We are pleased to have as a guest contributor Jeffrey W. Rubin. Mr. Rubin a partner of Hogan Lovells US LLP practicing in New York, and is the Chair of the Federal Regulation of Securities Committee in the Business Law Section of the American Bar Association. He can be contacted directly at firstname.lastname@example.org. The views he expresses below are solely his own.
Certainly one of the most frequently viewed pages on the SEC’s website these past few months has been the page announcing upcoming SEC meetings to adopt rule proposals. Interest in the timing of the SEC’s adoption of its final conflict minerals rules has perhaps prompted most of those views. Although Section 1502 of the Dodd-Frank Act required the SEC to promulgate regulations by last April, that date passed with the SEC caught between the Scylla of a statutory mandate and calls by the Congressional conflict minerals sponsors and NGOs for prompt and strict adoption of the final rules, and the Charybdis of companies’ concerns regarding the extraordinary burdens the rule will impose upon them. Contrast, for example, the SEC’s estimate that the aggregate additional burden on companies as a result of the rule will be 153,864 hours of company personnel time and $71,243,000 for the services of outside professionals with the study conducted by Tulane University’s Payson Center for International Development, which put the price tag at $7.93 billion. The SEC underscored its need for additional input by holding a roundtable in October, in which one participant highlighted the burden by noting that her company has 100,000 suppliers.
As December 31st approached without an SEC meeting being noticed, many companies breathed a sigh of relief, though not without a bit of anxiety when the SEC adopted its final rules on mine safety disclosure without a meeting on December 21st. The conflict minerals adoption date is significant because Section 1502 provides that the obligation of companies to implement the rules will commence with their first fiscal year that begins after the date the SEC promulgates its final regulations. Had the rules been published before the end of the year, calendar year companies would have had scant time to review the rules and implement procedures by January 1st.
We’re now in January, and it seems clear that the SEC will be publishing its final rules very soon. Calendar year companies will be obligated to implement the procedures contemplated by the new rules beginning on January 1, 2013, and to furnish the required disclosures in their reports filed with the SEC in 2014. This will provide these companies the opportunity to plan a thoughtful implementation process. However, non-calendar year companies, and especially companies with fiscal years beginning in the early part of the year will not have as long a grace period, and will be the first companies required to undertake supply chain reviews and to make the required disclosures. Although many commenters have suggested that the SEC adopt a phase-in with respect to the new rules, it is not certain that the SEC will do so, and in public comments SEC staff members have pointed out that since the passage of the Dodd-Frank Act and the promulgation of the SEC’s proposed rules in 2010, companies have had a considerable period of time to review their conflict minerals supply chains and to plan for the eventual implementation of final rules. Whether the final rules will provide any accommodations to smaller reporting companies or others remains to be seen.
As eyes focus on the final rules, I would also suggest that we consider the unprecedented nature of the conflict minerals provisions. Until the enactment of the Dodd-Frank Act, all securities legislation was oriented to promoting the historic mission of the SEC: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The conflict minerals provisions recite as their purposes none of these goals, and as many commenters have noted, the provisions may work to the detriment of these purposes by virtue of the burdens they will impose on companies. This is not to dismiss the importance of an appropriate response to the horrific human rights abuses taking place in the eastern Democratic Republic of the Congo (DRC), but instead to suggest that amendments to the securities laws are an inappropriate means to achieve humanitarian goals. The enactment of the conflict minerals provisions may be the start of a very slippery slope whereby a variety of interest groups seek to plant a flag on the real estate of companies’ disclosure documents in order to achieve parochial goals. Against the backdrop of complaints that company disclosure is already too prescriptive and obscure, adding to this burden may harm, rather than help, legitimate investor protection goals. Some have noted that we may have reached a tipping point whereby the burdens associated with public company disclosure and compliance outweigh the benefit of companies going public; provisions such as the conflict minerals rules only add to those burdens.
This is also not to state that companies should be blind to issues arising from their procurement processes and within their supply chains. Many companies have implemented robust supplier standards, reflecting both legal obligations and humanitarian principles, and regularly review compliance by their suppliers with these standards. This month, the California Transparency in Supply Chains Act took effect, requiring retailers and manufactures above a certain size doing business in California to disclose on their company websites measures used to track possible slavery and human trafficking in their supply chains. The disclosure is aimed at providing information to consumers, allowing them to make better, more informed choices about the products they buy and the companies they support. Similar legislation has been introduced in Congress. What is notable about these initiatives is that they do not impose substantive burdens or penalties on companies – companies are only required to disclose the extent to which (if any) they are taking certain actions with respect to their supply chains relating to human trafficking and slavery. On the basis of the disclosures, consumers can determine whether or not they want to purchase goods from these companies. This seems to be the same ultimate goal as Section 1502, but unfortunately the aggregate price tag of the Congressional approach with respect to conflict minerals will almost certainly run into billions of dollars, and impose considerable burdens on companies, especially smaller companies, that are struggling to survive in these difficult economic times. It’s not clear that any relief is in sight.
 Aside from the burdens the conflict minerals rules will impose on public companies, the concepts underlying the conflict minerals rules have also been challenged. The principal goal of the legislation is to encourage companies at the top of the supply chain to exercise pressure throughout their supply chains not to procure conflict minerals from groups financing the DRC conflict. However, as one observer has asked, is it reasonable to believe that an ounce of gold mined in the DRC will be unsalable on the world market? Moreover, the conflict minerals provisions may induce companies to source their minerals from places other than central Africa, adversely affecting not only legitimate mining activities in the DRC, but also those in adjoining countries. This could itself lead to a humanitarian crisis affecting artisanal miners whose livelihood depends on this industry. See the recent comment letter to the SEC from Observatoire Gouvernance et Paix and Bureau d’Etudes Scientifiques et Techniques at http://www.sec.gov/comments/s7-40-10/s74010-442.pdf [Ed. note: The December 2011 report from the United Nations Group of Experts in the DRC also presented findings supporting these concerns.]