Conflict minerals SEC compliance evaluation and the role of the IPSA Conflict Minerals and Ethical Sourcing Workshop December 3, 2015
Setting the stage The legal challenge lingering uncertainty concerning the IPSA US Court of Appeals for the DC Circuit (DC Court) Ruling 1 On August 18, 2015, the DC Court reaffirmed its April 14, 2014 ruling that the requirement for companies to describe their products as not been found to be DRC conflict free violates the First Amendment. On November 9, 2015, the DC Court rejected the SEC s appeal; the SEC has 90 days to appeal to the US Supreme Court Market participants remain uncertain around how the issue will ultimately be resolved and are awaiting guidance from the Securities and Exchange Commission (SEC). The main challenge for registrants are: SEC s Partial Stay Given the SEC s partial stay and the temporary suspension of the broad applicability of the independent private sector audit (IPSA) requirement, when will the IPSA be required? Expiration of Temporary Transition Period How to balance the SEC s partial stay with the expiration of the temporary transition period provided for in the Final Rule to determine the adequacy of disclosure for the 2015 calendar year reporting? Driving Conflict Minerals Compliance How to drive continued conflict minerals compliance program performance improvement with supply chain partners in light of regulatory uncertainty? 1 Nam Et Al., v. SEC Et Al.,. US Court of Appeals, DC Circuit. 18 Aug. 2015 2 Conflict Minerals Year 3 recommendations and IPSA implications Copyright 2015 Deloitte Development LLC. All rights reserved.
Setting the stage Understanding the IPSA An opinion or conclusion is to be expressed as to: 1) Whether the design of the registrant s due diligence framework, set forth in the Conflict Minerals Report (CMR), is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the registrant 2) Whether the registrant s description of the due diligence measures set forth in the CMR is consistent with the due diligence process that the registrant undertook Two types of engagements are allowable: Examination attestation engagement May only be performed by CPAs or individuals working for a licensed CPA firm or a governmental auditing organization Standard form of the report Performance audit May be performed by CPAs or individuals working for a licensed CPA firm or by persons other than CPAs or CPA firms Report contains the audit results, including findings, conclusions, and recommendations including, but not limited to: A description of the nature and extent of the issues being reported and the extent of the work performed that resulted in the finding Details of the performance audit, including objectives of the procedures performed in conducting the audit and results of such procedures 3 Conflict Minerals Year 3 recommendations and IPSA implications Copyright 2015 Deloitte Development LLC. All rights reserved.
Year two filing analysis and IPSA implications CMR approach: Organizing the CMR The following should be considered when organizing the CMR: The Situation The IPSA Implication(s) The Significance Organizing description of due diligence using steps of the OECD Framework: ~58% of registrants used the steps of the OECD Framework to organize their due diligence description (~47% in prior reporting year) Due diligence-related elements of the registrant s conflict minerals compliance program can be organized and disclosed in a manner to be easily identifiable as subject to the IPSA Assists IPSA provider in understanding how the registrant s activities align to each OECD step Distinguishing RCOI from due diligence: ~55% of registrants did separate RCOI from due diligence (~47% in prior reporting year) The IPSA provider need only opine on whether the design of the registrant s due diligence framework is in accordance with the due diligence realted portion of the nationally or internationally recognized due diligence framework (i.e., OECD Framework): RCOI is a distinct step separate from the due diligence process The IPSA provider can more efficiently identify the content of the CMR that will be subject to the IPSA Increases clarity in describing the registrant s conflict minerals program Minimizes duplication in the process description 4 Conflict Minerals Year 3 recommendations and IPSA implications Copyright 2015 Deloitte Development LLC. All rights reserved.
Year two filing analysis and IPSA implications CMR approach: Suitability of criteria The Situation The IPSA Implication(s) The Significance Year two filings included various approaches to describing the registrant s conflict minerals compliance program, including the following: Quantitative descriptions (e.g., number of suppliers surveyed, survey response rate and number of smelters identified) The registrant s description of the due diligence measures performed must meet the suitable criteria requirements (e.g., measurable, objective, relevant, and complete): Example language: The company sent surveys to its key suppliers The IPSA provider will use the registrant s description of due diligence measures performed as the criteria against which they will evaluate the due diligence measures the registrant actually performed Qualitative descriptions (e.g., general requirements established for all suppliers, overview of supplier engagement, involvement in the CFSI) Language that would facilitate ease of auditability: The company sent surveys to a total of 100 suppliers, which represents the population of suppliers that supplies 3TG to the company 5 Conflict Minerals Year 3 recommendations and IPSA implications Copyright 2015 Deloitte Development LLC. All rights reserved.
Year two filing analysis and IPSA implications Example CMR I. Introduction Conflict Minerals Report (excerpt) Exhibit 1.01 [The registrant includes an introduction section, although not required.] II. Reasonable Country of Origin Inquiry OECD Step X: [The registrant includes a description of the measures taken in accordance with the OECD steps considered to be RCOI.] III. Due Diligence Design and Performance 1. Due Diligence Design: The design of the Company s due diligence framework conforms to the due diligence related steps of the OECD Framework. In order to test the design assertion, the IPSA practitioner may conduct interviews to understand the registrant s program design in accordance with the due diligence related steps of the OECD Framework, and request documentation to support the alignment of the registrant s conflict minerals compliance program to the OECD Framework. 2. Due Diligence Measures Performed: OECD Step X1: The registrant contacted the 435 non-responding suppliers up to three times to obtain a survey response. The IPSA practitioner may (1) ask how the registrant identified the population of 435 non-responding suppliers, (2) obtain the listing of the 435 suppliers, and (3) select a sample for testing. For the sample selected, the IPSA practitioner may request evidence that the supplier was contacted up to three times (e.g., e-mails or logs the registrant maintained by using a conflict minerals technology tool). IV. Independent Private Sector Audit [If an IPSA was obtained, the registrant includes a statement that it obtained an IPSA of the CMR and provides the audit report prepared by the auditor in accordance with standards established by the Comptroller General of the United States. The registrant identifies the independent private sector auditor of the report if the auditor is not identified in the audit report.] [The registrant might note that the IPSA report is provided along with the CMR; however, this is not required.] V. Product Disclosures [The registrant provides a description of its products. If the registrant voluntarily labels any of its products as DRC conflict free, the registrant should consider clarifying which products are DRC conflict free and which are not]. VI. Smelter/Refiner Disclosures [The registrant includes the list of smelters/refiners used to process the necessary conflict minerals in their in-scope products, the country of origin of the necessary conflict minerals in those products, and the efforts to determine the mine or location of origin.] VII. Future Measures [The registrant might include a description of any planned future measures to improve due diligence processes if the registrant manufactures or contracts to manufacture products that the registrant is unable to determine whether or not such products qualify as DRC conflict free.] 6 Conflict Minerals Year 3 recommendations and IPSA implications Copyright 2015 Deloitte Development LLC. All rights reserved.
Additional good practices Registrants should consider: Seeking the advice of SEC legal counsel when determining whether and when the IPSA is required, especially in light of recent developments The potential implications related to the organization of the RCOI and due diligence disclosed in the CMR Evaluating the clarity and sufficiency of disclosures in the CMR of due diligence measures performed Taking demonstrated and focused efforts to increase the level of confidence in the data gathered and performance measurements related to supplier engagement, and focus on sufficiency of documentation to support activities undertaken and related disclosures Documenting the conflict mineral process in a standard operating procedure or a similar document Seeking assurance readiness to be prepared for an IPSA Engaging with your IPSA provider early 7 Conflict Minerals Year 3 recommendations and IPSA implications Copyright 2015 Deloitte Development LLC. All rights reserved.
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