On May 30, 2013, the SEC provided guidance on its new rules requiring public companies to disclose their use and sources of “conflict minerals.” The guidance clears up some uncertainty regarding application of the rules, but the rules remain a burdensome requirement for many companies.
The following is a summary of this new guidance:
Voluntary filers are subject to the rules
The conflict minerals rules apply to all companies that file reports with the SEC under Exchange Act Sections 13(a) or 15(d), whether or not the company is required to file such reports. Accordingly, companies that voluntarily file to comply with debt covenant requirements are subject to the conflict minerals rules.
Activities customarily associated with mining do not constitute manufacturing
A company that only engages in activities customarily associated with mining, including gold mining of lower grade ore, is not considered to be manufacturing those minerals for purposes of the rules. Thus, mining and related activities (such as transporting, crushing, milling, leaching and smelting) are excluded from the disclosure requirements.
Activities of consolidated subsidiaries are covered
A company must determine the origin of conflict minerals and make required disclosure for itself and its consolidated subsidiaries. The fact that the product incorporating conflict minerals is not manufactured by the company itself does not relieve the company of reporting obligations.
Branding or labeling generic products is outside of scope
A company that specifies that a generic product manufactured by a third party be etched or marked with a logo, serial number or other identifier is not considered to be “contracting to manufacture” the product for purposes of the rules.
Generic components of manufactured products are part of a product and subject to the rules
The conflict minerals rules cover all components (including generic purchased components) of a product that a company directly manufactures or contracts to manufacture. As a result, each company must conduct a reasonable country of origin inquiry with respect to conflict minerals included in these generic components.
Packaging is not considered part of the product
The packaging or container sold with a product is not considered to be part of the product, and, therefore, no conflict minerals analysis needs to be conducted with respect to the packaging or container. This is true even if the company manufactures or contracts to manufacture the packaging or the packaging is necessary to preserve the usability of the product before and after purchase. This clarification could provide relief to companies in the food and beverage and pharmaceutical industries, for example, whose products will likely fall outside the scope of the conflict minerals rules.
Packaging and containers are still considered to be products for purposes of the rules to the extent that the company manufactures and sells packaging or containers independent of the products ultimately included in the packaging or containers.
Equipment used to provide a service is not a product
Companies need not file reports with respect to conflict minerals in equipment they manufacture or contract to manufacture if the equipment is used for a service they provide, so long as the equipment is retained by the service provider, is to be returned to the service provider, or is intended to be abandoned by the customer following the terms of service. As an example, the SEC refers to conflict minerals used in the manufacture of cruise ships used by cruise lines. Thus, the SEC staff does not interpret equipment used to provide a service to be a “product” under the conflict minerals rules.
Tools and production equipment are not products
Tools, machines or other equipment used to manufacture a company’s products are not products themselves. Even if the company subsequently sells the used equipment, it is not required to file reports relating to that equipment under the conflict minerals rules.
Companies have flexibility in product descriptions
A company filing a Form SD reporting products that are not “DRC conflict free” or that are “DRC conflict undeterminable” has flexibility in how it describes those products. Descriptions may be in terms commonly understood within its industry, based on its own facts and circumstances. Such descriptions need not include model numbers.
Filings related to “DRC conflict free” products
A company that determines that its products contain conflict minerals from the Democratic Republic of the Congo (DRC) or an adjoining country but are “DRC conflict free” must nevertheless file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit of the Conflict Minerals Report, but is not required to disclose the products containing the conflict minerals or make certain other disclosures.
Transition period available for newly-public companies
Companies that become reporting companies through an initial public offering may start reporting under the conflict minerals rules for the first reporting calendar year that begins no later than eight months after the effective date of the registration statement for the initial public offering.
S-3 eligibility is not impacted
Failure to timely file a Form SD regarding conflict minerals does not impact a company’s eligibility to use Form S-3.
The SEC’s recent guidance, while helpful, does not alleviate the burden of compliance with the conflict minerals rules. As the first reporting deadline looms (May 31, 2014 for the 2013 calendar year), companies must determine how best to comply with the rules based on their unique circumstances and should proceed with their conflict minerals compliance programs and due diligence inquiries. Companies should conduct a thorough internal analysis to determine if any of their products fall within the scope of the rules and would trigger a reporting obligation.