On May 30, 2013, the Securities and Exchange Commission issued new interpretive guidance on the conflict minerals rules and disclosures of payments by resource extraction issuers in the form of frequently asked questions (FAQs). The guidance provides useful clarifications on questions that had been frequently raised by issuers ever since the adoption of the final rules in August 2012. For a discussion of the rules on conflict minerals and resource extraction payment disclosures, please refer to our August 2012 Client Alert titled "SEC Adopts Final Rules Regarding Conflict Minerals and Resource Extraction Payment Disclosures" available here.
- Voluntary filers are subject to the conflict minerals rules: The rules apply to all issuers that file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (e.g., Forms 10-K, 10-Q, 8-K, 20-F or 6-K), even if they are voluntary filers. Registered investment companies filing reports pursuant to Rule 30d-1 under the Investment Company Act are not subject to the rules.
- Activities customarily associated with mining are not considered to be "manufacturing" : Issuers that only engage in activities customarily associated with mining, such as transporting, crushing and milling, leaching or smelting, are not considered to be manufacturing such minerals for purposes of the rules.
- Products with conflict minerals manufactured by consolidated subsidiaries must be reported by issuers: Issuers must report the activities of its consolidated subsidiaries engaged in the manufacturing of products containing conflict minerals that are considered "necessary to the functionality or production" of such products.
- Labeling products manufactured by a third party is not "contracting to manufacture" : An issuer affixing its brand, marks, logo, label, serial number or other identifiers to a generic product manufactured by a third party is not considered to be "contracting to manufacture" for purposes of the rules.
- Generic components containing conflict minerals are covered by the conflict minerals rules: An issuer that manufactures or contracts to manufacture products with generic components containing conflict minerals must conduct a reasonable country of origin inquiry even if such components were manufactured by third parties, in the same manner as for components manufactured by the issuer.
- Packaging is not considered to be part of the product: The packaging or container of a product is not considered to be part of the product for purposes of the rules. This is also true even if a product’s package or container is necessary to preserve the usability of such product. Therefore conflict minerals contained in the packaging or container is not considered "necessary to the functionality or production" of the product and not covered by the rules. However if an issuer manufactures and sells packaging or containers independent of the product, then such packaging or containers would be considered a product and become subject to the rules.
- Services and equipment that an issuer manufactures or contracts to manufacture to provide a service are not subject to conflict minerals rules: SEC does not regard services or equipment used to provide services to be products under the rules. Therefore an issuer that manufactures or contracts to manufacture equipment containing conflict minerals that is used to provide a service does not need to file Conflict Mineral Reports on Form SD as long as the equipment is retained by the issuer, is required to be returned to the issuer, or is intended to be abandoned by the customer following the use of the service.
- Sale of used equipment containing conflict minerals is not covered by the conflict minerals rules: An issuer that manufactures or contracts to manufacture tools, machines or other equipment containing conflict minerals for use in the manufacture of its products does not become subject to the rules by disposing such equipment (e.g., sale to a third party) because such equipment is not regarded as a product of the issuer.
- Products that have not been found to be "DRC conflict free" or are "DRC conflict undeterminable" must be explicitly identified: An issuer is not required to describe its products using model numbers but the Conflict Minerals Report on Form SD must clearly state that the products have not been found to be "DRC conflict free" or are "DRC conflict undeterminable".
- A Conflict Minerals Report on Form SD and an audit of such report is required even if a product is "DRC conflict free": An issuer that determines that its products contain minerals originating in the Democratic Republic of Congo or its adjoining country must file a Conflict Minerals Report on Form SD and obtain an independent private sector audit of the Conflict Minerals Report even if it is confirmed that the minerals did not finance or benefit armed groups ("DRC conflict free"). However, products containing such DRC conflict free minerals need not be disclosed in the Form SD.
- An issuer that conducts an IPO may begin providing conflict minerals disclosure beginning with the first calendar year that begins no sooner than eight months after the effective date of the IPO registration statement: An issuer that was previously not subject to the rules because of its non-public status may delay its initial conflict minerals reporting period until the first calendar year beginning no sooner than eight months after the effective date of the IPO registration statement. This is the same accommodation provided to issuers that become subject to the rules through acquisitions of businesses.
- Failure to timely file a Form SD regarding conflict minerals does not affect S-3 eligibility: Failure to timely file a Form SD regarding conflict minerals pursuant to the conflict minerals rules does not render an issuer ineligible to use Form S-3 (or presumably Form F-3).
Resource Extraction Payment Disclosures
- Payments made by subsidiaries and controlled entities must be reported: A resource extraction issuer must disclose payments made to governments by the issuer, its subsidiaries or entities under its control. Furthermore, an issuer that is not engaged in commercial development activities but has subsidiaries or entities under its control that engage in such activities would be considered to be a resource extraction issuer.
- An issuer only providing services associated with exploration, extraction, processing and export of resources is not considered a resource extraction issuer: Issuers that only provide services associated with exploration, extraction, processing and export of resources and does not engage in the activities covered by the resource extraction payment diclosures rules generally would not be considered to be a resource extraction issuer. However, if such issuer makes a payment (as defined under the rules) to a government on behalf of a resource extraction issuer, then the resource extraction issuer must disclose such payments.
- The definition of "mineral" is broad: For purposes of the rules, "mineral" means any material commonly understood to be a mineral, including any material for which disclosures would be required under Industry Guide 7, "Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations," notwithstanding any test of materiality used for purposes of Guide 7.
- An issuer engaged in transportation activities of resources without ownership interests is generally not a resource extraction issuer: While an issuer transporting resources in which the issuer does not have an ownership interest would generally not be considered to be a resource extraction issuer, an issuer would be regarded as a resource extraction issuer if it had an ownership interest in the resources it is transporting.
- Payments made to a majority-owned government transportation service to supply people or materials to a job site do not need to be reported: Such payments are considered to be made in connection with activities that are ancillary or preparatory to the commercial development of resources and therefore need not be reported.
- Penalties and fines paid to government agencies do not need to be reported: Penalties and fines are not considered to be included in the definition of fees or payments as they are not part of the commonly recognized revenue stream for the commercial development of resources.
- Reporting payments on an accrual basis is not permitted: Payment information must be presented on an unaudited, cash basis for the year in which the payments are made.
- An Issuer does not need to segregate income from resource extraction activities or taxes paid on such income: A resource extraction issuer may elect to, but is not required to, segregate income from the commercial development activities (e.g., exploration, extraction processing and export of resources) from income earned on other business activities and disclose income taxes paid solely on the income generated by the commercial development activities. However, if a resource extraction issuer does not segregate the income information, then it may disclose that the information includes payments made for purposes other than commercial development activities.
- Failure to timely file a Form SD regarding payments by resource extraction issuers does not affect S-3 eligibility: Failure to timely file a Form SD regarding payments by resource extraction issuers pursuant to the resource extraction payment discloure rules does not render an issuer ineligible to use Form S-3 (or presumably Form F-3).