- The SEC adopted conflict minerals disclosure rules last month on a 3-2 vote. The final rules, all 356 pages of them, are here. Conflict mineral reports on new Form SD ("Specialized Disclosure") must be "filed" by May 31 of each year beginning in 2014. The report covers calendar years, irrespective of an issuer’s fiscal year, and the first report covers the reporting period beginning January 1, 2013—just three and a half months from now. Really. A few useful resources:
- The SEC press release, here, includes a fact sheet that outlines the rule requirements.
- A useful disclosure flowchart is here (and on page 33 of the release).
- A Conflict Minerals Resource Center is here.
- A sampling of the many memos summarizing the rule requirements is here and here.
- Expect auditors in particular to start serving up systems for rule compliance. See, e.g., here and here.
You may now start scrambling to react to the rule requirements, which likely will entail at least: (1) figuring out which of your products use tungsten, tantalum, tin or gold, whether those materials are “necessary to the functionality or production” of the product, and, if not, whether they can be replaced so you don’t need to file a report; (2) if you use conflict minerals, developing a process under OECD or other appropriate guidelines (see here) to trace their sources that can be replicated and taught to responsible employees, and consulting an independent auditor to ensure your process is up to snuff.
A few interesting changes in the final rule:
- The report must be made as an exhibit to the new Form SD rather than as an exhibit to Form 10-K, perhaps an explicit acknowledgement by the SEC that the disclosure is weird. A draft taxonomy for the form is here. The report also must be available on the issuer’s website.
- The rules recognize the burden of compliance for users of recycled or scrap conflict minerals, who still must file a Form SD but whose minerals derived from those sources are deemed "conflict free."
- For a two-year transition period (four years for smaller reporting companies), products may be designated "DRC conflict undeterminable" if a company can’t determine whether the minerals in its products originated in a covered country or financed or benefited armed groups in a covered country.
- The rule includes an "audit objective" to opine on whether the design of the diligence measures conforms to the OECD framework or other appropriate framework and whether the measures were followed.
The rules continue to be controversial, and the 3-2 adoption vote reflects the dissatisfaction by some Commissioners that appropriate executive muscle wasn’t flexed to, for example, exempt de minimis mineral amounts or smaller issuers, or to make rule compliance cheaper. Some question whether, despite good intentions, the rules will help or hurt people in the DRC (see Commissioner Paredes’ statement, here), and, more philosophically, when the SEC’s mandate to protect investors extended to saving their souls. See, e.g., here.
As noted last month, the rules may still be subject to challenge in the D.C. Circuit Court (see here), particularly given the disparity among estimates of the rule’s costs. Anticipating this, the SEC included a savings clause in the release ("such invalidity shall not affect other provisions . . . that can be given effect without the invalid provision").
- The SEC also adopted rules regarding the disclosure of payments by resource extraction issuers, here, also on Form SD. In contrast to conflict mineral rules, these are anticipated to apply "merely" to 1,101 oil, natural gas and mining companies, and compliance costs are estimated to be "lots" less. Summaries of the rules are here, here, here, and here.
- The SEC proposed rules, here, to eliminate the general solicitation prohibition for Rule 506 offerings. General solicitation in Rule 506 offerings will be OK provided that:
- The issuer takes unspecified “reasonable steps” to verify that purchasers are accredited investors;
- All purchasers are reasonably believed to be accredited investors; and
- The general conditions of Rule 506 are met, including integration principles and resale limitations.
Although unspecified, the SEC suggests the level of necessary investigation of accredited investor status depends on (1) the nature of the purchaser and the type of accredited investor the purchaser claims to be; (2) the information the issuer has about the purchaser; (3) the nature of the offering, such as whether general solicitation was used; and (4) the terms of the offering, such as the minimum investment amount.
The proposed rules would add a check box to Form D to indicate whether issuers used a general solicitation or general advertising in a Rule 506 offering, which presumably will help the SEC monitor how the new rules are working.
The SEC also proposes to provide that securities may be offered pursuant to Rule 144A through a general solicitation or general advertising as long as they are ultimately sold only to persons the seller reasonably believes are qualified institutional buyers.
The comment period for the rules expires October 5, which apparently is not fast enough for some who thought the rule should have been adopted as an immediately effective interim rule (see here).
- Rounding out the whirlwind of Dodd-Frank-related SEC activity in the last month, the SEC published its required report on retail investor literacy here. A summary: “poor.”
- The SEC posted FAQs about JOBS Act provisions affecting research analysts and underwriters here.
- For those who still want to hear more about the Facebook IPO, here is SEC Chairman Schapiro’s response to Congressman Issa’s 34 IPO-related questions, driven, no doubt, by continued bafflement that a really cool company valued well beyond its financial prospects could trade down after its hyped IPO. Glaringly absent questions include: Would disclosure that no Facebook products contain conflict minerals have rallied the stock price? Does it matter that that’s because Facebook doesn’t produce anything?
- The PCAOB adopted Auditing Standard No. 16, here, to improve communications between auditors and the audit committee. A summary is here. Assuming the SEC approves the new rules, they will be effective for fiscal years beginning on or after December 15, 2012. You might dust off your audit committee charter to see if updates are required.