PRA Supporting Statement Section 1502 - FINAL - Nov 13 2012

SUPPORTING STATEMENT FOR FINAL RULE UNDER THE SECURITIES
EXCHANGE ACT OF 1934 AND DODD-FRANK WALL STREET REFORM
AND CONSUMER PROTECTION ACT
This supporting statement is part of a submission under the Paperwork Reduction
Act of 1995 (“PRA”)1
A.

JUSTIFICATION
1.

CIRCUMSTANCES MAKING THE COLLECTION OF
INFORMATION NECESSARY

In Release No. 34-67716 (“Adopting Release”),2 the Securities and Exchange
Commission (“Commission”) adopted new Rule 13p-1 under the Securities Exchange
Act of 1934 (“Exchange Act”) and new Exchange Act Form SD to implement new
Exchange Act Section 13(p).3 Section 1502 (“Conflict Minerals Statutory Provision”) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)4
amends the Exchange Act by adding Section 13(p), which relates to new disclosure and
reporting obligations by issuers concerning “conflict minerals”5 that originated in the
Democratic Republic of the Congo (“DRC”) or an adjoining country6 (together with the
DRC, the “Covered Countries”). Conflict minerals are defined by the Dodd-Frank Act as
columbite-tantalite, cassiterite, gold, wolframite, or their derivatives.7 Exchange Act
Section 13(p) requires the Commission to promulgate disclosure and reporting
regulations regarding the use of conflict minerals from the Covered Countries.8
Exchange Act Section 13(p) requires that a “person described”9 disclose annually
whether any “conflict minerals” that are “necessary to the functionality or production of a
product manufactured by such person”10 originated in the Covered Countries, and make
that disclosure publicly available on the issuer’s Internet website.11 If such a person’s
1

44 U.S.C. §3501, et seq.

2

Conflict Minerals, Release No. 34-67716 (Aug. 22, 2012) [77 FR 56274].

3

15 U.S.C. 78m(p).

4

Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).

5

See Section 1502(e)(4) of the Dodd-Frank Act.

6

See Section 1502(e)(1) of the Dodd-Frank Act.

7

See Section 1502(e)(4) of the Dodd-Frank Act.

8

See Exchange Act Section 13(p)(1)(A).

9

See Exchange Act Section 13(p)(2).

10

Exchange Act Section 13(p)(2)(B).

11

See Exchange Act Section 13(p)(1)(E).

conflict minerals originated in the Covered Countries, that person must submit a report
(“Conflict Minerals Report”) to the Commission that includes a description of the
measures taken by the person to exercise due diligence on the minerals’ source and chain
of custody.12
Under Exchange Act Section 13(p), the measures taken to exercise due diligence
“shall include an independent private sector audit” of the Conflict Minerals Report that is
conducted according to standards established by the Comptroller General of the United
States, in accordance with the promulgated rules, in consultation with the Secretary of
State.13 The person submitting the Conflict Minerals Report must also identify the
independent private sector auditor14 and certify the independent private sector audit.15
Further, according to Exchange Act Section 13(p), the Conflict Minerals Report must
include “a description of the products manufactured or contracted to be manufactured that
are not DRC conflict free,”16 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.”17
The final regulation contains a “collection of information” requirement
within the meaning of the PRA. The Commission published a notice requesting
comment on the collection of information requirements in Release No. 34-63547
(“Proposing Release”) for the proposed rules and amendments.18 The proposed
rules and amendments would have amended one regulation and three forms. In
response to comments received from the public, the Commission decided to adopt a
new disclosure form, rather than amend existing rules and forms. The Commission
has submitted the new collection of information requirement to the Office of
Management and Budget (“OMB”) for review in accordance with the PRA.19
The title for the collection of information is:


“Form SD” (a new collection of information).

12

See Exchange Act Section 13(p)(1)(A)(i).

13

See id.

14

See Exchange Act Section 13(p)(1)(A)(ii).

15

As noted in Exchange Act Section 13(p)(1)(B), if an issuer is required to provide a Conflict Minerals
Report that includes an independent private sector audit, that issuer “shall certify the audit” and that
certified audit “shall constitute a critical component of due diligence in establishing the source and chain of
custody of such minerals.”
16

The term “DRC conflict free” is defined in Exchange Act Section 13(p)(1)(A)(ii) and Exchange Act
Section 13(p)(1)(D).
17

See Exchange Act Section 13(p)(1)(A)(ii).

18

Conflict Minerals, Release No. 34-63547 (Dec. 15, 2010) [75 FR 80948].

19

44 U.S.C. 3507(d) and 5 CFR 1320.11.

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2.

PURPOSE AND USE OF THE INFORMATION COLLECTION

The purpose of the new regulation is to implement Section 1502 of the DoddFrank Act that, as discussed above, added new Section 13(p) to the Exchange Act.
Exchange Act Section 13(p) requires the Commission to promulgate rules requiring
issuers with conflict minerals that are necessary to the functionality or production of a
product manufactured by such person to disclose annually whether any of those minerals
originated in the Covered Countries. New Exchange Act Rule 13p-1 and new Form SD
require reporting issuers that manufacture products or contract to have products
manufactured that contain conflict minerals necessary to the functionality or production
of those products to conduct a reasonable inquiry into the origin of those conflict
minerals. Based on this inquiry, an issuer may have to conduct a more extensive inquiry
that requires the exercise of due diligence on the source and chain of custody of its
conflict minerals. Depending on the results of the due diligence, the issuer may have to
describe the products containing conflict minerals that have not been found to be “DRC
conflict free” in a Conflict Minerals Report that is filed as an exhibit to Form SD, a new
specialized disclosure form, and obtain an independent private sector audit of the Conflict
Minerals Report. The information collected on Form SD may be used by interested
parties to determine whether an issuer’s products contain conflict minerals and, if so, the
source and chain of custody of an issuer’s conflict minerals.
3.

CONSIDERATION GIVEN TO INFORMATION TECHNOLOGY

Form SD is filed electronically with the Commission using the Commission’s
Electronic Data Gathering and Retrieval (“EDGAR”) system.
4.

DUPLICATION OF INFORMATION

The Commission is not aware of any rules that conflict with or substantially
duplicate the final regulation.
5.

REDUCING THE BURDEN ON SMALL ENTITIES

The final regulation applies to all issuers that file reports with the Commission
pursuant to Exchange Act Sections 13(a) or 15(d) that have conflict minerals that are
necessary to the functionality or production of a product manufactured by the issuer or
contracted by the issuer to be manufactured. Generally, the requirements of the final
regulation do not vary based on the size of the issuer. Smaller reporting companies,
however, are permitted to use the temporary “DRC conflict undeterminable” transition
period, if applicable, for four years instead of the two-year transition period for all other
issuers. The Commission believes that the final regulation would affect small entities
with necessary conflict minerals.

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6.

CONSEQUENCES OF NOT CONDUCTING COLLECTION

To accomplish the goal of helping end the human rights abuses in the DRC
caused by the conflict, Congress chose to use the securities laws disclosure requirements
to bring greater public awareness of the source of issuers’ conflict minerals and to
promote the exercise of due diligence on conflict mineral supply chains. By doing so, the
Commission understands Congress’s main purpose to have been to attempt to inhibit the
ability of armed groups in the Covered Countries to fund their activities by exploiting the
trade in conflict minerals. Reducing the use of such conflict minerals is intended to help
reduce funding for the armed groups contributing to the conflict and thereby put pressure
on such groups to end the conflict. The Congressional object is to promote peace and
security in the Covered Countries. Section 1502 amended the Exchange Act by adding
new Section 13(p), which requires the Commission to promulgate disclosure and reporting
regulations regarding the use of conflict minerals from the Covered Countries. The new
rule and new form implement Exchange Act Section 13(p) by setting forth the conflict
minerals disclosure requirements for issuers. Failure to require the collection of
information would frustrate the statutory intent of Exchange Act Section 13(p) and
Section 1502 of the Dodd-Frank Act.
7.

SPECIAL CIRCUMSTANCES
None

8.

CONSULTATIONS WITH PERSONS OUTSIDE THE AGENCY

In the Proposing Release, the Commission solicited comment on the new
“collection of information” requirements and associated paperwork burdens.
Additionally, to facilitate public input on rulemaking required by the Dodd-Frank Act,
members of the public interested in making their views known were invited to submit
comment letters in advance of the official comment period for the proposed rules.20
These comments were received before the Commission published the Proposing Release.
Many commentators provided comments at the pre-proposal stage, as well as after the
Proposing Release was published. Additionally, some commentators provided responses
to comment letters submitted by other commentators to the Commission.
Also, in response to the suggestion by some commentators that it extend the
comment period to allow the public additional time to thoroughly consider the matters
addressed in the Proposing Release and to submit comprehensive responses,21 the
20

The Commission provided a series of e-mail links, organized by topic, for these letters on its website at
http://www.sec.gov/spotlight/regreformcomments.shtml.
21

See, e.g., Advanced Medical Technology Association et al. (Dec. 16, 2010); Representative Spencer
Bachus, Chairman, Committee on Financial Services, U.S. House of Representatives (Jan. 25, 2011);
Department of State (Jan. 25, 2011); Jewelers Vigilance Committee et al. (Jan. 10, 2011); National Mining
Association (Jan. 3, 2011); National Stone, Sand Gravel Association (Jan. 13, 2011); and World Gold
Council (Jan. 7, 2011).

4

Commission extended the original comment period for an additional 30 days.22 Further,
in response to suggestions from commentators,23 the Commission held a public
roundtable on October 18, 2011 at which invited participants, including investors,
affected issuers, human rights organizations, and other stakeholders, discussed their
views and provided input on issues related to the rulemaking.24 In conjunction with the
roundtable, the Commission requested further comment.25 The Commission and staff
also participated in an ongoing dialogue with representatives of various market
participants and other government agencies through meetings and public conferences.
Although the Commission received only one comment letter that addressed the
PRA explicitly,26 it received a number of other comment letters and submissions that
discussed the costs and burdens to issuers generally that would have an effect on the PRA
analysis.27 These letters are all available to the public on the SEC’s website at
http://www.sec.gov/comments/s7-40-10/s74010.shtml. The Commission considered all
comment letters received prior to publication of the final regulation. A copy of the
Adopting Release is attached. The Commission adopted the final regulation with
modifications in response to commentators’ concerns.
9.

PAYMENT OR GIFT TO RESPONDENTS
Not applicable.

22

Conflict Minerals, Release No. 34-63793 (Jan. 28, 2011) [76 FR 6110].

23

See, e.g., letter from United States Chamber of Commerce (Feb. 28, 2011).

24

See Press Release, Securities and Exchange Commission, SEC Announces Agenda and Panelists for
Roundtable on Conflict Minerals (Oct. 14, 2011), available at http://www.sec.gov/news/press/2011/2011210.htm.
25

Roundtable on Issues Relating to Conflict Minerals, Release No. 34-65508 (Oct. 7, 2011) [76 FR
63573].
26

See letter from National Association of Manufacturers (Mar. 2, 2011).

27

See, e.g., letters from Assent Compliance (Dec. 19, 2011), Barrick Gold Corporation (Feb. 28, 2011),
Business Roundtable (Mar. 2, 2011), Claigan Environmental Inc. (Oct. 28, 2011), Claigan Environmental
Inc. (Dec. 1, 2011), Claigan Environmental Inc. (Dec. 16, 2011), Competitive Enterprise Institute (Mar. 2,
2011), Competitive Enterprise Institute (Aug. 22, 2011), Communications and Information Network
Association of Japan et al. (Mar. 2, 2011), CTIA – The Wireless Association (Mar. 1, 2011), Ford Motor
Company (Mar. 2, 2011), Howland Greene Consultants LLC (Jan. 28, 2011), IPC – Association
Connecting Electronics Industries (Mar. 2, 2011), ITRI Ltd. (Jan. 27, 2011), ITRI Ltd. (Feb. 25, 2011),
ITRI Ltd. (Oct. 19, 2011), National Association of Manufacturers (Mar. 2, 2011), National Retail
Federation (Mar. 2, 2011), Personal Care Products Council (Mar. 1, 2011), Representative Christopher J.
Lee (Feb. 3, 2011), Society of Corporate Secretaries and Governance Professionals (Jun. 21, 2011),
TriQuint Semiconductor, Inc. (Jan. 26, 2011), Tulane University, Payson Center for International
Development (Oct. 25, 2011), United States Chamber of Commerce (Feb. 28, 2011), United States
Chamber of Commerce (Jul. 18, 2011), United States Chamber of Commerce (Nov. 29, 2011), and World
Gold Council (Jan. 7, 2011).

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10.

CONFIDENTIALITY
Not applicable.

11.

SENSITIVE QUESTIONS
Not applicable.

12/13. ESTIMATES OF HOUR AND COST BURDENS
For purposes of the PRA for the final regulation, the Commission estimates the
total annual increase in the paperwork burden for all affected issuers to comply with the
collection of information requirements in our final regulation is approximately 2,225,273
hours of issuer personnel time and approximately $1,178,378,167 for the services of
outside professionals. These estimates include the time and cost of collecting the
information, preparing and reviewing disclosure, and submitting documents. In this
regard, the Commission includes due diligence, which includes updating information
technology systems and obtaining an independent private sector audit, as part of
collecting information. The Commission estimates that the total cost for issuers to satisfy
their due diligence is $1,030,026,667. To derive the total estimated cost for the services
of outside professionals, the Commission added this estimate to its estimate of the cost to
issuers to hire outside professionals to prepare and review disclosure, submit documents,
and retain records, which is $148,351,500. The Commission estimates that
approximately 5,994 issuers will be affected the regulation and will be required to
provide disclosure on Form SD.
As discussed more fully in the PRA section of the attached Adopting Release, the
Commission received a number of comments regarding the estimated costs of the
proposed rules, particularly setting up the overall supply chain tracking systems and
conducting an audit. For the PRA estimate of the due diligence costs, the Commission
relied primarily on the cost estimates from a manufacturing industry association
commentator and a university group commentator and, to a lesser extent, the Commission
also relied on an electronic interconnect industry association commentator’s estimates.
After thoroughly considering each comment letter, the Commission determined
that it was appropriate to modify and/or expand upon some of the estimates and
methodologies submitted by commentators to reflect data and information submitted by
other commentators, as well as the Commission’s own judgment and experience. The
Commission’s considered estimate of the total costs thus reflects these synthesized data
and analyses. Therefore, its overall estimate regarding the costs of conducting due
diligence, including the audit, is based on the modified cost figures.
To estimate the overall costs of conducting due diligence, including the audit, the
Commission averaged the modified estimates from a manufacturing industry association
commentator and a university group commentator. The average of these two costs is
approximately $1,030,026,667.
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The few estimates that the Commission received from commentators regarding
the number of hours it would take issuers to prepare and review the proposed disclosure
requirements varied widely. The commentators included a semiconductor company,
university group commentator, and manufacturing industry association commentator. In
calculating the number of hours necessary to prepare and review the disclosure required
by the final regulation, the Commission derived an average based on the estimates
provided by a semiconductor company commentator and university group
commentator.28 It determined that each affected issuer, on average, would spend 495
burden hours preparing and reviewing the disclosure. The Commission assumed that
75% of the burden of preparation would have been carried by the issuer internally
(approximately 371.25 hours per issuer) and that 25% of the burden of the preparation
(approximately 123.75 hours per issuer) would have been carried by outside professionals
retained by the issuer at an average cost of $200 per hour.29 The portion of the burden
carried by outside professionals would have been reflected as a cost, while the portion of
the burden carried by the issuer internally would have been reflected in hours. Therefore,
the total number of internal preparation hours for affected issuers would be 2,225,273
hours. Similarly, the total cost for external preparation for affected issuers would be
$148,351,500.
The following table illustrates the estimated changes in annual compliance burden
in the collection of information in hours and costs for the new Exchange Act specialized
disclosure report that will result from the final regulation. The burden hours figure is the
2,225,273 internal burden hours estimate for preparing the disclosure. The Commission
is adding the $148,351,500 estimate of external professional costs for preparing the
disclosure to the $1,030,026,667 estimate of conducting due diligence, including the
audit, to determine the $1,178,378,167 professional costs in the below table.

28

The Commission did not include the two-hour figure from a manufacturing industry association
commentator in its estimate because it was so much lower than the other two estimates and did not appear
to include all the necessary steps to comply with the proposed rules. Instead, this estimate was based only
on the time required to make changes to an issuer’s corporate compliance policies and supply chain
operating procedures. Also, a university group commentator specifically disagreed with this estimate and
the manufacturing industry association commentator acknowledged that these actions may take
“considerably more than two hours.”
29

A university group commentator estimated that outside professionals would cost $200 per hour because
it believed that “a substantial portion” of required consulting work will be done by “lower cost
environmental and sustainability consulting firms” instead of large accounting firms that would be more
expensive. The Commission frequently uses a $400 per hour estimate in our PRA analysis on the
assumption that attorneys will be involved in the preparation of the securities law disclosures required by
its rules. The disclosure required by the final regulation may likely involve work by other types of
professionals, so that the $200 per hour estimate may be more appropriate in this circumstance.

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Form

SD

Current
Annual
Responses

Final
Annual
Responses

Current
Burden
Hours
(A)

Increase in
Burden Hours
(B)

Final
Burden Hours
(C)=(A)+(B)

Current
Professional
Costs
(D)

Increase in
Professional Costs
(E)

Final Professional
Costs
(F)=(D)+(E)

……

5,994

……….

2,225,273

2,225,273

……….

$1,178,378,167

$1,178,378,167

14.

COSTS TO FEDERAL GOVERNMENT

The Commission estimates that the cost of preparing the final regulation and new
form will be approximately $150,000.
15.

REASON FOR CHANGE IN BURDEN
Not applicable.

16.

INFORMATION COLLECTION PLANNED FOR STATISTICAL
PURPOSES
Not applicable.

17.

APPROVAL TO OMIT OMB EXPIRATION DATE

We request authorization to omit the expiration date on the electronic version of
this form for design and scheduling reasons. The OMB control number will be displayed.
18.

EXCEPTIONS TO CERTIFICATION FOR PAPERWORK REDUCTION
ACT SUBMISSIONS
Not applicable.

B.

STATISTICAL METHODS
Not applicable.

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