Section 1502 of the Dodd-Frank Act amends Section 13 of the Securities Exchange Act of 1934 to impose a new reporting requirement on publicly traded companies that manufacture products for which "conflict minerals" are necessary to their functionality or production.

A little-discussed provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which President Obama signed into law on July 21, 2010, will require many manufacturing companies to submit a new annual report and, in some cases, an independent private sector audit report, to the U.S. Securities and Exchange Commission (SEC).

Specifically, Section 1502 of the Dodd-Frank Act amends Section 13 of the Securities Exchange Act of 1934 to impose a new reporting requirement on publicly traded companies that manufacture products for which "conflict minerals" are necessary to their functionality or production. Conflict minerals include "columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives" and other minerals determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo (DRC). Wolframite is highly valued as the main source of the metal tungsten, while cassiterite is the most important source of tin. These minerals are widely used in the production of electronics and other products.

Companies that use conflict minerals that are necessary to the functionality or production of products that they manufacture must report to the SEC and disclose on their websites annually whether any such materials "did originate in the Democratic Republic of the Congo or an adjoining country." If such conflict minerals did originate in any such country, then the manufacturing company must submit to the SEC a report that includes, with respect to the period covered by the report:

(i) a description of the measures taken by the person to exercise due diligence on the source and chain of custody of such minerals, which measures shall include an independent private sector audit of such report submitted through the Commission that is conducted in accordance with standards established by the Comptroller General of the United States, in accordance with rules promulgated by the Commission, in consultation with the Secretary of State; and

(ii) a description of the products manufactured or contracted to be manufactured that are not DRC conflict free ('DRC conflict free' is defined to mean the products that do not contain minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country), the entity that conducted the independent private sector audit in accordance with clause (i), the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.

The new provision was prompted by the U.S. Congress' concern "that the exploitation and trade of conflict minerals originating in the DRC is helping to finance conflict characterized by extreme levels of violence in the eastern DRC, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein."

While the Dodd-Frank Act does not impose any penalty on companies that report taking no action to avoid using conflict minerals, it does require companies to make the required disclosures publicly available on their websites, the clear intention of which is to allow the public marketplace to "judge" such companies. The new law does not otherwise expand the existing U.S. trade sanctions that already prohibit doing business with specified DRC individuals and entities, but the U.S. State and Treasury Departments are reported to be examining possible sanctions that might apply to U.S. companies that use conflict minerals.

As with many other provisions in the Dodd-Frank Act, including another provision that imposes new disclosure requirements on energy and mining companies (See McDermott's On the Subject " Dodd-Frank Act Imposes New Disclosure Requirements on Energy and Mining Companies"), section 1502 on conflict minerals imposes new requirements on U.S. businesses that are not very clear. For example, how will U.S. manufacturers determine sources of minerals used in components parts, and how will companies satisfy the audit/certification requirement? These issues and others will be the subject of much debate and comments in the rulemaking process, for which section 1502 gives the SEC 270 days to finalize regulations.

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