SEC Issues Guidance on Conflict Minerals Rules

Today we have a guest post from Kimberley R. Anderson, a partner at Dorsey & Whitney, resident in the Seattle, Washington office. Kimberly is a member of the firm’s capital markets group and focuses her practice on corporate and securities issues and cross-boarder matters. Her post today discusses the SEC’s new guidance on conflict minerals, a controversial area which has spawned extensive comment. Secactions welcomes the submission of other posts in key securities law areas.

On May 30, 2013, the Securities and Exchange Commission (SEC) issued its long anticipated guidance on the conflict minerals rules. The highly burdensome rules, which require disclosure regarding use and sources of “conflict minerals,” were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FAQs provide significant relief for certain kinds of manufacturers, particularly those in the food industry. The FAQs are available here.


In response to the extreme levels of violence in the Democratic Republic of the Congo (DRC), which Congress felt was financed in part by the trade of “conflict minerals,” in 2010 Congress mandated the SEC to adopt regulations requiring additional disclosure by SEC reporting companies that use conflict minerals in product manufacturing. Conflict minerals include tantalum, tin, tungsten and gold. All categories of SEC reporting companies are covered by the disclosure rules, including foreign private issuers and smaller reporting companies. The final rule release is available here.

SEC Guidance

The FAQs provide much needed clarification on a wide range of topics.

What constitutes a product for purposes of the rules?

· Perhaps most significantly, the FAQs specify that packaging containing conflict minerals is not considered part of the product, 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.” The question of whether packaging is necessary to the functionality of the product, and therefore considered part of the product, has been a nagging question since the rules were adopted. Canned soup is one commonly used example of this question. Is the product soup, or soup in a can? Now we know that, according to the Staff, the product is just the soup.

· Issuers that manufacture or contract to manufacture equipment, such as a cruise ship, used to provide a service are not subject to the conflict minerals rules with respect to that equipment, “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.”

· If an issuer manufactures or contracts to manufacture equipment containing conflict minerals that the issuer uses to manufacture its products, the issuer may subsequently resell the used manufacturing equipment without regard to the conflict minerals rules. Such manufacturing equipment is not considered to be a product of the issuer requiring a conflict minerals analysis.

What activities are not considered manufacturing or contracting to manufacture?

· Mining of conflict minerals is not considered manufacturing under the rules. In addition, the FAQs clarify that activities relating to mining are also not considered to be manufacturing. These activities include, but are not limited to: 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 the refining process.

· Etching or marking a logo or other identifier on a generic product manufactured by a third party is not considered to be “contracting to manufacture.”

What entities are subject to the rules?

· Voluntary filers are subject to the conflict minerals rules.

· Where the manufacturing activities are conducted by a consolidated subsidiary but not the issuer, the issuer must make the mandated inquiries and disclosures for itself and its consolidated subsidiaries.

· The FAQs provide some relief for newly public companies. Newly public companies may begin reporting with the first calendar year that begins no sooner than eight months after the effective date of the registration statement for its IPO.

Reporting Guidance

· Issuers must conduct reasonable country of origin inquiries for generic components included in manufactured products, if the generic components include conflict minerals.

· For products containing conflict minerals that are “DRC conflict undeterminable” or not “DRC conflict free,” product descriptions required by Form SD may be determined by the issuer based on the facts and circumstances, and need not include model numbers. However, the Conflict Minerals Report must clearly state that the product is “DRC conflict undeterminable” or “not found to be DRC conflict free.”

· Issuers that manufacture products containing conflict minerals which are “DRC conflict free” must still file a Form SD with an audited Conflict Minerals Report, but certain product information need not be specified.

· Failure to timely file a Form SD will not impact Form S-3 eligibility.


The conflict minerals rules have been subject to an ongoing lawsuit commenced last October by the National Association of Manufacturers, together with the U.S. Chamber of Commerce. The SEC guidance discussed above provides clarification and welcome relief, particularly to packaged goods manufacturers, but we expect the rules will continue to impose a significant burden on many issuers and their suppliers.

ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to Webcast nationally by the ABA and available in other Dorsey & Whitney offices. For further information please click here.

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