March 16, 2017
I submit this comment in response to the January 31, 2017 Statement on the Commissions Conflict Minerals Rule and the request for feedback from the SEC.
According to the SECs website, the agency has a mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As such, the SEC amended Section 13 of the Securities Exchange Act of 1934, subsection (p) and enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which provides requirements for disclosing information related to conflict minerals originating in the Democratic Republic of the Congo or one of its neighbor countries. Not only does this regulation not achieve congressional objectives, it harms rather than helps legitimate business in the Congo, and desired outcomes can be achieved effectively via other means. Based on the information contained in this comment, I recommend the conflict mineral disclosure requirement be removed from the Act and the US government proceed with alternative measures to achieve its goals.
The disclosure requirement does not achieve congressional objectives.
The SEC established the conflict mineral provision in an attempt to thwart sexual and gender based violence from certain areas in Africa and assist with emergency humanitarian relief needed for the region. As such, part of the original requirement was for companies to label their products as either DRC Conflict Free or DRC Not Conflict Free in an effort to put teeth into the regulation and provide a greater incentive for US companies to source from non-conflict areas since consumers will have visibility to conflict data. Furthermore, the original requirement would force US companies to take certain actions in order to be able to definitively state whether their products contain conflict minerals. However, after First Amendment challenges, in March 2016, the SEC decided not to pursue appeals and, as such, companies are not required to definitively describe whether their products are conflict free. By eliminating this requirement from the Act, much of the expected benefit to the African region was removed.
Since it is voluntary as to whether a company must disclose it has DRC Conflict Free products and is only required to submit an Independent Private Sector Audit (ISPA) if it discloses such information, the objectives of the Act are severely diminished. According to filings from 2014-2016, most companies reported that their conflict mineral status was either undeterminable or they made no determination. Only 19 companies submitted ISPA in 2016.
Additionally, the Act is only applicable for public companies. Therefore, private companies can continue to source from the region without disclosure requirements, hampering Congressional objectives.
The conflict mineral requirements in the Act may harm rather than help businesses.
Next, as mentioned above, while the intent of the provision should be applauded, it may harm rather than help legitimate businesses within affected African regions. First, the requirements within the Act are extremely cumbersome. The Act requires manufacturers with potentially small amounts of minerals such as components in cellular phones, computers and even manufacturers of childrens shoes to analyze their supply chain and the supply chain of their suppliers (and potentially the supply chains of their suppliers supplier) to ensure conformity with the disclosure requirements. This burden is complex, cumbersome and, at times, excessive. It may deter US companies to buy from legitimate mining organizations within the region in an effort to simplify their supply chain processes. For the legitimate suppliers, they also have additional burdens, such as validating their products as conflict-free, providing training and being highly educated on disclosure requirements, and, many times, the need to deal with documents and/or processes that are susceptible to fraud. Legitimate miners in the region may be negatively impacted based on the burden from U.S. companies.
Additionally, while costs to comply with the Act were below original SEC estimates, according to the 2017 Elm Sustainability Partners study, companies still spent approximately $600-$800 million to achieve SEC compliance with the conflict mineral requirements. While large companies can likely absorb these extra costs without major issue, smaller companies may have a real burden.
Third, there is no direct evidence that the Act eased humanitarian suffering in the African region. Even if companies are compliant with the regulations, because of the uncertainty within the region and the inability to have complete transparency to mining operations, it is very difficult to correlate any improvement in the regions condition with the Act.
The desired outcomes by the U.S. government can be achieved via other means.
Finally, the desired outcomes for why the Act was originally created can likely be achieved more effectively via alternate means. There is no debate that the war in central Africa has led to millions of deaths in the Congo and that after the war, armed groups were able to benefit from the sale of certain minerals from the region, however, there is debate on whether the existing Act removes violence and provides help.
Instead of inflicting additional requirements, alternatives should be developed which could have a greater impact on the humanitarian relief while, at the same time, minimizing unnecessary burdens for US companies. Alternatives could include placing the attestation requirement at the point of importation versus the entire manufacturing and retail process, like the EU proposed. Alternatively, the US government could create watch lists, similar to those available under the Department of Commerce, where companies could screen the supplier prior to ordering or importing minerals. Additional alternatives are also likely available that would have a greater impact with less unnecessary burden.
I suggest the Security and Exchange Commission, in line with President Trumps mandate to remove unnecessary regulations, amend the Dodd-Frank Act by removing the conflict mineral disclosure requirements.