Digging Deeper – SEC Issues FAQs Regarding the Conflict Minerals Rule

Earlier today, the staff of the SEC issued long-awaited FAQs  related to the conflict mineral rules.  The FAQs provide guidance on various aspects of the conflict mineral rules including the following:

  • The conflict mineral rules apply to all issuers that file reports with the SEC under Exchange Act Sections 13(a) or 15(d), whether or not the issuer is required to file such reports.  Accordingly, the rules apply to voluntary filers.  Registered investment companies that are required to file reports pursuant to Rule 30d-1 under the Investment Company Act are not subject to the conflict mineral rules.
  • An issuer that only engages in activities customarily associated with mining is not considered to be manufacturing those minerals.
  • An issuer must determine the origin of conflict minerals, and make any required disclosures regarding conflict minerals, for itself and all of its consolidated subsidiaries.
  • 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.”
  • An issuer would be required to conduct a reasonable country of origin inquiry with respect to conflict minerals included in generic components included in products it manufactures or contracts to manufacture.  Moreover, the staff stated that 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. 
  • Only a conflict mineral that is contained in a 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.  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. (i.e. cruise ship operators that manufacture or contract to manufacture cruise ships)  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 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.
  • If (i) an issuer manufactures or contracts to have manufactured tools, machines, or other equipment (which contain conflict minerals) which are used by the issuer in the manufacture of products, and (ii) after using such tools, machines, or other equipment the issuer subsequently sells such equipment, the issuer will not be required to file a report on Form SD regarding the conflict minerals in such equipment.  The tools, machines, or other equipment are not products 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.  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.  An issuer is not required to describe its products using model numbers.  Regardless of the manner by which an issuer describes its products, 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 Democratic Republic of the Congo or an adjoining country, but the products are “DRC conflict free,” is required to file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit of the Conflict Minerals 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.” 
  • The staff will not object if an issuer that conducts an initial public offering starts reporting under the conflict mineral rules for the first reporting calendar year that begins no sooner than eight months after the effective date of its initial public offering registration statement.
  • The failure to timely file a Form SD regarding conflict minerals will 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 twelve calendar months refers only to Exchange Act Section 13(a) or 15(d) reports and Exchange Act Section 14(a) and 14(c) materials.  Form SD regarding conflict minerals is required to be filed under Exchange Act Section 13(p).  Therefore, the filing of Form SD regarding conflict minerals does not impact an issuer’s eligibility to use Form S-3.


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