The Division of Corporation Finance of the U.S. Securities and Exchange Commission (the "SEC") recently released guidance in a question and answer format (“FAQ Guidance”) providing responses to nine interpretive questions that have arisen in connection with Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Conflict Minerals Rule”). The full FAQ Guidance is available at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm.
The recent FAQ Guidance supplements the SEC‟s initial FAQ guidance released in May 2013. For more information on the SEC‟s initial FAQ guidance, please read our memorandum dated June 18, 2013 titled SEC Provides Additional Conflict Minerals Guidance.
We have set forth below brief summaries of the principal takeaways of the FAQ Guidance, which generally fall into two categories: guidance on independent private sector audits (“IPSAs”) and guidance on Conflict Minerals Reports.1
Guidance Pertaining to Independent Private Sector Audit Requirements
IPSA auditors are not required to be CPAs.
Auditors that are not certified public accountants may perform the IPSA of an issuer‟s Conflict Minerals Report if they meet the applicable requirements under the U.S. Government Accountability Office‟s Government Auditing Standards (the “Yellow Book”), which can be found at http://www.gao.gov/yellowbook/overview.
An IPSA is not required if the issuer identifies any “DRC conflict undeterminable” products.
If, after exercising due diligence on the source and chain of custody of its conflict minerals, an issuer determines that at least one of its products may be described as “DRC conflict undeterminable,” an IPSA of the Conflict Minerals Report during the temporary transition period is not required. This transition period is four years for smaller reporting companies2 and two years for all other issuers.
A Conflict Minerals Report must not describe any products as “DRC conflict free” unless an IPSA is performed.
If an issuer does not obtain an IPSA of its Conflict Minerals Report because one of its products is “DRC conflict undeterminable,” it may not describe any of its other products as “DRC conflict free” in its Conflict Minerals Report. The SEC notes that an issuer is not required to describe any qualifying products as “DRC conflict free” in its Conflict Minerals Report, but may choose to describe certain products as “DRC conflict free” if the issuer is able to determine that the conflict minerals in those products did not finance or benefit armed groups based on its due diligence. However, since the rule defines due diligence as including an IPSA, an issuer must have obtained an IPSA to be able to describe qualifying products as “DRC conflict free.”
The scope of an IPSA is limited to the IPSA objectives provided in Rule 13p-1.
An IPSA must only satisfy the audit objectives set forth in Rule 13p-1, which include (1) whether the design of the issuer‟s due diligence measures as set forth in the issuers Conflict Minerals Report conforms, in all material respects, with the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer and (2) whether the issuer‟s description of the due diligence measures it performed in the Conflict Minerals Report is consistent with the due diligence process that the issuer undertook. The IPSA need not cover any matter beyond these objectives, including the completeness or reasonableness of the due diligence measures actually performed.
An IPSA is not required to cover an issuer‟s reasonable country of origin inquiry.
The SEC clarified that the IPSA does not need to opine on the reasonable country of origin inquiry—even when the issuer‟s diligence encompasses such inquiry—because, under the Conflict Minerals Rule, that inquiry is a distinct step separate from the due diligence process.
An issuer need not provide a full description of its due diligence design in its Conflict Mineral Report, but must provide sufficient detail regarding diligence measures actually performed to satisfy IPSA objectives.
Issuers are not required to include a full description of their due diligence design in Conflict Minerals Reports. However, the due diligence measures must be described in sufficient detail in the Conflict Minerals Report to allow the auditor to form an opinion about whether the description is consistent with the measures that the issuer actually performed.
Guidance Pertaining to Conflict Minerals Reports
Products containing any undeterminable conflict minerals cannot be described as “DRC conflict free” and products containing minerals that did support armed groups must be described as “having not been found to be „DRC conflict free.”’
During the temporary transition period, a product that would qualify as “DRC conflict free” except that the product contains a conflict mineral that the issuer is unable to determine did not originate in the DRC region, or did not finance or benefit armed groups in the region, may not be described as “DRC conflict free.”
During and after the temporary transition period, if a product contains a conflict mineral that did finance or benefit armed groups in the DRC region, it must describe that product as “having not been found to be „DRC conflict free.”’
Due diligence measures do not need to be conducted constantly throughout the year and may begin before or extend beyond the calendar year covered by a Conflict Minerals Report.
An issuer‟s due diligence measures must be applied to the conflict minerals in products manufactured during the calendar year covered by the Conflict Minerals Report and need not be carried out constantly throughout the year. The diligence measures can also begin before or extend beyond the calendar year covered by the Conflict Minerals Report.
If a product contains recycled or scrap minerals not requiring a Conflict Minerals Report and other conflict minerals that do require a Conflict Minerals Report, the recycled or scrap minerals need only be disclosed in the body of the Form SD.
If a product contains conflict minerals from recycled or scrap sources that alone would not require disclosure, but it also contains other minerals not from recycled or scrap sources that do require a Conflict Minerals Report, the report and any IPSA need not include disclosures about the recycled or scrap sources. However, the recycled or scrap minerals must be disclosed in the body of the Form SD.
The new FAQ Guidance provides additional answers to several open questions regarding IPSAs and Conflict Minerals Reports under the Conflict Minerals Rule. However, many interpretive questions remain unanswered. It appears that such questions may not be addressed by the SEC before June 2, 2014, the new Form SD filing deadline.