Although I was aware that among the Dodd-Frank Act’s hundreds of pages are provisions relating to so-called “conflict minerals,” until recently I had not had to pay much attention to these provisions. But now, for whatever reason, the conflict minerals disclosure requirements suddenly have hit the center of my radar screen. I have had to do a lot of backing and filling on the topic. Because I think we are all going to have to become familiar the conflict mineral disclosure requirements, I have summarized what I have learned below


First, some background. Section 1502 of the Dodd Frank Act required the SEC to promulgated rules requiring companies to annually disclosure their of conflict minerals originating in the Democratic Republic of Congo (DRC) or an adjoining country. On August 22, 2012, the SEC adopted the conflict mineral disclosure rules. The SEC’s August 22, 2012 press release can be found here and the rule itself can be found here.


The specific minerals at issue are tantalum, tin, tungsten and gold. The countries covered by the disclosure rules are, in addition to the DRC, Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia (the “Covered Countries”)


The rule applies not just to companies with SEC reporting obligations (including both domestic and foreign issues) but. It also applies to any company that uses the specified minerals if the minerals are “necessary to the functionality or production” of a product manufactured by or “contracted to be manufactured” by the company.


Companies are required to comply with the new disclosure rules for the calendar year beginning January 1, 2013, with the first disclosures due May 31, 2014 and subsequent disclosures due annually each year after that. However, a legal challenge to the rules has been raised. On October 19, 2012, the U.S. Chamber of Commerce and the National Association of Manufacturers filed a petition for review with the Court of Appeals for the District of Columbia requesting that the SEC’s rule be set aside in whole or in part.


While the legal challenge remains pending, many companies are readying themselves to comply with the rule. Basically, the rule requires disclosure by a public company if it manufactures (or has others manufacture) a product that includes a conflict mineral. If a company determines that its product has a conflict mineral, the company must conduct a good faith inquiry to determine if the mineral is derived from mining in one of the Covered Countries. If the company determines that the minerals came from one of the Covered Countries, it must then file a Conflict Minerals Report on Form SD.


Among other things, companies filing a Report must conduct due diligence efforts (using an internationally recognized framework, such as the OECD Due Diligence Guidance) to determine whether the operations in the Covered Country helped finance armed conflict. If the minerals are conflict free, the company must certify that conclusion with an independent audit. If the minerals are not conflict free, the company must disclose the information relating to its use of the conflict minerals. For companies unable to determine whether or not the minerals are conflict-free, the company can declare itself “conflict indeterminable” during a two-year grace period (four years for smaller reporting companies).


Notwithstanding the legal challenge, and though the first reporting deadline is still more than a year away, many companies are now scrambling to try to adapt to these reporting requirements. As Barbara Jones of the Greenberg Traurig firm wrote in a March 5, 2013 Law 360 article entitled “Sharpen Your Pencils for Conflict Minerals Disclosures” (here, registration required), reporting companies are “forming high-level internal compliance teams with representatives from legal, finance, internal audit and purchasing involved to assess the extent, if any, that the company’s product contain conflict minerals.” The efforts, she notes have extended to “supply chain participants” who are not “deeply involved in determining and certifying the original source of supplies of tantalum, tine, tungsten and gold (3TGs) and their numerous derivatives, sold to their customers.”


There is a lot of risk here for the companies involved. First and foremost, companies face a serious potential PR risk. Companies found to be out of position on conflict minerals will undoubtedly face a publicity firestorm from humanitarian groups and activist investors. Although it remains to be seen, adverse publicity could prove to be a problem not just for companies that must declare their use of conflict minerals but even for those that are unable to declare themselves conflict mineral free.


As with any disclosure requirement, there is also a significant litigation risk as well. Companies compelled to reveal their use of conflict minerals could well be the target of shareholder suits. A particularly difficult problem would involved companies that had declared themselves to be conflict free that are later shown have been using conflict minerals after all. The negative publicity and likely share price decline would undoubtedly be followed by a securities class action lawsuit. Activist shareholders could also launch derivative suits against companies based on allegations such as the failure to implement adequate procedures to ensure that the company’s products were conflict mineral free.


Of course, whether any of these kinds of suits actually emerge remains to be seen. But though these potential dangers remain off in the future, and though the first reporting deadline is more than a year ahead, the present challenge for reporting companies is to be prepared now for these coming tests. I also anticipate that in coming months, questions surrounding companies’ preparations for the conflict minerals disclosure requirements increasingly will become a part of the D&O insurance underwriting process.


As a final note, I should stress that in my description above I simplified the conflicts minerals disclosure requirements. Readers who want a deeper understanding may want to visit the Conflict Minerals Resource Center on the website of the Schulte Roth law firm. The site has a number of helpful links and articles.