On May 30, 2013, the U.S. Securities and Exchange Commission (SEC) issued limited guidance regarding the final Conflict Minerals Rule (CM Rule) under Section 13(p) of the Securities Exchange Act of 1934 (the Exchange Act). The guidance unfortunately does not clarify or overcome numerous ambiguities in the CM Rule or provide additional guidance on CM Rule compliance, yet does provide useful insight on 12 topics, including: the CM Rule does not apply to public issuers that merely mark a generic product with their corporate logo or symbol (see No. 4 below); the CM Rule does not apply to conflict minerals contained in packaging or containers of an issuer’s product (see No. 6 below) or equipment used for the performance of services (see No. 7 below); and finally, late filing of the applicable Form SD created for purposes of CM Rule compliance does not impact S-3 eligibility (see No. 12 below).
The SEC guidance comes in the form of Frequently Asked Questions (FAQs) with discrete answers. The FAQs represent the SEC’s first set of formalized guidance after adopting the CM Rule on August 22, 2012, pursuant to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Summary of May 2013 CM Rule FAQs
The final CM Rule clocked in at 356 pages, which despite its length created a great deal of uncertainty as to the scope of the compliance obligations imposed by the CM Rule (and on whom). By and large, the new and very limited FAQs are not tremendously helpful. They do not resolve key questions raised by the CM Rule, particularly on remaining questions regarding industry- or sector-specific certifications, diligence standards or supply chain assurance procedures.
Here is what the SEC FAQs do clarify:
- Rule applies to voluntary filers. The CM Rule applies to all issuers who file reports under Sections 13(a) or 15(d) of the Exchange Act, including voluntarily filers. Investment companies that are required to file reports under Rule 30d-1 of the Investment Company Act, however, are not subject to the CM Rule.
- Mining Issuers. Issuers that only engage in mining activities, and those customarily associated with mining, are not considered to be “manufacturing” those minerals for purposes of the CM Rule.
- Issuer’s Consolidated Subsidiaries. CM Rule compliance obligations arise relating to “manufacturing” conducted not only by the issuer, but also by any of its consolidated subsidiaries.
- Private Labeling. The CM Rule originally exempted certain private-label contracting. SEC clarified here that an issuer that contracts for a third party to etch or mark a generic product with the issuer’s logo or other information will not be deemed as contracting to manufacture the product in question.
- Generic Components of Products. If an issuer manufactures or contracts to manufacture a product containing a conflict mineral necessary to the functionality or production of the product, it is required to conduct a reasonable country or origin inquiry for all components of the product, including generic portions of the product.
- Packaging and Containers. Packaging and containers of an issuer’s product are not considered part of the issuer’s “product” for purposes of the CM Rule. Thus, conflict minerals present in packaging or containers for products of issuers do not, by themselves, trigger a compliance obligation under the CM Rule — even if the product packaging or containers are necessary to preserve the usability of the product itself. This carve-out does not apply to issuers who manufacture and sell packaging or containers independent of the product.
- Products vs. Services. The CM Rule only applies to conflict minerals in “products” manufactured or contracted to be manufactured by issuers, not in equipment or other materials used by an issuer to deliver a service.
- Tools and Equipment. Tools, machines or other equipment that are manufactured or contracted to be manufactured by an issuer and that contain conflict minerals are not subject to the CM Rule if the issuer simply uses them for manufacturing other products and subsequently sells the tools, machines or other equipment.
- Description on Form SD. For products that issuers are not able to certify as conflict-free or “conflict undeterminable,” those products must be described in the Form SD. There is no prescribed form for this description, and it may vary based on the issuer’s facts and circumstances.
- Conflict-Free Minerals Sourced in Conflict Regions. Issuers that manufacture or contract to manufacture products with conflict minerals sourced in the covered countries, but which products are determined to be conflict free, are required to obtain an independent audit and file the additional “Conflict Minerals Report” with the Form SD, but are subject to slightly reduced disclosure burdens.
- IPO Reporting. Following an initial public offering, the newly public company may start reporting under the CM Rule for the first calendar year beginning no sooner than eight months after the effective date of the IPO registration statement.
- S-3 Eligibility. A failure to timely file a Form SD will not affect an issuer’s eligibility to use Form S-3 because the CM Rule, and the Form SD, is under Section 13(p) of the Exchange Act, not pursuant to Sections 13(a) or 15(d) of the Exchange Act.