SEC Supports Environmental Provisions of Dodd-Frank
It’s not often that the financial sector takes on environmental issues, but that’s exactly what’s happening with the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The SEC voted today on two sections of the act that seek to end the exploitation and trade of conflict minerals and deter abuse and mismanagement of oil, gas, and mining projects. Members of the Commission voted along party lines in support of both provisions.
Section 1502, the “conflict minerals provision,” prevents the mineral trade from funding human rights abuses and conflict in the Democratic Republic of Congo. Eastern DRC holds a wealth of ores used in tin, tantalum, tungsten, and gold, materials used in the production of mobile phones and laptops. But that wealth is often appropriated by warring groups in the area that impose illegal taxes on mining sites and control the transport and smuggling of ores.
Companies using these materials are now required to investigate their supply lines and publicly disclose that information to the SEC within a two-year period. If the company finds that its minerals did not come from conflict zones, it can qualify its product as “DRC conflict free.” If the company cannot confirm that its minerals are conflict free, it will have to report which products use the conflict minerals, where the minerals came from and which facilities processed them, and detail the company’s process of due diligence.
Commissioner Daniel Gallagher, who dissented on the vote, says the SEC is “not the right tool for this job.” Indeed, the SEC has no power to punish companies not in compliance. Detractors also bemoan the costs. Estimated at a range of $71 million to $609 million annually, the financial responsibility falls on American companies.
Section 1504 takes on corruption in the gas, oil, and mining sector. United States-based companies are now compelled to disclose all payments made to governments on a project-by-project basis. This includes taxes, royalties, license fees, production entitlements, and bonuses paid to foreign governments for each extraction site. In the past, companies like BP and Shell (neither of which are US-based) have shadily poured money into “social projects” in countries like Angola and Nigeria. But no spending reports on the projects were ever published, and it’s possible the money went to corrupt local officials instead of the services for the general public.
The initial cost of compliance is estimated to range from $44 million to $1 billion, with annual compliance costing between $200 million to $400 million. The SEC set a $100,000 threshold for reporting payments, and does not exempt “confidential or competitively sensitive information” from reporting. Basically every foreign project conducted by an American company will fall under the rules for section 1504.
Today’s vote comes two years after the act was approved by Congress, a delay that dismayed many people. A letter signed by 58 Representatives in June chastised the Commission for missing its deadline by more than a year: “The Commission has received nearly 200,000 comments between the two rules, but the majority of these are simple messages from American citizens urging the Commission to issue strong final rules without delay. The Commission has had more than enough time to consider and respond to all of the substantive comments from the industry, civil society, investors, and others.”
The delay was likely a result of heavy lobbying from industry groups, which argued that the stricter disclosure laws would be costly and time consuming. Under section 1502, companies need to investigate each supplier of each ore. Many unlikely companies will be affected. Take Kraft Foods, for example, which uses tin to package biscuits. In order to carry the “DRC conflict free” label, it must report on all of its 100,000 tin suppliers.
Gas and oil companies are also concerned that making their spending records public puts them at a disadvantage to international companies. Under Dodd-Frank, only companies listed by the SEC are subject to the reporting requirement. State-owned multinationals are not. Those multinationals own 78 percent of all oil and natural gas reserves, and include the 16 biggest oil companies.
“Forcing publicly traded companies to release proprietary information about their foreign operations would put them at a serious competitive disadvantage because state-owned firms could plunder that information and determine their rivals' strategy and resource levels,” wrote Jack Gerard, president and CEO of the American Petroleum Institute, in a recent Wall Street Journal op-ed. “Information worth billions of dollars would be just a few mouse clicks away.”
Still, many see the passage of these sections a landmark for promoting ethical international trade. And coming just a day after the SEC issued its first whistleblower program award, maybe the SEC will, in fact, be just right for the job.