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A Few Things in the DFA You May Not Have Heard Much About
07/28/2010
By Cydney Posner

http://www.cooley.com/shownewsbrief.aspx?Show=64089

Below are a few additional items in the Dodd-Frank Act that you may or may not have heard about (there are probably plenty more to come to light):

BENEFICIAL OWNERSHIP AND SHORT-SWING PROFIT REPORTING (Sections 766 and 929R)

The Act deletes the requirement in the Exchange Act that beneficial ownership reports under Section 13 be sent to the issuer and the applicable exchange and that short-swing trading reports under Section 16 be sent to the applicable exchange. In addition, for purposes of Sections 13 and 16, the Act expands the concept of acquisition of beneficial ownership of an equity security to include the purchase or sale of a security-based swap, to the extent determined by the SEC.

WHISTLEBLOWER PROTECTION (Section 922 et seq.)

New Section 21E of the Exchange Act adds incentives and protection for whistleblowers in any "covered judicial or administrative action" brought by the SEC under the securities laws that results in monetary sanctions exceeding $1,000,000. The awards payable to whistleblowers who voluntarily provide original information to the SEC leading to the successful enforcement of a covered <br>judicial or administrative action, or related action, can range from 10 % to 30% of the amount of the monetary sanctions collected in the action or related actions. In addition, the Act expressly prohibits retaliation against whistleblowers. The prospect of a 30% reward just might be enough to encourage some otherwise shy whistleblowers, but in some cases, it may just be an opportunity for some (perhaps disgruntled employees?) to try to catch the gravy train.

SHORT SALE REFORMS (Section 929X)

You may recall that in the middle of the crisis, there was a lot of concern about short sales and their potential use to manipulate stock prices. The DFA amended Section 13(f) of the Exchange Act to add a new section requiring the SEC to issue rules for the public disclosure of the aggregate amount of the number of short sales of each security, and any additional information determined by the SEC. (Presumably this disclosure will be limited to investment managers.) The DFA also makes it unlawful for any person, directly or indirectly, to effect a manipulative short sale of any security. The SEC will also be issuing rules about enforcement and related remedies. In addition, Section 15 was amended to require brokers to notify their customers that they may elect not to allow their fully paid securities to be used in connection with short sales. Whether these rules will be enough to put an end to concerns about short sale manipulation remains to be seen.

CONFLICT MINERALS ORIGINATING IN THE DEMOCRATIC REPUBLIC OF THE CONGO (Section 1502)

Reportedly, this provision was co-sponsored by Senators Brownback and Feingold. That odd pairing should be enough to get your attention.

The provision is designed to help address the exploitation and trade of conflict minerals, originating in the Democratic Republic of the Congo, which are then used to finance "conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein…."

The Act adds new Section 13(p) of the Exchange Act, which requires the SEC to issue new rules within 270 days after enactment mandating annual disclosure by reporting companies of whether "conflict minerals" that are "necessary to the functionality or production of a product" manufactured by the company in the reporting year originated in the Democratic Republic of the Congo (the "DRC") or an adjoining country. "Conflict minerals'' include

- columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives; or
- any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.

(Note, because of a lack of clarity in the drafting, some commentators are contending that the provision may even apply to private companies. The SEC rules should straighten that out).

The Washington Post reports that NGOs and others are concerned that DRC groups are financing themselves with minerals such as gold and the "three T's" -- tin, tungsten and tantalum (apparently, derivatives of the minerals identified above). The Post reports that the new provision could apply to electronics companies (laptops, cell phones, PDAs, DVD players, televisions), which are major users of Congolese tantalum, but also to companies that use tin and gold. Conflict minerals may also be present in medical devices. An "adjoining country" is one that shares an internationally recognized border with the Congo: looking at a map, that's Angola, Burundi, Central African Republic, Republic of the Congo, Rwanda, Sudan, Tanzania, Uganda, Zambia.

When the conflict minerals used in the company's products did originate in one of those countries, the company must submit to the SEC a report that includes the following:

- a description of the measures taken by the company to exercise due diligence on the source and chain of custody of the minerals, which measures must include an independent private sector audit of the report submitted through the SEC that is conducted in accordance with standards established by the Comptroller General, in accordance with SEC rules and in consultation with the Secretary of State; and
- a description of the products manufactured or contracted to be manufactured that are not DRC conflict free (i.e., products that do not contain minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country), 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.

The company submitting the report must certify the audit described above, which will constitute a critical component of due diligence in establishing the source and chain of custody of the minerals, unless it's determined to be unreliable. The disclosure must also be posted on the company's website. <br> <br>The Post reports that "[m]any firms in the high-tech sector have been trying to ensure their suppliers don't use ‘conflict minerals,' jointly running a pilot program at smelters to identify where minerals come from." However, "U.S. executives say it can be exceedingly difficult to figure out whether there are ‘conflict minerals' in their products. Such minerals may, for example, be smuggled from Congo through Rwanda, mixed with ore from other countries in a smelter in Kazakhstan and then sold to a company in Southeast Asia that supplies a parts manufacturer in China…. Robert Hormats, the undersecretary of state for economic affairs, said in an interview that tracing the source of minerals is much more complicated than tracing the source of diamonds. For one thing, he said, diamonds ‘aren't melted down.' In addition, the rebels sometimes gain or lose control over mines."

If the SEC was reluctant to comment on SOX 402 (loans to executives, reportedly on the basis that it really wasn't within the SEC's province), it should be just ecstatic with its role in developing these rules. There is a fair amount of uncertainty regarding the provisions –e.g., the rules for the required due diligence, the meaning of "necessary to the functionality or production of a product" – that will need to be clarified. Companies all along the supply chain may be affected, whether or not they themselves are required to report.

REPORTING REQUIREMENTS REGARDING COAL OR OTHER MINE SAFETY (Section 1503)

Public reporting companies that operate, or have subsidiaries that operate, coal or other mines will be required to include, in each periodic report filed with the SEC, information regarding health and safety and other violations at each mine, including the total number of "flagrant violations" and " imminent danger orders," the total dollar value of proposed assessments for violations and the total number of mining-related fatalities. Operators will also have to file an 8-K regarding the receipt of an imminent danger order and other specified health and safety notices.

DISCLOSURE OF PAYMENTS BY RESOURCE EXTRACTION ISSUERS (Section 1504)

The Act adds Section 13(q) of the Exchange Act requiring each public "resource extraction issuer" to include in its annual report information relating to any payment made by company, its subsidiary or any other company under its control to a foreign government (including companies owned by that government) or the Federal Government for the purpose of the commercial development of oil, natural gas or minerals, including the type and total amount of the payments made for each project and made to each government. "Commercial development of oil, natural gas, or minerals" includes exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals, or the acquisition of a license for any such activity, as determined by the SEC. "Payment" includes any (not de minimis) payment made to further the commercial development of oil, natural gas or minerals, including taxes, royalties, fees (e.g., license fees), production entitlements, bonuses and other material benefits, that the SEC determines to be part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals. The information is required to be in XBRL. The SEC is required to issue rules within 270 days after enactment.