SEC Staff Issues FAQs on Conflict Minerals Reporting

by Morgan Lewis

FAQs address issues pertaining to the scope and application of the conflict minerals reporting requirement.

On May 30, the staff of the U.S. Securities and Exchange Commission (SEC) issued interpretive guidance on the SEC's conflict minerals rule. The rule, which was adopted in August 2012, applies to reporting companies that use conflict minerals in a manner that is necessary to the functionality or production of a product that is manufactured or contracted to be manufactured by such companies. Generally, the term "conflict minerals" refers to tin, tantalum, tungsten, gold, and any other minerals or derivatives that the Secretary of State identifies as financing conflict in the Democratic Republic of the Congo or an adjoining country (collectively, the DRC). The SEC staff's FAQs address issues pertaining to the scope and application of the conflict minerals reporting requirement.[1]

The FAQs explain that the conflict minerals rule applies to the following:

  • Voluntary filers. The requirement to file a report on Form SD with respect to the use of conflict minerals applies to any issuer that files reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), whether such issuer is required to file reports or is a voluntary filer. Investment companies that must file reports pursuant to Investment Company Act Rule 30d-1 are exempt from the conflict minerals reporting requirement.
  • Products manufactured by or for a subsidiary. An issuer must comply with the conflict minerals rule with respect to products manufactured by or for any of its consolidated subsidiaries.
  • Generic product components that contain conflict minerals. An issuer must conduct a "reasonable country of origin inquiry" with respect to conflict minerals in generic components contained in products that the issuer manufactures or contracts to be manufactured.

The FAQs also explain that the conflict minerals rule does not apply to the following:

  • Mining-related activities. An issuer that engages only in mining and activities "customarily associated" with the mining of conflict minerals, including transporting the mineral to a refinery, will not be considered to be "manufacturing" products under the conflict minerals rule.
  • Generic products to which identifying marks are added. An issuer is not considered to be contracting to manufacture a product if the issuer only adds an identifying mark, such as a logo or serial number, to a generic product manufactured by a third party.
  • Packaging or containers, unless the packaging or containers are sold as products. Packages or containers that an issuer manufactures or contracts to be manufactured and uses with respect to its products, including to transport or preserve such products, are not considered to be part of the products or necessary to the functionality or production of the products and, thus, are not subject to the conflict minerals rule. If an issuer, however, manufactures and sells packaging or containers separate from its products, the packaging or containers will be considered products subject to the conflict minerals rule.
  • Equipment used to provide a service. Equipment manufactured by or for an issuer that is used by the issuer to provide a service is not subject to the conflict minerals rule if the equipment is retained by the service provider, must be returned to the service provider, or will be abandoned by the customer after the service is provided.
  • Equipment containing conflict minerals that is sold after being used to manufacture products. If tools, machines, or other equipment manufactured by or for an issuer for use in the manufacture of its products are later sold by the issuer, any conflict minerals in such tools, machines, or equipment will not be subject to the conflict minerals rule.

Additionally, the FAQs provide the following guidance:

  • An issuer has discretion to describe its products in Form SD but must state the conflict status of its products. An issuer may determine, based on its facts and circumstances, how to describe its products on Form SD but must state clearly, when applicable, that its products "have not been found to be 'DRC conflict free'" or are "DRC conflict undeterminable."
  • "DRC conflict free" products need not be described in Form SD, but the form and audit must be filed. If an issuer determines that its products contain conflict minerals from the DRC but that such products are "DRC conflict free," the issuer must still file a Form SD and obtain an independent private sector audit of its Conflict Minerals Report. The issuer, however, is not required to identify the products containing the conflict minerals or provide the product description specified in Item 1.01(c)(2) of Form SD.
  • Compliance after an initial public offering (IPO) may begin as late as eight months after the effective date of the IPO. An issuer is permitted to start complying with the conflict minerals rule for the first reporting calendar year that begins no earlier than eight months after the effective date of the issuer's IPO registration statement.
  • Form S-3 eligibility is not affected by late Form SD filing. The failure to timely file a Form SD will not impact an issuer's eligibility to use Form S-3. The use of Form S-3, however, is conditioned on the filing of all materials required to be filed pursuant to section 13, 14, or 15(d) of the Exchange Act, including Form SD, for the 12-month period preceding the filing of a Form S-3.

Additional Information

For more information on the SEC's conflict minerals reporting requirement, see our September 2012 White Paper, "SEC Adopts Rules Implementing the Dodd-Frank Requirement for Conflict Minerals Reporting," available here. In that White Paper, we describe, among other things, the following steps that issuers should take in connection with compliance with the reporting requirement:

  • Determine whether the registrant manufactures or contracts to manufacture any products—including components—containing tin, tantalum, tungsten, or gold.
  • For those products containing conflict minerals, do the following:
    • Determine whether any of those minerals are necessary to the functionality or production of the products.
    • Determine whether any of those minerals are from recycled or scrap sources and, therefore, the related products are not subject to the conflict minerals rule.
    • Determine whether any of those minerals might meet the exclusion for minerals "outside the supply chain" prior to January 31, 2013.
  • Review the Organisation for Economic Co-operation and Development's guidance and any other applicable nationally or internationally recognized due diligence framework to determine appropriate steps to take to comply with the "reasonable country of origin inquiry" and due diligence requirements, including inquiries to be made to suppliers.
  • Examine the supply contracts for tin, tantalum, tungsten, and gold and for the manufacturing of products containing those minerals to determine whether the contractual terms can be revised to include representations with respect to the origin of the minerals.

Compliance with the conflict minerals rule will be required beginning with the 2013 calendar year. Thus, filings on new Form SD, when applicable, will be due on May 31, 2014 and on May 31 every year thereafter.

We will provide an update if the outcome of pending litigation concerning the rule impacts the reporting requirement.

[1]. View the FAQs here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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