By Cydney Posner
The SEC has finally issued some guidance on conflict minerals, but it chose to provide only 12 CDIs. How can that be??? I personally must have asked more than 12 questions! (Ok, maybe that's an exaggeration, but still .….) Here's a summary:
- Rule 13p-1 applies to all issuers that file reports with the SEC under Sections 13(a) or 15(d), even voluntary filers. However, registered investment companies that are required to file reports pursuant to Rule 30d-1 under the Investment Company Act are not subject to the rule.
- Instruction 1 to Item 1.01 of Form SD states that an issuer that mines conflict minerals would not be considered to be manufacturing those minerals for purposes of the rule. This Instruction is broad enough to exclude from the rule all of the activities customarily associated with mining. For example, gold mining of lower grade ore often involves, in addition to mining the ore, transporting the mined ore to a processing facility; crushing and milling the ore; mixing crushed/milled ore with cyanide solution; floating cyanide mixture through a leaching circuit; extracting gold from a leached circuit; melting leached gold, which is often referred to as smelting, into ingots or bars, which are often referred to as doré gold; and transporting the doré gold to refinery for refining process.
- The issuer must determine the origin of conflict minerals, and make any required disclosures regarding conflict minerals, for itself and all of its consolidated subsidiaries. Therefore, if the product that has conflict minerals necessary to its functionality or production is manufactured by a consolidated subsidiary of an issuer rather than directly by the issuer, the issuer is still subject to the rule.
- An issuer that specifies that its logo be etched into a generic product that is manufactured by a third party is not considered to be "contracting to manufacture" that product. The adopting release stated that an issuer is not considered to be "contracting to manufacture" a generic product if its actions involve no more than "affixing its brand, marks, logo, or label to a generic product manufactured by a third party." Etching or otherwise marking a generic product that is manufactured by a third party with a logo, serial number or other identifier is not considered to be "contracting to manufacture."
- This is a question about which there seemed to be a lot of confusion, despite language in the release, perhaps because the implications were so broad. (Maybe many folks were just hoping they could will a favorable answer from the SEC on this one! No such luck I'm afraid. ) If a product manufactured by an issuer or contracted by an issuer to be manufactured contains a conflict mineral solely because the conflict mineral is in a "generic" component included in the product, the issuer must conduct a reasonable country-of-origin inquiry regarding the origin of the conflict mineral in the generic component. (Note that, in this example, the issuer has not contracted to manufacture the generic component. ) In this regard, there is no distinction between the components of a product that an issuer directly manufactures or contracts to manufacture and the "generic" ones it purchases to include in a product.
- An issuer manufactures or contracts to manufacture a package or container that contains a conflict mineral, and the issuer uses the package or container in the display, transport or sale of a product the issuer also manufactures or contracts to have manufactured. In this case, even though the conflict mineral may be necessary to the functionality or production of the package or container, it would not also be considered necessary to the functionality or production of the product under the rule. For example, even if the container or packaging is necessary to preserve the product until the time the product is purchased or used, it would not be considered necessary to the functionality or production of the product. Only a conflict mineral that is contained in the product would be considered "necessary to the functionality or production" of the product. The packaging or container sold with a product is not considered to be part of the product. Once the consumer starts to use a product, the packaging is generally discarded. This conclusion is true even if a product's package or container is necessary to preserve the usability of that product up to and following the product's purchase. If, however, an issuer manufactures and sells packaging or containers independent of the product, the packaging or containers, in that circumstance, would be considered a product.
- Issuers that manufacture or contract for the manufacturing of equipment they use in providing a service they sell are not required to report on the conflict minerals in that equipment. For example, issuers that operate cruise lines are not required to file reports regarding the conflict minerals in the cruise ships they manufacture or contract to have manufactured. The staff would not object if issuers did not file reports on Form SD regarding the conflict minerals in the equipment that they manufacture or contract to have manufactured if that equipment is used for the service provided by the issuer and the equipment is retained by the service provider, is required to be returned to the service provider, or is intended to be abandoned by the customer following the terms of the service. Item 1.01(a) of Form SD requires issuers to report only 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.
- An issuer manufactures or contracts to have manufactured tools, machines or other equipment containing conflict minerals that it uses in the manufacture of products. If the issuer, after using the equipment subsequently sells it, the issuer is not required to file a report on Form SD regarding the conflict minerals in the equipment because the equipment is not a product of that issuer, and the staff will not view their later entry into the stream of commerce as transforming them into products of that issuer.
- 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. There is no type of product description that is prescribed. For example, the issuer is not required to describe its products using model numbers. As noted in the adopting release, the rule permits an issuer to describe its products based on its own facts and circumstances because the issuer is in the best position to know its products and to describe them in terms commonly understood within its industry. However, the description in the Conflict Minerals Report filed with Form SD must state clearly that the products "have not been found to be ‘DRC conflict free'" or are "DRC conflict undeterminable," as applicable.
- An issuer that determines that the products it manufactures or contracts to manufacture contain conflict minerals from the DRC countries, but also determines that the products are "DRC conflict free," is still required to file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit of the Report. The issuer, however, is not required to disclose the products containing those conflict minerals in its Conflict Minerals Report or provide certain other disclosures specified in Item 1.01(c)(2) of Form SD because those products are "DRC conflict free."
- An issuer that conducts an IPO may start reporting for the first reporting calendar year that begins no sooner than eight months after the effective date of its IPO registration statement. This accommodation is similar to that afforded to issuers that acquire control over a company that manufactures products with conflict minerals that previously had not been obligated to provide a specialized disclosure report for those minerals.
- The failure to timely file a Form SD regarding conflict minerals would not cause an issuer to lose eligibility to use Form S-3. In determining eligibility for use of Form S-3, the requirement that the registrant has filed in a timely manner all reports and materials required to be filed during the prior 12 calendar months refers only to Section 13(a) or 15(d) reports and Section 14(a) and 14(c) materials. (See CDI 115.04 under Securities Act Forms.) Form SD regarding conflict minerals is required to be filed under Section 13(p). Therefore, the filing of Form SD regarding conflict minerals does not affect an issuer's eligibility to use Form S-3.