August 23, 2012

Here Comes Form SD: The SEC Adopts Conflict Mineral Rules

At yesterday’s Open Meeting, a divided Commission adopted the conflict mineral disclosure rules required by Section 1502 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted (we’re posting memos in our “Conflict Minerals” Practice Area). The general contours of the final rules are similar to the proposed rules and are consistent with the statutory direction from the Dodd-Frank Act, however the Commission did make some notable adjustments in the final rules in response to comments, including:

1. The conflict mineral disclosures (including, if necessary, the Conflict Minerals Report) won’t be channeled into the existing periodic reporting regime (i.e. Form 10-K) as was proposed, and will rather now be provided in a new Form SD, with “SD” standing for “specialized disclosure.” (The SEC has been referring to the Dodd-Frank mine safety, conflict minerals and resource extraction disclosure provisions collectively as “specialized corporate disclosure.”)

2. The Form SD will be deemed “filed,” but there won’t be any separate CEO/CFO certifications involved. At the Open Meeting, the Staff downplayed the “furnished” versus “filed” distinction which wasn’t adopted with respect to the conflict mineral disclosures.

3. A new outcome is contemplated under the rules, at least on a temporary basis – “DRC Conflict Undeterminable.” For a two-year period (four years for smaller reporting companies), if an issuer is unable to determine whether the minerals in its products originated in the covered countries (the Democratic Republic of the Congo and adjoining countries) or finance or benefited armed groups in those countries, then the company provides specified disclosures in the Conflict Minerals Report but doesn’t have to obtain an independent private sector audit.

4. The SEC has made a number of accommodations in the case of minerals that come from recycled or scrap sources.

5. The SEC provided useful guidance in interpreting the term “contracting to manufacture,” by specifically carving out situations where a company is not deemed to have influence over the manufacturing of the product.

Application of conflict mineral disclosure rules to companies seems pretty complicated, however check out the flowchart on page 33 of the adopting release – it does a nice job of laying out the various disclosure outcomes. Also, as companies are considering whether these rules apply to them, it is important to consider the lack of any di minimis standard in the statute or rule, and just how ubiquitous the four minerals (tantalum, tin, gold or tungsten) in products and manufacturing processes. All public reporting companies, including foreign issuers and smaller reporting companies, will be subject to the rules, and whether any disclosure will be required at all turns on whether the minerals are “necessary to the functionality or production” of a product that the subject company manufactured or contracted to be manufactured.

There was a lot of discussion at the Open Meeting about the costs involved with compliance, with estimates in the range of $3 billion to $4 billion!

Companies must comply with the final rule for the calendar year beginning January 1, 2013, with the first reports due May 31, 2014. All conflict mineral reporting will be on a calendar year basis and the Form SD will be required annually on May 31st.

More Form SD: The SEC Also Adopts Resource Extraction Payment Rules

The SEC also adopted the final rules requiring disclosure of payments by resource extraction issuers as directed by Section 1504 of the Dodd-Frank Act. The final rules are described in a fact sheet and the adopting release including the final rules has already been posted. This rulemaking was also a source of contention for the Commission (albeit a much smaller Commission, because two Commissioners were recused), and in the end the SEC did make a few tweaks to the proposals in response to commenters. Like the conflict minerals disclosures, the required disclosures about payments be resource extraction issuers are filed on Form SD (rather than on Form 10-K as proposed), in an exhibit that is electronically tagged using XBRL. These rules likewise apply to domestic and foreign issuers, as well as smaller reporting companies (and include payments made by a subsidiary or another entity that the issuer controls). A de minimis threshold for disclosure was established at $100,000, rather than based on some notion of materiality as some had hoped.

Resource extraction issuers will need to comply with these new rules for fiscal years ending after September 30, 2013. For the first report, the SEC has said that most resource extraction issuers can provide a partial report disclosing only those payments made after September 30, 2013, and then thereafter reports covering the full fiscal year will be required no later than 150 days after the end of the fiscal year.

The Second Deal Cube Tourney: Round One; 7th Match

As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:

Fancy Single Malt Whiskey Bottle
Standard w/ Tender Offer Announcement

Online Surveys & Market Research

– Dave Lynn