SEC Issues More FAQs On Conflict Minerals

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
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The SEC has issued nine additional frequently asked questions, or FAQs, on the SEC’s conflict reporting rules. Some of the highlights are:

  • IPSA and DRC Conflict Undeterminable.  If any of an issuer’s products are “DRC conflict undeterminable” during the transition period, the issuer is not required to obtain an IPSA of its Conflict Minerals Report. Which infers this is the case even if some of the issuer’s products are not DRC conflict undeterminable.
  • Some But Not All Products are DRC Conflict Undeterminable.  If an issuer does not obtain an independent private sector audit, or IPSA, of its Conflict Minerals Report because one of its products is “DRC conflict undeterminable,” it cannot describe any of its other products as “DRC conflict free” in its Conflict Minerals Report.
  • Combination of Conflict Minerals in Product.   In its Conflict Minerals Report, how should the issuer describe any particular product based upon the various combinations of conflict minerals in the product?  During the temporary transition period, if an issuer has 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 or an adjoining country, or is unable to determine did not directly or indirectly finance or benefit armed groups in those countries, the issuer may not describe that product as “DRC conflict free.”   Both during and after the temporary transition period, however, if an issuer determines that a product contains a conflict mineral that did finance or benefit armed groups in the DRC or an adjoining country, it must describe that product as “having not been found to be ‘DRC conflict free.’”
  • Scope of IPSA is Limited.  The scope of the IPSA does not include the completeness or reasonableness of the issuer’s due diligence, including with respect to which products the issuer described as “DRC conflict free” or “having not been found to be ‘DRC conflict free,’” or which suppliers are covered by the due diligence measures.  The IPSA scope is limited to the IPSA objective provided in the rule.  The IPSA objective is to express an opinion or conclusion as to whether:
    •  the design of the issuer’s due diligence measures as set forth in, and with respect to the period covered by, the issuer’s Conflict Minerals Report is in conformity, in all material respects, with the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and
    • the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook.
  • IPSA Does Not Include Reasonable Country of Origin Inquiry.  The IPSA does not need to include the reasonable country of origin inquiry because, under the rule, that inquiry is a distinct step separate from the due diligence process.    As a result, the independent private sector auditor need only opine on whether the design of the issuer’s due diligence framework is in accordance with the portion of the nationally or internationally recognized due diligence framework beginning after the country of origin determination.
  • IPSA Opinion. With regard to the second part of the IPSA objective, the issuer’s conflict minerals report is required to describe the due diligence measures it undertook.  As such, the independent private sector auditor need only opine on whether the issuer actually performed the due diligence measures described in the report after the issuer determined it had reason to believe its conflict minerals may have originated in the DRC or an adjoining country.
  • Recycled and Scrap. If the issuer determines that any conflict minerals in its product came from recycled or scrap sources, the issuer must include in the body of its specialized disclosure report on Form SD the required disclosures for those conflict minerals.  The issuer must also file a Conflict Minerals Report as an exhibit to the Form SD that includes a description of the due diligence it performed and any other required disclosures about its conflict minerals that are not from recycled or scrap sources.  The Conflict Minerals Report would not need to include the disclosures for the conflict minerals from recycled or scrap sources.  An issuer is only required to obtain an IPSA of its Conflict Minerals Report and not of the disclosures contained in the body of its Form SD.
  • Continuous Due Diligence?  An issuer’s due diligence measures must apply to the conflict minerals in products manufactured during the calendar year.  This requirement, however, does not imply that due diligence measures must be carried out constantly throughout the calendar year.  It is also possible that the issuer’s due diligence measures may begin before or extend beyond the calendar year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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