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SEC Issues Final Rule on Conflict Minerals

- February 2013

The Securities & Exchange Commission (SEC) has issued its final rule that applies to certain publicly-traded companies that manufacture, or contract for the manufacture of, products that contain conflict minerals (tin, tantalum, tungsten or gold) that are necessary to the functionality or production of a product.  Please note that it is possible that a wholesaler-distributor or other reseller may, with respect to one or more of its products, qualify as a manufacturer or a company that contracts to manufacture a product.

Covered firms must disclose in an annual SEC filing (a new SEC Form SD) whether any conflict minerals used in their products originated in the Democratic Republic of the Congo or an adjoining country.  The filing must also include required information concerning the company’s conflict minerals compliance program.  The rule – a 356 page pdf – may be viewed at:  www.sec.gov/rules/final/2012/34-67716.pdf.  The rule was also published in the Federal Register on September 12, 2012, 77 Fed. Reg. 56274, and is effective January 1, 2013.  A fact sheet on the rule can be viewed at:  www.sec.gov/news/press/2012/2012-163.htm.  The SEC was required to adopt the rule by a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Companies Covered by the Rule

According to an SEC flowchart (Rule, p. 33), the rule applies to a company (referred to as an “issuer”) that files reports with the SEC under sections 13(a) or 15(d) of the Exchange Act—basically, a company whose stock is publicly traded.  However, private companies may be indirectly affected by the rule to the extent they are upstream suppliers to a public company.

In addition, the rule only covers an issuer who “manufactures” or “contracts to manufacture” one or more of the products it sells.  Thus, a public company will need to determine, for each product it sells, whether it manufactures the product or whether it contracts to manufacture the product.

The term “manufacture” is not defined in the rule because the SEC believes that the term is generally understood.  However, the SEC will not consider a company that only services, maintains or repairs a product containing conflict minerals to be a manufacturer of that product. (Rule, p. 60).

The term “contracts to manufacture” is not defined either.  Instead, the SEC offers this (Rule, pp. 61-62):

     “In general, the question of whether an issuer contracts to manufacture a product will depend
     on the degree of influence exercised by the issuer on the manufacturing of the product based
     on the individual facts and circumstances surrounding an issuer’s business and industry.

     The final rule does not define when an issuer contracts to manufacture a product because,
     although we believe this concept is intuitive at a basic level, after considering comments and
     attempting to develop a precise definition, we concluded that, for ‘contract to manufacture’ to
     cover issuers operating in the wide variety of the impacted industries and structured in various
     manners, any definition of that term would be so complicated as to be unworkable.” (Italics added).

The rule goes on to provide guidance on some general principles that the SEC believes are relevant in determining whether an issuer should be considered to be contracting to manufacture a product. (Rule, pp. 62-67).

Rule Being Challenged in Court

In October 2012, several business organizations filed a legal challenge to the rule in the U.S. Court of Appeals for the District of Columbia (National Association of Manufacturers, et al. v. Securities and Exchange Commission, No. 12-1422), claiming on numerous grounds that the agency rule is erroneous, arbitrary and an abuse of discretion.  The case is pending and no stay of enforcement has been issued by the court as of this writing.

Conclusion

The rule is extremely lengthy and complex.  Compliance by a publicly-traded company and attestation to compliance by an executive officer will require the active involvement of, and advice from, securities counsel, its outside auditors and other professionals, based on the company’s specific business operations and product offerings.  A thorough analysis of each product a company sells to determine whether it is “manufactured” or “contracted for manufacture” by the company will be an important part of the firm’s overall conflict minerals compliance program and its due diligence efforts necessary to implement the program as required by the SEC rule.