With a year to go until the first disclosure reports on the use of “conflict minerals” are due on May 31, 2014, the Securities and Exchange Commission has issued fresh guidance.

In August 2012, the Commission issued a final rule specifying how companies must report the use of certain minerals—including tin, tantalum, tungsten, and gold—mined in the war-torn Congo region of Africa and often used to fund violent militia groups. The rule, a mandate of the Dodd-Frank Act, requires companies to determine and disclose the source country of those minerals. A Reasonable County of Origin Inquiry is required, with disclosure of this assessment ddetailed in the SEC's new Form SD. If designated minerals do, or might, come from covered countries, additional due diligence into the source and chain of custody of those minerals is demanded, along with an audit of that assessment.

The latest guidance was published by the SEC's Division of Corporation Finance in the form of “frequently asked questions.”

Among the scenarios addressed was whether a conflict mineral necessary to the functionality or production of a package or container also be considered necessary to the functionality of the accompanying product under the rule?  What if the container or packaging is necessary to preserve the product until the time the product is purchased or used?

In these situations, the SEC provides some disclosure relief. Only a conflict mineral contained in the item itself would be considered necessary to its functionality or production.  The packaging or container sold with a product is not considered to be part of it, as it is generally discarded.  This holds is true even if the packaging is necessary to preserve its usability up to and following purchase. If, however, an issuer independently manufactures and sells packaging or containers they would then be considered a product.

Among the other matters clarified in the new FAQ:

An issuer is not considered to be “contracting to manufacture” a generic product if its actions involve nothing more than “affixing its brand, marks, logo, or label to a generic product manufactured by a third party.” 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.”

Even if a product with conflict minerals necessary to its functionality or production is manufactured by a consolidated subsidiary, rather than directly by the issuer, it is still subject to the rule.

Registered investment companies that are required to file reports pursuant to Rule 30d-1 under the Investment Company Act are not subject to the rule. 

An issuer that only engages in activities customarily associated with mining is not considered to be manufacturing those minerals.

If a product manufactured by an issuer, or contracted by an issuer to be manufactured, contains a conflict mineral solely because one is in a “generic” component included in the product, the issuer must still conduct a reasonable country of origin inquiry.

The failure to timely file a Form SD regarding conflict minerals will not cause an issuer to lose eligibility to use Form S-3, the simplified securities registration form.

Form SD guidelines allow an issuer that acquires or obtains control over a company that manufactures or contracts to manufacture products containing conflict minerals to report on the acquired company's products beginning with the first reporting calendar year that begins no sooner than eight months after the effective date of the acquisition. A similar accommodation is provided for an issuer that conducts an initial public offering, based on the effective date of its registration statement.