Securities Regulation and Corporate Governance

On April 7, 2014 the SEC’s Division of Corporation Finance issued a second set of Frequently Asked Questions (“FAQs”) on its conflict minerals rules (Exchange Act Section 13(p), Rule 13p-1 and Item 1.01 of Form SD).  The full set of FAQs, including the nine new FAQs and the 12 FAQs issued in May 2013, is available at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm.  For more information about the conflict minerals rules, please see our client alert available at http://www.gibsondunn.com/publications/pages/ConflictMinerals-UnderstandingFinalSECRules.aspx, and for a discussion of the first set of FAQs, please see our client alert available at http://www.gibsondunn.com/publications/pages/SEC-Issues-FAQs-On-Conflict-Minerals.aspx.   

The nine new FAQs focus primarily on the requirement under the conflict minerals rules to obtain an independent private sector audit (“IPSA”) of the conflict minerals report.  While many interpretive questions under the rules are still outstanding, the FAQs provide helpful guidance to companies as they seek to comply with the rules and prepare their first annual disclosures covering the 2013 calendar year, which are due on Monday, June 2, 2014.  Set forth below are several highlights from the new FAQs:

• Scope of IPSA Requirement.  FAQ #17 confirms that the scope of the IPSA is limited to the IPSA objective set forth in the conflict minerals rules and does not include any other matters, such as the completeness or reasonableness of the due diligence measures performed or the description of products as “DRC conflict free.”  As set forth in the rules, the IPSA objective is to express an opinion or conclusion as to (1) whether the design of a company’s due diligence measures as set forth in, and with respect to the period covered by, the conflict minerals report is in conformity with, in all material respects, the criteria set forth in the due diligence framework used by the company, and (2) whether the company’s description of the due diligence measures it performed, as set forth in the conflict minerals report, with respect to the period covered by the report, is consistent with the due diligence process it actually undertook.

• IPSA and Reasonable Country of Origin Inquiry.  FAQ #18 confirms that the IPSA does not cover a company’s reasonable country of origin inquiry (“RCOI”), even if the due diligence framework used by the company includes procedures for obtaining information about the country of origin of conflict minerals (such as the OECD’s due diligence guidance).  Thus, the auditor conducting the IPSA should opine on whether (1) the design of the company’s due diligence framework conforms to the portion of the due diligence framework beginning after the country of origin determination, and (2) whether the company actually performed the due diligence measures described in the report after the company determined there was reason to believe its conflict minerals may have originated in the covered countries.

• Disclosure Requirements for Conflict Minerals from Recycled or Scrap Sources.  FAQ #19 states that if a covered product contains conflict minerals from recycled or scrap sources (for which a conflict minerals report is not required) and other conflict minerals for which a conflict minerals report is required, the body of the company’s Form SD must include the required disclosures for the recycled or scrap conflict minerals, and the conflict minerals report must include the required disclosures for the other minerals.  Thus, the disclosures with respect to the recycled or scrap conflict minerals would not be included in the conflict minerals report and would not be covered by the IPSA.  By analogy, we believe that if a company is reporting on some conflict minerals for which only a RCOI and Form SD was required, and some conflict minerals for which the further step of due diligence and a conflict minerals report was required, the required disclosures with respect to the RCOI group should be included in the body of the company’s Form SD, and the required disclosures with respect to the due diligence group should be included in the conflict minerals report.  

• Description of Due Diligence Design.  FAQ #21 indicates that, while the conflict minerals report is required to include an auditable description of the due diligence measures a company performed, the report is not required to include a “full description” of the design of the company’s due diligence framework.  However, it is unclear which components of the due diligence design are required to be described in the report.