Urging the SEC to quickly implement the conflict minerals disclosure provisions of the Dodd-Frank Act, Senators Patrick Leahy (D-VT) and Christopher Coons (D-DE) emphasized that the final regulations must require company conflict minerals reports to be filed with the Commission not furnished. In a letter to the SEC, the Senators also advised that the filed reports should contain enough substantive information so that investors can understand what actions a company has taken to make a reasonable country of origin inquiry. Reports that do not clearly list a company's activities, they said, and SEC regulations allowing a category of ``indeterminate’’ would undermine the congressional intent of Section 1502 of Dodd-Frank. The letter was also signed by House Members Jim McDermott (D-WA) (a co-author of Section 1502), Harold Berman (D-CA), Gregory Meeks D-NY), Donald Payne (D-NJ) and Karen Bass (D-CA).
Section 1502 of the Act requires companies that report to the SEC to disclose the measures they use to certify that their products do not contain conflict minerals. Companies also have to track their supply chains back to a mineral's origin.
The Senators and House Members have become very concerned about the outlines of the final regulations under Section 1502, in particular that the Commission will approve a rule that contravenes Congress's legislative intent and does not require the conflict mineral reports to be filed with the SEC, but instead allows them to be furnished. The Commission's misreading of legislative history and congressional intent, they said, were made clear in meetings with the SEC and what they described as the ``alarming’’ report of June 13, 2011 by the SEC Inspector General stating that SEC staff had determined the transparency provisions of Section 1502 did not protect investors.
According to the lawmakers, it was clarified during the legislative process, meetings with the SEC, and in written comments to the Commission that Section 1502 was designed as a transparency measure to provide investors with the information they needed to make informed choices. Accountability in the reporting of conflict minerals is critical to both investors and to capital formation, they posited, and this is well documented in comments on Section 1502 by investment companies, investment advisors, and thousands of individual investors.
Even beyond the submissions, they continued, it is of deep material interests to investors when a public company relies on an unstable black market for inputs essential to manufacturing its products. Protecting investor interests by making companies liable for fraudulent or false reporting of conflict minerals is critical. Thus, the reports must be "filed," not "furnished."
The Senators pointed out that the need to adhere to congressional intent was further emphasized in the recently passed FY 2012 Omnibus Appropriations measure's Financial Services Explanatory Statement (based on Senate Report 112•79), which stated that the Committee expects the clear congressional intent of Section 1502 to be implemented in a timely manner.
In addition to the issues of divergence from congressional intent, the Senators are also concerned about the economic cost estimate contained in the final regulations. They advised that the SEC’s cost estimate should only rely on those submitted estimates that use credible and publicly cited data, methodologies that rely on practices of companies in the field, and comparisons to costs of truly similar regulations.
Finally, they are heartened that Section 1502 has started to have its intended effects. The black market is being curtailed, there is now transparent mining at considerable scale, militia disengagement has accelerated, overall violence has abated, and investors and consumers arc getting better informed. They noted that proactive companies have found that understanding their supply chains is manageable and considerably less complex and less expensive than they had first projected.
Despite positive change on the ground, however, the lack of final SEC regulations is having negative consequences. The SEC's inaction is undermining the policy goals of Section 1502. Further, it has slowed the establishment of transparent supply chains as good actors hesitate. Thus, in addition to the need to follow congressional intent, it is critically important that the SEC quickly finalize the regulations implementing Section 1502.
With strong final regulations in place, reasoned the Senators, companies will become more comfortable engaging, investors will have the accountability essential to sound capital formation, the smuggling that has emerged will become less economically viable, and the people of Central Africa will benefit from further reduced violence and increased economic opportunities.