The Conflict Minerals IPSA Trigger May Be Delayed

UPDATES: We discussed this with the SEC staff, who agreed with the position described below, citing the language of the April 29, 2014 stay – “Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its Conflict Minerals Report.”  However, in those cases where an issuer is planning for an IPSA, we strongly recommend reading this important information.

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There has plenty of coverage on the legal twists and turns of the National Association of Manufacturers (NAM) lawsuit against the Securities and Exchange Commission’s conflict minerals disclosures. The latest filing by NAM, dated December 29, 2014, is available here and provides a brief summary of the legal issues.  As of this writing, the SEC has not issued any further guidance or interpretations concerning the disclosure, and the April 29, 2014 administrative stay of the requirement to use the specific product determination phrases remains intact. Therefore any use of the “magic words” (as we call them) is still voluntary.

Because the wording was not required for 2013, 50% of filers who conducted due diligence (and therefore filed a CMR) chose not to use any of the magic words. Of the remaining issuers, 22% did not file a CMR and the rest (27%) did choose to use “DRC Conflict Undeterminable”. These figures are based on our study of the 2013 filings.

Against this background, issuers face the end of the two-year temporary category (“DRC Conflict Undeterminable”) this year along with the associated deferral of certain filing requirements and the Independent Private Sector Audit (IPSA). And like much else in the realm of conflict minerals, this leads to ambiguity and confusion on an important matter: given the current suspension of the mandate to use the term “DRC Conflict Undeterminable”,  does the deferral actually end?

The relevant language of the Instructions to Item 1.01 (page 354 of the final release) states:

Beginning with the third or fifth reporting year calendar year, as applicable, a registrant with products manufactured or contracted to be manufactured that are “DRC Conflict Undeterminable” must describe those products have having not been found to be “DRC Conflict Free” and must provide the information required in paragraph (c) of this item including the audit report.

For last year’s filing, some issuers looked to Item 1.01(c)(1)(iii) (page 347) when crafting their CMR content and chose to exclude certain elements tied to “DRC Conflict Undeterminable”. This instruction applies only to products classified as “DRC Conflict Undeterminable” and required disclosure of steps taken, or that will be taken, “to mitigate the risk that [the issuer’s] necessary conflict minerals benefit armed groups, including any steps to improve its due diligence.”  Where the words  “DRC Conflict Undeterminable” were not used by the issuer to describe products, a description of due diligence improvements was not required.

Is it not reasonable that the same logic would apply to the language describing the temporary deferral expiration?  Time will tell.  At the same time, we are seeing a much greater demand from customers to have their publicly-traded suppliers obtain an IPSA for the 2014 filing.  On one hand, we see the IPSA deadline being pushed a year ahead of the requirements, and on the other hand we see the possibility of the deadline extending beyond the 2014 filing year.

 

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