SEC Issues Final Rules under Dodd-Frank Regarding Transparency in Extractive Industries

International Alert
08.22.12

The U.S. Securities and Exchange Commission ("SEC") adopted today two sets of rules that implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The final rules, which were mandated by the Dodd-Frank Act that President Obama signed into law in July 2010, followed the SEC's earlier release of proposed rules and an extended comment period for stakeholders.

The two rules adopted today implement the requirements of Section 1502 and 1504 of the Dodd-Frank Act and impact manufacturers of consumer electronics, such as mobile phones, laptops, and MP3 players, as well as oil, gas and mining companies.

Section 1502 – Conflict Minerals

The first rule, which implements the requirements of Section 1502, requires that public companies file a report with the SEC if they manufacture or contract to manufacture products that contain conflict minerals (gold, columbite-tantalite (coltan), cassiterite (tin), wolframite (tungsten) or their derivatives) from the Democratic Republic of Congo and adjoining countries. If issuers do manufacture products which contain such minerals, and if the minerals are necessary for the production or the functionality of the product, the rules require the company to conduct a reasonable inquiry regarding the origins of the conflict minerals being used. Issuers using recycled or scrap conflict minerals will also have to conduct such an inquiry to confirm that the minerals are indeed recycled or scrap. If, after a reasonable inquiry, an issuer determines that its minerals originated or may have originated in the covered countries, or if the issuer learns or has reason to believe that the minerals used in its products may not be recycled or scrap materials, the issuer will be required to conduct due diligence on its supply chain to determine if the conflict minerals financed or benefited armed groups in the covered countries.

If it is determined that the minerals financed or benefited armed groups in the covered countries, the company must describe the product as "not conflict free." In addition, the company must provide a description of the products manufactured or contracted to be manufactured, the entity that conducted the independent private sector audit, the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity. Issuers that are unable to determine the source of their conflict minerals after conducting due diligence may, for two years, describe the products containing the minerals as "conflict undeterminable" rather than "not conflict free." Small reporting companies may use the "conflict undeterminable" characterization for four years. SEC staff estimated that the total industry-wide cost of implementing the new conflict minerals rule would be "substantial," at around $3 to $4 billion.

Section 1504 – Payments to Governments

The second rule, which implements the requirements of Section 1504, requires resource extraction issuers, such as oil, gas, and mining companies, to disclose and report "non de minimus" payments -- defined as any payment over $100,000 -- which they, a subsidiary, or an entity under their control make to U.S. and/or foreign governments for purposes of the commercial development of oil, natural gas, or minerals. The SEC estimates that nearly 1,100 companies will be affected by this rule.

According to the final rules, companies involved in, among other activities, exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals or the acquisition of a license for such activity, will be required to submit a report relating to those payments as part of their annual report to the SEC. The rule targets a single or a series of related payments for taxes, royalties, fees, including license fees, production requirements, bonuses, dividends, and infrastructure development projects. Although commentators requested that the SEC make an exception for confidential or commercially sensitive information, the SEC declined to make such an exception. The SEC noted that these requirements were consistent with those laid out by the Extraction Industry Transparency Initiative ("EITI"), although in some cases, the SEC rules have a broader reporting requirement than those called for by the EITI. The SEC estimated that initial industry-wide compliance costs for implementing this rule will be in the range of $1 billion with ongoing compliance costs estimated to be between $200 and $400 million.

The SEC noted that many commentators asked that the language used by the SEC mandate that disclosure in both rules be "furnished" rather than filed, so that any errors their disclosures might contain do not create additional liability. However, arguing that there is no strict liability for errors in the filed reports, the SEC opted for using the term "filed."

Oil, gas and mining companies would be required to report payments to U.S. and foreign governments for fiscal years that end after September 30, 2013. Companies subject to the conflict minerals tracking rule would have to start filing reports starting on May 31, 2014.

It remains unclear how deep into the exploration and production cycle the SEC will seek to extend the definition of a "resource extraction issuer." However, we note that today's SEC discussion indicated that the phrase includes U.S. and foreign issuers that are engaged in the commercial development of oil, natural gas, or minerals, which could suggest a fairly wide interpretation of "resource extraction issuer." Miller & Chevalier will continue to monitor the implementation of this rule and issue additional Alerts as appropriate.

For more information, please contact:

Lamia Matta, lmatta@milchev.com, 202-626-5989

Leila Babaeva, lbabaeva@milchev.com, 202-626-5803

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