On May 30, 2013, the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) provided guidance in the form of frequently asked questions with respect to two recent SEC rules: disclosure requirements for conflict minerals originating in the Democratic Republic of Congo or an adjoining country (the “DRC”) and disclosure requirements for certain payments to governments by resource extraction issuers with respect to the commercial development of oil, natural gas or minerals.1 The SEC adopted both the conflict minerals rules and resource extraction payments rules pursuant to the Dodd- Frank Wall Street Reform and Consumer Protection Act.2 The SEC created new Form SD for the specialized disclosures required by these two rules.  

FAQs Applicable to Both Conflict Minerals and Resource Extraction Payments Rules  

  • Failure to timely file a Form SD regarding conflict minerals or resource extraction payments will not make an issuer ineligible to use a short-form, Form S-3 registration statement.  
  • The issuer must include applicable disclosures with respect to subsidiaries.
    • In the case of conflict minerals, the disclosure is required with respect to the issuer and all of its consolidated subsidiaries.  
    • In the case of resource extraction payments, the disclosure is required with respect to the issuer and its subsidiaries, as well as any other entity over which the issuer has control.  

Key Points of the Conflict Minerals FAQs  

  • The conflict mineral rules apply to issuers that voluntarily file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934.  
  • Issuers that only engage in mining and activities customarily associated with mining, such as transporting, crushing, milling, mixing and smelting the mined ore, are not considered to be manufacturing those minerals.  
  • Specifying that a logo should be etched on a generic product manufactured by a third party is not considered to be “contracting to manufacture the product.”  
  • If an issuer purchases generic components containing conflict minerals to include in a product, it must conduct a reasonable country of origin inquiry with respect to conflict minerals included in the generic components, even if it did not contract to manufacture such components.  
  • The packaging or container sold with a product is not considered to be part of the product, even if a product’s package or container is necessary to preserve the product following purchase. 
  • When an issuer uses equipment in order to provide a service that it sells (but its customer does not keep the equipment), the Staff does not consider such equipment to be the issuer’s product for the purpose of the conflict minerals rules, even if the issuer manufactures or contracts to manufacture such equipment. Therefore, a cruise line company that contracts to manufacture cruise ships does not have to file reports on Form SD regarding cruise ships.  
  • Issuers do not have to file reports on Form SD with respect to tools, machines or equipment used in the manufacture of their products, even if they subsequently resell such equipment.  
  • Issuers do not need to disclose in Form SD the model numbers of products that have not been found to be DRC conflict free or that are DRC conflict undeterminable. However, issuers must clearly disclose that such products “have not been found to be ‘DRC conflict free’” or are “DRC conflict undeterminable,” as applicable.  
  • Issuers that manufacture or contract to manufacture products that contain conflict minerals from the DRC must file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit, even if they determine the products to be “DRC conflict free,” but they do not have to disclose the products or make certain other disclosures with respect to the “DRC conflict free” products.  
  • Following an issuer’s initial public offering, the Staff will not object if the company starts conflicts mineral reporting for the first reporting calendar year that begins no sooner than eight months after the effective date of its IPO registration statement.  

Key Points of the Resource Extraction Payments FAQs

  • Consistent with our analysis in our Legal Update on the resource extraction payments disclosure rules dated September 4, 2012, the Staff clarified that issuers involved only in oilfield services or contract drilling would generally not be considered to be “resource extraction issuers.”  
  • The term “minerals” in the context of the definition of a resource extraction issuer as being engaged “in the commercial development of oil, natural gas, or minerals,” should be determined by reference to any material for which disclosure is required under Industry Guide 7 – “Description of Property by Issuers Engaged or to Be Engaged in Significant Mining Operations.”  
  • An issuer engaged in transportation activities moving a resource from one country to another country is generally considered to be “exporting” the resource — and thereby a “resource extraction issuer” — only if the issuer has an ownership interest in the resource being transported; if the issuer does not have an ownership interest in that transported resource, then the transportation activities generally are not considered to be directly related to the export of the resource.  
  • With regards to payments made by resource extraction issuers to governments:
    • Payments from a resource extraction issuer to a majority-owned government transportation service to supply people or materials to a job site are not required to be reported because the payments are made in connection with a service activity that is considered to be “ancillary or preparatory” to the commercial development of resources.  
    • Penalties and fines paid to governmental agencies related to resource extraction activities are not reportable as “fees” that are part of the commonly recognized revenue stream for the commercial development of resources.  
    • Payment information must be presented on an unaudited, cash basis for the year in which the payments are made; it cannot be provided on an accrual basis.
    • Income taxes paid with respect to covered commercial development activities may be reported on a segregated basis, separated from the amounts of income taxes paid on the issuer’s other business activity income in that country, or else reported on an aggregate basis, noting that the disclosed information includes payments made for purposes other than commercial development activities.