On August 22, 2012, pursuant to the Dodd-Frank Act, the SEC adopted final rules requiring certain companies to disclose their use of conflict minerals if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. The conflict minerals include cassiterite, columbite-tantalite, wolframite, tantalum, tin, gold or tungsten.
The goal of the disclosure requirement is to address concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the DRC region and is contributing to an emergency humanitarian crisis.
A company is not required to comply with the conflict mineral disclosure requirements if it is able to answer “no” to any of the following questions:
- Does the company file reports with the SEC under Section 13(a) or 15(d) of the Exchange Act?
- Does the company manufacture or contract to manufacture products?
- Are conflict minerals necessary to the functionality or production of the product manufactured or contracted to be manufactured?
SEC Guidance on Applicable Thresholds
Assuming the other requirements are satisfied, the final rules apply to any issuer that files reports with the SEC under Section 13(a) or 15(d) of the Exchange Act, including domestic and foreign issuers and small reporting companies.
In order to determine how the answer threshold questions (2) and (3) above, the SEC has provided the following guidance regarding the applicable terminology without actually defining such terms:
Contract to Manufacture: The guidance states that whether an issuer will be considered to “contract to manufacture” a product depends on the degree of influence it exercises over the materials, parts, ingredients, or components to be included in any product that contains conflict minerals or their derivatives. An issuer will not be considered to “contract to manufacture” a product if it does no more than take the following actions:
- the issuer specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product (unless it specifies or negotiates taking these actions so as to exercise a degree of influence over the manufacturing of the product that is practically equivalent to contracting on terms that directly relate to the manufacturing of the product);
- the issuer affixes its brand, marks, logo, or label to a generic product manufactured by a third party; or
- the issuer services, maintains, or repairs a product manufactured by a third party.
Necessary to the functionality or necessary to the production: The determination of whether a conflict mineral is deemed “necessary to the functionality” of a product depends on the issuer’s particular facts and circumstances. However, the guidance suggests that in making such determination, an issuer should consider:
- whether the conflict mineral is intentionally added to the product or any component of the product and is not a naturally-occurring by-product;
- whether the conflict mineral is necessary to the product’s generally expected function, use, or purpose; and
- if conflict mineral is incorporated for purposes of ornamentation, decoration or embellishment, whether the primary purpose of the product is ornamentation or decoration.
Necessary to the production: The determination of whether a conflict mineral is deemed “necessary to the production” of a product depends on the issuer’s particular facts and circumstances. However, the guidance suggests that in making such determination, an issuer should consider:
- whether the conflict mineral is intentionally included in the product’s production process, other than if it is included in a tool, machine, or equipment used to produce the product (such as computers or power lines);
- whether the conflict mineral is included in the product; and
- whether the conflict mineral is necessary to produce the product.
In this regard, for a conflict mineral to be considered “necessary to the production” of a product, the mineral must be both contained in the product and necessary to the product’s production. The SEC will not consider a conflict mineral “necessary to the production” of a product if the conflict mineral is used as a catalyst, or in a similar manner in another process, that is necessary to produce the product but is not contained in that product.
Further, the final rule does not treat an issuer that mines conflict minerals as manufacturing those minerals unless the issuer also engages in manufacturing. Additionally, the final rule exempts any conflict minerals that are “outside the supply chain” prior to January 31, 2013. Under the final rule, conflict minerals are “outside the supply chain” if they have been smelted or fully refined or, if they have not been smelted or fully refined, they are outside the Covered Countries.
Finally, the final rule allows issuers that obtain control over a company that manufactures or contracts for the manufacturing of products with necessary conflict minerals that previously had not been obligated to provide a specialized disclosure report for those minerals to delay reporting on the acquired company’s products until the end of the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition.
If applicable, the final rule requires a company to provide the disclosure on a new form to be filed with the SEC (Form SD).
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