As mentioned on Brock and Dave’s Blog and a recent article by Bloomberg, the conflict minerals disclosure required by the Dodd-Frank Act appears to be close to final. These proposed rules are highly controversial because of the estimated high costs for public companies to comply with the new rules compared to the small perceived benefit to investors. In fact, we have previously blogged regarding the likelihood that the SEC has grossly underestimated the compliance costs.
Under the proposed conflict minerals rules, companies must disclose whether certain minerals used in production chains originate from the Democratic Republic of the Congo or its neighboring countries. Minerals sourced from these areas of central Africa often fund militia and other military groups’ operations which have exacerbated internal conflicts and human rights violations. Congress believes that by requiring these disclosures public companies may be encouraged to seek alternative sources, materials, or suppliers to project a more socially responsible image to consumers.
In a letter to the SEC, Senator Leahy and other members of Congress have taken issue with the proposed final rules apparently circulating around the Capitol. In the letter, the Senator and his colleagues have informed the SEC that they believe the proposed final rules contravenes Congress’s legislative intent by allowing the conflict mineral reports to be “furnished” rather than “filed.” The difference, of course, is not just semantics. Items “filed” in periodic reports are subjected to liability under the Securities Act of 1933, including Section 11 and Section 12(a)(2), because the information is incorporated by reference into Securities Act registration statements. Items “furnished” are subject only to liability under the Securities Exchange Act of 1934, primarily Rule 10b-5. Because Section 11 liability presents essentially “strict liability” for issuers, it would be much easier for a plaintiff to win a judgment against an issuer for faulty conflict minerals disclosure if the disclosure is “filed” rather than “furnished.”
Whether or not the legislative intent espoused by Senator Leahy in his letter is correct, we believe the foundation of the entire law is flawed. As we have blogged before, we strongly disagree with the increasing frequency in which social policy has been weaved into the securities laws. Public companies incur enough costs with complying with rules and regulations protecting investors that to burden public companies with the costs of social policies harms the entire capital formation process. While it is unlikely that the conflict minerals disclosure rules will be repealed, public companies incurring the added cost in complying with the law should not have the added burden of Securities Act liability for their disclosures, particularly when there is very little benefit of these disclosures to investors.