SEC Issues Statement Regarding the Status of the Conflict Minerals Rule

Today the SEC issued a Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule.   (See our earlier blogs regarding the conflict minerals rule and the legal challenge thereto).  Form SD did not go away and compliance with the conflict minerals rule was not stayed. The SEC tried to reach some sort of a compromise and provided the following in its statement:

“Subject to the guidance below and any further action that may be taken either by the Commission or a court, the Division expects companies to file any reports required under Rule 13p-1 on or before the due date. The Form SD, and any related Conflict Minerals Report, should comply with and address those portions of Rule 13p-1 and Form SD that the Court upheld. Thus, companies that do not need to file a Conflict Minerals Report should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook. For those companies that are required to file a Conflict Minerals Report, the report should include a description of the due diligence that the company undertook. If the company has products that fall within the scope of Items 1.01(c)(2) or 1.01(c)(2)(i) of Form SD, it would not have to identify the products as “DRC conflict undeterminable” or “not found to be ‘DRC conflict free,’” but should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.

No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” If a company voluntarily elects to describe any of its products as “DRC conflict free” in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule.  Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its Conflict Minerals Report.

The Division will consider the need to provide additional guidance in advance of the filing due date. Companies with questions about the content of the Form SD and Conflict Minerals Report should contact the Office of Rulemaking in the Division of Corporation Finance at (202) 551-3430.”

Conflict Minerals Rules…What Action will the SEC Take?

The recent opinion by the United States Court of Appeals for the District of Columbia has ignited much debate in the legal community as to what action the SEC will or should take in response.

 Today, SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar issued a Joint Statement on the Conflict Minerals Decision in which they stated that they think the SEC should stay the effectiveness of the conflict minerals rules and no further regulatory obligations should be imposed, pending the outcome of the conflict minerals litigation. Moreover, Commissioners Gallagher and Piwowar further state that in their view the District Court should determine that the entire rule is invalid.

 In contrast, last week members of Congress wrote a letter to the SEC Chair urging the SEC to continue the implementation of the conflict minerals rules as scheduled.

Many public companies who are busy preparing their initial Form SD are anxious to know how the SEC will respond. But, it remains to be seen as to what official action the SEC will take.

Conflict Minerals…the Legal Saga Continues…

Yesterday, the United States Court of Appeals for the District of Columbia issued its opinion on the conflict minerals legal challenge. (See our earlier blogs regarding the conflict minerals rules and the legal challenge thereto). The ruling rejected a number of the petitioner’s arguments, but agreed with the petitioner’s first amendment challenge. Specifically, the court held that the conflict minerals rules “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be DRC conflict free.’” Accordingly, the three-judge panel affirmed the district court’s judgment in part and reversed in part and remanded the case back to the district court for further proceedings.

It is not crystal clear what practical effect the Court of Appeal’s decision will have on the conflict minerals rules or what actions the SEC may take in response to such decision. Despite yesterday’s ruling, companies should “keep the course” and continue preparing their initial Form SD which, as of now, is still due on June 2, 2014.

New Conflict Minerals FAQs

I know that many companies are working through their conflict minerals analysis and have begun preparing their initial Form SD which is due June 2nd.  I wanted to make companies aware that the SEC issued new FAQs today clarifying various issues related to conflict minerals due diligence and the conflict minerals report.  Please see the link below:

http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm

Update- The Conflict Minerals Legal Challenge Continues

In July, the United States District Court for the District of Columbia rejected a summary judgment motion challenging the SEC’s conflict minerals rules. Accordingly, the conflict minerals rules remain in effect as adopted. 

However, the legal challenge continues as the National Association of Manufacturers and other business interests recently filed a notice of intent to appeal this district court ruling.  Initial documents related to the appeal are due on September 12th.

Conflict Minerals Rules Survive Legal Challenge

Yesterday, the United States District Court for the District of Columbia rejected a summary judgment motion challenging the SEC’s conflict minerals rules.  (See our May/June 2013 issue of Up to Date which discussed the legal challenge to the conflict minerals rules.)  Accordingly, the conflict minerals rules remain in effect as adopted.  

The conflict minerals rules require all public companies that manufacture (or contract for the manufacture of) a product where conflict minerals[1] are necessary to the functionality or production of such product to file a report annually with the SEC.  The first report must be filed with the SEC on May 31, 2014 for the 2013 calendar year. 

_____________________

[1] “Conflict minerals” currently include the following:

  • cassiterite (most commonly used to produce tin);
  • columbite-tantalite (the metal ore from which tantalum is extracted);
  • gold; and
  • wolframite (the metal ore that is used to produce tungsten).

 

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.

 

Last Minute Summer Reading Alert! SEC Adopts Rules Regarding Conflict Minerals and Resource Extraction Payments

           If you were concerned that you had finished all your summer reading with time to spare, worry no more.  The SEC has adopted a total of 588 pages of final rules regarding disclosures of the use of conflict minerals and payments by resource extraction issuers.

          The new rules were adopted on August 22, 2012.   Both rules were mandated by the Dodd-Frank Act and apply to all reporting companies (including foreign issuers and smaller reporting companies).  Congress enacted the conflict minerals requirement out of concerns that the exploitation and trade of “conflict minerals” by armed groups was helping to finance conflict in the Democratic Republic of the Congo (DRC) and adjoining countries.  Congress enacted the resource extraction payments disclosure to increase the transparency of payments made by oil, natural gas and mining companies to foreign governments so that, in theory, the citizens of those countries could hold their governments accountable for the wealth generated by those resources.

            The conflict minerals rule will require reporting companies that use certain minerals, including gold, tin, tungsten and tantalum, that are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company, to make disclosures on new Form SD (rather than as an exhibit to Form 10-K as originally proposed).  The rule requires that the company make a reasonable inquiry to determine whether any of the conflict minerals originated in the DRC or an adjourning country and, based on the results of that inquiry, make disclosures including, in some cases, a Conflict Minerals Report that will require an independent private sector audit.  There is no de minimis standard in the rule.   All issuers are required to use the same reporting period, the calendar year, regardless of fiscal year.  The first report is due on or before May 31, 2014 for the 2013 calendar year and no later than May 31st every year thereafter.

            The resource extraction payment rule will require reporting companies that are engaged in the commercial development of oil, natural gas or minerals to disclose certain payments (including taxes, royalties, fees, bonuses, dividends and costs of infrastructure improvements) made to foreign governments (including foreign local governments) or the U.S. government.  Payments (including a series of related payments) of less than $100,000 are considered de minimis under the rule and need not be disclosed.

            As with the conflict minerals rules, disclosure will be made on Form SD, but are required to be filed within 150 days after the end of the issuer’s fiscal year.  Issuers are required to comply with the new rules for fiscal years ending after September 30, 2013. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013.

            Both rules provide that the disclosures will be deemed “filed” and not “furnished” (as had originally been proposed), thereby imposing potential liability under the Securities Exchange Act, but no separate CEO and CFO certifications will be required.

SEC to hold Sunshine Act Meeting

The SEC announced yesterday that on August 22, 2012 at 10:00 a.m. it will hold an open meeting to consider:

  • whether to adopt rules regarding disclosure and reporting obligations with respect to the use of conflict minerals;
  • whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers; and
  • rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended and Rule 144A promulgated thereunder.