As part of the Dodd-Frank rulemaking–a mountain of rules that the Securities & Exchange Commission has been struggling to implement over the past two years–yesterday the SEC finalized its “conflict minerals” disclosure rules. The rules require “issuers with conflict minerals that are necessary to the functionality or production of a product manufactured by such person to disclose annually whether any of those minerals originated in the Democratic Republic of the Congo or an adjoining country.”
The enabling legislation, the Dodd-Frank Act, contains a discussion of the purposes of the rulemaking. As summarized by the SEC:
[I]n enacting the Conflict Minerals Statutory Provision, Congress intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC. This section explains that the exploitation and trade of conflict minerals by armed groups is helping to finance the conflict and that the emergency humanitarian crisis in the region warrants the disclosure requirements established by Exchange Act Section 13(p).
Similarly, the legislative history surrounding the Conflict Minerals Statutory Provision, and earlier legislation addressing the trade in conflict minerals, reflects Congress’s motivation to help end the human rights abuses in the DRC caused by the conflict.
The new rules can be found here. I don’t have much to add to the discussion of desirability of the rule beyond what has been said by Professor Bainbridge and SEC Commissioner Troy Paredes (both of whom argue that the rules go well beyind disclosure) No doubt, the DRC is a humanitarian tragedy. The question is whether this rule does anything to meaningfully address the tragedy.
Aside from that question, what strikes me about the rule is that it shows the SEC’s continued transformation from an agency primarily focused on disclosure to an agency increasingly focused on corruption: insider trading, the Foreign Corrupt Practices Act, and conflict minerals, among other things. I see the SEC’s enhanced role in corporate governance issues (sometimes, of course, through Congressional fiat, but often on the SEC’s own initiative) as partially an SEC effort to fight on yet another front in a war against corruption. I am not trying to argue that the SEC should not fight against corruption as a general matter–of course it should, within its Congressional mandate–but in an agency with limited financial resources, I question whether the SEC’s resources are being put to their best use as the SEC increasingly shifts to what seems to be a more litigation-driven agency. I can’t imagine how the SEC’s anti-corruption and corporate governance initiatives have not invariably diverted resources away from the simple but crucial task of improving disclosures; instead, the rules have made disclosures increasingly cumbersome, opaque and less useful to investors, often of dubious value in actually protecting investors, and, at the same time, much more expensive for companies to produce. (Although it won’t help companies from a cost perspective, perhaps XBRL is the best hope of making disclosures useful for investors again–one could create the company disclosure equivalent to a simple nutritional label, for example.) Anti-corruption efforts are certainly important to the SEC’s mission to protect investors, but I fear that the SEC’s expansion from its central role as a disclosure regulation agency has had and will have unintended consequences that are not in the best interests of investors.