June 27, 2013

SEC's FAQ on the New Conflict Minerals Rules Leaves Many 'Frequently Asked Questions' Unanswered for the Consumer Sector

Seller Beware: Consumer Protection Insights for Industry,

We have previously discussed the Securities and Exchange Commission's (SEC's) struggle to develop rules as required by the Dodd-Frank Act on the reporting of companies' use of four "conflict minerals" -- tin, tungsten (a hard, dense metal used in applications such as x-ray tubes), tantalum (a hard, corrosion-resistant metal used in capacitors for electronic equipment, among other things) and gold derived from the Democratic Republic of Congo and surrounding countries. These minerals are so named because their excavation often comes as a result of civil strife, and, in some cases, bloodshed. Last August, the SEC issued its "final rule," which left many questions unanswered about what products and companies it covers and the level of due diligence required of companies encompassed by the rule. The legal landscape is further complicated by the fact many industry groups representing the more than 5,000 companies estimated to be affected by the rule -- including companies in the automotive, electronics, construction, medical equipment, and aerospace sectors -- have been vocally critical of the rule. Indeed, a lawsuit brought by the National Association of Manufacturers and US Chamber of Commerce challenging the rule is pending in federal court in the District of Columbia.

Helpful information in the SEC's FAQ. Against this backdrop, the SEC issued an FAQ on May 30th that attempted to clarify some of the outstanding unknowns about the rule and its implementation. Some of the explanations provided by SEC staffers, which are explained in greater detail in our advisory on this topic, may be of interest to the readers of this blog:

  • Packaging sold with a product is not considered part of a "product" covered by the rule, so a company need not report a product if it contains conflict minerals only in its packaging. This will come as a relief for the food industry and other sectors that are unlikely to have conflict minerals incorporated into the product itself, but might use such minerals in their packaging.
  • Equipment used to provide a service is not a "product" covered by a rule, so equipment such as a cruise ship or rental car need not be reported even if it contains conflict minerals.
  • The SEC also confirmed that if all a company does to a third-party generic product it buys to resell is put its logo or other branding on it, that product need not be reported under the rule.
  • On the other hand, if a company's product contains conflict minerals, it must be reported even if the conflict minerals are only in a generic component the company purchased from a third party. For example, if a cell phone manufacturer's products only contained conflict minerals in generic battery components that the manufacturer purchased from a third party, the cell phone manufacturer would still be required under the rule to report those products.
  • Companies also need to file a conflict minerals report if the products produced by their consolidated subsidiaries would be covered by the rule.
  • Even companies that are voluntary filers of annual reports with the SEC may be covered by the rule.

Much is left unanswered. The SEC's latest guidance has, for the most part, merely confirmed prevailing views on compliance with the conflict minerals rule. But many important questions remain unanswered, including what steps will be sufficient in the SEC's eyes to constitute "due diligence" for a company's investigation into the country of origin and supply line of any conflict minerals used in their products. Companies potentially affected by this rule should keep tabs on the pending litigation challenging the rule as well as any further guidance the SEC may issue. This blog, as well as Arnold & Porter's more in depth advisories, will continue to track this area.

© Arnold & Porter Kaye Scholer LLP 2013 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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