Dodd-Frank Wall Street Reform and Consumer Protection Act


The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act“) came into force on July 21, 2010 and was designed to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, to hold Wall Street accountable, to protect and empower American consumers with stronger consumer protections, increase transparency in financial dealings and end taxpayer buyouts once and for all”. This paper will discuss the impact of the Dodd-Frank Act on foreign private issuers. While much of the Dodd-Frank Act is focused on the regulation of financial institutions, it also contains significant provisions that affect all public companies which have securities registered with the Securities and Exchange Commission (the “SEC“). The SEC has announced that they will be releasing final rules shortly relating to conflict minerals, mine safety information, resource extraction issuers and stock exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence. The information below is based upon the proposed rules and is therefore subject to possible change once the final rules are adopted. The SEC has also announced that it will soon release proposed rules regarding disclosure of pay for performance, pay ratios, and hedging by employees and directors as well as rules on recovery of executive compensation. Again, the information below is based upon the Dodd-Frank Act and is also subject to change once the proposed rules are adopted.

Foreign Private Issuer

The term “foreign issuer” means any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.

The term “foreign private issuer” means any foreign issuer other than a foreign government except for an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter:

  1. More than 50 percent of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the United States; and
  2. Any of the following:
    1. The majority of the executive officers or directors are United States citizens or residents;
    2. More than 50 percent of the assets of the issuer are located in the United States; or
    3. The business of the issuer is administered principally in the United States.

An issuer is required to “look through” the record ownership of brokers, dealers, banks or other nominees holding securities for the accounts of their customers to determine the residency of those shareholders. An issuer must also take into account information regarding United States ownership derived from beneficial ownership reports that are provided to it or filed publicly, as well as information that is otherwise provided to it. The reference to beneficial ownership reports is not limited to reports filed with the SEC, but also includes information provided to the issuer or disclosed publicly in other countries, as well as in the United States.

The application of the “look through” provisions is limited to voting securities held of record:

  • in the United States;
  • in the issuer’s home jurisdiction; and
  • in the primary trading market for the issuer’s securities if different from the issuer’s home jurisdiction.

The underlying principle is that these jurisdictions should cover most of the trading volume for the issuer’s securities, and searches in these jurisdictions are likely to yield the greatest number of United States beneficial owners. If, after reasonable inquiry, the issuer is unable to obtain information about a nominee’s customer accounts, including cases where the nominee’s charge for supplying this information would be unreasonable, the issuer may rely on a presumption that the customer accounts are held in the nominee’s principal place of business.

Once an issuer qualifies as a foreign private issuer, it will immediately be able to use the forms and rules designated for foreign private issuers until it fails to qualify for this status at the end of its most recently completed second fiscal quarter. An issuer’s determination that it fails to qualify as a foreign private issuer governs its eligibility to use the forms and rules designated for foreign private issuers beginning on the first day of the fiscal year following the determination date. Once an issuer fails to qualify for foreign private issuer status, it will remain unqualified unless it meets the requirements for foreign private issuer status as of the last business day of its second fiscal quarter.

Corporate Governance
Disclosure of CEO/Chairman Structure

The Dodd-Frank Act requires the SEC to issue rules mandating United States public companies to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman of the board are filled by the same person or by different individuals. This provision has already been substantially implemented for United States public companies. Because this is a disclosure requirement for proxy statements, it will not apply to foreign private issuers unless the SEC takes additional steps to extend that requirement.

Broker Discretionary Voting

The Dodd-Frank Act requires United States stock exchanges to amend their rules to prohibit brokers from exercising discretionary authority to vote in connection with the election of directors, executive compensation (including say on pay), or any other significant matter as determined by the SEC. Effective for the 2010 proxy season, the NYSE had already amended its rules to eliminate broker discretionary voting for the election of directors, whether or not the election was contested. The prohibition affects not only companies listed on the NYSE, but also companies listed on other exchanges, such as NASDAQ, because most large brokerage firms are NYSE member organizations. The NYSE rule applies to foreign private issuers listed on U.S. stock exchanges, and this provision of the Dodd-Frank Act will apply to them as well.

Private Placement Exemption

The Dodd-Frank Act excludes the value of a primary residence from the calculation of the net worth of a natural person for the purpose of determining whether such a person qualifies as an accredited investor which may be sold securities in an exempt private placement. This provision is effective immediately. Issuers, including foreign private issuers that offer securities in U.S. private placements, should amend the definition of an accredited investor in their subscription documentation to exclude the value of a primary residence from an investor’s net worth.

Executive Compensation
Compensation Committee Independence

The Dodd-Frank Act mandates rules that will require all U.S. stock exchanges to impose on listed companies the requirement that compensation committees of the board be exclusively composed of independent directors. However, both the New York Stock Exchange and NASDAQ allow a foreign private issuer to follow the corporate governance practices of its home country instead of those prescribed by the listing standards, provided it discloses the ways in which such practices differ from those followed by domestic U.S. issuers under the listing standards, a disclosure which the SEC also requires in the annual report on Form 20-F. The Dodd-Frank Act follows a similar approach by expressly exempting foreign private issuers from the requirement to have an independent compensation committee as long as they disclose why they do not have such a committee. For foreign private issuers which opt to follow this requirement, the Dodd-Frank Act provides guidance on the factors that the U.S. stock exchanges should consider in defining who is an “independent” director, and in particular whether the director receives any remuneration from, or is affiliated with, the issuer. Specifically, U.S. stock exchanges could be required to consider such factors as the sources of compensation of a director, including any consulting, advisory or compensatory fee paid by the issuer and whether a member of the board of directors is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

Responsibilities for Consultants, Legal Counsel and Other Advisors

The Dodd-Frank Act requires that compensation committees be empowered to retain, oversee and compensate consultants, independent legal counsel and other advisors. The proposed rules also require that the issuer appropriately fund the committee so that it can carry out its mandate. While not requiring that compensation committees retain only independent consultants and advisors, the Dodd-Frank Act imposes an obligation that they consider the SEC’s definition of independence. These listing standards will apply to foreign private issuers listed in the U.S., unless the SEC uses its exemptive authority to continue its practice of allowing foreign private issuers to follow the corporate governance practices of their home country, provided that the differences are disclosed.

New Compensation Disclosures

The Dodd-Frank Act requires that public companies provide additional compensation disclosure regarding: (i) the relationship between “executive compensation actually paid” and the financial performance of the issuer, “taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions”; and (ii) whether directors and employees are permitted to purchase financial instruments designed to “hedge or offset any decrease in the market value of equity securities,” whether granted to the director or employee as compensation or held, directly or indirectly, by the director or employee. These disclosure changes will be accomplished through future SEC amendments to the proxy rules. Because foreign private issuers are not presently subject to the proxy rules, these new disclosures should not be applicable to them.

Say on Pay

The Dodd-Frank Act provides that U.S. public companies shall be required to submit to a non-binding shareholder vote not less than every three years the compensation of executives disclosed in their proxy statements and not less than every six years the question of the frequency at which such vote shall be required. In addition, when soliciting shareholder approval of a proposed acquisition, merger, consolidation or sale of all or substantially all their assets, public companies will be required to disclose information on all golden parachutes that relate to the proposed transaction and to submit those payments that have not already been approved to a non-binding shareholder vote. Disclosure is required of all agreements and understandings that the acquiring and target companies have with the named executive officers of both companies. A temporary exemption has been adopted for smaller reporting companies (public float of less than $75 million) such that they are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after January 21, 2013. These provisions impose new requirements concerning the content of proxy statements and therefore do not apply to foreign private issuers.

Clawbacks for Accounting Restatements:

The Dodd-Frank Act mandates U.S. stock exchanges to adopt listing standards requiring that listed companies develop and implement a clawback policy for accounting restatements. The policy must provide that in the case of an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement, whether intentional or not, the company will recover from all present and former “executive officers” any incentive-based compensation (including stock options) received in excess of what would have been paid based on the company’s results after giving effect to the accounting restatement during the three-year period preceding the date on which the company is required to prepare the restatement. As is the case with Section 304 of Sarbanes-Oxley, there is no express exemption for foreign private issuers from this clawback policy and, unless the SEC adopts an exemption, it will cover all companies listed on a U.S. stock exchange.

Requirements of Section 954

The SEC’s web page outlining its plans for the implementation of the Dodd-Frank Act indicates that the SEC will propose rules to implement Section 954 during the period from August to December 2011.

The provisions of Section 954 of The Dodd-Frank Act are relatively brief. Section 954 opens by saying that the SEC “shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the requirements of this section.” In other words, the clawback policy will become mandatory for all issuers whose securities are listed on a U.S. national securities exchange, including the New York Stock Exchange and NASDAQ.

Under Section 954, the rules to be adopted by the SEC will require each issuer to develop and implement a policy providing for disclosure of the policy of the issuer on incentive-based compensation that is based on financial information required to be reported under the securities laws. Furthermore, the rules will require that:

[I]n the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive-based compensation (including stock options awarded as compensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement.

Background of Section 954

The Sarbanes-Oxley Act included a provision that may be viewed as a predecessor to the Section 954 requirement. Under Section 304 of Sarbanes-Oxley, the SEC can bring legal proceedings to require a chief executive officer or chief financial officer to reimburse an issuer for:

  • any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following publication of financial statements, if they are subsequently restated, and
  • any profits realized from the sale of securities of the issuer during that 12-month period.

The provision is only applicable if the restatement is due to material noncompliance, as a result of misconduct, with financial reporting requirements.

It is not entirely clear whether Section 304 applies only when the CEO or CFO personally engaged in the misconduct leading to the misstatement. In the case SEC v. Jenkins, decided by the Arizona federal court last year, the court agreed with the SEC’s position that clawback may be required from a CEO or CFO who is not personally culpable.

A number of U.S. companies, going further than the requirements of Section 304, have adopted their own incentive compensation clawback policies. These companies have done so in part in response to pressure from activist shareholders. The policies vary in their application from company to company.

Dodd-Frank 954 Compared to SOX 304

In a number of respects, the requirements of Section 954 are stricter than those of Sarbanes-Oxley Section 304. In particular:

  • Section 954 requires clawbacks without regard to whether misconduct has occurred;
  • The look-back period is three years, rather than twelve months;
  • Section 954 applies to current and former executive officers, not just the CEO and CFO, and
  • Section 954 can be enforced by the issuer, not just the SEC.

The implementation of Section 954 will present the SEC with a number of significant issues, many of which have been forecast by public comments submitted to the SEC in anticipation of rulemaking. Some of these issues are described below.

Under Section 954, the clawback policy will apply to “executive officers”. However, the term is not defined there. Rule 3b-7 under the 1934 Act defines the term “executive officer” to mean the president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant. Executive officers of subsidiaries may be deemed executive officers of the registrant if they perform such policy making functions for the registrant. The SEC will need to determine whether to use the Rule 3b-7 definition or some other definition.

The clawback policy will apply to “incentive-based compensation (including stock options awarded as compensation)”. SEC regulations already define incentive-based compensation in the context of proxy statement disclosure requirements for U.S. issuers. The wording of Section 954 strongly suggests that the clawback policy need only apply to incentive-based compensation that is based on financial information required to be reported under the securities laws.

Calculation of the amount of the clawback will not always be straightforward. Clawback will be required for the “excess of what would have been paid to the executive officer under the accounting restatement”. The determination of this amount may be unclear, for example in the case of an equity-based award, since the value of the equity will vary depending upon the time at which the value is measured. While the SEC might adopt bright-line rules for these sorts of issues, another approach would be to leave the relevant determinations to the board of directors or a committee of the board.

Tax considerations may also raise complicated issues. An executive required to return compensation may already have paid taxes on the compensation. Depending upon the laws of the relevant jurisdiction, the executive may or may not be able to recover all of the taxes previously paid, and if she is able to recover them the recovery may occur at a time that is significantly later than the time at which clawback is required.

There is some ambiguity as to when the three year recovery period contemplated by Section 954 begins and ends. Under Section 954, the period is the three years preceding “the date on which the issuer is required to prepare an accounting restatement …” In the case of a U.S. issuer, a Form 8-K filing may be required to report a restatement. If so, that may be the relevant date for purposes of this requirement. For a foreign registrant, however, Form 8-K is inapplicable. If the foreign registrant otherwise publishes a material restatement of its financial results, it will be required promptly to submit a Form 6-K with the publication. The SEC should evaluate whether the date of such publication, or the date of the Form 6-K submission, or some other date is the relevant date for purposes of this requirement.

Section 954 by its terms appears to contemplate that clawbacks will be enforced by the issuers themselves — in contrast to Sarbanes Oxley Section 304, which is enforceable only by the SEC. However, the statute does not specify whether an issuer is required in all cases of restatement, or whether issuers may themselves determine following a restatement whether to require clawbacks. If the SEC decides on the latter alternative, it might specify substantive or procedural criteria for the decision. In an analogous context –– the guidelines for clawbacks applicable to recipients of federal funds under the TARP program –– issuers are not required to enforce a clawback if to do so would be unreasonable. Among other imaginable circumstances, enforcement may be unreasonable if the costs of enforcement exceed the recoverable funds, or if the executive no longer has sufficient financial resources to return the funds. Enforcement against former employees may be more difficult, as the issuer may be unable to withhold compensation otherwise payable.

Some who have commented on Section 954 to the SEC in anticipation of rulemaking have suggested that the rule include a de minimis threshold below which clawback is not required.

State laws governing creditors’ ability to attach employee wages may limit an issuer’s ability to enforce its clawback policy. Federal laws (such as the Dodd-Frank Act) may of course preempt state law, but Section 954 relies for enforcement on policies adopted by issuers, not on a law or regulation. It is possible that courts will find that clawback policies adopted under the Section 954 requirement do not themselves have the status of federal law that can preempt state wage protection laws.

A company faced with practical or legal obstacles to recovering incentive payments from executives under a clawback policy might address those obstacles by using a deferred incentive compensation arrangement, in which funds are not disbursed to the executive until the period in which a restatement could trigger clawback has expired. The SEC in rulemaking might decide to require such arrangements, although it is unclear they have the authority to do so.

Section 954 raises retroactivity issues. To what extent will the rules require that clawback policies apply to compensation periods that precede the adoption of the policies by the issuers? Will they have to apply to executive officers who departed before the policies were adopted (or even before the Dodd-Frank Act itself was enacted)? Will the policies supersede agreements (such as exculpatory agreements) with executive officers, even if those agreements were entered into prior to the adoption of the policies? A number of commenters have suggested that the clawback policies only apply to incentive compensation awarded after the effective date of rules under Section 954.

Application to Foreign Private Issuers

Section 954 only applies to a foreign private issuer whose securities are listed on a U.S. national securities exchange or national securities association. An issuer that registers its securities with the SEC –– for example, in connection with a merger registered on Form F-4 –– is not covered by the provision unless its securities are listed on a U.S. exchange.

The SEC may decide to adopt a full or partial exemption for foreign private issuers. Section 954 does not itself authorize the SEC to grant an exemption. However, Section 954 operates by amending the 1934 Act to incorporate the clawback policy requirement. The 1934 Act, in turn, contains a general authorization for the SEC to exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision of the 1934 Act or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.

Restatements are less common for foreign private issuers than they are for U.S. issuers. One reason is that foreign accounting principles, such as International Financial Reporting Standards, often provide for adjustments of accounting errors in current periods where U.S. GAAP requires a restatement. Furthermore, the laws of some jurisdictions limit restatements.

Auditor Attestation On Internal Control

The Dodd-Frank Act exempts companies, including foreign private issuers, which have a market capitalization of less than $75 million (as determined on the last business day of the most recent second fiscal quarter) from the requirement to include an auditor attestation regarding their internal control over financial reporting in their annual reports filed with the SEC. The SEC is reviewing the burden of complying with Section 404(b) for companies whose market capitalization is between $75 million and $250 million for the relevant reporting period.

Credit Ratings

The Dodd-Frank Act repeals Rule 436(g) under the 1933 Act. This Rule provided that, when included in a registration statement, a rating assigned to debt securities or preferred stock by a nationally recognized statistical rating organization was not considered an expert statement under the 1934 Act. This meant that these rating organizations did not face the enhanced liability for misstatements or omissions that is applicable to these kinds of statements when included in registration statements regarding public offerings of covered securities under the 1934 Act. This change is effective immediately and is applicable to the registration statements filed by foreign private issuers. As a result, an issuer will be required to obtain the consent of the credit rating agency to include credit ratings in their registration statements. Credit rating agencies that consent will have exposure as experts to liability for material misstatements or omissions. It is expected that credit rating agencies will not consent to the inclusion of their ratings in documents filed with the SEC.

New Required Disclosure
Disclosure Relating to “Conflict Minerals”

The Dodd-Frank Act mandates the SEC to issue rules imposing additional reporting requirements on issuers that use “conflict minerals” in their products. In general, the SEC rules under Section 1502 of the Dodd-Frank Act will, when promulgated, require issuers to disclose annually whether the conflict minerals used in, or in the manufacturing of, their products originated in the Democratic Republic of the Congo (the “DRC“) or an adjoining country. Issuers that use conflict minerals originating in these countries will be required to submit to the SEC a report describing the due diligence undertaken on the source and chain of custody of the conflict minerals, including an independent private sector audit, and certain other specified disclosures. The statutory text of Section 1502 of the Dodd-Frank Act is ambiguous regarding the scope of its intended application, silent on the definitions of key concepts and leaves it to the SEC to work out how to turn the lofty intentions of Congress into disclosure rules that work in practice. Section 1502 of the Dodd-Frank Act gave the SEC until 17 April 2011 to issue rules implementing the conflict minerals reporting requirements. On 15 December 2010, the SEC published proposed rules (the “Proposed Rules“). Shortly before the original implementation deadline set by Section 1502 of the Dodd-Frank Act, the SEC indicated that it plans to issue final rules by the end of 2011. On October 18, 2011, the SEC held a public roundtable (the “Roundtable“) on the agency’s required rulemaking under Section 1502 of the Dodd-Frank Act, which relates to reporting requirements regarding conflict minerals originating in the DRC and adjoining countries.

Scope of the Rule and Definition of Terms
Conflict Minerals

Conflict mineral” is defined in Section 1502 of the Dodd-Frank Act as “columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives”. At the Roundtable, the SEC sought to clarify that Section 1502 is intended to apply to the “3 Ts” (i.e., tin, tantalum and tungsten, the derivatives of cassiterite, columbite-tantalite and wolframite, respectively) plus gold. Section 1502 of the Dodd-Frank Act provides that the conflict minerals reporting applies to persons that “manufacture” or “contract to manufacture” products using conflict minerals.


In the Proposed Rules, the SEC proposed to subject mining companies to the conflict minerals reporting by considering mining to come within the definition of “manufacturing”. While some panelists advocated that mining companies should be subject to conflict minerals reporting because of the integral role they play in the supply chain, the SEC emphasized that it is seeking input specifically on its proposed interpretation that including mining is consistent with the statutory language. The SEC queried whether mining is akin to a transformative process and thus comes within the definition of “manufacturing”. This may suggest that, on this issue, the SEC is striving to stay as closely as possible within the statutory language and may be receptive to the argument that the rules under Section 1502 of the Dodd-Frank Act do not apply to mining companies because such issuers do not “manufacture” “products”. This panelist noted that the definition of “manufacturing” in other contexts excludes mining.

Necessary to the functionality or production

Section 1502 of the Dodd-Frank Act provides that the conflict minerals reporting applies if conflict minerals are “necessary to the functionality or production” of a product manufactured by an issuer. In the Proposed Rules, the SEC is proposing not to define when a conflict mineral is necessary to the functionality or production of a product. However, in the Proposed Rules, the SEC states its view that the rules would apply to a product if the conflict mineral is intentionally included in a product’s production process and is necessary to that process, even if the final product does not contain any conflict minerals. The SEC is also proposing to exclude conflict minerals that are necessary to the functionality or production of a tool or item of capital equipment that is used in the production of the issuer’s products. Finally, the SEC is proposing not to adopt a de minimis exception, especially in light of the fact that many of the consumer products in which conflict minerals are most commonly used contain only relatively miniscule quantities of conflict minerals. There was general consensus among the Roundtable panelists that the SEC’s proposals are appropriate. One industry representative voiced the view that determining whether conflict minerals are “necessary to the functionality or production” of a product could potentially be more burdensome than exercising due diligence on all conflict minerals in an issuer’s supply chain.

Tracking the Supply Chain

If conflict minerals are necessary to the functionality or production of an issuer’s products, Section 1502 of the Dodd-Frank Act requires the issuer to disclose whether the conflict minerals originated in the DRC or an adjoining country. The Proposed Rules would require issuers to make a reasonable country of origin inquiry, but the SEC is proposing not to specify in the rules what constitutes a reasonable country of origin inquiry. The Roundtable panelists generally advocated for adopting a flexible approach for tracing the source of conflict minerals in an issuer’s supply chain. In particular, the panelists agreed that the smelter, or refinery in the case of gold, is the critical “choke point” in the conflict minerals supply chain. International initiatives, such as the EICC-GeSI Conflict-Free Smelter Assessment Program, are already underway to set standards for verifying smelters and refineries that produce conflict-free metals. Such verifications could play an important part in the reasonable country of origin inquiry. It was also suggested that issuers that use conflict minerals can include “flow-down” clauses in their contracts with suppliers, requiring their suppliers to purchase conflict minerals from verified smelters or refineries and in turn requiring their own suppliers to do the same.

Several of the industry representatives advocated that the SEC should adopt internationally recognized due diligence standards, such as those established by the Organisation for Economic Co-operation and Development (OECD), as a non-exclusive “safe harbor”. Under this proposal, an issuer that opted to follow such a standard would be deemed to comply with its obligations to trace the source of its conflict minerals, but this would not be the only means of compliance. Commissioner Walter recognized that it may be appropriate for the SEC to adopt a phased approach to implementation of the conflict minerals reporting. The industry representatives on the panel argued that a phase-in is necessary given that it will likely take several years for the structures necessary for verifying the sources of conflict minerals to mature. These representatives suggested that the SEC’s rules should focus on requiring disclosure of the measures that an issuer undertakes in its reasonable country of origin inquiry rather than prescribing what measures such an inquiry must entail.

One industry representative advocated for the SEC to adopt a classification for minerals of an “indeterminate origin”, even if only temporarily during a phase-in period. This would exempt an issuer from the requirement to prepare a conflict minerals report if, after making a reasonable country of origin inquiry, the issuer is unable to ascertain the origin of the conflict minerals it uses. This proposal for a temporary “indeterminate” category was also made in a comment letter submitted to the SEC by the House Committee on Financial Services.

With regard to conflict minerals that come from recycled or scrap sources, the Roundtable panelists generally recognized both the value in supporting efforts to recycle materials as well as the significant difficulties in tracing the origins of recycled or scrap metals. It was proposed that the SEC should adopt a specific definition of what constitutes recycled or scrap conflict minerals and require issuers to disclose the inquiry undertaken to determine that their conflict minerals come from recycled or scrap sources. However, the Roundtable panelists generally agreed that recycled or scrap minerals should not be subject to the requirement to prepare a conflict minerals report. Under the proposed rules, an issuer is permitted to file a conflict minerals report stating that their conflict minerals were obtained from recycled or scrap sources and provide the basis on which they believe their conflict minerals are recycled or scrap.

Audit of Conflict Minerals Report

If, after making a reasonable country of origin inquiry, an issuer determines that its conflict minerals originated in the DRC or an adjoining country—or, under the Proposed Rules, if the issuer is unable to determine if the conflict minerals originated in the DRC or an adjoining country—the issuer will be required to prepare a conflict minerals report. The conflict minerals report would include a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its conflict minerals and must include a certified independent private sector audit. Under standards established by the Government Accountability Office, such an audit may be either an attestation engagement or a performance audit. An attestation engagement is likely to be more standardized than a performance audit, but can only be conducted by an accounting professional, whereas a performance audit may be conducted by a non-accountant expert. The SEC expressed that it is concerned with minimizing the costs to issuers of its rules, and suggested that requiring a performance audit might be the less costly alternative.

The conflict minerals report must also include a description of the issuer’s products manufactured or contracted to be manufactured containing conflict minerals that are not “DRC conflict free” (a term defined to refer to products that do not contain minerals that “directly or indirectly finance or benefit armed groups in the DRC or an adjoining country”), the facilities used to process those conflict minerals, the conflict minerals’ country of origin and the efforts to determine the mine or location of origin with the greatest possible specificity.

Form and Timing of Conflict Minerals Information and Report

The SEC solicited the views of the Roundtable panelists regarding whether the rules should require issuers to include the conflict minerals disclosure and, if required, conflict minerals report in annual reports filed under the 1934 Act on Form 10-K, Form 20-F or Form 40-F, as applicable. The industry representatives on the panel advocated that the conflict minerals reporting should not be tied to an issuer’s financial reporting, and instead should be provided on Form 8-K/6-K or a new form. These panelists expressed the view that issuers likely will need more time to comply with conflict minerals reporting than for financial reporting. In addition, some of the panelists recommended that the rules should synchronize the timing of conflict minerals reporting for all issuers, to avoid suppliers having to provide information on their conflict minerals for issuers with different fiscal year-ends.


In enacting Section 1502, Congress hoped to remedy what it perceived as the exploitation and trade of conflict minerals originating in the DRC that help 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. The purpose of Section 1502 is to promote transparency and consumer awareness regarding the use of conflict minerals and, ultimately, to discourage the use of conflict minerals by manufacturing and processing companies. Senator Sam Brownback, who introduced an early form of Section 1502 in the proposed Congo Conflict Minerals Act in 2009, said at the time that “the legislation…brings accountability and transparency to the supply chain of minerals used in the manufacturing of many electronic devices. I hope that the legislation will help save lives”. As such, Section 1502 represents the intrusion of foreign policy into federal securities legislation and a further departure from the stated mission of the SEC “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”.

Disclosure Relating to Mine Safety

Section 1503 of the Dodd-Frank Act requires mining companies to include mine safety and health information in their annual and quarterly reports filed with the SEC. It also requires mining companies to file a Form 8-K when they receive certain notices from the Mine Safety and Health Administration (the “MSHA“). The disclosure requirements in the Dodd-Frank Act are based on the safety and health requirements that apply to mines under the Federal Mine Safety and Health Act of 1977 (the “Mine Act“) and therefore, for the most part, only cover foreign private issuers that are regulated by the Mine Act. All foreign private issuers must, however, disclose the total number of mining related fatalities that have occurred in mines operated by them or their subsidiaries.

The mine safety disclosure requirements are currently in effect. However, the SEC is proposing to add the requirements to its rules and forms and address the scope and application of the requirements.

Requirements of the Proposed Rules

Under the proposed rules, mining companies would be required to provide, as an exhibit to their annual and quarterly reports, mine safety information listed in Section 1503 of the Dodd-Frank Act and certain additional disclosure designed to provide context to such information. The Dodd-Frank Act requires companies to disclose:

  • The total number of significant and substantial violations of mandatory health or safety standards that could significantly and substantially contribute to a mine safety or health hazard under section 104 of the Mine Act for which the operator received a citation from MSHA.
  • The total number of orders issued under section 104(b) of the Mine Act.
  • The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health and safety standards under section 104(d) of the Mine Act.
  • The total number of flagrant violations under section 110(b)(2) of the Mine Act.
  • The total number of imminent danger orders issued under section 107(a) of the Mine Act.
  • The total dollar value of proposed assessments from MSHA.
  • A list of the mines that have been notified by MSHA of a pattern of violations or a potential to have a pattern of violations under section 104(e) of the Mine Act.
  • Pending legal actions before the Federal Mine Safety and Health Review Commission.
  • The total number of mining-related fatalities.

The proposed rules would use the language used in Section 1503 of the Dodd-Frank Act to set forth the disclosure requirements, and also provide instructions to mining companies about the information required to be disclosed about penalty assessments and pending legal actions.

For example, in a quarterly report, mining companies would need to report the total amount of penalty assessments proposed during the quarter, and also the total of all assessments outstanding on the last day of the quarter, even if the company is contesting the assessment. Similarly, under the proposal, mining companies would report a pending legal action in the report for the quarter when the legal action began, and also update the information in later reports if there were material developments.

In addition to the Dodd-Frank Act required disclosure, the Commission is proposing that mining companies provide a brief description of each category of violations, orders and citations they are reporting, so that investors can understand the information provided without having to research the Mine Act and MSHA’s rules.

As proposed, the periodic reporting requirements would apply to both U.S. companies and foreign private issuers.

Form 8-K Reporting Requirement

The SEC is also proposing to add a new item to Form 8-K, which would require domestic mining companies to file Form 8-K within four business days after receiving from MSHA three types of notices specified by the Dodd-Frank Act:

  • An imminent danger order under section 107(a) of the Mine Act.
  • Written notice of a pattern of violations under section 104(e) of the Mine Act.
  • Written notice of the potential to have a pattern of such violations.

The proposed Form 8-K item would require a mining company to report the date it received the notice, the type of notice, and the name and location of the mine involved. Foreign private issuers would not be required to file current reports under the proposal. Finally, under the proposal a late filing of the Form 8-K would not affect a company’s eligibility to use Form S-3 short-form registration.

Disclosure Relating to Payments by Resource Extraction Issuers

Under the proposed rules issued by the SEC on December 15, 2010, a resource extraction issuer would be required to disclose certain payments made to a foreign government, including subnational governments, or the U.S. federal government.

In addition, a resource extraction issuer would be required to disclose payments made by a subsidiary or another entity controlled by the issuer. A resource extraction issuer would need to make a factual determination as to whether it has control of an entity based on a consideration of all relevant facts and circumstances. At a minimum, the resource extraction issuer would be subject to disclosure if it otherwise must provide consolidated financial information for the subsidiary or other entity in its financial statements included in its 1934 Act reports.

A resource extraction issuer would be required to disclose payments that are made to further the commercial development of oil, natural gas, or minerals and that are not de minimis. The proposed rules define commercial development of oil, natural gas, or minerals to include exploration, extraction, processing, and export, or the acquisition of a license for any such activity.

The types of payments related to commercial development activities that must be disclosed include:

  • Taxes
  • Royalties
  • Fees (including license fees)
  • Production Entitlements
  • Bonuses

These types of payments generally are consistent with the types of payments that the Extractive Industries Transparency Initiative, which was referenced in the statutory definition of payment, suggests should be disclosed.

The rules would require a resource extraction issuer to provide the following information about payments made to further the commercial development of oil, natural gas, or minerals:

  • Type and total amount of payments made for each project.
  • Type and total amount of payments made to each government.
  • Total amounts of the payments, by category.
  • Currency used to make the payments.
  • Financial period in which the payments were made.
  • Business segment of the resource extraction issuer that made the payments.
  • The government that received the payments, and the country in which the government is located.
  • The project of the resource extraction issuer to which the payments relate.

A resource extraction issuer would be required to provide the information annually in its 1934 Act annual report. The information would be included in two exhibits — one exhibit that would be filed in text format, which would enable investors to easily read the disclosure about payment information without additional computer programs or software, and another exhibit filed in eXtensible Business Reporting Language (XBRL) format that would be readable through a viewer.


One concern in relation to Section 1504 is its relationship to the U.S. Foreign Corrupt Practices Act (the “FCPA“). Interestingly, the legislative debates that led to the enactment of the FCPA in the late 1970s expressed a clear preference for prohibition-based restrictions on payments from businesses to foreign governments, rather than a disclosure-based system. Accordingly, the FCPA currently limits the types of payments that public companies can make to foreign officials and governments. It does not impose any requirement that companies disclose payments that are FCPA-compliant. Section 1504 represents a shift in policy, creating a hybrid prohibition- and disclosure– based scheme governing payments to foreign governments for those companies that engage in the commercial development of oil, natural gas, or minerals. Pending further interpretive guidance by the SEC, Section 1504 potentially imposes on affected issuers increased compliance costs (in addition to FCPA compliance costs currently faced by such companies), including both the internal costs of establishing appropriate disclosure procedures, and the cost of having to publicly disclose payments made to foreign governments, which may implicate public relations concerns, and could put U.S. reporting issuers at a competitive disadvantage in commercial negotiations with foreign governments vis-à-vis companies not subject to 1934 Act reporting.