On May 30, 2013, the SEC’s Division of Corporation Finance issued 12 Frequently Asked Questions (“FAQs”) on its conflict minerals rules (Exchange Act Section 13(p), Rule 13p-1 and Item 1.01 of Form SD), which are detailed in our client alert available here. The full set of FAQs is available here.
The SEC also issued nine other FAQs relating to the SEC’s resource extraction rules (Exchange Act Section 13(q), Rule 13q-1 and Item 2.01 of Form SD), which were adopted at the same time as the conflict minerals rules and require resource extraction issuers to disclose certain payments made to governments for the commercial development of oil, natural gas or minerals. Those FAQs are available here.
Several of the FAQs will be particularly useful to companies as they seek to comply with these rules, most notably:
- Product Packaging. Consistent with the position taken by the SEC in briefs that it filed in response to a legal challenge to the conflict minerals rules, FAQ # 6 confirms that the packaging or container used for the “display, transport or sale” of a product is not considered to be part of the product, and therefore is not covered under the conflict minerals rules, even if it is necessary to preserve the usability of the product until it is purchased or used (e.g., a soup can). This guidance makes clear that all product packaging is excluded from the scope of the rules, including decorative packaging that adds marketability to the product and packaging that a company contracts to manufacture specifically for its products. If, however, a company sells the packaging or containers independently of the product, the packaging or containers would then be considered to be the company’s products and thus would be covered under the rules.
- Tools, Machines and Other Equipment Used by Manufacturers. FAQ ## 7 and 8 state that equipment, tools and machines that a company uses in providing services or manufacturing products are not themselves considered products, and therefore are not covered under the conflict minerals rules. This applies even if the company subsequently sells the equipment, tools or machines. Thus, the sale of surplus, scrap or obsolete equipment outside the ordinary course of a company’s business should be considered outside the scope of the rules.
- Generic Components of Products. FAQ # 5 states that a company is subject to the conflict minerals rules if it incorporates a generic, off-the-shelf component containing conflict minerals into a product, even though the company has not contracted to manufacture the component, and even if the company’s product contains no other conflict minerals. Thus, for compliance purposes no distinction is made between product components that a company manufactures or contracts to manufacture and generic components that are included in a product.
- Scope of Reporting Obligation. The FAQs state that the conflict minerals and the resource extraction reporting requirements apply with respect to products manufactured or contracted to be manufactured by a reporting company’s consolidated subsidiaries, even if the reporting company itself is not engaged in covered activities.
- Form S-3 Eligibility. The FAQs confirm that failure to timely file a Form SD under the conflict minerals or resource extraction rules will not cause a company to lose its eligibility to use Form S-3 for the registration of securities. In this regard, the guidance explains that the Form S-3 eligibility requirement to meet prior reporting requirements covers only Exchange Act Section 13(a) or 15(d) reports and Exchange Act Section 14(a) and 14(c) materials. Because Form SD is required to be filed under Exchange Act Sections 13(p) and (q), it does not impact a company’s Form S-3 eligibility.