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The SEC Issues 9 New FAQs Relating to Conflict Mineral Disclosure

With the filing deadline for the first Form SD a little more than a month away (June 2, 2014), yesterday the Division of Corporation Finance issued nine new FAQs providing additional conflict mineral disclosure guidance. This latest guidance principally addresses the independent private sector audit requirements.

Below is an edited/tl;dr rendition; the questions and answers in their entirety can be accessed through CorpFin’s Compliance and Disclosure Interpretations webpage.

Q13: May an auditor that is not a CPA perform the independent private sector audit (“IPSA”) of an issuer’s Conflict Minerals Report … ?

A13: Yes, if the applicable requirements are met. …

Q14: 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,” is the issuer required to obtain an IPSA of its Conflict Minerals Report during the temporary transition period (four years for smaller reporting companies and two years for all other issuers)?

A14: No. …

Q15: If an issuer does not obtain an IPSA of its Conflict Minerals Report because one of its products is “DRC conflict undeterminable,” may it describe any of its other products as “DRC conflict free” in its Conflict Minerals Report?

A15: No. …

Q16: During the temporary transition period, an issuer has products that it manufactured or contracted to have manufactured with conflict minerals that are necessary to the functionality or production of those products. Each product is composed of a number of conflict minerals from different sources. In its Conflict Minerals Report, how should the issuer describe any particular product based upon the various combinations of conflict minerals in the product?

A16: 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.’”

Q17: Does the scope of the IPSA 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?

A17: No. The IPSA scope is limited to the IPSA objective provided in the rule. … The following diagram demonstrates the two distinct parts of the IPSA objective.

IPSA Objectives Diagram

As shown, the objective is to compare A to B and C to D. Any other comparison would be outside the IPSA scope.

Q18: The … due diligence framework used by an issuer may include procedures for obtaining information about a conflict mineral’s country of origin. If so, this aspect of the … framework would encompass the reasonable country of origin inquiry requirement under the rule. In that situation, would the IPSA also include the issuer’s reasonable country of origin inquiry?

A18: No. 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. …

Q19: A product manufactured by an issuer or contracted by an issuer to be manufactured includes some conflict minerals from recycled or scrap sources, which would not require the issuer to file a Conflict Minerals Report. It also includes conflict minerals not from recycled or scrap sources, which would require the issuer to file a Conflict Minerals Report. Must the issuer provide the required disclosures about the conflict minerals from recycled or scrap sources in the Conflict Minerals Report? Would the IPSA of the Conflict Minerals Report include the conflict minerals from recycled or scrap sources?

A19: … 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.

Q20: The second part of the IPSA objective is to express an opinion or conclusion as to whether the issuer’s description of the due diligence measures it performed … with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. The “period covered by the report” is the calendar year. … [I]s the issuer required to exercise due diligence constantly throughout the entire calendar year covered by the Conflict Minerals Report? Could the issuer’s due diligence measures described in the Conflict Minerals Report extend beyond the calendar year?

A20: 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.

Q21: The IPSA objective is to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures … is in conformity, in all material respects, with the criteria set forth in the … due diligence framework used by the issuer, and whether the issuer’s description … of the due diligence measures it performed … is consistent with the due diligence process that the issuer undertook. Although the rule requires that the issuer include in its Conflict Minerals Report a description of the due diligence it exercised, it does not require a separate description of the design of its due diligence framework. The rule indicates, however, that the auditor must express an opinion or conclusion as to the design of the issuer’s due diligence measures “as set forth in” the Conflict Minerals Report. Does the rule require that an issuer provide a full description of the design of its due diligence in its Conflict Minerals Report?

A21: No. … [T]he due diligence measures undertaken that are the subject of the second part of the IPSA must be described in the Conflict Minerals Report, and the description must be 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.

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