Thank you, Chairman Schapiro.
I join my colleagues in thanking the staff – particularly those from the Division of Corporation Finance – for your hard work throughout this challenging rulemaking. I appreciate your professionalism in shaping the final rule – a rule that, given its express humanitarian goal, stands out as unique in the SEC´s long history of administering the federal securities laws.1
The humanitarian crisis that besets the Democratic Republic of the Congo (DRC) is shameful. Because of the extraordinarily violent conflict there, the people of the DRC are subjected to untold suffering. Without question, the tragedy must end so that the DRC can enjoy a future of peace and prosperity.
In an attempt to at least abate the violence and human rights abuses that are devastating the DRC, Section 1502 of the Dodd-Frank Act was enacted. Giving rise to Section 1502 of Dodd-Frank is "the sense of the Congress" that trading in so-called "conflict minerals"2 is contributing to the conflict in the DRC by financing the armed groups inflicting the violence, so that, the logic continues, if the demand for minerals coming from mines that finance the violence is cut off, peace and security in the DRC will be promoted and the conditions in the country will improve.3 More particularly, the aspiration seems to be that the humanitarian crisis in the DRC will improve if, in response to the new disclosure obligations and supply chain due diligence that Section 1502 contemplates, companies reject conflict minerals that finance the violence.
Section 1502 adds new Section 13(p) to the Securities Exchange Act of 1934 (‘34 Act). Section 13(p) directs the Commission to fashion a regulatory regime that requires reporting companies to make public disclosures regarding their use in the products they manufacture of conflict minerals that originate from the DRC or an adjoining country. The disclosure requirements relate to the use and sourcing of conflict minerals throughout the entirety of a company´s supply chain and, therefore, impact not just the company that bears the disclosure obligations, but also the company´s suppliers.
Today, the Commission is adopting its final rule pursuant to Section 1502 of Dodd-Frank. This rulemaking has proven to be especially difficult because the Commission has no expertise when it comes to the humanitarian goal of ending the atrocities that besiege the DRC. The agency is not even expert when it comes to supply chain management. More to the point, because the SEC´s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, it is not clear that the SEC and the federal securities laws are the proper instrument for achieving the laudable social objective behind Section 1502.
Although the Commission finds itself in a difficult position by having to undertake a rulemaking that falls far outside its zone of expertise, the agency still must base its final rule on a reasoned assessment that considers the potential consequences of its judgments. Otherwise, one cannot determine whether the rule is likely to do more good than harm.
Regrettably, notwithstanding the time that has been taken, the effort that has been expended, and the comment that has been received, the Commission has not met its obligation in this respect. The SEC´s conflict minerals rulemaking suffers from an analytical gap that I cannot overlook – namely, there is a failure to assess whether and, if so, the extent to which the final rule will in fact advance its humanitarian goal as opposed to unintentionally making matters worse. Indeed, based on some of the comment that the Commission has received, there is reason to worry that, contrary to the aims of Section 1502, a chief consequence of the final rule could be that it actually worsens conditions in the DRC.
The best of intentions cannot substitute for a rigorous analysis by this agency of whether the social benefits that Section 1502 strives for are likely to be realized by the final rule, including when accounting for unintended consequences of the rule that could contribute to the despair that characterizes life in the DRC. There is all the more need for such an analysis given the great deal of discretion that the SEC has exercised in fashioning the final rule. How are we to determine whether the Commission´s many discretionary choices will promote as opposed to hinder the goal of peace and security in the DRC? Because this rulemaking lacks any analysis of whether the benefits will materialize – failing to assess how the choices the Commission has made will impact life on the ground in the DRC – I am unable to support the recommendation and respectfully dissent.
Let me take a few additional moments to expand on two aspects of this core concern of mine.
First is the extensive discretion the Commission has exercised in formulating the final rule for conflict minerals. Section 1502 of Dodd-Frank identifies its humanitarian goal and instructs the SEC to undertake a rulemaking in accordance with the statute. Although Section 1502 sets the general contours and direction of the rulemaking, the Commission is afforded considerable room to determine the particulars that make up the regulatory requirements.4 The Commission has taken advantage of its discretion, making key choices in this rulemaking that will determine for those living in the DRC the ultimate impacts of Section 1502.
One straightforward indicator of how the SEC has used its discretion is how what is being adopted today differs from what was proposed; the Commission has chosen to markedly change the final rule as compared to the proposal. The adopting release itself describes the "most significant choices [the Commission] made in implementing the statute" as covering the central features of the regulatory regime, including, among other things, the reasonable country of origin inquiry; the "DRC conflict undeterminable" category; supply chain due diligence and the corresponding audit; the treatment of recycled or scrap sources of minerals; requiring that Conflict Minerals Reports be "filed" instead of "furnished"; the meaning of "necessary to the functionality and production"; and whether to exempt smaller reporting companies.
Second is a fundamental question that has to be asked and answered: Will the final rule – reflecting, as it does, the SEC´s discretionary choices – promote Section 1502´s humanitarian goal? Would a better outcome for the DRC have resulted if the Commission had made different choices among the regulatory alternatives available to it? To address these questions, one must assess how effective the final rule is likely to be in abating the DRC´s humanitarian crisis. For example, what if the demand for DRC-sourced conflict minerals coming from countries other than the U.S. increases to offset any reduction in the demand from U.S. companies? What if conflict minerals are smuggled into other countries and sold as being from those other countries? What if armed groups find other ways to finance their violence? What if the result is a persistent de facto embargo against conflict minerals sourced from the DRC? As to this last point, it is essential to recognize that mining is a means of livelihood for many in the DRC. Some have already expressed their concern that a de facto embargo will create more hardship for the people of the DRC and may have already done so.
Notwithstanding this, the adopting release acknowledges that the Commission did not assess how effective the final rule will be in addressing the crisis in the DRC. As the Commission´s adopting release explains, Section 1502 "aims to achieve compelling social benefits, which we are unable to readily quantify with any precision, both because we do not have the data to quantify the benefits and because we are not able to assess how effective Section 1502 will be in achieving those benefits."
In other words, the Commission has declined to analyze whether the choices it has made will advance the rulemaking´s objective.5 It is not enough to cite Congress´s humanitarian goal or to assume that good results will follow without analyzing whether the final rule will in fact promote peace and security in the DRC. Whether the final rule makes things better or worse does not turn on what we hope or assume will happen but on what actually happens in the DRC once the final rule goes into effect. An understanding of how the final rule is likely to translate into real-life impacts on the ground can only come from careful analysis. Indeed, we know that Congress did not intend for the plight of the Congolese to worsen. Yet still the Commission´s adopting release does not examine whether the final rule could inadvertently contribute to such an unfortunate outcome in contravention of Section 1502´s purpose. It will be especially disquieting if the situation in the DRC ends up deteriorating more.
We all want the violence in the DRC to end. Unfortunately, the adopting release does not offer a reasoned basis for concluding that the final rule will help bring this about, and there is cause for concern that the hardship and suffering could worsen if the outcome is a de facto embargo. Accordingly, I caution against any sense that the need for action to abate the humanitarian crisis is allayed because of the rule the Commission is adopting today.
This has been a very demanding rulemaking for the staff. So I want to conclude by once again thanking you for your commitment, dedication, and public service.
1 According to the Commission´s adopting release, "[T]he social benefits [of the rulemaking] are quite different from the economic or investor protection benefits that our rules ordinarily strive to achieve."
2 These include columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which, at present, are limited to tantalum, tin, and tungsten.
3 See Section 1502(a) of Dodd-Frank, Sense of Congress on Exploitation and Trade of Conflict Minerals Originating in the Democratic Republic of the Congo ("It is the sense of the Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein, warranting the provisions of section 13(p) of the Securities Exchange Act of 1934, as added by subsection (b).").
4 Recall that Section 1502 of Dodd-Frank operates by adding a new section to the ´34 Act, Section 13(p). This is important because it would follow that Section 13(p) is subject to the Commission´s exemptive authority under Section 36 of the ´34 Act. Section 36, then, is a distinct source of discretion that the Commission can avail itself of to fashion what it believes is the appropriate final rule.
5 The Commission declined even to undertake a qualitative analysis. The Commission´s decision not to analyze the benefits evidences how the agency is ill-equipped to fashion rules designed to achieve social goals that are extraneous to the longstanding purposes motivating the federal securities laws. But the SEC´s lack of expertise in promoting interests other than protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation cannot mean that the agency does not even have to attempt to assess the impacts of its regulatory choices when shaping a rule with aims that are afield of the SEC´s traditional mission. The Commission remains responsible for understanding the potential consequences of its actions to help ensure that the Commission´s actions result in more good than harm.