Perhaps nothing has become more apparent about the SEC’s conflict minerals regulation than the confusion, ambiguities and inconsistent interpretations the regulatory language has spawned. We have written extensively in the past about several of these matters, including the trigger for, and process of, conducting the independent private sector audit (IPSA) of conflict minerals reports.
The regulations contain a two year deferral for calendar years 2013 and 2014 for the IPSA requirement for all companies subject to SEC reporting that claim the classification of “DRC Conflict Undeterminable”, but as 2013 progressed it became less clear that the deferral is as certain as expected. Questions have arisen about critical aspects of the regulatory language of the deferral. The three most common questions we hear on this point are:
- Is the “Undeterminable” status negated if a company has reasonable information about the sourcing status of only one metal in a product, or is “Undeterminable” linked to knowledge of all the conflict minerals in a product?
- Is the IPSA triggered for sourcing from the Covered Countries that is verified conflict-free, such as Solutions for Hope? Or is it intended to apply only where it is determined that the source is funding or benefitting armed groups?
- Does a company “have reason to believe” that it may have sourced from a Covered Country if Conflict Free Smelters (CFS) are identified in their supply chain? The DRC is one country of origin associated with the CFS list, but the CFS program does not link specific countries of origin to specific smelters. Therefore, absent linkages between the smelters and countries of origin, some have argued that a company “may have reason to believe” that any CFS smelter may have sourced from a Covered Country.
A number of companies are therefore planning on conducting an IPSA for calendar year 2013. However, we suggest that companies put off this decision until the beginning of 2014.
We understand that SEC hopes to publish another round of FAQs before the end of 2013 that should clarify IPSA applicability and deferral questions. We believe it is beneficial to wait for these FAQs before formally engaging auditors. Of course, there is no certainty that the FAQs will indeed be published by the expected date, and some companies may want to move ahead regardless.