SEC Issues FAQS Regarding Conflict Minerals and Resource Extraction Issuer Disclosure Requirements Under Dodd-Frank Act
The SEC's Division of Corporation Finance recently issued much-anticipated interpretive guidance, in the form of frequently asked questions, regarding the conflict minerals and resource extraction issuer disclosure requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The interpretive guidance is consistent with our previous publications discussing the SEC's rules on these topics. These FAQs provide additional clarification on certain key topics.
Packaging Is Not Part of a "Product." The packaging or container sold with a product is not considered part of the product, even if the packaging or container is necessary to preserve the usability of that product. As a result, for example, the tin used in tin cans to package a company's products would not be subject to the rules, although the company must still consider whether the product contained in the packaging is subject to the rules.
Mining and Certain Related Activities Are Not Subject to the Rules. Mining is not considered "manufacturing" under the rules. Furthermore, a company engaging only in activities customarily associated with mining, including transporting, crushing, milling, and smelting ore, is also not engaged in "manufacturing."
Service Provider Equipment in Providing a Service Is Not a "Product" Under the Rules. Equipment manufactured, or contracted to be manufactured, by service providers (such as airlines and cruise lines) in providing a service is not considered a "product" subject to the rules, as long as the equipment is retained by the service provider, required to be returned to the service provider, or intended to be abandoned by the customer following the terms of the service.
Generic Components Are Subject to the Rules. The rules apply to any component of a product that contains conflict minerals, even if the component is a generic item that the company did not manufacture or contract to manufacture.
Even if Products Are "DRC Conflict Free," a Form SD and a Conflict Minerals Report Are Required. A company that manufactures, or contracts to manufacture, products containing conflict minerals is required to file a Form SD and a Conflict Minerals Report under the rules, even if due diligence determines that the products are "DRC conflict free." However, disclosure of products containing those minerals is not required.
Resource Extraction Issuer Disclosure Requirements
Companies That Provide Only Services Are Not Subject to the Rules. Only companies directly engaged in the exploration, extraction, processing, and export of oil, natural gas, or minerals must disclose payments. A company that provides only services associated with such activities, such as hardware, logistics, hydraulic fracturing, or drilling services, would not be a "resource extraction issuer." However, where a service provider makes a payment that falls within the definition of "payment" to a government on behalf of a company, the company must disclose such payment.
Transportation Activities Are Not Subject to the Rules, Unless a Company Has an Ownership Interest in the Resources Being Transported. The movement of a resource across an international border by a company is not considered to be an "export" subject to the rules unless the company has an ownership interest in such resource. As a result, a company that merely transports resources across international borders, but does not have an ownership interest in such resources, is not a "resource extraction issuer" under the rules.
Penalties and Fines Paid to Government Agencies Are Not Subject to the Rules. Because penalties and fines paid to governments are not part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals, these penalties and fines are not reportable.
Definition of "Mineral" Under the Rules. Disclosure is required for 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." For example, metalliferous minerals, coal, shale, tar, sands, and limestone, among other materials, are considered minerals under the rules, notwithstanding any test of materiality used for purposes of Guide 7.
Voluntary Filers Are Required to File Form SD. Any company that files reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, whether or not the company is required to file such reports, is subject to the rules with respect to conflict minerals. Accordingly, voluntary filers, such as "debt only" filers, may have to file a Form SD with respect to conflict minerals.
No Impact on Form S-3 Eligibility. Failure to timely file a Form SD by a resource extraction issuer or regarding conflict minerals will not affect the company's eligibility to use Form S-3, although the company potentially would be subject to SEC enforcement actions for failure to file such form.
For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.
Bradley C. Brasser
Michael G. Marting
Michael J. Solecki
Darrell W. Taylor
Andrew C. Thomas, an associate in the Cleveland Office, assisted in the preparation of this Commentary.Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our web site at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.