One of the many things we learned from our analysis of the CY2013 SEC conflict minerals filings is that 23% of the 1300 filers filed a Form SD only, indicating those filers conducted the RCOI and found no reason to believe any materials originated from the Covered Countries, and filed no Conflict Minerals Report (CMR). Most of these filers did not make a statement about their conflict status or determination, although some specifically classified their products as DRC Conflict Free.
But can you really call yourself DRC Conflict Free without full due diligence, a CMR and the Independent Private Sector Audit of that report?
For this discussion, let’s put aside the question of whether the first-year information was good enough to be relied on for such a determination, and the legal wranglings surrounding the First Amendment matter. Let’s focus on whether a determination based solely on RCOI is sufficient to make a claim of DRC Conflict Free.
Pages 149 and 150 of the Final Release, SEC states
… if an issuer reasonably designs an inquiry and performs the inquiry in good faith, and in doing so receives representations indicating that its conflict minerals did not originate in the Covered Countries, the issuer may conclude that its conflict minerals did not originate in the Covered Countries, even though it does not hear from all of its suppliers, as long as it does not ignore warning signs or other circumstances indicating that the remaining amount of its conflict minerals originated or may have originated in the Covered Countries. For example, we would agree that “if reasonable inquiry has been made, and if no evidence of [Covered Country] origin has arisen, and if the origin of only a small amount of gold were still unknown, a manufacturer should be allowed to declare that its gold is not from the [Covered Countries] and is DRC Conflict Free.”
Yet in what seems to be a contradiction, Question 15 of the SEC Q&A states that “to be able to describe qualifying products in its Conflict Minerals Report as ‘DRC conflict free,’ an issuer must have obtained an IPSA.”
But the key here is that Question 15 specifically references situations where the determination is made within a CMR. No mention is made of a situation where a DRC Conflict Free determination is made outside of a CMR (i.e., RCOI/Form SD only). Or, to be more direct – the difference is conflict minerals that simply do not originate from Covered Countries versus those that originate from non-conflict sources within the Covered Countries. The term “DRC Conflict Free” applies to both circumstances, but different paths are required to get to the same final conclusion.
Further, Stephen Quinlivan of Stinson Leonard Street LLP pointed out in relation to an amicus brief filed December 8, 2014 in the current conflict minerals rehearing:
… nothing in the statute or the rule requires any speaker to use any variant of the term “DRC conflict free.” You can comply with Form SD with a statement as simple as “the following products are required to be disclosed pursuant to 15 U.S.C. § 78m(p)(1)(A)(ii) and its implementing rule” followed by a description of the products—such as “Model XYZ handheld cameras manufactured between Dates A and B.”
This is essentially the direction we take with clients. Our view has been that an RCOI-only determination does not lead to any formal mandated status with no specific wording required. Moreover, given the questionable quality, reliability and credibility of the conflict minerals supply chain data developed for CY2013 and CY2014, we typically don’t suggest that clients rely too heavily on it, and undertake due diligence where there are uncertainties, gaps or ambiguities.
In the end, more issuers may choose to make an RCOI-only DRC Conflict Free determination in CY2014 and beyond, which is a continuing disincentive to participating in responsible sourcing from the region. Or as one highly respected expert put it – “more incentive to hurt the people this darn thing was supposed to help”.
A final thought – What of us auditors anticipating a flood of IPSA work? Well, we should probably consider cutting back our expectations if issuers have an option in achieving the same end point that does not involve an IPSA. Not everyone will go this route, but some will.