The Red Flag Group®
Compliance and audit in word tag cloud on wooden blocks

Implementation of the final rule for the Dodd-Frank Act

Implementation of the final rule for the Dodd-Frank Act

In the previous edition of Compliance Insider® we provided a detailed report on the emerging issue of human rights obligations in multinational businesses and the growing trend of companies and governments working to stem the financing of conflicts in central Africa by restraining the trade of conflict minerals. Since the publication of this initial report there have been significant developments in the requirements imposed upon the private sector in terms of conducting supply-chain due diligence and tracking the source of materials used by companies in the production of their goods.

The final rule takes a three-step approach, which involves determining whether an issuer is subject to requirements of the rule, the conducting of a reasonable country of origin inquiry and the conducting of supply chain due diligence and preparation of a Conflict Minerals Report. This article aims to identify the requirements which various companies will be obliged under law to comply with and provide guidance as to how your business can prepare accordingly.

Rule Coverage and Applicability

Companies will come within the ambit of the Act depending on their use of various minerals as part of their business. Conflict minerals that are defined in the Act are tin, tantalum, tungsten, gold and other minerals or derivatives that are deemed as contributory to the financing of conflict in the DRC and neighbouring countries. These minerals are all crucial for the production of electronic and technological products, amongst other things, and have significant economic value. It is therefore expected that many companies would need to concern themselves with the final rule and ensure strict compliance to it.

The final rule has also determined that the Conflict Minerals Statutory Provision of the Act will apply to all issuers that file reports to the SEC under sections 13(a) and 15(d) of the Exchange Act. This covers United States companies, foreign private issuers and smaller reporting companies.

Filing a Report with the SEC

The final rule requires that if the Conflict Minerals Statutory Provisions of the Act applies to a particular company, disclosure must be filed with the SEC via a new form called a “Form SD”. This effectively requires the disclosure of the use of tantalum, tin, gold and tungsten if those minerals are necessary to the functionality or production of a product. Therefore, if a company files reports with the SEC under the Exchange Act and uses minerals which are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company, that company must submit a Form SD.

The implication of this requirement is that the issuer would be liable for any misleading or fraudulent statements included in the reports in accordance with Section 18 of the Securities Exchange Act of 1934. Under the final rule, investors would have a private right of action if their buying or selling of company securities was induced by misleading or fraudulent statements in filed reports, and would have an improved avenue of reimbursement for economic damages.

Although issuers are not held in strict liability, according to Section 18 of the Securities Exchange Act they are required to demonstrate that their management acted in good faith in making statements regarding the presence of conflict minerals in the supply chain. It is expected that issuers, as well as auditors and underwriters, would be incentivised to conduct an appropriate level of diligence, and as a result it is expected that companies will file comprehensive, accurate reports for the reference of investors.

Reasonable Country of Origin Inquiry

As part of preparing to file a Form SD, issuers are required to conduct a reasonable country of origin inquiry (RCOI) for suppliers and processing facilities of conflict minerals. This is a preliminary screening stage to identify any possible warnings of conflict minerals that originate from the countries covered by the legislation. It is not specified in the final rule what steps and outcomes are expected, and issuers can have discretion over how the RCOI is performed, taking into account factors such as the size of the issuer, products or existing relationships with suppliers. It should be noted, however, that the rule emphasises the concept of “reasonableness” and “good faith performance”, meaning that not only that the inquiry should be reasonably designed, but that issuers are obliged to conduct and execute each step of the design accordingly.

Issuers must seek and obtain a reasonably-reliable representation from their supplier indicating the processing facilities of minerals, and seek demonstration of whether these conflict minerals are sourced from the DRC or surrounding regions. Representations may be obtained directly from the facility, or indirectly from immediate suppliers of the issuer. Any warning signs that suggest the origin of conflict minerals may be from the DRC or surrounding regions or that they did not come from recycled or scrap sources must be taken into account.

Facilities that have received “conflict-free” designations from a recognised industry group that requires an independent private sector audit or those that have publicly offered independent private sector audit results may be deemed entities which the issuer can consider to be conflict free. As previously described, an issuer will be required to disclose their determination and briefly describe the RCOI it undertook in coming up with such determination, as well as the result of the inquiry in the body of its Form SD. A Form SD should cover the previous calendar year and is required to be filed annually, with the deadline of submission being 31 May of the subsequent year. The first Form SDs are not required to be filed until 31 May 2014.

Since there are no set steps provided in the rule it is up to the stakeholders to assess the adequacy of the RCOI conducted by the issuer, and it is expected that if current measures prove to be insufficient stakeholders will intervene and advocate for a different process, hence progressively improving the reporting practices of the company.

Conflict Minerals Report

The final rule states that if, after conducting an RCOI, issuers find their minerals originated from the DRC or surrounding regions and did not come from recycled or scrap sources, due diligence is required to be performed and a Conflict Minerals Report is to be submitted. However, if it is found that the conflict minerals did not come from the DRC or surrounding regions or did come from recycled or scrap sources and due diligence has already been conducted, no Conflict Minerals Report is required, and the issuer would be required to disclose the due diligence and results in a specialised disclosure report, along with the description of the RCOI. Should an issuer be required to submit a Conflict Minerals Report it should be filed as an exhibit to the Form SD within the same deadline, as well as being provided on the publicly-available company website of the issuer, the link of which must be provided in the Form SD.

Certain elements must be included in the Conflict Minerals Report of an issuer. First, the issuer must include a description of measures taken to exercise due diligence on source and chain of custody of conflict minerals. Measures that involve an independent private sector audit should be specified. Second, the report should also include a description of products manufactured or contracted to be manufactured that are not “DRC conflict free”. The entity that conducted the independent private sector audit, certification of said audit, facilities used to process conflict minerals and efforts to determine the mine or location of origin with greatest specificity are also elements that must be included.

Due Diligence

Issuers are required by the rule to describe the due diligence measures exercised to determine source and chain of custody of conflict minerals. These efforts must follow a nationally- or internationally-recognised framework to ensure that auditors are provided with a structure to assess the due diligence efforts of the issuer. The adoption of nationally- or internationally-recognised framework also enhances quality and promotes comparability. The OECD “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas”, which was reported on in the last issue of Compliance Insider®, was identified in the final rule as an example of a framework that would satisfy this requirement.

Looking Forward

The essence of the final rule is that issuers need to demonstrate that reasonable care and good faith is taken when conducting the RCOI and subsequent due diligence. The repercussions for not complying with the final rule requirements are potentially severe. The SEC wishes to allow time and space for the rule to progressively develop, considering mandatory steps as to how inquiries and due diligence should be conducted are not yet stipulated. However, this does not mean companies cannot begin preparing as such. Some things to consider are:

  • Has this issue been raised with your company’s senior management? Introducing the mechanism by which to comply with the conflict minerals provisions and ensure continual adherence to principals of preserving human rights requires  commitment from your company’s most-senior decision-makers. Without their support it will be difficult to develop the necessary internal procedures to be fully aware of supply-chain activity.
  • Have appropriate internal policies and procedures been developed? A major part of the requirements of this legislation is that a firm stance is taken with direct suppliers as to what is expected of them. Before developing policies and procedures your company must have thoroughly defined its position in how it intends to comply with these laws.
  • Has consideration been given to routinely monitoring relationships with suppliers and ensuring they are on board with your expectation of sourcing minerals of legitimate origin? Under the Conflict Minerals Statutory Provision, a one-off assurance from a supplier is not enough; you will need to routinely monitor the effectiveness of policies and expectations externally.

The final rule illustrates the intention of congress and the SEC to let stakeholders mould the process of reporting as procedures are gradually implemented. As such, a major motivator for companies in complying with these laws is keeping stakeholders satisfied and preserving the company’s image as a globally-conscious operator.


Where companies have used proper due diligence to determine that the production of their products do not involve conflict minerals, the phrase “DRC Conflict Free” can be used in describing that company’s products. This allows consumers and investors to differentiate products that have directly or indirectly financed the armed groups in the concerned countries and those that have taken reasonable steps to avoid doing so.

It is mentioned in the final rule that by refusing exemption for foreign private issuers in the United States it is hoped that these businesses will in turn exert pressure to their respective governments to pass similar legislations on the incentive of creating a fair platform in their domestic market. Thus, it is to be expected that similar rules will soon be passed in various jurisdictions across the globe, especially those that are actively involved in the international market. In addition, the inclusion of foreign private issuers once again undermines the feasibility for companies to blame insufficient inspection of the entire supply chain on uncooperative foreign partners. The final rule is broad in its application and aims at helping ensure accurate reporting amongst the supply chains of large companies by obliging foreign or smaller-scale partners to perform the same.

To businesses covered by the rule the implication is that the minimum expectation is for them to demonstrate they have adopted measures to ensure statements made in the reports submitted to the SEC are in good faith. It is imperative that businesses should begin to familiarize themselves with the process of supply chain due diligence and maintain a close reporting relationship with suppliers. It is also recommended that companies covered by the final rule establish relationships with independent private sector auditors and develop the company due diligence framework collectively.

For companies that are involved in mineral processing but are not foreseeably covered by the final rule, initiating an internal-reporting procedure and taking the initiative in United States markets to demonstrate a willingness to work with suppliers to conquer this issue of supporting armed groups in central Africa would keep such companies strategically ahead of the game. Addressing conflict minerals in global production is an ever-growing issue, and it is expected that similar laws will be passed in regions that have a close economic relationship with the United States, thus giving the obligations outlined in this article a universal application. Those who are proactive in taking steps to address such issues increase their chances of avoiding damaging public-image perceptions, and potentially severe legal repercussions.