SEC Staff Guidance on Conflict Minerals of Interest to REITs

On May 30, 2013, the staff of the SEC Division of Corporation Finance (the “Staff”) published Frequently Asked Questions (“FAQs”) providing guidance on the new conflict minerals disclosure requirements stemming from Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The conflict minerals FAQs provide useful guidance for companies that are struggling with the issue of whether they are required to make disclosures regarding conflict minerals on Form SD, the first of which will be due in May 2014 for the 2013 calendar year. The conflict minerals disclosure requirements are generally applicable to a public company if conflict minerals are necessary to the functionality or production of a product the company manufactures or contracts to be manufactured.

We believe that most REITs have likely already determined that the development or redevelopment of real estate assets does not subject them to these disclosure requirements, even if these activities utilize conflict minerals, based, in part, on conclusions regarding the meaning of the terms “product” and “manufactured.” The FAQs published by the Staff did not include any guidance specifically related to the leasing, development or sale of real estate assets, but they did include an interpretation relating to the manufacture of cruise ships by companies that operate cruise lines that we believe supports the conclusion that development and redevelopment of real estate assets by REITs is not subject to the conflict minerals disclosure requirements.

Using companies that operate cruise lines as an example, the FAQs state that the Staff “does not interpret equipment used to provide services to be ‘products’ under the [conflict minerals] rule.” To come within this interpretation, the Staff stated that the “equipment” should satisfy both of the following conditions:

• the equipment that the company manufactures or contracts to have manufactured must be used for the “service” provided by the company, and
• the equipment must be retained by the service provider, returned to the service provider or intended to be abandoned by the customer following the term of the “service.”

While we do not believe that real estate assets are “equipment” or that leasing real estate assets is providing a “service,” we believe that this Staff interpretation supports the conclusion that the development or redevelopment of real estate assets that are primarily held for lease would not subject a REIT to the conflict minerals disclosure requirements. Note that the interpretive question answered by this FAQ would not arise in cases where a REIT acquires existing real estate assets, since the REIT did not “manufacture” or contract for the manufacture of such assets.

In addition, companies should note that another Staff interpretation published in the FAQs confirms that failure to timely file a Form SD regarding conflict minerals will not affect an issuer’s eligibility to use Form S-3. As a result, companies that, in good faith, conclude they are not subject to the conflict minerals disclosure requirements will not need to fear that they will lose Form S-3 eligibility in that event that they are later second-guessed.

Although the FAQs address some questions about the conflict minerals rules, other interpretive questions remain unanswered. In the absence of further SEC guidance, companies should continue to consult with their advisors (and, to the extent applicable, industry groups) as they make judgments about how to apply the conflict minerals rules to their specific circumstances. 

Goodwin Procter attorneys counsel clients on a range of issues associated with the conflict mineral disclosure requirements. Additional information from Goodwin Procter on conflict minerals is available here.