On April 7, the SEC staff issued nine new FAQs regarding conflict minerals reporting. These questions address some of the issues regarding the content of Form SD and the Conflict Minerals Report (CM Report) that companies are struggling with as they prepare their initial filing, due by June 2, 2014. In particular, these questions deal with how a company should report (1) multiple products subject to the disclosure requirement, only some of which will be described as "conflict undeterminable" in 2014, and (2) products that contain multiple conflict minerals, or a combination of conflict minerals from scrap sources and conflict minerals from the Democratic Republic of the Congo (DRC) or adjacent countries. In addition, several questions relate to the scope of the Independent Private Sector Audit (IPSA) requirement.
The nine new questions and answers, which join twelve prior FAQs issued in May 2013, are available on the Commission’s website and can be viewed here. Below is a brief summary of some of the key points in the new FAQs.
IPSA Requirement During the Transition Period. During the initial reporting years (four years for smaller companies and two years for other issuers), companies are allowed to describe products as "DRC conflict undeterminable," if, after due diligence, they are unable to determine whether conflict minerals in their products originated in the DRC or its neighbors, or whether such conflict minerals supported armed conflict in the region. The instructions to Form SD state that companies are not required to submit an IPSA with respect to conflict minerals in products that are "DRC conflict undeterminable." This has raised a question about whether an IPSA is required if only some of a company’s products are "undeterminable." FAQ #14 states that an IPSA is not required in this situation. "If any of the issuer’s products are ‘DRC conflict undeterminable" during this [transition] period, the issuer is not required to obtain an IPSA of its Conflict Minerals Report."
Describing Some Products as "Conflict Free" and Others as "Conflict Undeterminable." FAQ #15 states that an issuer may not describe a product as "conflict free" unless it has obtained an IPSA. Products may only be described as "conflict free" on the basis of due diligence, which is defined as including an IPSA of the CM Report. Therefore, a company that does not obtain an IPSA during the transition period because some products are "undeterminable" may not describe any of its products as "conflict free."
Products that Contain Conflict Minerals from Several Sources. FAQ #16 explains that, during the transition period, a product that would qualify as "DRC conflict free" except for the presence of a conflict mineral as to which the company cannot determine the origin (or whether it financed or benefitted armed groups) may not be described as "DRC conflict free." Both during and after the transition period, a product that contains a conflict mineral that financed or benefitted armed groups in the DRC or its neighbors must be described as "having not been found to be ‘DRC conflict free’" — regardless of the status of other conflict minerals in that product.
Products that Contain Scrap and Non-Scrap Conflict Minerals. A product subject to the rule might contain some conflict minerals from recycled or scrap sources and some from other sources. FAQ #19 states that, in this situation, the company’s Form SD must include the required disclosure regarding recycled or scrap minerals. The company must also file a CM Report containing the required disclosures about the conflict minerals that are not from recycled or scrap sources. The CM Report need not include the recycled or scrap sources disclosures. Also, the company would only be required to obtain an IPSA of the CM Report; the IPSA would not be required to include the Form SD disclosure about the scrap/recycled minerals.
Description of the Design of the Issuer’s Due Diligence. One of the two objectives of the IPSA is to express an opinion as to whether the design of the company’s due diligence measures "as set forth in, and with respect to the period covered by, the Conflict Minerals Report" is in material conformity with the criteria in the nationally or internationally due diligence framework used by the company. Apart from this statement, there is no explicit requirement that a CM Report contain a description of the design of the company’s due diligence. FAQ #21 confirms that the "rule does not require an issuer to include a full description of the design of its due diligence in the Conflict Minerals Report." However, FAQ #21 also says that the due diligence measures undertaken must be described "in sufficient detail for the auditor to be able to form an opinion or conclusion about whether the description in the Conflict Minerals Report is consistent with the process the issuer actually performed."
Scope and Duration of Due Diligence. While the issuer’s due diligence measures must apply to products manufactured during the calendar year covered by the report, those procedures do not have to be carried out constantly throughout the year and may begin before, or extend beyond, the calendar year. (FAQ # 20)
Scope of the IPSA. Although most companies will probably not require an IPSA this year, several FAQs address IPSA issues. The IPSA-related guidance:
- The IPSA can be performed by an auditor that is not a CPA. Under the applicable GAO standards, the IPSA may be performed as an Attestation Engagement (which requires a CPA) or as a Performance Audit (which can be performed by other qualified auditors). (FAQ #13)
- The scope of the IPSA does not include the completeness or reasonableness of the company’s due diligence measures or which suppliers are covered by those measures. The objectives of the IPSA are limited to expressing an opinion or conclusion on (1) whether the design of the due diligence measures is in material conformity with the nationally or internationally recognized due diligence framework used by the company; and (2) whether the description of the due diligence measures performed is consistent with the due diligence process the company undertook. (FAQ #17)
- The IPSA does not encompass the company’s reasonable country of origin inquiry, even if the nationally or internationally recognized due diligence framework used by the company includes country of origin procedures. (FAQ #18)