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Broken SEC pushes unworkable rules on 'conflict minerals'
Soon to be finalized Conflict Mineral disclosure rules exemplify the broken state of our financial regulatory structure. Once again, it is disappointing that the Securities and Exchange Commission appears to have missed an opportunity to get it right.
Through the Dodd-Frank Act, Congress directed the SEC to require new disclosures for companies to reveal if they use four separate minerals, or their derivatives, from the Democratic Republic of the Congo in any products. Unfortunately, the SEC’s rule will not be reflective of the way supply chains actually work and will do little to curtail the turmoil and civil wars that have raged in the central African nation since 1960. Instead the rule will create an unworkable regulatory regime that will be exploited by bad actors and difficult to implement for honest market participants.
The underlying goal of this provision is both noble and worthy of the efforts by Congress to end human rights abuses. There has yet to be, however, an adequate cost benefit analysis and uncertainty remains over whether these rules can achieve their intended goals. These lingering questions indicate the likely possibility of unintended, negative consequences for American businesses.
For example, it is not unusual for companies to have 100,000 suppliers or to produce more than 40,000 different products. Many of those products likely include only trace amounts or even untraceable amounts of the minerals in question, sometimes through the use of recycled materials. Now the SEC wants American companies not only to audit their complex supply chains but also monitor those of vendors.
Not surprisingly, some industry estimates places costs on all businesses – large and small, public and private – as high as $16 billion. A Tulane University study commissioned by supporters of these rules put the costs at almost $8 billion with two-thirds of those falling on small businesses.
To fix this unworkable rule the business community offered constructive solutions including a recycling material exemption to incent less mining, safe harbors provision to limit liability, a de minimis exception to excuse trace mineral elements, and a phase-in period to allow companies to implement rules that will require massive changes in their operations.
Unfortunately, it appears that the SEC is likely to reject these common sense proposals. If enacted as they currently stand, these rules will harm our manufacturing base, saddle small businesses with more costs, and worse not solve the horrific issue at hand.
As it is, the SEC is ill-equipped to perform its fundamental missions. The Commission is understaffed and overworked leaving a capable few to achieve an incredible amount of work. This situation results in rules that are formulated improperly and without a clear understanding of their impacts.
That is why two studies from the U.S. Chamber of Commerce have made more than 50 recommendations to make it a more effective regulator. These include simple suggestions such as managerial accountability, hiring market based expertise, and enhanced cost-benefit analysis. Until the SEC fixes its internal shortcomings, it is unreasonable to think that they can or should oversee regulations with such far reaching consequences for such a broad segment of the business community.
Businesses can’t grow or raise capital in a tangle of well-intended but misguided regulations. Congress was wrong to make the SEC a new vehicle to project foreign, social policy. Instead of compounding the problem, we believe the SEC must follow the letter of the law by first conducting a true cost benefit analysis of these rules before they vote on them.
Despite best intentions, Congress got this wrong. The SEC is getting this wrong. Luckily, it’s not too late to go back to the drawing board and get it right.
Thomas P. Quaadman is vice president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
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