The Securities and Exchange Commission (SEC) recently updated its answers to frequently asked questions from registered companies to provide additional guidance on disclosure requirements under its conflict minerals rule. The update clarifies the scope of corporate disclosure requirements related to whether their conflict minerals originated in the Democratic Republic of the Congo (DRC) or an adjoining country (Covered Countries) and the role of independent auditors. Below is a summary of the guidance issued.
Independent Private Sector Audits (IPSA)
IPSA required for "DRC conflict free" products. An IPSA is required any time an issuer claims its conflict minerals are "DRC conflict free" in its Conflict Minerals Report. Conflict minerals may only be designated as DRC conflict free if an issuer's due diligence — including an IPSA of the Conflict Minerals Report — is able to determine that its conflict minerals did not finance or benefit armed groups in any of the Covered Countries.
Auditors do not have to be CPAs. Auditors performing an IPSA of an issuer's Conflict Minerals Report do not have to be certified public accountants, but must meet the applicable requirements under the Government Accountability Office's Generally Accepted Government Auditing Standards (the Yellow Book).
No IPSA required if any products are "DRC conflict undeterminable" during transition period. An issuer is not required to obtain an IPSA during the temporary transition period — four years for smaller companies and two years for all others — if any of its products can be described as "DRC conflict undeterminable."
IPSA does not evaluate the completeness/reasonableness of due diligence. The scope of the IPSA does not include an evaluation of the completeness or reasonableness of the issuer's due-diligence measures. Rather, it is limited to a determination as to whether (1) the issuer's due-diligence framework is consistent with the nationally or internationally recognized due-diligence framework used by the issuer; and (2) the issuer's description of the due-diligence measures in the Conflict Minerals Report is consistent with the due-diligence measures actually used.
IPSA is separate from reasonable country of origin inquiry. IPSAs do not need to cover the reasonable country of origin inquiry (RCOI). The RCOI is a different step under the Conflict Minerals Rule, even if the procedures used to obtain information about a conflict mineral's country of origin in a RCOI are the same as those included in an issuer's due-diligence framework.
DRC Conflict Undeterminable Descriptions
If an issuer cannot determine whether or not at least one of its conflict minerals financed or benefited armed groups in the Covered Countries, it would not require an IPSA. Such products must be described as "DRC conflict undeterminable," and — even if all other products are conflict free — an issuer may not describe any of its other products as "DRC conflict free" in its Conflict Minerals Report.
Similarly, with respect to products that contain conflict minerals from different sources, if any portion of the conflict minerals is "DRC conflict undeterminable" during the temporary transition period, the product may not be described as "DRC conflict free." However, if an issuer at any point — either during or after the temporary transition period— discovers that a product contains a conflict mineral that did finance or benefit armed groups in the Covered Countries, the product must be described as "having not been found to be 'DRC conflict free.'"
Conflict Minerals from Recycled or Scrap Sources
Conflict minerals derived from recycled or scrap sources must only be disclosed in the body of Form SD (specialized disclosure report). They do not have to be included in a Conflict Minerals Report filed as an exhibit to Form SD related to conflict minerals that are not from recycled or scrap sources.
Issuers only need to describe due-diligence measures carried out on those products manufactured during the calendar year of the Conflict Minerals Report. Such measures can be initiated before and/or ended after the period covered by the report, but do not have to be carried out continuously throughout the year.
With respect to describing due-diligence measures, a full description is not required; however, enough detail must be included to allow an auditor to determine whether the description is consistent with the process actually performed by the issuer.
Companies should review the updated guidance prior to the May 31 deadline to determine if their conflict minerals compliance programs are in line with the SEC. Given the evolving nature of the conflict minerals rule, compliance training is particularly important.