Great job, as usual, with a topic and venue where you excel. You have separated yourself from others who inaccurately claim to know more about conflict minerals and the view you take towards these important matters. Congratulations once again.

David Nelson
President
Global Decisions International, Inc.

In fairness, it appears that I misinterpreted your initial comment “The OECD guidance is in fact strongly supported by business” to mean that “business supports OECD being the SEC-mandated framework”. As you said, industry is supportive of some consistent guidance/standard in order to begin their reviews and process development.

We do, however, stand by our statements about discussions with our clients and companies on THEIR views of the document. Many of these companies have specifically stated their view of the OECD document as impractical to implement, period. As you point out, this is indeed a very different matter than the timing of implementation. Clearly, your views and experience differ, but we are reflecting viewpoints specifically expressed by others.

Again, our experience indicates that there is confusion on the part of at least some issuers and suppliers on what role smelter audits play relative to SEC audit mandates. More broadly, the Big 4 accounting firms (plus Grant Thornton) submitted comments on SEC’s proposal. A common theme among these comments is the matter of how the due diligence framework directly impacts the type of audit and the auditor’s reliance on the information rolled up within that framework. This goes to their point (and ours as well) that the quality/results of a smelter audit and other due diligence efforts under OECD impacts the type, evidence, scope and assurances under SEC’s audit standards for the CMR. That same concern was also voiced by a leading securities lawyer with whom I have spoken.

Ultimately, the fact that you and I are having this dialog demonstrates a lack of clarity in relation to how the OECD framework (a voluntary international standard) fits into a US legal standard with certain potentially overlapping pre-existing standards. Until the regulation is finalized, we all are relying on our opinions, experiences and interpretations.

Lastly, on our own initiative, we voluntarily withdrew as an auditor from the EICC CFS in January of this year.

- First, I’ve scoured the OECD’s web page on the pilot and haven’t found anything about re-writing the Guidance. So I just spoke with another company I know that is participating in the pilot and they hadn’t heard anything about re-drafting the guidance. They did confirm that (as indicated on the OECD website): “At the end of the pilot period, the implementation reports will be used to identify concrete best practices and helpful implementation tools to further assist companies to respect human rights and avoid contributing to conflict through their mineral or metal purchasing decisions and practices.” I guess the pilot will provide additional examples of how to implement the OECD’s due diligence in various contexts.

- The SEC stuff you sight is unfortunately taken out of context. The full IPC quote for example reads as follows: “we believe that the SEC should not require the use of specific due diligence standards or guidance as this would impose a significant burden on certain issuers. The SEC should, however, provide assistance to issuers by identifying examples of acceptable due diligence such as industry developed smelter validation audits, the bag and tag scheme being developed by ITRI, information or standards provided by the Department of State or other federal agencies, the OECD standards, and others.” Thus IPC views the issue of “requiring” OECD as not good (of course, no industry likes specific requirements, and prefer to have as much flexibility as possible), but still support its use as a reference for understanding reliable due diligence.

- Again, OECD guidance lays out due diligence principles, to be adapted to specific contexts. Thus, they cannot be implemented as is – it’s up to each of us to find our way of meeting those overarching recommendations. As an affected company, I would be unduly restricted if the OECD had prescribed “one way” of identifying smelters, for example. The flexibility affords me the chance to see what works and what doesn’t work. Instead the Guidance says I must use reasonable efforts to identify smelters while also acknowledging that it will take time to do so (See the Introduction, as well as Step2 Part II). I can’t see how it would be desirable to have international normative document prescribing more specific methods for doing due diligence. It’s informed me tremendously. No company I’ve spoken to (including my own suppliers) think that the recommendations of the OECD guidance are impractical per se, but rather that the timing is impractical because of compliance with outcome-oriented obligations in Dodd-Frank. I for one am hopeful that the SEC will take the OECD position that “Due diligence is an on-going, proactive and reactive process, and therefore information may be collected and progressively built with the quality progressively improved through various steps in the Guidance” (see Step 1, footnote 4). My guess is that the anxiety you have found in talks and the workshop, and attributed to the OECD, is not about rejecting the recommendation as impractical, but rather wanting MORE INFO, to comply as quickly as possible with 1502. These are very different things.

- You misunderstand my point about smelters. Yes, all companies in the supply chain are caught in the OECD work, BUT ONLY SMELTER’S DUE DILIGENCE SYSTEMS SHOULD BE AUDITED. The title of Step 4 (of the Supplement on 3Ts) makes that pretty clear to me “Carry out independent third-party audit of smelter/refiner’s due diligence practices”. I suppose this targeting of audits helps with effectiveness and fatigue issues. And knowing my supply chain, the smelters are the best focal point. So, the EICC-GeSI conflict free smelter program would fulfill this function. I understand you’re an auditor for that program. Do you comply with all SEC requirements for those audits or ISO requirements? Auditing only the smelters systems makes it easier for me too. I already audit my financial reports and will have to add the conflict minerals report to that basket as well, but that’s an additional requirement of 1502.

Your comment concerning the differentiation between the audits under OECD due diligence and Section 1502 is fair, however, there is already confusion about this point. For instance, see P. 42 of the OECD document that discusses downstream companies and their audits under the OECD program. Issuers who implement OECD due diligence must understand that difference – they cannot rely on OECD audits as satisfying Section 1502 audits. That is the point of our discussions.

Relative to the point about OECD applying to smelters only, that is not accurate. First, the document itself is intended to apply to the entire supply chain, although it does appropriately differentiate between upstream and downstream companies. The document contains sections and recommendations on downstream companies (those from the smelter to the finished product). For example, see pages 33, 36, 38 of the final document. Secondly, nowhere in the SEC proposal or preamble does SEC state their intent to limit the application of the OECD document to smelters. In contrast, they quite clearly intend to adopt it for overall use by all issuers (by rather oblique reference). See for example, 75 Fed. Reg. 80961. What confuses the matter, however, is that OECD’s audit section does limit itself to smelters/refiners (see p. 40). So under OECD, are other links in the supply chain not subject to audits? We don’t think that is what SEC intends, nor do we think companies would be comfortable relying on that. Again, our point is that there is confusion about the scope/applicability of OECD audits needing clarification, including that OECD audits are not the same as audits for compliance with Section 1502. In the end, we agree with each other on that fundamental point.

We believe the confusion may lead to a false sense that audits under the OECD guidance are equivalent to audits for Section 1502 compliance, especially where smelting companies are themselves issuers. Also, for those downstream suppliers, there remains a “reliance risk” based on the information coming out of due diligence audits under OECD. Ultimately, issuers throughout the US – some of the largest companies in the world – will be relying on audits that (a) may not be as consistent in scope as originally thought (see our comments about ambiguities/inconsistencies in the OECD audit/due diligence scope) and (b) are conducted by auditors that meet only the lowest potentially-applicable auditor qualification standard.

Related to ISO auditor qualifications, two very recent surveys conducted by and of professional EHS auditors (on at last month’s meeting of The Auditing Roundtable and one at an international industry group managing international audit protocol development) demonstrated that even within our own ranks as EHS auditors, we see that ISO certification brings little value and almost no quality in auditor performance. Many of us who have been practitioners for years have known and argued that point for a long while. But with its potential incorporation into SEC regulation, it seems a rather low bar on which to base supply chain reliance and (to some extent) US legal compliance.