Last Minute Summer Reading Alert! SEC Adopts Rules Regarding Conflict Minerals and Resource Extraction Payments

           If you were concerned that you had finished all your summer reading with time to spare, worry no more.  The SEC has adopted a total of 588 pages of final rules regarding disclosures of the use of conflict minerals and payments by resource extraction issuers.

          The new rules were adopted on August 22, 2012.   Both rules were mandated by the Dodd-Frank Act and apply to all reporting companies (including foreign issuers and smaller reporting companies).  Congress enacted the conflict minerals requirement out of concerns that the exploitation and trade of “conflict minerals” by armed groups was helping to finance conflict in the Democratic Republic of the Congo (DRC) and adjoining countries.  Congress enacted the resource extraction payments disclosure to increase the transparency of payments made by oil, natural gas and mining companies to foreign governments so that, in theory, the citizens of those countries could hold their governments accountable for the wealth generated by those resources.

            The conflict minerals rule will require reporting companies that use certain minerals, including gold, tin, tungsten and tantalum, that are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company, to make disclosures on new Form SD (rather than as an exhibit to Form 10-K as originally proposed).  The rule requires that the company make a reasonable inquiry to determine whether any of the conflict minerals originated in the DRC or an adjourning country and, based on the results of that inquiry, make disclosures including, in some cases, a Conflict Minerals Report that will require an independent private sector audit.  There is no de minimis standard in the rule.   All issuers are required to use the same reporting period, the calendar year, regardless of fiscal year.  The first report is due on or before May 31, 2014 for the 2013 calendar year and no later than May 31st every year thereafter.

            The resource extraction payment rule will require reporting companies that are engaged in the commercial development of oil, natural gas or minerals to disclose certain payments (including taxes, royalties, fees, bonuses, dividends and costs of infrastructure improvements) made to foreign governments (including foreign local governments) or the U.S. government.  Payments (including a series of related payments) of less than $100,000 are considered de minimis under the rule and need not be disclosed.

            As with the conflict minerals rules, disclosure will be made on Form SD, but are required to be filed within 150 days after the end of the issuer’s fiscal year.  Issuers are required to comply with the new rules for fiscal years ending after September 30, 2013. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013.

            Both rules provide that the disclosures will be deemed “filed” and not “furnished” (as had originally been proposed), thereby imposing potential liability under the Securities Exchange Act, but no separate CEO and CFO certifications will be required.

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