On May 30, 2013, the Securities and Exchange Commission issued guidance related to the requirement that issuers disclose the use of conflict minerals in their products, as mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.1 The guidance, in the form of FAQs, clarifies the requirements for compliance with the SEC's conflict minerals rule.2
Application of guidelines.
- Voluntary filers must comply.
Under Rule 13p-1 "[e]very registrant that files reports with the Commission under Sections 13(a) (15 U.S.C. 78m(a)) or 15(d) (15 U.S.C. 78o(d)) of the Exchange Act, having conflict minerals that are necessary to the functionality or production of a product manufactured or contracted by that registrant to be manufactured, shall file a report on Form SD within the period specified in that Form disclosing the information required by the applicable items of Form SD as specified in that Form (17 CFR 249b.400)." This rule, therefore, applies to every issuer required to file reports under either 13(a) or 15(d), including voluntary filers.
- IPO issuers must comply for the current calendar year if their registration statement goes effective before May 1 of that year.
An issuer that acquires, or otherwise obtains control of, a non-reporting company that manufactures or contracts to manufacture products containing conflict minerals must file a report regarding the acquired company's products at least starting the first calendar year that begins no sooner than eight months after the effective date of the acquisition. The FAQ explains that the SEC staff "will not object if an IPO issuer starts reporting for the first calendar year that begins no sooner than eight months after the effective date of its IPO registration statement." Effectively, a company that acquires a manufacturer that previously was not subject to the rules need not gather information on the acquired company's products until the next calendar year if the closing of the acquisition occurred on or after May 1.
- Consolidated subsidiaries must comply.
An issuer must file a disclosure on its behalf as well as on behalf of the subsidiaries included in its consolidated financials.
- Activities customarily associated with mining are not covered by the rule.
Mining activities are excluded specifically from the rule because they are not viewed as falling within the definition of "manufacturing." The FAQ clarifies that this exclusion includes the mining of lower grade gold ore, as well as the ancillary activities of mining, such as transporting the ore to a processing facility, crushing and milling the ore, mixing crushed or milled ore with cyanide solution, floating cyanide mixture through a leaching circuit, extracting gold from a leached circuit, smelting the gold into ingots or bars and transporting the ingots or bars to a refinery for refining.
- Packaging will not be considered part of the "product."
The FAQ states that the packaging or container sold with a product is not considered to be part of the product, even if the packaging or container is necessary to preserve the usability of the product up to, and following, the product's purchase. The FAQ explains that, generally, once the consumer begins to use a product, the packaging is discarded. This clarification is particularly important to companies in the food, beverage and pharmaceutical industries where the packaging could contain conflict minerals, but the actual products do not. Although such companies need not comply with the rule, companies that manufacture the packaging and containers must do so.
- Generic component parts contained in a product are subject to the rule.
The guidance makes clear that, for purposes of the rule, the SEC will not distinguish between the components of a product that an issuer directly manufactures or contracts to manufacture and the generic purchased components included in the product. Thus, companies whose products contain generic components not manufactured by the company must conduct appropriate due diligence to ascertain the source of the minerals in the generic components included in their products.
- Equipment used in providing a service is not a product.
An issuer is not required to report on conflict minerals contained in equipment that it manufactures or contracts to manufacture to the extent that the equipment is used for a service provided by the issuer and that: (a) the equipment is retained by the service provider; (b) is to be returned to the service provider; or (c) is intended to be abandoned by the customer following the terms of service. The FAQ states, "Item 1.01(a) of Form SD requires issuers only to report on conflict minerals that are necessary to the functionality or production of "products" they manufacture or contract to have manufactured, and the staff does not interpret equipment used to provide services to be "products" under the rule."
- The sale of used equipment does not trigger the rule.
The sale of used tools, machines or other equipment that an issuer manufactured or contracted to manufacture for use in the manufacture of its products does not fall under the Rule. The FAQ states that the SEC staff does not view these items as products of the issuer, and their subsequent entry into the stream of commerce does not transform them into products of the issuer.
- Labeling a product manufactured by a third party does not constitute "contracting to manufacture."
If an issuer's logo, serial number or other identifier is etched into a generic product that is manufactured by a third party, the issuer will not be deemed to have contracted to manufacture the product.
- Issuers have flexibility in describing their products.
Item 1.01(c)(2) of Form SD requires an issuer that manufactures products, or contracts for products to be manufactured, that have not been found to be "DRC conflict free" or that are "DRC conflict undeterminable" to provide a description of those products. The FAQ makes clear that an issuer has flexibility in the manner in which it describes its products, and that it may describe them based on "its own facts and circumstances." The SEC staff reasoned that companies are in the best position to know their products and to describe them in terms commonly understood in the industry. An issuer is not required to describe its products using model numbers.
- DRC-sourced but conflict free minerals trigger the rule.
If an issuer determines that its covered products contain conflict minerals from the DRC or an adjoining country, but the products are DRC conflict free, it must complete a Conflict Minerals Report in addition to its Form SD and obtain an independent audit of the applicable portions of the report. However, the issuer is not required to disclose the products containing those conflict minerals in its Conflict Minerals Report or provide the product description indicated in Item 1.01(c)(2) of the Rule because the products are conflict free.
- Failure to file, or a late filing of Form SD does not render issuers ineligible to use Form S-3.
The failure to timely file a Form SD does not cause an issuer to lose eligibility to use a Form S-3 registration statement for shelf registrations. The Form S-3 requirement that a registrant timely file all reports and materials required to be filed during the prior 12 months refers only to filings under Sections 13(a), 15(d), 14(a) and 14(c) of the Exchange Act. Form SD, however, is required to be filed under Section 13(p) of the Exchange Act. Thus, the filing of Form SD regarding conflict minerals has no bearing on an issuer's eligibility to use Form S-3.