SEC Issues Guidance on Conflict Minerals
Davis Polk & Wardwell
On May 30 the staff of the Securities and Exchange Commission issued interpretive guidance on the SEC’s new conflict minerals rules. The guidance, which is consistent with the discussion contained in our October 26, 2012 client memorandum, clarifies the following: Packaging is not “product”. The packaging or container that a product is sold in is not a “product” for purposes of the rules – even where the packaging is needed to preserve the usability of the product up to and following the product’s purchase. Therefore, for example, a food and beverage company selling its products in cans that are manufactured from tin is not required to file a Form SD covering that activity. A company in the business of selling the packaging itself would, however, be subject to the rules. Services are not “products”. A service provider (such as a transportation company) is not covered by the rules even if it manufactures equipment containing conflict minerals, as long as 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 use of the service. Selling used equipment is not covered by the rules. A company that manufactures tools, machines or other equipment containing conflict minerals for use in the manufacture of its products does not become subject to the rules merely by disposing of that equipment at a later date, even if it sells the equipment to a third party. Labeling is not “contracting” to manufacture. Marking a product manufactured by a third party with a label, logo, serial number or other identifier does not subject a company to the rules. Manufacturing using generic components is covered by the rules. A company that manufactures (or contracts to manufacture) a product with third-party components containing conflict minerals is subject to the rules, even if the company did not manufacture (or contract to manufacture) the component. Activity customarily associated with mining is not “manufacturing”. Mining is not considered “manufacturing” for purposes of the rules, and nor are activities customarily associated with mining, such as transportation, crushing, milling and smelting. Form SD and a Conflict Minerals Report are required even if products are “DRC conflict free”. A company with products containing conflict minerals from the Democratic Republic of Congo or an adjoining country is required to file a Form SD and a Conflict Minerals Report even if its due diligence confirms that the conflict minerals did not finance armed groups. The Form SD need not, however, disclose the conflict-free products. Voluntary filers are subject to the rules. All companies that file reports with the SEC on Form 10-K, 10-Q and 8-K (or, for non-U.S. companies, Form 20-F and 6-K) are covered by the rules – even companies that are not legally required to file these reports but who do so, for example, because of indenture or other contractual obligations. Consolidated subsidiaries are covered. A company must report on the activities of its consolidated subsidiaries. Although the guidance does not say so explicitly, a company should not have to report on the activities of unconsolidated entities such as 50/50 joint ventures. Shelf eligibility is not lost by a failure to comply with the rules. Although a company would be subject to enforcement risk for failing to comply with the conflict minerals rules, that failure would not automatically cost the company its ability to use Form S-3 or Form F-3 for shelf offerings. The staff reaffirmed its previous guidance that failure to comply with filing obligations results in shelf ineligibility only with respect to reports required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934; the conflict minerals rules are required by Section 13(p). In separate guidance issued on May 30 covering disclosure of payments by resource extraction issuers, the staff similarly reaffirmed its previous guidance for reports required by Section 13(q). This reaffirmation should also mean that failure to comply with the new Iran disclosure requirements contained in Section 13(r) does not automatically result in shelf ineligibility. An IPO company is not required to report for the year it goes public – unless its registration statement goes effective before May 1. A company that acquires a manufacturer that previously was not subject to the rules may delay gathering information on the acquired company’s products until the next calendar year if the closing of the acquisition occurred on or after May 1. The SEC is applying a similar transitional rule for IPO companies. Please refer to our October 26, 2012 client memorandum for a more detailed description of the rules.