Five “Must Know’s” About SEC’s New Conflict Minerals Q&A

With a few days gone by since SEC published their new Q&A, we have been able to read them more carefully and thoughtfully.  Most of the Q&A address matters we already considered resolved or that we felt had an emerging industry consensus already aligned with the answers provided.  Given that, we won’t rehash those.  Instead, we highlight and comment on some of details and subtleties we believe shed new light on the compliance activities, definitions and the disclosure.

Clarifications of DRC Undeterminable

  • A product is “DRC Conflict Undeterminable” until a company determines that all applicable 3TG in that product did/did not originate in a Covered Country, or that the 3TG did/did not directly or indirectly finance or benefit armed groups in those countries.
  • If any of an issuer’s products are “DRC conflict undeterminable”, the issuer is not required to obtain an IPSA of its Conflict Minerals Report in part or in its entirety.  Our view:  This may be a surprise (or relief) to some. From our perspective, although we raised questions publicly about product-level IPSAs, we didn’t hold that view in our client engagements.

IPSA Objectives

Our view:  Further clarification was provided on the specified objectives of the IPSA.  The AICPA and The Auditing Roundtable have both published guidance that is fully consistent with the SEC positions set forth in the new Q&A.  The main points are that the two parts of the objective are independent of each other and the IPSA is not required to cover any matter beyond that objective, including the completeness or reasonableness of the due diligence measures actually performed.  There were issuers and audit professionals who had differing opinions. We feel there is little remaining ambiguity on this point.  Issuers who require an IPSA would be wise to confirm this understanding with the auditor before engaging them.

IPSA Scope

  • The IPSA is limited to specific sections of the CMR only and does not include the disclosures contained in the body of the Form SD.
  • RCOI activities are not within the scope of the IPSA.  The IPSA covers due diligence activities beginning after the country of origin determination. Our view:  We have held for some time that issuers need not consider activities related to OECD Steps 1 and 2 to be within the boundary of the due diligence framework, as those are equivalent to the RCOI process.  In our opinion, Question 18 makes it clear that this is indeed an appropriate interpretation and should help issuers develop CMR language to control the cost and effort of the IPSA.  This is not intended to imply that companies can avoid implementing Steps 1 and 2, just that those are not within the due diligence processes.

Timing of Due Diligence Activities in Relation to the Reporting Year

An issuer’s due diligence measures must apply to the conflict minerals in products manufactured during the reporting calendar year.  This requirement, however, does not imply that due diligence measures must be carried out constantly throughout that calendar year.  An issuer’s due diligence measures may begin before or extend beyond the calendar year.   Our view:  This could involve capturing data from suppliers that were used only during the last part of the year, obtaining updated information from existing suppliers, or implementing improvements to due diligence measures.

Description of the Due Diligence in the CMR

  • Where a product contains material from both a scrap/recycle source and a non-scrap/recycle source, the CMR need only address the non-scrap sources and related due diligence activities.  The Form SD must include the appropriate disclosures for scrap/recycled sources however. If an IPSA is triggered, it is only to address only the disclosure content related to non-scrap sources.
  • The rule does not require an issuer to include a full description of the design of its due diligence in the Conflict Minerals Report.  With regard to the description of the due diligence measures undertaken, the description must be in sufficient detail for the auditor to form an opinion or conclusion about whether the description in the Conflict Minerals Report is consistent with what the issuer actually did.  Our view:  In reality, the rule does not require an issuer to specifically describe its design at all.  The reference to design description is only in the IPSA objective.  However, we suggest creating specific sections of the CMR with headings clearly indicating the location of the design description and the measures undertaken.  This eliminates ambiguity and helps control the effort and cost when an IPSA is triggered.


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