SEC Issues Guidance on Conflict Minerals and Resource Extraction Rules
On May 30, 2013, the Securities and Exchange Commission's Division of Corporation Finance issued guidance on various aspects of (1) Exchange Act Section 13(p), Rule 13p-1 and Item 1.01 of Form SD, which require disclosures regarding the use of conflict minerals from the Democratic Republic of the Congo or adjoining countries, and (2) Exchange Act Section 13(q), Rule 13q-1 and Item 2.01 of Form SD, which require disclosures concerning certain payments made by resource extraction issuers to foreign governments or the U.S. government for the commercial development of oil, natural gas or minerals. The guidance was issued in the form of Frequently Asked Questions. The Division emphasized that the FAQs were not official rules, regulations or statements of the SEC and only reflected the views of the Division.
This Client Alert sets forth a high-level summary of the guidance. A copy of the Conflict Minerals FAQs can be found here and a copy of the Resource Extraction FAQs can be found here. The SEC's adopting release concerning the conflict minerals rules can be found here and the adopting release concerning the resource extraction rules can be found here.
The Conflict Minerals FAQs
- Rule 13p-1 and the obligation to file Form SD apply to all issuers filing reports under Sections 13(a) and 15(d) of the Exchange Act, including voluntary filers. Registered investment companies that are required to file reports, however, are not subject to the rule.
- Per the instructions to Form SD, issuers that mine conflict minerals are not considered to be manufacturers for purposes of the rule. The Division confirmed that activities customarily associated with mining are not considered manufacturing. The Division gave the following as examples of activities customarily associated with mining in the context of gold mining of lower grade ore: transporting, crushing, milling and leaching ore, smelting leached gold, and transporting the resulting ingots to a refinery.
- An issuer is subject to Rule 13p-1 for the activities of both itself as well as all of its consolidated subsidiaries.
- If an issuer specifies that a logo, serial number or other identifier be etched into a generic product manufactured by a third party manufacturer, the issuer will not be considered to have contracted to manufacture the product solely as a result of that specification.
- An issuer that manufactures or contracts to manufacture a product containing a "generic" component must conduct a reasonable country of origin inquiry regarding the origin of the conflict minerals in such component. There is no distinction between components that an issuer directly manufactures or contracts to manufacture and the "generic" ones it purchases to include in a product.
- Packaging or containers sold with a product are not considered part of the product and are not subject to the rule. If, however, an issuer manufactures and sells packaging or containers independent of the product, the packaging or containers would be considered a product.
- An issuer that manufactures or contracts to manufacture equipment used in providing services is not required to report on conflict minerals in that equipment, 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 the term of the service.
- An issuer that manufactures or contracts to manufacture tools, machines and equipment for its own use in manufacturing is not required to report on conflict minerals in such equipment if it subsequently sells such equipment after use.
- Item 1.01(c)(2) of Form SD requires an issuer that manufactures or contracts to manufacture products that have not been found to be "DRC conflict free" or that are "DRC conflict undeterminable" to provide a description of the products. No specific form of product description is required 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. 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 is still required to file a Form SD with a Conflicts Mineral Report if its products contain conflict minerals from the Democratic Republic of the Congo or an adjoining country, even if the products are found to be "DRC conflict free." However, the issuer is not required to disclose the products containing those conflict minerals in its Conflict Minerals Report or provide certain other disclosures specified in Form SD because those products are "DRC conflict free."
- An IPO issuer may start reporting for the first reporting calendar year that begins no sooner than eight months after the IPO registration statement effective date.
- Failure to file a Form SD (regarding conflict minerals, as well as payments by resource extraction issuers) does not impact eligibility to use Form S-3.
The Resource Extraction FAQs
- An issuer that does not directly engage in any of the activities comprising commercial development of oil, natural gas or minerals, but controls another entity that engages in those activities and makes payments to governments to further those activities, is considered a resource extraction issuer and must comply with the disclosure requirements of Section 13(q) and the rules issued thereunder.
- A company providing only services associated with exploration, extraction, processing and export generally would not be considered to be a resource extraction issuer. Examples offered by the Division include (1) a company that provides hardware and logistics to help companies explore for or extract resources, and (2) a company engaged by an operator to provide hydraulic fracturing services or drilling services. Where a service provider makes a payment on behalf of a resource extraction issuer that falls within the definition of "payment" to a government, the resource extraction issuer must disclose such payments.
- A "mineral" for purposes of Section 13(q), Rule 13q-1 and Item 2.01 of Form SD is any material commonly understood to be a mineral, which would include any material for which disclosure would be required under Industry Guide 7, "Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations" (a copy of which is available here), notwithstanding any test of materiality used for purposes of Guide 7.
- Transportation of a resource generally would not be included within the definition of "commercial development" unless the activities are directly related to the export of the resource. Generally, the Division views the movement of a resource across an international border from host Country A to Country B by a company with an ownership interest in the resource as export falling within the definition of commercial development, but would not view transportation activities by an issuer that does not have an ownership interest in the resource as directly related to the export of the resource.
- Payments made by an issuer for use of a majority-owned government transportation service to supply people or materials to an extractive job site would not be covered by the disclosure rules.
- Penalties and/or fines related to resource extraction paid to government agencies are not reportable as fees.
- Payment information may not be provided on an accrual basis. The rules require that payment information be presented on an unaudited, cash basis for the year in which the payments are made.
- An issuer that has many sources of income in a particular country and pays corporate level income tax on the consolidated amount is not required to segregate income from resource extraction activities and disclose taxes paid only on that income for purposes of Rule 13q-1 and Form SD. An issuer may elect to segregate such income and only disclose related income taxes or may choose not to segregate the income information and simply disclose that the information includes payments made for purposes other than commercial development activities.
ABOUT SCHIFF HARDIN LLP
With significant experience in the federal securities laws, Schiff Hardin is well-positioned to provide public companies across the United States with the full range of services necessary to compete effectively in today's global marketplace. Our primary goals are to know our clients, learn their business and their industry, and work closely with them to address the many legal, regulatory and other challenges currently facing public companies.
For more information, see our Web site.