By Scott Costa, Publisher, tED magazine
While the CHOICE Act has a number of provisions to eliminate the Dodd-Frank Act of 2010, one section has a huge impact on NAED members. The elimination of Conflict Minerals reporting, which is “Title XV” of Dodd-Frank, will ease a huge burden on members who are reporting the country of origin for tin, tungsten, tantalum, and gold.
But what does that section of the CHOICE Act really say? Calling itself “The Financial CHOICE Act; Creating hope and opportunity for investors, consumers, and entrepreneurs,” the act is the “Republican proposal to reform the financial regulatory system.”
We at tEDmag.com are breaking down the sections of the bill for you so you can have a better understanding of what is at stake.
Executive Summary:
- Title XV of the Dodd-Frank Act imposes a number of overly burdensome disclosure requirements related to conflict minerals, extractive industries, and mine safety that bear no rational relationship to the SEC’s statutory mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation. The Financial CHOICE Act repeals those requirements.
- There is overwhelming evidence that Dodd-Frank’s conflict minerals disclosure requirement has done far more harm than good to its intended beneficiaries – the citizens of the Democratic Republic of Congo and neighboring Central African countries.
- Former SEC Chair Mary Jo White, an Obama appointee, has conceded the Commission is not the appropriate agency to carry out humanitarian policy. The provisions of Title XV of the Dodd-Frank Act are a prime example of the increasing use of the federal securities laws as a cudgel to force public companies to disclose extraneous political, social, and environmental matters in their periodic filings.
An Overworked and Understaffed SEC Doing the Conflict Minerals Regulating:
Former SEC Commissioner Daniel Gallagher noted that because of Dodd-Frank, “the SEC became the implementing tool for the long pent-up dreams of liberal policymakers and special interest groups. Indeed, Dodd-Frank stands as the only piece of major securities legislation in U.S. history that was rammed through Congress without bipartisan support.” As a result, the Dodd-Frank Act was able to include “miscellaneous” title, or basically a title that allowed partisan provisions to be included without an legislative record, or proof that the requirements addressed any issues related to the financial crisis.
Sections 1502, 1503, and 1504 of the Dodd-Frank Act present new challenges to the SEC, which is ill-equipped to handle rulemaking requirements that fall outside of its statutory mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In the words of former SEC Chair Mary Jo White: “Seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share. But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.”
Writing in the Fordham Law Review, Karen Woody, Assistant Professor of Law at Indiana University, argues that the mission creep imposed by foreign policy-related disclosure requirements threatens the SEC’s effectiveness. Section 1502, she writes, “flies in the face of the SEC’s mandate. . . Furthermore, requiring the SEC to enforce these disclosure requirements stretches thin an already overburdened agency and demands that it oversee diplomatic and humanitarian regulations for which it lacks the institutional competence.”
Conflict Minerals Reporting Imposes Huge Costs on Companies:
Section 1502 of the Dodd-Frank Act requires public companies to disclose whether they source “conflict minerals” – tin, tungsten, tantalum, and gold – from the Democratic Republic of Congo (DRC) and its nine neighboring countries. These minerals are used in countless products, from cell phones to apparel, and mining proceeds have been blamed for financing rebels in eastern Congo.
By imposing enormous compliance costs on public companies, Section 1502 impedes the ability of those firms to innovate, grow, and create jobs, while at the same time lowering the returns they can offer their investors. In its economic analysis of the final rule implementing Section 1502, the SEC estimated the initial cost of compliance as “between approximately $3 billion to $4 billion, which the annual cost of ongoing compliance will be between $207 million and $609 million.”
Conflict Minerals Reporting May Be Unconstitutional:
Since the SEC issued its disclosure rule in August 2012, the courts have highlighted the unconstitutionality of certain requirements. In April 2014, a panel of the U.S. Court of Appeals for the D.C. Circuit ruled that forcing companies to describe the conflict-free status of their products violated their First Amendment rights. This decision was upheld by the same three-judge panel in August 2015, with the court also noting that the SEC had failed to demonstrate that its rulemaking would alleviate the humanitarian crisis in the DRC. The SEC and Amnesty International requested an en banc rehearing before the full D.C. Circuit, but this petition was denied. The Justice Department later declined to seek Supreme Court review of the decision.
Conflict Minerals Reporting has No Impact in Central Africa:
Section 1502’s constitutional and procedural deficiencies have been compounded by the damage it has done to the citizens of Central Africa, the very region it purports to help. Critics, many from the region itself, argue that Section 1502 has led to a de facto embargo on the region’s minerals, further impoverishing Africans while leaving local militias unaffected. In one letter to the SEC, leaders from three Congolese mining cooperatives wrote, “We the local population in the areas that will be the most effected [sic] by your proposed legislation Dodd-Frank Bill, have not been consulted. . . .” Noting that the SEC’s rule would lead to a boycott of their minerals, the Congolese went on the plead, “we cannot continue to suffer any longer. Do we now have to choose between dying by a bullet or starving to death?”
Villagers who relied on their mining income to buy food when harvests failed are beginning to go hungry. . . . Meanwhile, [Dodd-Frank] is benefiting some of the very people it was meant to single out. The chief beneficiary is Gen. Bosco Ntaganda, who is nicknamed ‘The Terminator’ and is sought by the International Criminal Court. Ostensibly a member of the Congolese Army, he is in fact a freelance killer with his own ethnic Tutsi militia, which provides ‘security’ to traders smuggling minerals across the border to neighboring Rwanda.
Conflict Minerals Reporting is Inconclusive:
In addition to the harm inflicted on Africans, research has shown that the SEC’s rule has not illuminated companies’ sourcing of conflict minerals to any meaningful degree. According to the GAO, initial company disclosures revealed little: 67 percent of companies reported not being able to determine their minerals’ country of origin, and another 3 percent did not provide a clear determination. No company in GAO’s sample could determine whether its minerals financed armed groups. GAO confirmed these findings the following year, with 67 percent of companies still unable to confirm the source of their conflict minerals, and 97 percent reporting that they could not determine whether those minerals benefitted armed groups in the DRC.
Even the U.S. government has found tracing minerals to armed groups to be an impossible task: in a 2014 analysis mandated by Dodd-Frank, the Commerce Department reported it was unable to determine whether smelters drew on minerals that benefitted armed groups. “We do not have the ability to distinguish such facilities,” the Commerce department said.
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