California Code of Regulations
Title 17 - Public Health
Division 3 - Air Resources
Chapter 1 - Air Resources Board
Subchapter 10 - Climate Change
Article 4 - Regulations to Achieve Greenhouse Gas Emission Reductions
Subarticle 7 - Low Carbon Fuel Standard
Section 95503 - Conflict of Interest Requirements for Verification Bodies and Verifiers

Universal Citation: 17 CA Code of Regs 95503

Current through Register 2024 Notice Reg. No. 38, September 20, 2024

(a) Applicability of Conflict of Interest Provisions. The conflict of interest provisions of this section shall apply to verification bodies and lead verifiers, including independent reviewers, accredited by the Executive Officer to perform LCFS validation and verification services for responsible entities and must apply to all verification team members.

Any individual person or company that is hired by the entity required to contract with a verification body on behalf of the entity required to contract for verification services is also subject to the conflict of interest assessment in this subarticle. In such instances, the verification body must assess the potential conflict of interest between itself and the contracting entity as well as between itself and the responsible entity, and must also address the potential conflict of interest between the contracting entity and the responsible entity, including a written assessment provided and signed by the contracting entity.

(1) "Member" for the purposes of this section means any employee or subcontractor of the verification body or its related entities.

(2) "Related Entity" for the purposes of this section means any direct parent company, direct subsidiary, or sister company.

(3) "Lookback Period" for the purposes of this section means to disclose services provided and assess potential for conflicts of interest beginning five years preceding the start of verification services.

(4) Emerging conflicts of interest must also be monitored. The monitoring period for determining emerging conflicts of interest is during the period verification services are offered and one year after verification services are completed.

(b) Disclosure of Services with High Potential for Conflict of Interest. If any of the following occurred during the lookback period, the activity or activities must be disclosed to the Executive Officer with a description of actions the verification body has taken to avoid, neutralize, or mitigate any ongoing potential for conflict of interest.

The potential for a conflict of interest must be deemed high if any of the following occurred during the lookback period. If the Executive Officer determines the verification body or its related entities or any member of the verification team meets the criteria specified in section 95503(b), the Executive Officer shall find a high potential conflict of interest with the following exceptions:

Prior to August 31, 2023, the Executive Officer shall deem the following services to be medium potential for conflict of interest and allow verification services to proceed when the verification body or its related entities or a member of the verification team has provided the services listed in sections 95503(b)(2)(A), (B), (C), (E), (G), (H), (I), or (N) within the five year lookback period, provided that the potential conflict of interest is mitigated by meeting the minimum mitigation plan requirements in section 95503(d)(1). On and after August 31, 2023, if any of the situations or services listed in section 95503(b) occurred during the five year lookback period by a verification body and its related entities or a verification team member, verification services may not proceed and rotation is required.

(1) Organizational High Potential Conflict of Interest Conditions. The verification body and responsible entity share any management staff or board of directors membership, or any of the senior management staff of the responsible entity have been employed by the verification body, or vice versa; or

(2) Organizational and Individual High Potential Conflict of Interest Conditions. Any employee of the verification body, or any employee of a related entity, or a subcontractor who is a member of the verification team has provided to the responsible entity any of the following services:

(A) Designing, developing, implementing, reviewing, or maintaining an information or data management system for data submitted pursuant to this subarticle or MRR unless the review was part of providing independent quality assurance audit services, attestation engagement services, providing validation or verification services pursuant to the U.S. EPA RFS or the EU RED, or third-party engineering reports pursuant to the U.S. EPA RFS;

(B) Developing CI or fuel transaction data or other greenhouse gas-related engineering analysis that includes facility-specific information;

(C) Designing or providing consultative engineering or technical services in the development and construction of a fuel production facility; or energy efficiency, renewable power, or other projects which explicitly identify greenhouse gas reductions as a benefit;

(D) Designing, developing, implementing, conducting an internal audit, consulting, or maintaining a greenhouse gas emissions reduction or greenhouse gas removal offset project as defined in the Cap-and-Trade Regulation and reported to the Executive Officer, or a project to receive LCFS project-based credits;

(E) Preparing or producing LCFS fuel pathway application or LCFS reporting manuals, handbooks, or procedures specifically for the responsible entity;

(F) Directly managing any health, environment or safety functions for the responsible entity;

(G) Any service related to development of information systems, or consulting on the development of environmental management systems is considered high conflict of interest except for systems that will not be part of the validation or verification process and except for accounting software systems;

(H) Verification services that are not conducted in accordance with, or equivalent to, section 95503 requirements, unless the systems and data reviewed during those services, as well as the result of those services, will not be part of the verification process;

(I) Reporting pursuant to this subarticle, or uploading data for the Executive Officer, on behalf of the entity required to contract for verification services;

(J) Owning, buying, selling, trading, or retiring LCFS credits, RINs, or credits in any carbon market;

(K) Dealing in or being a promoter of credits on behalf of the responsible entity;

(L) Appraisal services of carbon or greenhouse gas liabilities or assets;

(M) Brokering in, advising on, or assisting in any way in carbon or greenhouse gas-related markets;

(N) Bookkeeping and other non-attest services related to accounting records or financial statements, excluding services and results of those services that will not be part of the validation or verification process;

(O) Appraisal and valuation services, both tangible and intangible;

(P) Any actuarially oriented advisory service involving the determination of amounts recorded in financial statements and related accounts;

(Q) Any internal audit service that has been outsourced by the entity required to contract for verification services that relates to the entity's internal accounting controls, financial systems or financial statements, unless the result of those services will not be part of the verification or validation process;

(R) Fairness opinions and contribution-in-kind reports in which the verification or validation body has provided its opinion on the adequacy of consideration in a transaction, unless the resulting services will not be part of the verification or validation process;

(S) Acting as a broker-dealer (registered or unregistered), promoter or underwriter on behalf of the responsible entity;

(T) Any legal services;

(U) Expert services to the entity required to contract for verification services, a trade or membership group to which the entity required to contract for verification services belongs, or a legal representative for the purpose of advocating the entity's interests in litigation or in a regulatory or administrative proceeding or investigation.

(3) Prohibition on Monetary or Non-Monetary Incentives. The potential for conflict of interest shall be disclosed and deemed to be high when any member of the verification body provides any type of monetary or non-monetary incentive to an entity required to contract for verification services to secure a validation or verification services contract.

The potential for conflict of interest shall be deemed to be high when any member of the entity required to contract for verification services provides any type of monetary or non-monetary incentive to a member of the verification body to influence validation or verification documentation or findings.

(4) Potential for High Conflict of Interest if Rotation Limit Exceeded. The potential for a conflict of interest shall also be disclosed and deemed to be high where any member of the verification body or verification team has provided verification services for the entity required to contract for verification services except within the time periods in which the entity required to contract for verification services is allowed to use the same verification body or team members as specified in section 95500(g).

(c) Low Conflict of Interest. The potential for a conflict of interest shall be deemed to be low where the following conditions are met:

(1) No potential for a high conflict of interest is found pursuant to section 95503(b); and

(2) Any services provided by any member of the verification body or verification team to the entity required to contract for verification, within the look-back period specified in section 95503(a)(3), are valued at less than 20 percent of the fee for the proposed verification services. Any verification conducted in accordance with, or substantially equivalent to, section 95503 provided by the verification body or verification team outside the jurisdiction of the Executive Officer is excluded from this financial assessment, but must be disclosed to the Executive Officer in accordance with section 95503(e).

(3) Non-CARB verification services are excluded from categories of risk if those services are conducted in accordance with, or substantially equivalent to, section 95503, including, but not limited to, auditing services provided under the U.S. EPA RFS (QAP services, attest engagement services, third-party engineering reports), third-party certification of environmental management systems under ISO 14001, energy management systems under 50001 standards, or certification systems recognized by other governmental agencies, including the European Commission. Verification services provided under MRR or the Cap-and-Trade Regulation are also excluded from categories of risk for potential conflict of interest.

(d) Medium Conflict of Interest. The potential for a conflict of interest shall be deemed to be medium where the potential for a conflict of interest is not deemed to be either high or low as specified in sections 95503(b) and 95503(c). The potential for conflict of interest will also be deemed to be medium where there are any instances of personal or familial relationships between the members of the verification body and management or members of the entity required to contract for verification services.

(1) If a verification body identifies a medium potential for conflict of interest and intends to provide verification services for the entity required to contract for verification services, the verification body shall submit, in addition to the submittal requirements specified in section 95503(e), a plan to avoid, neutralize, or mitigate the potential conflict of interest situation. At a minimum, the conflict of interest mitigation plan shall include:

(A) A demonstration that any individuals with potential conflicts have been removed and insulated from the project.

(B) An explanation of any changes to the organizational structure or verification body to remove the potential conflict of interest. A demonstration that any unit with potential conflicts has been divested or moved into an independent entity or any subcontractor with potential conflicts has been removed.

(2) The Executive Officer shall evaluate the conflict of interest mitigation plan and determine whether verification services may proceed pursuant to section 95503(e).

(e) Conflict of Interest Submittal Requirements for Accredited Verification Bodies. Verification bodies accredited by the Executive Officer to perform validation or verification services must adhere to the conflict of interest submittal, determinations, and monitoring requirements in MRR section 95133(e) through (g), except section 95133(f)(2) and (3). Except as otherwise specifically provided:

(1) Wherever the term "reporting entity" is used, the term "entity required to contract for validation or verification services" shall be substituted;

(2) Whenever the term "emissions data report" is used, the term "applications or reports specified in section 95500 of this subarticle" shall be substituted;

(3) Whenever the term "verification services" is used, the term "verification or validation services" shall be substituted;

(4) Wherever "section 95133(a)-(d)" referenced, "section 95503(a)-(d)" shall be substituted; and

(5) When potential for a conflict of interest is deemed to be low, as specified in section 95503(c), the verification body must submit its self-assessment to the Executive Officer, except the Executive Officer authorization to perform verification services as specified in MRR sections 95133(e)(1) and 95133(f)(3) is not required prior to performing LCFS verification services.

1. New section filed 1-4-2019; operative 1-4-2019 pursuant to Government Code section 11343.4(b)(3) (Register 2019, No. 1).

Note: Authority cited: Sections 38510, 38530, 38560, 38560.5, 38571, 38580, 39600, 39601, 41510, 41511 and 43018, Health and Safety Code; 42 U.S.C. section 7545; and Western Oil and Gas Ass'n v. Orange County Air Pollution Control District, 14 Cal.3d 411, 121 Cal.Rptr. 249 (1975). Reference: Sections 38501, 38510, 39515, 39516, 38571, 38580, 39000, 39001, 39002, 39003, 39515, 39516, 41510, 41511 and 43000, Health and Safety Code; Section 25000.5, Public Resources Code; and Western Oil and Gas Ass'n v. Orange County Air Pollution Control District, 14 Cal.3d 411, 121 Cal.Rptr. 249 (1975).

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