Recently, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the "SEC") released unofficial guidance in a question and answer format (“FAQ Guidance”) providing responses to certain interpretive questions that have arisen in connection with Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Conflict Minerals Rule”). The FAQ Guidance marks the first guidance by the U.S. government with respect to the Conflict Minerals Rule since the SEC‟s release in August 2012.
The Conflict Minerals Rule requires certain filing companies to determine whether they “manufacture” or “contract to manufacture” any “product” containing Conflict Minerals1 that originated in Covered Countries2 for which the Conflict Mineral is necessary to the product's functionality or production. For more information on the specifics of the Conflict Minerals Rule, please read our memorandum dated September 25, 2012, available at http://www.friedfrank.com/index.cfm?pageID=25&itemID=6606. The FAQ Guidance provides interpretive guidance to assist companies in determining the extent to which they are subject to the Conflict Minerals Rule, and guidance pertaining to certain requirements for issuers that are required to make a disclosure pursuant to the Conflict Minerals Rule.
We have set forth below brief summaries of the takeaways of the FAQ Guidance, which generally fall into two categories: guidance on threshold interpretive questions (i.e., questions that determine whether a company or product is subject to the Conflict Minerals Rule) and guidance on specific reporting requirements of the Conflict Minerals Rule (i.e., requirements that arise only after a company has determined that it has diligence and/or reporting obligations for certain of its products that are subject to the Conflict Minerals Rule). The full FAQ Guidance is available at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm.
Guidance Pertaining to Threshold Interpretive Questions
Packaging of Product Not Considered a “Product”
If a Conflict Mineral is contained in the packaging or container that an issuer manufactures or contracts to manufacture, which the issuer uses to display, transport, or sell a product the issuer also manufactures or contracts to have manufactured, such packaging or container would not be considered “necessary to the functionality or production” of the product. This guidance is applicable even where such package or container is necessary to preserve the usability of the product until the time the product is purchased or used, due to the fact that the packaging or container sold with a product is not considered to be a part of the product, and once a consumer begins to use such product, the packaging or container is usually discarded. Thus, only a Conflict Mineral that is contained in the product itself would be considered “necessary to the functionality or production” of such product.
However, if an issuer manufactures or contracts to manufacture the packaging or container containing Conflict Minerals and such packaging or container is sold separately from the product, the packaging or container would then be considered a distinct product for purposes of the Conflict Minerals Rule.
“Mining Activities” Exclusion Includes Activities Customarily Associated with Mining
In determining whether an issuer manufactures a product, Form SD states that an issuer that mines Conflict Minerals would not be considered to be manufacturing those minerals for purposes of the Conflict Minerals Rule. The FAQ Guidance states that other activities that are customarily associated with mining are also excluded (i.e., transporting minerals to a processing facility, processing minerals, smelting, and transporting minerals to a refinery).
Specification of Logo on Generic Product Not Considered “Contracting to Manufacture”
Etching or otherwise marking a generic product that is manufactured by a third party with the issuer‟s brand, marks, logo, label, serial number, or other identifier is not considered to be “contracting to manufacture” if this is the only degree of control the issuer has exercised over the third party manufacturer.
Issuers Must Report on Manufactured or Contracted to be Manufactured Products Incorporating Generic Components Containing Conflict Minerals
If an issuer manufactures or contracts to manufacture a product that incorporates a generic component containing Conflict Minerals, the issuer is subject to the Conflict Minerals Rule and must conduct a reasonable country of origin inquiry (and any additional required diligence) with respect to Conflict Minerals included in such generic component. The FAQ Guidance confirms that there is no distinction between the components of a product that an issuer directly manufactures or contracts to manufacture and the “generic” ones it purchases to include in a product.
Equipment Used to Provide Services Not Considered “Products”
An issuer is not required to file a report on Form SD if it manufactures or contracts to manufacture equipment containing Conflict Minerals where such equipment is utilized in connection with a service provided by the issuer to the extent the equipment is retained by the service provider, is required to be returned to the service provider, or is intended to be abandoned by the customer following the terms of service, as such equipment would not qualify as a “product.”
For example, an issuer that operates a cruise line would not be required to file a report regarding the presence of Conflict Minerals in the cruise ships that the issuer manufactures or contracts to have manufactured, as the cruise ships are not the product that the issuer sells.
Tools Used in Manufacturing Sold Secondarily Not Considered “Products”
If an issuer manufactures or contracts to manufacture tools, machines, or other equipment containing Conflict Minerals for use by the issuer in the manufacture of products, and then subsequently sells such tools, machines, or equipment, the issuer is not required to file a report on Form SD. Such items were not “products” of the issuer when they were manufactured or contracted to be manufactured, and they are not transformed into “products” by virtue of the fact that they subsequently enter the stream of commerce.
Conflict Minerals Rule Applies to Voluntary Filers
Every registrant that files reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), including issuers that are not required to file such reports, is a “registrant” for purposes of the Conflict Minerals Rule and, thus, has an obligation to address the threshold interpretive questions under such rule.
However, registered investment companies that are required to file reports pursuant to Rule 30d-1 under the Investment Company Act of 1940 are not subject to the Conflict Minerals Rule.
Consolidated Subsidiaries Subject to Conflict Minerals Rule Requirements
Where the consolidated subsidiary of an issuer manufactures or contracts to manufacture a product for which Conflict Minerals are necessary to the functionality or production of such product, the issuer must determine the origin of the relevant Conflict Minerals and must make a disclosure, if required, for itself and all of its consolidated subsidiaries.
Guidance Pertaining to Specific Reporting Requirements
Description of Products in Form SD Based on Issuer’s Own Facts and Circumstances
If an issuer manufactures or contracts to manufacture products that have not been found to be “DRC conflict free” or that are “DRC conflict undeterminable,” such issuer is required to file a report on Form SD pursuant to the Conflict Minerals Rule, and must provide a description of such products. The FAQ Guidance states that an issuer may describe its products based on its own facts and circumstances, and does not need to describe its products using model numbers. However, in addition to such description by the issuer, the Form SD must clearly state that such products “have not been found to be „DRC conflict free‟” or are “DRC conflict undeterminable,” as applicable.
Form SD and Independent Private Sector Audit Required for Products Containing Conflict Minerals Determined to be “DRC Conflict Free”
If an issuer manufactures or contracts to manufacture products that contain Conflict Minerals from Covered Countries, and the issuer determines that such products are “DRC conflict free,” such issuer is still required to file a report on Form SD with a Conflict Minerals Report that is independently audited by a private sector auditor. However, the FAQ Guidance states that, under such circumstances, the issuer is not required to disclose which of its products contain Conflict Minerals in its Conflict Minerals Report, or to disclose certain other facts, the disclosure of which would otherwise be mandatory if the products were not found to be “DRC conflict free.”
Transition Period Permitted for IPOs and Acquired Entities
If an issuer acquires or obtains control over a company that manufactures or contracts to manufacture products containing Conflict Minerals which are necessary to the functionality or production of such products where such company previously has not been obligated to provide a report on Form SD for such minerals, Form SD provides for an eight-month reporting cushion for the issuer. The FAQ Guidance states that a similar reporting cushion is also available to issuers that conduct an initial public offering. Under such circumstances, an issuer that conducts an initial public offering is not required to file a report on Form SD until the first reporting calendar year that begins no sooner than eight months after the effective date of the initial public offering registration statement.
Eligibility to File Form S-3 Not Forfeited by Failure to Timely File Form SD
The failure to timely file a Form SD relating to Conflict Minerals does not impact an issuer‟s eligibility to use Form S-3 (an SEC short-form registration statement), as the relevant Form S-3 timely reporting requirements do not apply to Form SD.
The FAQ Guidance provides detailed answers to many questions regarding the interpretation of key terms and requirements under the Conflict Minerals Rule; however, many interpretive questions are left unanswered. It is unclear whether the SEC will publish additional guidance to aid companies in navigating this complex rule which frequently requires extensive diligence and detailed reporting.
Companies are still working on “best practices” regarding the application of the Conflict Minerals Rule. We continue to support our clients as they assess the threshold requirements of the Conflict Minerals Rule, and otherwise determine the disclosure and ancillary impacts of the rule on their businesses.