this did, that a conflict mineral used in even de minimis exception, and including approach would be less burdensome a very small amount could be one in the final rule would therefore than requiring a separate annual report. ‘‘necessary’’ to the product’s functionality or production. If it had 242 See Section 1504 of the Act and Exchange Act 245 See letter from Claigan Environmental Inc. intended that the provision be limited Section 13(q). Exchange Act Section 13(q)(1)(C) (Dec. 16, 2011) (‘‘Claigan III’’). states that ‘‘the term ‘payment,’ means a payment 246 17 CFR 249.310. further, so as not to apply to a de that is made to further the commercial development 247 17 CFR 249.220f. minimis use of conflict minerals, we of oil, natural gas, or minerals; and not de 248 17 CFR 249.240f. sroberts on DSK5SPTVN1PROD with RULES minimis.’’ 249 In the Proposing Release, we indicated that, by 240 However, the issuer that manufactures or 243 See State II (‘‘In light of the nature in which requiring an issuer to provide its Conflict Minerals contracts to manufacture the indirect equipment the covered minerals are often used in products, i.e. Report as an exhibit to its annual report, the would likely come within the definition of either often in very limited quantities, such a change proposed rules would enable anyone accessing the ‘‘necessary to the functionality’’ or ‘‘necessary to could have a significant impact on the proposed Commission’s Electronic Data Gathering, Analysis, the production’’ for the indirect equipment. regulations. A de minimis threshold should not be and Retrieval system (the ‘‘EDGAR’’ system) to 241 See Exchange Act Sections 13(p)(1)(A) and considered under current circumstances.’’). determine quickly whether an issuer furnished a 13(p)(2)(B). 244 See letters from Chamber I and NRF I. Conflict Minerals Report with its annual report. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56299 To facilitate locating the conflict public by posting the text of the report report.257 As one commentator noted, minerals disclosure within the annual on its Internet Web site. As proposed, this requirement contrasts with the one report without over-burdening investors the rules would require that the text of in Section 1503 of the Act,258 which with extensive information about the Conflict Minerals Report remain on states that mine safety disclosure be conflict minerals in the body of the the issuer’s Web site at least until it provided in ‘‘each periodic report filed report, our proposed rules would have filed its subsequent annual report. with the Commission under the required issuers to include brief conflict Although the proposed rules would securities laws.’’ 259 Therefore, these minerals disclosure under a separate have required an issuer that furnished a commentators reasoned that if Congress heading entitled ‘‘Conflict Minerals Conflict Minerals Report to provide intended the Conflict Minerals Statutory Disclosure’’ and more extensive some disclosures in the body of its Provision to require an issuer to provide information in a separate exhibit to the annual report regarding that report, we the conflict minerals information in the annual report. would not have required that an issuer annual report on Forms 10–K, 20–F, or We proposed to require that an issuer post this disclosure on its Web site. We 40–F, Congress would have used disclose in its annual report under a language similar to that in Section 1503. believed this was appropriate because separate heading, entitled ‘‘Conflict Certain commentators asserted that any information disclosed in the body of Minerals Disclosure,’’ its determination the subject matter underlying the the annual report would also be as to whether any of its conflict conflict minerals information is both minerals originated in the Covered included in the Conflict Minerals very specialized and substantively Countries, based on its reasonable Report, which would have been different from the financial and business country of origin inquiry, and, for its required to be posted on the issuer’s information in the annual report on conflict minerals that did not originate Internet Web site. Forms 10–K, 20–F, or 40–F.260 Some of in the Covered Countries, a brief b. Comments on the Proposed Rules these commentators stated that the description of the reasonable country of existing Exchange Act reporting system origin inquiry it conducted in making We received mixed comments on the is designed to provide investors with such a determination. The proposed proposal. While many commentators material information from a financial rules would not have required an issuer believed that the final rule should not perspective, whereas the Conflict that determined that its conflict require an issuer’s conflict minerals Minerals Statutory Provision uses the minerals did not originate in the information to be provided in that securities disclosure laws to provide Covered Countries, based on its issuer’s annual report,251 other conflict mineral supply chain reasonable country of origin inquiry, to commentators believed that an issuer’s information for the purpose of stopping provide any further disclosures. We also conflict minerals information should be the humanitarian crisis in the Covered proposed that an issuer include brief provided in that issuer’s annual report, Countries.261 Commentators suggested additional disclosure in the body of the as proposed.252 Commentators that did that the processes with which to obtain annual report if the issuer’s conflict not want the conflict minerals and provide conflict minerals minerals originated in the Covered information included in the annual information should be different from Countries or if the issuer could not report generally agreed that the those processes developed for current determine that its conflict minerals did information should be provided either year-end reporting.262 not originate in the Covered Countries, in a newly created report or form, or in Other commentators argued that the based on its reasonable country of origin a current report on Form 8–K 253 or disclosures required by the final rule inquiry. As proposed, these rules would Form 6–K,254 instead.255 A small should be treated no differently than have required an issuer to disclose that number of commentators stated that an other disclosures required by the its conflict minerals originated in the issuer’s conflict minerals information Exchange Act.263 In this regard, one Covered Countries, or that it was unable should be provided solely on its Internet such commentator agreed that the final to conclude that its conflict minerals Web site.256 Some commentators rule should require that an issuer’s did not originate in the Covered suggested that the final rule should conflict minerals information be Countries, that its Conflict Minerals included in the issuer’s annual report allow issuers to submit their conflict Report had been furnished as an exhibit because such a requirement is inherent minerals information on a separate form to the annual report, that the Conflict in the policy goals underlying the or in a current report, noting that the Minerals Report, including the certified Conflict Minerals Statutory Provision Conflict Minerals Statutory Provision independent private sector audit, was and would foster consistency in the does not require explicitly that the publicly available on the issuer’s form, location, and timing of the Internet Web site, and the issuer’s information be submitted in a Form 10– K, Form 20–F, or Form 40–F annual information.264 Similarly, another such Internet address on which the Conflict commentator stated that not requiring Minerals Report and audit report were 251 See, e.g., letters from AdvaMed I, AngloGold, located. 257 See, e.g., letters from AngloGold, ITIC I, JVC Barrick Gold, Cleary Gottlieb, Corporate Secretaries The Conflict Minerals Statutory I, CTIA, Davis Polk, Ford Motor Company (Mar. 2, et al. II, and NAM I. Exchange Act Section Provision requires that each issuer make 2011) (‘‘Ford’’), Industry Group Coalition I, ITIC I, 13(p)(1)(A) requires only that issuers ‘‘disclose its Conflict Minerals Report available to Japanese Trade Associations, JVC et al. II, NAM I, annually’’ their conflict minerals information. 258 Section 1503 of the Act. the public on the issuer’s Internet Web NAM III, NCTA, NMA II, NY State Bar, Roundtable, SEMI, Taiwan Semi, and Tiffany. 259 See letter from AngloGold. site.250 Consistent with the statute, we 252 See, e.g., letters from Earthworks, Enough 260 See, e.g., letters from Barrick Gold, CEI I, proposed rules to require an issuer to Project I, Global Witness I, Methodist Pension, Cleary Gottlieb, Davis Polk, Ford, ITIC I, JVC et al. make such a report, including the Peace, and TIAA–CREF. II, NAM I, NMA II, NY State Bar, PCP, Taiwan sroberts on DSK5SPTVN1PROD with RULES certified audit report, available to the 253 17 CFR 249.308. Semi, and SEMI. 254 17 CFR 249.306. 261 See, e.g., letters from CEI I, NY State Bar, and 250 See Exchange Act Section 13(p)(1)(E), which 255 See, e.g., letters from AdvaMed I, AngloGold, Taiwan Semi. 262 See letters from Davis Polk and NAM I. is entitled ‘‘Information Available to the Public’’ Barrick Gold, Cleary Gottlieb, Davis Polk, Ford, ITIC and states that ‘‘[e]ach person described under I, JVC et al. II, NAM I, NMA II, NY State Bar, and 263 See letters from CRS I, Global Witness I, paragraph (2) shall make available to the public on Taiwan Semi. Methodist Pension, Sen. Durbin/Rep. McDermott, the Internet Web site of such person the information 256 See letters from Corporate Secretaries I, CTIA, and SIF I. disclosed by such person under subparagraph (A).’’ NCTA, and Tiffany. 264 See letter from Global Witness I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56300 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations conflict minerals information in the Instruction G.(3) of Form 10–K 272 and to acknowledge that the various officer annual report on Forms 10–K, 20–F, or prospective incorporation by reference certifications required by those rules do 40–F would inhibit the public’s ability of separate financial statements of not extend to any conflict minerals to monitor an issuer’s use of conflict unconsolidated entities under Item 3–09 information provided either in or as an minerals and allow issuers to hide their of Regulation S–X.273 Commentators exhibit to the annual report.282 Another conflict minerals information.265 In this proposed a variety of time periods, commentator stated that, if we required regard, a number of commentators including 120, 150, and 180 days after conflict minerals disclosure in the believed that there is little or no an issuer’s fiscal year-end, in which an existing annual reports, we should difference in the purposes of the issuer could be required to provide its include ‘‘a clear statement in the rules Conflict Minerals Statutory Provision conflict minerals information as part of or the adopting release that the officer and the rest of the Exchange Act, in that its annual report.274 Similarly, as certifications required to be included as both require the disclosure of discussed in greater detail below, some exhibits to the existing annual reports meaningful supply chain and commentators suggested that the final would not apply to the conflict minerals reputational information about an issuer rule should consider a single start and disclosure.’’ 283 Also, some for the benefit of investors.266 For end date for the reporting period for all commentators were concerned about the example, the co-sponsors of the companies, regardless of their particular negative effects that providing the legislation stated explicitly that the fiscal year,275 and one of these information in the annual report on purposes of the Conflict Minerals commentators recommended that this Forms 10–K, 20–F, or 40–F would have Statutory Provision and the rest of the one year period coincide with the on form or other eligibility, Exchange Act are ‘‘very much the same’’ calendar year.276 incorporation by reference into because they both ‘‘‘assure a stream of Additionally, some commentators Securities Act filings, and home country current information about an issuer for were concerned about the liability of the reporting in the case of foreign private the benefit of purchasers * * * and for principal executive offers, principal issuers.284 the public.’’’ 267 As another example, a financial officers, and auditors who Some commentators indicated that, commentator asserted that ‘‘conflict must certify an annual report under regardless of where the information was minerals disclosures are material to Sections 302 277 and 906 278 of the provided, they wanted the conflict investors and will inform and improve Sarbanes-Oxley Act if the rule requires minerals information in a location that an investor’s ability to assess social (i.e., that an issuer provide its conflict was easily available to the public,285 or human rights) and reputational risks in minerals information in its filed annual on the Web sites of both the issuer and an issuer’s supply chain.’’ 268 report.279 In this regard, one the Commission.286 In this regard, Some commentators were concerned commentator stated that, if the final rule certain commentators recommended about providing conflict minerals requires an issuer to provide conflict that the final rule require an issuer to information in the annual report on minerals information in its annual post its Conflict Minerals Reports and/ Forms 10–K, 20–F, or 40–F due to the report, the Commission should amend or its audit reports on its Internet Web timing of filing an annual report.269 rules 13a–14(a) and (b) 280 and 15d– site, as we proposed.287 However, some These commentators noted that the 14(a) and (b) 281 under the Exchange Act of these commentators suggested that increased burden on issuers in the final rule should require an issuer to collecting and reporting conflict 272 General Instruction G.(3) of Form 10–K [17 keep that information on its Internet minerals information could cause those CFR 249.310]. Web site longer than until the issuer 273 Item 3–09 of Regulation S–X [17 CFR 210.3– issuers to be unable to file their annual 09]. filed its subsequent annual report.288 reports in a timely manner. Some 274 See letters from AngloGold, CTIA, ITIC I, Other commentators noted that the final commentators offered an alternative NAM I, Roundtable, and SEMI. rule should not require an issuer to post scheme in which an issuer would be 275 See letters from Advanced Micro Devices, Inc., its audit report online 289 because, as permitted to provide its conflict mineral Africa Faith and Justice Network, Boston Common one of the commentators noted,290 such Asset Management, LLC, Calvert Asset Management information on either a new report or Co., Inc., Congo Global Action, Enough Project, form, an amended annual report, or a Falling Whistles, Free the Slaves, Future 500, 282 See letter from NY State Bar. current report on Form 8–K or Form 6– General Electric Company, Global Witness, Hewlett- 283 See letter from Cleary Gottlieb. K within a certain number of days Packard Company, Interfaith Center on Corporate 284 See, e.g., letters from Barrick Gold, Cleary Responsibility, Jantzi-Sustainalytics, Jesuit Gottlieb, Corporate Secretaries I, Davis Polk, ITIC I, following the end of the issuer’s fiscal Conference, Jewish World Watch, Mercy Investment NMA II, NY State Bar, and WGC II. But see letter year.270 A few of these commentators 271 Services, Inc., Microsoft Corporation, Royal Philips from Global Witness I (stating that conflict minerals pointed out that the Commission Electronics, Trillium Asset Management, Unity information should be incorporated by reference permits delays in providing certain Minerals, US SIF: The Forum for Sustainable and into Securities Act filings). Responsible Investment (Aug. 22, 2011) (‘‘MSG II’’) 285 See, e.g., letters from Episcopal Conference of information on an annual report, such and State II. Catholic Bishops of the DRC (Apr. 5, 2011) as with prospective incorporation by 276 See letter from MSG II (‘‘We respectfully (‘‘CENCO I’’) and Good Shepherd. reference of information from an issuer’s request that the SEC rule synchronize the timing for 286 See, e.g., letter from Catholic Charities. proxy statement under General the information contained in the Conflict Minerals 287 See letters from CRS I, Douglas Hileman Reports from all issuers on a calendar year basis. Consulting LLC (Oct. 31, 2011) (‘‘Hileman The MSG recommends that all issuers begin Consulting’’), Howland, NEI, SEMI, SIF I, and 265 See letter from Peace. exercising and reporting due diligence on the TriQuint I. 266 See, e.g., letters from CRS I, FRS, Global source and chain of custody for the subject minerals 288 See letters from Hileman Consulting Witness I, Methodist Pension, Sen. Durbin/Rep. used in their products on a common calendar (suggesting ‘‘more than the proposed one year’’), McDermott, Sen. Leahy et al., SIF I, and SIF II. date.’’). NEI (suggesting ‘‘issuers to post several years worth 267 See letter from Sen. Durbin/Rep. McDermott. 277 Public Law 107–204, 116 Stat. 745, Sec. 302 of reports on their Web sites’’), SIF I (suggesting that 268 See letter from SIF I. (2002). an ‘‘issuer should be required to keep posted its sroberts on DSK5SPTVN1PROD with RULES 269 See, e.g., letters from AngloGold, Cleary 278 Public Law 107–204, 116 Stat. 745, Sec. 906 Conflict Minerals Report and audit reports on its Gottlieb, CTIA, Ford, ITIC I, NAM I, NY State Bar, (2002). Internet Web site for five years’’), and TriQuint I Roundtable, and SEMI. 279 See, e.g., letters from ITIC I, NMA II, and (suggesting that an issuer’s Conflict Minerals 270 See letters from AngloGold, Cleary Gottlieb, Taiwan Semi. Reports should be posted on its Web site ‘‘for 10 CTIA, IPC I, ITIC I, JVC et al. II, NAM I, NY State 280 Rule 13a–14(a) [17 CFR 240.13a–14(a)] and years after the issuer’s products were last sold on Bar, Roundtable, and SEMI. Rule 13a–14(b) [17 CFR 240.13a–14(b)]. the open market’’). 271 See letters from Cleary Gottlieb and NY State 281 Rule 15d–14(a) [17 CFR 240.15d–14(a)] and 289 See letters from AngloGold and NMA II. Bar. Rule 15d–14(b) [17 CFR 240.15d–14(b)]. 290 See letter from AngloGold. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56301 a requirement would increase costs proposed, however, the final rule the final rule requires an issuer with without increasing benefits. requires an issuer to provide its Conflict conflict minerals necessary to the Finally, some commentators Minerals Report as an exhibit, and not functionality or production of a product suggested that the final rule should in the body of the new report. In this it manufactures or contracts to be address how an issuer must handle a regard, we continue to believe that manufactured to provide us a situation in which it acquires or providing the Conflict Minerals Report specialized disclosure report on Form otherwise obtains control over a as an exhibit to the specialized SD by May 31 of each year, reporting on company that manufactures or contracts disclosure report will enable anyone the preceding calendar year. The to manufacture products with conflict accessing the EDGAR system to specialized disclosure report is due later minerals necessary to the functionality determine quickly whether an issuer than when an annual report is due for or production of products that provided a Conflict Minerals Report calendar year end issuers so as not to previously had not been obligated to with its specialized disclosure report. interfere with such issuer’s preparation provide conflict minerals information to We proposed requiring disclosure of its Exchange Act annual report, as us.291 These commentators noted that regarding conflict minerals in an requested by a number of the acquired company may not have any issuer’s annual report because we commentators.299 Also, as discussed in processes in place to determine the believed that this approach would be greater detail below, the final rule origin of conflict minerals in its less burdensome than requiring that an requires each issuer to provide its products and, therefore, the acquiring issuer provide a separate report. Based conflict minerals information for each issuer would most likely need a on the comments we received, however, calendar year, rather than its fiscal year. ‘‘reasonable amount of time’’ 292 to it appears that issuers will find it less establish those processes before it could burdensome to provide their conflict We agree with the comments we provide an accurate specialized minerals information on a new report received that a reasonable amount of disclosure report that included the that is separate from the annual report additional time to submit the conflict acquired company’s supply chain. Some and due later than the annual report. minerals information is appropriate commentators recommended that the For example, one commentator where an issuer acquires or otherwise issuer not be required to report on the explained that ‘‘between an issuer’s obtains control over a company that products manufactured by the acquired fiscal year end and the date the issuer manufactures or contracts to company until the end of the first is required to file its audited annual manufacture products with conflict reporting period that begins no sooner financial statements, the issuer’s minerals necessary to the functionality than eight months after the effective accounting and financial reporting or production of those products that date of the acquisition.293 One teams focus their resources on preparing previously had not been obligated to commentator suggested that the issuer the issuer’s annual report,’’ so provide conflict minerals information to not be required to report on the ‘‘[r]equiring the conflict minerals us. We have added an instruction to the products manufactured by the acquired disclosure to be furnished at the same final rule to reflect this delay. Therefore, company until the end of the first time as the issuer’s Exchange Act the final rule allows an issuer to delay reporting period that begins no sooner annual report would put further strain the initial reporting period on the than 18 months from the date of the on these resources at a time when they products manufactured by the acquired acquisition.294 Another commentator are likely already to be operating near company until the first calendar year recommended that the issuer not be full capacity.’’ 296 Another commentator beginning no sooner than eight months obligated to report with respect to the noted that issuers are going to be after the effective date of the products manufactured by or for the required to utilize ‘‘significantly acquisition. This option appears to be a acquired entity ‘‘until the first fiscal different processes to comply with the reasonable approach based on some of year beginning after the fiscal year in new reporting requirement that are the comments we received.300 We note which the acquisition is outside the scope of processes that a shorter period, such as requiring consummated.’’295 developed for regular year-end an issuer to report with respect to the reporting, and it may be a burden to products manufactured by or for the c. Final Rule complete the necessary inquiry and due acquired entity during the first fiscal After considering the comments, we diligence pertaining to conflict minerals year beginning after the fiscal year in are revising the proposed rules to on the same timetable as’’ an annual which the acquisition is consummated, require that an issuer provide its report.297 may leave an issuer that acquires a conflict minerals information in a new We considered commentators’ company late in the year with an report on a new Exchange Act form. As arguments that it would be easier for insufficient amount of time to establish investors to locate the information in 291 See, e.g., letters from ABA, Industry Group Forms 10–K, 20–F, and 40–F. We Company Act of 1940 [15 U.S.C. 80a et seq.] Coalition I, Industry Group Coalition II, NAM I, and believe, however, that new Form SD (‘‘registered investment companies’’) would not Semiconductor. should provide ready access to the have been subject to the disclosure requirement 292 Letter from Semiconductor. information. Indeed, it may be easier for because those companies are not required to file 293 See letters from Industry Group Coalition I Form 10–K, Form 20–F or Form 40–F. Our decision (suggesting an eight month lead-in period because investors to find the information when to require this disclosure in a new form is not it is similar to the time that will elapse between the it is included in the new Form SD, intended to change the scope of companies subject adoption of final rules implementing the Act and rather than as one of potentially dozens to the disclosure requirement. Therefore, consistent the commencement of the reporting period of exhibits in a voluminous Form 10–K, with the proposal, registered investment companies applicable to calendar-year filers, and that time that are required to file reports on Form N–CSR or period is necessary to allow sufficient time for the Form 20–F, or Form 40–K.298 Therefore, Form N–SAR pursuant to Rule 30d–1 under the sroberts on DSK5SPTVN1PROD with RULES acquiring issuer to implement its conflict minerals Investment Company Act (17 CFR 270.30d–1) will reasonable inquiry and due diligence processes 296 Letter from AngloGold. not be subject to the final rule. throughout the supply chain of the acquired firm), 297 Letter from NAM I. 299 See, e.g., letters from AngloGold, Cleary NAM I (same), and Semiconductor (same). 298 Under the proposed rules, an issuer would Gottlieb, CTIA, Ford, ITIC I, NAM I, NY State Bar, 294 See letter from Industry Group Coalition II. Roundtable, and SEMI. have been required to furnish its conflict minerals See also letters from Industry Group Coalition I, information in its annual report on Form 10–K, 300 See, e.g., letters from Industry Group Coalition NAM I, and Semiconductor. Form 20–F or Form 40–F. As such, investment I, Industry Group Coalition II, NAM I, and 295 See letter from ABA. companies that are registered under the Investment Semiconductor. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56302 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations systems to gather and report on the Form 20–F, or Form 40–F, as applicable, material to investors.306 As one conflict minerals information. and the Conflict Minerals Report to be commentator explained, ‘‘[n]othing in Additionally, we are modifying the included as an exhibit to the issuer’s the statute itself suggests that the proposed rules regarding how long an annual report. Certain proposed item ‘reasonable’ investor would find this issuer must keep its conflict minerals requirements would have instructed an information to be important in deciding disclosure or its Conflict Minerals issuer to furnish its Conflict Minerals whether to buy or sell’’ an issuer’s Report available on the issuer’s Internet Report as an exhibit to its annual report. securities, which is ‘‘the touchstone of Web site to reflect that the information Additionally, as proposed, an issuer’s materiality under the federal securities is not to be included in an issuer’s Conflict Minerals Report, which would laws.’’ 307 However, this commentator annual report on Form 10–K, Form 20– have included the independent private acknowledged that ‘‘socially conscious F, or Form 40–K. The proposed rules sector audit report, would not be ‘‘filed’’ investors might well factor this would have required an issuer to keep for purposes of Section 18 of the information into an investment its conflict minerals information on its Exchange Act and thus would not be decision.’’ 308 Some commentators Internet Web site until its subsequent subject to potential liability of that asserted that the conflict minerals annual report was filed. We intended section of the Exchange Act, unless the information is different from other this period to last only one year issuer stated explicitly that the Conflict information in required filings, so the because, whether or not the issuer had Minerals Report and the independent conflict minerals information should be any conflict minerals information to private sector audit report were filed ‘‘furnished.’’ 309 Other commentators provide in its subsequent annual report, under the Exchange Act. Instead, these noted that, if the conflict minerals the issuer had to file the subsequent documents would only have been information is material to a reasonable annual report one year after its prior furnished to the Commission. Similarly, person’s investment decision, it would annual report or cease to be a reporting as proposed, the rules would not have have to be disclosed in an issuer’s issuer. However, with the final rule considered the Conflict Minerals Report filings even without the Conflict requiring an issuer to provide its and the independent private sector Minerals Statutory Provision, so any conflict minerals information in a audit report to be incorporated by other information regarding conflict specialized disclosure report on Form reference into any filing under the minerals should be ‘‘furnished.’’ 310 SD, the period between specialized Securities Act or the Exchange Act, Another commentator recommended disclosure reports may be more than one except to the extent that the issuer that the conflict minerals information year if an issuer has no reportable specifically incorporated them by should be ‘‘furnished’’ because, whereas conflict minerals in its subsequent reference into the documents. As noted the data used to generate the financial calendar year. If we did not modify the above and in the Proposing Release, statements in issuers’ ‘‘filed’’ periodic proposed rules, such an issuer may have furnishing the Conflict Minerals Report reports are generally within their been required to keep its conflict would not have subjected the issuer to control and subject to internal controls, minerals information on its Internet Section 18 liability,302 but the issuer issuers would be required to rely on Web site for more than one year, would still have had liability for its third parties (suppliers, smelters, etc.) possibly indefinitely. Therefore, the conflict minerals information. Under for their conflict minerals data that are final rule specifies that an issuer must Exchange Act Section 13(p)(1)(C), a mostly beyond the issuer’s control.311 make its conflict minerals disclosure or failure to comply with the Conflict Some commentators argued that the its Conflict Minerals Report available on Minerals Statutory Provision would conflict minerals information should be the issuer’s Internet Web site for one have rendered the issuer’s due diligence ‘‘furnished’’ so that Exchange Act year. In response to concerns expressed process ‘‘unreliable,’’ and, therefore, the Section 18 liability would not attach to by commentators that the information Conflict Minerals Report would ‘‘not the conflict minerals information.312 should be required to be mandated satisfy’’ the proposed rules.303 In this One of these commentators asserted that longer, we note that the issuer’s Form regard, as proposed, an issuer that failed Section 18 liability should not be SD with the Conflict Minerals Report to comply with the proposed rules available because there is no indication will be available on EDGAR would have been subject to liability for that Congress intended for an issuer’s indefinitely, so the information will violations of Exchange Act Sections conflict minerals information to be continue to be widely available. 13(a) or 15(d), as applicable.304 subject to such liability.313 In this In another release we are issuing regard, some commentators contended today, we are requiring issuers to b. Comments on the Proposed Rules that, if ‘‘furnished,’’ issuers’ conflict disclose certain resource extraction A number of commentators stated minerals information would still receive payment information on Form SD.301 specifically that the final rule should, as significant attention and scrutiny, and Because of the order of the releases, we proposed, require an issuer to ‘‘furnish’’ the issuers’ disclosures regarding this are adopting the form in this release and rather than ‘‘file’’ its conflict minerals information will still be subject to amending it in the resource extraction information.305 Many of these liability sufficient enough to deter release. We intend, however, for the commentators believed that the nature form to be used equally for these two and purpose of the conflict minerals 306 See, e.g., letters from AngloGold, Barrick Gold, separate disclosure requirements. disclosure is qualitatively different from Cleary Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, NY State Bar, and Taiwan Semi.

2. ‘‘Filing’’ of Conflict Minerals the other disclosure required under 307 See letter from JVC et al. II. Information Exchange Act Section 13 and the 308 See id. conflict minerals information is not 309 See, e.g., letters from AngloGold, Barrick Gold, a. Proposed Rules Cleary Gottlieb, Ford, ITIC I, JVC et al. II, NMA II, sroberts on DSK5SPTVN1PROD with RULES The proposed rules would have 302 15 U.S.C. 78r. NY State Bar, and Taiwan Semi. 303 See Exchange Act Section 13(p)(1)(C). 310 See letter from AngloGold and NMA II. required an issuer’s conflict minerals 311 See letter from Ford. 304 15 U.S.C. 78m(a) and 15 U.S.C. 78o(d). information to be provided in the 305 See, e.g., letters from AngloGold, Barrick Gold, 312 See letters from Barrick Gold, Cleary Gottlieb, issuer’s annual report on Form 10–K, Cleary Gottlieb, Corporate Secretaries I, Deloitte & NMA II, Society of Corporate Secretaries and Touche LLP (Mar. 2, 2011) (‘‘Deloitte’’), Ford, ITIC Governance Professionals (Aug. 16, 2011) 301 Disclosure of Payments by Resource Extraction I, JVC et al. II, NAM III, NMA II, NY State Bar, (‘‘Corporate Secretaries III’’), and WGC II. Issuers, Release No. 34–67717 (Aug. 22, 2012). Taiwan Semi, and WGC II. 313 See letter from the WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56303 abuse.314 The commentators pointed out investors and the public the information ‘‘filed.’’ 328 A group of investors in one that issuers would still be liable for any needed to make informed choices.’’ 321 comment letter noted that the conflict materially false or misleading Therefore, according to the letter, minerals information is material to an statements under the antifraud ‘‘[p]rotecting investor interests by investor in evaluating its investment provisions of the federal securities laws, making companies liable for fraudulent decision, so the information should be including, Section 10(b) of the Exchange or false reporting of conflict minerals is ‘‘filed.’’ 329 Specifically, the letter stated Act and Rule 10b–5 there under.315 critical—so the reports must be ‘filed,’ that ‘‘[g]iven the materiality of the data They indicated further that failure to not ‘furnished.’’’ 322 in evaluating a company’s risk, we urge comply with the Conflict Minerals Further commentators asserted that a the Commission to require all Statutory Provision would render the plain reading of the Conflict Minerals information outlined in the proposed issuer’s due diligence ‘‘unreliable’’ and, Statutory Provision demonstrates that rule to be filed in the body of the annual therefore, the Conflict Minerals Report Congress intended that the term report rather than furnished as an would not satisfy the final rule, which ‘‘submit’’ to mean ‘‘file.’’ 323 The exhibit.’’ 330 Also, in another comment would subject the issuer to liability for commentators argued that ‘‘submit’’ letter, an institutional investor indicated violations of Exchange Act Sections means ‘‘file’’ in the provision because that the conflict minerals information is 13(a) or 15(d), as applicable.316 new Exchange Act Section 13(p)(2)(A) material to an investment decision and, Conversely, other commentators states that conflict minerals disclosure therefore, ‘‘as material information[,] indicated that the final rule should is required if conflict minerals are this report should be filed, not require an issuer to ‘‘file’’ its conflict necessary to the functionality or furnished as proposed by the minerals information.317 Two of the co- production of a product manufactured Commission.’’ 331 Moreover, one sponsors of the statutory provision by a person described and the person commentator argued that allowing the noted that Congress intended for an described is required to ‘‘file’’ reports conflict minerals information to be issuer’s conflict minerals information, with us pursuant to the Conflict ‘‘furnished’’ instead of ‘‘filed’’ would particularly the Conflict Minerals Minerals Statutory Provision. Also, one ‘‘send a regrettable signal that the Report, to be ‘‘filed’’ rather than of the commentators noted that the term Commission believes these disclosures ‘‘furnished’’ so that the information ‘‘furnish’’ is not in the text of the to be of lesser importance at the very would be subject to the liability provision.324 moment that issuers, regulators, provisions in Section 18 of the Additionally, some commentators investors, and governments around the Exchange Act and, thereby, allow for asserted that requiring the conflict world are looking to the Commission to private sector remedies for false and minerals information be ‘‘filed’’ would help establish the way forward,’’ which misleading statements.318 These co- benefit investors by making an issuer’s would ‘‘scale back the vigor of issuer sponsors asserted that, in the Proposing conflict minerals information more compliance and undermine the entire Release, we incorrectly reasoned that transparent, accessible, accurate, and purpose of the statute’’ and ‘‘undermine the Conflict Minerals Statutory complete. In this regard, one of these the goals of ending the resource-related Provision’s requirement that an issuer commentators suggested that requiring violence in the DRC and providing ‘‘submit’’ its Conflict Minerals Report the conflict minerals information to be meaningful and reliable disclosures to means that Congress intended that the ‘‘filed’’ would allow for private rights of the American consumer and information be ‘‘furnished’’ instead of action, which would permit investors to investor.’’ 332 ‘‘filed.’’ They noted that the term seek remedies for material ‘‘furnish’’ is included throughout the c. Final Rule misstatements regarding conflict Act 41 times, but that term is ‘‘expressly Although the proposal would have minerals disclosures, and provide an not used in Section 1502,’’ which required the conflict minerals incentive for issuers and others to demonstrates that ‘‘Congress intended information to be ‘‘furnished,’’ after conduct an appropriate due for the word ‘submit’ to be synonymous considering the comments, the final rule diligence.325 Another commentator with ‘filed,’ not ‘furnished.’’’ 319 we are adopting requires issuers with Similarly, another comment letter noted that requiring issuers to ‘‘file’’ their conflict minerals information necessary conflict minerals to ‘‘file’’ the written by other members of Congress conflict minerals information provided also emphasized that it was Congress’s ‘‘promotes greater transparency, makes Section 1502 more effective,’’ and helps in their specialized disclosure reports, legislative intent to the Conflict including any Conflict Minerals Reports Minerals Report be ‘‘filed’’ not ‘‘facilitate access to this information.’’326 In a further comment and independent private sector audit ‘‘furnished.’’ 320 The letter stated that it reports.333 As discussed above, was made clear ‘‘during the legislative letter, a group of investors indicated that requiring issuers to ‘‘file’’ their conflict commentators disagreed as to whether process, meetings with the SEC, and in the required information should be written comments to the Commission minerals information would ‘‘allow investors greater assurance that conflict ‘‘furnished’’ or ‘‘filed,’’ 334 and in our that Section 1502 was designed as a transparency measure to provide minerals disclosure is as 328 See letters from Global Witness I, SIF II, and comprehensive, transparent and TIAA–CREFF. 314 See letters from Barrick Gold, Ford, and JVC accurate as possible.’’327 329 See letter from SIF II. et al. II. Finally, some commentators argued 330 Id. 315 See letters from Barrick Gold and JVC et al. II. that the conflict minerals information is 331 See letter from TIAA–CREF. 316 See letters from Ford and JVC et al. II. material and, therefore, should be 332 See letter from Global Witness I. 317 See, e.g., letters from Bario-Neal, Brilliant 333 15 U.S.C. 78r. Earth, Columban Center et al., Earthworks, Enough 321 Id. 334 Compare letters from AngloGold, Barrick sroberts on DSK5SPTVN1PROD with RULES Project I, Global Witness I, Hacker Jewelers, Hoover Gold, Cleary Gottlieb, Corporate Secretaries I, 322 Id. & Strong, Metalsmiths, Sen. Durbin/Rep. Deloitte, Ford, ITIC I, JVC et al. II, NAM III, NMA 323 See letters from Global Witness I and Enough McDermott, SIF II, TakeBack, TIAA–CREF, and II, NY State Bar, Taiwan Semi, and WGC II World Vision US and World Vision DRC (Feb. 21, Project I. (supporting a requirement to ‘‘furnish’’ the 2012) (‘‘World Vision II’’). 324 See letter from Global Witness I. disclose), with letters from Bario-Neal, Brilliant 318 See letter from Sen. Durbin/Rep. McDermott. 325 See id. Earth, Columban Center et al., Earthworks, Enough 319 See id. 326 See letter from Enough Project I. Project I, Global Witness I, Hacker Jewelers, Hoover 320 See letter from Sen. Leahy et al. 327 See letter from SIF II. Continued VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56304 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations view the Conflict Minerals Provision is knowledge that the statement was false rule.344 The report would be required to ambiguous on this question. In reaching or misleading.342 cover that first full fiscal year. our conclusion that the information Moreover, as discussed below, the b. Comments on the Proposed Rules should be ‘‘filed’’ instead of final rule will include a transition ‘‘furnished,’’ we note particularly that We included a request for comment period in which issuers that are asking whether our rules should allow although Section 13(p)(1)(a) states that a required to perform due diligence and individual issuers to establish their own Conflict Minerals Report should be are unable to determine that their criteria for determining which reporting ‘‘submitted’’ to the Commission, the conflict minerals did not originate in the period to cover in any required conflict definition of a ‘‘person described,’’ who Covered Countries or unable to minerals disclosure or Conflict Minerals is required to submit a report, uses the determine that their conflict minerals Report, provided that the issuers are term ‘‘file.’’ This reference in the statute that originated in the Covered Countries consistent and clear with their criteria indicates that the reports should be did not directly or indirectly finance or from year-to-year. Some commentators filed. benefit armed groups in the Covered agreed that the final rule should allow Additionally, commentators asserted Countries may describe their products individual issuers flexibility in choosing that allowing the information to be with such conflict minerals as ‘‘DRC the appropriate criteria for determining ‘‘furnished’’ would diminish the conflict undeterminable.’’ We believe the reporting period in which conflict importance of the information,335 and this period will allow issuers sufficient minerals disclosures are made, provided that requiring the information to be time to obtain more data on, and control that the issuer’s methodology is clear.345 ‘‘filed’’ would enhance the quality of the over, their supply chain through revised Other commentators, however, asserted disclosures.336 Some commentators contracts with suppliers and smelter that the final rule should require that argued that the conflict minerals verification confirmations, thereby the conflict minerals reporting period information should not be treated as of mitigating this liability concern.343 correspond to the issuer’s fiscal year in lesser importance than other required its annual report.346

3. Uniform Reporting Period We did not request comment disclosures,337 and another specifically on whether an issuer’s commentator indicated specifically that a. Proposed Rules conflict minerals reporting period the conflict minerals information is should correspond to an issuer’s fiscal qualitatively similar to disclosures that The Conflict Minerals Statutory Provision requires, and we proposed to year. Even so, some commentators are required to be ‘‘filed.’’ 338 indicated that an issuer’s annual require, that issuers provide their initial Other commentators supporting the conflict minerals disclosure and, if reporting period for conflict minerals proposal that the disclosure be disclosure should not be based on its necessary, their initial Conflict Minerals ‘‘furnished’’ argued that the information fiscal year but, instead, should be based Report after their first full fiscal year is not material to investors,339 while on a one-year period that is the same for following the adoption of our final all issuers.347 One of these some argued that it was.340 Given the disagreement, and that materiality is a commentators recognized that 342 Exchange Act Section 18(a) provides: ‘‘Any fact-specific inquiry, we are not ‘‘synchronizing the timing for the person who shall make or cause to be made any persuaded that this is a reason to statement in any application, report, or document information* * *from all issuers on a provide that the information should be filed pursuant to this title or any rule or regulation calendar year basis* * *would offer ‘‘furnished.’’ Additionally, we thereunder or any undertaking contained in a integrity and consistency throughout the registration statement as provided in subsection (d) various supply chains’’ and because appreciate the comments that the of section 15 of this title, which statement was at ‘‘component manufacturers and others conflict minerals information should be the time and in the light of the circumstances under which it was made false or misleading with respect through the supply chain provide ‘‘furnished’’ because issuers should not to any material fact, shall be liable to any person products for many customers who have be held liable for the information when (not knowing that such statement was false or different fiscal years, it would be more they are required to rely on third parties misleading) who, in reliance upon such statement efficient and more accurate if the whole for their conflict minerals data and shall have purchased or sold a security at a price which was affected by such statement, for damages supply chain worked towards a direct knowledge of relevant facts may caused by such reliance, unless the person sued common deadline.’’ 348 Another not be available to them.341 We note, shall prove that he acted in good faith and had no commentator noted that a uniform however, that section 18 does not create knowledge that such statement was false or misleading. A person seeking to enforce such calendar year reporting period ‘‘would strict liability for filed information. liability may sue at law or in equity in any court clarify the reporting obligations, level Rather, it states that a person shall not of competent jurisdiction. In any such suit the court the playing field among the various be liable for misleading statements in a may, in its discretion, require an undertaking for companies, and provide a clearer date of filed document if it can establish that it the payment of the costs of such suit, and assess implementation for due diligence and reasonable costs, including reasonable attorneys’ acted in good faith and had no fees, against either party litigant.’’ A plaintiff related initiatives in the region.’’ 349 A asserting a claim under Section 18 would need to further commentator asserted that a & Strong, Metalsmiths, Sen. Durbin/Rep. meet the elements of the statute to establish a claim, ‘‘single reporting date will allow for McDermott, SIF II, TakeBack, TIAA–CREF, and including reliance and damages. In addition, we World Vision II (supporting a requirement to ‘‘file’’ note that issuers that fail to comply with the final 344 See Exchange Act Section 13(p)(1)(A) (stating the disclosure). rule could also be violating Exchange Act Sections that an issuer must ‘‘disclose annually, beginning 335 See letter from Global Witness I. 13(a) and (p) and 15(d), as applicable. Issuers would with the [issuer’s] first full fiscal year that begins 336 See letters from Enough Project I and SIF II. also be subject to potential liability under Exchange after the date of promulgation of [our] regulations’’). 337 See letter from Global Witness I. Act Section 10(b) [15 U.S.C. 78j] and Rule 10b–5 [17 345 See letters from Howland, IPC I, and NMA II. CFR 240.10b–5], promulgated thereunder, for any sroberts on DSK5SPTVN1PROD with RULES 338 See Sen. Durbin/Rep. McDermott. 346 See letters from AngloGold and TIC. false or misleading material statements in the 339 See letters from AngloGold, Barrick Gold, 347 See letters from IPC II; Matheson II; MSG II; information disclosed pursuant to the rule. Cleary Gottlieb, Corporate Secretaries I, Deloitte, 343 As discussed above, requiring the disclosure Multi-Stakeholder Group comprised of 29 issuers, Ford, ITIC I, JVC et al. II, NAM III, NMA II, NY State in a new form, rather than in issuers’ Exchange Act non-governmental organizations, and investors Bar, Taiwan Semi, and WGC II. annual reports, should alleviate some (Nov. 10, 2011) (‘‘MSG III’’); and State II. 340 See letters from Sen. Leahy et al., SIF I, SIF 348 Letter from MSG II. See also letter from MSG commentators’ concerns about the disclosure being II, and TIAA–CREF. subject to the officer certifications required by Rules III. 341 See letter from Ford. 13a–14 and 15d–14 under the Exchange Act. 349 Letter from State II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56305 increased efficiency and thus lower issuer’s fiscal year until its annual commentators did not provide costs, without reducing the effectiveness report is due to gather, report on, and alternative factors to consider in of the regulations.’’ 350 have audited their conflict minerals determining for which annual reporting information, as discussed above.353 The period an issuer must report its conflict c. Final Rule specialized disclosure report will be due minerals information, but stated only After considering the comments, the later than an Exchange Act annual that an issuer should be allowed the final rule will require each issuer to report is due for calendar year end flexibility to establish its own criteria provide its conflict minerals issuers so as not to interfere with an for determining when an issuer would information on a calendar year basis issuer’s preparation of its Exchange Act be required to provide information on regardless of any particular issuer’s annual report, as requested by the conflict minerals it obtained.358 fiscal year end.351 The final rule commentators. Also, the final rule will Other commentators provided requires an issuer to provide its annual require each issuer to provide its alternative factors, such as the year in conflict minerals information in its conflict minerals information for each which the mineral is purchased, the specialized disclosure report on Form calendar year, rather than its fiscal year. year the issuer takes possession and SD for every calendar year from January The May 31 due date is approximately ownership of the mineral, the year the 1 to December 31 and the specialized 150 days after the calendar year end, mineral is processed, or the year the disclosure report will be due to the which is consistent with a product containing conflict minerals is Commission on May 31 of the following commentator’s suggested due date for an produced or placed on the market.359 year. In this regard, the first reporting issuer to provide us with its conflict period for all issuers will be from c. Final Rule minerals information.354 January 1, 2013 to December 31, 2013, After considering the comments, the and the first specialized disclosure 4. Time Period for Providing Conflict final rule is revised from the proposal report must be filed on or before May Minerals Information such that possession is not the 31, 2014. a. Proposed Rules determining factor for deciding for We agree with the commentators that which reporting year an issuer has to The Conflict Minerals Statutory explained that burdens on participants provide its required conflict minerals Provision requires issuers to provide the in the supply chain could be reduced if information. We are making this specified disclosure with respect to our final rule adopted a uniform revision because we agree, as one necessary conflict minerals ‘‘in the year reporting period. This requirement commentator noted, that the ‘‘statutory for which such reporting is allows component suppliers that are requirement to report is triggered not by required.’’ 355 We proposed that the date part of a manufacturer’s supply chain to acquisition or possession of conflict an issuer takes possession of a conflict provide reports to their upstream minerals.’’ 360 Instead, the final rule mineral would determine which purchasers regarding the conflict provides that an issuer must provide its reporting year that issuer would have to minerals in their components only once required conflict minerals information provide its required conflict minerals a year. Otherwise, if the due date of the for the calendar year in which the information. Also, if an issuer Conflict Minerals Report was tied to an manufacture of a product that contains contracted the manufacturing of a issuer’s fiscal year end, as proposed, any conflict minerals is completed, product in which a conflict mineral is component suppliers could have to irrespective of whether the issuer necessary to the production of that provide reports regarding the conflict manufactures the product or contracts to product, but the conflict mineral would minerals in their components on a have the product manufactured.361 We not be included in the product, the continuous basis throughout the year believe this approach is appropriate issuer would, under the proposal, have because their customers may have because it should be relatively easy for used the date it takes possession of the different fiscal year ends. If a an issuer to identify when the product to determine which reporting component supplier has numerous manufacture of a product is completed, year the issuer would have to provide purchasers, it might have to provide as the issuer has a certain amount of the required conflict minerals separate reports regarding the conflict control over this decision. Thus, this information. minerals in its components every approach also allows issuers some month, or even more often, which could b. Comments on the Proposed Rules flexibility in determining the reporting be very burdensome and costly.352 Some commentators suggested that, as period. For example, if an issuer Additionally, requiring a uniform proposed, an issuer should be required completes the manufacture of a product May 31 due date for the specialized to provide its conflict minerals with conflict minerals necessary to the disclosure report responds to concerns information in the reporting period functionality or production of that raised by certain industry commentators during which the issuer took possession product on December 30, 2018, the that there would not be sufficient time of its conflict minerals.356 Other issuer must provide a specialized in the period between the end of an commentators recommended, however, disclosure report regarding the conflict 350 Letter from IPC II. that the final rule should use some other minerals in that product for the 2018 351 We are aware that Exchange Act Section determining factor.357 Some calendar year. However, if that issuer 13(p)(1)(A) requires that we promulgate regulations completes the manufacture of that same requiring any ‘‘person described’’ to disclose 353 See, e.g., letters from AngloGold, Cleary product on January 2, 2019, the issuer annually its conflict minerals information, Gottlieb, CTIA, Ford, ITIC I, NAM I, NY State Bar, must provide a specialized disclosure ‘‘beginning with the person’s first full fiscal year Roundtable, and SEMI. 354 See letter from AngloGold (suggesting that an that begins after the date of promulgation of such 358 See, e.g., letters from Howland, IPC I, and regulations.’’ The Conflict Minerals Statutory issuer be required to provide its conflict minerals sroberts on DSK5SPTVN1PROD with RULES Provision does not tie any required conflict information on a Form 8–K or Form 6–K ‘‘within NMA II. 150 calendar days after the issuer’s fiscal year- 359 See, e.g., letters from AngloGold, NAM I, RJC, minerals information to an issuer’s annual report or its audited financial statements. Therefore, although end’’). and TIC. the provision requires an issuer to begin reporting 355 Exchange Act Section 13(p)(1)(A). 360 See letter from NAM I. after an issuer’s full fiscal year has cycled through, 356 See, e.g., letters from Cleary Gottlieb, ITIC I, 361 See id. (recommending that, ‘‘[i]f the rule there is no requirement for the final rule’s reporting and WGC II. specifies a reporting trigger, it should be producing period to correspond to an issuer’s fiscal year. 357 See, e.g., letters from AngloGold, NAM I, RJC, or placing on the market a product containing 352 See letter from MSG II. and TIC. conflict minerals’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56306 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations report regarding the conflict minerals in takes effect, including existing minerals stored outside the Covered that product for the 2019 calendar year. stockpiles of conflict minerals. The Countries would not contribute to This timeframe is the same for an Proposing Release, however, requested conflict in the Covered Countries.367 issuer that contracts the manufacturing comment on this point. Another panelist asserted that a of its products. An issuer that contracts stockpile ‘‘exemption is essential for b. Comments on the Proposed Rules the manufacturing of a product must both existing unsmelted mineral and provide its required conflict minerals Almost all commentators that refined metal stocks held by industry, information for the calendar year in discussed the topic recommended that metal warehouses, investors and even in which the issuer’s contract an issuer’s existing stockpile of conflict US Government stockpile,’’ because the manufacturer completes the minerals should be exempt from the ‘‘value of current tin stocks is probably manufacturing of product. For example, final rule.362 One commentator around US$7billion, generally with non- if an issuer’s contractor completes the explained, that ‘‘[c]ategorizing existing specific mine origin,’’ so not exempting manufacturing of the product with stock as ‘conflict’ simply because the such minerals would lead to ‘‘market conflict minerals necessary to the mineral was mined before SEC rules disruption and financial losses on this functionality or production of that have been agreed and published serves potentially unsaleable material.’’ 368 product on December 30, 2018, the no purpose in furthering the aims of the Many commentators suggested issuer must provide a specialized legislation and would cause serious different requirements for when a disclosure report regarding the conflict financial loss to the holders of that conflict mineral should be considered minerals in that product for the 2018 stock[pile].’’ 363 In this regard, one stockpiled and, therefore, excluded from calendar year, even if the issuer does commentator asserted that ‘‘[s]tockpiled the final rule. A number of not receive the product until January 2, minerals may have originated in mines commentators recommended that the

2019. However, if that issuer’s that support the conflict; however, it final rule should exempt any conflict contractor completes the manufacturing would be impractical to ask companies minerals mined prior to the adoption of of that same product on January 2, 2019, to trace the origin of these minerals.’’ 364 the final rule.369 One commentator the issuer must provide a specialized Another commentator argued noted, however, that ‘‘the date of disclosure report regarding the conflict specifically that, if the final rule causes extraction is not generally recorded or minerals in that product for the 2019 owners to dispose of their existing known for minerals purchased from calendar year. conflict minerals inventory because they artisanal miners.’’ 370 Some This outcome is the same for an issuer are unable to determine that they are commentators asserted that the final that manufactures the product using a ‘‘DCR conflict free,’’ the cost of the rule rule should exempt any conflict component product with conflict would increase ‘‘dramatically.’’ 365 minerals smelted or refined by a certain minerals necessary to the functionality Panelists discussed this issue further date 371 because, as one of these of the product that is manufactured by at the SEC Roundtable. Some panelists commentators indicated, ‘‘[e]ach metal an independent third party. If the explained that there are stocks of metals batch produced by a smelter will manufacturer of the product completes and other materials stored throughout possess a dated certificate of analysis the product that incorporates the the world in warehouses and vaults by which may be considered as the component product with necessary many individuals and institutions that production date.’’372 Similarly, another conflict minerals on December 30, 2018, are already past the point in the supply commentator recommended that the issuer that manufactured the chain at which they could contribute to stockpiled gold that ‘‘has been fully product must provide a specialized conflict.366 One panelist representing a refined before the effective date’’ of the disclosure report regarding the conflict human rights group appeared to final rule be exempted.373 In this regard, minerals in that product for the 2018 acknowledge that stockpiled conflict one commentator suggested that the calendar year. However, the reporting final rule exclude ‘‘inventory produced period of the independent third party 362 See, e.g., letters from AAEI; AngloGold; before the date on which Dodd-Frank manufacturer of the component product, ArcelorMittal; Arkema; Cleary Gottlieb; CTIA; Davis 1502 will first apply to the issuer.’’ 374 if it is a reporting issuer, is not Polk; Earthworks; Enough Project I; Enough Project Another commentator ‘‘proposed that IV; Global Tungsten I; Global Tungsten & Powders the effective date of disclosure determined by when the manufacturing Corp. (Oct. 13, 2011) (‘‘Global Tungsten II’’); requirement on metal should be for of the subsequent product containing its Howland; Industry Group Coalition I; ICAR et al. II; IPC I; IPMI I; ITIC I; ITRI I; ITRI Ltd. (Oct. 19, 2011) ingot produced [one] year after the component product is completed. (‘‘ITRI III’’); ITRI Ltd. (Oct. 31, 2011) (‘‘ITRI IV’’); effective date’’ of the final rule.375 Instead, the reporting period for that Japanese Trade Associations; Jean Goldschmidt A few commentators urged that the component product manufacturing International SA (Feb. 14, 2011) (‘‘JGI’’); JVC et al. final rule exempt any conflict minerals issuer is determined by when it II; Jewelers Vigilance Committee, American Gem outside the Covered Countries by July completes the manufacturing of the Society, Manufacturing Jewelers & Suppliers of America, Jewelers of America, and Fashion Jewelry 15, 2010.376 One commentator suggested component product. Therefore, an & Accessories Trade Association (Nov. 1, 2011) issuer that completes the manufacture of (‘‘JVC et al. III’’); Kemet; Kuala Lumpur Tin Market 367 See id. at Section 0172 lines 19–23 (stating a component product on December 30, (Jan. 17, 2011) (‘‘Kuala Tin’’); LBMA I; Metal that ‘‘there’s a truth to the fact that if something is 2018, must provide a specialized Solutions Corporation (Dec. 28, 2010) (‘‘Solutions’’); stockpiled out of the region, and it’s being held MSG III; NAM I; NEI; NMA II; NMA III; Pact II; PCP; somewhere else, does it really get at what the intent disclosure report regarding the conflict Responsible Jewellery Council (Feb. 25, 2011) (‘‘RJC of the law is’’). minerals in that completed component I’’); RMA; SEMI; Signet Jewelers Ltd. (Nov. 1, 2011) 368 See id. at Section 0118 lines 8–15. See also product for the 2018 calendar year. (‘‘Signet’’); Somima; TIAA–CREF; SIF I; and WGC letter from ITRI III. II. 369 See, e.g., letters from AAEI, Davis Polk, ITIC

5. Conflict Minerals Already in the 363 Letter from ITRI I. I, Kemet, MSG III, RJC I, RMA, and WGC II. sroberts on DSK5SPTVN1PROD with RULES Supply Chain 364 Letter from Enough Project I. 370 See letter from ITRI I. 365 See letter from Claigan Environmental Inc. a. Proposed Rules (Oct. 28, 2011) (‘‘Claigan I’’). 371 See letters from ITRI I, LBMA I, and Signet. 372 See letter from ITRI I. 366 See Transcript of SEC Roundtable on Conflict The proposed rules did not discuss 373 See letter from LBMA I. Minerals, Sections 0171–0174 (Oct. 18, 2011), specifically how an issuer would handle available athttp://www.sec.gov/spotlight/ 374 See letter from ArcelorMittal. any conflict minerals already in the conflictminerals/ 375 See letter from ITRI III. supply chain at the time our final rule conflictmineralsroundtable101811-transcript.txt. 376 See letters from Earthworks and SIF I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56307 that conflict minerals should be exempt minerals are smelted, refined, or outside minerals will no longer benefit or if, by January 1, 2013, those minerals are of the Covered Countries, it appears finance armed groups. We note, included in components or products unlikely that they could further finance however, that market participants may already incorporated in finished goods or benefit armed groups. Therefore, need additional time to move their in a supplier’s inventory or are included applying the final rule to these already- stockpiles outside the Covered in parts or components included in the stockpiled minerals would not further Countries or have those stockpiles repair or maintenance of products.377 the purpose of the Conflict Minerals smelted or refined. Therefore, to One commentator recommended that Statutory Provision because those accommodate this timing constraint, the the final rule should exempt gold in the minerals would not contribute to further final rule provides transition relief to issuer’s possession by, or extracted conflict. Similarly, requiring issuers to permit market participants sometime before, the effective date of the final determine the origin and chain of after the final rule becomes effective to rule.378 Another commentator asserted custody of these minerals that may have move, smelt, or refine any existing that the final rule should exempt any been extracted prior to the passage of stocks of conflict minerals without conflict mineral that an issuer took the Conflict Minerals Statutory having to comply with the rule’s possession of before the first full fiscal Provision, could result in undue costs if requirements. year following the adoption of the final the minerals could not be sold, as rule.379 This commentator suggested suggested by one commentator.382 6. Timing of Implementation also that the final rule should not We considered exempting stockpiled a. Proposed Rules require reporting on conflict minerals in conflict minerals that were extracted The Conflict Minerals Statutory an issuer’s supply chain that have been before a date certain, as one Provision states that issuers must manufactured prior to the beginning of commentator recommended.383 We disclose their conflict minerals the issuer’s first reporting year. One decided not to do so, however, because, information annually beginning with commentator asserted that the final rule as another commentator noted, the date the issuer’s first full fiscal year that should exclude, as of the date of the of extraction is not generally recorded or begins after the date of promulgation of effectiveness of the final rule, ‘‘gold bars known for minerals from artisanal our final rule.388 Therefore, the in storage at the central banks,’’ ‘‘bars miners.384 Further, if the final rule marked with the London Bullion proposed rules would have included exempts conflict minerals extracted at a Marketers Association (LBMA) stamp,’’ neither a transition period for issuers date certain, the rule would not and ‘‘gold coins issued by governments unable to determine that their conflict necessarily account for payments or other entities.’’ 380 One commentator minerals did not originate in the illegally demanded by armed groups of recommended that the final rule include Covered Countries or unable to those that transport conflict minerals a 24-month ‘‘grace period’’ that would determine that their conflict minerals through remote areas of the DRC. permit the ‘‘sale of existing stockpiles of that originated in the Covered Countries Instead, we believe that the proper point minerals that have already been mined did not directly or indirectly finance or to use for ensuring that a conflict and have been sitting in warehouses’’ in benefit armed groups, nor a general mineral is truly stockpiled is the the DRC.381 delay of the rules. We requested smelting or primary refining date comment, however, regarding whether c. Final Rule because the dates of these actions are we should provide a transition period or more likely to be reliably recorded.385 After considering the comments, the a delay. Similarly, as is true with smelted or final rule excludes any conflict minerals refined conflict minerals, conflict b. Comments on the Proposed Rules that are ‘‘outside the supply chain’’ minerals stockpiled outside the Covered prior to January 31, 2013. The final rule In response to our request for Countries would not contribute to comment, a number of commentators considers conflict minerals to be conflict in the Covered Countries.386 ‘‘outside the supply chain’’ only in the stated that the final rule should not Therefore, the final rule exempts any permit any general delay or specific following instances: After any conflict minerals outside the Covered columbite-tantalite, cassiterite, and phase-in period for issuers to provide Countries as well. their conflict minerals information.389 A wolframite minerals have been smelted; We recognize that there may be after gold has been fully refined; or after number of other commentators, situations in which conflict minerals are any conflict mineral, or its derivatives, however, indicated that the final rule past the point in the supply chain where that have not been smelted or fully should allow for some type of delay or they are able to be used to finance or refined are located outside of the benefit armed groups, but these 388 Exchange Act Section 13(p)(1)(A). Covered Countries. minerals have yet to be stored outside 389 See, e.g., letters from Catholic Charities; We are aware that these existing the Covered Countries,387 smelted, or Earthworks; Global Witness I; Good Shepherd; stockpiles could have financed or refined. Even so, we believe that ICAR et al. II; Larry Cox of Amnesty International, benefited armed groups in the Covered smelting, refining, or being outside the Lisa Shannon of A Thousand Sisters, John Countries. However, once those Covered Countries marks the first Bradshaw of Enough Project, Karen Stauss of Free the Slaves, Corinna Gilfillan of Global Witness, opportunity in the supply chain that Arvind Ganesan of Human Rights Watch, Tzivia 377 See letter from NAM I. 378 See letter from AngloGold. offers reliable proof that the conflict Schwartz Getzug of Jewish World Watch, Morton Halperin of Open Society Policy Center, Rabbi 379 See letter from SEMI. 382 See letter from Claigan I. David Saperstein of Religious Action Center of 380 See letter from NMA III. 383 See letter from ITIC I. Reform Judaism, Kent Hill of World Vision (Mar. 1, 381 See letter from Charles F. Blakeman (Mar. 15, 2011) (‘‘Amnesty et al.’’); Rep. Berman et al.; Sen. 384 See letter from ITRI I. 2012) (‘‘Blakeman III’’) (arguing overall that no final Boxer et al. I; Senators Barbara Boxer, Frank R. sroberts on DSK5SPTVN1PROD with RULES 385 Id. rule should be adopted, but seeking a 24-month Lautenberg, Barbara A. Mikulski, Sheldon 386 See Transcript of SEC Roundtable on Conflict grace period for the sale of existing stockpiles of Whitehouse and Ron Wyden (Feb. 16, 2012) (‘‘Sen. conflict minerals, in the alternative, should the Minerals, at Section 0172 lines 19–23. Boxer et al. II’’); Sen. Durbin/Rep. McDermott; Delly Commission adopt a final rule). See also letter from 387 For example, a stockpile of conflict minerals Mawazo Sesete (Dec. 19, 2011) (‘‘Sesete’’); State II; Charles Blakeman (Nov. 17, 2011) (‘‘Blakeman II’’) could be stored in a warehouse in a DRC country Synergie des Femmes Pour les Victimes des (recommending a grace period for conflict minerals that is insulated from and is beyond the reach of Violences Sexuelles (Mar. 7, 2011) (‘‘Synergie’’); already, but not specifying a length of time for the any armed group, so these conflict minerals would World Vision US (Jul. 8, 2011) (‘‘World Vision I’’); grace period). not contribute to conflict. and World Vision II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56308 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations phase-in period.390 Some of the instituted.’’ 396 In this regard, one investors, members of Congress, and commentators specified that there commentator indicated that the ‘‘private individuals, agreed that all conflict should be a phase-in for only certain sector is moving forward on this issue,’’ minerals should be treated equally, as categories of issuers, such as foreign and that one company ‘‘aims to have proposed.403 Some commentators private issuers, accelerated filers, and built the first verifiably conflict free asserted that gold should be treated smaller reporting companies.391 Other microprocessor’’ by 2013.397 Another differently than the other three conflict commentators recommended that the commentator suggested that the final minerals because of its unique qualities, final rule should include a phase-in rule ‘‘set clear and specific dates for and the OECD had not approved the period but did not provide any details when company reporting will take supplement to its due diligence for implementing such a mechanism.392 effect,’’ because ‘‘using benchmarks or guidance specifically for gold,404 which Some commentators asserted that the trigger points will prolong the at the time of the Proposing Release was effectiveness of the final rule should be uncertainty that is causing so much scheduled to be published by the end of delayed for all issuers until either the trouble and suffering.’’ 398 Comptroller General has established 2011. Subsequent commentators noted A number of commentators auditing standards and/or the State that the OECD’s gold supplement would recommended and described specific Department has developed its conflict not be finalized until sometime in phase-in periods that focused on issuers minerals map and its strategy to address 2012,405 and some commentators unable to determine the origins of their linkages between human rights abuses conflict minerals.399 Although each of suggested that the final rule’s and conflict minerals.393 Other these approaches varied to some degree, application to gold be delayed until the commentators stated that the final rule’s they all provided that, for a certain OECD has adopted its gold effectiveness for all issuers should be number of years after adoption of the supplement.406 At present, the final delayed for two to five years after final rule, an issuer unable to determine gold supplement has been approved by promulgation for issuers to set up its conflict minerals’ origins must the OECD.407 One of the commentators traceability systems in the Covered disclose this fact, but would not be suggested that the final rule be delayed Countries and clear mineral stockpiles required to describe the products for gold until the beginning of an from the supply chain.394 One containing these conflict minerals as not issuer’s first full fiscal year following commentator stated that we should ‘‘DRC conflict free.’’ Some of these adoption and issuance of the OECD’s establish a general reporting delay for commentators recommended that we gold supplement.408 Another one of the one year following promulgation of the require an issuer, during a phase-in commentators argued that any ‘‘effort to final rule to allow issuers the period, to describe its conflict minerals establish credible and effective due opportunity to eliminate conflict policy, its reasonable country of origin diligence systems in the absence of minerals from their products and, inquiry, the conflict minerals in its OECD guidance will be stymied by the during this time, issuers would not be supply chains, and/or certain other lack of a widely accepted base for required to provide conflict minerals information.400 A few commentators responsible sourcing.’’409 One information.395 Another commentator indicated that we should phase-in the commentator, however, asserted that the recommended a one-year general phase- final rule for particular issuers based on final rule should not be delayed for gold in of the final rule ‘‘so that a thorough the issuer’s position in supply chain, so regardless of whether the OECD’s gold and reliable traceability process can be that an issuer closer in position to the supplement has been completed.410 mine or smelter would have to disclose This commentator argued that, even if 390 See, e.g., letters from AAEI; AAFA; AdvaMed more information regarding its conflict the OECD’s gold supplement has not I; AngloGold; Arkema; Barrick Gold; BEST II; Boeing Company (Oct. 18, 2011) (‘‘Boeing’’); Bureau minerals.401 One commentator been completed when an issuer’s d’Etudes Scientifiques et Techiques (Mar. 10, 2011) recommended that the final rule permit reporting period begins, the issuer (‘‘BEST I’’); Chamber I; Corporate Secretaries I; a three-year phase-in period in which CTIA; Davis Polk; Fédération des Enterprises du all issuers would be required only to 403 See, e.g., letters from Bario-Neal, Brilliant Congo (Feb. 25, 2011) (‘‘FEC I’’); Howland; Industry Group Coalition I; IPC I; ITIC I; ITRI I; ITRI II; ITRI receive certifications from their first-tier Earth, Calvert, Catholic Charities, CRS I, IV; JGI; JVC et al. II; JVC et al. III; Medtronic, Inc. suppliers during the first year after Earthworks, Enough Project I, Metalsmiths, Good (Mar. 2, 2011) (‘‘Medtronic’’); Malaysia Smelting promulgation, identify the smelters used Shepherd, Hacker Jewelers, Hoover & Strong, Corporation (Oct. 25, 2011) (‘‘MSC II’’); NAM I; Howland, IPC I, ITRI I, NAM I, Niotan I, Peace, Rep. to process their conflict minerals in the Berman et al., Sen. Durbin/Rep. McDermott, SIF I, National Association of Manufacturers (Jul. 26, 2011) (‘‘NAM II’’); NEI; NRF I; Pact I; PCP; Plexus second year, and fully implement the State II, TakeBack, and TIAA–CREF. (Feb. 25, 2011) (‘‘Plexus’’); Representative Mark S. rules in the third year.402 404 See, e.g., letters from AngloGold, IPMI I, JVC Critz (Feb. 29, 2012) (‘‘Rep. Critz’’); RILA; RMA; Many commentators, including et al. II, LBMA II, NMA II, Tiffany, TriQuint I, and Roundtable; Solutions; Somima; Taiwan Semi; industry associations, corporations, WGC II. TechAmerica, Professional Services Council, 405 See letters from Government of Canada, National Defense Industrial Association, American human rights groups, institutional Foreign Affairs and International Trade (Dec. 23, Council of Engineering Companies, Aerospace 2011) (‘‘Canada’’); JVC et al. III; Signet; World Gold 396 See also letter from Somima. Industries Association, and U.S. Chamber of Council, London Bullion Market Association, and Commerce (Nov. 28, 2011) (‘‘CODSIA’’); TIC; 397 See letter from Senator Jeff Merkley and Responsible Jewellery Council (Oct. 28, 2011) TriQuint I; TriQuint Semiconductor Manufacturing Representatives Peter DeFazio, Earl Blumenauer, (‘‘WGC et al. I’’); and World Gold Council, London Company, Ltd. (Mar. 2. 2011) (‘‘TriQuint II’’); and Kurt Schrader, and Suzanne Bonamici (May 17, Bullion Market Association, and Responsible WGC II. 2012) (‘‘Sen. Merkley et al.’’). See also letter from Jewellery Council (Dec. 9, 2011) (‘‘WGC et al. II’’). 391 See letters from AngloGold, Howland, and Enough Project (Aug. 10, 2011) (‘‘Enough Project 406 See, e.g., letters from Boeing, JVC et al. III, Taiwan Semi. III’’) (providing a link to an article that ‘‘details Signet, World Gold Council (Jun. 20, 2011) (‘‘WGC 392 See, e.g., letters from AAEI, AAFA, Arkema, current efforts on the ground in response to Section III’’), WGC et al. I, and WGC et al. II. BEST I, Chamber I, Davis Polk, FEC I, ITRI I, JGI, 1502’’). 407 See OECD, Due Diligence Guidance for sroberts on DSK5SPTVN1PROD with RULES 398 See letter from BEST II. Medtronic, Solutions, MSC I, NEI, Pact I, Rep. Critz, Responsible Supply Chains of Minerals from and RMA. 399 See, e.g., letters from AdvaMed I, CTIA, Conflict-Affected and High-Risk Areas: Supplement 393 See letters from Barrick Gold, Corporate Industry Group Coalition I, IPC I, ITIC I, JVC et al. on Gold (2012), available at http://www.oecd.org/ Secretaries I, NRF I, Roundtable, and WGC II. II, and NAM I. corporate/guidelinesformultinationalenterprises/ 394 See, e.g., letters from AdvaMed I, Arkema, 400 See letters from AdvaMed I, Industry Group FINAL%20Supplement%20on%20Gold.pdf. BEST II, FEC I, IPC I, ITRI I, ITRI II, ITRI IV, JVC Coalition I, and NAM I. 408 See letter from WGC et al. II. et al. II, NAM I, Plexus, and TriQuint II. 401 See letters from NRF I and Teggeman. 409 See letter from JVC et al. III. 395 See letter from PCP. 402 See letter from TriQuint II. 410 See letter from ICAR et al. II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56309 would still be able to apply the OECD’s legislation was first considered in 2008, years, including issuers’ 2013 and 2014 core due diligence framework to gold. the Conflict Minerals Statutory reporting periods, but will not be The commentators that advocated Provision was over a year old at the time permitted for the reporting period treating gold differently from the other of the letter, and many issuers have beginning January 1, 2015. For smaller conflict minerals comprise mostly gold, been working with various groups in reporting companies, this period will mining, and jewelry companies or developing supply chain tracing for last four years, including issuers’ 2013 associations. Of these commentators, years.416 Therefore, under the final rule, through 2016 reporting periods, but will only one indicated that the final rule most issuers with necessary conflict not be permitted for the reporting period should initially be more stringent with minerals will be required to file a beginning January 1, 2017. We note that, issuers using gold because 80% of the specialized disclosure report on or although some commentators funds generated by conflict minerals for before May 31, 2014 containing conflict recommended that there be no such armed groups come from gold.411 The minerals disclosure for the initial transition period and other other commentators indicated that the reporting period that will extend from commentators recommended that such a final rule should be more lenient for January 1, 2013 to December 31, 2013. transition period be permitted for either gold and that we should defer full Since Congress adopted the Conflict a shorter or longer amount of time, a incorporation of gold into the final rule Minerals Statutory Provision in July number of commentators appeared to because such a large percentage of gold 2010, we have sought comment on our suggest that a transition period through coming from the DRC is illegally implementation of the provision, 2014 would be appropriate to allow the exported that it will require greater time including our proposal, and have necessary traceability systems in the and effort to make the gold supply chain provided opportunities for Covered Countries to be established.417 transparent than it will for the other commentators to provide their input, Issuers taking advantage of this conflict minerals.412 One commentator both before and after the rules were temporary category are still be required was concerned that, until a more proposed. As noted above, we extended to conduct due diligence and prepare transparent supply chain is developed, the comment period for the rule and file a Conflict Minerals Report, and the final rule would stigmatize gold and proposal and convened an October 2011 are required to disclose in their Conflict thereby harm that mineral’s ability to be roundtable at the request of Mineral Report all steps taken by such used as a hedge and damage the global commentators. We have continued to issuer, if any, since the issuer’s last such financial economy because so many receive comment letters through August report to mitigate the risk that its companies would not be able to 2012, all of which we have considered. necessary conflict minerals benefit determine the origin of their gold.413 Some commentators have provided armed groups, including any steps to Finally, a few commentators stated that responses to other commentators, improve its due diligence. the final rule should permit issuers to particularly on the Economic Analysis. As discussed in greater detail below, exclude certain information from public This robust, public, and interactive the final rule provides a temporary dissemination regarding the storage and debate has allowed us to more fully ‘‘DRC conflict undeterminable’’ category transportation routes of gold for security consider how to develop our final rule. for a two-year period for all issuers and reasons.414 Additionally, as discussed further in the a four-year period for smaller reporting Economic Analysis section, below, we companies. This category is available for c. Final Rule have considered and analyzed the issuers that proceed to step three but are After considering the comments, the numerous comments received regarding unable to determine, after exercising final rule will not provide a general the costs and complexities of the statute their required due diligence,418 whether delay of effectiveness, nor will the and proposed rule, and have taken them proposal be withdrawn and re- into account in the final rule. Overall, 417 See, e.g., letters from AdvaMed I proposed. Although many we believe interested parties have had (recommending an ‘‘unknown determination’’ commentators advocated that the final sufficent opportunity to review the transition period at least through 2014), FEC I rule include an extended general delay (‘‘Disclosure of minerals mined could be mainly proposed rules, as well as the comment conflict free for 2014 and finally the companies of the rule’s effectiveness, we do not letters, and to provide views on the could successfully report to the Securities and believe this approach would proposal, other comment letters, Exchange Commission in 2015.’’), JVC et al. II appropriately implement Congress’s including data to inform our (urging ‘‘the Commission to adopt a calibrated directive in the Conflict Minerals ‘phase-in’ disclosure approach spanning the period consideration of the final rule. from April 15, 2011 (the statutorily-prescribed Statutory Provision. The provision Accordingly, we do not believe that effective date of the Commission’s implementing states when an issuer must begin to withdrawal of the proposed rule and re- rules) through at least early 2014, to afford all report on its conflict minerals. Congress proposal is necessary. affected issuers a minimum two-year transition directed us to promulgate regulations While the final rule does not include period before becoming obligated to furnish an requiring any ‘‘person described’’ to audited CMR’’), Plexus (suggesting that a ‘‘phase in a general delay for the reasons noted, we compliance schedule of at least 2 years is needed disclose annually ‘‘beginning with the acknowledge that there are legitimate in order to provide time for the due diligence person’s first full fiscal year that begins concerns about the feasibility of systems to be set-up, most importantly on the after the date of promulgation of such preparing the required disclosure in the ground in the DRC,’’ but even ‘‘this would be a regulations.’’ 415 Additionally, it is not significant challenge’’), Verizon (recommending near term because of the stage of ‘‘delaying the full applicability of the due diligence clear that a general delay of the final development of the supply chain tracing requirements of the Conflict Minerals Report until rule is necessary or appropriate. As mechanisms. In order to address these after fiscal 2014, to allow the DRC Zone countries noted by two of the co-sponsors of the concerns, rather than providing an to develop the traceability protocols and related statutory provision, conflict minerals infrastructure required in order to supply Conflict extended general delay of effectiveness, Free Smelters’’), and WilmerHale (‘‘After fiscal year sroberts on DSK5SPTVN1PROD with RULES the final rule includes a targeted and 2014, when sufficient infrastructure is expected to 411 See letter from TriQuint I. temporary provision intended to help have been developed to permit companies to 412 See letters from AngloGold, IPMI I, JVC et al. issuers address some of the burdens and determine the source of all their conflict minerals, II, NMA II, and WGC II. the ‘indeterminate source’ category would no longer 413 See letter from WGC II. costs of compliance with the final rule. be available.’’). 414 See letters from NMA II, NAM III, and WGC For all issuers, this period will last two 418 As discussed in greater detail below, issuers II. are required to exercise due diligence on the source 415 See Exchange Act Section 13(p)(1)(A). 416 See letter from Sen. Durbin/Rep. McDermott. Continued VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56310 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations their conflict minerals originated in the Internet Web site.421 To determine determine, based on whatever means Covered Countries or whether their whether their conflict minerals they believe appropriate, that their conflict minerals that originated in the originated in the Covered Countries, so conflict minerals did not originate in the Covered Countries directly or indirectly as to determine whether they must Covered Countries, provided they finance or benefit armed groups in the exercise due diligence on the source and disclose this fact.424 Many other Covered Countries. chain of custody of those minerals and commentators on this subject agreed The final rule permits any such issuer provide a Conflict Minerals Report, the that the proposed rules’ reasonable for purposes of the conflict minerals final rule requires issuers with country of origin inquiry approach is disclosure to describe its products with necessary conflict minerals to conduct a appropriate.425 Some of these such conflict minerals as ‘‘DRC conflict reasonable country of origin inquiry. commentators disagreed, however, on undeterminable,’’ unless those products the meaning and application of the also include other conflict minerals that 1. Reasonable Country of Origin Inquiry standard. Some such commentators directly or indirectly financed or a. Proposed Rules asserted that a reasonable country of benefited armed groups in the Covered We proposed that an issuer would be origin standard should be equivalent to Countries. Further, although issuers required to disclose whether it has the due diligence standard required for with ‘‘DRC conflict undeterminable’’ necessary conflict minerals that the Conflict Minerals Report.426 Others products are required to provide a suggested that the reasonable country of originated in the Covered Countries Conflict Minerals Report that describes, origin standard should conform, at least based on its ‘‘reasonable country of among other matters, the measures in part, to international standards,427 origin inquiry.’’ Our proposed rules did taken by the issuer to exercise due such as the ‘‘preliminary review’’ in the not specify, however, what constituted diligence on the source and chain of OECD guidance.428 a reasonable country of origin inquiry. custody of the conflict minerals, during Many commentators agreed that the Rather than describing what a the temporary period they will not have final rule should not define the reasonable country of origin inquiry to provide an independent private reasonable country of origin standard, or would entail, we indicated that such a sector audit of that report. We believe should provide only general guidance determination would depend on each that not requiring an independent regarding the standard, so that the rules issuer’s particular facts and private sector audit of the Conflict would allow for greater flexibility to Minerals Report during the temporary circumstances. In this regard, we noted evolve as processes improved.429 Some period is appropriate because an audit that the reasonable country of origin of these commentators provided of the design of an issuer’s due diligence inquiry requirement was not meant to examples of the general guidance that that results in an undeterminable suggest that issuers would have to conclusion would not appear to have a determine with absolute certainty 424 See letter from Roundtable (stating that the meaningful incremental benefit. whether their conflict minerals ‘‘Conflict Minerals Statutory Provision requires originated in the Covered Countries as issuers to disclose ‘whether’ their conflict minerals D. Step Two—Determining Whether we have often stated that a originated in the Covered Countries, and, in the Conflict Minerals Originated in the reasonableness standard is not the same case of a positive determination, to provide a Conflict Minerals Report,’’ and it ‘‘does not impose Democratic Republic of the Congo or as an absolute standard.422 any obligation on an issuer who determines that the Adjoining Countries and the Resulting conflict minerals did not originate in the Covered Disclosure b. Comments on the Proposed Rules Countries to make any disclosure beyond that fact, One commentator indicated that the nor does it specify how the issuer is to determine Once an issuer determines that that the conflict minerals did not originate in the conflict minerals are necessary to the final rule should not include a Covered Countries’’). functionality or production of a product reasonable country of origin inquiry for 425 See, e.g., letters from AAFA, AngloGold, manufactured or contracted to be determining whether an issuer’s conflict ArcelorMittal, Barrick Gold, Boeing, Chamber I, manufactured by the issuer, the Conflict minerals originated in the Covered Cleary Gottlieb, CRS I, Enough Project I, Evangelical Countries.423 This commentator Alliance, Evangelicals, Global Witness I, Howland, Minerals Statutory Provision requires ICGLR, Industry Group Coalition I, IPC I, IPMI I, the issuer to determine whether those objected to the use of a reasonable ITIC I, JVC et al. II, LBMA I, Metalsmiths, Methodist conflict minerals originated in the country of origin inquiry because it Board, MSG I, NAM I, NEI, NMA II, NYCBar I, Covered Countries.419 If so, the issuer believed that the origin of a product NYCBar II, RILA–CERC, SEMI, Semiconductor, SIF should be determined based on where I, SIF II, PCP, Presbyterian Church II, Sen. Durbin/ must submit a Conflict Minerals Report Rep. McDermott, State II, TIAA–CREF, TIC, concerning those conflict minerals that the product is produced rather than TriQuint I, and WGC II. originated in the Covered Countries,420 where the minerals in the product were 426 See letters from Metalsmiths and Sen. Durbin/ and make that report available on its mined. Another commentator Rep. McDermott. recommended that the final rule not 427 See letters from CRS I and IPMI I. 428 See letter from IPMI I (stating that ‘‘the OECD and chain of custody of their conflict minerals and require issuers to make any reasonable advocates an initial determination of origin potentially provide a Conflict Minerals Report if, country of origin inquiry at all if they inquiry’’). See also OECD, OECD Due Diligence following their reasonable country of origin inquiry, they know they have conflict minerals from the Guidance for Responsible Supply Chains of 421 See Exchange Act Section 13(p)(1)(D). Covered Countries and not from recycled or scrap Minerals from Conflict-Affected and High-Risk 422 Cf. Foreign Corrupt Practices Act (the Areas, 33 (2011), available at http://www.oecd.org/ sources, or they have reason to believe that their conflict minerals may have originated in the ‘‘FCPA’’), 15 U.S.C. 78m(b)(7) and Exchange Act daf/internationalinvestment/ Covered Countries and may not have come from Section 13(b)(7), which states that ‘‘the terms guidelinesformultinationalenterprises/ recycled or scrap sources. Only after these issuers ‘reasonable assurances’ and ‘reasonable detail’ 46740847.pdf. (‘‘This Guidance applies to actors have exercised their required due diligence may mean such level of detail and degree of assurance operating in a conflict-affected and high-risk area, they use the ‘‘DRC conflict undeterminable’’ as would satisfy prudent officials in the conduct of or potentially supplying or using tin (cassiterite), alternative if they are still unable to determine that their own affairs.’’ The release further cites to the tantalum (tantalite) or tungsten (wolframite), or sroberts on DSK5SPTVN1PROD with RULES their conflict minerals originated in the Covered conference committee report on amendments to the their smelted derivates, from a conflict-affected and Countries or, if they determine that their minerals FCPA, Cong. Rec. H2116 (daily ed. Apr. 20, 1988), high-risk area. Companies should preliminarily did originate in the Covered Countries, but they are which states the reasonableness ‘‘standard ‘does not review their mineral or metal sourcing practices to unable to determine that their conflict minerals connote an unrealistic degree of exactitude or determine if the Guidance applies to them.’’). directly or indirectly financed or benefited armed precision,’ ’’ but instead ‘‘ ‘contemplates the 429 See, e.g., letters from AAFA, AngloGold, groups in the Covered Countries. weighing of a number of relevant factors, including ArcelorMittal, Industry Group Coalition I, IPC I, 419 See Exchange Act Section 13(p)(1)(A). the cost of compliance.’ ’’ IPMI I, ITIC I, JVC et al. II, NAM I, RILA–CERC, 420 See id. 423 See letter from Teggeman. Semiconductor, SIF I, TriQuint I, and WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56311 the final rule could include while still A large number of commentators steps up the supply chain,’’ but that allowing flexibility.430 For example, suggested that, as part of a reasonable these representations should be made some commentators suggested that we country of origin standard, the final rule public.443 indicate that the reasonable country of should permit an issuer to rely on Commentators were almost evenly origin inquiry could differ among reasonable representations from split about whether the final rule should issuers based on their size, products, suppliers and/or smelters.438 Other allow an issuer to use qualifying or and relationships with suppliers.431 In commentators recommended, however, that written representations could explanatory language in concluding addition, one commentator whether its conflict minerals originated recommended that the final rule should provide only some evidence in making a reasonable country of origin inquiry in the Covered Countries.444 Some of clarify that a ‘‘reasonable person’’ but should not, by themselves, satisfy the commentators that believed the final standard applies to the reasonable the reasonable country of origin inquiry rule should permit some qualification or country of origin standard.432 As a standard.439 Some of these explanation, however, qualified their further example, some commentators commentators provided examples of recommendations.445 sought flexibility for the reasonable country of origin standard that permits other evidence an issuer could use in c. Final Rule some combination of reasonable addition to written representations in supplier declarations, contractual satisfying a reasonable country of origin After considering the comments, we obligations, risk-based follow-up, and/or standard, including contractually are adopting the final rule regarding the smelter validations.433 One obligating suppliers to source only from reasonable country of origin inquiry commentator asserted that an issuer’s conflict-free smelters, conducting spot substantially as proposed, but with reasonable country of origin inquiry checks of suppliers and smelters to some modification. The final rule does should be conducted under a reasonable verify they are obtaining conflict not specify what steps and outcomes are care standard that requires ‘‘more than minerals from only conflict-free sources, necessary to satisfy the reasonable disclosing publicly the smelters used country of origin inquiry requirement a passive acceptance by the filer of and the processes undertaken to ensure information provided by their because, as stated in the Proposing that only conflict-free minerals are used, suppliers,’’ which does not ‘‘mandate Release, such a determination depends and/or determining that there is no that an issuer always reach the legally on each issuer’s particular facts and contrary evidence or ‘‘red flags’’ that correct conclusion, but does require circumstances. A reasonable country of would cast doubt on the minerals’ sufficient investigation by an issuer to origins.440 Some commentators origin inquiry can differ among issuers support reasonable cause to believe in suggested that an issuer should be able based on the issuer’s size, products, the conclusion.’’ 434 to rely on representations from smelters relationships with suppliers, or other Some commentators asserted that the only if the smelter was designated factors.446 Further, as we stated in the final rule should define or provide ‘‘compliant’’ by nationally or Proposing Release, we continue to specific guidance on what constitutes a internationally recognized standards.441 believe that the steps necessary to ‘‘reasonable country of origin inquiry,’’ A few commentators, however, asserted constitute a reasonable country of origin although many of these commentators that smelters and refiners are unable to inquiry depend on the available did not provide suggested definitions or verify the country of origin of the infrastructure at a given time. As guidance.435 A few commentators minerals they process at the present commentators noted, such an approach argued, however, that any definition or time.442 One commentator argued that guidance in the final rule should make an issuer should be able to rely on 443 See letter from Hileman Consulting. clear that a reasonable country of origin reasonable representations ‘‘one or two 444 Some commentators asserted that such standard should not be an absolute language should be permitted. See letters from AngloGold, Cleary Gottlieb, Howland, NAM I, NMA standard.436 One commentator 438 See, e.g., letters from AngloGold, Arkema, II, and WGC II. Others took the opposite view. See suggested that the reasonable country of Cleary Gottlieb, Global Tungsten I, Global Tungsten II, Howland, ICGLR, IPC I, IPC II, NAM I, NEI, NMA letters from CRS I, Earthworks, Global Witness I, origin inquiry standard should require II, PCP, RILA, Roundtable, SEMI, Taiwan Semi, NEI, and State II. an issuer to take ‘‘sufficient steps to TIAA–CREF, TIC, TriQuint I, US Telecom, and 445 See letters from Howland (stating that an accurately determine and disclose WGC II. issuer should be able to use qualifying language 439 See, e.g., letters from CTIA, Enough Project I, only if it knows that 80% or more of its conflict whether its conflict minerals originate minerals did not originate from the Covered Global Witness I, Howland, IPMI I, ITIC I, MSG I, from the DRC,’’ and the commentator, NYCBar II, Sen. Durbin/Rep. McDermott, SIF I, and Countries), MSG I (stating that qualifying language therefore, recommended that an issuer TIC. is not relevant as long as an issuer discloses the should disclose the steps it undertook to 440 See, e.g., letters from Enough Project I, Global manner in which it determined its reasonable Witness I, IPMI I, and MSG I. country of origin inquiry), NAM I (stating that complete its inquiry.437 441 See letters from Howland, Enough Project I, qualifying language should be permitted only when ITIC I, MJB Consulting (May 30, 2011) (‘‘MJB III’’), there is appropriate information to support the 430 See, e.g., letters from Industry Group Coalition MSG III, NYCBar II, SIF I, and TIC. conclusion), NMA II (same), and TriQuint I (stating I, IPC I, ITIC I, NAM I, RILA–CERC, and SIF I. 442 See letters from Nordic Sun Worldwide Ltd. that the final rule should allow qualifying language 431 See letters from IPC I and ITIC I. (Mar. 17, 2012) (‘‘Nordic Sun’’) (stating that, before when an issuer concludes that its conflict minerals 432 See letter from RILA–CERC. smelter verification schemes can be relied upon, ‘‘a are not ‘‘DRC conflict free,’’ but should not allow 433 See, e.g., letters from Industry Group Coalition more scientific component must be added,’’ and such a qualification if it states that its conflict that only ‘‘the addition of a low acquisition cost minerals are, in fact, ‘‘DRC conflict free’’). I and NAM I. 446 As we indicated in the Proposing Release, 434 See letter from Enough Project IV. mineral analyzer with a reasonably detailed geologic mineralization fingerprinting capability although a reasonable country of origin inquiry may 435 See, e.g., letters from CRS I, Earthworks, that include GPS location data and certification tag be based on a particular issuer’s size, products, Enough Project I, Evangelical Alliance, data in a tamper-proof format will add the relationships with suppliers, or another factor, an sroberts on DSK5SPTVN1PROD with RULES Evangelicals, Global Witness I, Howland, ICGLR, necessary missing step to all the 3T minerals and issuer may not conclude that, because of the large IPC I, IPMI I, Metalsmiths, Methodist Board, MSG smelter certification systems’’) and Southern Africa (or small) amount of conflict minerals it uses in its I, NYCBar I, NYCBar II, PCP, Presbyterian Church Resource Watch (Apr. 4, 2012) (‘‘SARW’’) (stating products or the large (or small) number of products II, Roundtable, SEMI, Sen. Durbin/Rep. McDermott, that any scheme that ‘‘essentially depends on that include conflict minerals, it is unreasonable for State II, and TIC. assurances from refining and smelting facilities will that issuer to conduct any inquiry into the origin 436 See letters from Chamber I, Cleary Gottlieb, not be helpful’’). But see letter from iTSCi of its conflict minerals. Instead, that issuer must and NAM I. Programme Governance Committee (Apr. 14, 2012) make some inquiry into the origin of its conflict 437 See letter from SIF II. (‘‘iTSCi’’) (refuting the letter from Nordic Sun). minerals. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56312 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations allows the final rule to be flexible and or scrap sources.448 An issuer would The reasonable country of origin evolve with available tracing processes. have reason to believe representations inquiry is consistent with the supplier Even though the final rule does not were true if a processing facility engagement approach in the OECD specify the steps necessary to satisfy the received a ‘‘conflict-free’’ designation by guidance where issuers use a range of reasonable country of origin inquiry a recognized industry group that tools and methods to engage with their requirement, the final rule includes requires an independent private sector suppliers.450 The results of the inquiry general standards governing the inquiry audit of the smelter, or an individual may or may not trigger due diligence. and the steps required as a result of the processing facility, while it may not be This is the first step issuers take under inquiry. First, the final rule provides part of the industry group’s ‘‘conflict- the OECD guidance to determine if the that, to satisfy the reasonable country of free’’ designation process, obtained an further work outlined in the OECD origin inquiry requirement, an issuer’s independent private sector audit that is guidance—due diligence—is necessary. reasonable country of origin inquiry made publicly available. An issuer’s The Conflict Minerals Statutory must be reasonably designed to policies with respect to the sourcing of Provision specifically contemplates due determine whether the issuer’s conflict conflict minerals will generally form a diligence, which goes beyond inquiry minerals did originate in the Covered part of the issuer’s reasonable country of and involves further steps to establish Countries, or did come from recycled or origin inquiry, and therefore would the truth or accuracy of relevant scrap sources, and it must be performed generally be required to be disclosed in information, by requiring a description in good faith. The proposed rules did the issuer’s Form SD. of the measures the issuer took to not discuss the design of an issuer’s Moreover, the issuer is not required to exercise due diligence on the source and reasonable country of origin inquiry or receive representations from all of its chain of custody of the minerals. The an issuer’s performance in carrying out suppliers. The standard focuses on Conflict Minerals Statutory Provision its reasonable country of origin inquiry. reasonable design and good faith specifically notes that due diligence We believe providing these standards in inquiry. Therefore, if an issuer includes the audit discussed below. the rule will facilitate compliance with reasonably designs an inquiry and Second, the final rule establishes a the rule by providing guidance to performs the inquiry in good faith, and different standard from that included in issuers about what is required to satisfy in doing so receives representations the proposal for determining whether the reasonable country of origin inquiry. indicating that its conflict minerals did due diligence on the conflict minerals’ In this regard, we note that one not originate in the Covered Countries, source and chain of custody and a commentator stated that ‘‘[i]t is the issuer may conclude that its conflict Conflict Minerals Report is required essential, in order to make the minerals did not originate in the after the reasonable country of origin implementation of 1502 practical and Covered Countries, even though it does inquiry. The proposed rules would have cost effective, that the concept of not hear from all of its suppliers, as long required an issuer to conduct due reasonableness, and good faith efforts’’ as it does not ignore warning signs or diligence and provide a Conflict be recognized in the final rule.447 other circumstances indicating that the Minerals Report if, based on its remaining amount of its conflict reasonable country of origin inquiry, the Further, we believe the notion of good minerals originated or may have issuer determined that its conflict faith performance is important so that originated in the Covered Countries. For minerals originated in the Covered an issuer will not be able to establish a example, we would agree that, ‘‘if Countries, the issuer was unable to reasonably designed inquiry but reasonable inquiry has been made, and determine that its conflict minerals did subsequently fail to undertake the steps if no evidence of [Covered Country] not originate in the Covered Countries, necessary to carry out the actual origin has arisen, and if the origin of or the issuer determined that its conflict inquiry. only a small amount of gold were still minerals came from recycled or scrap Although we do not prescribe the unknown, a manufacturer should be sources. Under the proposal, issuers steps constituting a reasonable country allowed to declare that its gold is not could only avoid providing a Conflict of origin inquiry, we do view an issuer from the [Covered Countries] and is Minerals Report if they could prove a as satisfying the reasonable country of DRC conflict free.’’ 449 negative—that their conflict minerals origin inquiry standard if it seeks and did not originate in the Covered obtains reasonably reliable 448 As discussed below, this approach is Countries. This approach would representations indicating the facility at consistent with the OECD’s due diligence guidance, arguably be more burdensome than which its conflict minerals were which states that issuers should preliminarily necessary to accomplish the purpose of processed and demonstrating that those review their sourcing practices to determine if their due diligence guidance applies, and provides non- the statutory provision. The reasonable conflict minerals did not originate in the exclusive examples of situations that it states country of origin inquiry standard does Covered Countries or came from should trigger the guidance. See OECD, OECD Due not require an issuer to determine to a recycled or scrap sources. These Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk representations could come either Areas (2011), available at http://www.oecd.org/daf/ Countries did not necessarily discuss this topic in directly from that facility or indirectly internationalinvestment/ relation to conflict minerals from recycled or scrap through the issuer’s immediate guidelinesformultinationalenterprises/ sources. suppliers, but the issuer must have a 46740847.pdf. See also OECD, Due Diligence 450 In June 2012, the OECD issued a report Guidance for Responsible Supply Chains of regarding implementation of the OECD guidance. reason to believe these representations Minerals from Conflict-Affected and High-Risk See OECD, Downstream Implementation of the are true given the facts and Areas: Supplement on Gold (2012), available at OECD Due Diligence Guidance for Responsible circumstances surrounding those http://www.oecd.org/corporate/ Supply Chains of Minerals from Conflict-Affected representations. An issuer must also guidelinesformultinationalenterprises/ and High-Risk Areas, Cycle 2 Interim Progress FINAL%20Supplement%20on%20Gold.pdf. Report on the Supplement on Tin, Tantalum, and take into account any applicable sroberts on DSK5SPTVN1PROD with RULES 449 See letter from IPMI I. Commentators opining Tungsten Final Draft (June 2012), available at warning signs or other circumstances on whether the statutory language requiring due http://www.oecd.org/investment/ indicating that its conflict minerals may diligence and a Conflict Minerals Report applies guidelinesformultinationalenterprises/ have originated in the Covered only to issuers that know that their conflict Downstream%20cycle%202%20report%20- Countries or did not come from recycled minerals originated in the Covered Countries or %20Edited%20Final%20-%201%20June.pdf. This whether that statutory language applies also to additional guidance includes sample letters to issuers that are unable to determine that their suppliers and customers regarding the use of 447 See letter from ITRI IV (emphasis in original). conflict minerals did not originate in the Covered conflict minerals. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56313 certainty that all its conflict minerals Report. If, based on its due diligence, issuer with reason to believe that its did not originate in the Covered the issue cannot determine the source of conflict minerals may have originated in Countries because the standard required its conflict minerals, it is also required the Covered Countries is if an issuer is a reasonable inquiry, and requiring a to submit a Conflict Minerals Report. becomes aware that some of its conflict certainty in this setting would not be This revised approach does not minerals were processed by smelters reasonable and may impose undue require an issuer to prove a negative to that sourced from many countries, costs.451 avoid moving to step three, but it also including the Covered Countries, but Under the final rule, if (i) an issuer does not allow an issuer to ignore or be the issuer is unable to determine determines that, based on its reasonable willfully blind to warning signs or other whether the particular minerals it country of origin inquiry, its necessary circumstances indicating that its received from such a ‘‘mixed smelter’’ conflict minerals did not originate in the conflict minerals may have originated in were from the Covered Countries.456 Covered Countries or did come from the Covered Countries. This approach We appreciate that commentators recycled or scrap sources, or (ii) based appears consistent with the ‘‘reason-to- differ in their views as to when due on its reasonable country of origin believe approach’’ provided by one diligence and, potentially, a Conflict inquiry, the issuer has no reason to commentator.452 Also, as some Minerals Report is required under the believe that its conflict minerals may commentators noted,453 this approach is language of the Conflict Minerals have originated in the Covered consistent with the OECD’s due Statutory Provision. The provision Countries or the issuer reasonably diligence guidance, which states that requires issuers to provide a Conflict believes that its conflict minerals are issuers ‘‘should preliminarily review Minerals Report if their conflict from recycled or scrap sources, the their mineral or metal sourcing practices minerals ‘‘did originate’’ in the Covered issuer is not required to exercise due to determine if the [due diligence] Countries but does not address how to diligence on its conflict minerals’ source Guidance applies to them.’’ 454 In its due determine whether the minerals ‘‘did or chain of custody or file a Conflict diligence guidance, the OECD provides originate’’ in those countries.457 The Minerals Report with respect to such non-exclusive examples of final rule adopts the reasonable country conflict minerals. Instead, the issuer circumstances, or red flags, that it states of origin inquiry as the procedure for only is required, in the body of its should trigger its guidance.455 One making this determination. Some specialized disclosure report, to disclose example of a circumstance that, absent commentators argued that the statutory its determination and briefly describe other information, should provide an language should be read to require that the reasonable country of origin inquiry only an issuer that knows, after it undertook in making its 452 See letter from Tiffany (‘‘A better way to conducting its reasonable country of determination and the results of the address this issue would be to impose the obligation to submit a conflict minerals report on origin inquiry, that its conflict minerals inquiry it performed. only those companies that actually have a reason originated in the Covered Countries Conversely, an issuer must exercise to believe that they use gold (or some other ‘conflict must perform due diligence and provide due diligence on its conflict minerals’ mineral’) that does, in fact, originate in the DRC or surrounding countries (the ‘reason-to-believe a Conflict Minerals Report.458 source and chain of custody and approach’).’’). Alternatively, other commentators provide a Conflict Minerals Report if the 453 See letters from Enough Project I (stating that, argued that the provision should be read issuer knows that it has necessary through its reasonable country of origin inquiry, to require issuers that are unable to conflict minerals that originated in the ‘‘an issuer should identify red flags that would alert determine that their conflict minerals Covered Countries and did not come it to the possibility that the minerals in its products support conflict in the DRC and adjoining did not originate in the Covered from recycled or scrap sources. In countries,’’ and citing to the OECD’s due diligence Countries to perform due diligence and addition, if, based on its reasonable guidance), Global Witness I (stating that an issuer potentially submit a Conflict Minerals country of origin inquiry, the issuer has should ‘‘[r]eview for and consider ‘red flags’ Report.459 We believe the approach that reason to believe that its necessary indicating possible sourcing from Covered conflict minerals may have originated in Countries,’’ and citing to the OECD’s due diligence is most consistent with the statutory the Covered Countries (and may not guidance), and IPMI I (‘‘The OECD’s new language and its purposes, however, is international standard for an initial inquiry is a to require any issuer that, after the have come from recycled or scrap specific point where harmonization will be sources), the issuer must also exercise particularly advantageous, while conforming well reasonable country of origin inquiry, due diligence on the source and chain to the direction of Congress for a reasonable country knows that its minerals originated in the of custody of its conflict minerals. If, of origin inquiry. Like Congress, the OECD Covered Countries and did not come advocates an initial determination of origin inquiry: from recycled or scrap sources to however, as a result of that due ‘Companies should preliminarily review their diligence, such an issuer determines mineral or metal sourcing practices to determine if perform due diligence regarding those that its conflict minerals did not the Guidance applies to them.’’’). 454 See OECD, OECD Due Diligence Guidance for 456 This scenario is consistent with the OECD due originate in the Covered Countries or Responsible Supply Chains of Minerals from diligence framework’s statement that ‘‘tracing that its conflict minerals did come from Conflict-Affected and High-Risk Areas, 33 (2011), minerals in a company’s possession are generally recycled or scrap sources, no Conflict available at http://www.oecd.org/daf/ unfeasible after smelting, with refined metals internationalinvestment/ entering the consumer market as small parts of Minerals Report is required, but the various components in end products.’’ See OECD, guidelinesformultinationalenterprises/ issuer is required, in the body of its 46740847.pdf. OECD Due Diligence Guidance for Responsible specialized disclosure report, to disclose 455 See id. (providing a number of examples, Supply Chains of Minerals from Conflict-Affected its determination and briefly describe its including whether conflict minerals are claimed to and High-Risk Areas, 33 (2011), available at http:// www.oecd.org/daf/internationalinvestment/ due diligence and the results of the due originate from a country that has limited known guidelinesformultinationalenterprises/ diligence. If, based on its due diligence, reserves of the conflict mineral in question) and OECD, Due Diligence Guidance for Responsible 46740847.pdf. the issuer determines that its conflict Supply Chains of Minerals from Conflict-Affected 457 See Exchange Act Section 13(p)(1)(A) (stating sroberts on DSK5SPTVN1PROD with RULES minerals did originate in the Covered and High-Risk Areas: Supplement on Gold (2012), that ‘‘in cases in which such conflict minerals did Countries, and did not come from available at originate in the’’ Covered Countries (emphasis http://www.oecd.org/corporate/ added), the issuer must ‘‘submit to the recycled or scrap sources, the issuer is Commission’’ a Conflict Minerals Report). guidelinesformultinationalenterprises/ required to submit a Conflict Minerals FINAL%20Supplement%20on%20Gold.pdf. The 458 See, e.g., letters from AngloGold, Clearly gold supplement also addresses circumstances Gottlieb, NAM I, and Tiffany. 451 As discussed below, certainty also is not triggering due diligence for gold claimed to have 459 See, e.g., letters from NEI, NYCBar I, and required for the due diligence inquiry. come from recycled or scrap sources. NYCBar II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56314 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations minerals and submit a Conflict Minerals small amount of its overall conflict conclusion in the body of its annual Report. In addition, any issuer that, after minerals did not originate in the report and on its Internet Web site.461 conducting its reasonable country of Covered Countries or come from Also, the proposed rules would have origin inquiry, has reason to believe that recycled or scrap sources. While such required that such an issuer disclose in its minerals may have originated in the an interpretation of the provision is the body of its annual report and on its Covered Countries, and may not have plausible and, in fact, was suggested by Internet Web site the reasonable country come from recycled or scrap sources two of the co-sponsors of the provision of origin inquiry it used in making that must perform due diligence. If, as a as the accurate interpretation of the determination. The proposed rules result of that due diligence, such an Conflict Minerals Statutory would not, however, have required an issuer determines that its conflict Provision,460 we do not believe that issuer that, after its reasonable country minerals did not originate in the approach is necessary to achieve of origin inquiry, determined that its Covered Countries or did come from Congress’s goal. Instead, we believe the conflict minerals did not originate in the recycled or scrap sources, no Conflict reasonable country of origin inquiry Covered Countries to disclose the actual Minerals Report is required (although, standard provides a clearer way for countries from which the conflict as discussed below, such due diligence, issuers to make the necessary minerals originated. The issuer would and the results thereof, must be determination and does so in a manner have been required to provide in the disclosed in the body of such issuer’s that significantly reduces burdens and is body of the annual report the Internet specialized disclosure report, together more cost-effective. Although the address on which the disclosure was with the description of such issuer’s reasonable country of origin inquiry will posted and retain the information on the reasonable country of origin inquiry). impose costs on issuers, we believe the Web site at least until the issuer’s Otherwise, such an issuer must submit costs are lower than those that would be subsequent annual report was filed. a Conflict Minerals Report. We are incurred if issuers were always required Finally, the issuer would have been adopting this approach in the final rule. to perform due diligence. required to maintain reviewable Interpreting the Conflict Minerals Finally, we note that an issuer business records in support of its Statutory Provision to require due conducting an appropriate reasonable negative determination. The issuer, diligence only if an issuer has country of origin inquiry may not be however, would not have been required affirmatively determined that its conflict able to determine to a certainty the to make any other disclosures with minerals originated in the Covered origin of all its conflict minerals or regard to the conflict minerals that did Countries and does not come from whether they came from recycled or not originate in the Covered Countries. recycled or scrap sources would scrap sources. A certainty is not Alternatively, if an issuer determined undermine the goals of the statute. For required to satisfy the reasonable through its reasonable country of origin instance, if we allowed an issuer to stop country of origin inquiry standard. inquiry that any of its conflict minerals its inquiry after learning that its Disclosure indicating that the originated in the Covered Countries, or necessary conflict minerals came from a determination is uncertain is if the issuer was unable to determine smelter that includes minerals from the unnecessary. Consistent with this after a reasonable country of origin Covered Countries and other sources approach, issuers may explicitly state inquiry that its conflict minerals did not without knowing if its particular that, if true, their reasonable country of originate in the Covered Countries, the minerals came from the Covered origin inquiry was reasonably designed proposed rules would have required the Countries, there would be an incentive to determine whether the conflict issuer to disclose this result in the body for issuers to avoid learning the ultimate minerals did originate in the Covered of its annual report and disclose that the source of the minerals. Thus, although Countries or did not come from recycled Conflict Minerals Report was furnished we realize our approach will be more or scrap sources and was performed in as an exhibit to its annual report. costly than only requiring due diligence good faith, and the issuer’s conclusion Additionally, the issuer would have and, potentially, a Conflict Minerals that the conflict minerals did not been required to make available its Report if the issuer has affirmative originate in the Covered Countries or Conflict Minerals Report on its Internet knowledge that its minerals came from came from recycled or scrap sources Web site until its subsequent annual the Covered Countries, in our view, was made at that reasonableness level. report was filed, disclose in the body of requiring further steps by issuers that its annual report that the Conflict

2. Disclosures in the Body of the have reason to believe that they have Minerals Report was posted on its Specialized Disclosure Report necessary conflict minerals that may Internet Web site, and provide the have originated in the Covered a. Proposed Rules Internet address on which the Conflict Countries is necessary to carry out the Under the proposed rules, an issuer Minerals Report was located.462 Under requirements contemplated by the would have been required to make a the proposed rules, such an issuer statute. Moreover, this approach strikes reasonable country of origin inquiry as would have been required to post the a more appropriate balance than to whether its conflict minerals Conflict Minerals Report on its Internet requiring an issuer to prove a negative— originated in the Covered Countries. Web site, but the issuer would not have that their necessary conflict minerals After the reasonable country of origin had to post any of the disclosures it did not originate in the Covered inquiry, if an issuer concluded that its provided in the body of its annual Countries—which would be even more conflict minerals did not originate in the report on its Web site. costly. Covered Countries, the issuer would Alternatively, the Conflict Minerals b. Comments on the Proposed Rules have been required to disclose its Statutory Provision could be interpreted Almost all of those that commented on this point believed that the final rule sroberts on DSK5SPTVN1PROD with RULES to require all issuers to determine 460 See letter from Sen. Durbin/Rep. McDermott whether their conflict minerals (‘‘The proposed rule differentiates between the should require some very brief originated in the Covered Countries country of origin inquiry and the due diligence involved in determining the source and chain of 461 See Exchange Act Section 13(p)(1)(E). The through the exercise of due diligence. custody of conflict minerals, indicating that the issuer would be required to keep this information This inquiry could be quite costly, former could be ‘less exhaustive.’ This is a on its Internet Web site until it filed its subsequent especially in a situation in which an misreading of our intent—we see no difference in annual report. issuer is unable to determine that a very the effort that should be exercised in each case.’’). 462 See Exchange Act Section 13(p)(1)(E). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56315 discussion of the conflict minerals to maintain reviewable business records the proposal required due diligence information in the body of the annual when it determines that its conflict regarding conflict minerals from report.463 Some commentators minerals did not originate in the recycled or scrap sources. An issuer indicated, however, that an issuer Covered Countries.473 These determining that its conflict minerals should not have to provide any commentators disagreed, however, that did not originate in the Covered disclosure in the body of the annual about the length of time that the final Countries or that came from recycled or report,464 and one commentator stated rule should require the records be kept. scrap sources or that has no reason to that an issuer should not have to The suggested durations ranged from believe that its necessary conflict describe the findings of its Conflict one year to a period covering the minerals may have originated in the Minerals Report in the body of the duration of the law.474 In addition, some Covered Countries or may not be from annual report.465 Other commentators commentators recommended that the recycled or scrap sources must disclose remarked that the full text of the final rule clarify the meaning of its determination and results and Conflict Minerals Report could be ‘‘reviewable business records.’’ 475 provide a brief description of the provided as an exhibit to an issuer’s There were a few commentators, inquiry it undertook and the results and annual report.466 In contrast, a few however, that did not believe that the provide a link to its Internet Web site commentators asserted that an issuer final rule should require an issuer to retain reviewable business records at all where the disclosure is publicly should be required to include its full because such a requirement is not in the available. However, in a change from country of origin disclosure and the full Conflict Minerals Statutory Provision, the proposal, the final rule requires such text of its Conflict Minerals Report in an issuer should be permitted to create an issuer to provide a brief description the body of the annual report.467 A number of commentators agreed its own records as it does for the of the results of the inquiry it performed that, as proposed, an issuer with conflict financial and other information in its to demonstrate the basis for concluding minerals that did not originate in the annual reports, and such a rule would that it is not required to submit a Covered Countries should be required to provide an independent books and Conflict Minerals Report. disclose its reasonable country of records requirement that goes beyond As discussed above, we note that inquiry because not requiring such the Conflict Minerals Statutory there may be instances in which an disclosure would undercut the essential Provision.476 issuer determines, based on its purpose of the Conflict Minerals c. Final Rule reasonable country of origin inquiry, Statutory Provision.468 A number of that it has reason to believe it has other commentators, however, After considering the comments, we conflict minerals that may have disagreed,469 and some of these are modifying the proposal regarding originated in the Covered Countries and commentators justified their position by the substantive disclosures in the body may not be from recycled or scrap noting that the Conflict Minerals of the specialized disclosure report, in sources and, therefore, must exercise Statutory Provision does not require part. An issuer that determines that, due diligence on the source and chain such disclosure and asserted that such following its reasonable country of origin inquiry, its conflict minerals did of custody of the conflict minerals. If, at disclosure would not serve any any point during the exercise of that due constructive purpose.470 Also, of the not originate in the Covered Countries or came from recycled or scrap sources diligence, the issuer determines that its many commentators that discussed this conflict minerals did not originate in the topic,471 one asserted that an issuer with or has no reason to believe that its necessary conflict minerals may have Covered Countries or came from no conflict minerals from the Covered recycled or scrap sources, the issuer is Countries should be required to disclose originated in the Covered Countries or may not be from recycled or scrap not required to submit a Conflict the name of the country from which its Minerals Report. The issuer, however, is conflict minerals’ originated so that sources, is required to make certain disclosures in the body of its specialized still required to submit a specialized investors could determine the veracity disclosure report disclosing its of the conclusion.472 disclosure report on Form SD,477 under the ‘‘Conflict Minerals Disclosure’’ determination and briefly describing the Most of the commentators that heading. This requirement is generally reasonable country of origin inquiry and discussed the topic agreed that, as consistent with the proposal, except that the due diligence efforts it exercised and proposed, an issuer should be required the results of the inquiry and due 463 See, e.g., letters from AngloGold, Howland, 473 See, e.g., letters from AngloGold, Columban diligence efforts to demonstrate why the NEI, NY State Bar, SEMI, SIF I, and TriQuint I. Center et al., CRS I, Hileman Consulting, issuer believes that the conflict minerals Earthworks, Global Witness I, Howland, ICGLR, JVC 464 See letters from ITIC I and WGC II. et al. II, Kemet, MSG I, NEI, NMA II, Sen. Durbin/ did not originate in the Covered 465 See letter from NY State Bar. Rep. McDermott, SIF I, State II, TIAA–CREF, TIC, Countries or came from recycled or 466 See letters from Ford, NEI, and WGC II. TriQuint I, and WGC II. scrap sources. 467 See letters from CRS I and Earthworks. 474 Suggested durations included, ‘‘multiple 468 See, e.g., letters from CRS I, Earthworks, years,’’ ‘‘a sufficiently long period of time,’’ ‘‘as long We note the views of some Hileman Consulting, Methodist Pension, MSG I, as their home jurisdictions (of foreign private commentators that requiring issuers to NEI, TIC, Tiffany, and TriQuint I. issuers) require,’’ ‘‘for the duration of the law,’’ one describe their reasonable country of 469 See, e.g., letters from AngloGold, Cleary year, two years, three years, five years, seven years, origin inquiry would impose costs Gottlieb, Howland, NMA II, NY State Bar, SEMI, and 10 years. See, e.g., letters from AngloGold, and WGC II. Columban Center et al., CRS I, Earthworks, Global neither justified nor required by the 470 See letters from Cleary Gottlieb, NY State Bar, Witness I, Hileman Consulting, Howland, ICGLR, provision. Also, we note that the and SEMI. Kemet, MSG I, NEI, NMA II, Sen. Durbin/Rep. Conflict Minerals Statutory Provision 471 See, e.g., letters from AngloGold, Global McDermott, SIF I, State II, TIC, TriQuint I, Trott, requires only that a ‘‘person described’’ sroberts on DSK5SPTVN1PROD with RULES Tungsten I, Howland, IPC I, ITRI I, JVC et al. II, and WGC II. NAM I, NEI, NMA II, RMA, SEMI, State II, TIC, 475 See letters from JVC et al. II and TIC. disclose annually ‘‘whether conflict TriQuint I, and WGC II. 476 See letters from Cleary Gottlieb, NAM I, SEMI, minerals that are necessary * * * did 472 See letter from SIF I. See also letter from State and Tiffany. originate in the Democratic Republic of II (noting that such a requirement would encourage 477 As discussed above, the final rule will require the Congo or an adjoining country and, issuers to establish due diligence procedures across that all disclosure be in the body of the issuer’s their conflict mineral supply chains regardless of specialized disclosure report on new Form SD in cases in which such conflict minerals the minerals’ country of origin). instead of its annual report. did originate in any such country, VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56316 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations submit to the Commission a report.’’ 478 information, stakeholders could proposal, an issuer required to provide Therefore, the Conflict Minerals advocate for different processes for a Conflict Minerals Report, including an Statutory Provision only explicitly individual issuers if they believe it is issuer required to provide a Conflict requires an issuer to provide additional necessary.482 In addition, it is expected Minerals Report because its conflict disclosure if the issuer determines that that reasonable country of origin inquiry minerals came from the recycled or its conflict minerals did originate in the processes will change over time based scrap sources, would have been Covered Countries.479 both on improved supply chain required to disclose in the body of its We believe, however, that requiring visibility and the results of an issuer’s annual report that it furnished a Conflict an issuer to provide a brief description prior year inquiry. Requiring an issuer Minerals Report as an exhibit to its of the reasonable country of origin to provide a brief description of the annual report, that the Conflict Minerals inquiry it undertook is appropriate results of its inquiry, therefore, will Report and certified independent despite the additional costs associated allow stakeholders to track that progress private sector audit report were with providing such a description. As and advocate for different procedures if available on its Internet Web site, and discussed above, the reasonable country they think it is necessary. the Internet address where the Conflict of origin inquiry is not a prescriptive We have decided, however, not to Minerals Report and audit report were standard and does not require certainty. adopt the proposed requirement for an located. Instead, to reduce some costs As a result, there will likely be variation issuer to maintain reviewable business and burdens to issuers, the final rule in the approaches taken by issuers. records supporting its conclusion that only requires an issuer required to Consequently, we believe it is its conflict minerals did not originate in provide a Conflict Minerals Report to appropriate to require disclosure the Covered Countries based on its disclose in its specialized disclosure regarding the reasonable country of reasonable country of origin. The report, under a separate heading entitled origin inquiry so that interested parties Conflict Minerals Statutory Provision ‘‘Conflict Minerals Disclosure,’’ that a can evaluate ‘‘the degree of care’’ the does not require an issuer to maintain Conflict Minerals Report is provided as issuer used in making its negative reviewable business records to support an exhibit to its specialized disclosure determination,480 and it will ‘‘help its determination of the source of its report and to disclose a link to its ensure credibility of issuer conflict minerals. In addition, there Internet Web site where the Conflict disclosure.’’ 481 Also, although the does not appear to be a need for the rule Minerals Report is publicly available. Conflict Minerals Statutory Provision to require that an issuer maintain such The final rule does not require an does not explicitly require an issuer to records. As one commentator noted, issuer to disclose in the body of its provide further disclosure if the issuer issuers ‘‘provide vast amounts of specialized disclosure report the reason determines that its conflict minerals did material information in, for example, that the issuer is providing a Conflict not originate in the Covered Countries, Management’s Discussion and Analysis Minerals Report because that the provision does not provide that such in periodic reports, for which the SEC information will be disclosed by the disclosures cannot be required. does not impose specific record issuer in the Conflict Minerals Report. Therefore, we believe that requiring this retention requirements for maintaining Requiring that information also in the disclosure is permitted as well as the source materials used to generate the body of the specialized disclosure report appropriate. disclosures.’’ 483 Therefore, we believe would be redundant and unnecessary. As described above, the final rule that it is unnecessary for us to require Similarly, the final rule does not require does not prescribe particular steps or an issuer to maintain reviewable an issuer to disclose in its specialized require an issuer to establish to a business records, although maintenance disclosure report that it has provided an certainty that its minerals did not of appropriate records may be useful in audit report or a certification of the originate in the Covered Countries or demonstrating compliance with the audit, if applicable, because the audit come from recycled or scrap sources. final rule, and may be required by any report and certification would be part of Instead, the final rule relies on a nationally or internationally recognized the Conflict Minerals Report already, so reasonable design and good faith due diligence framework applied by an specifically mentioning the audit report execution approach. Requiring an issuer issuer. or certification here is not necessary and to briefly describe the results of the Also, in contrast to the proposal, we may be confusing. inquiry it performed is intended to are not requiring an issuer to disclose in either its specialized disclosure report E. Step Three—Conflict Minerals enable stakeholders to assess the Report’s Content and Supply Chain Due issuer’s reasonable country of origin or its annual report, under a separate heading entitled ‘‘Conflict Minerals Diligence design and its efforts in carrying out that design. Also, this disclosure is intended Disclosure,’’ whether any of its The Conflict Minerals Statutory to allow stakeholders to form their own necessary conflict minerals originated in Provision requires an issuer that views on the reasonableness of the the Covered Countries or did not come determines that its necessary conflict issuer’s efforts. Based on this from recycled or scrap sources or that minerals originated in the Covered the issuer was unable to determine that Countries to submit a Conflict Minerals 478 See Exchange Act Section 13(p)(1)(A). its conflict minerals did not originate in Report.484 The Conflict Minerals Report 479 See, e.g., letter from Cleary Gottlieb. This the Covered Countries or come from must include, among other matters, a commentator argued ‘‘an issuer that concludes it recycled or scrap sources. Under the description of the measures taken by the has necessary conflict minerals that did not issuer to exercise due diligence on the (emphasis in original) originate in the Covered Countries must only disclose that conclusion— 482 In this regard, an issuer’s description of the source and chain of custody of its results of the reasonable country of origin inquiry conflict minerals, which measures there is no requirement in the Dodd-Frank Act for should make clear why it determined that its sroberts on DSK5SPTVN1PROD with RULES disclosure of the inquiry process the issuer conflict minerals did not originate in the Covered ‘‘shall include an independent private undertook in coming to that conclusion,’’ because Countries. This is also the case for issuers that must sector audit’’ of the Conflict Minerals the provision ‘‘only provides for increased disclose their reasonable country of origin inquiry disclosure requirements * * * once an issuer has Report.485 In this regard, the Conflict and due diligence efforts if they determine, affirmatively determined that its necessary conflict following their due diligence, that their conflict Minerals Statutory Provision states also minerals originated in a DRC country.’’ Id. minerals did not originate in the Covered Countries 480 See letter from MSG I. or did come from recycled or scrap sources. 484 See Exchange Act Section 13(p)(1)(A). 481 See letter from NEI. 483 See letter from NAM I. 485 See Exchange Act Section 13(p)(1)(A)(i). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56317 that the issuer submitting the Conflict Further, as required by the Conflict identify these products as ‘‘not DRC Minerals Report ‘‘shall certify the audit Minerals Statutory Provision,493 we conflict free’’ 497 because the issuer * * * that is included in such report’’ proposed that the rules would require would not have determined that the and such a certified audit ‘‘shall descriptions, in the Conflict Minerals products satisfied the statutory constitute a critical component of due Report, of an issuer’s products that are definition of ‘‘DRC conflict free’’—that diligence in establishing the source and not ‘‘DRC conflict free,’’ the facilities the products do ‘‘not contain conflict chain of custody of such minerals.’’ 486 used to process those conflict minerals, minerals that directly or indirectly Also, the Conflict Minerals Statutory the country of origin of those conflict finance or benefit armed groups in the’’ Provision requires that the Conflict minerals, and the efforts to determine Covered Countries. The proposed rules Minerals Report must provide a the mine or location of origin with the would have allowed an issuer to description of the products greatest possible specificity. provide additional disclosure ‘‘manufactured or contracted to be The Conflict Minerals Statutory explaining, for example, that although manufactured that are not ‘DRC conflict Provision uses the phrase ‘‘facilities these products were categorized as not free,’ ’’ the entity that conducted the used to process the conflict minerals,’’ ‘‘DRC conflict free’’ in compliance with independent private sector audit, the which we noted in the Proposing the proposed rules implementing the facilities used to process the conflict Release would appear to refer to the Conflict Minerals Statutory Provision minerals, the country of origin of the smelter or refinery through which the and the statutory definition of ‘‘DRC conflict minerals, and the efforts to issuer’s minerals passed. We noted also conflict free,’’ the issuer had been determine the mine or location of origin that the Conflict Minerals Statutory unable to determine the source of the with the greatest possible specificity.487 Provision states that products are ‘‘DRC conflict minerals, including whether the conflict free’’ when those products do conflict minerals in these products

1. Content of the Conflict Minerals not contain conflict minerals that actually benefited or financed armed Report directly or indirectly finance or benefit groups in the Covered Countries. Also, a. Proposed Rules armed groups.494 The Proposing Release such an issuer would have been The proposed rules would have also noted that Section 1502(e)(3) of the required to describe, to the extent required an issuer to exercise due Act defines the term ‘‘armed group’’ as known after conducting due diligence, diligence on the source and chain of ‘‘an armed group that is identified as the facilities used to process those custody of its conflict minerals that it perpetrators of serious human rights conflict minerals and the efforts to was unable to determine, based on its abuses in the annual Country Reports on determine the mine or location of origin reasonable country of origin inquiry, did Human Rights Practices under sections with the greatest possible specificity.498 not originate in the Covered Countries 116(d) and 502B(b) of the Foreign Any issuer with products considered and to describe those due diligence Assistance Act of 1961,’’ 495 as they not ‘‘DRC conflict free’’ would have measures in its Conflict Minerals relate to the Covered Countries been required to provide a description Report. Consistent with the Conflict (‘‘Country Reports’’).496 Our proposed of those products in its Conflict Minerals Statutory Provision,488 we rules included a cross reference to that Minerals Report. That description proposed to require that the description definition to provide guidance. would have been based on the issuer’s of the measures taken by an issuer to Under the proposed rules, an issuer individual facts and circumstances so exercise due diligence on the source and that was unable to determine that its that the description sufficiently chain of custody of its conflict minerals conflict minerals did not originate in the identified the products or categories of would include a certified independent Covered Countries would have been products. For example, an issuer could private sector audit conducted in required to furnish a Conflict Minerals disclose each model of a product accordance with the standards Report to the same extent as an issuer containing conflict minerals that established by the Comptroller General with conflict minerals that originated in directly or indirectly financed or of the United States.489 The proposed the Covered Countries. We recognized benefited armed groups in the Covered rules also stated that the audit would that an issuer unable to determine that Countries, each category of a product constitute a critical component of due its conflict minerals did not originate in containing such conflict minerals, the diligence.490 To implement the Conflict the Covered Countries may not be able specific products containing such Minerals Statutory Provision’s to determine to a certainty whether any conflict minerals that were produced requirement that an issuer ‘‘certify the of its products are or are not ‘‘DRC during a specific time period, that all its audit,’’ 491 we proposed that an issuer conflict free,’’ insofar as its initial effort 497 If any products contained both conflict would be required to certify that it to determine the origin of the conflict minerals that did not originate in the Covered obtained an independent private sector minerals in those products under the Countries and conflict minerals that the issuer was audit of its Conflict Minerals Report,492 reasonable country of origin inquiry was unable to determine did not originate in the and we proposed that an issuer would inconclusive and its subsequent due Covered Countries, the issuer, under the proposal, provide this certification in that report. diligence on the source and chain of would be required to classify those products as not ‘‘DRC conflict free.’’ Similarly, if any of an issuer’s custody of such minerals was also products contained conflict minerals that did not 486 See Exchange Act Section 13(p)(1)(B). inconclusive. Consistent with Exchange originate in the Covered Countries, that the issuer 487 See Exchange Act Section 13(p)(1)(A)(ii). Act Section 13(p)(1)(A)(ii), we proposed was unable to determine did not originate in the 488 See Exchange Act Sections 13(p)(1)(A)(i) and that an issuer unable to determine that Covered Countries, or that originated in the Covered 13(p)(1)(B). Countries but did not directly or indirectly finance 489 See Exchange Act Section 13(p)(1)(A). its conflict minerals did not originate in or benefit armed groups in the Covered Countries, 490 See Exchange Act Section 13(p)(1)(B). the Covered Countries would be and also contained conflict minerals that originated 491 See id. required to describe all of its products in the Covered Countries and that directly or sroberts on DSK5SPTVN1PROD with RULES 492 As discussed in the Proposing Release, that contain such conflict minerals and indirectly financed or benefited armed groups in alternatively, one could interpret this language to the Covered Countries, the issuer would be required mean that an issuer must ensure that the audit it to classify those products as not ‘‘DRC conflict 493 See Exchange Act Section 13(p)(1)(A)(ii). obtained is accurate, but such an interpretation free.’’ 494 See Exchange Act Sections 13(p)(1)(A)(ii) and 498 We recognized that such an issuer would not would appear to mean that an issuer must review the audit of its Conflict Minerals Report, which the 13(p)(1)(D). be able to provide the country of origin of those 495 22 U.S.C. 2151n(d) and 2304(b). issuer created originally. We did not propose this minerals, so the proposed rules would not require approach. 496 Section 1502(e)(3) of the Act. this information. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56318 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations products contain such conflict minerals, the Covered Countries be required to the First Amendment because, among or another such description depending describe its products as not ‘‘DRC other reasons, the rules would compel on the issuer’s facts and circumstances. conflict free’’ in its Conflict Minerals speech that is not of a commercial As proposed, our rules would have Report.501 In one comment letter, five nature, which is different from other required an issuer to furnish, as part of senators stated that Congress did not corporate disclosures, and would its Conflict Minerals Report, the audit intend for the Conflict Minerals require some issuers, such as those report prepared by the independent Statutory Provision to allow issuers to unable to determine that their conflict private sector auditor and the identity of report that the origins of their conflict minerals did not originate in the the auditor.499 We noted that, while one minerals was undeterminable.502 Covered Countries, to provide false, might read the statutory language to Instead, the letter argued that Congress stigmatizing information.509 suggest that only the issuer’s ‘‘intended and directed’’ the final rule to Some commentators urged that an certification of the audit, and not the require that, if an issuer ‘‘cannot affirm issuer unable to determine that its audit report itself, is required to be that the minerals are ‘conflict-free,’ the conflict minerals did not originate in the submitted, we preliminarily believed only other conclusion that could be Covered Countries should not be that approach was not the better reading reported would be that the product may required to submit a Conflict Minerals of the Conflict Minerals Statutory contain materials that directly or Report that is audited by an Provision. As noted above, the Conflict indirectly finance armed groups in the independent private sector auditor.510 Minerals Statutory Provision DRC.’’ 503 In another comment letter, As one commentator asserted, the emphasizes that the independent audit members of Congress asserted that provision ‘‘does not require an issuer is a ‘‘critical component of due conflict minerals information that does that has been unable to determine (after diligence.’’ In light of the importance of ‘‘not clearly list a company’s activities proper inquiry) the source of its conflict this audit report to the proposed and rules allowing a category of minerals * * * to provide a Conflict reporting requirements and the statutory ‘indeterminate’ would undermine Minerals Report,’’ because the ‘‘statute language, we proposed to require that congressional intent.’’ 504 uses the phrase ‘in cases in which such the audit report be furnished with the Other commentators indicated, conflict minerals did originate in [a DRC Conflict Minerals Report. however, that the final rule should not country],’ as the trigger for providing a Proposed Item 4(a) of Form 10–K require an issuer unable to determine Conflict Minerals Report’’ (emphasis (referring to proposed Instruction 2 to that its conflict minerals did not and bracket in original).511 Item 104 of Regulation S–K), proposed originate in the Covered Countries to One commentator, in two separate Instruction 3 to Item 16 of Form 20–F, state that its conflict minerals are not letters, disagreed with this position, and proposed Instruction 3 to General ‘‘DRC conflict free’’ either on a however, and stated that any issuer that Instruction B(16) of Form 40–F would temporary or permanent basis.505 Some is unable to determine that its conflict have provided that the Conflict Minerals commentators who are members of minerals did not originate in the Report, which would include the audit Congress requested that we consider, as Covered Countries must be required to report, would not be deemed to be an alternative to the proposed rules, submit an audited Conflict Minerals incorporated by reference into any filing ‘‘phasing-in implementation to allow for Report to support its conclusion.512 under the Securities Act or the materials of indeterminate origin Another commentator recommended Exchange Act, except to the extent that currently in the supply chain to be that the final rule allow issuers to the issuer specifically incorporated it by properly classified.’’ 506 In another provide annual, unaudited conflict reference. For example, if an issuer letter, members of Congress suggested minerals disclosure that would identify incorporated by reference its annual that the final rule create a temporary the issuer’s products that the issuer report into a Securities Act registration classification for minerals of an ‘‘reasonably believes may contain statement, that issuer would not also indeterminate origin that would exempt ‘conflict minerals;’ ’’ indicate that the automatically incorporate the Conflict companies with such minerals from the origin of these minerals is indeterminate Minerals Report into that Securities Act requirement to provide a Conflict and explain why the minerals origin is document. Also, in such a situation, the Minerals Report.507 Some commentators indeterminate; identify and disclose the independent private sector auditor suggested that such issuers should be issuer’s involvement in any would not have assumed expert liability required to state that its products with governmental, semi-governmental, and and the issuer would not,500 therefore, such conflict minerals are not ‘‘DRC private sector diligence initiatives; and have been required to file a consent conflict free’’ after a certain number of describe the measures the issuer has from that auditor unless the issuer years.508 Some commentators asserted undertaken to develop a management specifically incorporated by reference that the proposed rules would violate 509 See letters from Taiwan Semi, Tiffany, and the Conflict Minerals Report into the WLF. Securities Act registration statement. 501 See, e.g., letters from CRS I, Earthworks, 510 See, e.g., letters from AngloGold, Cleary Evangelical Alliance, Evangelicals, Howland, b. Comments on the Proposed Rules Methodist Board, NEI, Presbyterian Church II, Rep. Gottlieb, NAM I, and Tiffany. 511 See letter from Cleary Gottlieb. Berman et al., Sen. Boxer et al. II, Sen. Durbin/Rep. A number of commentators agreed McDermott, State II, and World Vision II. 512 See letters from NYCBar I (‘‘We also believe with the proposed rules’ requirement 502 See letter from Sen. Boxer et al. II. the rules should require reporting firms that cannot, that an issuer unable to determine that 503 Id. after due diligence, determine the origin of the materials used in their products to submit a Conflict its conflict minerals did not originate in 504 See letter from Sen. Leahy et al. Minerals Report and an independent audit of such 505 See, e.g., letters from AdvaMed I, Cleary report to ensure such issuers cannot easily avoid 499 Our proposal to require the issuer to identify Gottlieb, IPC I, ITRI I, JVC et al. II, NAM I, NAM their obligations and disclosure requirements sroberts on DSK5SPTVN1PROD with RULES the certified independent private sector auditor III, Rep. Bachus et al., Rep. Critz, Rep. Ellmers, Rep. prescribed by these rules.’’) and NYCBar II (‘‘The would satisfy Exchange Act Section 13(p)(1)(A)(ii), Murphy, TIAA–CREF, Tiffany, TriQuint I, and WGC rules should require reporting firms that cannot, which states that the issuer must provide a II. after due diligence, determine the origin of the 506 See letters from Rep. Critz, Rep. Ellmers, and description of ‘‘the entity that conducted the materials used in their products to submit a Conflict independent private sector audit in accordance Rep. Murphy. Minerals Report and an independent audit of such with clause (i).’’ 507 See letter from Rep. Bachus et al. report to ensure such issuers cannot easily avoid 500 See Rule 436 of Regulation C [17 CFR 508 See letters from IPC I, SIF I, TIAA–CREF, and their obligations and disclosure requirements 230.436]. TriQuint I. prescribed by the rules.’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56319 due diligence system covering its benefited armed groups in the Covered obtained an independent private sector supply chain for each conflict Countries.520 A few commentators audit.527 Many of these commentators, mineral.513 One commentator asserted suggested that all issuers with conflict plus some others, remarked that these that investors would have ‘‘insufficient minerals originating in the Covered certifications should either not be material information to evaluate a Countries, including issuers with signed or, if they are required to be company’s supply chain risk’’ if the conflict minerals that did not directly or signed, be signed by the issuer or by an final rule allowed issuers to declare indirectly finance or benefit armed individual on behalf of the issuer and their conflict minerals from an groups in the Covered Countries and not in any individual capacity.528 In indeterminate origin ‘‘without issuers with conflict minerals that did contrast, one commentator describing the steps they have taken to directly or indirectly finance or benefit recommended that an issuer’s senior make their determination,’’ and armed groups in the Covered Countries, management or executive officers in recommended that the final rule should be required to disclose the some manner certify the independent ‘‘require reporting to be sufficiently facilities, countries of origin, and efforts private sector audit,529 another detailed to inform investors of the steps to determine the mine or location of commentator asserted that it is an issuer has taken to determine origin of those conflict minerals.521 Two ‘‘essential that there be CEO level whether the minerals the issuer commentators further recommended involvement in the filing of the purchases come from the DRC or an that all issuers with conflict minerals, disclosures in order to make sure that adjoining country.’’ 514 regardless of whether the minerals companies do not simply ‘game the Although we did not propose to originated within or without of the system,’ ’’ 530 and a further commentator require any type of physical label on a Covered Countries, should be required argued that the ‘‘certification of an audit product, one commentator stated that it to disclose the facilities, countries of will make little sense unless the is essential for the final rule to mandate origin, and efforts to determine the mine signatories verify on a quarterly basis that an issuer with products containing or location of origin of those conflict that certain minimal standards have conflict minerals that did not finance or minerals.522 been maintained by the auditors.’’ 531 benefit an armed group label those Some commentators agreed that the One commentator asserted that products as ‘‘DRC conflict free.’’ 515 final rule should, as proposed, require certifying the audit is unnecessary Many commentators, however, an issuer to disclose only the efforts to because the audit report will be remarked that an issuer should not be determine the conflict minerals’ mine or submitted to the Commission in the required to physically label its location of origin with the greatest Conflict Minerals Report.532 This products.516 Some commentators possible specificity.523 Other commentator and another stated that asserted that an issuer should be commentators suggested going further requiring an issuer to certify the audit permitted to describe its products as and requiring an issuer to disclose the would prevent an issuer from stating ‘‘DRC conflict free’’ only if the issuer actual mine or location of origin with that its products are ‘‘DRC conflict free’’ sources its conflict minerals in those the greatest possible specificity.524 Still because no issuer could be so certain of products from the Covered Countries other commentators argued that the that conclusion that its officers would and those conflict minerals did not final rule should not require issuers to certify the audit.533 One commentator finance or benefit armed groups.517 include specific supply chain suggested that no liability should be Another commentator added information, such as conflict mineral assigned to individuals that may sign specifically that products should be sources, quantities, transit routes, or the certifications ‘‘unless the situation labeled as ‘‘DRC conflict free’’ only if store houses because such disclosures involves a knowing and willful intent to either they are not from the Covered could hurt an issuer’s competitive mislead.’’ 534 Countries or do not directly or advantage or subject the issuer or its Some commentators agreed that the indirectly support armed groups in the employees to violence.525 Alternatively, audit report should, as proposed, be Covered Countries.518 Also, all these commentators recommended that included as part of the Conflict Minerals commentators that discussed the subject the rule allow for generic descriptions Report.535 Other commentators agreed that the final rule should, as or approximate geographic locations or recommended that an issuer’s audit proposed, allow issuers to provide permit an issuer to redact sensitive or report should not be submitted as part additional disclosure in describing any secure information.526 of the Conflict Minerals Report because of their products that have not been A number of commentators indicated such a requirement would increase found to be ‘‘DRC conflict free’’ 519 that an issuer should, as proposed, audit costs without providing A number of commentators ‘‘certify the audit’’ by certifying that it comparable benefits.536 Certain mentioned that the final rule should, as commentators opposed having to make proposed, require an issuer to disclose 520 See, e.g., letter from AngloGold, Barrick Gold, the audit report public and suggested the facilities, countries of origin, and Cleary Gottlieb, Howland, IPC I, JVC et al. II, NAM instead that issuers provide the audit efforts to determine the mine or location I, NMA II, and WGC II. 521 See letters from MSG I, NEI, SIF I, and of origin only for its conflict minerals TriQuint I. 527 See, e.g., letters from Barrick Gold, Cleary that directly or indirectly financed or 522 See letters from Earthworks and Trott. Gottlieb, Ford, ICGLR, ITIC I, NAM I, NY State Bar, and WGC II. 523 See, e.g., letters from AngloGold, Barrick Gold, 528 See, e.g., letters from AngloGold, Barrick Gold, 513 See letter from Signet. JVC et al. II, NAM I, TriQuint I, and WGC II. Cleary Gottlieb, Ford, Howland, JVC et al. II, NAM 514 See letter from SIF II. 524 See, e.g., letters from CRS I, Howland, ICGLR, I, NEI, and WGC II. 515 See, e.g., letter from Catholic Relief Services NEI, State II (acknowledging that, as a best practices 529 See letter from Grant Thornton LLP (Mar. 2, of St. Cloud, Minnesota (Apr. 14, 2011) (‘‘CRS I— approach, an issuer should make every effort to 2011) (‘‘Grant Thornton’’). St. Cloud’’). include specific information regarding the mine), 530 See letter from TakeBack. sroberts on DSK5SPTVN1PROD with RULES 516 See, e.g., letters from Columban Center et al., TakeBack, and Trott (stating that the final rule 531 See letter from SARW. Howland, Industry Group Coalition I, ITIC I, should require an issuer to provide as much 532 See letter from TIC. Japanese Trade Associations, MSG I, NAM I, and information as possible regarding its conflict 533 See letters from Teggeman and TIC. SIF I. minerals’ mine or location of origin). 517 See letters from ITRI III, MSG I, and SIF I. 525 See letters from Barrick Gold, Global Tungsten 534 See letters from Cleary Gottlieb and NMA II. 518 See letter from State II. II, IPMI I, NMA II, NMA III, and TIC. 535 See, e.g., letters from Howland, NEI, and Sen. 519 See letters from Howland, IPC I, NMA II, 526 See letters from Barrick Gold, NMA II, and Durbin/Rep. McDermott. SEMI, TriQuint I, and WGC II. TIC. 536 See letters from AngloGold and WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56320 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations report to the Commission confidentially, comprised largely of ex-rebels, is the minerals may have originated in the allow for sensitive portions to be major player in the conflict minerals Covered Countries and may not have redacted, or provide it to the trade and regularly commits appalling come from recycled or scrap sources, to Commission with the Commission crimes against the civilian provide a Conflict Minerals Report that making it available to the public only in population.’’ 545 Another commentator, includes a description of the measures hardcopy form at the Commission’s however, stated that if the final rule the issuer has taken to exercise due headquarters.537 Similarly, one defined ‘‘armed group’’ using the diligence on the source and chain of commentator objected to requiring an Country Reports, it would exclude the custody of those conflict minerals. issuer to post the audit report on the ex-militia groups that joined the DRC Additionally, in circumstances in issuer’s Internet Web site as long as the armed forces but continue to contribute which an independent private sector Conflict Minerals Report describes the to conflict and commit human rights audit is required, the final rule requires, audit report,538 whereas another violations.546 One commentator as proposed, that an issuer include a commentator argued that the final rule recommended that the final rule define certified independent private sector should require an issuer to post the ‘‘armed group’’ using the OECD’s audit conducted in accordance with the audit report on an issuer’s Web site.539 definition for that term.547 Another standards established by the Some commentators indicated that, as commentator suggested that the final Comptroller General of the United proposed, an audit report should not be rule apply only to issuers that are States as part of its due diligence on the deemed incorporated by reference into ‘‘directly funding the conflict (or who source and chain of custody of its any filing under the Securities Act or knowingly indirectly fund the conflict minerals. Further, the final rule Exchange Act unless the issuer conflict).’’ 548 One commentator states that, as proposed, the audit specifically incorporates the audit into recommended that the final rule define constitutes a critical component of due such a filing.540 A few commentators ‘‘indirect financing’’ of an armed group diligence. To implement the Conflict further suggested that an auditor should to include ‘‘[a]ny way in which an Minerals Statutory Provision’s not be considered an ‘‘expert’’ under illegitimate armed group profits from requirement that issuers ‘‘certify the Rule 436 of the Securities Act and the mining, sale, transportation or audit,’’ 552 as proposed, an issuer must recommended that audit reports taxation of minerals or mineral certify that it obtained an independent submitted in subsequent years be able to derivatives.’’ 549 Some commentators private sector audit of its Conflict build off prior audit reports to eliminate asserted that the final rule should clarify Minerals Report and include that duplicative work and, thereby, reduce the definition of an ‘‘armed group’’ or certification in the Conflict Minerals costs.541 One commentator went further disclose the steps issuers must take to Report.553 While we did not specify this and suggested that any issuer with a verify whether their conflict minerals in the Proposing Release or proposed recognized supply chain tracking benefited armed groups.550 Other rules, in response to commentators’ process should not be required to obtain commentators suggested that the concerns, the final rule clarifies that the an audit of its Conflict Minerals definition of ‘‘armed group’’ in the final issuer’s audit certification need not be Report.542 rule should not refer to the ‘‘most signed by an officer. Instead, the Some commentators requested that recently issued’’ version of the Country certification takes the form of a the final rule define how an issuer Reports ‘‘for the year the annual report statement in the Conflict Minerals would ‘‘directly or indirectly finance or is due’’ because the most recently issued Report that the issuer obtained an benefit an armed group.’’ 543 Some of version of the Country Reports may not independent private sector audit. these commentators and others be published for the year the annual The final rule also requires, unless an recommended that the Country Reports report is due.551 issuer’s products are ‘‘DRC conflict not be the basis for the Commission’s free,’’ the Conflict Minerals Report to c. Final Rule include a description of the facilities final rule because those reports are not sufficiently specific with respect to The final rule requires any issuer that, used to process those conflict minerals, which groups it labels as ‘‘armed after its reasonable country of origin the country of origin of those conflict groups’’ such that it is unclear whether inquiry, knows that its conflict minerals minerals, and the efforts to determine the DRC army would be considered an originated in the Covered Countries and the mine or location of origin with the ‘‘armed group.’’ 544 For example, one did not come from recycled or scrap greatest possible specificity. As noted in commentator submitted an article sources to provide a Conflict Minerals the Proposing Release, we believe that arguing that the Conflict Minerals Report that includes a description of the the phrase in the Conflict Minerals Statutory Provision ‘‘targets units of the measures the issuer has taken to Statutory Provision, ‘‘facilities used to Congolese army as much as it does exercise due diligence on the source and process the conflict minerals,’’ refers to militias precisely because the army is chain of custody of those conflict the smelter or refinery through which minerals. It also requires an issuer that, the issuer’s minerals pass. One 537 See, e.g., letters from Barrick Gold, Materials after its reasonable country of origin commentator pointed out that smelting Management Corporation (Jan. 13, 2011) (‘‘Materials inquiry, had reason to believe that its and refining processes are not I’’), NAM I, and NMA II. minerals may have originated in the similar.554 Smelting refers to the 538 See letter from ITIC I. Covered Countries and may not have 539 See letter from Columban Center et al. come from recycled or scrap sources 552 Exchange Act Section 13(p)(1)(B). 540 See, e.g., letters from Barrick Gold, Cleary and, after the exercise of due diligence, 553 We are not adopting the alternative Gottlieb, Corporate Secretaries I, NY State Bar, and WGC II. still has reason to believe that its interpretation of the Conflict Minerals Statutory Provision that an issuer must ensure that the audit 541 See letters from NY State Bar and WGC II. it obtained is accurate. The Conflict Minerals sroberts on DSK5SPTVN1PROD with RULES 545 See letter from ICAR II. 542 See letter from TIC. 546 See letter from Save. Report contains management’s assertions related to 543 See, e.g., letters from NMA II, Peace, and WGC compliance with this rule; the third-party audit is 547 See letter from Pact II. II. designed to attest to certain of those assertions. 548 See letter from CEI I. 544 See letters from ITRI I, NMA II, NYCBar I, and Given this relationship, there does not appear to be 549 See letter from Peace. a need to have management assert to the accuracy Peace. See also letter from NYCBar II (stating specifically that the final rule should include ‘‘the 550 See, e.g., letters from CRS I—St. Cloud, ITRI of the audit. Congolese military (FARDC) in its definition of I, NMA II, NYCBar I, Peace, and TIC. 554 Letter from ITRI I. In the Proposing Release, ‘armed group’’’). 551 See, e.g., letters from ITRI I and TIC. we stated that columbite-tantalite, cassiterite, and VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56321 conversion of the mineral ore into its chains.558 The commentator noted that however, required to obtain an metal form, but the metal still contains it could turn out that, upon further independent private sector audit of that many impurities that must be removed investigation of the minerals’ origins, Conflict Minerals Report. We are by refining the metal. Columbite- the minerals were not from the Covered permitting this temporary category to tantalite, cassiterite, and wolframite are Countries or did not finance or benefit address concerns of many industry mined only as ores and are smelted into armed groups, in which case the commentators that supply chain due their metal derivatives. Gold, however, products made with solely those diligence mechanisms have not yet been is mined in its metallic form because it minerals would be ‘‘DRC conflict free.’’ established; 560 and, therefore, many is found that way naturally. Therefore, Of course, we are concerned that any issuers will not be able to readily gold does not have to be smelted into a disclosure requirement results in determine whether their conflict metal, but does have to be refined to accurate disclosure. At the same time, minerals did not originate in the remove any impurities. In both we are cognizant of our responsibility to Covered Countries, did not finance or instances, however, we recognize that as fulfill Congress’s directive in Section benefit armed groups, or did come from a practical matter it is very difficult, if 1502 and to remain faithful to the recycled or scrap sources. This not impossible, to trace conflict language of the statute, and temporary category should allow issuers minerals to their mine or other location promulgating rules that provide an time to establish supply chain due of origin after columbite-tantalite, incentive for issuers to avoid diligence mechanisms to determine cassiterite, and wolframite have been determining the origins of the conflict whether their minerals originated in the smelted initially and after gold has been minerals that they use could undermine Covered Countries, directly or indirectly refined initially other than through the the reporting system that Congress has financed or benefited armed groups in smelter or refinery. established in Section 13(p) of the the Covered Countries, or came from Exchange Act Section 13(p)(1)(A)(ii) Exchange Act. Accordingly, we have recycled or scrap sources. also requires an issuer with conflict modified the final rule to address the This additional time should also minerals originating in the Covered commentator’s concerns while decrease the possibility that issuers that Countries to submit a Conflict Minerals remaining faithful to the language and might ultimately be able to determine Report that includes a description of the intent of the statute. that their necessary minerals did not issuer’s products ‘‘that are not DRC As described above, during a originate in the Covered Countries, did conflict free.’’ 555 The Conflict Minerals temporary period, instead of requiring not finance or benefit armed groups, or Statutory Provision does not define ‘‘not issuers that have proceeded to step three came from recycled or scrap sources DRC conflict free,’’ but instead defines that are unable to determine that their would initially be required to report that ‘‘DRC conflict free.’’ 556 Products are conflict minerals did not originate in the their products have not been found to be considered ‘‘DRC conflict free’’ under Covered Countries, that their conflict ‘‘DRC conflict free’’ simply because they Exchange Act Section 13(p)(1)(A)(ii) if minerals that originated in the Covered had not yet been able to determine the they ‘‘do not contain minerals that Countries did not directly or indirectly minerals’ origins or whether they were directly or indirectly finance or benefit finance or benefit armed groups, or that from recycled or scrap sources. By armed groups in the’’ Covered their conflict minerals came from decreasing this possibility, the Countries. (Emphasis added).557 As recycled or scrap sources to describe temporary category will lead to more discussed above, under the proposed their products as ‘‘not ‘DRC conflict accurate disclosure. We believe this rules’ approach, an issuer with a free,’ ’’ the final rule permits such approach will allow the final rule to product containing conflict minerals of issuers to describe products containing more appropriately target the an undeterminable origin cannot know those conflict minerals as ‘‘DRC conflict population of issuers from which that its product is ‘‘DRC conflict free;’’ undeterminable.’’ An issuer with Congress intended to require this that is, the issuer cannot know that its products that are ‘‘DRC conflict disclosure and will allow time for product ‘‘do[es] not contain conflict undeterminable’’ is required to exercise processes to be put in place so that minerals that directly or indirectly due diligence on the source and chain issuers may be able to determine the finance or benefit armed groups in the’’ of custody of its conflict minerals and origin of their conflict minerals. Covered Countries, so the issuer would submit a Conflict Minerals Report The ‘‘undeterminable’’ reporting have to describe the product as ‘‘not describing its due diligence; the steps it alternative, however, is only permitted ‘DRC conflict free.’ ’’ has taken or will take, if any, since the temporarily. For all issuers, this A commentator raised concerns that end of the period covered in its most alternative will be permitted during the this approach could lead to incorrect recent prior Conflict Minerals Report to first two reporting cycles following the and misleading disclosures and could mitigate the risk that its necessary effectiveness of the final rule, which unfairly punish companies that lack conflict minerals benefit armed groups, includes the specialized disclosure complete visibility into their supply including any steps to improve its due reports for 2013 through 2014. For diligence; the country of origin of the smaller reporting companies, this wolframite are smelted into their component metals conflict minerals, if known; the facilities alternative will be permitted during the whereas gold is refined, and we indicated that both processes are substantially similar such that, when used to process the conflict minerals, if first four reporting cycles following the we would refer to smelting a conflict mineral, those known; and the efforts to determine the references were intended to include the refining of mine or location of origin with the issuers only have to describe the processing gold. facilities if they are known to the issuer and do not 555 See Exchange Act Section 13(p)(1)(A)(ii). greatest possible specificity, if have to disclose the country of origin. Also, an 556 See id. and Exchange Act Section 13(p)(1)(D). applicable.559 Such an issuer is not, issuer that is unable to determine whether its 557 Exchange Act Section 13(p)(1)(A)(ii). Also, conflict minerals came from recycled or scrap sroberts on DSK5SPTVN1PROD with RULES 558 See letter from Tiffany. sources does not have to describe its efforts to although similar, the definition of ‘‘DRC conflict free’’ under Exchange Act Section 13(p)(1)(D) is 559 We recognize that an issuer that is unable to determine the mine or location of origin with the slightly different than the definition under determine the origin of its conflict minerals, or greatest possible specificity because issuers with Exchange Act Section 13(p)(1)(A)(ii). Exchange Act unable to determine whether its conflict minerals conflict minerals from recycled or scrap sources are Section 13(p)(1)(D) states that ‘‘a product may be came from recycled or scrap sources, may not also not required to determine the mine or location of labeled as ‘DRC conflict free’ if the product does not be able to determine the processing facility of those origin. contain minerals that directly or indirectly finance conflict minerals and will not be able to determine 560 See, e.g., letters from CTIA, FEC I, JVC et al. or benefit armed groups in the’’ Covered Countries. the minerals’ country of origin. Therefore, these II, NAM III, NRF I, Roundtable, and WilmerHale. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56322 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations effectiveness of the final rule, which specific meaning, or to otherwise period through 2014 in which issuers includes the specialized disclosure address their particular situation.562 We would be permitted to use an ‘‘unknown reports for 2013 through 2016. also believe that the revised disclosure determination’’ category in which such Beginning with the third reporting that the products ‘‘have not been found issuers would be required only to period, from January 1, 2015 to to be ‘DRC conflict free’ ’’ mitigates disclose their conflict minerals policy, December 31, 2015, for all issuers and concerns expressed by some reasonable country of origin inquiry, the fifth reporting period, from January commentators that the Proposing and the conflict minerals used in their 1, 2017 to December 31, 2017, for Release’s specific required language, supply chain.564 smaller reporting companies, every such ‘‘are not ‘DRC conflict free,’ ’’ would Other commentators recommended issuer will have to describe products in impose an unfair stigma, particularly on similar temporary approaches for its Conflict Minerals Report as having issuers that did not know whether their conflict minerals when an issuer could ‘‘not been found to be ‘DRC conflict minerals directly or indirectly financed not determine the origin of its conflict free.’’’ Also, issuers will be required to or benefited armed groups in the minerals.565 In this regard, one make such a disclosure even if they Covered Countries. commentator noted that, ‘‘requiring proceed to step three and are unable to Although it does not appear that any issuers that are unable to determine that determine that their conflict minerals individual commentator suggested the the conflict mineral in their products did not originate in the Covered exact approach we are adopting, this did not originate in the Covered Countries, that their conflict minerals approach incorporates suggestions from Countries to submit a Conflict Minerals that originated in the Covered Countries various commentators. One Report providing the required did not directly or indirectly finance or commentator recommended that we information that is available to them, is benefit armed groups, or that their adopt a ‘‘phase-in or transitional reasonable.’’ 566 Also, one commentator conflict minerals came from recycled or approach in order to address the recognized that, during the initial scrap sources. These issuers will also be substantial practical difficulties issuers period after the rule is finalized, it required to provide an independent currently face in seeking to trace the expected that some conflict minerals private sector audit of their Conflict origins of conflict minerals included in would be of unknown origin, and Minerals Report.561 their products and to determine if these issuers with those conflict minerals While this disclosure is required after minerals are or are not ‘DRC conflict should, among other information, the temporary period, even when free.’ ’’ 563 This commentator’s disclose ‘‘any progress made in the issuers are unable to determine the recommendation was for the final rule reporting year toward determination of origin of their conflict minerals, we to include a phase-in period through origin.’’ 567 Finally, some commentators have changed the language of the 2014 in which any issuer with conflict suggested that smaller reporting disclosure from the proposal to address minerals for which the issuer was companies should be allowed to phase- concerns raised about the accuracy of unable to determine their origin would in or that the implementation of the the disclosure required in these describe the conflict minerals as from an final rule should be deferred for circumstances. In our view, it is ‘‘indeterminate source’’ and would be them.568 accurate to describe such products as permitted, instead of providing a Based on the comments we have having ‘‘not been found to be ‘DRC Conflict Minerals Report, to disclose its received, we believe that permitting all conflict free.’ ’’ ‘‘DRC conflict free’’ is a conflict minerals policy and provide a issuers to describe their products as defined term in the statute, meaning statement that, due to the lack of current ‘‘DRC conflict undeterminable’’ for a that the product ‘‘do[es] not contain infrastructure, it is not possible to two-year period is appropriate to allow conflict minerals that directly or determine the origin of its conflict viable tracking systems to be put in indirectly finance or benefit armed minerals. The commentator place in the Covered Countries and groups in the’’ Covered Countries. An recommended that the ‘‘indeterminate throughout supply chains and avoid a issuer that does not know that its source’’ category would be available de-facto embargo on conflict minerals conflict minerals did not originate in the only through 2014. Another from the Covered Countries. We also Covered Countries, that its conflict commentator recommended that the believe that allowing this category for a minerals that originated in the Covered final rule allow a similar phase-in two-year period will avoid a situation in Countries did not finance or benefit which virtually all issuers would armed groups, or that the minerals came 562 For example, in addition to the disclosure in describe their products as having not the Conflict Minerals Report, the issuer could state: from recycled or scrap sources cannot ‘‘The following is a description of our products that 564 See letter from AdvaMed I. accurately state that its conflict minerals have not been found to be ‘‘DRC conflict free’’ 565 See, e.g., letters from TIAA–CREF (‘‘Where the have been found to meet this definition; (where ‘DRC conflict free’ is defined under the federal securities laws to mean that a product does source of minerals cannot be confirmed, we believe therefore, its products have not been not contain conflict minerals necessary to the it would be most accurate to allow companies to found to be ‘‘DRC conflict free’’ as functionality or production of that product that use indeterminate language such as ‘may not be DRC conflict free,’ but not language that would defined in the statute. directly or indirectly finance or benefit armed suggest a presumption that minerals would be Additionally, under the final rule, as groups in the Democratic Republic of the Congo or an adjoining country).’’ Alternatively, an issuer that conflict free absent specific evidence to the proposed, issuers can add disclosure or is still unable to determine the origin of some of its contrary. Moreover, over time the information clarification. This allows issuers to conflict minerals after the two-year or four-year systems necessary to trace these minerals will likely include the statutory definition of ‘‘DRC period, might state: ‘‘We have been unable to improve. We suggest that, after a reasonable time determine the origins of some of our conflict interval, the SEC consider reviewing whether a conflict free’’ in the disclosure to make higher standard might be warranted.’’) and TriQuint minerals. Because we cannot determine the origins clear that ‘‘DRC conflict free’’ has a very of the minerals, we are not able to state that I (recommending that the final rule ‘‘allow products containing such minerals do not contain companies to label their products as ‘May Not Be sroberts on DSK5SPTVN1PROD with RULES 561 As noted below, an issuer exercising due conflict minerals that directly or indirectly finance DRC Conflict Free’ until such a time when it is diligence to determine whether a conflict mineral or benefit armed groups in the Democratic Republic expected that companies will be able to purchase is from a recycled or scrap source is not required of the Congo or an adjoining country. Therefore, processed conflict minerals from smelters that have to obtain an independent private sector audit of its under the federal securities laws we must describe been validated as ‘DRC conflict free’ ’’). 566 See letter from ABA. Conflict Minerals Report, regarding that conflict the products containing such minerals as having not been found to be ‘DRC conflict free.’ Those 567 See letter from SIF I. mineral, if there is no nationally or internationally recognized due diligence framework for that products are listed below.’’ 568 See, e.g., letters from Howland and JVC et al. recycled or scrap conflict mineral. 563 See letter from WilmerHale. II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56323 been found to be ‘‘DRC conflict free,’’ As to the concern that the rule understood within its industry.573 Also, simply because they could not impermissibly compels speech that is to remedy any confusion in the determine the origin of their conflict not of a commercial nature, we presume Proposing Release, an issuer with minerals, which would render that that Congress acted constitutionally products that are ‘‘DRC conflict free’’ disclosure less meaningful.569 Similarly, when it passed the statute.571 And, as does not have to describe those products we believe that allowing smaller discussed above, we believe that the in the Conflict Minerals Report in any reporting companies four years to changes made in the final rule mitigate manner. An issuer with such products describe their products as ‘‘DRC conflict the concern that the rule compels may describe them in its specialized undeterminable’’ is appropriate because speech that may be false or unfairly disclosure report as ‘‘DRC conflict free’’ these issuers may lack the leverage to stigmatizing for some issuers. The if it chooses to do so, provided, the obtain detailed information regarding requirement that issuers that know or products do not contain any conflict the source of a particular conflict have reason to believe that their conflict minerals that directly or indirectly mineral.570 minerals may have originated in the financed or benefited armed groups in We do not, however, believe that a Covered Countries but that cannot the Covered Countries. permanent ‘‘DRC conflict determine the origin or cannot The Conflict Minerals Statutory undeterminable’’ category would be determine whether they financed or Provision requires the State Department consistent with the language in the benefited armed groups state that their to ‘‘produce a map of mineral-rich statute, and we believe it would products have not been found to be zones, trade routes, and areas under the undermine the overall goals of Section ‘‘DRC conflict free’’ compels an accurate control of armed groups’’ in the Covered

1502. Such an approach might create disclosure in light of the statutory Countries.574 Also, the Conflict Minerals incentives for issuers not to exercise definition of ‘‘DRC conflict free.’’ Statutory Provision requires the State care in identifying the origins of their Moreover, the use of this revised Department to submit to Congress a necessary conflict minerals. Also, we do language, the ability of issuers to add strategy to address the linkages between not believe that, after the temporary additional explanation and disclosure, human rights abuses, armed groups, reporting period, the number of issuers and the provision of a temporary mining of conflict minerals, and that would describe their products as ‘‘undeterminable’’ period all represent commercial products that contains a having not been found to be ‘‘DRC accommodations to ensure that the rule ‘‘plan to provide guidance to conflict free’’ would be so substantial as is appropriately tailored to lessen the commercial entities seeking to exercise to render the disclosure meaningless impact on First Amendment interests due diligence on and formalize the because, based on our review of the while still accomplishing Congress’s origin and chain of custody of conflict comments, it appears that there should objective. minerals used in their products and on be systems in place at that time on their suppliers to ensure that conflict which issuers could rely to determine We note that many commentators minerals used in the products of such whether their conflict minerals appeared to believe that the proposed suppliers do not directly or indirectly originated in the Covered Countries and, rules would require that an issuer finance armed conflict or result in labor if so, whether they contributed to physically label its products as ‘‘DRC or human rights violations.’’ 575 Some conflict. Overall, we believe that the conflict free’’ or not ‘‘DRC conflict commentators have suggested that we change from ‘‘not ‘DRC conflict free’ ’’ to free.’’ 572 Although we used the term delay the implementation of the final having ‘‘not been found to be ‘DRC ‘‘label’’ in the Proposing Release, we did rule until the State Department’s map conflict free,’ ’’ the ability to add so in the context of the disclosure and/or strategy have been published,576 additional explanation and disclosure, required in the annual report. The final or that we should allow an issuer to rely and the periods for the ‘‘DRC conflict rule does not require a physical label on on the State Department’s map for its undeterminable’’ category will provide any product. Instead, the final rule conflict minerals information.577 issuers who are initially unable to requires that an issuer describe in its The State Department has published a determine that their conflict minerals Conflict Minerals Reports any products conflict minerals map already.578 Also, did not originate in the Covered that have not been found to be ‘‘DRC we understand that the State Countries or unable to determine that conflict free,’’ as defined in the final Department has developed guidance for their conflict minerals that originated in rule. Also, consistent with the proposal, commercial entities seeking to exercise the Covered Countries did not directly the final rule permits issuers the due diligence on and formalize the or indirectly finance or benefit armed flexibility to describe their products origin and chain of custody of conflict groups in the Covered Countries means based on each issuer’s individual facts minerals used in their products and on to make their disclosure while still and circumstances. We believe this their suppliers.579 Even so, it does not accomplishing the goals that Congress flexibility is important because, as one intended when it required the commentator noted, an issuer is in the 573 See letter from WGC II. disclosure of products that are not ‘‘DRC best position to know its products and 574 Section 1502(c)(2) of the Act. conflict free.’’ to describe them in terms commonly 575 Section 1502(c)(1) of the Act. 576 See, e.g., letters from Barrick Gold, Corporate We believe that this approach also 571 See Nebraska v. EPA, 331 F.3d 995, 997 (DC Secretaries I, NRF I, and WGC II. responds to the First Amendment 577 See, e.g., letters from AngloGold and NRF I. Cir. 2003) (‘‘Agencies do not ordinarily have concerns raised by the commentators. jurisdiction to pass on the constitutionality of 578 See State Department, Humanitarian federal statutes.’’) (citing Thunder Basin Coal Co. v. Information Unit, Democratic Republic of the Congo 569 See, e.g., letters from AdvaMed I, ITIC I, and Reich, 510 U.S. 200, 215 (1994)); Todd v. SEC, 137 Mineral Exploitation by Armed Groups Map (Jun. ITRI II. F.2d 475, 478 (6th Cir. 1943) (same); William J. 14, 2011), available at https://hiu.state.gov/ sroberts on DSK5SPTVN1PROD with RULES 570 See letters from ABA, Corporate Secretaries I, Haberman, 53 SE.C. 1024, 1029 n.14 (1998) (‘‘[W]e Products/DRC_MineralExploitation_2010Jun28_ and JVC et al. II. But see letter from Green II have no power to invalidate the very statutes that HIU_U182.pdf. (arguing that, although smaller reporting companies Congress has directed us to enforce.’’) (citing Milton 579 See State Department, Bureau of Economic, may lack leverage, this disadvantage may be J. Wallace, 45 SE.C. 694, 697 (1975); Walston & Co., Energy, and Business Affairs, Statement Concerning reduced through the influence exerted over their 5 SE.C. 112, 113 (1939)). Implementation of Section 1502 of the Dodd-Frank suppliers by larger issuers that use the same 572 See, e.g., letters from Howland, Industry Legislation Concerning Conflict Minerals Due supplier base and that have more leverage to Group Coalition I, Japanese Trade Associations, Diligence (July 15, 2011), available at http:// request such information.). MSG I, NAM I, and SIF I. www.state.gov/e/eb/diamonds/docs/168632.htm. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56324 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations appear that either the State Countries.583 The final rule includes, as and chain of custody of its conflict Department’s map or guidance is proposed, a cross reference to that minerals.586 In addition, the provision necessary for complying with the final definition to provide guidance to requires that an issuer include an rule. First, it does not appear that issuers. This cross reference, however, independent private sector audit of the Congress intended that they be removes the phrases ‘‘most recently Conflict Minerals Report as a ‘‘critical necessary to comply with our rule. The issued’’ and ‘‘for the year the annual component of due diligence.’’ 587 Under map and guidance requirements are report is due’’ to address the concerns Exchange Act Section 13(p)(1)(C), the located in a part of Section 1502 that is of commentators.584 The final rule Commission may determine an issuer’s not incorporated into the Exchange Act mirrors the Conflict Minerals Statutory independent private sector audit or and that part of Section 1502 is directed Provision in its definition of ‘‘armed other due diligence processes to be solely to agencies other than the group’’ and does not include any unreliable and any Conflict Minerals Commission.580 Therefore, although extraneous phrases that were included Report that relies on such unreliable they may be related to our final rule, it in the proposal. due diligence process would not satisfy does not appear that the map and The Conflict Minerals Statutory the statute’s reporting requirement.588 guidance were intended to have direct Provision assigns to the State impact on the rule. Department the authority to identify a. Proposed Rules Also, we do not believe that an issuer perpetrators of serious human rights The proposed rules would have must rely solely on the State abuses in that agency’s annual Country required an issuer to use due diligence Department’s map or guidance for Reports, and we lack the authority and regarding the supply chain determining whether its conflict expertise to provide further guidance or determinations 589 in its Conflict minerals contributed to conflict in the qualify the State Department’s Minerals Report. Other than requiring Covered Countries because other conclusions in this area. We note that that the due diligence be reliable, the resources are available. For example, as some commentators indicated that we proposed rules would not have dictated discussed above, the OECD has should consider products containing the standard for, or otherwise provided developed an internationally recognized conflict minerals obtained from mines guidance concerning, the due diligence system of due diligence that an issuer not controlled by armed groups when that an issuer would be required to use can use as guidance in exercising its due purchased to be considered ‘‘DRC in making such determinations. Instead, diligence. The OECD’s due diligence conflict free’’ even if those mines the proposed rules would have required guidance does not rely on or incorporate subsequently come under the control of an issuer to disclose the due diligence the State Department map and guidance armed groups.585 We agree and consider it used in making its determinations, referenced in the Conflict Minerals products ‘‘DRC conflict free’’ if, when such as whether it used any nationally Statutory Provision in determining the the conflict minerals contained in those or internationally recognized standards steps an issuer must take to exercise due products are purchased and transported or guidance for supply chain due diligence. However, as discussed above, through the supply chain from the mine diligence. due to the stage of development of the to the issuer, those conflict minerals do In the Proposing Release, we noted supply chain tracing mechanisms, we not directly or indirectly finance or our belief that the statutory provision recognize that there are concerns about benefit armed groups in the Covered contemplates that an issuer must use obtaining this information reliably in Countries, even if some point in that due diligence in its supply chain the near term. Therefore, we are supply chain subsequently becomes determinations. Although we did not providing this targeted and temporary controlled by an armed group. For propose to establish any particular period in the final rule. example, if an issuer’s conflict minerals conduct requirements, we believed that The final rule requires, as proposed, are purchased from a mine that does not due diligence would be required to be an issuer with conflict minerals that directly or indirectly finance or benefit exercised and information about what originated in the Covered Countries to armed groups in the Covered Countries conduct the issuer exercised in its due determine whether those minerals when they are purchased, but the next diligence regarding its supply chain directly or indirectly financed or day that mine is taken over by an armed determinations was relevant to benefited armed groups in the Covered group and the armed group takes the determine the extent of the issuer’s due Countries. The Conflict Minerals money previously provided to the miner diligence. As proposed, the rules, Statutory Provision states that products from the issuer to purchase the conflict therefore, would require issuers to are ‘‘DRC conflict free’’ when those minerals that already left the mine, the describe the due diligence used in products do not contain conflict products containing those conflict making these determinations. In minerals that ‘‘directly or indirectly minerals may be considered ‘‘DRC particular, we noted that we would have finance or benefit armed groups’’ in the conflict free,’’ even though the money expected that an issuer whose conduct Covered Countries.581 Section used to purchase the conflict minerals conformed to a nationally or 1502(e)(3) of the Act defines the term does, in fact, benefit that armed group internationally recognized set of ‘‘armed group’’ as ‘‘an armed group that subsequently. standards of, or guidance for, due is identified as perpetrators of serious diligence regarding its conflict minerals human rights abuses in the annual 2. Due Diligence Standard in the Conflict Minerals Report supply chain determinations would Country Reports on Human Rights provide evidence that it used due Practices under sections 116(d) and We have interpreted the Conflict 502B(b) of the Foreign Assistance Act of Minerals Statutory Provision as 586 Exchange Act Section 13(p)(1)(A)(i). 1961,’’ 582 as they relate to the Covered requiring an issuer to exercise due 587 Exchange Act Section 13(p)(1)(B). sroberts on DSK5SPTVN1PROD with RULES diligence based on the provision’s 588 Exchange Act Section 13(p)(1)(C). 580 The map and guidance requirements are in requirement that an issuer describe the 589 We refer to the ‘‘supply chain determinations’’ Section 1502(c) of the Act, but only Section 1502(b) as an issuer’s determinations regarding the source of the Act actually amends the Exchange Act and due diligence it exercised on the source and chain of custody of its conflict minerals, the directs the Commission to promulgate rules. facilities used to process those minerals, the 581 See Exchange Act Sections 13(p)(1)(A)(ii) and 583 Section 1502(e)(3) of the Act. country of origin of those minerals, and the efforts 13(p)(1)(D). 584 See, e.g., letters from ITRI I and TIC. to determine the mine or location of origin with the 582 22 U.S.C. 2151n(d) and 2304(b). 585 See, e.g., letters from AAEI, IPC I, and NRF I. greatest possible specificity. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56325 diligence in making those required due diligence.595 Some of these what they believed the final rule should determinations. commentators reasoned that the final consider as acceptable due diligence.601 rule should prescribe a specific due One commentator recommended that b. Comments on the Proposed Rules diligence standard so that an issuer will the final rule not only refer to the OECD Some commentators believed that the be unable to ‘‘engage in a type of ‘forum due diligence framework, but also Conflict Minerals Statutory Provision shopping’’’ for the least burdensome should require issuers to disclose the expressly requires an issuer to exercise standard and so that each issuer’s due steps that they took to complete the due diligence on the source and chain diligence measures will be consistent, OECD due diligence.602 of custody of its conflict minerals.590 accurate, and reliable.596 Other Some commentators recommended One commentator noted that nothing in commentators suggested that the final that a due diligence standard should not the statute gives us explicit authority to rule should prescribe a safe harbor for require an absolute standard of care.603 develop due diligence guidance.591 an issuer’s conduct allowing an issuer to Instead, these commentators suggested Another commentator asserted that avoid any undue or impractical either a ‘‘reasonable care’’ or a Congress intended the Conflict Minerals requirements set forth by independent ‘‘commercially practicable efforts’’ Statutory Provision to require due private sector auditors.597 While we did standard that would encompass diligence only on the source and chain not propose to require satisfaction of a contractual obligations, risk-based of custody of conflict minerals mined in particular set of standards, we requested programs, and industry-wide processes, the DRC and on the transportation comment on whether we should. but not necessarily include the routes through which such minerals A number of commentators suggested identification of all the parties in the that the final rule should refer to, supply chain or the determination of pass in countries adjoining the DRC.592 incorporate, or require the use of every mineral used for manufactured This commentator claimed that national or international standards or items. Some commentators Congress did not intend for the Conflict guidance in some manner, such as recommended that an issuer’s due Minerals Statutory Provision to require accepting an issuer’s due diligence as diligence should be presumed reliable if due diligence on the source and chain reliable if that issuer used a national or the issuer performs some or all of the of custody of minerals mined in the international standard or guidance, following steps: uses information from adjoining countries and recommended considering national or international an industry-wide process, creates a that the final rule not require such due due diligence standards or guidance conflict minerals policy that requires diligence. when developing the final rule, or conflict-mineral free provisions in all Many commentators supported our contracts, conducts supply chain risk requiring an issuer to use a national or proposal to not prescribe any specific assessments, requires suppliers to push international due diligence framework due diligence requirements and allow policies upstream and transmit for that due diligence to be considered an issuer to have flexibility in information downstream, establishes reliable.598 Some commentators did not developing its due diligence measures policies and procedures to remediate believe the final rule should require that based on the issuer’s own facts and instances of non-conformity of policy, an issuer use any particular national or circumstances.593 A number of these obtains independent third party audits, international due diligence standard.599 commentators, however, suggested that and publishes its supply chain Other commentators recommended the final rule provide guidance as to findings.604 Similarly, other against incorporating voluntary what would be considered acceptable commentators indicated that due international standards, such as the due diligence.594 Many other diligence should be presumed reliable if OECD due diligence framework, into the commentators recommended that the these conditions are met, but only if the final rule or suggested that we identify final rule provide a definition of or issuer requires upstream and and assess the potential latent risks and/ prescribe specific guidance for any downstream due diligence and or impacts to industry and auditors describes that due diligence.605 Other related to codifying voluntary industry 590 See, e.g., letters from NEI (‘‘We agree that commentators suggested that the due standards, such as the OECD due issuers should be required to use due diligence, as diligence standard in the final rule proposed.’’), Presbyterian Church USA (Feb. 15, diligence framework, into the final should be commensurate with the 2012) (‘‘Presbyterian Church I’’) (stating that the rule.600 Some commentators specifically Conflict Minerals Statutory Provision ‘‘requires due issuer’s position in the supply chain referenced the due diligence framework diligence’’), Sen. Durbin/Rep. McDermott (stating such that the due diligence requirement that ‘‘Section 1502 requires companies to exercise developed by the OECD in discussing for an issuer would be less rigorous the strict due diligence to determine the source of 595 See, e.g., letters from Arkema, Earthworks, conflict minerals in their products’’), and State II 601 See, e.g., letters from Arkema, Boeing, (‘‘It is unclear how a reasonable conflict minerals Enough Project I, CENCO I, CODSIA, Global Witness I, Howland, ICAR et al. II, Materials I, CODSIA, Earthworks, Enough Project I, Evangelical determination can be made without due diligence Alliance, Evangelicals, Global Witness I, ICAR et al. given the complexity of the region and the risk of Andrew Matheson (Mar. 2, 2011) (‘‘Matheson I’’), II, ITRI I, ITRI IV, Matheson I, Methodist Board, fraud.’’). MSG I, NYCBar I, Rep. Berman et al., SEMI, SIF I, MSG I, NEI, NYCBar I, NYCBar II, Presbyterian 591 See letter from TriQuint I. This commentator State I, State II, and WGC et al. I. 596 See letters from Global Witness I and ICAR et Church II, Rep. Berman et al., Sen. Durbin/Rep. suggested that the Commission work with other McDermott, SEMI, SIF I, SIF II, State I, State II, and government agencies to establish rules that govern al. II. WGC II, and WGC et al. I. what due diligence processes are reliable. 597 See, e.g., letters from ArcelorMittal, Chamber 602 See letter from SIF II. 592 See letter from Minister of Energy and I, ITIC I, Materials I, NAM I, NRF I, and RILA. 603 See, e.g., letters from AAEI, Chamber I, CRS Minerals of the United Republic of Tanzania (May 598 See, e.g., letters from Arkema, CODSIA, I, Industry Group Coalition I, ITIC I, and NAM I. 23, 2011) (‘‘Tanzania II’’). Earthworks, Enough Project I, Global Witness I, 604 See, e.g., letters from AAEI, Global Witness I, 593 See, e.g., letters from AAEI, AngloGold, Cleary Howland, ICAR et al. II, IPC I, ITIC I, ITRI I, Industry Coalition Group II, NAM I, and NRF I. Gottlieb, Industry Group Coalition Group I, IPC I, Matheson I, MSG I, NEI, NYCBar I, Rep. Berman et These steps are similar to the steps in the Annex sroberts on DSK5SPTVN1PROD with RULES ITIC I, ITRI I, Japanese Trade Associations, NAM I, al., SEMI, Sen. Durbin/Rep. McDermott, SIF I, State I of the OECD’s due diligence guidance. NEI, Niotan II, NMA II, NRF I, RILA, RILA–CERC, I, State II, WGC II, and WGC et al. I. 605 See, e.g., letters from Earthworks, Enough RMA, Roundtable, Sen. Durbin/Rep. McDermott, 599 See, e.g., letters from Cleary Gottlieb, NAM I, Project I, MSG I, and SIF I. The upstream and TriQuint I, and WGC II. NMA II, and WGC II. downstream due diligence that would be required 594 See, e.g., letters from AAEI, Cleary Gottlieb, 600 See letters from Auditing Roundtable, Inc. by these commentators is similar to the upstream Earthworks, Howland, IPC I, ITIC I, ITRI I, NAM I, (Oct. 31, 2011) (‘‘ARI’’) and Board of and downstream due diligence described in the NEI, NMA II, NRF I, RILA, Sen. Durbin/Rep. Environmental, Health & Safety Auditor Supplement on Tin, Tantalum, and Tungsten to the McDermott, and WGC II. Certifications (Oct. 31, 2011) (‘‘BEAC’’). OECD’s due diligence guidance. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56326 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations farther that issuer’s position in the regarding the conflict-free nature of the high-risk areas.’’ 615 A comment letter supply chain is from the mine or other minerals.612 submitted by the OECD in conjunction location of origin.606 with the United Nations Group of In the Proposing Release, we c. Final Rule Experts on the Democratic Republic of requested comment as to whether the After considering the comments, we the Congo (‘‘Group of Experts’’) and the final rule should prescribe different due are revising the final rule. The final rule International Conference on the Great diligence measures for gold because of requires that an issuer describe the due Lakes Region (‘‘ICGLR’’) indicated that any unique characteristics of the gold diligence it exercised in determining the the OECD due diligence guidance was supply chain. In response, most source and chain of custody of its ‘‘adopted as an OECD Recommendation commentators that discussed this point conflict minerals. The final rule requires by forty one OECD and non-OECD agreed that the due diligence required that an issuer’s due diligence follow a countries meeting at ministerial level on for gold should be the same as the due nationally or internationally recognized 25 May 2011 under the chairmanship of diligence required for the other three due diligence framework. We are U.S. Secretary of State Hillary Rodham conflict minerals.607 Two persuaded by commentators that Clinton.’’ 616 The final rule does not commentators, however, stated that gold requiring an issuer to use a nationally or mandate that an issuer use any is unique among the four conflict internationally recognized due diligence particular nationally or internationally minerals so the due diligence framework that is relevant to the audit recognized due diligence framework, requirements for it should be different objectives and permits consistent such as the OECD’s due diligence than for the other minerals.608 As assessment of the subject matter will guidance, in recognition of the fact that discussed above, a few commentators provide an independent private sector other evaluation standards may develop further recommended that the final rule auditor with a structure by which to that satisfy the intent of the Conflict permit issuers to exclude certain assess an issuer’s due diligence, which Minerals Statutory Provision. However, information from public dissemination we believe should make the rule more to satisfy the requirements of the final regarding the storage and transportation workable and less costly than if no rule, the nationally or internationally routes of gold for security reasons.609 framework was specified. We are also recognized due diligence framework In the Proposing Release, we also persuaded by commentators that used by the issuer must have been requested comment as to whether the requiring the use of nationally or established by a body or group that has final rule should state that an issuer is internationally recognized due diligence followed due-process procedures, permitted to rely on the reasonable framework will enhance the quality of including the broad distribution of the representations of its smelters or any an issuer’s due diligence and will framework for public comment, and be other actor in the supply chain, promote comparability of the Conflict consistent with the criteria standards in provided there is a reasonable basis to Minerals Reports of different issuers. GAGAS established by the GAO. believe the representations of the Also, we believe that requiring such due As a related matter, one commentator smelters or other parities. A number of diligence will provide issuers with a stated that the final rule should clarify commentators suggested, in response, degree of certainty and, as one whether an issuer has to describe that the final rule should allow an issuer commentator noted, ‘‘ameliorate the risk generally its due diligence processes or to rely on reasonable representations that a due diligence process will later be whether issuers have to describe from suppliers and/or smelters in judged to be unreliable.’’ 613 specifically purchase contracts satisfying their due diligence The OECD’s ‘‘Due Diligence Guidance associated with particular conflict requirement.610 Some of these for Responsible Supply Chains of minerals in their products.617 We commentators, however, explained that Minerals from Conflict-Affected and believe an issuer’s description of its due such written representations must be High-Risk Areas’’ 614 satisfies our diligence should be based on the accompanied by additional processes, criteria and may be used as a framework individual issuer’s facts and such as industry-wide smelter for purposes of satisfying the final rule’s circumstances. In this regard, if an verification programs, before they could requirement that an issuer exercise due issuer’s due diligence process is be relied upon.611 One commentator diligence in determining the source and relatively consistent throughout its recommended that the final rule should chain of custody of its conflict minerals. supply chain, the issuer could satisfy allow due diligence to be satisfied if an As one commentator noted, the OECD is the requirements by generally issuer includes obligations in its supply an international organization with 34 describing its due diligence. We contracts and receives reasonable member countries, including the United recognize, however, that an issuer may representations from its suppliers States, that works internationally with use different due diligence processes for governments and businesses and different aspects of its supply chain. For 606 See letters from CERC, Chamber I, ITIC I, NRF approved its due diligence guidance as example, an issuer using the OECD due I, and RILA. diligence guidance may use different 607 See, e.g., letters from Earthworks, Global the ‘‘the result of a collaborative initiative among governments, due diligence processes for tin, Witness I, ITRI I, SIF I, and State II. 608 See letters from AngloGold and WGC II. international organizations, civil society tantalum, and tungsten as compared 609 See letters from NMA II, NAM III, and WGC organizations, and industry participants with that for gold. If an issuer exercises II. to promote accountability and significantly different due diligence 610 See, e.g., letters from AngloGold, Global transparency in the supply chain of processes for different aspects of its Witness I, Howland, IPC I, ITIC I, Japanese Trade supply chain, such as with separate Associations, JVC et al. II, Kemet, NEI, NMA II, minerals from conflict-affected and RILA–CERC, RMA, Roundtable, SEMI, Sen. Durbin/ conflict minerals or products, that issuer Rep. McDermott, State II, Taiwan Semi, and WGC 612 See letter from Roundtable. should describe how they are different. sroberts on DSK5SPTVN1PROD with RULES II. 613 See letter from NAM I. As we note above, a number of 611 See letters from Global Witness I, Howland, 614 OECD, Due Diligence Guidance for commentators recommended that the ITIC I, JVC et al. II (stating that written Responsible Supply Chains of Minerals from final rule allow an issuer to rely on representations would not have to be accompanied Conflict-Affected and High-Risk Areas (2011), by additional processes ‘‘until such time as reliable available at http://www.oecd.org/daf/ 615 See letter from Global Witness I. smelter/refiner certification and due diligence internationalinvestment/ 616 See letter from OECD I. systems can be implemented’’), Kemet, NMA II, guidelinesformultinationalenterprises/46740847. RMA, Sen. Durbin/Rep. McDermott, and State II. pdf. 617 See letter from ITIC I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56327 reasonable representations from objectives and standards, the audits design of the due diligence process suppliers and/or smelters in satisfying would not be useful because they would described in the Conflict Minerals their due diligence requirement,618 lack any comparability.622 Some Report conforms to a recognized a whereas other commentators argued that commentators remarked that the standard and whether the process was written representations should not be Comptroller General or the Commission sufficiently effective; 630 whether the able to satisfy due diligence by must delineate suitable criteria for the issuer’s conclusion regarding the source themselves.619 The final rule requires measurement and presentation of the and chain of custody of its conflict that an issuer’s due diligence follow a information in the Conflict Minerals minerals is accurate; 631 and whether the nationally or internationally recognized Report, including the elements of the issuer appropriately included in the due diligence framework. Therefore, Conflict Minerals Report subject to the report all its products described as not whether an issuer may rely on audit, so as to provide an audit ‘‘DRC conflict free.’’ 632 Generally, reasonable representations from framework that would aid both issuers commentators recommended that the suppliers and/or smelters in satisfying and auditors.623 Such criteria would final rule not require an audit objective its due diligence requirement will be provide the basis for the auditor to to include a determination as to whether dependent on the nationally or measure the information provided by an issuer’s due diligence process was internationally recognized due diligence the issuer, and this criteria should be effective or that any conclusion based framework. objective, measurable, complete, and on that due diligence process was relevant.624 Commentators noted, accurate, because that would be very

3. Independent Private Sector Audit however, that the criteria would differ challenging and expensive to Requirements based on the objective of the audit. For undertake.633 a. Proposed Rules example, the criteria for evaluating Consistent with the Conflict Minerals whether an issuer is correct in Additionally, some commentators Statutory Provision, we proposed that concluding that its products are ‘‘DRC indicated that the Comptroller General the description of the measures taken by conflict free’’ are different from the or the Commission must identify the an issuer to exercise due diligence on criteria for determining whether the acceptable auditing standards for firms the source and chain of custody of its issuer’s process for determining whether to use when auditing an issuer’s conflict minerals include a certified its products are ‘‘DRC conflict free’’ is Conflict Minerals Report.634 In this independent private sector audit sufficient.625 regard, as some commentators noted,635 conducted in accordance with the Commentators from the accounting the Proposing Release stated that the standards established by the profession and others recommended staff of the GAO informed our staff of its Comptroller General of the United that the final rule clearly state the preliminary view that no new audit States.620 Under the Conflict Minerals objective of the audit and the subject standards need to be promulgated. Statutory Provision, the GAO is to matter to be audited.626 Some of these Therefore, the audit of the Conflict establish the appropriate standards for commentators identified possible audit Minerals Report would be performed the independent private sector audit. objectives, including: whether under GAGAS, and auditors could use Therefore, we did not include any management’s description of the either the provisions for Attestation auditing standards in the proposed rules procedures and controls performed in Engagements or Performance Audits in or discuss such standards in the an issuer’s due diligence process are GAGAS.636 However, as commentators Proposing Release. fairly described in the Conflict Minerals noted, in addition to certain substantive Report; 627 whether the design of an differences between the two standards b. Comments on the Proposed Rules issuer’s due diligence process described in GAGAS, only a licensed certified A number of commentators indicated in the Conflict Minerals Report public accountant or person working that the final rule must clarify the conforms to a recognized standard of with a certified public accounting firm independent private sector audit’s due diligence; 628 whether or governmental auditing organization criteria, objectives, and standards.621 management’s description of an issuer’s may perform an Attestation One commentator was concerned that, if due diligence process in its Conflict Engagement.637 Similarly, neither the Comptroller General nor the Minerals Report is accurate, the results commentators noted that Performance Commission required uniform of that process are fairly stated, and the Audits are not required to be conducted issuer has evaluated/identified the by certified public accountants, but 618 See, e.g., letters from AngloGold, Global upstream and downstream due auditors using the Performance Audit Witness I, Howland, IPC I, ITIC I, Japanese Trade diligence processes; 629 whether the standard would still need to satisfy Associations, JVC et al. II, NEI, NMA II, RILA– CERC, RMA, SEMI, State II, Taiwan Semi, and WGC 622 See letter from WGC II. certain qualification requirements under II. GAGAS, such as continuing 623 See, e.g., letters from Deloitte and KPMG. 619 See letters from Global Witness I, Howland, 624 See letters from Deloitte and Grant Thornton. professional education requirements, ITIC I, and RMA. 620 See Exchange Act Section 13(p)(1)(A)(i). 625 See letters from AICPA I and Grant Thornton. quality control measures, and 626 See letters from AICPA I, AICPA II, Barrick 621 See, e.g., letters from American Institute of Certified Public Accountants (Mar. 1, 2011) Gold, Grant Thornton, IPC II, KPMG, MSG III, and the audit of the Conflict Minerals Report should (‘‘AICPA I’’), American Institute of Certified Public SIF II. include a ‘‘review of management systems and 627 See letters from AICPA I, AICPA II, Grant Accountants (Nov. 17, 2011) (‘‘AICPA II’’), Barrick processes, and of conclusions reached’’). Gold, BEAC, Calvert, Deloitte, The Elm Consulting Thornton, and KPMG. 630 See letter from AICPA I. 628 See letters from AICPA I, AICPA II, IPC II, and Group International LLC (Mar. 1, 2011) (‘‘Elm’’), 631 See letters from AICPA I and KPMG. Ernst & Young LLP (Mar. 2, 2011) (‘‘E&Y’’), Grant KPMG. Commentators also observed that this 632 See id. Thornton (recommending that the Commission second objective would require the final rule to sroberts on DSK5SPTVN1PROD with RULES 633 See, e.g., letters from AICPA I, AICPA II, establish a ‘‘working group to support the provide a clear due diligence standard against which an auditor could compare the issuer’s due Deloitte, ITIC I, KPMG, MSG III, and Roundtable. Comptroller General in the development of the 634 See letters from AICPA I, Deloitte, E&Y, Elm, appropriate form of engagement, including the diligence process. criteria to be used to evaluate the subject matter and 629 See letter from MSG III (noting, however, that and KPMG. 635 See, e.g., letters from Barrick Gold and E&Y. the opinion (or conclusion) to be expressed the audit scope should not include verification of 636 See letters from AICPA I, AICPA II, BEAC, thereon’’), Hileman Consulting, ICGLR, IPC II, the ultimate conclusions of the Conflict Minerals KPMG LLP (Mar. 2, 2011) (‘‘KPMG’’), MSG III, NEI, Report, only that the process was applied as Deloitte, E&Y, Elm, Grant Thornton, and MSG III. NYCBar I, WGC II. described). See also letter from SIF II (stating that 637 See, e.g., letters from AICPA I and BEAC. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56328 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations independent peer reviews.638 In this the statement in the proposed rules and concerns about the application of such regard, to increase the pool of auditors the Conflict Minerals Statutory standards. and thereby reduce costs, some Provision that the independent private ii. Auditor Independence commentators recommended that the sector audit would be considered a final rule allow auditors to use the ‘‘critical component of due diligence’’ Similarly, entities performing an Performance Audit standard under could create confusion regarding the independent private sector audit of the GAGAS.639 Some of these commentators application of our auditor independence Conflict Minerals Report must comply recommended that auditors that are not requirements in Rule 2–01 of Regulation with any independence standards certified public accountants could S–X.648 established by the GAO, and any satisfy GAGAS’s Performance Audit questions regarding applicability of qualification requirements by receiving c. Final Rule GAGAS on this point should be directed a professional certification relating to i. Auditing Standards to the GAO. We are not adopting any environmental, health, and safety additional independence requirements. As noted above, the GAO staff has Also, the independence required for the auditing from organizations that certify indicated to our staff that the GAO does auditors by requiring that an auditor independent private sector audit of the not intend to develop new standards for Conflict Minerals Report is not the same meet certain standards, such as having the independent private sector audit of as the OECD’s independence a code of conduct, committing to a code the Conflict Minerals Report. As we requirement for auditors conducting of ethics and rigorous practices, noted in the Proposing Release, GAO audits of conflict mineral smelters. engaging in continuing professional staff informed our staff that existing We acknowledge commentators’ development and education, being GAGAS standards,649 such as the requests to clarify how our own subjected to review, and other standards for Attestation Engagements independence requirements would provisions to maintain a high caliber of or the standards for Performance Audits apply to an accountant that performed expertise.640 One commentator will be applicable.650 The GAO staff has both the independent private sector suggested that the final rule should also indicated to our staff that the audit of the Conflict Minerals Report allow any auditor to perform the audit GAGAS Performance Standards could and an engagement (e.g., the audit of the as long as it was knowledgeable and be used by the auditor to express a financial statements of an issuer) subject able to meet the requirements of the conclusion as to whether the design of to the independence requirements in OECD’s criteria for the competence of the issuer’s due diligence measures are Rule 2–01 of Regulation S–X.651 The auditors.641 Other commentators noted, in conformity with the criteria set forth independent private sector audit of the however, that the OECD’s criteria for the in a nationally or internationally Conflict Minerals Report is specifically competence of auditors are inadequate recognized due diligence framework described in the Act as constituting a because they fail to provide any used by the issuer, such as the OECD’s ‘‘critical component’’ of the registrant’s guidance as to how this would be ‘‘Due Diligence Guidance for due diligence process,652 which assured.642 Another commentator Responsible Supply Chains of Minerals commentators were concerned may recommended that the final rule should from Conflict-Affected and High-Risk suggest the auditor would perform work delineate specific requirements for the Areas,’’ and whether the issuer’s that would impair independence. accreditation and selection of auditors description of the due diligence Despite this language, the Conflict but did not provide any suggested measures it performed, as set forth in Minerals Statutory Provision only requirements.643 the Conflict Minerals Report, with requires an audit and no other functions Several commentators asserted that respect to the period covered by the that may imperil independence, such as the final rule should clarify the report, is consistent with the due ‘‘management functions’’ described in independence standards for auditors.644 diligence process that the issuer Rule 2–01(c)(4)(vi) of Regulation S–X. Some of these commentators 645 undertook. Therefore, unless the GAO Therefore, we do not believe that it recommended that the final rule state makes some formal pronouncement, it would be inconsistent with the that performing the independent private appears that any auditor of the Conflict independence requirements in Rule 2– sector audit of the Conflict Minerals Minerals Report will need to conduct 01 of Regulation S–X if the independent Report is not inconsistent with the the audit using the standards set forth public accountant also performs the Commission’s auditor independence in GAGAS. Because the Conflict independent private sector audit of the requirements in Rule 2–01 of Regulation Minerals Statutory Provision provides Conflict Minerals Report. The S–X.646 One commentator noted, that the audit standards are to be engagement to perform the independent however, that the OECD’s independence established by the GAO, the GAO is private sector audit of the Conflict requirements prohibit a Conflict responsible for matters pertaining to the Minerals Report would nevertheless be Minerals Report auditor from having audit standards, including questions or considered a ‘‘non-audit service’’ provided any other service for the issuer subject to the pre-approval requirements within a 24-month period.647 Similarly, 648 See letters from E&Y and Grant Thornton. two other commentators asserted that 649 See U.S. Gov’t Accountability Office, GAO–12– 651 Rule 2–01 of Regulation S–X [17 CFR 210.2– 331G, Government Auditing Standards 2011 01]. 638 See letter from Deloitte and BEAC. Revision (Dec. 2011), available at http:// 652 Exchange Act Section 13(p)(1)(A)(i), as added 639 See, e.g., letters from ArcelorMittal, ARI, www.gao.gov/assets/590/587281.pdf. by Section 1502 of the Act, states that the BEAC, Hileman Consulting, IPC II, and MSG III. 650 The GAGAS Attestation Engagement independent private sector audit of the conflict 640 See letters from BEAC and Hileman standards, in Chapter 3.75, require that auditors be minerals report is included in the ‘‘measures taken Consulting. ‘‘licensed certified public accountants, persons by the [issuer] to exercise due diligence on the 641 See letter from NYCBar I. working for a licensed certified public accounting source and chain of custody of such minerals.’’ sroberts on DSK5SPTVN1PROD with RULES 642 See letter from ARI and BEAC. firm or for a government auditing organization, or Exchange Act Section 13(p)(1)(B) further provides 643 See letter from ICGLR. licensed accountants in states that have multi-class that the audit must be certified by the issuer and 644 See, e.g., letters from AICPA I, Deloitte, E&Y, licensing systems that recognize licensed states that the certified audit ‘‘is a critical accountants other than certified public component of due diligence in establishing the Grant Thornton, Hileman Consulting, and KPMG. accountants.’’ Unlike the GAGAS Attestation source and chain of custody of such minerals.’’ 645 See letters from AICPA I, Deloitte, and E&Y. Engagement standards, the GAGAS Performance These provisions make clear that the independent 646 17 CFR 210.2–01. Audit standards allow auditors other than certified private sector audit is one step in management’s 647 See letter from KPMG. public accountants to perform a Performance Audit. due diligence process. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56329 of Rule 2–01(c)(7) of Regulation S–X. In to the sections of the Conflict Minerals or to express an opinion or conclusion addition, the fees related to the Report that discuss the design of the as to whether or not the issuer’s independent private sector audit of the issuer’s due diligence framework and necessary conflict minerals are ‘‘DRC Conflict Minerals Report would need to the due diligence measures the issuer conflict free,’’ which are more similar to be included in the ‘‘All Other Fees’’ performed because the provision’s audit objectives in our other rules. category of the principal accountant fee requirement for an issuer to obtain an However, we believe that the audit is disclosures.653 If the accountant were to independent private sector audit is still meaningful because investors and provide services that extended beyond located in the provision’s subsection other users will have some assurance the scope of the independent private relating to due diligence.656 from an independent third party that the sector audit of the Conflict Minerals The audit requirement is not issuer’s due diligence framework, as set Report, the accountant would need to discussed in the subsequent subsection forth in the Conflict Minerals Report, is consider whether those services were that requires a description in the designed in conformity with the inconsistent with Rule 2–01 of Conflict Minerals Report of the issuer’s relevant nationally or internationally Regulation S–X. products manufactured or contracted to recognized due diligence framework. be manufactured that are ‘‘not DRC Further, we believe it is necessary and iii. Audit Objective conflict free,’’ 657 and the final rule does appropriate to require the audit to We agree with commentators that the not require an audit of that information. address whether the issuer actually final rule should clearly state the We note that the objective we are performed the due diligence measures objective of the Conflict Minerals adopting differs significantly from the that it represents that it performed in Statutory Provision’s independent objectives of other audits required by the Conflict Minerals Report, so that the private sector audit and the subject our rules.658 Nonetheless, in light of the audit also addresses, in a cost efficient matter to be audited to provide a basis statutory structure, as well as concerns manner, the actual performance of the for the auditor to measure the about the costs that could arise from a due diligence and not just the design, as information provided by the issuer. requirement to audit the conclusion well as provides independent third Therefore, the final rule specifies an about the conflict minerals’ status or party confirmation that the work audit objective. The final rule states that take other approaches,659 we have described was performed. the audit’s objective is to express an concluded that the audit objective opinion or conclusion as to whether the should be limited in this manner. We 4. Recycled and Scrap Minerals design of the issuer’s due diligence recognize that an audit objective a. Proposed Rules framework as set forth in the Conflict requiring an auditor to express an As proposed, the rules would allow Minerals Report, with respect to the opinion or conclusion as to whether the for different treatment of conflict period covered by the report, is in design of the issuer’s due diligence minerals from recycled and scrap conformity with, in all material measures as set forth in the Conflict sources than from original sources due respects, the criteria set forth in the Minerals Report, with respect to the to the difficulty of looking through the nationally or internationally recognized period covered by the report, is in recycling or scrap process to determine due diligence framework used by the conformity with, in all material respects, the criteria set forth in the the mine or other location of origin of issuer, and whether the issuer’s the minerals. Given this difficulty, we description of the due diligence nationally or internationally recognized due diligence framework used by the expected that an issuer generally would measures it performed as set forth in the not know the origins of its recycled or Conflict Minerals Report, with respect issuer, and whether the issuer’s description of the due diligence scrap conflict minerals, so we believed to the period covered by the report, is it would be appropriate for the proposed consistent with the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect rules to require that an issuer using process that the issuer undertook. recycled or scrap conflict minerals The Conflict Minerals Statutory to the period covered by the report, is consistent with the due diligence furnish a Conflict Minerals Report Provision requires an issuer to submit a process that the issuer undertook, is not subject to special rules. Under the Conflict Mineral Report that includes ‘‘a as comprehensive as an audit objective proposed rules, if an issuer obtained description of the measures taken by the requiring an auditor to express an conflict minerals from a recycled or [issuer] to exercise due diligence on the opinion or conclusion as to whether the scrap source, it would have been source and chain of custody of its due diligence measures were effective, required to consider the products conflict minerals, which measurers shall containing or produced with those include an independent private sector 656 See Exchange Act Section 13(p)(1)(A)(i). conflict minerals to be ‘‘DRC conflict audit of such report,’’ 654 and ‘‘a 657 See Exchange Act Section 13(p)(1)(A)(ii). free.’’ 660 description of the products 658 The objective of the ordinary audit of financial As proposed, an issuer with conflict manufactured or contracted to be statements by the independent auditor is the minerals that originated from recycled manufactured that are not DRC conflict expression of an opinion on the fairness with which or scrap sources would have been free.’’ 655 We recognize that the final they present, in all material respects, financial position, results of operations, and its cash flows in required to disclose in its annual report, rule does not require an audit of the conformity with generally accepted accounting under the ‘‘Conflict Minerals entire Conflict Minerals Report. We principles. See paragraph .01 of AU sec. 110, Disclosure’’ heading, that its conflict believe, however, that it is appropriate Responsibilities and Functions of the Independent minerals were obtained from recycled or for the final rule to limit the audit only Auditor. The auditor’s objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the 660 Because the proposed rules would have 653 See Item 9(e)(4) of Schedule 14A [17 CFR company’s internal control over financial reporting, automatically classified recycled or scrap conflict sroberts on DSK5SPTVN1PROD with RULES 240.14a-101]. Registrants also are required to as a part of which the auditor should test the design minerals as ‘‘DRC conflict free,’’ issuers with describe the nature of the services comprising the effectiveness of controls, as well as the operating products containing such minerals would not have fees disclosed under the ‘‘All Other Fees’’ category. effectiveness of controls. See paragraphs 3, 42, and needed to provide in the Conflict Minerals Report As such, the independent private sector audit of the 44 of Auditing Standard No. 5, An Audit of Internal a description of the recycled or scrap conflict Conflict Mineral Report should be included in that Control over Financial Reporting That Is Integrated minerals’ processing facilities or country of origin, description. With An Audit of Financial Statements. nor would they have been required to describe their 654 Exchange Act Section 13(p)(1)(A)(i). 659 See, e.g., letters from AICPA I, Deloitte, and efforts to determine the mine or location of origin 655 Exchange Act Section 13(p)(1)(A)(ii). KPMG. with the greatest possible specificity. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56330 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations scrap sources and that it furnished a indicated that they supported, as the conflict minerals are from recycled Conflict Minerals Report regarding those proposed, alternative recycled or scrap or scrap sources, or not require that an recycled or scrap minerals. Also, under reporting that requires an issuer to issuer provide any information other the proposed rules, an issuer would perform due diligence in determining than a statement that the conflict have been required to state that its that the conflict minerals were, in fact, minerals are from recycled or scrap products containing or produced with from recycled and scrap sources and to sources.667 Some commentators agreed recycled or scrap minerals in the submit a Conflict Minerals Report that products with conflict minerals Conflict Minerals Report were describing the due diligence exercised from recycled and scrap sources should considered ‘‘DRC conflict free.’’ In that includes an audit of the report.663 be considered ‘‘DRC conflict free,’’ as addition, such an issuer would have A number of commentators believed proposed.668 Other commentators described the measures taken to exercise that the final rule should require that an indicated that the final rule should due diligence in determining that its issuer only conduct the equivalent of a require an issuer with products conflict minerals were recycled or scrap reasonable country of origin inquiry, containing conflict minerals from and obtain an independent private instead of due diligence, to determine recycled or scrap sources to label those sector audit of that report. whether its conflict minerals were from products with a name other than ‘‘DRC We did not propose to define when a recycled or scrap sources.664 Also, some conflict free,’’ such as ‘‘recycled’’ or conflict mineral is from recycled or of these and other commentators stated ‘‘scrap’’ products.669 scrap sources. Instead, any issuer explicitly that an issuer should not be Some commentators stated that the seeking to use this alternative approach required to submit a Conflict Minerals more the alternative reporting approach would describe the measures it took to Report and/or an audit of its recycled or for conflict minerals from recycled or exercise due diligence in determining scrap conflict minerals.665 Other scrap sources resembles our approach that the conflict minerals came from commentators, including a number of for newly mined conflict minerals the recycled or scrap sources. The members of Congress, recommended greater the risk of creating a disincentive Proposing Release stated, however, that that the final rule exempt conflict for a manufacturers to use conflict we would consider conflict minerals to minerals from recycled or scrap minerals from recycled or scrap be ‘‘recycled’’ if they are reclaimed end- sources.666 sources.670 As one of these user or post-consumer products, but we Other commentators stated that the commentators asserted, without certain would not consider those minerals final rule should require due diligence alternative reporting requirements for ‘‘recycled’’ if they are partially but not a Conflict Minerals Report, not issuers with conflict minerals from processed, unprocessed, or a byproduct require a Conflict Minerals Report but recycled or scrap sources, such minerals from another ore.661 require an audit of the inquiry into ‘‘would be doomed for burial in a land whether the conflict minerals are from fill until mined anew under a different b. Comments on the Proposed Rules recycled or scrap sources, require a authority having jurisdiction,’’ which Commentators offered a wide variety ‘‘reliable process’’ to determine whether would be a ‘‘clear waste’’ of conflict of views on the appropriate approach to minerals that ‘‘cannot contribute to new conflict minerals from recycled or scrap Ellmers, Representative Steven LaTourette (Jun. 13, suffering in the DRC even though its sources. A number of commentators 2012) (‘‘Rep. LaTourette’’), Representative Robert E. disposition regarding past suffering may stated that they either agreed with the Latta (May 16, 2012) (‘‘Rep. Latta’’), Rep. Murphy, Representatives Tim Murphy and Peter J. Visclosky not be clear.’’ 671 According to this recycled and scrap alternative reporting (Aug. 2, 2012) (‘‘Reps. Murphy and Visclosky’’), commentator, ‘‘it is possible that requirements, as proposed, or agreed Representative James B. Renacci (Mar. 6, 2012) dishonest people may find a way to pass with some type of recycled and scrap (‘‘Rep. Renacci’’), Representative Bill Shuster (Mar. new material off as recycled,’’ but this 12, 2012) (‘‘Rep. Shuster’’), Representative Patrick alternative reporting requirements or J. Toomey (Apr. 12, 2012) (‘‘Rep. Toomey’’), possibility ‘‘does not outweigh the very exemption, although some of these Representative Stephen A. Womack (Dec. 23, 2011) obvious benefit of using recycled commentators did not necessarily (‘‘Rep. Womack’’), RMA, SEMI, Senator Mark Pryor products and materials.’’ 672 In this discuss the mechanics of such reporting (Mar. 19, 2012) (‘‘Sen. Pryor’’), and US Steel. 663 See, e.g., letters from Bario-Neal, Brilliant regard, other commentators argued that alternatives.662 Some commentators Earth, Earthworks, Enough Project I, Enough Project requiring issuers to provide the reason IV, Hacker Jewelers, ICAR et al. II, Howland, SIF they determined that their conflict 661 As we noted in the Proposing Release, the I, and TIAA–CREF. minerals came from recycled or scrap proposed rules regarding recycled and scrap 664 See, e.g., letters from AdvaMed I, Advanced conflict minerals would apply to all conflict sources, including the due diligence Medical Technology Association (Nov. 1, 2011) minerals equally. If recycled or scrap minerals were (‘‘AdvaMed II’’), AngloGold, Global Tungsten II, processes they used in making their mixed with new minerals, the recycled and scrap Industry Group Coalition I, ITIC I, ITRI I, ITRI IV, determination, would offset the reduced alternative approach would apply to only the JVC et al. II, LBMA I, Metalor Technologies USA burden provided by the exemption.673 portion of the minerals that were recycled or scrap (Feb. 25, 2011) (‘‘Metalor’’), NMA I, RJC I, United One commentator suggested that an and the issuer would be required to furnish a States Chamber of Commerce (Nov. 29, 2011) Conflict Minerals Report regarding at least the (‘‘Chamber III’’), and WGC II. issuer should be able to describe a recycled or scrap minerals. If the issuer’s new 665 See, e.g., letters from AdvaMed I, AdvaMed II, product as using recycled or scrap conflict minerals did not originate in the Covered ArcelorMittal, Copper & Brass Fabricators Council, minerals if a majority of the minerals Countries, that Conflict Minerals Report would Inc. (Mar. 2, 2011) (‘‘Copper & Brass’’), Global used in the product are from recycled or contain only information regarding the recycled or Tungsten II, IPC I, IPC II, ITIC I, ITRI I, ITRI III, ITRI scrap minerals. If, however, the new conflict IV, JVC et al. II, JVC et al. III, Materials I, NAM I, 667 See, e.g., letters from Cleary Gottlieb, JVC et minerals originated in the Covered Countries, or the Rep. Altmire, Rep. Amodei, Rep. Bachus et al., Rep. issuer was unable to determine that its new conflict al. II, MSG I, and NEI. Ellmers, Rep. Murphy, Rep. Shuster, Sen. Pryor, 668 See, e.g., letters from Copper & Brass, JVC et minerals did not originate in the Covered Countries, Specialty Steel Industry of North America (Mar. 2, the Conflict Minerals Report would include 2011) (‘‘SSINA’’), Tiffany, and WGC II. See also al. II, MSG I, NEI, NMA II, SIF I, SSINA, TIAA– information regarding both the new conflict letter from Rep. Critz (stating that we should CREF, and WGC II. sroberts on DSK5SPTVN1PROD with RULES 669 See, e.g., letters from CRS I, Global Witness I, minerals and the recycled or scrap conflict consider ‘‘reconfiguring the auditing requirement as minerals. it relates to recycled scrap materials’’). and State II. 662 See, e.g., letters from AAEI, AAFA, CRS I, 670 See, e.g., letters from Copper & Bass, Global 666 See, e.g., letters from Rep. Altmire, Rep. Global Tungsten I, Global Witness I, Japanese Trade Murphy, Reps. Murphy and Visclosky Tungsten I, RMA, SEMI, and SSINA. 671 See letter from SEMI. Associations, MSC I, NRF I, Ohio Precious Metals (recommending exempting recycled or scrap steel 672 See id. (Mar. 2, 2011) (‘‘OPM’’), PCP, Representative Jason that contains conflict minerals), Rep. Renacci, Rep. Altmire (Mar. 23, 2012) (‘‘Rep. Altmire’’), Rep. Shuster, Rep. Toomey, Rep. Womack, and Sen. 673 See letters from Rep. LaTourette and Rep. Amodei, Rep. Bachus et al., Rep. Critz, Rep. Pryor. Latta. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56331 scrap sources or a combination of did not consider partially processed * * * scrap that is the result of an recycled, scrap, and newly mined materials as being recycled, because industrial process.’’ 688 conflict minerals because it would be they believed that such a definition Additionally, some commentators impossible to determine whether all the would exclude industrial scrap, provided recommendations specifically minerals in a product were from sometimes referred to as ‘‘new’’ scrap, for treating conflict minerals in jewelry, recycled or scrap sources.674 Another generated by downstream manufacturers coins, and bars as recycled or scrap. One commentator recommended that the from the treatment given to recycled such commentator stated that conflict final rule should allow an issuer to minerals.681 minerals from discarded consumer describe its products as ‘‘DRC conflict Some commentators provided jewelry should be considered recycled free’’ if a majority of the conflict alternative definitions for recycled and or scrap.689 Another commentator minerals in those products are from scrap minerals. One commentator stated argued that any definition of recycled recycled or scrap sources.675 One that the final rule should define a and scrap gold should grandfather gold commentator asserted that tolled recycled or scrap conflict mineral as ‘‘a bars and gold coins produced before the material (scrap, second life-cycle conflict mineral or a conflict mineral effective date of the final rule and materials, or ores processed into raw derivative that is within, or has been exclude sludges, slimes, flue dust, materials suitable for use in the reclaimed from, a used product that was carbon fines, slag, and other by-products manufacture of products) received from collected directly from the last product from consideration as conflict processing facilities or suppliers should end user, or that was collected from a minerals.690 Conversely, other be treated as conflict free if the original municipal waste stream.’’ 682 Other commentators stated that the definition material supplied was conflict free.676 A commentators indicated that conflict of conflict minerals from recycled or number of other commentators minerals should be considered recycled scrap sources should include only those suggested that the final rule allow an or scrap only if they have been through conflict minerals from post-consumer issuer to designate the origin of any a cycle of production and products and not include any jewelry recycled or scrap conflict minerals as application.683 A further commentator unsold or not previously owned as end- the country in which those minerals suggested that the final rule adopt, in use products by consumers.691 Also, were generated and collected or substantial part, the Environmental some of these commentators indicated otherwise initially submitted into the Protection Agency’s definition of solid that gold coins and bars should not be recycling or scrap supply chain, which waste for our definition of conflict classified as recycled or scrap 692 is consistent with the United States minerals from recycled or scrap sources, because, as some of these commentators customs law.677 Also, commentators with the related exclusions and stated, they do not represent a clear agreed that the alternative reporting definitions of various scrap materials.684 consumer end-of-life product and are requirements for recycled and scrap One commentator recommended that less identifiable as not newly-mined minerals should apply to all conflict we incorporate the Electronic Industry gold.693 minerals and issuers equally.678 Citizenship Coalition’s (‘‘EICC’’) Many commentators discussed the c. Final Rule definition of ‘‘scrap’’ for tantalum as the Proposing Release’s statement that we definition for scrap in the final rule.685 We are revising the proposal’s would consider conflict minerals to be treatment of conflict minerals from Certain commentators sought to limit from a recycled or scrap sources if those recycled and scrap sources in the final the definition of recycled and scrap minerals are reclaimed end-user or post- rule. We agree with commentators that minerals to 100% post-consumer consumer products but would not it is appropriate to provide alternative metals.686 Some commentators consider those minerals ‘‘recycled’’ if treatment for such conflict minerals so suggested a definition that would they are partially processed, that the final rule does not provide a include reclaimed materials from the unprocessed, or a byproduct from disincentive for using conflict minerals manufacture of downstream products another ore. Some of these from recycled and scrap sources. that incorporate those metals, processes commentators recommended that the However, we also want to include utilizing those metals, or end-user or final rule expand this statement to safeguards to prevent issuers from post-consumer products, which would match the OECD’s definition of recycled claiming to use conflict minerals from not include minerals partially and scrap minerals or explicitly adopt recycled and scrap sources when that is processed, materials from the partially the OECD’s definition in the final not the case. We believe, as certain processed minerals, or materials from rule.679 Likewise, certain commentators commentators noted,694 requiring an intermediate stages of the smelting and recommended that the final rule clarify refining process.687 One commentator issuer with necessary conflict minerals that we would consider conflict to conduct an inquiry similar to the recommended that the final rule minerals from recycled or scrap sources reasonable country of origin inquiry to consider as conflict minerals from to include scrap processed metals determine whether its minerals are from recycled or scrap sources, ‘‘not only created during product manufacturing, * * * post-consumer scrap, but also which is part of the OECD definition.680 688 See letter from ArcelorMittal. 689 See letter from JVC et al. II. These commentators, however, were 681 Id. 690 See letter from NMA II. concerned that the Proposing Release 682 See letter from SEMI (defining a ‘‘used 691 See, e.g., letters from Brilliant Earth, Bario- product’’ as ‘‘a product that, prior to recycling or Neal, Earthworks, Enough Project I, Hacker 674 See letter from AngloGold. disposal, is commercially sold or otherwise Jewelers, ICAR et al. II, and TakeBack 675 See letter from WGC II. distributed to a buyer not in the commercial chain 692 See, e.g., letters from Brilliant Earth, Bario- 676 See letter from Global Tungsten II. of distribution and used for some period of time’’). Neal, Enough Project I, Hacker Jewelers, ICAR et al. sroberts on DSK5SPTVN1PROD with RULES 677 See, e.g., letters from IPMI I, LBMA I, Metalor, 683 See letters from Global Tungsten I and RMA. II, and TakeBack. NMA II, and RJC I. 684 See letter from Elm. 693 See letter from Enough Project I and ICAR et 678 See, e.g., letters from Howland, IPC I, ITRI I, 685 See letter from H.C. Starck GmbH (Jul. 27, al. II. and NEI. 2011) (‘‘Starck’’). 694 See, e.g., letters from AdvaMed I, AdvaMed II, 679 See, e.g., letters from Global Witness I, MSG 686 See, e.g., letters from Bario-Neal, Brilliant AngloGold, Global Tungsten II, Industry Group I, and SIF I. Earth, Earthworks, Metalsmiths, Hacker Jewelers, Coalition I, ITIC I, ITRI I, ITRI IV, JVC et al. II, 680 See, e.g., letters from Copper & Brass and and TakeBack. LBMA I, Metalor, NMA I, RJC I, Chamber III, and SSINA. 687 See letters from ITRI I, JGI, and Solutions. WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56332 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations recycled or scrap sources is an explained, the ‘‘intent of the statute is final rule and not just included as appropriate way to balance these to provide investors with information guidance in the release.704 concerns.695 Under the final rule, if an about whether minerals used in Further, we are persuaded by issuer has reason to believe, as a result manufacturing processes may contribute commentators that we should use the of its reasonable country of origin to the ongoing conflict in the DRC,’’ 699 OECD definition to provide certainty inquiry, that its conflict minerals may and it is ‘‘comfortable that legitimate and prevent an issuer from using an not have been from recycled or scrap recycled post-consumer or scrap alternative definition that would allow sources, it must exercise due diligence. minerals do not contribute to the crisis the issuer to classify it minerals as The issuer would then be required to and can be therefore identified as ‘DRC recycled or scrap when they were provide a Conflict Minerals Report if it conflict free.’ ’’ 700 We are aware that the not.705 Therefore, the final rule states is unable to determine that the conflict underlying conflict minerals that were that conflict minerals are considered to minerals came from recycled or scrap recycled or from scrap sources may have be from recycled or scrap sources if they sources. once directly or indirectly financed or are from recycled metals, which are We believe this approach for any benefited armed groups in the Covered reclaimed end-user or post-consumer issuer with conflict minerals from Countries. However, because the products, or scrap processed metals recycled or scrap sources is consistent purpose of the provision is to provide created during product manufacturing. with the Conflict Minerals Statutory information about whether minerals Also, based on the OECD definition, the Provision. The provision was intended used in manufacturing directly or final rule states that recycled metal to affect the ‘‘exploitation and trade of indirectly financed or benefited armed includes excess, obsolete, defective, and conflict minerals originating in the groups in the Covered Countries, and scrap metal materials that contain Democratic Republic of the Congo [that] conflict minerals from recycled or scrap refined or processed metals that are is helping to finance conflict sources no longer do so, we believe it appropriate to recycle in the production characterized by extreme levels of is appropriate to deem all products with of tin, tantalum, tungsten and/or gold. violence in the eastern Democratic conflict minerals from recycled or scrap The final rule states further, however, Republic of the Congo.’’ 696 As noted by source as ‘‘DRC conflict free.’’ 701 This that minerals partially processed, some commentators, however, armed prevents the final rule from providing a unprocessed, or a byproduct from groups in the Covered Countries are disincentive to use conflict minerals another ore will not be included in the financed and benefit from the extraction from recycled or scrap sources. definition of recycled metal. and illegal taxation of newly mined The definition included in the final conflict minerals and their transport, i. Definition of ‘‘Recycled and Scrap rule should alleviate certain not the use of recycled or scrap conflict Sources’’ commentators’ concern that the minerals.697 No further revenue or other We are revising the proposed rules to Proposing Release would limit the benefit will be provided to the armed adopt a definition of conflict minerals definition of conflict minerals from groups from any transaction involving from recycled or scrap sources, which recycled or scrap sources to only end- the conflict minerals from recycled or mirrors the OECD definition of recycled user or post-consumer scrap and not scrap sources because the armed groups metals.702 We are persuaded by include scrap processed metals created ‘‘have already extracted their revenue commentators that argued that it is during product manufacturing.706 The and do not stand to gain with [their] use important for us to prescribe clear final rule’s definition, which is or sale.’’ 698 definitions regarding conflict minerals consistent with the OECD definition, In this regard, we believe it is from recycled or scrap sources so that includes scrap processed metals created appropriate, as proposed, to allow an an issuer does not use this alternative during product manufacturing. issuer, if it wishes, to describe its reporting scheme as a means to avoid products containing conflict minerals ii. Due Diligence for Conflict Minerals the requirement to exercise due That May Not Be From ‘‘Recycled and from recycled or scrap sources as ‘‘DRC diligence on the source and chain of Scrap Sources’’ conflict free.’’ As one commentator custody of its conflict minerals in order to describe its products as ‘‘DRC conflict In a change from the proposal, the 695 Because we envision these inquiries to be free.’’ 703 Also, we agree with one of final rule only requires an issuer with similar, we use the term ‘‘reasonable country of origin inquiry’’ to refer to an issuer’s inquiry into these commentators that the definition conflict minerals from recycled or scrap both the conflict minerals’ country of origin and should be included in the body of the sources to exercise due diligence if it whether the minerals are from recycled or scrap has reason to believe, following its sources. reasonable country of origin inquiry, 696 See Section 1502(a) of the Act. 699 See letter from TIAA–CREF. 697 See letters from AAEI and Global Tungsten I. 700 See id. that its conflict minerals that it thought 698 See letter from AAEI. See also OECD, OECD 701 We also note that, going forward, newly mined were from recycled or scrap sources Due Diligence Guidance for Responsible Supply minerals, even if they are eventually recycled, will may not be from such sources. If so, as Chains of Minerals from Conflict-Affected and be covered under the final rule when they are first is true for issuers with conflict minerals High-Risk Areas, 7 n.2 (2011), available at http:// used. 702 See OECD, Due Diligence Guidance for from newly mined sources, the issuer www.oecd.org/daf/internationalinvestment/ guidelinesformultinationalenterprises/ Responsible Supply Chains of Minerals from must exercise due diligence that 46740847.pdf (stating that metals ‘‘reasonably Conflict-Affected and High-Risk Areas, 12 n.2 conforms to a nationally or assumed to be recycled are excluded from the scope (2011), available at http://www.oecd.org/dataoecd/ internationally recognized due diligence of this’’ guidance) and OECD, Due Diligence 62/30/46740847.pdf. (‘‘Recycled metals are reclaimed end-user or post-consumer products, or framework, if such a framework is Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk scrap processed metals created during product available. The proposed rules would Areas: Supplement on Gold, 28 n.34 (2012), manufacturing. Recycled metal includes excess, have required issuers with conflict sroberts on DSK5SPTVN1PROD with RULES available at http://www.oecd.org/corporate/ obsolete, defective, and scrap metal materials which minerals from recycled or scrap sources guidelinesformultinationalenterprises/ contain refined or processed metals that are appropriate to recycle in the production of tin, to exercise due diligence in determining FINAL%20Supplement%20on%20Gold.pdf (stating that ‘‘[r]ecycled material is not itself a concern for tantalum, tungsten and/or gold. Minerals partially 704 See letter from Global Witness I. contributing to conflict, however, recycled material processed, unprocessed or a bi-product from another ore are not recycled metals.’’). 705 See, e.g., letters from Global Witness I, MSG is a potential means of laundering gold that has been mined in conflict-affected and high-risk areas 703 See, e.g., letters from Global Witness I, MSG I, and SIF I. in order to hide its origin’’). I, and SIF I. 706 See letters from Copper & Brass and SSINA. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56333 that their conflict minerals were from with respect to those minerals will be regarding the use of conflict minerals recycled or scrap sources without due on May 31, 2016. Issuers with gold from the Covered Countries. Section requiring adherence to any due from recycled or scrap sources, 13(p) mandates that the Commission diligence framework. Presently, it however, are required to submit a promulgate regulations requiring that a appears that the OECD’s supplement for specialized disclosure report for that person described disclose annually gold is the only nationally or mineral using the OECD’s due diligence whether any conflict minerals that are internationally recognized due diligence for recycled or scrap gold for the necessary to the functionality or framework for any conflict mineral from reporting period beginning January 1, production of a product manufactured recycled or scrap sources. Therefore, we 2013, which will be due on May 31, by such person originated in the anticipate that issuers would use the 2014. Covered Countries, and make that gold supplement to conduct their due Further, consistent with the proposal, disclosure publicly available on the diligence for gold that issuer has reason because our final rule considers issuer’s Internet Web site. If a person to believe may not come from recycled products with conflict minerals from concludes that the person’s conflict or scrap sources. recycled or scrap sources to be ‘‘DRC minerals originated in the Covered However, neither the OECD nor any conflict free,’’ the final rule does not Countries, that person must submit a other body has a similar due diligence require a discussion of processing Conflict Minerals Report, which must be framework for cassiterite, columbite- facilities, countries of origin, or efforts posted on the person’s Internet Web tantalite, or wolframite. Therefore, until to determine the mine or location of site, that includes a description of the such a framework is developed, the origin with the greatest possible measures taken by the person to required due diligence for issuers who specificity. Therefore, we believe that exercise due diligence on the minerals’ may have those recycled or scrap our approach is consistent with source and chain of custody, which conflict minerals is the same as comments that indicated that the final must include an independent private proposed. Those issuers are required to rule should not require an issuer with sector audit of the Conflict Minerals exercise due diligence in determining conflict minerals from recycled or scrap Report that is conducted according to that their conflict minerals were from sources to provide a Conflict Minerals standards established by the GAO. The recycled or scrap sources without the Report, but should require such issuers person submitting the Conflict Minerals benefit of a due diligence framework. If, to ‘‘disclose how they have determined Report must also identify the however, a nationally or internationally that sources are genuine scrap independent private sector auditor and recognized due diligence framework recycled.’’ 707 Without this disclosure, certify the independent private sector becomes available for any of the such issuers ‘‘might otherwise be audit. Further, the report must include remaining conflict minerals, issuers will encouraged to ‘launder’ new DRC a description of the products be required to utilize that framework for conflict minerals through their manufactured or contracted to be that mineral. Specifically, if due operations—misleading consumers and manufactured that are not DRC conflict diligence guidance for a particular other stakeholders, and undermining free, the facilities used to process the conflict mineral under a nationally or the value of the disclosure exercise.’’ 708 conflict minerals, the country of origin internationally recognized due diligence of the conflict minerals, and the efforts framework becomes available prior to F. Other Matters to determine the mine or location of June 30 of a calendar year, the first If any provision of this rule, or the origin with the greatest possible reporting period in which issuers must application thereof to any person or specificity. use the framework for that conflict circumstance, is held to be invalid, such mineral will be the subsequent calendar invalidity shall not affect other We are adopting amendments to our year. However, if the due diligence provisions or application of such rules to implement the Conflict guidance is not approved until after provisions to other persons or Minerals Statutory Provision. The final June 30 of a calendar year, issuers are circumstances that can be given effect rule requires any reporting issuer for not required to use that framework for without the invalid provision or which conflict minerals are necessary to that conflict mineral until the second application. Moreover, if any portion of the functionality or production of a calendar year after approval to provide Form SD not related to conflict minerals product manufactured or contracted to a full year before implementation. disclosure is held to be invalid, such be manufactured by that issuer to For example, if the OECD or another invalidity shall not affect the use of the disclose annually in a separate body adopts a nationally or form for purposes of disclosure specialized disclosure report on a new internationally recognized due diligence pursuant to Exchange Act Section 13(p). form the results of its reasonable inquiry framework for cassiterite, columbite- into whether its conflict minerals tantalite, or wolframite from recycled or III. Economic Analysis originated in the Covered Countries or scrap sources prior to June 30, 2013, the A. Introduction came from recycled or scrap sources. initial reporting period in which issuers Under the final rule, following its As discussed in greater detail reasonable country of origin inquiry, if with those conflict minerals from above,709 Section 1502 amended the (a) The issuer knows that its conflict recycled or scrap sources must use the due diligence framework will begin on Exchange Act by adding new Section minerals did not originate in the January 1, 2014 and their specialized 13(p), which requires us to promulgate Covered Countries or knows that they disclosure reports that discuss their disclosure and reporting regulations came from recycled or scrap sources, or exercise of such due diligence will be 707 See letter from NEI. (b) the issuer has no reason to believe due on May 31, 2015. If, however, the 708 See id. (recommending also that ‘‘[i]ssuers its conflict minerals may have originated in the Covered Countries, or sroberts on DSK5SPTVN1PROD with RULES OECD or another body adopts such a should use due diligence in determining whether due diligence framework on or after July conflict minerals are from scrap/recycled sources’’). (c) the issuer reasonably believes its 1, 2013, but before June 30, 2014, the 709 We are incorporating Sections I and II of this conflict minerals came from recycled or initial reporting period for issuers with release, which fully describe the statutory scrap sources, then in all such cases the requirements of Section 1502 of the Act and the those conflict minerals to use the final rule in detail, into Section III of the release and issuer must, in the body of Form SD, framework will begin on January 1, 2015 providing only a short summary of the statutory disclose its determination and describe and their specialized disclosure reports requirements and final rule in this section. briefly the reasonable country of origin VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56334 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations inquiry it undertook and the results of regarding the conflict minerals in those We note, however, that one the inquiry. On the other hand, products. commentator recommended that the following its reasonable country of Finally, after its reasonable country of proposed rules be withdrawn because origin inquiry, if (a) the issuer knows origin inquiry, an issuer that determines the commentator did not believe we that its conflict minerals originated in that its conflict minerals it thought were fully analyzed the potential costs, the Covered Countries and knows that from recycled or scrap sources might supply chain complexities, and other they did not come from recycled or instead be from newly mined sources practical obstacles to implementing the scrap sources, or the issuer has reason must exercise due diligence that final rule.710 We disagree. As discussed to believe that its conflict minerals may conforms to a nationally or above, members of the public interested have originated in the Covered internationally recognized due diligence in making their views known were Countries, and (b) the issuer knows that framework developed specifically for invited to submit comment letters in its conflict minerals did not come from conflict minerals from recycled sources advance of the official comment period recycled or scrap sources or has reason to determine that its conflict minerals for the proposed rules. In addition, in to believe that its conflict minerals may are from recycled or scrap sources. The response to the suggestion by some not have come from recycled or scrap issuer must also describe its due commentators that we extend the sources, then the issuer must exercise diligence in its Conflict Minerals comment period to allow the public Report. Currently, gold is the only additional time to thoroughly consider due diligence on the source and chain conflict mineral with a nationally or the matters addressed in the Proposing of custody of its conflict minerals that internationally recognized due diligence Release and to submit comprehensive conforms to a nationally or framework for recycled or scrap conflict responses, we extended the comment internationally recognized due diligence period for an additional 30 days and framework, if one is available. minerals. If no nationally or internationally recognized due diligence have continued to receive comment Following that due diligence, unless the letters through August 2012, which we issuer determines, based on that due framework for a particular recycled or scrap conflict mineral is available, have considered. In addition, we diligence, that its conflict minerals did convened an October 2011 roundtable at not originate in the Covered Countries which is the case for the other three minerals, until such a framework is the request of commentators. Some or that its conflict minerals did come commentators have provided responses from recycled or scrap sources, the developed, the issuer must exercise due diligence in determining that its conflict to other commentators, particularly on issuer must file a Conflict Minerals the Economic Analysis. This robust, Report. minerals are from recycled or scrap sources and describe the due diligence public, and interactive debate has In most circumstances, the issuer measures it exercised in its Conflict allowed us to more fully consider how must obtain an independent private Minerals Report. to develop our final rules. Additionally, sector audit of its Conflict Minerals As we considered how to implement as discussed further in the Economic Report. The issuer must also describe in Analysis section, below, we have the requirements of Section 1502, we its Conflict Minerals Report, among considered and analyzed the numerous considered the costs and benefits other information, its products comments received regarding the costs imposed by the new rule and form we manufactured or contracted to be and complexities of the statute and are adopting, as well as their effects on manufactured that have not been found proposed rule, and have taken them into efficiency, competition, and capital to be ‘‘DRC conflict free.’’ For a account in the final rule. Overall, we formation. Many of the economic effects temporary two-year period for all believe interested parties have had of the rule stem from the statutory issuers, and for a temporary four-year sufficient opportunity to review the mandate, and the discussion below period for smaller reporting issuers, an proposed rules, as well as the comment addresses the costs and benefits issuer that must perform due diligence letters, and to provide views on the resulting from both the statute and from proposals and on the other comment and is unable to determine that the our exercise of discretion, and the conflict minerals in its products letters and data to inform our comments we received about these consideration of the final rules. originated in the Covered Countries or matters. came from recycled or scrap sources, or Accordingly, we do not believe that The Proposing Release cited some withdrawal of the proposed rule and re- unable to determine that the conflict pre-proposal letters we received from proposal is necessary. minerals in those products that commentators indicating the potential After analyzing the comments and originated in the Covered Countries impact of the proposed rules on taking into account additional data and financed or benefited armed groups, competition and capital formation. In information, we believe it is likely that may consider those products ‘‘DRC addition to requesting comment the initial cost of compliance is conflict undeterminable.’’ In that case, throughout the release on the proposal approximately $3 billion to $4 billion, the issuer must describe, among other and on potential alternatives to the while the annual cost of ongoing information, its products manufactured proposal, we also solicited comment in compliance will be between $207 or contracted to be manufactured that the Proposing Release on whether the million and $609 million. As discussed are ‘‘DRC conflict undeterminable’’ and proposal, if adopted, would promote in detail below, we reach this estimate the steps it has taken or will take, if any, efficiency, competition, or capital by taking into account the many since the end of the period covered in formation, or have an impact or burden comments we received on potential its most recent prior Conflict Minerals on competition. We also requested costs, relying particularly on those Report to mitigate the risk that its comment on the potential effect on comment letters that provided necessary conflict minerals benefit efficiency, competition, or capital sroberts on DSK5SPTVN1PROD with RULES quantification and were transparent armed groups, including any steps to formation should we not adopt certain about their methodologies. As will be improve its due diligence. An issuer exceptions or accommodations. As discussed in more detail below, after with products that are ‘‘DRC conflict discussed throughout this release, we thoroughly considering each comment undeterminable’’ is not required to received many comments addressing the letter, we determined that it was obtain an independent private sector potential economic and competitive audit of the Conflict Minerals Report impact of the proposed rules. 710 See letter from Chamber I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56335 appropriate to modify and/or expand discussion of the costs associated with argued that the Conflict Minerals upon some of the submitted estimates the final rule as adopted.714 Statutory Provision has already made and methodologies to reflect data and progress in this area.719 For example, B. Benefits and Costs Resulting From the information submitted by other some commentators have argued that Mandatory Reporting Requirement commentators, as well as our own the Conflict Minerals Statutory judgment and experience. Our 1. Benefits Provision has already pressured DRC considered estimate of the total costs Congress intended for the rule issued authorities to begin to demilitarize some thus reflects these synthesized data and pursuant to Section 1502 to decrease the mining areas and to increase mining analyses. We consider the full range of conflict and violence in the DRC, oversight.720 Congress provided that the these costs in the following sections, particularly sexual- and gender-based disclosure requirements of Exchange although where it is possible to discuss violence.715 We note also that the Act Section 13(p) shall remain in effect separately the costs and benefits related Congressional object is to promote peace until the President determines and to our discretionary choices in the rule, and security in the Covered certifies that ‘‘no armed groups continue we attempt to do so.711 Countries.716 As a means to address the to be directly involved in and Exchange Act Section 23(a)(2) 712 also humanitarian situation in the DRC, new benefitting from commercial activity requires us, when adopting rules under Section 13(p) requires issuers to involving conflict minerals.’’ 721 the Exchange Act, to consider the understand and report on their use and The statute therefore aims to achieve impact that any new rule would have on source of certain minerals from the compelling social benefits, which we competition, and Exchange Act Section Covered Countries. By mandating the are unable to readily quantify with any 23(a)(2) prohibits us from adopting any additional disclosure requirements of precision, both because we do not have rule that would impose a burden on Exchange Act Section 13(p), we the data to quantify the benefits and competition not necessary or understand that Congress likely sought because we are not able to assess how appropriate in furtherance of the to reduce the amount of money effective Section 1502 will be in purposes of the Exchange Act. In provided to armed groups engaged in achieving those benefits. Additionally, addition, Exchange Act Section 3(f) 713 conflict in the DRC,717 thereby the social benefits are quite different requires us, when engaging in achieving the stated objective of the from the economic or investor rulemaking where we are required to statute.718 Some commentators have protection benefits that our rules consider or determine whether an action ordinarily strive to achieve. is necessary or appropriate in the public 714 As noted below, Congress’s goals of reducing We also note that these objectives of interest, to also consider whether the violence and promoting peace and security in the Section 1502 do not appear to be those Covered Countries, as well as enhanced that will necessarily generate action will promote efficiency, transparency through Section 13(p) and this competition, and capital formation. rulemaking is intended to result in benefits that measurable, direct economic benefits to Accordingly, as we considered how to cannot be readily quantified with any precision, investors or issuers. Some implement the requirements of Section and therefore, our quantitative analysis focuses on commentators urged, however, that the costs. conflict minerals information is material 1502, we considered the impact on the 715 Section 1502(a) of the Act (‘‘It is the sense of economy, burden on competition, and the Congress that the exploitation and trade of 719 See, e.g., letters from International Corporate promotion of efficiency, competition, conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict Accountability Roundtable (Jul. 29, 2011) (‘‘ICAR and capital formation. I’’), Sen. Boxer et al. I, Sen. Leahy et al., and United characterized by extreme levels of violence in the Given the specific language of the eastern Democratic Republic of the Congo, Nations Group of Experts on the Democratic statute and our understanding of particularly sexual- and gender-based violence, and Republic of Congo (Oct. 21, 2011) (‘‘UN Group of Congress’s objectives, we believe it is contributing to an emergency humanitarian Experts’’). Other commentators, however, have situation therein, warranting the provisions of argued that the Conflict Minerals Statutory appropriate for the final rule generally section 13(p) of the Securities Exchange Act of Provision has hurt the general economy and to track the statutory provision. Our 1934, as added by subsection (b).’’). population of the DRC. See, e.g., letters from BEST discretionary authority to implement 716 See Exchange Act Section 1502(c)(1)(B)(i) II (‘‘Though [the Conflict Minerals Statutory Section 13(p) is limited, and we are (stating that the Secretary of State, in consultation Provision] seeks to provide a mechanism for with the Administrator of the United States Agency combating the corruption and violence crippling committed to executing the the DRC, its impact on the upstream mining for International Development, shall submit to Congressional mandate. Throughout this Congress a plan to ‘‘promote peace and security’’ in industry has been devastating to the mining release, and in the following Economic the Covered Countries). See also Section communities and the broader economy of Eastern Analysis, we discuss the benefits and 1502(d)(2)(A) of the Act (directing the GAO to DRC.’’), CEI II (‘‘There are already indications that assess the effectiveness of Exchange Act Section Dodd-Frank has had damaging consequences for the costs arising from the new mandatory 13(p) in promoting peace and security in the artisanal miners. In a recently published New York reporting requirement, those choices in Covered Countries). Times op-ed, freelance reporter David Aronson which we have exercised our discretion, 717 Cf. Exchange Act Section 1502(c)(1) requiring observed that the law is harming the very people and the comments we received about the Secretary of State in consultation with the it is aimed at protecting, and that the sole Administrator of the United States Agency for beneficiaries are those perpetrating the violence.’’), these matters. Sections III.B and III.C and FEC II (stating that, ‘‘we can confirm today that International Development to submit a report to below provide a narrative discussion of Congress discussing a strategy to address the as expected there is more smuggling activities, very the costs and benefits resulting from the linkages between human rights abuses, armed big decrease in revenue of the Government of DRC, mandatory reporting requirement and groups, mining of conflict minerals, and huge impact on the live hoods of thousands of commercial products that includes a plan to Congolese, there is no more formal business in the our exercise of discretion, respectively. promote peace, a plan to provide guidance to Kivus due to this interpretation of consumers which In Section III.D below, based on commercial entities seeking to exercise due is far more than the requirements of the law and commentators’ estimates and our diligence, and a description of possible punitive does not give chance for the improvements that had estimates, we provide a quantitative measures. already begun to work’’). 718 As discussed above, some commentators, 720 See, e.g., Sen. Boxer et al. I, Sen. Leahy et al., sroberts on DSK5SPTVN1PROD with RULES including co-sponsors of the legislation and other and United Nations Group of Experts on the 711 As discussed above, our discretionary choices members of Congress, indicated that the Conflict Democratic Republic of Congo (Oct. 21, 2011) (‘‘UN are informed by the statutory mandate and thus, Minerals Statutory Provision also materially Group of Experts’’). Other commentators, however, discussion of the benefits and costs of those choices informs an investor’s understanding of the risks in have argued that the Conflict Minerals Statutory will necessarily involve the benefits and costs of the an issuer’s reputation and supply chain. See, e.g., Provision has hurt the general economy and underlying statute. letters from CRS I, FRS, Global Witness I, Methodist population of the DRC. See, e.g., letters from BEST 712 15 U.S.C. 78w(a)(2). II, CEI II, and FEC II. Pension, Sen. Durbin/Rep. McDermott, Sen. Leahy 713 15 U.S.C. 78c(f). et al., SIF I, and SIF II. 721 Exchange Act Section 13(p)(4). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56336 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations to an investment decision and, section below, we discuss the comments companies who use or supply conflict therefore, similar to other disclosures we consider to be the most useful minerals. Although, as one commentator required to be filed by issuers.722 For regarding the costs of the disclosure noted, it would be difficult to determine example, one commentator noted that, requirements. In both the general and a realistic cost approximation,734 most ‘‘[a]s a sustainable and responsible specific comments, commentators did of these commentators believed that investor,’’ this commentator ‘‘values not typically distinguish between the compliance costs would be high. companies’ prudent management of risk costs and benefits of the statutory b. Specific Comments in their global supply chains and has mandate and the costs and benefits of been particularly concerned in recent the specific aspects of the rule for which Four commentators in particular years by the use of certain minerals to we exercised discretion. The overall attempted to catalogue the expense of fund the continuing bloody conflict in specific cost range provided by complying with the new reporting the’’ DRC.723 As another example, a commentators, as discussed in greater requirements. The commentators different commentator stated that, ‘‘[a]s detail below, was between generally focused on three categories of sustainable and responsible investors, $387,650,000 729 and $16 billion.730 In costs as the most significant: Due we carefully assess the prudent analyzing the comments, we believe it is diligence for both suppliers and issuers, management of risk in companies’ more likely that the initial cost of information technology (‘‘IT’’) costs, and global supply chains and we have been complying with the statutory audit costs. Although there is a general particularly concerned in recent years requirement is approximately $3 billion consensus among these four by the use of certain minerals, namely to $4 billion. We explain why as we commentators as to the broadest tin, tantalum, tungsten and gold, to fund consider and describe the full range of categories of significant costs, in several the continuing bloody conflict in the’’ these costs below, although where it is cases they provided divergent cost DRC.724 possible to discuss separately the costs estimates as well as supplying differing and benefits related to our discretionary levels of detail as to how they

2. Cost Estimates in the Comment developed these estimates. The Letters choices in the rule, we attempt to do so. following section is intended to lay out In the Proposing Release, we included a. General Comments the cost estimates as submitted by the our estimates of the costs of the Most commentators stated that they commentators. disclosure requirements.725 A number of fully support the humanitarian goals of i. Manufacturing Industry Association commentators indicated that we the Conflict Minerals Statutory Comments underestimated the costs.726 One Provision of reducing the levels of commentator, however, asserted that violence in the DRC,731 but some In its comment letter, a manufacturing Economic Analysis was both ‘‘thorough commentators argued that the Proposing industry association 735 stated that, and accurate.’’ 727 In this regard, another Release did not adequately demonstrate based on its research, of the 5,994 commentator stated that the cost any benefits to investors.732 As noted issuers that the Proposing Release stated estimates in comment letters from above, the purpose of Section 1502 is could be affected by the final rule, the industry ‘‘seem[ed] significantly furthering the humanitarian goals of average issuer would have between inflated.’’ 728 Some commentators reducing violence and advancing peace 2,000 and 10,000 first-tier suppliers, discussed the costs in a more specific and security in the DRC and the benefits which would result in the total initial manner. In the Specific Comments Congress intended are derived directly costs to issuers of complying with the from the statute. Other commentators, final rule being anywhere from 722 See letters from Calvert, Global Witness I, Sen. including two of the co-sponsors of the approximately $8 billion to $16 Durbin/Rep. McDermott Sen. Leahy et al., SIF I, SIF provision and other members of billion.736 II, and TIAA–CREFF. But see letters from The industry association noted that ‘‘a AngloGold, Barrick Gold, Cleary Gottlieb, Corporate Congress, have indicated in comment large portion of America’s 278 thousand Secretaries I, Deloitte, Ford, ITIC I, JVC et al. II, letters that the provision also serves NAM III, NMA II, NY State Bar, Taiwan Semi, and small and medium-sized manufacturers important investor protection objectives, WGC II. could be affected by the requirement to such as additional disclosure on a 723 See letter from Calvert. provide information on the origin of the company’s supply chain,733 although 724 See letter from SIF II. minerals in the parts and components 725 In the Proposing Release, we estimated solely the legislative history and statutory they supply to companies subject to the for the purposes of the Paperwork Reduction Act language do not generally reference the total annual increase in the paperwork burden SEC.’’ It estimated, however, that ‘‘only investor protection. Therefore, we have one in five smaller companies would be for all affected companies to comply with our proposed collection of information requirements to designed a final rule to help achieve the in one or more issuer’s supply be approximately 153,864 hours of company intended humanitarian benefits in the personnel time and to be approximately way that Congress directed, even though 734 See letter from Howland. $71,243,000 for the services of outside we recognize that the final rule will 735 See letter from NAM I. The manufacturing professionals. Also, we estimated that the PRA burden for the audit and due diligence impose significant compliance costs on industry association indicated that, in developing its cost estimates, it consulted with its requirements to the industry would be manufacturing members and relied on research by 729 See letter from Claigan III. approximately $46,475,000. These cost estimates The Global Research Center for Strategic Supply were calculated based on the effect that the 730 See letter from NAM I. Management at the W.P. Carey School of Business proposed rules and form amendments, if adopted, 731 See, e.g., letters from ABA, Chamber I, at Arizona State University. would have on those collections of information as Industry Group Coalition I, NAM I, and WGC II. 736 But see letter from the Fafo Institute for a result of the required due diligence process and 732 See, e.g., letters from Chamber I and PCP. Applied International Studies (Oct. 17, 2011) independent private sector audit of the Conflict These commentators stated also that the Proposing (‘‘Fafo’’). This commentator asserted that the Minerals Report. Release did not demonstrate adequately the manufacturing industry association’s cost estimate sroberts on DSK5SPTVN1PROD with RULES 726 See, e.g., letters from Barrick Gold, CEI II, proposed rules’ efficiencies for the market place or was too high because of some incorrect assumptions Chamber I, Ford, Howland, IPC I, ITRI I, ITRI II, any promotion of capital formation, as discussed regarding an issuer’s costs of changing legal NAM I, NRF I, PCP, Rep. Lee, RILA, TriQuint I, below. obligations, obtaining an independent private sector Tulane University Payson Center for International 733 See, e.g., letter from Senator Leahy et al. (‘‘[I]t audit, monitoring of the supply chain, Development (Oct. 25, 2011) (‘‘Tulane’’), and WGC seems abundantly clear that when a publicly traded administering procurement and contracts, II. company relies on an unstable black market for implementing remediation recommendations, 727 See letter from ICAR et al. I. inputs essential to manufacturing its products it is conducting internal audits of its due diligence 728 See letter from Enough Project IV. of deep material interest to investors.’’). system, and reporting to the Commission. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56337 chains,’’ 737 and these smaller would be required to provide conflict each issuer’s estimated 2,000 first-tier companies’ only costs regarding the minerals information also would be suppliers, and an additional $300 proposed rules would be a $25,000 required to provide a Conflict Minerals million for issuers to implement risk- audit cost. Therefore, the proposed rules Report and an audit rather than the 20% based programs that use control would cost smaller companies, which that we estimated in the Proposing processes to verify that suppliers are are not required to report with us under Release, which would equate to providing them with credible Exchange Act Sections 13(a) or 15(d), approximately 4,500 issuers out of the information and pushing legal approximately $1.4 billion.738 5,994 issuers we estimated would be obligations upstream. Also, the Further, the commentator remarked affect by the final rule.741 Taking into commentator estimated that affected that our $25,000 estimate 739 of the cost consideration the higher estimated issuers would need to expend a of the independent private sector audit number of affected issuers, the industry ‘‘would only cover the initiation of an collective total of $6 billion to develop association estimated that the total cost audit for a small company with a simple to all affected issuers to obtain an new information technology systems to supply chain,’’ and argued that, at a independent private sector audit of their collect information on each issuer’s minimum, an independent private Conflict Minerals Report would be $450 first-tier suppliers.742 Therefore, the sector audit of a company with a more million. sum of the costs to affected issuers complex supply chain would cost at In addition, the commentator would total approximately $8 billion. least $100,000.740 Additionally, the estimated that, to implement their new Below is a summary of the manufacturing industry association due diligence policies, it would cost manufacturing industry association’s ‘‘conservatively estimate[d]’’ that $1.2 billion for the 5,994 affected issuers cost estimates in tabular form: approximately 75% of the issuers that to change their legal obligations with 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 ¥ $1,390,000,000 737 278,000 × .20 = 55,600. commentator, the majority of issuers would not be manufacturing industry association commentators 738 278,000 × .20 × $25,000 = $1,390,000,000. able to determine the origin of their conflict in their calculations even though a more exact 739 As discussed in the Proposing Release, we minerals. number of issuers would be 4,496 (.75 × 5,994 = indicated that each independent private sector 742 See letter from NAM I. 4,495.5). See infra note 869. sroberts on DSK5SPTVN1PROD with RULES audit of the Conflict Minerals Report would cost 743 The manufacturing industry association 746 The manufacturing industry association approximately $25,000 on average based on the commentator refers to this as ‘‘changes to corporate commentator refers to this as the cost of preliminarily estimates of one industry group. compliance policies.’’ ‘‘provid[ing] proper information regarding the 740 See letter from NAM I. 744 The manufacturing industry association source of minerals.’’ 741 See id. The manufacturing industry commentator refers to this as IT system 747 Supplier compliance cost in the association commentator estimated that 75% of development or revision. manufacturing industry association commentator’s affected issuers would be required to submit a 745 We are using the rounded estimate (4,500) proposal is considered an audit cost and is not Conflict Minerals Report because, according to the that was used by the university group and limited to smaller suppliers that are issuers. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56338 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Additionally, this commentator not provide an estimate of the costs to private companies, would need to carry calculated that the costs of the final rule all potentially affected issuers, but out three principal actions to implement could be ‘‘as high as $16 billion’’ by focused on the electronic interconnect Section 1502. These actions consisted of ‘‘extrapolating from the recent industry. strengthening internal management experience of company costs in The electronic interconnect industry systems in view of performing due complying with the European Union’s association also argued that more than diligence, instituting necessary hazardous waste directive (‘‘RoHS’’), 20% of the 5,994 affected issuers would information technology systems, and and estimated on that basis the have to provide an independent private obtaining independent private sector economic impact of the SEC’s proposed sector audit.753 The commentator noted audits. The university group’s model regulations.’’ 748 In fact, this that, although the Covered Countries indicated that the largest driving cost commentator postulated that ‘‘Section may, at most, supply 20% of the world’s factor was strengthening companies’ 1502 may be broader in scope because’’ supply of conflict minerals, this 20% management systems, which would it ‘‘covers more products and sectors could be distributed to 100% of the total approximately $5.17 billion for than RoHS,’’ it ‘‘discriminates against issuers. Therefore, all issuers could be both issuers and private companies, origin,’’ and it ‘‘does not include a de required to file a Conflict Minerals with issuers’ costs being approximately minimis or weight-based exception.’’ 749 Report and obtain an independent $26 million and private companies’ The commentator stated that, according private sector audit, and the electronic costs being approximately $5.14 billion. to Technology Forecasters, Inc., the interconnect industry group ‘‘expected The other costs would be borne only by RoHS directive cost the electronics that nearly 100% of affected issuers will issuers. These other costs included industry $2,640,000 per company to need to complete a [Conflict Minerals instituting the necessary information achieve initial RoHS compliance and Report], especially in the initial years of technology systems, which would cost another $482,000 annually to maintain the regulation.’’ 754 In this regard, the approximately $2.56 billion, and compliance. Therefore, based on these commentator noted that respondents to obtaining an independent private sector per company figures, the commentator its survey stated that ‘‘[s]upplier audit, which would cost companies calculated that initial compliance of all verification and auditing was a approximately $207 million. Ultimately, 5,994 issuers would be approximately frequently cited anticipated cost,’’ and according to the university group, the $16 billion. the respondents ‘‘estimated direct costs proposed rules would cost all affected of [$]10,000 to [$]100,000 for the third companies, both issuers and private ii. Electronic Interconnect Industry companies involved in the conflict party due diligence audits.’’ 755 The Association Comments minerals supply chain, approximately commentator also indicated that the Another commentator, an electronic average number of suppliers in the $7.93 billion initially and interconnect industry association,750 supply chain for those companies approximately $207 million annually estimated that the electronic responding to their survey was 163. thereafter. interconnection industry suppliers As noted, the university group would incur compliance costs of iii. University Group Comments commentator estimated the due approximately $279 million in the first Another commentator, a university diligence costs to both issuers and their year and approximately $165 million in group, provided its own cost figures private company suppliers. The total ongoing annual costs.751 Additionally, regarding the proposed rules in its initial labor costs, including both this commentator stated that there could comment letter.756 The university group laborers and consultants, to all 5,994 be additional hidden costs for contended that our model issuers would be approximately $26 companies that varied widely from no underestimated the costs of the million. For the costs to private additional costs to more than $2 million proposed rules due to, among other company suppliers, the university group in such costs.752 This commentator did reasons, our failure to consider the costs estimated the total number of small incurred by all actors, especially first- private company suppliers to be 748 See letter from NAM I. This commentator tier private company suppliers, that are 148,459, and the number of large private estimated that each issuer affected by RoHS had an required to modify their management company suppliers to be 711,607.757 initial compliance cost of $2,640,000. For the 5,994 The total initial labor costs, including issuers that we estimate may be affected by the final systems to provide critical information rule, the estimated total cost to comply with RoHS to its customers that are the issuers. In both laborers and consultants, to all would be $15,824,160,000 ($2,640,000 × 5,994 = contrast, the university group found that 860,066 private company suppliers $15,824,160,000). the manufacturing industry group’s would be approximately $5.14 billion. 749 See id. economic model overstated the costs by In sum, the total initial labor costs for 750 See letter from IPC I. 751 See id. The letter includes an Appendix A, overestimating the number of suppliers due diligence to both the 5,994 issuers which consists of a published survey produced by and failing to account for cost and the 860,066 private company Market Research Service of the electronic efficiencies. suppliers would be approximately $5.17 interconnect industry association commentator The university group contended that billion. entitled, ‘‘Results of an IPC Survey on the Impact all affected companies, both issuers and Also, the university group disagreed of U.S. Conflict Minerals Reporting Requirements’’ (Feb. 2011) (‘‘electronic interconnect industry group with the manufacturing industry group’s survey’’). Much of the information cited from this 753 Id. estimate that the costs for modifying 754 See id. This commentator noted as well that commentator is located in the published survey. For the survey, the commentator surveyed 3,839 of its ‘‘the vast majority of users will be unable to identify 757 The university group commentator developed members in the electronic interconnection industry the origin of their conflict minerals * * * and these estimates by multiplying the number of with a total of 60 separate companies actually therefore will need to complete’’ a Conflict Minerals issuers by the company size factor (large or small) participating in the survey. Of these 60 companies, Report. and multiplying the number of relevant first tier sroberts on DSK5SPTVN1PROD with RULES 30% were public issuers while the remaining 70% 755 See id. supplier contracts by an overlap factor of 0.40. This were private companies. Despite acknowledging 756 See letter from Tulane. The staff of Senator factor attempts to differentiate and correct for the that the survey was not intended ‘‘to produce Richard J. Durbin, one of the co-sponsors of the number of estimated material supply contracts statistical significant data,’’ the commentator argued Conflict Minerals Statutory Provision, contacted versus the number of unique businesses impacted. that the survey respondents do ‘‘make up a this commentator ‘‘with a specific request for help Tulane estimated a 60% overlap factor meaning that representative sample of the U.S. electronic in providing a detailed estimate of what it would only 40% (100% ¥ 60% = 40%) of the supply interconnect supply chain.’’ See id. cost companies to implement the Congo Conflict contracts corresponded to non-overlapping 752 See id. Mineral Act.’’ Id. suppliers. See letter from Tulane. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56339 each issuer’s information technology $1.68 billion. Therefore, the total costs allowed to use ‘‘reasonably reliable systems would be $1 million. The to the 5,994 affected issuers of changing representations’’ from suppliers. For university group agreed that these costs information technology systems would these reasons, the university group would be borne solely by issuers be approximately $2.56 billion. excluded any costs for independent because they would be responsible for Finally, the university group private sector audits for private creating tracking systems for the discussed the costs associated with the company suppliers from their cost supplier-furnished supply chain independent private sector audit. The estimates. The university group, information, and that large issuers that university group disagreed with the however, agreed with the manufacturing use complex information technology manufacturing industry group’s industry group’s cost estimates and systems to manage their supply chains assertion that private company indicated that the cost for an audit of a would have costs of $1 million per suppliers would be required to obtain a small issuer would be $25,000 and the company. However, the university private sector audit to demonstrate to cost to a large issuer would be $100,000. group argued that the unit costs for their issuer customers that they Based on these assumptions, the small companies, based on the data performed sufficient due diligence. The university group estimated that the from the 2011 electronic interconnect university group noted that there is no audit costs for small issuers would be industry association commentator requirement that private company $81 million,758 and those costs for large survey, would be $205,000 per suppliers obtain such an audit, so the issuers would be approximately $126 company. The university group burden and cost for a private company million.759 Therefore, the total audit estimated that the information supplier to obtain an audit is voluntary cost for all issuers would be technology costs for the affected small in the context of the proposed rules. approximately $207 million per year.760 issuers would be approximately $885 Further, the university group noted that Below is a summary of the university million, and the cost for the affected the impetus for issuers to demand such group commentator’s estimates in large issuers would be approximately audits would be reduced if issuers are tabular form: Calculation University Group Commentator Estimate: Issuers affected .......................................................................................................................... 5,994 Large issuer (28% of issuers) .................................................................................................... 1,678 5,994*0.28 Small issuer (72% of issuers) .................................................................................................... 4,316 5,994*0.72 Average number of 1st tier suppliers (53% of manufacturing industry association commen- tator) ........................................................................................................................................ 1,060 2,000*0.53 Issuer Due Diligence Reform: Number of compliance hours for large issuer ............................................................................ 100 Number of compliance hours for small issuer ........................................................................... 40 Internal cost per hour ................................................................................................................. $50 Internal costs for large issuer (90% of total work load) ............................................................. $7,551,000 1,678*0.9*100*$50 Internal costs for small issuer (75% of total work load) ............................................................. $6,473,520 4,316*0.75*40*$50 Consulting cost per hour ............................................................................................................ $200 Consulting costs for large issuer (10% of total work load) ........................................................ $3,356,000 1,678*0.1*100*$200 Consulting costs for small issuer (25% of total work load) ........................................................ $8,632,000 4,316*0.25*40*$200 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 issuers ....................................................................................................... $126,000,000 1,260*$100,000 Total costs for small issuers ....................................................................................................... $81,000,000 3,240*$25,000 Total costs ........................................................................................................................... $207,000,000 ........................................ Supplier Due Diligence Reform: Average number of 1st tier supply contracts per large issuer ................................................... 1,060 Average number of 1st tier supply contracts per small issuer .................................................. 86 Overlap factor (percent of suppliers affected) ............................................................................ 0.4 ........................................ sroberts on DSK5SPTVN1PROD with RULES Total large suppliers ................................................................................................................... 711,472 1,678*1,060*0.4 Total small suppliers ................................................................................................................... 148,470 4,316*86*0.4 Number of compliance hours for large supplier ......................................................................... 100 ........................................ 758 5,994 issuers × 75% of issuers requiring an 759 5,994 issuers × 75% of issuers requiring an 760 $80,919,000 + $125,874,000 = $206,793,000. audit × 72% for number of small issuers × $25,000 audit × 28% for number of large issuers × $100,000 per audit = $80,919,000. per audit = $125,874,000. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56340 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Calculation Number of compliance hours for small supplier ........................................................................ 40 ........................................ Internal cost per hour ................................................................................................................. $50 ........................................ Internal costs for large supplier (90% of total work load) .......................................................... $3,201,624,000 711,472*100*0.9*$50 Internal costs for small supplier (75% of total work load) .......................................................... $222,705,000 148,470*40*0.75*$50 Consulting cost per hour ............................................................................................................ $200 ........................................ Consulting costs for large supplier (10% of total work load) ..................................................... $1,422,944,000 711,472*100*0.1*$200 Consulting costs for small supplier (25% of total work load) ..................................................... $296,940,000 148,470*40*0.25*$200 Total cost ............................................................................................................................. $5,144,213,000 Total ............................................................................................................................. $7,940,006,000 iv. Environmental Consultancy communicating requirements Further, the environmental Company Comments throughout their companies, we failed consultancy company suggested that the An additionalcommentator, an to account for the costs of issuers’ manufacturing industry group’s cost environmental consultancy company, software changes, and we did not estimate regarding issuers’ information provided cost figures regarding the acknowledge that ‘‘many companies’’ technology systems should be adjusted proposed rules.762 The environmental may work to a higher standard than the from $6 billion to $350 million and that consultancy company asserted that the rules would require due to public the university group’s estimate should models provided by the manufacturing sensitivity of this issue. be adjusted from $2.56 billion to $360 industry group and the university group Conversely, the commentator asserted million.766 Additionally, the significantly overestimated the costs of that the manufacturing industry group’s environmental consultancy company the proposed rules, whereas our PRA $8 billion and the university group’s asserted that the $100,000 per company section underestimated the paperwork $7.93 billion cost estimates were too audit costs provided by both the costs. Specifically, the commentator high. The environmental consultancy manufacturing industry group and the stated that the manufacturing industry company argued that the manufacturing university group were too high because association group’s and the university industry group’s estimate regarding the companies’ financial statement audits group’s ‘‘estimates provide cost cost for issuers to modify legal represent only 0.2 to 0.25% of a projections that do not reflect current responsibilities should be only $300 company’s annual revenue, which industry practice in compliance million, instead of the manufacturing would mean that a $100,000 cost for a programs by the vast majority of affected industry group’s estimated $1.2 Conflict Minerals Report audit would issuers,’’ so it ‘‘would be inadvisable to billion.764 Similarly, the environmental represent 5% of the total audit costs for use’’ their ‘‘data as the basis for an consultancy company maintained that a company with a $1 billion per year accurate cost estimate for the university group’s $5.17 billion revenue. Instead, the commentator implementation of Section 1502.’’ 763 estimate to strengthen internal argued that it would be more accurate Also, the environmental consultancy management systems was too high to assume that the Conflict Minerals company argued that we because of incorrect assumptions, and Report audit would represent 1% to 2% underestimated the costs of the that the actual cost should be only $600 of the total audit costs for such a proposed rules primarily because we million.765 company.767 Also, the environmental overestimated issuers’ knowledge of the 764 According to the environmental consultancy consultancy company contended that origin of materials in their products. company, the manufacturing industry group’s only 50% of all reporting issuers would According to the commentator, most of assumption that every issuer would have to amend be required to provide a Conflict the compliance costs for the proposed every legal obligation with its suppliers was Minerals Report because the ‘‘majority rules would be derived from identifying incorrect because ‘‘[a]ll standard contracts with of Energy sector, finance and utilities suppliers of public companies contain standard where an issuer’s materials are sourced. provisions requiring suppliers to comply with Further, the commentator suggested that relevant laws.’’ Letter from Claigan I. As a result, minerals disclosure is required by more than just our estimate of the percentage of it would be unlikely that many contracts would electronics industry issuers, ‘‘the total number of need to be modified to enable compliance. Also, the affected first-tier suppliers being over 100,000 affected issuers was too low, we did not seems unrealistic based on this more substantiated environmental consultancy company asserted that recognize that issuers needed to expend the manufacturing industry group overestimated the information.’’ Also, the environmental consultancy greater internal efforts in cost of modifying legal responsibilities because the company noted that, in many cases, first-tier manufacturing industry group assumed that every suppliers may not be supplying products or 761 We are using the rounded estimate (4,500) that supplier supplies components or products components containing conflict minerals, or these was used by the university group and containing conflict minerals to an issuer, which the products or components will represent only a small manufacturing industry association commentators environmental consultancy company claimed was fraction of their business. 766 The environmental consultancy company in their calculations even though a more exact ‘‘very unlikely.’’ Instead, a more reasonable number of issuers would be 4,496 (.75 × 5,994 = estimate of the numbers of suppliers affected that commentator noted that the CEA study found that 4,495.5). See infra note 869. would require a modification to its legal obligations the average cost for information technology systems 762 See letter from Claigan I. In this letter, the ‘‘would be closer to 50% of suppliers.’’ This changes for RoHS was $120,000 per company, and commentator stated that it submitted its letter commentator asserted that number, however, it discovered that the most expensive conflict because it was asked ‘‘by Congress and others’’ to should be further reduced by an additional 50% minerals software was $40,000 by conferring with comment on the potential costs of implementing the due to duplicative and overlapping relationships a provider of conflict minerals compliance software final rule. within and among suppliers. to confirm that their most expensive software for sroberts on DSK5SPTVN1PROD with RULES 763 See letter from Claigan Environmental Inc. 765 The environmental consultancy company conflict minerals compliance was $40,000 for the (Jan. 17, 2012) (‘‘Claigan IV’’). But see letters from commentator noted that the university group first year. IPC—Association Connecting Electronics Industries commentator estimated that there were 860,066 first 767 In its second letter, however, the (Feb. 14, 2012) (‘‘IPC III’’) and National Association tier suppliers. However, a 2008 study by the environmental consultancy company commentator of Manufacturers (Feb. 10, 2012) (‘‘NAM IV’’) Consumer Electronics Association (‘‘CEA’’) on acknowledged that it had limited expertise (challenging certain of the assumptions made by the RoHS that identified only 90,000 total electronic regarding estimates of the cost of third party audits. environmental consultancy company in its suppliers. In this regard, the environmental See letter from Claigan Environmental Inc. (Dec. 1, comment letters). consultancy company noted that, although conflict 2011) (‘‘Claigan II’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56341 will not have to create’’ a Conflict estimate again to approximately $64,673 full-time employee in the first year with Minerals Report, and ‘‘[n]o more than per issuer.773 costs declining over time.’’ 776 half of the consumer discretionary, Regarding the above cost estimates by v. Other Specific Comments consumer staples, and materials sectors other commentators, the commentator is expected’’ to provide a Conflict One commentator, an environmental argued that the manufacturing industry Minerals Report.768 research company, discussed some of association commentator’s cost estimate the specific cost estimates above and Finally, the environmental ‘‘significantly overstates the costs most discussed some cost estimates it consultancy company developed its companies will incur, especially those gathered through interviews with own cost model,769 which was based on of updating IT systems.’’ 777 Also, the potentially affected issuers.774 This current service quotations in the commentator noted that the electronic commentator conducted a study, industry and past costs for RoHS interconnect industry commentator’s sponsored by Global Witness, based on compliance based on the 2008 CEA cost estimate was overstated because the interviews with executives at more than study. In this regard, the commentator estimate included electronics 20 global companies that ranged in size provided its estimate of the typical from $500 million per year in revenue manufacturing services companies, and initial costs for affected issuers with to over $120 billion in annual revenue, that industry is ‘‘dominated by very revenue of $1 billion per year. Initially, including companies engaged in large companies,’’ which ‘‘probably in its first comment letter, the electronic components, computers, account[ed] for the higher median cost environmental consultancy company consumer health care, automotive, and estimates.’’ 778 Further, the commentator concluded that the proposal’s retail. Also, the commentator spoke noted of the environmental consultancy compliance cost for a typical affected with industry associations, consulting company commentator’s letter that the issuer with $1 billion of revenue would firms, and software providers. ‘‘relative magnitude of the costs shown be approximately $315,000 per year.770 Generally, the commentator found by the [environmental consultancy that, based on its interviews, costs for company commentator] estimate are In a subsequent letter to us, the aligned with what [environmental environmental consultancy company complying with the provision ‘‘will vary widely with the size and complexity of research company commentator] found lowered its cost estimate.771 Instead of in [its] interviews: that the effort to the $315,000 per issuer estimate in its companies’ supply chains but seem to be manageable for all company gather reliable data from supply chain initial letter, the environmental partners is likely to be more costly consultancy company argued that the sizes.’’ 775 In this regard, the commentator also found that the better initially than any systems changes cost per issuer for compliance would be required.’’ 779 closer to $213,000 per issuer because of informed executives were regarding the ‘‘more recent information on corporate Conflict Minerals Statutory Provision Another commentator that is budgeting and expenditures’’ that and its impacts on their company, the attempting to establish a due diligence ‘‘better reflect current corporate more likely they thought the costs of ‘‘bag-and-tag’’ monitoring system in the implementation strategies.’’ 772 Further, compliance would be manageable. The Covered Countries asserted that the total commentator stated that the largest costs incurred by local governments and in another letter, the environmental companies with annual revenues over industry as a whole just for the on-the- consultancy company lowered its cost $50 billion would have one-time costs ground set-up and implementation of 768 See letter from Claigan I. ranging from $500,000 to $2 million, but this system in the Covered Countries 769 Id. the companies with well-developed would be $52 million for the first 770 The environmental consultancy company responsible sourcing systems may only year.780 This commentator noted that commentator noted that the $315,000 per year cost need to spend half as much. Also, the this $52 million estimate is much higher would equate to approximately 0.03% of an issuer’s commentator found that many smaller than our $8 to $10 million estimated revenue, but argued that, based on certain companies ‘‘should be able to meet their cost for setting up a mineral source variations, the cost range could be anywhere between 0.02% and 0.05% of revenue. Id. The obligations for less than the cost of a validation scheme in the Proposing commentator stated further that the average cost of Release. Similarly, another commentator initial compliance with RoHS for a company with 773 See letter from Claigan III. In this letter, the provided the February 2011 five-year annual revenue of $1 billion was close to 0.8% of environmental consultancy group commentator plan of the organization that administers revenue. However, the commentator indicated that broke down the number of affected issuers by size the data gathering and the software costs for RoHS and cost per issuer based on that size. The the bag-and-tag scheme.781 The was approximately 0.08% of the initial RoHS commentator determined that the total cost to 6,000 commentator noted that, according to compliance costs, which the commentator argued affected issuers would be $387,650,000, which the five-year plan, ‘‘the cost of cleanly was ‘‘the same order of magnitude’’ of its 0.03% would be $64,608 per issuer. However, because we bagged-and-tagged minerals, including calculation. This commentator suggested that its estimated that there would be 5,994 affected ‘‘slightly lower’’ cost projections were due to less issuers, we divided the $387,650,000 by 5,994 taxes, will remain below the world expensive conflict minerals software packages, as issuer to come up with $64,673 per issuer. See also market price.’’ 782 Also, according to the compared to RoHS, and the large data gathering cost letter from Assent Compliance (Dec. 19, 2011) document provided, it appears that the for RoHS, the need to gather data for every part and (‘‘Assent’’) (discussing the software costs to issuers funding requirements for the bag-and- create new part numbers for compliant parts, are for implementing Section 1502, which apparently not required for conflict minerals. The commentator was included as part of the overall cost calculation tag scheme, including a 10% noted also that, if the final rule would cause issuers in the letter from Claigan III). Further, the contingency, in Eastern DRC and to dispose of their current conflict mineral environmental consultancy company commentator inventories because the conflict minerals were of provided an additional comment letter that did not 776 See id. indeterminate origin or our rule would not exempt revise its cost estimate, but expanded upon 777 See id. conflict minerals from recycled or scrap sources, differences between costing estimates it submitted 778 See id. the expected costs of compliance would be closer and previous costing estimates submitted by the sroberts on DSK5SPTVN1PROD with RULES 779 See id. to 0.5% of revenue.1 Finally, the commentator manufacturing industry association and university claimed that this initial cost of compliance is group commentators. See letter from Claigan IV. 780 See letter from ITRI II. expected to increase by a factor of 2.5 for an issuer 774 See letter from Green II. At the end of the 781 Representative Jim McDermott (Oct. 12, 2011) having ten times the annual revenue ($10 billion) letter, the commentator describes itself as a (‘‘Rep. McDermott’’) (providing the five-year plan and decrease by a factor of 2.5 for an issuer with ‘‘research, advisory and consulting firm focusing on authored by iTSCi, the International Tin Research 10% of revenue ($100 million). Id. clean tech, alternative energy and corporate Institute’s Tin Supply Chain Initiative, in February 771 See letter from Claigan II. sustainability.’’ 2011). 772 Id. 775 See id. 782 Id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56342 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Rwanda will be approximately multiplied many times throughout the independent audit [sic] of $25,000 is $38,971,000 from 2011 through 2015. entire economy.’’ also not specifically for the type of Also, this commentator stated that Another commentator indicated that audits that would be required either on trading companies, transporters, and ‘‘the initial cost for establishing record the upstream supply chain, or at the keeping processes, staffing, and smelters.’’ 795 Another commentator concentrate treatment facilities that identifying the contacts throughout the stated that we ‘‘did not specify the continue to trade with the Covered supply chain will run approximately scope of the independent private sector Countries would incur additional costs [four times] the on-going annual staffing audit of the Conflict Minerals Report’’ in in relation to the greatly increased levels [and] cost for certification.’’ 786 In the Proposing Release, and our $25,000 of administration and auditing that addition, this commentator asserted that estimate would correspond only to an ‘‘may amount to an additional man the ‘‘software to track and retain these audit of whether the issuer’s Conflict year,’’ which is ‘‘approximately records for [five to ten] years could add US$100,000 per year’’ per trading Minerals Report accurately describes the another [two times] the annual cost for due diligence the issuer exercised.796 company, transporter, and concentrate certification.’’ 787 Ultimately, although treatment facility going forward.783 The According to this commentator, this cost the commentator did not disclose the estimate, however, could be far higher costs to trading companies, transporters, actual costs associated with its and concentrate treatment facilities that depending on the audit scope to be estimates, it concluded that complying outlined in the final rule. A further stop treating minerals from the Covered with the proposed rules would be ‘‘very Countries would be less ‘‘but still of commentator indicated that our expensive’’ for even one year. assumptions about the scope and significance.’’ The commentator Another commentator argued that the estimated that these companies’ costs objective of the audit in the Proposing costs of the proposed rules to Release were not clear, but it appeared could ‘‘perhaps be an additional half a implement the statute would be man year,’’ which would be that the estimate ‘‘may depend on a expensive even for an issuer with company relying on an industry-wide approximately $50,000 per year per existing systems in place to track inputs company. Further, this commentator due diligence process and that company in the supply chain because such an being able to conclude that its conflict indicated that smelters and processing issuer would still have to add capability facilities may be requested to perform minerals did not originate in a DRC to its existing systems, provide country.’’ 797 This commentator stated an independent audit every six months additional supplier training, and revise or every year, which would cost these that it was not aware of any such its existing information technology industry-wide due diligence process in smelters and processing facilities systems.788 A few commentators noted approximately $60,000 per audit. place. Apple Inc.’s Supplier Responsibility Finally, the commentator argued that 2011 Progress Report.789 As one of these C. Benefits and Costs Resulting From the ‘‘sum cost of new auditing commentators noted, Apple investigated Commission’s Exercise of Discretion requirements and increasing burden of the use of extractives at all levels of its documentation in the international supply base and mapped its supply As discussed in detail in Section II, supply chain may amount to a total of chain to the smelter level to know we have revised the rules from the US$7 million per year.’’ which of its suppliers are using Proposing Release to address comments A few commentators provided other, tantalum, tin, tungsten, or gold and from we received while remaining faithful to less specific cost estimates. One where they are receiving the metal.790 the language and intent of the statute as commentator indicated that it would Accordingly, Apple determined that it adopted by Congress. In addition to the require 1,400 hours in the first year has a total of 142 suppliers of conflict statutory benefits and costs noted above, working with its suppliers to implement minerals.791 Some commentators we believe that the use of our discretion the proposed rules and an additional asserted that the costs of the proposed in implementing the statutory 700 hours in each subsequent year to rules could be disproportionally higher requirements will result in a number of comply with the proposed rules.784 The to smaller issuers.792 Other benefits and costs to issuers and users commentator calculated this figure by commentators asserted that the of the conflict minerals information. using the 450 different materials the Proposing Release failed to account for Below, we discuss the most significant commentator would have to research, the costs to non-issuers, which would choices we made in implementing the and estimated that it would require be significant.793 statute and the associated benefits and three hours per material, which would Other commentators asserted also that costs. We are unable to quantify the equate to approximately 1,400 hours.785 the $25,000 estimated audit cost is not impact of each of the decisions we The commentator stated that this the correct cost for the type of audit that discuss below with any precision estimate did ‘‘not take into account the would be required.794 One such because reliable, empirical evidence days and weeks that will be required to commentator noted that the ‘‘cost of an regarding the effects is not readily write any required reports and work available to the Commission, and with auditors.’’ Although the 786 See letter from Teggeman. commentators did not provide sufficient commentator provided an estimate of 787 See id. information to allow us to do so. Thus, the number of hours required to comply 788 See letter from Ford. in this section, our discussion on the 789 See, e.g., letters from Enough Project I (citing with the rules, it did not disclose the costs and benefits of our individual to Apple Inc.’s Supplier Responsibility 2011 costs associated with its number of Progress Report at http://images.apple.com/ discretionary choices is qualitative. estimated hours. The commentator supplierresponsibility/pdf/ Later in the release, we present a noted, however, that it is ‘‘a relatively Apple_SR_2011_Progress_Report.pdf), Enough quantified analysis on the overall costs sroberts on DSK5SPTVN1PROD with RULES Project IV, and Fafo (citing to http:// and benefits of the final rule that small company, [and] these costs will be images.apple.com/supplierresponsibility/pdf/ Apple_SR_2011_Progress_Report.pdf). includes all aspects of the 783 See letter from ITRI II. 790 See letter from Enough Project I. implementation of the statute. 784 See letter from TriQuint I. 791 See letters from Enough Project IV and Fafo. 785 Id. The commentator did not provide a similar 792 See letter from Howland. 795 See letter from ITRI I. 793 See letters from NAM I and WGC II. 796 See letter from CTIA. breakdown of its calculation regarding its 700 hour per subsequent year estimate. 794 See letters from CTIA, ITRI I, and KPMG. 797 See letter from KPMG. 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1. Reasonable Country of Origin Inquiry they must submit a Conflict Minerals the issuer’s use of conflict minerals. An The Conflict Minerals Statutory Report. Therefore, some inquiry is overly rigorous inquiry, on the other Provision requires any issuer with necessary. hand, could cause issuers to incur We could have required an issuer to greater costs than they would otherwise. necessary conflict minerals that ‘‘did exercise due diligence in determining We believe, however, that the originate’’ in the Covered Countries to whether its conflict minerals originated requirement that issuers make certain provide a Conflict Minerals Report.798 in the Covered Countries or came from disclosures about the particular The provision, however, does not recycled or scrap sources. We also could reasonable country of origin inquiry specify how an issuer is to determine have required an exhaustive inquiry in they undertook mitigates concerns about whether its conflict minerals originated which an issuer would be required to an insufficiently rigorous inquiry. in the Covered Countries. The provision determine to a certainty whether each Similarly, we believe our guidance that states only that any issuer with such mineral originated in the Covered issuers need only conduct an inquiry conflict minerals must submit a report Countries. However, while these would reasonably designed to determine to us that describes, among other be plausible alternatives, such inquiries whether conflict minerals originated in matters, the measures taken by the likely would be more costly, and we do the Covered Countries mitigates issuer to determine the source and chain not believe those approaches are concerns about an overly rigorous of custody of those conflict minerals. necessary. Instead, we believe the inquiry. Overall, we believe that the We used our discretion in the final reasonable country of origin inquiry benefit of mitigating issuer compliance rule to require that issuers covered by standard provides a clear way for costs justifies the ‘‘reasonable country of Section 1502 of the Act conduct a good issuers to make the necessary origin’’ approach we have chosen. faith ‘‘reasonable country of origin determination and does so in a more Also, in a change from the proposal, inquiry’’ that is reasonably designed to cost-effective manner. The reasonable the final rule establishes a different determine whether their conflict country of origin inquiry is consistent standard for the issuer in determining, minerals originated in the Covered with the supplier engagement approach based on its reasonable country of origin Countries or are from recycled or scrap in the OECD guidance where issuers use inquiry, whether due diligence on the sources. We do not specify what would a range of tools and methods to engage conflict minerals’ source and chain of constitute a ‘‘reasonable country of with their suppliers.799 The results of custody and a Conflict Minerals Report origin inquiry.’’ We believe that this the inquiry may or may not trigger due is required. The proposed rules would decision to employ a performance diligence. This is the first step issuers have required an issuer to conduct due standard rather than a design standard take under the OECD guidance to diligence and provide a Conflict should benefit issuers by allowing them determine if the further work outlined Minerals Report, based on its reasonable the flexibility to use the reasonable in the OECD guidance—due diligence— country of origin inquiry, if, among country of origin inquiry standard that is necessary. The Conflict Minerals other conclusions, the issuer was unable is best suited to their circumstances. Statutory Provision specifically to determine that its conflict minerals Although the final rule does not contemplates due diligence, which goes did not originate in the Covered specify what would constitute a beyond inquiry and involves further Countries or came from recycled or reasonable country of origin inquiry, it steps to establish the truth or accuracy scrap sources. Under the proposal, requires that the issuer conduct in good of relevant information, by requiring a issuers could only avoid providing a faith an inquiry that is reasonably description of the measures the issuer Conflict Minerals Report if they could designed to determine whether any of took to exercise due diligence on the prove a negative—that their conflict its conflict minerals originated in the source and chain of custody of the minerals did not originate in the Covered Countries or came from minerals. The Conflict Minerals Covered Countries. That approach recycled or scrap sources. Although the Statutory Provision specifically notes would arguably have been more proposal did not state explicitly that an that due diligence includes the audit burdensome than necessary to issuer must reasonably design its discussed below. accomplish the purpose of the statutory inquiry and conduct it in good faith, we We recognize that our reasonable provision. believe that this is not a change from the country of origin approach is broad Under the final rule, however, an proposal, but a clarification of the enough that some issuers might perform issuer must exercise due diligence on its proposal’s intent. We believe providing an insufficiently rigorous inquiry and conflict minerals’ source and chain of this clarification will facilitate some issuers might perform an overly custody and potentially provide a compliance with the rule by providing rigorous inquiry. An insufficiently Conflict Minerals Report if the issuer further guidance to issuers about what rigorous inquiry could result in an knows that its necessary conflict is required to satisfy the reasonable erroneous determination that the issuer minerals originated in the Covered country of origin inquiry. Other than is not required to submit a Conflict Countries and did not come from being reasonably designed and Minerals Report, thus reducing the recycled or scrap sources, or has reason performed in good faith, however, the utility of the disclosure with respect to to believe that its necessary conflict final rule does not require issuers to minerals may have originated in the conduct an exhaustive inquiry to 799 In June 2012, the OECD issued a report Covered Countries and may not have establish to a certainty whether their regarding implementation of the OECD guidance. come from recycled or scrap sources. See OECD, Downstream Implementation of the conflict minerals originated in Covered OECD Due Diligence Guidance for Responsible This new approach does not require an Countries or came from recycled or Supply Chains of Minerals from Conflict-Affected issuer to prove a negative to avoid scrap sources. We believe this is and High-Risk Areas, Cycle 2 Interim Progress performing due diligence, but it also Report on the Supplement on Tin, Tantalum, and sroberts on DSK5SPTVN1PROD with RULES appropriate because, under the Conflict does not allow an issuer to ignore Tungsten Final Draft (June 2012), available at Minerals Statutory Provision, issuers are http://www.oecd.org/investment/ warning signs or circumstances required to ascertain whether their guidelinesformultinationalenterprises/ reasonably indicating that its conflict conflict minerals did originate in the Downstream%20cycle%202%20report%20- minerals may have originated in the %20Edited%20Final%20-%201%20June.pdf. This Covered Countries to know whether additional guidance includes sample letters to Covered Countries or may not have been suppliers and customers regarding the use of from recycled or scrap sources. This 798 Exchange Act Section 13(p)(1)(A). conflict minerals. approach should reduce the total costs VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56344 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations of the final rule, by enabling an issuer In a further change from the proposal, certification here is not necessary and that, following a reasonable country of the final rule requires an issuer that may be confusing. Instead, the issuer origin inquiry, is unable to determine determines that, following its reasonable must only disclose that a Conflict that its conflict minerals did not country of origin inquiry, its conflict Minerals Report is provided as an originate in the Covered Countries or minerals did not originate in the exhibit to its specialized disclosure come from recycled or scrap sources, Covered Countries or come from report and a link to its Internet Web site but has no reason to believe that its recycled or scrap sources or has no where the Conflict Minerals Report is necessary conflict minerals may have reason to believe that its necessary publicly available. We believe these originated in the Covered Countries or conflict minerals may have originated in decisions should benefit issuers by not do not come from recycled or scrap the Covered Countries or did not come requiring them to provide as much sources, to fully comply with the rule from recycled or scrap sources to disclosure in the specialized disclosure without conducting due diligence, provide a brief description of the results report, which should reduce the costs obtaining an audit, or preparing and of that inquiry. The proposal required involved as compared to the other filing a Conflicts Mineral Report. issuers to disclose their reasonable possible methods of implementing the We realize that requiring a Conflict country of origin inquiry and their statute. However, we do not believe that Minerals Report if, after exercising a determination based on that inquiry. such decisions will reduce the benefits reasonable country of origin inquiry, the Compared to an alternative that does not to be achieved by the final rule, because issuer has reason to believe that it has require such description, this the information that the proposal necessary conflict minerals that may requirement will increase the disclosure required to be disclosed in the have originated in the Covered costs to issuers. However, the disclosure specialized disclosure report is already Countries and may not have come from will enable users of the information to provided in the Conflict Minerals recycled or scrap sources will be more assess more thoroughly the issuer’s Report, which is required to be filed as costly than only requiring a report if the reasonable country of origin design and an exhibit to Form SD. issuer has affirmatively determined that its efforts in carrying out that design. its minerals did come from the Covered 3. ‘‘DRC Conflict Undeterminable’’ This information will allow Countries. However, as already Determination stakeholders to form their own views on discussed, we believe that such an the reasonableness of the issuer’s efforts The final rule temporarily permits approach is required to achieve the and track those efforts over a number of issuers to describe their products as benefits intended by the statute. years. Based on this information, ‘‘DRC conflict undeterminable’’ if they Moreover, this approach provides an stakeholders could advocate for are required to file a Conflict Minerals appropriate balance compared to the different processes for individual Report and are either unable to more costly possible approach of issuers if they believe it is necessary, determine that their conflict minerals requiring an issuer to submit a Conflict thereby maximizing the potential did not originate in the Covered Minerals Report unless it determines to benefits of the performance-based Countries or are unable to determine a certainty that its necessary conflict approach we are adopting. that their conflict minerals that minerals did not originate in the Additionally, we revised the final rule originated or may have originated in the Covered Countries. from the proposal so that, following its Covered Countries did not directly or This approach regarding when an reasonable country of origin inquiry, an indirectly benefit or finance armed issuer must exercise due diligence as to issuer that determines its conflict groups in the Covered Countries. An the source and chain of custody of its mineral did not originate in the Covered issuer with products that are ‘‘DRC conflict minerals and provide a Conflict Countries is not required to keep conflict undeterminable’’ is required to Minerals Report could increase costs of reviewable records for five years. We exercise due diligence on the source and the final rule. Some issuers may expend believe this decision should benefit chain of custody of its conflict minerals more resources than necessary to satisfy issuers by allowing them greater and submit a Conflict Minerals Report the standard in order to assure flexibility and by reducing their describing the due diligence, the themselves that their minerals did not compliance costs because they no longer country of origin of the conflict originate in the Covered Countries. On have a record retention cost, which minerals, if known, the facilities used to the other hand, other issuers may should reduce the overall costs involved process the conflict minerals, if known, expend insufficient resources which as compared to the other possible and the efforts to determine the mine or could lead to inadequate inquiries. methods of implementing the statute. location of origin with the greatest However, we anticipate that overall this possible specificity. Also, such an issuer approach will result in fewer issuers 2. Information in the Specialized is required to describe its products engaging in due diligence and providing Disclosure Report containing these conflict minerals as a Conflict Minerals Report because, We revised the final rule from the ‘‘DRC conflict undeterminable,’’ rather although an issuer may not be able to proposal so that an issuer that must file than stating that they have not been determine to a certainty, even after a a Conflict Minerals Report is not found to be ‘‘DRC conflict free.’’ An reasonable country of origin inquiry, required to disclose, in its specialized issuer with such conflict minerals, that its conflict minerals did not disclosure report under a separate however, is not required to obtain an originate in the Covered Countries or are ‘‘Conflict Minerals Disclosure’’ heading, independent private sector audit of that from recycled and scrap sources, that the reason it is filing its Conflict Conflict Minerals Report. This reporting issuer may have no reason to believe Minerals Report. Similarly, the final alternative is temporary and will be that its necessary conflict minerals may rule does not require an issuer to available only during the first two disclose in its specialized disclosure sroberts on DSK5SPTVN1PROD with RULES have originated in the Covered reporting cycles following the Countries and not come from recycled report that it has provided an audit effectiveness of the final rule for all or scrap sources. This situation will report or a certification of the audit issuers, which includes the specialized reduce costs to such issuers because because the audit report and disclosure reports for 2013 and 2014, those issuers are not required to exercise certification are part of the Conflict and the first four reporting cycles due diligence and provide a Conflict Minerals Report already, so specifically following the effectiveness of the final Minerals Report. mentioning the audit report or rule for smaller reporting companies, VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56345 which includes the specialized information regarding the source of a believe the alternative reading suggested disclosure reports for 2013 through particular conflict mineral.801 by commentators is consistent with the

2016. After these times, an issuer unable Issuers that are unable to determine, purposes of the statute. The final rule’s to determine that its conflict minerals following their exercise of due temporary provision for ‘‘DRC conflict did not originate in the Covered diligence, that their conflict minerals undeterminable’’ products, however, is Countries or unable to determine that its did not originate in the Covered designed to reduce compliance costs conflict minerals that originated or may Countries; that their conflict minerals during the transition period. have originated in the Covered that originated in the Covered Countries did not directly or indirectly finance or 4. ‘‘Contract To Manufacture’’ Countries did not directly or indirectly finance or benefit armed groups in the benefit armed groups in the Covered As discussed above, the final rule Covered Countries must describe its Countries; or, after their exercise of due applies to issuers that contract to products containing those minerals as diligence, are unable to determine that manufacture products. This requirement having not been found to be ‘‘DRC their conflict minerals came from is based on our interpretation of the conflict free’’ and provide an recycled or scrap sources are required to statute in light of our understanding of independent private sector audit of its file a Conflicts Minerals Report the statutory intent and a reading of the Conflict Minerals Report. describing, among other matters, the statute’s text. We recognize that this due diligence they exercised and the approach affects the overall compliance This temporary provision will have costs and burdens, in particular, on the steps they have taken or will take, if the benefit of lowering the initial costs subset of issuers that contract to any, since the end of the period covered of the rule both because an audit will in their most recent prior Conflict manufacture products. However, we not be required and because, to the Minerals Report to mitigate the risk that have sought to mitigate these costs by extent issuers suffer negative their necessary conflict minerals benefit not defining the term ‘‘contract to consequences from disclosure that their armed groups, including any steps to manufacture’’ in the final rule, and products have not been found to be improve their due diligence. After the instead letting issuers determine based ‘‘DRC conflict free,’’ those consequences transition period, such issuers will be on their own facts and circumstances would likely not be as significant for an required to include an independent which of their products have conflict issuer that is able to disclose that it has private sector audit of their Conflict minerals that may trigger a reporting conducted due diligence on its conflict Minerals Reports with respect to those obligation. minerals and not found a connection to minerals, which is likely to increase Compared to the alternative approach armed groups. We believe that not costs for those issuers. One of defining this term, our decision not requiring an independent private sector commentator argued that ‘‘Section 1502 to define the term provides issuers with audit of the Conflict Minerals Report does not require an issuer that has been significant flexibility to use a definition during this temporary period is unable to determine (after a proper that applies best to their particular appropriate because an audit of the inquiry) the source of its conflict circumstances. Such flexibility may design of an issuer’s due diligence that minerals * * * to provide a Conflict lower issuers’ compliance costs to the results in an undeterminable conclusion Minerals Report.’’ 802 As discussed extent any definition could have been would not appear to have a meaningful above, we believe the process that better overbroad. But, we also recognize that incremental benefit. Also, we recognize reflects the statutory intent is as follows: our decision not to define this phrase the concerns about the feasibility of • An issuer that, following a could increase uncertainty for issuers on preparing the required disclosure in the reasonable country of origin inquiry, has how the phrase should be implemented near term because of the stage of reason to believe that its necessary and may result in additional costs to development of the supply chain tracing conflict minerals may have originated in some issuers. For example, the mechanisms. We adopted this the Covered Countries, and may not be uncertainty associated with leaving the temporary provision to allow sufficient from recycled or scrap sources, must phrase undefined could lead some time for more comprehensive tracking conduct due diligence on the source and issuers to interpret the definitions in a systems to be developed by industry custody of such conflict minerals, in manner that is more expansive than if and trade groups. The development and accordance with a nationally or the phrase was defined, thus incurring use of such comprehensive tracking internationally recognized due diligence a higher compliance cost than is systems should improve due diligence framework, and necessary. In this regard, some issuers performance and lower the cost of • If, following such due diligence, may decide to use more internal or compliance with the statute by reducing such issuer is unable to determine that external resources than if this phrase duplication and taking advantage of such conflict minerals did not originate was defined to make sure they are economies of scale. We believe that a in the Covered Countries (and is unable compliant with the rule, which would two-year period for issuers with an to determine that such conflict minerals also increase compliance costs. The lack indeterminate conclusion is appropriate are from recycled or scrap sources), then of a clear definition could also result in because this appeared to be the such issuer is required to submit a a diminishment of the benefit if some approximate amount of time that many Conflict Minerals Report. issuers are less rigorous in determining commentators stated would be While this approach may add to the and reporting on their products that necessary to establish traceability overall costs of compliance, we do not have conflict minerals, which would systems in the Covered Countries.800 reduce the utility of their disclosure. 801 Using the cost of audit estimates provided by Also, we believe that a four-year period Overall, however, we believe the the university group and the manufacturing for smaller reporting companies with an industry group commentators, which we also use potential benefit of flexibility outweighs sroberts on DSK5SPTVN1PROD with RULES indeterminate conclusion is appropriate below, we estimate that this exercise of discretion the potential increases in costs. because they may have fewer resources by the Commission would reduce the initial In the proposal, we expressed our to implement the final rule and may compliance cost of a small issuer by approximately view that an issuer that does not $25,000 and the initial compliance cost of a large manufacture a product itself but that has lack the leverage to obtain detailed issuer by approximately $100,000 per year for each year of the applicable temporary period based upon ‘‘any’’ influence over the product’s 800 See, e.g., letters from AdvaMed I, FEC I, JVC the analysis of the university group commentator. manufacturing should be considered to et al. II, Plexus, Verizon, and WilmerHale. 802 See letter from Cleary Gottlieb. be contracting to manufacture that VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56346 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations product. Also, we expressed our view description of the due diligence Under the final rule, an issuer’s audit that an issuer that offers a generic measures it performed is consistent with certification is in the form of a statement product under its own brand name or a the due diligence process it undertook. in the Conflict Minerals Report that the separate brand name should be As discussed below, having a clear audit issuer obtained an independent private considered to be contracting to objective based on the design of an sector audit. This should benefit issuers manufacture that product so long as the issuer’s due diligence framework lowers by not subjecting individuals employed issuer had contracted to have the audit costs compared with a rule that by the issuer to liability for the product manufactured specifically for does not require a specified framework information in the Conflict Minerals itself. As noted in the Proposing because it focuses the scope of the audit Report or the audit. Additionally, the Release, we had believed that these that must be performed and, therefore, final rule does not require an auditor to issuers should have been considered to makes the audit less time-consuming assume expert liability regarding the be contracting those products to be and less costly. audit because the audit report would manufactured because the issuers would Further, the final rule requires that an not be incorporated by reference or implicitly influence the manufacturing issuer’s due diligence follow a otherwise included in Securities Act of the products. However, we are nationally or internationally recognized filings. Therefore, depending on the persuaded by commentators that this due diligence framework that is state of competition in the market for level of control set forth in the established by a body or group that has independent private sector audits, not Proposing Release was ‘‘overbroad’’ and followed due-process procedures, requiring the assumption of such ‘‘confusing’’ and would impose on such including the broad distribution of the liability may result in lower audit fees, an issuer ‘‘significant,’’ ‘‘unrealistic,’’ framework for public comment, and is which in turn should decrease conflict and ‘‘costly’’ burdens.803 Therefore, we consistent with the criteria standards in minerals-reporting companies’ cost of provide guidance indicating that an GAGAS established by the GAO. This compliance with the statute. However, issuer is considered to be contracting to requirement improves the credibility not requiring the certification to be manufacture a product depending on and usefulness of the reports. Also, signed by an officer and not requiring an the degree of influence it exercises over requiring adherence to a nationally or auditor to assume expert liability could the materials, parts, ingredients, or internationally recognized due diligence decrease the benefits of the rule if it components to be included in any framework will provide issuers with a results in issuers taking less care in their product as well as examples. We believe degree of certainty that their due certifications and auditors conducting that this guidance may decrease issuers’ diligence process is reliable and will less thorough audits. flexibility for some issuers, but it will pass a regulatory review. However, this 7. Audit Objective provide more certainty for others. requirement also will limit the issuer’s The final rule provides a clear audit flexibility in determining the source of

5. Nationally or Internationally objective. We believe that the audit is origin and chain of custody of their Recognized Due Diligence Framework meaningful because investors and other conflict minerals. If the established (Including Gold) users will have some assurance from an requirement is more burdensome than Although Exchange Act Section independent third party that the issuer’s what the issuer might have otherwise 13(p)(1)(A)(i) requires issuers to due diligence framework, as set forth in considered sufficient due diligence, it describe the measures taken to exercise the Conflict Minerals Report, is might make it more costly for issuers due diligence, the provision does not designed in conformity with the compared to using a due diligence relevant nationally or internationally indicate the due diligence required. The process based on their own facts and recognized due diligence framework, final rule’s requirement that issuers use circumstances. and that the issuer actually performed a nationally or internationally

6. Liability for the Audit and Audit the due diligence measures that it recognized due diligence framework in Certifications represents that it performed in the their Conflict Minerals Reports may Conflict Minerals Report. We recognize result in a certain degree of Exchange Act Section 13(p)(1)(A)(i) that an audit objective requiring an standardization in the preparation of the requires the independent private sector auditor to express an opinion or disclosure and may reduce audit costs audit to be conducted in accordance conclusion as to the design and by focusing the audit. To the extent with the standards established by the description of an issuer’s due diligence issuers tend to use the same due GAO. Exchange Act Section 13(p)(1)(B) measures is not as comprehensive as an diligence framework, this states that the issuer must certify the audit objective requiring an auditor to standardization will benefit users of the audit and that certified audit constitutes express an opinion or conclusion as to information by making the Conflict a critical component of due diligence.804 the effectiveness of due diligence Minerals Reports easier to compare, measures or the accuracy of conclusions thus reducing costs for users of 804 As noted elsewhere in this release, the staff of in the Conflict Minerals Report. comparing information across issuers. the GAO has indicated to our staff that the GAO does not intend to publish standards for the However, we believe that the audit will Also, requiring a nationally or independent private sector audit and that GAGAS’ internationally recognized due diligence Performance Audit or Attestation Engagement licensed accountants in states that have multi-class framework allows us to provide a clear standards can be used for these audits. See U.S. licensing systems that recognize licensed audit objective that includes whether Gov’t Accountability Office, GAO–12–331G, accountants other than certified public Government Auditing Standards 2011 Revision accountants.’’ Unlike the GAGAS Attestation the design of an issuer’s due diligence (Dec. 2011), available at http://www.gao.gov/assets/ Engagement standard, the GAGAS Performance measures is in conformity with the 590/587281.pdf. Therefore, to conduct an Audit standard allows auditors other than certified criteria set forth in the nationally or independent private sector audit, an auditor must public accountants to perform a Performance Audit, sroberts on DSK5SPTVN1PROD with RULES internationally recognized due diligence comply with certain quality control procedures and provided the auditor complies with the applicable peer reviews, which are required under the GAGAS qualification requirements under GAGAS, which framework and whether an issuer’s Performance Audit and Attestation Engagement will increase the number of firms eligible to standards. The GAGAS Attestation Engagement conduct the private sector audits. Increasing the 803 See, e.g., letters from ABA, AT&T, Corporate standards, in Chapter 3.75, require that auditors be number of firms that are eligible to conduct the Secretaries I, Davis Polk, and Verizon. See also ‘‘licensed certified public accountants, persons independent private sector audits should increase letter from NRF I (stating that our proposed working for a licensed certified public accounting competition, which should make it less costly for approach would be ‘‘draconian’’). firm or for a government auditing organization, or an issuer to obtain such an audit. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56347 still be meaningful because it will with the criteria set forth in the exercise due diligence in determining provide some assurance from an nationally or internationally recognized whether the minerals are, in fact, from independent third party that the issuer’s due diligence framework. We believe an recycled or scrap sources. That due due diligence framework is designed in audit related to whether the issuer diligence must follow a nationally or conformity with the relevant nationally actually performed the due diligence internationally recognized due diligence or internationally recognized due measures that it represents that it framework, if such framework is diligence framework and that the issuer performed in the Conflict Minerals available. While providing a higher actually performed the due diligence Report is necessary and appropriate so degree of certainty that those conflict measures as they were described. that the audit also addresses, in a cost minerals came from recycled or scrap With respect to what audit objective effective manner, the actual sources, the requirement will also is appropriate, we considered the performance of the due diligence and increase the costs to issuers, compared following possible audit objective not just the design as well as provide to an alternative that would allow alternatives from commentators: independent third party confirmation issuers to rely on their own due whether management’s description of that the work described was performed. diligence approach to verify that these procedures and controls performed in Based on the comments we received, minerals are from recycled or scrap their due diligence process are fairly however, an audit objective based on sources. Eliminating the requirement of described in the report; whether an any of the alternatives other than just an independent private sector audit of issuer’s design of its due diligence the design of the issuer’s due diligence their Conflict Minerals Report, however, process described in the report measures and the issuer’s description of could potentially decrease costs to conformed to a recognized standard of the due diligence measures it performed issuers. due diligence; whether management’s would be very costly and burdensome to We believe that the magnitude of the description of an issuer’s due diligence undertake due to the breadth of those cost savings for issuers with conflict process in its report is accurate, the alternatives and the fact that most of the minerals from recycle or scrap sources results of that process are fairly stated, evidence required for those alternatives will be greatest for companies that use and the issuer has evaluated/identified would be held by third party suppliers exclusively scrap and recycled the upstream and downstream due and smelters. materials. Although we did not receive diligence processes; whether the design any information from commentators as of the due diligence process described 8. Conflict Minerals From Recycled or to the number of companies that may in the report conformed to a recognized Scrap Sources fall into this category, a number of standard and whether the process was The Conflict Minerals Statutory commentators stated that the use of effective; whether the issuer’s Provision is silent as to the treatment of conflict minerals from recycled or scrap conclusion regarding the source and conflict minerals from recycled or scrap sources is significant. For example, chain of custody of its conflict minerals sources. In the final rule, however, we some commentators noted that China is accurate; and whether the issuer provided for alternative treatment for controls approximately 85% of the appropriately included in the report all conflict minerals from recycled or scrap world’s tungsten supply, but China is its products described as having not sources. The alternative reporting cutting back on tungsten exports, which been found to be ‘‘DRC conflict free.’’ requirements for conflict minerals from is causing the price of tungsten to We used our discretion to make the recycled or scrap sources should benefit increase by 130%.806 According to these audit objective in the final rule similar issuers by reducing issuers’ compliance commentators, this development has to the first and second alternatives with costs with the disclosure requirements caused American manufactures to move some modification. The final rule states in Section 1502 because those issuers to recycled tungsten, which represented that the objective of the independent will conduct a reasonable inquiry approximately 55% of apparent private sector audit is for the auditor to regarding whether those minerals are consumption of tungsten in all forms. express an opinion or conclusion as to from recycled or scrap sources instead Also, as another example, one whether the design of the issuer’s due of having to exercise due diligence and commentator noted that up to 40% of diligence measures as set forth in the provide a Conflict Minerals Report in all the world’s gold supply is from recycled Conflict Minerals Report, with respect cases. Also, issuers that, following a or scrap sources.807 Even so, issuers that to the period covered by the report, is reasonable inquiry conducted in good use both conflict minerals from recycled in conformity with, in all material faith, reasonably believe their minerals or scrap sources and newly mined respects, the criteria set forth in the are from recycled or scrap sources will minerals may still need to exercise due nationally or internationally recognized not have to obtain an independent diligence and obtain an audit regarding due diligence framework used by the private sector audit. A reduction in the conflict minerals that are not from issuer, and whether the issuer’s costs of not having to exercise due to recycled or scrap sources and thus, may description of the due diligence diligence or obtain an independent not have significant additional cost measures it performed as set forth in the private sector audit is likely to be savings. Overall, however, even with Conflict Minerals Report, with respect significant for those industries that use these requirements, we believe that to the period covered by the report, is a high concentration of conflict minerals providing an alternative treatment for consistent with the due diligence that are from recycled or scrap conflict minerals from recycled or scrap process that the issuer undertook. sources.805 sources should benefit issuers by We believe that our choice of audit The final rule requires issuers with reducing their compliance costs for objective in the final rule will reduce conflict minerals that have reason to those minerals as compared with the the costs and burdens more than certain believe their conflict minerals may not costs applicable to newly mined conflict sroberts on DSK5SPTVN1PROD with RULES other alternatives. However, we come from recycled or scrap sources to minerals. Moreover, an indirect recognize that the audit objective will consequence of our differential not reduce the costs and burdens as 805 We are unable to estimate the total magnitude much as if the audit objective required of these cost savings because we do not have 806 See, e.g., letters from Rep. Altmire, Rep. empirical evidence regarding the scope of the use only an opinion or conclusion as to of conflict minerals that are from recycled or scrap Murphy, Rep. Renacci, Rep. Shuster, Rep. Toomey, whether the design of the issuer’s due sources. See below Section D for a further analysis Rep. Womack, and Sen. Pryor. diligence measures is in conformity of the potential costs of this provision. 807 See letter from WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56348 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations treatment of scrap and recycling commentator noted, the cost of the final standardized manner. Users that find materials may be to increase the extent rule would increase ‘‘dramatically.’’ 808 the information about an issuer’s to which these materials are recycled. conflict minerals relevant to their

10. Conflict Mineral Derivatives Finally, the reasonable country of origin decision making will benefit from the inquiry requirements are likely to The Conflict Minerals Statutory standardization and simplification of improve the disclosures regarding Provision defines the term ‘‘conflict the disclosure. conflict materials from recycled or scrap mineral’’ as cassiterite, columbite- Further, requiring issuers to use a new sources. tantalite, gold, wolframite, or their form with a uniform filing date rather derivatives, or any other minerals or than submitting conflict minerals

9. Conflict Minerals ‘‘Outside the their derivatives determined by the information in their annual reports Supply Chain’’ Secretary of State to be financing would benefit most issuers by allowing Like conflict minerals from recycled conflict in the Covered Countries.809 them to have sufficient time to prepare and scrap sources, the Conflict Minerals The Proposing Release provided the and file their conflict minerals Statutory Provision is silent as to the same definition of the term ‘‘conflict information independent from the due treatment of conflict minerals ‘‘outside mineral’’ as well. In the final rule, dates for annual reports.811 Moreover, the supply chain’’ at the time our final however, we used our discretion to limit we believe that this staggered filing date rule takes effect, including existing the term ‘‘conflict mineral’’ to include will benefit issuers because they could, stockpiles of conflict minerals. only cassiterite, columbite-tantalite, if they choose to do so, use the same However, in the final rule we have gold, wolframite, and their derivatives, personnel to handle this filing as their determined to exclude any conflict which are limited to only the 3Ts, annual reports. Another benefit for minerals that are ‘‘outside the supply unless the Secretary of State determines issuers of requiring issuers to provide chain’’ prior to January 31, 2013. The that additional derivatives are financing their conflict minerals information on a final rule considers conflict minerals to conflict in the Covered Countries, in new form, instead of an annual report be ‘‘outside the supply chain’’ after such which case they are also considered on Form 10–K, Form 20–F, or Form 40– conflict minerals have been smelted (in ‘‘conflict minerals.’’ By using our F, is to remove the conflict minerals the case of tantalum, tin, or tungsten) or discretion to limit the covered mineral information from the disclosure that refined (in the case of gold), or, if not derivatives, we could be limiting the principal executive and financial smelted or refined, are physically usefulness of the information of the officers must certify under Sections 302 located outside of the Covered conflict minerals disclosure. This and 906 of Sarbanes-Oxley, which could Countries. potential disadvantage is mitigated, reduce costs to issuers. Also, requiring We are aware of the concern that however, by the fact that tantalum, tin, a uniform reporting period for all these existing stockpiles could have and tungsten are by far the most issuers will benefit companies that come from activities that financed or common derivatives of these supply products or components with benefited armed groups in the Covered minerals.810 A different approach would conflict minerals by allowing them to Countries. However, once those increase costs to issuers by increasing provide reports once per year for all minerals have been smelted, refined, or the number of derivatives that they their customers, rather than having to transported out of the Covered would have to determine are in their prepare reports throughout the year for Countries, it seems unlikely that they products. customers with different reporting could further finance or benefit armed periods, which will reduce such groups. Therefore, we believe excluding 11. Method and Timing of Disclosure on Form SD companies’ costs. these stockpiled minerals would be Our decision to require a new form consistent with the statutory intent of Exchange Act Section 13(p)(1)(A) will result in costs related to the the Conflict Minerals Statutory requires issuers to ‘‘disclose annually’’ preparation of this form, as we discuss Provision and does not significantly their conflict minerals information, but below in the Paperwork Reduction Act impair the benefits sought by the does not specify how issuers should section. Also, our decision to require an statute. Moreover, the approach we have disclose this information or at what time issuer to provide its Conflict Minerals chosen may substantially reduce during the year the disclosure must be Report and its independent private compliance costs for some issuers by provided. The final rule requires issuers sector audit report as an exhibit to its not requiring them to determine the to provide this information annually in specialized disclosure report on Form origin and chain of custody of these a new specialized disclosure report on SD will result in costs related to the stockpiled minerals. An alternative new Form SD that covers a calendar preparation of such an exhibit. approach that requires issuers to year, regardless of the issuer’s fiscal year Requiring covered issuers to file, determine the origin and chain of end, and is due on May 31 of the instead of furnish, their Conflict custody of their stockpiled minerals subsequent year. Our decision to Minerals Reports gives investors the would greatly increase costs, provide through rulemaking that issuers ability to bring suit if issuers fail to particularly for conflict minerals that use the new form for the disclosure of comply with the new disclosure were extracted prior to the conflict minerals’ origin and the requirements, for instance under contemplation of the Conflict Minerals Conflict Minerals Report makes it easier Exchange Act Section 18. This may, Statutory Provision because issuers for those interested in the disclosed therefore, potentially improve the would not have known they were information to locate the form. In avenues of redress available to expected to determine the origin of addition, the final rule requires that investors. This, in turn, may provide those minerals at the time of their issuers present the information in a benefits to investors to the extent they extraction. Further, if stockpiled sroberts on DSK5SPTVN1PROD with RULES rely on the information to make minerals were not excluded, issuers 808 See letter from Claigan I. investment decisions. Because this might not be able to sell those minerals 809 Section 1502(e)(4) of the Act. Presently, the could improve investors’ ability to seek and could be forced to dispose of their Secretary of State has not designated any other mineral as a conflict mineral. Therefore, the conflict existing conflict minerals inventory at minerals include only cassiterite, columbite- 811 We estimate that almost 58% of total number below market prices, or at a loss. If such tantalite, gold, wolframite, or their derivatives. of affected issuers uses December 31 as a fiscal year a situation occurred, as one 810 See letters from AAFA, ITIC I, and PCP. end. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56349 redress, it is possible that covered compliance cost than is necessary. In concerned that any broad categories of issuers could be found liable for the this regard, some issuers may decide to exemptions would undermine the disclosure. Our decision to require use more internal or external resources statutory objectives discussed above. issuers to ‘‘file,’’ rather than ‘‘furnish,’’ than if this phrase was defined to make For the provision to have the effect we the information will potentially subject sure they are compliant with the rule, understand Congress intended, we are issuers to litigation under Section 18 which would also increase compliance not exempting any class of issuer from and may ‘‘incentivize issuers (and costs. The lack of a clear definition its application. We recognize that this auditors and underwriters) to conduct could also result in a diminishment of imposes a cost burden on those issuers an appropriate level of diligence’’ in the benefit of the rule if some issuers are who are not exempted, but conclude preparing the disclosures,812 thereby less rigorous in determining and that this burden is required by the increasing issuers’ cost of complying reporting on their products that have statute. with the final rule.813 In addition, our conflict minerals, which would reduce Additionally, as one commentator decision to require a uniform reporting the informativeness of their disclosure. noted, it is unclear whether exempting period could further increase costs to We have attempted to mitigate the smaller reporting companies would issuers that do not have calendar year potential cost of leaving the phrase significantly reduce their burdens fiscal years by requiring separate undefined by the guidance we provide because smaller reporting companies reporting outside of the issuer’s normal in the release. Our guidance provides could still be required to track and reporting period. issuers with contributing factors that provide their conflict minerals they should use in their determination information for larger issuers.815

12. ‘‘Necessary to the Functionality or of ‘‘necessary to the functionality or Moreover, as other commentators noted, Production’’ production,’’ which will reduce the to the extent there are benefits to Exchange Act Section 13(p)(2)(B) possibility that some issuers may smaller companies from an exemption, defines a ‘‘person described’’ as one for interpret the phrase in either an over or such an exemption could increase the which conflict minerals are ‘‘necessary underinclusive manner. Also, we noted burden on larger companies that rely on to the functionality or production of a concerns that there is ambiguity in the smaller reporting company suppliers to product manufactured by such a application of the provision to conflict provide conflict minerals information person.’’ The Conflict Minerals minerals that do not end up in the needed by the larger reporting Statutory Provision, however, provides product, and, as noted above, companies.816 Further, the temporary no additional explanation or guidance commentators were mixed in their availability of the ‘‘DRC conflict as to the meaning of ‘‘necessary to the views regarding how the rule should undeterminable’’ category is likely to functionality or production of a treat catalysts and other conflict reduce the compliance burden for all product.’’ We use our discretion not to minerals necessary to the production of companies, including smaller reporting define this phrase in the final rule. a product that do not appear in the companies. In this regard, not including Compared to an alternative of the product. After considering the private companies and individuals in rule, which would define this phrase, comments, we agree that it would be the final rule may not unduly burden our decision not to provide a definition very difficult for any manufacturer of reporting issuers because the gives issuers significant flexibility to use products that do not themselves contain commercial pressure on private a definition that applies best to their conflict minerals to know every conflict companies from issuers that need this particular circumstances. Such mineral used in the production process. information for their reports and from flexibility generally lowers issuers’ Therefore, we used our discretion to the public in general demanding that compliance costs as issuers can decide that, for a conflict mineral to be issuers make this information available determine whether the phrase is considered ‘‘necessary to the could be sufficient for the private applicable based upon their specific production’’ of the product, the conflict companies to provide voluntarily their facts and circumstances. But we also mineral must be contained in the conflict minerals information as recognize that our decision not to define product—and be necessary to the standard practice.817 Further, the this phrase could increase uncertainty product’s production. Therefore, extension of the availability of the ‘‘DRC for issuers on how the phrase should be although this requirement may decrease conflict undeterminable’’ category for an implemented and may therefore result the number of issuers that are covered additional two years is likely to reduce in additional costs to some issuers. For under the final rule, we believe this is example, the uncertainty associated the compliance burden even more for a reasonable approach that reduces costs some smaller reporting companies. with leaving the phrase undefined could to issuers by eliminating an especially Similarly, exempting foreign private lead some issuers to interpret the challenging aspect from the proposal. issuers from the final rule could definitions in a manner that is more

13. Categories of Issuers increase domestic issuers’ burdens by expansive than if these terms were making it very difficult for them to defined, thus incurring a higher We do not read the statute as making compel their foreign private issuer any distinction among issuers based on suppliers to provide conflict minerals 812 See letter from Global Witness I. 813 While the increased potential for litigation the issuer’s size or domesticity. As information. In addition, exempting may increase costs, we note that Section 18 claims discussed above, although not foreign private issuers from the final have not been prevalent in recent years and a specifically in the context of smaller rule could result in a competitive plaintiff asserting a claim under Section 18 would reporting companies or foreign private disadvantage for domestic issuers need to meet the elements of the statute, including issuers, some commentators suggested materiality, reliance, and damages. See Louis Loss because foreign private issuers would and Joel Seligman, Ch. 11 ‘‘Civil Liability,’’ Subsect. that we exempt certain classes of not be subject to the final rule.818 sroberts on DSK5SPTVN1PROD with RULES c ‘‘False Filings [§ 18],’’ Fundamentals of Securities companies from full and immediate Overall, we are not exempting foreign Regulation (3rd Ed. 2005). We are unable to compliance with the disclosures estimate the magnitude of this potential cost required by the Conflict Minerals 815 See letters from IPC I. increase because we cannot predict at this time whether Section 18 claims will increase (and if so, Statutory Provision.814 We are 816 See, e.g., letters from IPC I and TriQuint I. 817 See letter from Howland and TIC. by how much) and how costly it may be to ultimately prove the required elements or defend 814 See, e.g., letters from Davis Polk, NCTA, 818 See letter from CEI II, Rep. Amodei, Rep. such a case. Verizon, and WilmerHale. Ellmers, Rep. Murphy, and TriQuint I. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56350 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations private issuers because we believe that statute is the promotion of peace and companies that are not reporting in the doing so would not give effect to security in the Congo.820 These are United States—and thus need not Congressional intent. compelling social benefits, which we comply—but do compete directly with are unable to readily quantify with any reporting issuers in the United States. In

14. Not Including Mining Issuers as precision, both because we do not have requiring the Commission to promulgate Manufacturing Issuers the data to quantify the benefits and this rule, however, Congress determined The Conflict Minerals Statutory because we are not able to assess how that its costs were necessary and Provision does not state whether issuers effective Section 1502 will be in appropriate in furthering the goals of that mine conflict minerals should be achieving those benefits.821 We also helping end the conflict in the DRC and considered to be manufacturing those note that these objectives of Section promoting peace and security in the minerals and be included under the 1502 appear to be directed at achieving DRC. To the extent the final rule provision. We do not consider an issuer overall social benefits and are not implementing the statute imposes a that mines or contracts to mine conflict necessarily intended to generate burden on competition in the industries minerals to be manufacturing or measurable, direct economic benefits to of affected issuers, therefore, we believe contracting to manufacture those investors or issuers specifically. the burden is necessary and appropriate minerals unless the issuer also engages Additionally, the social benefits are in furtherance of the purposes of in manufacturing, whether directly or quite different from the economic or Section 13(p). Also, if foreign through contract, in addition to mining. investor protection benefits that our jurisdictions implement similar laws or In this regard, we do not believe that rules ordinarily strive to achieve. We regulations similar to Section 1502 or mining is ‘‘manufacturing’’ based on a therefore have not attempted to quantify the final rule,824 any advantages plain reading of the provision. the benefits of the final rule. available to foreign companies listed in Excluding such mining issuers from the Based on comments and our analysis, such jurisdictions but not listed in the universe of covered companies could we do expect that the statute will result United States may be diminished. create a competitive advantage for those in significant economic effects. We have As we have observed, unlike in most companies over covered companies to noted the views of commentators on of the securities laws, Congress the extent that they are competitors, but direct compliance costs, and we intended the Conflicts Mineral this advantage should be diminished for acknowledge that these costs are Provision to serve a humanitarian mining companies that are suppliers of substantial. In addition, issuers with a purpose, which is to prevent armed conflict minerals to covered companies reporting obligation under the Conflict groups from benefiting from the trade of because the covered companies would Minerals Statutory Provision could be conflict minerals. There may also be a require the conflict minerals put at a competitive disadvantage with benefit to investors given the view information from the mining company. respect to private companies that do not expressed by some commentators that Also, excluding such mining issuers have such an obligation.822 We note, the provision also protects investors by from the final rule could increase costs however, that non-reporting companies requiring disclosure of information that to other issuers along the supply chain are part of the supply chain of reporting may be material to their understanding because, without being covered, such issuers and will bear many of the of the risks of investing in an issuer or mining issuers may not have the compliance costs of determining its supply chain. To the extent that the incentive to share origin and chain of whether their minerals are conflict- required disclosure will help investors custody information about the conflict free.823 We also expect that the in pricing the securities of the issuers minerals they mined. However, not implementation of the statute may subject to the Conflict Minerals including such mining issuers may provide significant advantage to foreign Statutory Provision, the rule could decrease certain costs for mining improve informational efficiency. issuers, since such issuers will not have conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict Because, however, the cost of to comply with the Conflict Minerals characterized by extreme levels of violence in the compliance for this provision will be Statutory Provision with respect to eastern Democratic Republic of the Congo, borne by the shareholders of the conflict minerals mined by such issuers particularly sexual- and gender-based violence, and company, which could potentially (unless necessary to the production or contributing to an emergency humanitarian situation therein, warranting the provisions of divert capital away from other functionality of a product section 13(p) of the Securities Exchange Act of productive opportunities, the rule may manufactured, or contracted to be 1934, as added by subsection (b).’’). result in a loss of allocative efficiency. manufactured, by such issuer). 820 See Section 1502(d)(2)(A) of the Act (directing The reduction in allocative efficiency However, we expect that such mining the GAO to assess the effectiveness of Exchange Act Section 13(p) in promoting peace and security in could be offset, somewhat, by increased issuers will incur costs to provide the Covered Countries). demand for the firm’s products and/or information on the source and custody 821 Some commentators argued, however, that the shares by socially conscious consumers of conflict minerals mined by such Conflict Minerals Statutory Provision has already and investors. We do not expect that the issuers to their customers, and other pressured DRC authorities to begin to demilitarize rule would negatively impact prospects some mining areas and to increase mining participants in their supply chain, who oversight. See, e.g., letters from International of the affected industries to an extent are subject to the Conflict Minerals Corporate Accountability Roundtable (Jul. 29, 2011) Statutory Provision. (‘‘ICAR I’’), Sen. Boxer et al. I, Sen. Leahy et al., 824 See cf. letters from Member of the European and United Nations Group of Experts on the Parliament (Nov. 17, 2011) (‘‘European Parliament’’) D. Quantified Assessment of Overall Democratic Republic of Congo (Oct. 21, 2011) (‘‘UN (stating that in ‘‘2010 the European Parliament Economic Effects Group of Experts’’). adopted a resolution welcoming the adoption of the 822 In our Economic Analysis, we use the term new US ‘Conflict Minerals’ Law and asked the As noted above, Congress intended for ‘‘competition’’ to mean competition in the Commission and the Council to examine a sroberts on DSK5SPTVN1PROD with RULES the rule issued pursuant to Section 1502 industries of the affected issuers, not competition legislative initiative along these lines’’) and NEI to decrease the conflict and violence in in all of the markets that the Commission is charged (stating that ‘‘[s]imilar action can be expected in with regulating, which are the United States other countries in response to the SEC’s leadership, the DRC, particularly sexual and gender securities markets. We do not expect any effects of and as global awareness of the conflict minerals based violence.819 A related goal of the the rule on the competition in the United States issue increases,’’ that ‘‘conflict minerals legislation securities markets. [in Canada] has already been tabled,’’ and ‘‘the 819 Section 1502(a) of the Act (‘‘It is the sense of 823 See, e.g., letters from Japanese Trade Canadian Securities Administrators (CSA) pay[s] the Congress that the exploitation and trade of Associations and NAM I. close attention to SEC rule-making developments’’). VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56351 that would result in withdrawal of will be substantial. Thus, we have association and university group capital from these industries. Thus, we revised our own prior estimate of the commentators accordingly. What do not expect the rule to have a cost of complying with the rule. Based follows is a modified analysis of the significant impact on capital formation. on our analysis of the data, we provide manufacturing industry association and There may, however, be several a range of the costs of both initial university group commentators’ indirect economic effects that could be compliance and the annual cost of estimates that we believe better significant. The high cost of compliance ongoing compliance. In our view, synthesizes the information provided to provides an incentive for issuers to because of the potential variations in the us in the comment process. choose only suppliers that obtain their manner in which issuers will undertake First, in both of these estimates, an minerals exclusively from outside the compliance, providing such a range is important consideration is the cost of Covered Countries, thereby avoiding the more appropriate than providing a upgrading or implementing changes to need to prepare a Conflict Minerals precise cost estimate. Our revised IT systems. Based on the letters Report. To the extent that Covered estimate is that the initial cost of submitted as well as estimates from Countries are the lowest cost suppliers compliance is between approximately other commentators, we believe the of the minerals affected by the statute, $3 billion to $4 billion, while the annual manufacturing industry association and issuers preferring to find substitutes or cost of ongoing compliance will be university group commentators may other suppliers of non-DRC minerals between $207 million and $609 million. have been over-inclusive in their would have to increase the costs of their We start our analysis of the cost of estimates. For example, the products to recoup the higher costs. compliance by incorporating all of the environmental consultancy company Reducing the viable supply of such comments that provide quantified data commentator estimates a much smaller minerals may have the indirect effect of on the aggregate potential costs of the number of $25,000 for the IT system and increasing the cost of acquiring these proposed rule. So, while our $10,000 for IT support.830 The minerals. overarching consideration of the costs of commentator then states that, ‘‘a cost of As mentioned above, the overall the rule we are adopting today takes $6B is 10 times the total annual sales for specific range of costs for compliance into account the information provided all restricted materials software (of with the rule provided by commentators by a broad range of commentators, the which conflict minerals is a small part) was between $387,650,000 and $16 most useful frameworks for considering and does not seem realistic * * * billion. The wide divergence of the cost costs were provided by the [p]articularly since conflict minerals estimates among the four separate manufacturing industry association and software for small companies can be analyses submitted by a manufacturing university group commentators. Other downloaded for free.’’ The industry association,825 an electronic comments, while also providing certain environmental consultancy company interconnect industry association,826 a valuable insights into how our rules commentator further states that ‘‘[t]he university group,827 and an would be implemented, were either not systems quoted by [the manufacturing environmental consultancy company 828 as transparent in their analytical industry association and university illustrates to us the difficulty of frameworks or not easily generalizable group commentators] are the most ascertaining the estimated costs of in terms of aggregating the costs across expensive systems on the market,’’ and implementing the statute and our multiple industries.829 that ‘‘[m]ost companies we interviewed discretionary choices. We have We also found it significant that the said they would not need to invest in reviewed the proposal and the two analyses by the manufacturing new software solely for conflict comments received and have used the industry association and university minerals * * * .’’ 831 information provided by commentators group commentators take into account While we are persuaded by the to inform our Economic Analysis of the the categories of costs most often argument that an average issuer should final rule. In the remaining part of this identified as significant by not expect to spend $1,000,000 to invest section we attempt to quantify, to the commentators and that we agree are in a new IT system, we do not accept extent possible, the compliance costs likely to be deemed as such. Moreover, the environmental consultancy resulting from the final rule by relying we did not find the assumptions company commentator’s own estimate on and critically evaluating the underlying their frameworks to be of $35,000 because it does not provide estimates and the analyses that qualitatively different from the a factual basis for the assertion. In commentators provided. Rather than discussions of costs provided by other modifying the estimates of the using a single analysis, a combination of commentators. manufacturing industry association and the analyses can provide a useful At the same time, in our view, even university group commentators, we do framework for understanding various these two studies did not provide not intend to replace the manufacturing cost components of our implementing sufficiently documented evidence to industry association and university the rule. Our approach strives to achieve support all of their assumptions and group commentators’ cost estimates a balanced and reasonable analysis assertions and consequently, with the smaller estimate provided; based on the data and assumptions commentators differed on the rather, for purposes of our cost estimate, provided by all commentators, as well quantification of these costs. We have the appropriate estimate lies somewhere as our own analysis and assumptions. therefore taken into account the views in between those two estimates. When it is deemed prudent, we have expressed in other comment letters, and Based on the university group chosen to make conservative made modifications to the analyses commentator’s analysis, we assumed assumptions that may, in some cases, provided by the manufacturing industry $205,000 for small company computer lead to an overestimation of the costs. costs rather than $1,000,000. Further, sroberts on DSK5SPTVN1PROD with RULES Overall, after performing our analysis 829 As shown below, while we draw on the quantified analyses supplied by the electronic we assumed that the computer costs for we conclude that the costs of the statute interconnect industry association and the 830 See letter from Claigan III. See also letter from 825 See Section III.B.2.b.i. environmental consultancy company commentators, these letters did not provide as Assent (critiquing the cost estimates of both the 826 See Section III.B.2.b.ii. broad a range of quantified cost estimates as those manufacturing industry association commentator 827 See Section III.B.2.b.iii. and the university group commentator). provided by the manufacturing industry association 828 See Section III.B.2.b.iv. and university group commentators. 831 Letter from Claigan III. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56352 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations large issuers would be twice those for of compliance costs from $1.2 billion to reports, then the relative burden on the smaller issuers, or $410,000, and not $635 million. issuers will be very small. All of this four times those for a smaller issuer as In addition, we are not convinced that will, however, depend in turn on the assumed by the university group the estimate of cost to suppliers is comparative bargaining power between commentator.832 In order to make the IT appropriately generated by a top-down the issuers and the suppliers at every cost analysis consistent between the approach (number of supplier level. Ultimately, none of the studies university group and the manufacturing relationships). Indeed, we think a top- have provided compelling explanations group’s revised analysis, we averaged down approach may not reflect how our for the precise dynamics that will the total IT cost per company in the rule may be implemented because it is govern the issuer-supplier or first-tier university analysis and divided it by the not clear how the market may react in supplier-second-tier supplier total number of issuers for an average IT placing the various burdens of traces on relationships. On the whole, we think it cost for all companies (irrespective of the countless entities in the supply would be much more reasonable to size) of approximately $250,000 and chains. In this top-down approach believe that suppliers at all levels will apply it to the manufacturing group’s (which is the approach used by many expend some effort individually in analysis.833 This respectively changes commentators) each firm using these providing information to some of their the manufacturing industry association minerals will need to track backwards customers regarding the source of their and university group commentators’ through each supplier. If many firms minerals, but each supplier’s effort in estimates of the total IT cost from $5.9 share the same supplier, the underlying turn will most likely reduce the cost of billion and $2.6 billion, respectively, to assumption is there are few economies its customers to comply with our rules. approximately $1.5 billion. of scale in determining whether the Few commentators provided an minerals are conflict-free. Under this estimate of the total number of suppliers Second, another important cost approach, each firm pays an affected. In the university group assumption is that the manufacturing independent cost of finding out from commentator’s estimate, even after industry association commentator each of their suppliers where the adjusting for potential overlap, the total assumes that each issuer has an average minerals originate.835 number of suppliers to be affected totals of 2000 first-tier suppliers. They arrive We believe, however, that due over 860,000, which is based on the at this number based on their diligence on the part of suppliers likely total supply chain. Using the total ‘‘consultations with a number of large will be a bottom-up approach in which supply chain to estimate the affected manufacturers, and based on research materials are tagged at the mine and suppliers will create redundancies by’’ others. This estimate of the average certified at the smelter and then are because a supplier may be in more than number of first-tier suppliers is, introduced into the supply chain. Given one supply chain and therefore, be however, not supported by other this bottom-up approach, each supplier counted multiple times. Thus, we estimates, and is in fact difficult to will then track whether the mineral is believe the total number of suppliers reconcile with figures reported by other conflict-free and to whom it will be affected in the university group commentators. For example, the average sold. While the system for tracking the commentator’s analysis is likely to be number of suppliers per company in the sales of these minerals may increase in too high. The manufacturing industry electronic interconnect industry magnitude with the number of association commentator, on the other association commentator study is only companies the supplier supplies, we hand, estimated the total number of 163.834 The environmental consultancy believe the better approach to estimating small and medium-sized manufacturing company commentator also believes the costs of the supply chain would be to businesses to be affected at 278,000 and supply chain would be much simpler estimate the total number of affected states that many of these small than the manufacturing industry suppliers (bottom-up) rather than the businesses are likely to be suppliers. association commentator predicts, based total number of supplier relations (top- The 2009 Statistics of U.S. Businesses on the EICC/GeSI process. The down). from the U.S. Census estimates the total manufacturing industry association A bottom-up approach places more number of manufacturing businesses at commentator maintains, however, that emphasis on the number of suppliers 266,175, and the number of small many of its members have well over and assumes that there are economies of manufacturing businesses (those with 2,000 suppliers. We do think a prudent scale in the cost because suppliers need fewer than 500 employees) at reduction in the manufacturing industry only determine the source of their 262,524.836 Both of these numbers are association commentator’s estimate is minerals once and then spread the cost warranted, but here again, we do not of determining the source across many 836 See U.S. Census Bureau, Statistics of U.S. know that 163 is any more issuing firms. For example, if issuers Business (2009), available at http:// representative of an average company’s have many suppliers to choose from, www.census.gov/econ/susb/. We recognize that the experience. Thus, we use the university they may find it easier to deal with— U.S. Census Bureau uses the NAICS definitions, including the definition of ‘‘manufacturing.’’ As group commentator’s estimate of 1,060 and hence more valuable to employ— discussed above, we did not adopt that definition suppliers while employing the only those suppliers who can fully attest for the final rule because it appears to exclude any manufacturing industry association that they are conflict-free. Therefore, if issuer that manufactures a product by assembling commentator’s analysis. Revising the all first-tier suppliers bear the burden of that product out of materials, substances, or components that are not in raw material form, manufacturing industry association certifying and providing conflict which would exclude large categories of issuers that commentator’s number of suppliers in manufacture products through assembly. However, the supply chain lowers their estimate 835 The university group commentator states that we believe it is not inappropriate to use the Census there are ‘‘overlap’’ or ‘‘mutuality’’ cost efficiencies Bureau’s data regarding the total number of that will emerge on the supplier side, as the same manufacturing businesses and the number of small sroberts on DSK5SPTVN1PROD with RULES 832 The environmental consultancy company supplier may have supply contracts with more than manufacturing businesses in determining whether commentator estimates the IT costs for a company one issuer thus allowing them to use any to use the number of suppliers provided by the with $1 billion in revenue to be $35,000. Our management systems changes to meet the needs of university group commentator or the number estimate of IT costs attempts to incorporate these multiple issuers. This commentator estimates that provided by the manufacturing industry association two widely varying viewpoints. See letter from supplier efforts will be reduced by 60% because of commentator. Because we only have two real Claigan III. this supplier-issuer overlap and modifies the choices in the number of suppliers to use for our 833 Approximately $1.5 billion/5,994 issuers. number of suppliers accordingly. See letter from calculations, we need some way to determine 834 See letter from IPC I. Tulane. which figure is a more viable estimate. Despite the VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56353 similar to the number provided by the while the total number of small estimated cost of compliance manufacturing industry association suppliers is 200,160. This changes the substantially. The manufacturing commentator. We therefore have revised total compliance cost for suppliers from industry association commentator’s the university group commentator’s $5.1 billion in the university group estimate declines from $9.3 billion to analysis on the number of affected commentator’s analysis to $1.2 billion $4.1 billion while the university group suppliers to be consistent with the in our revised analysis. commentator’s estimate drops from manufacturing industry association The overall impact of these changes to $7.94 billion to $3.0 billion. commentator at 278,000 to reflect this the analysis, a reduction in IT costs (to both the manufacturing industry The combination of these judgment. In addition, consistent with modifications in the two analyses leads association and university group the university group commentator us to estimate that initial compliance commentators), a modification in the framework, we assumed that the same number of suppliers in the supply chain costs could be between $3.0 and $4.0 percentage of suppliers as issuers would (to the manufacturing industry billion for all companies to comply with be considered large (28%) and small association commentator) and a the statutory requirements. Below are (72%). Thus, in our revised university decrease in the number of suppliers the two revised analyses in tabular form group commentator’s analysis, the total affected (to the university group with the revised estimates highlighted number of large suppliers is 77,840 commentator) changes the total in bold: Revised Calculation Manufacturing Industry Association Commentator Estimate: Issuers affected .......................................................................................................................... 5,994 ........................................ Average number of 1st tier suppliers ......................................................................................... 1,060 2000*.53 Issuer Due Diligence Reform: 837 Number of compliance hours per supplier ................................................................................. 2 ........................................ Cost per hour .............................................................................................................................. $50 ........................................ Total compliance cost ......................................................................................................... $635,364,000 5,994*1,060*2*$50 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 839 ................................................................................................................. 4,500 5,994*75% 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 20% to conduct) .................................................................................. 55,600 278,000*.2 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 issuers) .................................................................................................... 1,678 5,994*0.28 Small issuer (72% of issuers) .................................................................................................... 4,316 5,994*0.72 Number of 1st tier suppliers (53% of NAM) ............................................................................... 1,060 2,000*0.53 Issuer Due Diligence Reform: .............................. ........................................ Number of compliance hours for large issuer ............................................................................ 100 ........................................ Number of compliance hours for small issuer ........................................................................... 40 ........................................ Internal cost per hour ................................................................................................................. $50 ........................................ fact that the Census Bureau uses the NAICS industry association commentator’s figure even 839 We are using the rounded estimate (4,500) that definition of ‘‘manufacturing,’’ which may exclude though our reasoning was based on the NAICS was used by the university group and sroberts on DSK5SPTVN1PROD with RULES certain manufacturers, it would need to exclude definition of ‘‘manufacturing.’’ manufacturing industry association commentators almost 600,000 manufacturers for the university 837 The manufacturing industry association in their calculations even though a more exact group commentator’s figure to be more accurate commentator refers to this as ‘‘changes to their number of issuers would be 4,496 (.75 × 5,994 = than the manufacturing industry association corporate compliance policies.’’ See letter from 4,495.5). See infra note 869. commentator’s figure. This appears to be too high. NAM I. 840 The manufacturing industry association Therefore, because the manufacturing industry 838 The manufacturing industry association commentator refers to this as the cost of providing association commentator’s figure is so much closer commentator refers to this as IT system ‘‘proper information regarding the source of to the Census Bureau’s figures, we decided it would development or revision. See id. minerals.’’ Id. not be inappropriate to use the manufacturing VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56354 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations Revised Calculation Internal costs for large issuer (90% of total work load) ............................................................. $7,551,000 1,678*0.9*100*$50 Internal costs for small issuer (75% of total work load) ............................................................. $6,474,000 4,316*0.75*40*$50 Consulting cost per hour ............................................................................................................ $200 ........................................ Consulting costs for large issuer (10% of total work load) ........................................................ $3,356,000 1,678*0.1*100*$200 Consulting costs for small issuer (25% of total work load) ........................................................ $8,632,000 4,316*0.25*40*$200 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 issuers ....................................................................................................... $126,000,000 1,260*$100,000 Total costs for small issuers ....................................................................................................... $81,000,000 3,240*$25,000 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 hours for large supplier ......................................................................... 100 ........................................ Number of compliance hours for small supplier ........................................................................ 40 ........................................ Internal cost per hour ................................................................................................................. $50 ........................................ Internal costs for large supplier (90% of total work load) .......................................................... $350,280,000 77,840*100*0.9*$50 Internal costs for small supplier (75% of total work load) .......................................................... $300,240,000 200,160*40*0.75*$50 Consulting cost per hour ............................................................................................................ $200 ........................................ Consulting costs for large supplier (10% of total work load) ..................................................... $155,680,000 77,840*100*0.1*$200 Consulting costs for small supplier (25% of total work load) ..................................................... $400,320,000 200,160*40*0.25*$200 Total cost ............................................................................................................................. $1,206,520,000 ........................................ Total ............................................................................................................................. $3,012,293,000 ........................................ The manufacturing industry approximately $300 million for issuer costs.845 As with the manufacturing association and the university group verification of supplier information.842 industry association commentator, we commentators also provided estimates In our table above, however, we revised did not modify the approximately $207 of ongoing compliance costs. As the estimate for issuer verification of million cost estimate of the audit. discussed above, we consider the supplier information to approximately Therefore, we believe that the ongoing framework provided by these $159 million.843 We did not modify the compliance cost estimate is likely to be commentators to be the most useful for approximately $450 million cost in the range of $207 million to $609 estimating costs. The only other estimate of the audit, which was based million.846 commentator to provide an estimate of on its estimate that the cost of such an ongoing costs was the electronic 845 The university group commentator noted that audit for these issuers would be ‘‘there would be some internal operations costs interconnect industry association $100,000 per issuer, and not the $25,000 associated with performing ongoing due diligence commentator, but its analysis only and maintaining the necessary [information included companies in that industry. we estimated it to be in the Proposing technology] systems on a company-to-company The analyses provided by the Release. The total estimate of ongoing basis over the years,’’ but that the ‘‘recurring costs manufacturing industry association and compliance costs based on our revisions of operating same is very low compared with the to the manufacturing industry initial implementation.’’ See letter from Tulane. university group commentators yield 846 The manufacturing industry association costs estimates across multiple association commentator’s analysis is commentator also quotes compliance costs by industries. The manufacturing industry therefore approximately $609 Technology Forecasters, Inc on the RoHS directive. association group commentator million.844 We believe that the Using the RoHS directive, they estimate total university group commentator’s only compliance costs of $32 billion and $3 billion estimated an ongoing audit cost of $450 annually for maintenance. See letter from NAM I. sroberts on DSK5SPTVN1PROD with RULES million and an ongoing cost estimate of significant recurring costs are the One potential method to estimate ongoing costs is approximately $207 million audit to apply the ratio of initial compliance costs to 841 We are using the rounded estimate (4,500) that ongoing compliance costs (9.375%) in the was used by the university group and submitted RoHS analysis ($3 billion/$32 billion or manufacturing industry association commentators 842 See letter from NAM I. 9.375%) and apply it to our revised estimates of the in their calculations even though a more exact analyses of the manufacturing industry association 843 5,994*1,060 *0.5 *$50 = $158,841,000 number of issuers would be 4,496 (.75 × 5,994 = and university group commentators. This results in 4,495.5). See infra note 869. 844 $450,000,000 + $158,841,000 = $608,841,000 total ongoing estimated compliance costs of $400 VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56355 IV. Paperwork Reduction Act analysis.850 A detailed discussion of not take into account the commentator’s these comments is included in the $1.4 billion figure because it relates A. Background section III above regarding the Economic solely to non-reporting companies. As a Certain provisions of the final rule Analysis of the statute. In the Proposing result, the commentator’s paperwork contain ‘‘collection of information’’ Release, we estimated that burden estimate appears to be requirements within the meaning of the approximately 5,994 of the approximately $8 billion, which is Paperwork Reduction Act of 1995 (the approximately 14,600 annual reports are much higher than our estimate of ‘‘PRA’’).847 We published a notice filed by issuers that would be affected $46,475,000 in the Proposing Release. requesting comment on the collection of by the proposed rules and form Also, as we note above, other information requirements in the amendments. commentators provided costs estimates. Proposing Release for the proposed The letter discussing the PRA These commentators did not specifically rules and amendments. The proposed specifically was from the manufacturing discuss the costs of the statute or the rules and amendments would have industry association commentator.851 rule as they relate to the PRA. However, amended one regulation and three The commentator concluded that, of the as discussed in greater detail below, we forms. In response to comments 5,994 issuers that the Proposing Release have attempted to extrapolate the received from the public, the stated could be affected by the final paperwork costs from the overall cost Commission has decided to adopt a new rule, the average issuer would have between 2,000 to 10,000 first-tier estimates of these commentators.854 disclosure form, rather than amend existing rules and forms. We have suppliers. The commentator agreed, C. Revisions to PRA Reporting and Cost submitted the new collection of therefore, with our statement in the Burden Estimates information requirements to the Office Proposing Release that the paperwork of Management and Budget (the costs could be significant because the For purposes of the PRA, in the ‘‘OMB’’) for review in accordance with disclosure requirement in the proposed Proposing Release, we estimated that the PRA.848 rules ‘‘drastically increases the amount the total annual increase in the The title for the collection of of paperwork issuers will have to collect paperwork burden for all companies to information is: ‘‘Form SD’’ (a new and provide to the SEC to make the prepare the disclosure that would be collection of information). required disclosures.’’ 852 The amount required under the proposed rules The form is adopted under the calculated by the commentator was $9.4 would be approximately 153,864 hours Exchange Act and sets forth the billion, which included approximately of company personnel time and a cost disclosure requirements for reports filed ‘‘$8 billion for issuers and $1.4 billion of approximately $71,243,000 for the by certain issuers regarding their use of from smaller companies that are not services of outside professionals. These conflict minerals from the Covered issuers.’’ 853 figures reflected our estimated costs for Countries. The hours and costs Our PRA analysis pertains solely to issuers to satisfy the due diligence and associated with preparing and the paperwork burdens of issuers that audit requirements of the proposed submitting the form constitute the file reports with us, although we discuss rules, which we estimated would be reporting and cost burdens imposed by the burdens and costs of the final rule $46,475,000. As discussed in more the collection of information. An agency to both reporting issuers and non- detail below, we are revising our PRA may not conduct or sponsor, and a reporting companies in our Economic burden and cost estimates in light of the person is not required to respond to, a Analysis section above. Therefore, for comments we received. collection of information unless it the purpose of the PRA analysis, we do For purposes of the PRA for the final displays a currently valid control 850 See, e.g., letters from Assent, Barrick Gold, CEI rule, we estimate the total annual number. Compliance with the rule is I, CEI II, Chamber I, Chamber III, Claigan I, Claigan increase in the paperwork burden for all mandatory. Responses to the II, Claigan III, CTIA, Ford, Howland, IPC I, ITRI I, affected companies to comply with the information collection will not be kept ITRI II, ITRI III, Japanese Trade Associations, NAM I, NRF I, PCP, Rep. Lee, Roundtable, Society of collection of information requirements confidential and there is no mandatory Corporate Secretaries and Governance Professionals in our final rule is approximately retention period for the information (Jun. 21, 2011) (‘‘Corporate Secretaries II’’), 2,225,273 hours of company personnel disclosed. TriQuint I, Tulane, United States Chamber of time and approximately $1,178,378,167 Commerce (Jul. 18, 2011) (‘‘Chamber II’’), and WGC B. Summary of the Comment Letters I. for the services of outside In the Proposing Release, we 851 See letter from NAM I. professionals.855 These estimates requested comment on the PRA 852 Id. include the time and cost of collecting analysis. We received only one 853 See id. In response to our estimate in the the information, preparing and Proposing Release, of 793 reporting companies that reviewing disclosure, and submitting comment letter that addressed the PRA would qualify as ‘‘small entities’’ for purposes of explicitly,849 but we received a number the Initial Regulatory Flexibility Act and that have documents. In this regard, we include of other comment letters and conflict minerals necessary to the functionality or due diligence, which includes updating submissions that discussed the costs production of products they manufacture or information technology systems and contract to manufacture, the manufacturing obtaining an independent private sector and burdens to issuers generally that industry association commentator noted that ‘‘a would have an effect on the PRA large portion of America’s 278 thousand small and audit, as part of collecting information. medium-sized manufacturers could be affected by We estimate that the total cost for the requirement to provide information on the issuers to satisfy their due diligence is million ($4.1 billion * 9.375%) and $281 million origin of the minerals in the parts and components ($3.0 billion * 9.375%), respectively. However, they supply to companies subject to the SEC.’’ Id. $1,030,026,667. We added this estimate because the manufacturing industry association The commentator estimated, however, that ‘‘only to our estimate of the cost to issuers to sroberts on DSK5SPTVN1PROD with RULES commentator does not specify the composition of one in five smaller companies would be in one or hire outside professionals to prepare these maintenance costs (e.g., it is not stated more issuer’s supply chains,’’ and these smaller whether this includes audit costs), nor does it and review disclosure, submit companies’ only costs regarding the proposed rules provide the underlying RoHS study for verification, would be a $25,000 audit cost. Id. Therefore, the we are unable to confirm the accuracy of this ratio. proposed rules would cost smaller companies that 854 See letters from Claigan I, Claigan II, Claigan 847 44 U.S.C. 3501 et seq. are not required to report with us under Exchange III, Claigan IV, IPC I, and Tulane. 848 44 U.S.C. 3507(d) and 5 CFR 1320.11. 855 $1,030,026,667 + $148,351,500 = Act Sections 13(a) or 15(d) approximately $1.4 849 See letter from NAM I. billion. Id. $1,178,378,167. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56356 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations documents, and retain records, which is only issuers who know or have reason suppliers.862 We note that the electronic $148,351,500.856 to believe that their conflict minerals interconnect industry association Consistent with our methodology in may have originated in the Covered commentator provided an extensive the Proposing Release, in deriving our Countries and may not have come from discussion of the costs of the proposed estimates for the final rule, we recognize recycled or scrap sources are required to rules.863 Its discussion and cost that the burdens will likely vary among proceed to step three, and the ‘‘DRC estimates, however, were limited to the individual companies based on a conflict undeterminable’’ temporary electronic interconnect industry, which number of factors, including the size provision, we believe it is appropriate to is only one segment of affected issuers. and complexity of their operations, the estimate that some percentage of issuers Also, although the tin industry number of products they manufacture or will not be required to submit a Conflict association commentator’s estimates contract to manufacture, and the Minerals Report, an independent private were useful, they were limited to the number of those products that contain sector audit, or both. Therefore, for the costs of its bag-and-tag system, which conflict minerals. We believe that some final rule, we estimate that 75% of all covers only the costs of due diligence issuers will experience costs in excess the 5,994 issuers, which is for the portion of the supply chain from of this average in the first year of approximately 4,496 issuers,860 will the mine to the smelter.864 For the PRA compliance with the final rule and some have to submit a Conflict Minerals estimate of the due diligence costs, we issuers may experience less than these Report and provide an independent relied primarily on the cost estimates average costs. We base our revised private sector audit of that report for the from the manufacturing industry estimates of the effect that the final rule first two years after implementation. We association and the university group will have on the collection of note that, under the final rule, issuers commentators and, to a lesser extent, we information as a result of the required that proceed to step three but are unable also relied on the electronic reasonable country of origin inquiry, to determine whether their conflict interconnect industry association due diligence process, and independent minerals originated in the Covered commentator’s estimates.865 private sector audit of the Conflict Countries, came from recycled or scrap The manufacturing industry Minerals Report primarily on sources, or financed or benefited armed association commentator estimated that information that we have obtained from groups in those countries are required to the initial costs to affected issuers comment letters. provide a Conflict Minerals Report, but would be approximately $8 billion.866 In the Proposing Release, we noted that report does not have to be audited This commentator’s only two recurring that the DRC accounts for approximately for the first two years following the costs in its $8 billion estimate were the 15% to 20% of the world’s tantalum, rule’s adoption for all issuers and the approximately $300 million cost for and accounts for a considerably smaller first four years for smaller reporting risk-based programs needed to verify the percentage of the other three conflict issuers. This change from the proposal credibility of suppliers’ information, minerals.857 Therefore, for the purposes which the commentator indicated could cause the actual costs to issuers of the PRA, we assumed in the would be incurred ‘‘on an annual for the first two years after Proposing Release that only 20% of the basis,’’ 867 and the approximately $450 implementation, for all issuers and four 5,994 affected issuers would have to million cost for the annual audit of the years after implementation for smaller provide an audited Conflict Minerals Conflict Minerals Report, which issuers, to be lower than the Report, which would have been 1,199 together total $750 million.868 commentators’ cost estimates. We issuers. Both the manufacturing The university group commentator believe, however, that our assumption industry association commentator and estimated that the initial costs to that 75% of affected issuers will have to the university group commentator, affected issuers would be approximately submit a Conflict Minerals Report and however, estimated in their comment letters that 75% of issuers would have provide an independent private sector 862 See letters from NAM I and Tulane. to submit a Conflict Minerals Report.858 audit of that report will balance some of 863 See letter from IPC I. Also, the electronic interconnect the cost estimate discrepancies because 864 See letter from ITRI II. industry association commentator 75% was lower than the 100% estimate 865 We note that in the Economic Analysis above, of the number of affected issuers.861 we provided a range to estimate the ongoing indicated that it expected ‘‘nearly 100% compliance costs. For purposes of the PRA, of affected issuers will need to 1. Estimate of Conducting Due however, which calls for a specific estimate of the complete’’ a Conflict Minerals Report Diligence, Including the Audit total annual paperwork burden imposed by the rule, we are using two of the data points within that because ‘‘the vast majority of [issuers] range based on the more comprehensive comment will be unable to identify the origin of We received a number of comments letters we received and are then averaging the their conflict minerals.’’ 859 However, regarding the estimated costs of the results to yield a final PRA estimate. because of the reasonable country of proposed rules, particularly setting up 866 We calculate the exact amount, based on the origin inquiry requirement, the fact that the overall supply chain tracking commentator’s estimates and assumptions, to be $7,941,250,000. The commentator stated that this systems and conducting an audit. The cost would include changing legal obligations, 856 We note that commentators rounded many of cost estimates provided by the changing IT systems, obtaining an independent the calculations they made and used. However, for manufacturing industry association private sector audit, and implementing risk-based clarity in the body of the release, we refer to many programs. Changing legal obligations would entail rounded figures, but we have included the more commentator and the university group 2 hours for each affected issuer’s 2,000 suppliers at exact figures and our calculations in the footnotes. commentator were the most $50 per hour [2 × $50 × 2,000 × 5,994 = Regardless, it does not appear that the rounded comprehensive because they discussed $1,198,800,000.]. Changing IT systems would entail numbers vary significantly from the more exact the costs to all companies, including a cost of $1 million per affected issuer [$1 million calculations to make them meaningfully different. issuers and private company × 5,994 = $5,994,000,000]. Obtaining an audit 857 See Proposing Release. See also Jessica Holzer, would entail a cost of $100,000 for 75% of all sroberts on DSK5SPTVN1PROD with RULES Retailers Fight to Escape ‘Conflict Minerals’ Law, affected issuers [$100,000 × 75% × 5,994 = The Wall Street Journal, Dec. 2, 2010, at B1. The 860 5,994 issuers × 75% = 4,495.5. $449,550,000]. Implementing risk-based programs DRC also accounts for approximately 4% of the 861 See letters from IPC I (stating that nearly 100% would entail 1,000 hours at a cost of $50 per hour world’s tin, see id., and approximately 0.3% of of affected issuers would have to complete a for all affected issuers [1,000 × $50 × 5,994 = global gold mine production, see letter from JVC et Conflict Minerals Report) and NAM I (stating that $299,700,000]. al. II (citing to GFMS Gold Survey 2010). it ‘‘conservatively’’ estimated that 75% of affected 867 See letter from NAM I. 858 See letters from NAM I and Tulane. issuers would have to provide an audited Conflict 868 The actual cost would be $749,250,000 859 See letter from IPC I. Minerals Report). [$449,550,000 + $299,700,000 = $749,250,000]. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56357 $2.8 billion,869 and the cost to affected Proposing Release.873 We note that the the burdens over the first three years. issuers in subsequent years would electronic interconnect industry Over a three-year period, the average consist primarily of the approximately association commentator agreed that the annual cost to affected issuers would be $207 million portion of that amount that costs for an independent private sector approximately $740 million using the would be used for the annual audit of audit could be as much as $100,000.874 university group commentator’s the Conflict Minerals Report.870 The manufacturing industry association figures.879 As discussed above in section III, commentator noted, however, that To estimate the overall costs of however, we adjusted the cost estimates $25,000 would cover the audit for a conducting due diligence, including the provided to us by the manufacturing small company with a simple supply audit, we averaged the modified industry association and the university chain.875 estimates from the manufacturing group commentators. Therefore, our From the approximately $159 million industry association and the university overall estimate regarding the costs of cost estimate for the risk-based group commentators discussed above. conducting due diligence, including the programs needed to verify the The average of these two costs is audit, is based on the modified cost credibility of suppliers’ information, approximately $1.03 billion.880 figures. Although the manufacturing based on our revised calculations of the industry association commentator manufacturing industry association 2. Estimate of Preparing the Disclosure estimated that the initial costs to commentator’s figures, and that The few estimates that we received affected issuers would be approximately commentator’s approximately $450 from commentators regarding the $8 billion, we modified that figure to be million cost estimate for the audit, we number of hours it would take issuers approximately $2.7 billion for affected derive an approximate estimate of $609 to prepare and review the proposed issuers.871 In this regard, we modified million for annual recurring costs.876 disclosure requirements varied widely. that commentator’s approximately $300 We note that the initial approximately One commentator, a semiconductor million cost estimate for risk-based $2.7 billion burden is much greater than company, asserted that it would require programs to be approximately $159 the subsequent approximately $609 1,400 hours initially to implement the million.872 We did not, however, modify million annual burden, and we averaged proposed rules and 700 hours in the commentator’s approximately $450 the burdens over the first three years. subsequent years.881 The university million cost estimate of the independent Over a three-year period, the average group commentator suggested that a private sector audit for affected issuers, annual cost to affected issuers would be small issuer would require 40 man- which was based on its estimate that the approximately $1.32 billion using the hours to comply with the proposed cost of such an audit for these issuers manufacturing industry association rules and a large issuer would require would be $100,000 per issuer, and not commentator’s figures.877 100 man-hours,882 and it appears that the $25,000 we estimated it to be in the Additionally, although the university these costs would be recurring.883 The group commentator estimated that the manufacturing industry association 869 The actual estimated cost was $2,795,793,000. initial costs to affected issuers would be commentator concluded that changing This cost estimate included a $2,562,780,000 cost approximately $2.8 billion, we modify for instituting the necessary IT systems legal obligations to reflect a company’s [$1,678,000,000 for large issuers plus $884,780,000 that figure to be approximately $1.8 new due diligence would require ‘‘at a for small issuers], a $26,013,000 cost for billion.878 We did not, however, modify minimum’’ two hours of employee time, strengthening internal management systems in view the university group commentator’s of performing due diligence, and a $207,000,000 approximately $207 million cost 879 ($1,805,773,000 + $207,000,000 + cost for the independent private sector audit. The university group commentator estimated the audit estimate of the independent private $207,000,000)/3 = $739,924,333. cost to be exactly $207 million by using the sector audit for affected issuers. 880 ($1,320,129,000 + $739,924,333)/2 = manufacturing industry association commentator’s Therefore, we do not modify the $1,030,026,667. estimate that 4,500 of the 5,994 affected issuers estimate of the cost to affected issuers in 881 See letter from TriQuint I. (75%) would be required to obtain an audit of their subsequent years, which would still be 882 See letter from Tulane. This commentator Conflict Minerals Report. The 4,500 figure, stated that an issuer’s compliance could be however, is rounded up from a more exact approximately $207 million. Again, the ‘‘facilitated’’ by using third parties. The calculation of 75% of 5,994. The more exact initial approximately $1.8 billion commentator assumed that large issuers would use calculation for 75% of 5,994 is 4,496 [5,994 × .75 burden is much greater than the third parties for 10% of their compliance needs and = 4,459.5], and not 4,500, but both the university subsequent approximately $207 million small companies would use third parties for 25% group commentator and the manufacturing industry of their compliance needs. In our calculations for association commentator rounded to 4,500. Using annual burden, and we also averaged the number of hours issuers would require in the electronic interconnect industry association complying with our proposed rules, we did not commentator’s estimates that 72% of all affected 873 See letter from NAM I. include third parties because it appears that the use issuers are small and medium-sized issuers (under 874 See letter from IPC I. of third parties would not affect the number of $99 million in annual sales) and 28% are large 875 See letter from NAM I. We note that the hours required for compliance, but would only issuers, the university group estimated that, of the manufacturing industry association commentator affect the cost. 4,500 affected issuers, 3,240 were small and separately indicated that costs of the final rule 883 Id. This commentator stated that the 100 hours medium-sized issuers and 1,260 were large issuers. could be $16 billion or more by extrapolating from or 40 hours needed to comply with the proposed The university group commentator assumed that, the costs of compliance with the RoHS. We did not rules would involve multiple tasks, including: based on the manufacturing industry association use this estimate in our analysis because, despite Initial reviews of the issuer’s policies, procedures, commentator’s estimates, an audit for small and the fact that this commentator claimed that both and controls; developing a gap analysis and medium-sized issuers would cost $25,000 per audit directives require companies to trace materials used compliance plan, and modifying that plan as and an audit for large issuers would cost $100,000 in their products, the commentator did not discuss needed; developing draft revised policies, per audit. Using these estimates, the university how RoHS compares to the requirements in the procedures, and controls; conducting initial testing group determined that the total audit cost amount final rule. on those revised policies, procedures, and controls; for affected issuers would be $207 million exactly. 876 $450,000,000 + $158,841,000 = $608,841,000. and implementing the revised policies, procedures, 870 See letter from Tulane. 877 ($2,742,705,000 + $608,841,000 + and controls, training personnel on them, and sroberts on DSK5SPTVN1PROD with RULES 871 Our estimate of the cost is $2,742,705,000. $608,841,000)/3 = $1,320,129,000. communicating them to suppliers. Although many This cost estimate included a $635,364,000 cost for 878 The estimated cost was $1,805,773,000. This of these are described as ‘‘initial’’ actions, issuers issuer due diligence reform, a $1,498,500,000 cost cost estimate for issuers included the modified will need to review and modify many of them as for IT system modifications, a $450,000,000 cost for $1,572,760,000 cost for instituting the necessary IT well. For example, it is likely that each year issuers the independent private sector audit, and a systems, the $207,000,000 cost for the independent may need to review and test their policies, $158,841,000 cost of risk-based programs needed to private sector audit, and the $26,013,000 cost for procedures, and controls, modify them as needed, verify the credibility of suppliers’ information. strengthening internal management systems in view and implement any new further revised policies, 872 Our estimate of the cost is $158,841,000. of performing due diligence. procedures, and controls. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56358 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations ‘‘and considerably more than two hours small companies in our estimate of spend 495 burden hours preparing and is a distinct possibility.’’ 884 burden hours. Therefore, we multiplied reviewing the disclosure.895 We In calculating the number of hours the university group commentator’s 100 assumed that 75% of the burden of necessary to prepare and review the hour estimate for large issuers by the preparation would have been carried by disclosure required by the final rule, we electronic interconnect industry the company internally and that 25% of derived an average based on the association commentator’s estimated the burden of the preparation would estimates provided by the 28% for large affected issuers, so the have been carried by outside semiconductor company and university burden for large affected issuers would professionals retained by the company group commentators.885 For the be 167,832 hours,891 and multiplied the at an average cost of $200 per hour.896 semiconductor company commentator 40 hour estimate for small issuers by the The portion of the burden carried by estimate, we multiplied its initial 1,400 electronic interconnect industry outside professionals would have been hour estimate by the 5,994 affected association commentator’s 72% for reflected as a cost, while the portion of issuers, so the first year’s burden for all small affected issuers, which resulted in the burden carried by the company affected issuers would be approximately 172,627 hours for small affected internally would have been reflected in 8.4 million hours,886 and the 700 hour issuers.892 To determine the estimated hours. Therefore, the total number of subsequent year estimate also by the number of hours per year per issuer, we internal preparation hours for affected 5,994 affected issuers, which resulted in added the estimated hours for the small issuers would be 2,225,273 hours.897 approximately 4.2 million hours for and large companies, which would be Similarly, the total cost for external each subsequent year.887 Averaging the 340,459 hours,893 and divided that preparation for affected issuers would burden hours over the first three years number by all the 5,994 affected issuers. be $148,351,500.898 resulted in an average burden hour Therefore, the average amount of hours estimate of approximately 5.6 million 3. Revised PRA Estimate per year for each issuer, both large and hours per year.888 To determine the small, to prepare and review the The following table illustrates the estimated number of hours per year per disclosure required by our rule would estimated changes in annual compliance issuer, we divided the 5.6 million hours be approximately 57 hours.894 Although burden in the collection of information by 5,994 affected issuers, which resulted not explicit in its comment letter, it in hours and costs for the new Exchange in 933 hours per year per affected issuer appears that the burden hours for the Act specialized disclosure report that to comply with the proposed rules.889 The university group commentator university group commentator’s will result from the final rule. The separated its estimated hours between estimates would be incurred annually, burden hours figure is the 2,225,273 small and large issuers using the so we did not average these hours over internal burden hours estimate for estimated breakdown between the the first three years as we did for the preparing the disclosure. We are adding number of affected large and small semiconductor company commentator’s the $148,351,500 estimate of external companies provided by the electronic estimate. professional costs for preparing the interconnect industry association in its Next, we averaged the two burden disclosure to the $1,030,026,667 comment letter.890 Because we hour estimates by adding the 933 hour estimate of conducting due diligence, recognized that companies of varying estimate to the 57 hour estimate (and by including the audit, to determine the sizes may incur different burdens, we dividing by two) and determined that $1,178,378,167 professional costs in the also differentiated between large and each affected issuer, on average, would below table. Current Current Increase in Final Current Final Increase in Final burden burden professional professional professional Form annual annual burden hours hours hours costs costs costs responses responses (B) (C) = (A) + (B) (A) (D) (E) (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 rule 13p–1 and new Form SD, which obligations of issuers with conflict Analysis implement Section 13(p) of the minerals necessary to the functionality Exchange Act. Section 13(p) concerns or production of any product This Final Regulatory Flexibility Act certain disclosure and reporting manufactured or contracted by those Analysis (‘‘FRFA’’) 899 relates to new 884 See letter from NAM I. 888 [8,391,600 hours + (4,195,800 hours × 2)]/3 = cost environmental and sustainability consulting 885 We did not include the two-hour figure from 5,594,400 hours average per year. firms’’ instead of large accounting firms that would the manufacturing industry association 889 5,594,400 hours/5,994 affected issuers = 933 be more expensive. We frequently use a $400 per commentator in our estimate because it was so hours. hour estimate in our PRA analysis on the much lower than the other two estimates and did 890 See letter from Tulane. assumption that attorneys will be involved in the not appear to include all the necessary steps to 891 100 hours × 5,994 affected issuers × 28% large preparation of the securities law disclosures comply with the proposed rules. Instead, this affected issuers = 167,832 hours. required by our rules. The disclosure required by estimate was based only on the time required to 892 40 hours × 5,994 affected issuers × 72% small the final rule may likely involve work by other make changes to an issuer’s corporate compliance types of professionals, so that the $200 per hour policies and supply chain operating procedures. affected issuers = 172,627 hours. 893 167,832 hours + 172,627 hours = 340,459 estimate may be more appropriate in this Also, the university group commentator specifically sroberts on DSK5SPTVN1PROD with RULES hours. circumstance. disagreed with this estimate and the manufacturing 894 340,459 hours/5,994 affected issuers = 56.80 897 495 hours × 75% internal preparation × 5,994 industry association commentator acknowledged that these actions may take ‘‘considerably more hours. affected issuers = 2,225,272.50 hours. 898 495 hours × 25% external preparation × $200 than two hours.’’ 895 933 hours + 57 hours/2 = 495 hours. 886 1,400 hours × 5,994 affected issuers = 896 The university group commentator estimated per hour for outside consultants × 5,994 affected 8,391,600 hours. that outside professionals would cost $200 per hour issuers = $148,351,500. 887 700 hours × 5,994 affected issuers = 4,195,800 because it believed that ‘‘a substantial portion’’ of 899 This analysis has been prepared in accordance hours. required consulting work will be done by ‘‘lower with 5 U.S.C. 601. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56359 issuers to be manufactured. An Initial from recycled or scrap sources, the sources and describe the due diligence Regulatory Flexibility Act Analysis was issuer must file a Conflict Minerals measures it exercised in its Conflict prepared in accordance with the Report. Minerals Report. Regulatory Flexibility Act and included In most circumstances, the issuer must obtain an independent private B. Significant Issues Raised by Public in the Proposing Release. sector audit of its Conflict Minerals Comments A. Reasons for, and Objectives of, the Report. The issuer must also describe in Final Action In the Proposing Release, we its Conflict Minerals Report, among requested comment on any aspect of the The final rule is designed to other information, its products IRFA, including the number of small implement the requirements of Section manufactured or contracted to be entities that would be affected by the 1502 of the Act. Specifically, we are manufactured that have not been found proposed rules, the nature of the impact, adopting amendments to our rules to to be ‘‘DRC conflict free.’’ For a how to quantify the number of small implement the Conflict Minerals temporary two-year period for all entities that would be affected, and how Statutory Provision. The final rule issuers, and for a temporary four-year to quantify the impact of the proposed requires any reporting issuer for which period for smaller reporting issuers, an rules. We received some comments that conflict minerals are necessary to the issuer that must perform due diligence specifically referenced the Regulatory functionality or production of a product and is unable to determine that the Flexibility Analysis (‘‘RFA’’).900 Some manufactured or contracted to be conflict minerals in its products of these commentators claimed that we manufactured by that issuer to disclose originated in the Covered Countries or underestimated the number of small annually in a separate specialized came from recycled or scrap sources, or entities that would be impacted by the disclosure report on a new form the unable to determine that the conflict proposal because our estimate did not results of its reasonable country of minerals in those products that account for the number of small origin inquiry into whether its conflict originated in the Covered Countries businesses that do not report with us minerals originated in the Covered financed or benefited armed groups in but participate in a reporting issuer’s Countries or came from recycled or those countries, may consider those supply chain.901 In this regard, the SBA scrap sources. Under the final rule, products ‘‘DRC conflict recommended that we publish an following its reasonable country of undeterminable.’’ In that case, the issuer amended IFRA for the proposed rules to origin inquiry, if (a) The issuer knows must describe, among other information, ‘‘more accurately reflect the costs of the that its conflict minerals did not its products manufactured or contracted originate in the Covered Countries or proposed rule and the number of small to be manufactured that are ‘‘DRC knows that they came from recycled or businesses that it will affect.’’ 902 conflict undeterminable’’ and the steps scrap sources, or (b) the issuer has no Another commentator noted specifically it has taken or will take, if any, since the reason to believe its conflict minerals that we must look beyond the 793 end of the period covered in its most may have originated in the Covered reporting issuers that are also small recent prior Conflict Minerals Report to Countries, or (c) the issuer reasonably entities because, when an issuer seeks to mitigate the risk that its necessary believes its conflict minerals came from establish whether its supply chain is conflict minerals benefit armed groups, recycled or scrap sources, then in all free of conflict minerals, it will have to including any steps to improve its due such cases the issuer must disclose its turn to its first-tier suppliers and require diligence. An issuer with products that determination and describe briefly in are ‘‘DRC conflict undeterminable’’ is due diligence.903 This commentator the body of Form SD, the reasonable not required to obtain an independent indicated, therefore, that ‘‘a large country of origin inquiry it undertook private sector audit of the Conflict portion of America’s 278 thousand and the results of the inquiry. On the Minerals Report regarding the conflict small and medium-sized manufacturers other hand, following its reasonable minerals in those products. could be affected by’’ the final rule. country of origin inquiry, if (a) the Finally, after its reasonable country of Moreover, for purposes of determining issuer knows that its conflict minerals origin inquiry, an issuer that has reason the cost of the independent private originated in the Covered Countries and to believe that its conflict minerals may sector audit on smaller companies, the knows that they did not come from not have been from recycled or scrap commentator estimated that one in five recycled or scrap sources, or the issuer sources must exercise due diligence that smaller companies would be in an has reason to believe that its conflict conforms to a nationally or issuer’s supply chain. As discussed in minerals may have originated in the internationally recognized due diligence the Economic Analysis section above, Covered Countries, and (b) the issuer framework developed specifically for we acknowledge that the statute and the knows that its conflict minerals did not conflict minerals from recycled sources final rule will affect many companies, come from recycled or scrap sources or to determine that its conflict minerals including both companies that are has reason to believe that its conflict are from recycled or scrap sources. The directly subject to the rule’s minerals may not have come from issuer must also describe its due requirements and those that are not recycled or scrap sources, then the diligence in its Conflict Minerals reporting companies but are part of a issuer must exercise due diligence on Report. Currently, gold is the only reporting issuer’s supply chain.904 For the source and chain of custody of its conflict mineral with a nationally or conflict minerals that conforms to a internationally recognized due diligence 900 See, e.g., letters from Industry Group Coalition nationally or internationally recognized framework for recycled or scrap conflict II; IPC I; NAM I; Senator Olympia J. Snowe, Representative Sam Graves, Senator Scott P. Brown, due diligence framework, if one is minerals. If no nationally or Representative Roscoe Barlett, Representative Scott available. If one is not available, the internationally recognized due diligence Tipton, and Representative Joe Walsh (Nov. 17, sroberts on DSK5SPTVN1PROD with RULES issuer must exercise due diligence framework for a particular recycled or 2011) (‘‘Sen. Snowe et al.’’); and the Small Business without the benefit of such a framework. scrap conflict mineral is available, Administration’s Office of Advocacy (Oct. 25, 2011) (‘‘SBA’’). Following its due diligence, unless the which is the case for the other three 901 See, e.g., letters from NAM I, SBA, Sen. Snowe issuer determines, based on that due minerals, until such a framework is et al., and WGC II. diligence, that its conflict minerals did developed, the issuer must exercise due 902 See letter from SBA. not originate in the Covered Countries diligence in determining that its conflict 903 See letter from NAM I. or that its conflict minerals did come minerals are from recycled or scrap 904 Id. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56360 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations purposes of the RFA, however, the focus commentators agreed that smaller necessary to the functionality or is the impact on entities on which our reporting companies should not be production of a product manufactured rules impose direct requirements.905 exempt from the rule, but stated that or contracted by an issuer to be Therefore, although we do acknowledge they should be allowed to phase-in the manufactured originated in the Covered the rule’s impact on non-reporting small rules to mitigate their costs and not Countries or may have originated in the entities, they were not included in our drain their resources.914 Covered Countries and may not have RFA estimate of the 793 small entities come from recycled or scrap sources; C. Small Entities Subject to the Final that would be directly subject to the • If not, or if the issuer knows or has final rule. Rule reason to believe that its necessary Additionally, several commentators The final rule will affect some conflict minerals came from recycled or addressed aspects of the proposed rules reporting issuers that are small entities. scrap sources, disclosure in the body of that could potentially affect smaller Exchange Act Rule 0–10(a) 915 defines the specialized disclosure report and on reporting companies or small companies an issuer to be a ‘‘small business’’ or the issuer’s Internet Web site of that generally.906 These commentators did ‘‘small organization’’ for purposes of the determination and a brief description of not clarify whether they were referring Regulatory Flexibility Act if it had total the reasonable country of origin inquiry to ‘‘small entities’’ as that term is assets of $5 million or less on the last used in making that determination and defined under Exchange Act Rule 0– day of its most recent fiscal year. We the results of the inquiry it performed, 10(a).907 In particular, certain believe that the final rule would affect and disclosure in the body of the commentators argued that the costs of small entities with necessary conflict specialized disclosure report of the the rules could be disproportionally minerals as defined under Exchange Act address of the issuer’s Internet Web site higher to smaller issuers.908 One Section 13(p). In the Proposing Release, where that information is publicly commentator suggested that the Conflict we estimated that there were available; Minerals Statutory Provision ‘‘does approximately 793 issuers to which • If so, and the issuer is able to create a burden on small businesses, but conflict minerals are necessary and that determine whether its conflict minerals not as high or disproportionate to may be considered small entities. As directly or indirectly financed or revenue as has been reported’’ by other discussed above some commentators benefited armed groups in the Covered commentators.909 Also, as discussed indicated that we underestimated the Countries, above, one commentator argued that the number of small entities that would be Æ A Conflict Minerals Report filed as final rule should exempt smaller impacted by the rule, but that was based an exhibit to the specialized disclosure reporting companies.910 Many other on the assertion that we consider small report, which includes a certified commentators argued, however, that entities that are not directly subject to independent private sector audit report, final rule should not exempt smaller the requirements of the final rule.916 We a description of the nationally or reporting companies.911 Many note that no commentator provided any internationally recognized due diligence commentators indicated that exempting other number of small entities or framework the issuer used to determine smaller reporting companies would not disagreed that 793 is the number that the source and chain of custody of its reduce significantly their burdens 912 will be directly subject to the final rule. conflict minerals, a description of the because, among other reasons, many of We continue to believe that there are issuer’s products that have not been these smaller companies are part of 793 small entities that file reports with larger companies’ supply chains and found to be ‘‘DRC conflict free,’’ and a us under Exchange Act Sections 13(a) description of the facilities used to these larger companies would require and 15(d) and that will be directly the smaller companies to provide process the necessary conflict minerals subject to the final rule because they in those products, the country of origin conflict minerals information so that the likely have conflict minerals necessary larger companies could meet their of the necessary conflict minerals in to the functionality or production of those products, and the efforts to obligations under the rule.913 Two products they manufacture or contract determine the mine or location of origin 905 See, e.g., Mid-Tex Electric Cooperative v. to manufacture. with the greatest possible specificity; FERC, 773 F.2d 327 (D.C. Cir. 1985) and White D. Reporting, Recordkeeping, and Other Æ Disclosure in the body of the Eagle Cooperative Ass’n v. Conner, 553 F.3d 467 Compliance Requirements specialized disclosure report that a (7th Cir. 2009). See also Small Bus. Admin., Office Conflict Minerals Report is filed as an of Advocacy, A Guide for Government Agencies: The final rule will add to the annual exhibit to the specialized disclosure How to Comply with the Regulatory Flexibility Act (June 2010) (‘‘SBA Guidance’’), available at http:// disclosure requirements of issuers with report and is publicly available on the archive.sba.gov/advo/laws/rfaguide.pdf. necessary conflict minerals, including issuer’s Internet Web site, and 906 See, e.g., letters from BCIMC, Corporate small entities, by requiring them to disclosure within the body of the Secretaries I, CRS I, Earthworks, Global Witness I, comply with the disclosure and specialized disclosure report of the Howland, IPC I, JVC et al. II, NAM I, Rep. Bachus et al., Rockefeller, Sen. Durbin/Rep. McDermott, reporting obligations under Section address of the issuer’s Internet Web site SIF I, State II, TIAA–CREF, TIC, TriQuint I, and 13(p) and provide certain additional on which the Conflict Minerals Report WGC II. disclosure in their new specialized is publicly available; 907 17 CFR 240.0–10(a) (defining an issuer to be disclosure reports on Form SD that a ‘‘small business’’ or ‘‘small organization’’ for Æ Posting of the Conflict Minerals certain issuers will be required to file purposes of the Regulatory Flexibility Act if it had Report on the issuer’s publicly available total assets of $5 million or less on the last day of annually. Among other matters, that Internet Web site. its most recent fiscal year). information must include, as applicable: • If so, but the issuer is unable to 908 See, e.g., letters from Howland, NAM I, and • Disclosure in the body of the WGC II. determine that its conflict minerals did specialized disclosure report as to not directly or indirectly finance or sroberts on DSK5SPTVN1PROD with RULES 909 See letter from Claigan IV. whether such issuer knows or has 910 See letter from Corporate Secretaries I. benefit armed groups in the Covered 911 See, e.g., letters from BCIMC, CRS I, reason to believe that conflict minerals Countries, if the issuer has reason to Earthworks, Global Witness I, Howland, IPC I, JVC et al. II, Rockefeller, Sen. Durbin/Rep. McDermott, 914 See letters from Howland and JVC et al. II. believe that its conflict minerals may SIF I, State II, TIAA–CREF, TIC, and TriQuint I. 915 17 CFR 240.0–10(a). have originated in the Covered 912 See, e.g., letters from IPC I and TriQuint I. 916 See, e.g., letters from NAM I, SBA, and WGC Countries but is unable to determine the 913 See letter from IPC I. II. origin, VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56361 Æ A Conflict Minerals Report filed as determine that those conflict minerals requirements, would not achieve an exhibit to the specialized disclosure were or has reason to believe may have Congress’s objectives of Section 13(p). report that includes a description of the been from recycled or scrap (until a The final rule is designed to implement nationally or internationally recognized nationally or internationally recognized the conflict minerals disclosure and due diligence framework the issuer used due diligence framework is available for reporting requirements of Section 13(p). to determine the source and chain of those conflict minerals from recycled or That statutory section applies to all custody of its conflict minerals, a scrap sources, such issuers are not issuers with necessary conflict minerals, description of the facilities used to required to have their Conflict Minerals regardless of size. In any case, as several process the necessary conflict minerals Report audited regarding such commentators noted, many smaller in those products, if known, the country minerals); companies are part of larger companies’ of origin of the necessary conflict Æ Disclosure in the body of the supply chains and would need to minerals in those products, if known, specialized disclosure report that a provide conflict minerals information so and the efforts to determine the mine or Conflict Minerals Report is filed as an that the larger companies could meet location of origin with the greatest exhibit to the specialized disclosure their obligations under the rule.917 possible specificity, and, for a report and is publicly available on the However, under the final rule, issuers temporary period, a description of the issuer’s Internet Web site and the that proceed to step three but are unable issuer’s products that are ‘‘DRC conflict address of the issuer’s Internet Web site to determine their conflict minerals undeterminable’’ (for the temporary on which the Conflict Minerals Report originated in the Covered Countries or period, such issuers are not required to is publicly available. came from recycled or scrap sources, or have their Conflict Minerals Report The same disclosure and reporting unable to determine that the conflict audited regarding such minerals); requirements apply to U.S. and foreign minerals that originated in the Covered Æ Disclosure in the body of the issuers. However, under the final rule, Countries financed or benefited armed specialized disclosure report that a issuers that proceed to step three but are groups in those countries are required to Conflict Minerals Report is filed as an unable to identify the origin of their provide a Conflict Minerals Report, but exhibit to the specialized disclosure conflict minerals or whether their that report does not have to be audited report and is publicly available on the conflict minerals came from recycled or for the first four years following the issuer’s Internet Web site and the scrap sources are required to provide a rule’s adoption for smaller reporting address of the issuer’s Internet Web site Conflict Minerals Report, but that report companies and the issuers may describe on which the Conflict Minerals Report does not have to be audited for the first the product with known origin as ‘‘DRC is publicly available; four years following the rule’s adoption conflict undeterminable.’’ Æ Posting of the Conflict Minerals for smaller reporting companies. We are We clarified and simplified aspects of Report on the issuer’s publicly available creating new Form SD that requires the final rule for all issuers, including Internet Web site. every issuer to file its conflict minerals • If there is reason to believe that the small entities. For example, the final information for each applicable calendar rule specifies and clarifies the objective conflict minerals may not be from year on May 31 of the following year. recycled or scrap sources and there is a for the audit of a Conflict Minerals nationally or internationally recognized E. Agency Action To Minimize Effect on Report for newly-mined conflict due diligence framework for those Small Entities minerals. The final rule also requires an particular conflict minerals, The Regulatory Flexibility Act directs issuer to disclose the information in the Æ A Conflict Minerals Report filed as us to consider significant alternatives body of and as an exhibit to its an exhibit to the specialized disclosure that would accomplish the stated specialized disclosure report, which report, which includes a description of objectives, while minimizing any may simplify the process of submitting the nationally or internationally significant adverse impact on small the conflict minerals disclosure and recognized due diligence framework the entities. In connection with the final Conflict Minerals Report as compared issuer used to determine that those rule, we considered the following with requiring disclosure in an issuer’s conflict minerals were or has reason to alternatives: annual report on Form 10–K, Form 20– believe may have been from recycled or (1) Establishing different compliance F, or Form 40–F. scrap sources, which includes a or reporting requirements which take We have generally used design rather certified independent private sector into account the resources available to than performance standards in audit report regarding those minerals; small entities; connection with the final rule because Æ Disclosure in the body of the (2) Exempting small entities from we believe design standards will better specialized disclosure report that a coverage of the disclosure requirements, accomplish Congress’s objectives. The Conflict Minerals Report is filed as an or any part thereof; reasonable country of origin inquiry is exhibit to the specialized disclosure (3) Clarification, consolidation, or the performance standard. In addition, report and is publicly available on the simplification of the rules compliance the specific disclosure requirements in issuer’s Internet Web site and the and reporting requirements for small the final rule will promote consistent address of the issuer’s Internet Web site entities; and and comparable disclosure among all on which the Conflict Minerals Report (4) Use of performance standards issuers with necessary conflict minerals. is publicly available. rather than design standards. However, we are providing guidance • If there is reason to believe that the We considered but did not establish regarding ‘‘contract to manufacture,’’ conflict minerals may not be from different compliance requirements for and ‘‘necessary to the functionality and recycled or scrap sources but there is no small entities. As discussed above in production,’’ which we believe will response to commentators’ suggestions sroberts on DSK5SPTVN1PROD with RULES nationally or internationally recognized allow issuers to comply with the due diligence framework for those that we exempt smaller reporting statutory requirements in a manner particular conflict minerals, companies, we similarly believe that more tailored to their individual Æ A Conflict Minerals Report filed as separate disclosure requirements for circumstances. an exhibit to the specialized disclosure small entities that would differ from the report, which includes a description of final reporting requirements for other 917 See, e.g., letters from NAM I, SBA, Sen. Snowe the due diligence the issuer used to issuers, or exempting them from those et al., and WGC II. VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56362 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations VI. Statutory Authority and Text of the Section 249b.400 is also issued under secs. 2. If the deadline for filing this form Final Rule 1502, Pub. L. 111–203, 124 Stat. 2213. occurs on a Saturday, Sunday or holiday We are adopting the rule amendments ■ 4. Add § 249b.400 to read as follows: on which the Commission is not open contained in this document under the for business, then the deadline shall be § 249b.400 Form SD, specialized the next business day. authority set forth in Sections 3(b), 12, disclosure report. 13, 15(d), 23(a), and 36 of the Exchange This Form shall be filed pursuant to C. Inapplicability to Registered Act, as amended. § 240.13p–1 of this chapter by Investment Companies. List of Subjects in 17 CFR Parts 240 and registrants that file reports with the The disclosures required in Form SD 249b Commission pursuant to Sections 13(a) shall not apply to investment companies Reporting and recordkeeping or 15(d) of the Securities Exchange Act required to file reports pursuant to Rule requirements, Securities. of 1934 and are required to disclose the 30d–1 (17 CFR 270.30d–1) under the information required by Section 13(p) Investment Company Act of 1940. In accordance with the foregoing, we under the Securities Exchange Act of are amending Title 17, Chapter II of the D. Preparation of Report. 1934 and Rule 13p–1 (§ 240.13p–1) of Code of Federal Regulations as follows: this chapter. This form is not to be used as a blank PART 240—GENERAL RULES AND ■ 5. Add Form SD (referenced in form to be filled in, but only as a guide REGULATIONS, SECURITIES § 249b.400) to read as follows: in the preparation of the report meeting EXCHANGE ACT OF 1934 Note: The text of Form SD does not appear the requirements of Rule 12b–12 (17 in the Code of Federal Regulations. CFR 240.12b–12). The report shall ■ 1. The authority citation for part 240 contain the number and caption of the is amended by adding an authority for UNITED STATES SECURITIES AND applicable item, but the text of such § 240.13p–1 in numerical order to read EXCHANGE COMMISSION item may be omitted, provided the 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, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77jjj, 77kkk, FORM SD CFR 240.12b–13). All items that are not 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, required to be answered in a particular 78i, 78j, 78j–1, 78k, 78k–1, 78 l, 78m, 78n, Specialized Disclosure report 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 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– its charter) instructions should also be omitted. 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 L. 111–203, Sec. 712, 124 Stat. 1376 (2010), or organization) The General Rules and Regulations unless otherwise noted. lllllllllllllllllllll under the Act (17 CFR Part 240) contain * * * * * (Commission File Number) Section 240.13p–1 is also issued under sec. certain general requirements which are 1502, Pub. L. 111–203, 124 Stat. 1376. lllllllllllllllllllll applicable to reports on any form. These (IRS Employer Identification No.) * * * * * general requirements should be lllllllllllllllllllll carefully read and observed in the ■ 2. Add § 240. 13p–1 to read as (Address of principal executive offices) follows: preparation and filing of reports on this (Zip code) form. § 240.13p–1 Requirement of report lllllllllllllllllllll regarding disclosure of registrant’s supply (Name and telephone number, including area F. Signature and Filing of Report. chain information regarding conflict code, of the person to contact in connection with this report.) The report must be signed by the minerals. registrant on behalf of the registrant by Every registrant that files reports with Check the appropriate box to indicate an executive officer. the Commission under Sections 13(a) the rule pursuant to which this form is (15 U.S.C. 78m(a)) or 15(d) (15 U.S.C. being filed, and provide the period to INFORMATION TO BE INCLUDED IN 78o(d)) of the Exchange Act, having which the information in this form THE REPORT conflict minerals that are necessary to applies: Section 1—Conflict Minerals Disclosure the functionality or production of a ll Rule 13p–1 under the Securities Exchange Act (17 CFR 240.13p–1) for Item 1.01 Conflict Minerals Disclosure product manufactured or contracted by the reporting period from January 1 to and Report that registrant to be manufactured, shall file a report on Form SD within the December 31, llll. (a) If any conflict minerals, as defined period specified in that Form disclosing lllllllllllllllllllll by paragraph (d)(3) of this item, are the information required by the necessary to the functionality or GENERAL INSTRUCTIONS applicable items of Form SD as production of a product manufactured specified in that Form (17 CFR A. Rule as to Use of Form SD. by the registrant or contracted by the 249b.400). This form shall be used for a report registrant to be manufactured and are pursuant to Rule 13p–1 (17 CFR required to be reported in the calendar PART 249b—FURTHER FORMS, 240.13p–1) under the Exchange Act. year covered by the specialized SECURITIES EXCHANGE ACT OF 1934 disclosure report, the registrant must B. Information to be Reported and Time conduct in good faith a reasonable sroberts on DSK5SPTVN1PROD with RULES ■ 3. The authority citation for part 249b for Filing of Reports. country of origin inquiry regarding is amended by adding an authority for 1. Form filed under Rule 13p–1. A those conflict minerals that is § 249b.400 to read as follows: report on this Form shall be filed on reasonably designed to determine Authority: 15 U.S.C. 78a et seq., unless EDGAR no later than May 31 after the whether any of the conflict minerals otherwise noted. end of the issuer’s most recent calendar originated in the Democratic Republic of * * * * * year. the Congo or an adjoining country, as VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56363 defined by paragraph (d)(1) of this item, making its determination and the results private sector audit of the Conflict or are from recycled or scrap sources, as of the inquiry and due diligence efforts Minerals Report, which shall constitute defined by paragraph (d)(6) of this item. it performed. Also, the registrant must an audit certification; (b) Based on its reasonable country of disclose this information on its publicly (C) As part of the Conflict Minerals origin inquiry, if the registrant available Internet Web site and, under a Report, the registrant must identify the determines that its necessary conflict separate heading in its specialized independent private sector auditor of minerals did not originate in the disclosure report entitled ‘‘Conflict the report, if the auditor is not identified Democratic Republic of the Congo or an Minerals Disclosure,’’ provide a link to in the audit report, and provide the adjoining country or did come from that Web site. Otherwise, the registrant audit report prepared by the auditor in recycled or scrap sources, or if it has no must file a Conflict Minerals Report as accordance with standards established reason to believe that its necessary an exhibit to its specialized disclosure by the Comptroller General of the conflict minerals may have originated in report and provide that report on its United States; the Democratic Republic of the Congo or publicly available Internet Web site. (iii) Any registrant that manufactures an adjoining country, or if based on its Under a separate heading in its products or contracts for products to be reasonable country of origin inquiry the specialized disclosure report entitled manufactured that are ‘‘DRC conflict registrant reasonably believes that its ‘‘Conflict Minerals Disclosure,’’ the undeterminable,’’ as defined in necessary conflict minerals did come registrant must disclose that it has filed paragraph (d)(5) of this item, must from recycled or scrap sources, the a Conflict Minerals Report and provide disclose the steps it has taken or will registrant must, in the body of its the link to its Internet Web site where take, if any, since the end of the period specialized disclosure report under a the Conflict Minerals Report is publicly covered in its most recent prior Conflict separate heading entitled ‘‘Conflict available. Minerals Report to mitigate the risk that Minerals Disclosure,’’ disclose its The Conflict Minerals Report must its necessary conflict minerals benefit determination and briefly describe the include the following information: armed groups, including any steps to reasonable country of origin inquiry it (1) Due Diligence: A description of the improve its due diligence. undertook in making its determination measures the registrant has taken to (iv) For the temporary period and the results of the inquiry it exercise due diligence on the source and specified in Instruction 2 to Item 1.01, performed. Also, the registrant must chain of custody of those conflict following its exercise of appropriate due disclose this information on its publicly minerals; diligence, a registrant with products that available Internet Web site and, under a (i) The registrant’s due diligence must are ‘‘DRC conflict undeterminable’’ is separate heading in its specialized conform to a nationally or not required to obtain an independent disclosure report entitled ‘‘Conflict internationally recognized due diligence private sector audit of its Conflict Minerals Disclosure,’’ provide a link to framework, if such a framework is Minerals Report regarding the conflict that Web site. available for the conflict mineral; minerals that the registrant is unable to (c) Alternatively, based on its (ii) Except as provided in paragraphs determine did not originate in the reasonable country of origin inquiry, if (c)(1)(iv), (c)(1)(v), and (c)(1)(vi) of this Democratic Republic of the Congo or an the registrant knows that any of its item, the due diligence measures shall adjoining country, or that the registrant necessary conflict minerals originated in include but not be limited to an is unable to determine did not directly the Democratic Republic of the Congo or independent private sector audit of the or indirectly finance or benefit armed an adjoining country and are not from Conflict Minerals Report that is groups in the Democratic Republic of recycled or scrap sources, or has reason conducted in accordance with standards the Congo or an adjoining country. to believe that its necessary conflict established by the Comptroller General (v) If a nationally or internationally minerals may have originated in the of the United States and certified recognized due diligence framework Democratic Republic of the Congo or an pursuant to paragraph (c)(1)(ii)(B) of this does not exist for a necessary conflict adjoining country and has reason to item, which shall constitute a critical mineral, until such a framework is believe that they may not be from component of the registrant’s due developed, the registrant is required to recycled or scrap sources, the registrant diligence in establishing the source and exercise appropriate due diligence in must exercise due diligence on the chain of custody of the necessary determining the source and chain of source and chain of custody of its conflict minerals. custody of the necessary conflict conflict mineral, as discussed in (A) The objective of the audit of the mineral, including whether the conflict paragraph (c)(1) of this item, that Conflict Minerals Report is to express an mineral is from recycled or scrap conforms to a nationally or opinion or conclusion as to whether the sources, without the benefit of a due internationally recognized due diligence design of the registrant’s due diligence diligence framework. If a nationally or framework, if such a framework is measures as set forth in, and with internationally recognized due diligence available for the conflict mineral. If, as respect to the period covered by, the framework becomes available for the a result of that due diligence, the registrant’s Conflict Minerals Report, is necessary conflict mineral prior to June registrant determines that its conflict in conformity with, in all material 30 of a calendar year, the registrant must minerals did not originate in the respects, the criteria set forth in the use that framework in the subsequent Democratic Republic of the Congo or an nationally or internationally recognized calendar year. If the due diligence adjoining country or the registrant due diligence framework used by the guidance does not become available determines that its conflict minerals did registrant, and whether the registrant’s until after June 30 of a calendar year, the come from recycled or scrap sources, a description of the due diligence registrant is not required to use that Conflict Minerals Report is not required, measures it performed as set forth in the framework until the second calendar year after the framework becomes sroberts on DSK5SPTVN1PROD with RULES but the registrant must disclose its Conflict Minerals Report, with respect determination and briefly describe, in to the period covered by the report, is available to provide a full calendar year the body of its specialized disclosure consistent with the due diligence before implementation. If no nationally report under a separate heading entitled process that the registrant undertook. or internationally recognized due ‘‘Conflict Minerals Disclosure,’’ the (B) The registrant’s Conflict Minerals diligence framework is available for a reasonable country of origin inquiry and Report must include a statement that the particular conflict mineral from the due diligence efforts it undertook in registrant has obtained an independent recycled or scrap sources, the due VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> 56364 Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations diligence inquiry regarding the conflict human rights abuses in annual Country derivatives, that have not been smelted mineral focuses on whether the conflict Reports on Human Rights Practices or fully refined are located outside of mineral is from recycled or scrap under sections 116(d) and 502B(b) of the the Democratic Republic of the Congo or sources. In addition, an independent Foreign Assistance Act of 1961 (22 an adjoining country. private sector audit will not be required U.S.C. 2151n(d) and 2304(b)) relating to (8) Nationally or internationally for the section of the Conflict Minerals the Democratic Republic of the Congo or recognized due diligence framework. Report pertaining to the registrant’s due an adjoining country. The term ‘‘nationally or internationally diligence on that recycled or scrap (3) Conflict mineral. The term conflict recognized due diligence framework’’ conflict mineral. mineral means: means a nationally or internationally (vi) If the registrant performs due (i) Columbite-tantalite (coltan), recognized due diligence framework diligence because it has a reason to cassiterite, gold, wolframite, or their established following due-process believe that its conflict minerals derivatives, which are limited to procedures, including the broad originated in the Democratic Republic of tantalum, tin, and tungsten, unless the distribution of the framework for public the Congo or an adjoining country, and Secretary of State determines that comment, and is consistent with the as a result of that due diligence it additional derivatives are financing criteria standards in the Government determines that its conflict minerals did conflict in the Democratic Republic of Auditing Standards established by the not originate in the Democratic Republic the Congo or an adjoining country; or Comptroller General of the United of the Congo or an adjoining country (or (ii) Any other mineral or its States. it determines as a result of that due derivatives determined by the Secretary diligence that its necessary conflict of State to be financing conflict in the Item 1.02 Exhibit minerals did come from recycled or Democratic Republic of the Congo or an Registrants shall file, as an exhibit to scrap sources), a Conflict Minerals adjoining country. (4) DRC conflict free. The term DRC this Form SD, the Conflict Minerals Report and an audit is not required. Report required by Item 1.01. (2) Product Description: Any conflict free means that a product does registrant that manufactures products or not contain conflict minerals necessary Instructions to Item 1.01 contracts for products to be to the functionality or production of that product that directly or indirectly (1) A registrant that mines conflict manufactured that have not been found minerals would not be considered to be to be ‘‘DRC conflict free,’’ as defined in finance or benefit armed groups, as defined in paragraph (d)(2) of this item, manufacturing those minerals for the paragraph (d)(4) of this item, must purpose of this item. The specialized provide a description of those products, in the Democratic Republic of the Congo or an adjoining country. Conflict disclosure report on Form SD shall the facilities used to process the cover a calendar year, regardless of the necessary conflict minerals in those minerals that a registrant obtains from recycled or scrap sources, as defined in registrant’s fiscal year, and be due products, the country of origin of the annually on May 31 for the prior necessary conflict minerals in those paragraph (d)(6) of this item, are considered DRC conflict free. calendar year. products, and the efforts to determine (5) DRC conflict undeterminable. The (2) During the first two calendar years the mine or location of origin with the term DRC conflict undeterminable following November 13, 2012 for all greatest possible specificity. (i) For the temporary period specified means, with respect to any product registrants and the first four calendar in Instruction 2 to Item 1.01, following manufactured or contracted to be years for any smaller reporting its exercise of appropriate due diligence, manufactured by a registrant, that the company, a registrant will not be any registrant that manufactures registrant is unable to determine, after required to submit an audit report of its products or contracts for products to be exercising due diligence as required by Conflict Minerals Report prepared by an manufactured that are ‘‘DRC conflict paragraph (c)(1) of this item, whether or independent private sector auditor with undeterminable’’ must provide a not such product qualifies as DRC respect to the conflict minerals in any description of those products, the conflict free. of its products that are ‘‘DRC conflict facilities used to process the necessary (6) Conflict Minerals from Recycled or undeterminable.’’ Beginning with the conflict minerals in those products, if Scrap Sources. Conflict minerals are third or fifth reporting calendar year, as known, the country of origin of the considered to be from recycled or scrap applicable, a registrant with products necessary conflict minerals in those sources if they are from recycled metals, manufactured or contracted to be products, if known, and the efforts to which are reclaimed end-user or post- manufactured that are ‘‘DRC conflict determine the mine or location of origin consumer products, or scrap processed undeterminable,’’ must describe those with the greatest possible specificity; metals created during product products as having not been found to be (ii) A registrant is not required to manufacturing. Recycled metal includes ‘‘DRC conflict free’’ and must provide provide the information in paragraph excess, obsolete, defective, and scrap the information required in paragraph (c)(2) of this item if the necessary metal materials that contain refined or (c) of this item including the audit conflict minerals in its product are processed metals that are appropriate to report. solely from recycled or scrap sources recycle in the production of tin, (3) A registrant that acquires or because those products are considered tantalum, tungsten and/or gold. otherwise obtains control over a ‘‘DRC conflict free.’’ Minerals partially processed, company that manufactures or contracts (d) For the purposes of this item, the unprocessed, or a bi-product from to manufacture products with conflict following definitions apply: another ore will not be included in the minerals necessary to the functionality (1) Adjoining country. The term definition of recycled metal. or production of those products that (7) Outside the Supply Chain. A previously had not been obligated to sroberts on DSK5SPTVN1PROD with RULES adjoining country means a country that shares an internationally recognized conflict mineral is considered outside provide a specialized disclosure report border with the Democratic Republic of the supply chain after any columbite- with respect to its conflict minerals will the Congo. tantalite, cassiterite, and wolframite be permitted to delay reporting on the (2) Armed group. The term armed minerals, or their derivatives, have been products manufactured by the acquired group means an armed group that is smelted; any gold has been fully refined; company until the end of the first identified as a perpetrator of serious or any conflict mineral, or its reporting calendar year that begins no VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break --> Federal Register / Vol. 77, No. 177 / Wednesday, September 12, 2012 / Rules and Regulations 56365 sooner than eight months after the pursuant to Section 1504 of the Dodd- Table of Contents effective date of the acquisition. Frank Wall Street Reform and Consumer I. Background (4) A registrant is not required to Protection Act relating to disclosure of II. Final Rules Implementing Section 13(q) provide any information regarding its payments by resource extraction issuers. A. Summary of the Final Rules conflict minerals that, prior to January Section 1504 added Section 13(q) to the B. Definition of ‘‘Resource Extraction 31, 2013, are located outside of the Securities Exchange Act of 1934, which Issuer’’ and Application of the supply chain, as defined by paragraph requires the Commission to issue rules Disclosure Requirements (d)(7) of this item. requiring resource extraction issuers to 1. Proposed Rules (5) A registrant must provide its include in an annual report information 2. Comments on the Proposed Rules required conflict minerals information relating to any payment made by the 3. Final Rules for the calendar year in which the issuer, a subsidiary of the issuer, or an C. Definition of ‘‘Commercial Development manufacture of a product that contains entity under the control of the issuer, to of Oil, Natural Gas, or Minerals’’ any conflict minerals necessary to the a foreign government or the Federal 1. Proposed Rules functionality or production of that 2. Comments on the Proposed Rules Government for the purpose of the

3. Final Rules product is completed, irrespective of commercial development of oil, natural D. Definition of ‘‘Payment’’ whether the registrant manufactures the gas, or minerals. Section 13(q) requires 1. Types of Payments product or contracts to have the product a resource extraction issuer to provide 2. The ‘‘Not De Minimis’’ Requirement manufactured. information about the type and total 3. The Requirement To Provide Disclosure Section 2—Exhibits amount of such payments made for each for ‘‘Each Project’’ project related to the commercial 4. Payments by ‘‘a Subsidiary * * * or an Item 2.01 Exhibits development of oil, natural gas, or Entity Under the Control of * * *’’ List below the following exhibit filed minerals, and the type and total amount E. Definition of ‘‘foreign government’’ as part of this report. of payments made to each government. 1. Proposed Rules In addition, Section 13(q) requires a 2. Comments on the Proposed Rules Exhibit 1.01—Conflict Minerals Report 3. Final Rules as required by Items 1.01 and 1.02 of resource extraction issuer to provide information regarding those payments F. Disclosure Required and Form of this Form. Disclosure in an interactive data format. SIGNATURES 1. Annual Report Requirement DATES: Effective date: November 13, 2. Exhibits and Interactive Data Format Pursuant to the requirements of the 2012. Requirements Securities Exchange Act of 1934, the Compliance date: A resource 3. Treatment for Purposes of Securities Act registrant has duly caused this report to extraction issuer must comply with the and Exchange Act be signed on its behalf by the duly G. Effective Date new rules and form for fiscal years authorized undersigned. 1. Proposed Rules ending after September 30, 2013. For the 2. Comments on the Proposed Rules lllllllllllllllllllll first report filed for fiscal years ending (Registrant) 3. Final Rules after September 30, 2013, a resource III. Economic Analysis lllllllllllllllllllll extraction issuer may provide a partial A. Introduction By (Signature and Title)* year report if the issuer’s fiscal year B. Benefits and Costs Resulting From the lllllllllllllllllllll began before September 30, 2013. The Mandatory Reporting Requirement (Date) issuer will be required to provide a 1. Benefits * Print name and title of the registrant’s report for the period beginning October 2. Costs signing executive officer under his or 1, 2013 through the end of its fiscal C. Benefits and Costs Resulting From her signature. year. For any fiscal year beginning on or Commission’s Exercise of Discretion after September 30, 2013, a resource 1. Definition of ‘‘Commercial Development * * * * * of Oil, Natural Gas, or Minerals’’ Dated: August 22, 2012. extraction issuer will be required to file

2. Types of Payments a report disclosing payments for the full 3. Definition of ‘‘Not De Minimis’’ By the Commission. fiscal year. 4. Definition of ‘‘Project’’ Elizabeth M. Murphy, FOR FURTHER INFORMATION CONTACT: 5. Annual Report Requirement Secretary. Tamara Brightwell, Senior Special 6. Exhibit and Interactive Data [FR Doc. 2012–21153 Filed 9–11–12; 8:45 am] Requirement Counsel, Division of Corporation BILLING CODE 8011–01–P Finance, Elliot Staffin, Special Counsel, D. Quantified Assessment of Overall Economic Effects Office of International Corporate IV. Paperwork Reduction Act SECURITIES AND EXCHANGE Finance, Division of Corporation A. Background COMMISSION Finance, or Eduardo Aleman, Special B. Summary of the Comment Letters Counsel, Office of Rulemaking, Division C. Revisions to PRA Reporting and Cost 17 CFR Parts 240 and 249 of Corporation Finance, at (202) 551– Burden Estimates 3290, U.S. Securities and Exchange D. Revised PRA Estimate [Release No. 34–67717; File No. S7–42–10] Commission, 100 F Street NE., V. Final Regulatory Flexibility Act Analysis RIN 3235–AK85 Washington, DC 20549–4553. A. Reasons for, and Objectives of, the Final Rules SUPPLEMENTARY INFORMATION: We are B. Significant Issues Raised by Public Disclosure of Payments by Resource Extraction Issuers adopting new Rule 13q–1 1 and an Comments sroberts on DSK5SPTVN1PROD with RULES amendment to new Form SD 2 under the C. Small Entities Subject to the Final Rules AGENCY: Securities and Exchange Securities Exchange Act of 1934 D. Reporting, Recordkeeping, and Other Commission. (‘‘Exchange Act’’).3 Compliance Requirements ACTION: Final rule. E. Agency Action To Minimize Effect on 1 17 CFR 240.13q–1. Small Entities SUMMARY: We are adopting new rules 2 17 CFR 249.448. VI. Statutory Authority and Text of Final and an amendment to a new form 3 15 U.S.C. 78a et seq. Rule and Form Amendments VerDate Mar<15>2010 21:18 Sep 11, 2012 Jkt 226001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 E:\FR\FM\12SER2.SGM 12SER2 <!-- page break -->