United States: SEC Staff Provides Guidance On Conflict Mineral And Resource Extraction Disclosure Requirements

On May 30, 2013, the staff (the "Staff") of the U.S. Securities and Exchange Commission (the "SEC") published Frequently Asked Questions ("FAQs") regarding certain disclosures required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act").1 The new FAQs provide important guidance to issuers regarding disclosures they may be required to make in connection with products containing conflict minerals and certain payments made by resource extraction issuers.

BACKGROUND

Title XV of the Dodd-Frank Act, entitled "Miscellaneous Provisions," contains these "specialized corporate disclosure" provisions, which include:

  • Conflict Minerals. Section 1502 of the Dodd-Frank Act requires issuers to disclose annually whether any "conflict minerals" that are "necessary to the functionality or production" of a product of the issuer originated in the Democratic Republic of the Congo or an adjoining country and, if so, to provide a report describing, among other matters, the measures taken to exercise due diligence on the source and chain of custody of those minerals. This disclosure must include an independent private sector audit of the report that is certified by the issuer.
  • Resource Extraction Payments. Section 1504 of the Dodd-Frank Act requires issuers engaged in the commercial development of oil, natural gas, or minerals to disclose, in an annual report, certain payments made to the United States or a foreign government.

In August 2012, the SEC adopted final rules establishing the process by which issuers provide the disclosures required by the specialized corporate disclosure provisions.2 Pursuant to these rules, issuers are required to provide such disclosures using the newly promulgated Form SD. Disclosures made pursuant to the Conflict Minerals Rule are included under Item 1.01 of Form SD, while disclosures under the Resource Extraction Rule are included under Item 2.01 of Form SD.

Since the adoption of the new rules, issuers have raised a variety of questions with the Staff regarding the scope of the specialized corporate disclosure requirements. In the FAQs, the Staff has attempted to respond to several of the most common inquiries.

CONFLICT MINERALS GUIDANCE

The Conflict Minerals FAQs provide guidance regarding the disclosure requirements under the Conflict Minerals Rule, including:

  • Types of Issuers Covered. The Conflict Minerals Rule applies 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 (thereby including so-called "voluntary files"). 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 Minerals Rule.
  • Mining Activities Do Not Trigger Disclosure. Issuers that only engage in activities customarily associated with mining (including gold mining of lower grade ore) are not considered to be "manufacturing" those minerals and are not required to make disclosures under Item 1.01 of Form SD.
  • Consolidated Subsidiaries Covered. Issuers must determine the origin of conflict minerals, and make any required disclosures regarding such minerals, for themselves and all consolidated subsidiaries.
  • Etching a Logo or Identifier Not Considered Contracting to Manufacture. In the commentary to the Conflict Minerals Rule adopting release, the SEC noted that an issuer is not considered to be "contracting to manufacture" a generic product if its actions involve no more than "affixing its brand, marks, logo, or label to a generic product manufactured by a third party." In the FAQs, the Staff indicated that etching or otherwise marking a generic product, manufactured by a third party, with a logo, serial number, or other identifier is not considered to be "contracting to manufacture."
  • Generic Components Require Inquiry. Issuers are required to conduct a reasonable country of origin inquiry with respect to conflict minerals included in generic components included in products they manufacture or contract to manufacture. There is no distinction between the components of a product that an issuer directly manufactures or contracts to manufacture and the "generic" components of a product the issuer purchases to include in a product.
  • Packaging Not Part of Products. The packaging or container sold with a product is not considered to be part of the product for purposes of the Conflict Minerals Rule. This is true even if a product's package or container is necessary to preserve the usability of the 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.
  • Equipment Used to Provide Services Not Considered Products. The Staff indicated that it "would not object if issuers did not file reports . . . 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." The Staff further indicated that it does not consider equipment used to provide services to be products under the Conflict Minerals Rule.
  • Tools, Machines, and Equipment Not Considered Products. An issuer's tools, machines, or other equipment that it manufactures or contracts to have manufactured are not considered "products" of that issuer. Even if such tools, machines or other equipment are later sold by the issuer, the Staff will not view the items' entry into the stream of commerce as transforming them into products of the issuer.
  • Form S-3 Eligibility. The failure by an issuer to timely file Form SD for disclosures required under the Conflict Minerals Rule does not impact an issuer's eligibility to file a registration statement on Form S-3.

RESOURCE EXTRACTION GUIDANCE

The Resource Extraction FAQs also provide useful guidance on several topics related to disclosure requirements under the Resource Extraction Rule, including:

  • Subsidiaries and Controlled Companies. Payments made to governments by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer must be disclosed by the issuer. A reporting issuer that is not engaged in commercial development activities itself but which has a subsidiary or entity under its control that engages in those activities would be considered a resource extraction issuer and would be subject to the resource extraction disclosure requirements.
  • Service Providers Are Not Resource Extraction Issuers. Companies providing only services associated with resource exploration, extraction, processing, and export generally would not be considered to be "resource extraction issuers." By way of example, the Staff noted that it does not believe companies that provide hardware and logistics to help companies explore for or extract resources would be considered to be exploring for or extracting the resources even though their services are being used to explore or extract. Similarly, the Staff stated that it does not believe a company engaged by an operator to provide hydraulic fracturing services or drilling services for the operator, thus enabling the operator to extract resources, would be considered to be a resource extraction issuer. If, however, a service provider makes a payment on behalf of a resource extraction issuer that falls within the definition of "payment" under the Resource Extraction Rule, the resource extraction issuer must disclose such payments.
  • "Mineral" Definition. For purposes of the Resource Extraction Rule, disclosure is required with respect to "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,' notwithstanding any test of materiality used for purposes of Guide 7."
  • Transportation Activities. If an issuer transports resources across international borders and has an ownership interest in such resources, the Staff indicated that it would consider the issuer to be a resource extraction issuer. The Staff also indicated, however, that it would not consider an issuer to be a resource extraction issuer if it merely transported resources in which it did not have an ownership interest across international borders.
  • Cash Basis Reporting. Payments required to be disclosed under the Resource Extraction Rule should be presented on an unaudited, cash basis for the year in which the payments are made.
  • No Requirement to Segregate Taxable Income. If a resource extraction issuer pays taxes on multiple sources of income in a particular country and is required to disclose such tax payments under the Resource Extraction Rule, the issuer may either (1) elect to segregate income from exploration, extraction, processing, and export from income earned on other business activities, and disclose only income taxes paid solely on the income generated by the commercial development activities or (2) report the aggregate tax payment and disclose that the reported payment information includes payments made for purposes other than commercial development activities.
  • Form S-3 Eligibility. The failure by an issuer to timely file Form SD for disclosures required under the Resource Extraction Rule does not impact an issuer's eligibility to file a registration statement on Form S-3.

CONCLUSION

As a reminder, the new reporting requirements under the Conflict Minerals Rule are now in effect for the calendar year ending December 31, 2013, and any required disclosures must be included in a report on Form SD filed by May 31, 2014. Disclosures required under the Resource Extraction Rule must be included in a report on Form SD filed within 150 days after the conclusion of any fiscal year ending after September 30, 2013. Issuers who have not already done so should begin to assess their compliance with, and implement appropriate disclosure controls and procedures regarding, these new disclosure requirements.

Footnotes

1. See Dodd-Frank Wall Street Reform and Consumer Protection Act Frequently Asked Questions: Conflict Minerals (May 30, 2013), available at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm (the "Conflict Minerals FAQs"); Dodd-Frank Wall Street Reform and Consumer Protection Act Frequently Asked Questions: Disclosure of Payments by Resource Extraction Issuers (May 30, 2013), available at http://www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm (the "Resource Extraction FAQs").

2 See Conflict Minerals, Exchange Act Release No. 34-67716 (Aug. 22, 2012); Disclosure of Payments by Resource Extraction Issuers, Exchange Act Release No. 34-67717 (Aug. 22, 2012); see also 17 C.F.R. 13p-1 (the "Conflict Minerals Rule"); 17 C.F.R. 240.13q-1 (the "Resource Extraction Rule").

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.