In our Weekly Recap #6, we called your attention to a conflict minerals article in Forbes Magazine that described what it called a “loophole” in the Conflict Minerals Rule. After the article was published, the author engaged in a long online discussion about his perhaps wishful, perhaps misguided conclusions. While the author might have been advocating a position that he would like to take, it is clear that a “loophole” is not provided in the SEC Release. At most, the Release leaves room that certain activity may not be deemed to be “manufacturing.” In fact, the loophole suggested in the article and proposed by commentators was closed by the final Rule. But, you may now find yourself having to respond to those who point to this article in support of a position that your company is not covered by the Rule.
It would not be wise for a company to conclude that it has no diligence or disclosure obligations merely because it thinks of its activity as “assembly.” The SEC Release specifically rejected this position after it was advocated by a number of those who provided comment to the proposed rule. In response to these proposals, the SEC noted that excluding assembly altogether would exclude from the Rule “large categories of issuers that manufacture products through assembly, such as certain auto and electronics manufacturers, whom we believe are intended to be covered by the Conflict Minerals Statutory Provision.” See Release, page 61 and Squire Sanders Interactive Flowchart under the term “manufacture.” Note that the SEC states that “manufacture through assembly” is covered by the Rule, but it does not say that all assembly is manufacture. I would argue that companies whose activities involve the joining of a few component parts or the placing of one part into another may not be “manufacturing through assembly” and therefore not covered by the Rule. So, it is possible to conclude correctly that an activity is not “manufacturing,” but such a conclusion must be reached carefully and after due consideration of all the facts and circumstances. Also, it’s important to remember that you need to undertake this analysis for each of your company’s products. You may conclude that you manufacture one product but not another.
Many of the key terms of the Conflict Minerals Rule are not defined in the Release because the SEC believed that the meanings were generally understood. Instead, the SEC chose to provide examples of what some of the key terms mean (and what they do not mean). The SEC advises companies to consider all the particular facts and circumstances when considering whether the Rule applies to them and their activities. In fact, the Release uses the phrase “facts and circumstances” 22 times to describe the required review and consideration. Clearly, the SEC is expecting thoughtful analysis of each activity to determine whether the Rule applies. Companies should not be reluctant to conclude that the Rule does not apply to certain activities. But, those conclusions should be reached thoughtfully and in a way that can be justified later if necessary.
We will continue to use our Weekly Recaps to draw your attention to news items and commentary of the prior week. By noting them, we are not endorsing their conclusions or what is recited in them as “facts,” but we hope to compile relevant information for your consideration. That said, from time to time we will, either directly or indirectly, weigh in on some conclusions reached in those stories in order to move the dialogue forward. We invite you to use this blog as a forum to discuss them as well.