RPC Reg Spotlight September 13, 2012

 

Regulatory Action in the Spotlight:

 

SEC rules derived from Dodd-Frank relating to disclosure of payments by resource extraction issuers

 

Adverse Effects:

 

  • Places expensive burden on U.S. companies to determine the source of natural resources
  • Rule will not have any foreseeable beneficial effects on reducing violence in the Eastern Congo

 

 

Response of the Obama Administration:

 

On August 22, 2012, the Security and Exchange Commission (SEC) issued two major new rules pertaining to so-called “blood diamonds.”   The first rule (RIN 3235-AK85) implements Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which “requires the Commission to promulgate rules requiring 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.”  This rule requires a resource extraction issuer to “provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government.”  The rule is set to go into effect for all fiscal years ending after September 30, 2013. 

 

The second rule (RIN 3235-AK84) implements Section 1502 of the Dodd-Frank Act.  This section requires the resource extraction issuer to determine whether or not the resources extracted from the Democratic Republic of the Congo and to ensure measures are “taken to exercise due diligence” and to “include an independent private sector audit of the report that is conducted.”  This rule will go into effect beginning on January 1, 2013, with first reports due on May 31, 2014. 

 

 

Impact on the United States:

 

According to the American Action Forum (AAF), compliance with the rule dealing with resource extraction disclosures will have a final cost of $1.4 billion while the rule concerning conflict minerals has a cost of $4.7 billion, for a cumulative cost of $6.1 billion and 2.55 million annual paperwork burden hours.  Both of these rules are far more than the proposed rules were due to cost: $11.8 million and $71.1 million in costs respectively.  Upon taking effect, these rules will be the first and third priciest Dodd-Frank rules. 

 

Franklin Vargo, the Vice President of International Economic Affairs for the National Association of Manufacturers, stated that these new rules “pose a potentially huge financial and reporting burden on America’s manufacturers” and “also potentially affect many tens of thousands of small and medium-sized companies not subject to SEC reporting because they will, in turn, be asked by their large customers to provide the due diligence that will be required by the rule.”  In the same statement, Mr. Vargo also alleged the rules could end up costing $9-16 billion to implement, or nearly 100 times higher than the SEC’s initial estimate. 

 

 

In Closing:

 

These rules will require American companies to go into an expensive and extensive process of determining the source of extracted resources.  Despite the additional high cost of compliance, there is nothing in these rules that would reduce the unacceptable level of violence against innocent people in the Congo.   In fact, these rules could result in the harmful unintended consequence of placing American companies at a competitive disadvantage to international competitors while at the same time costing many innocent African miners their jobs by acting as a de facto embargo on African resources. 

 

 

Relevant Legislation:

 

On May 10, 2012, the Subcommittee on International Monetary Policy and Trade held a hearing entitled “The Costs and Consequences of Dodd-Frank Section 1502: Impacts on America and the Congo.”  Rep. Donald Manzullo, in an opening statement, said: “We all share the same goal of ending the conflict in the eastern region of the DRC and crippling the militias. We all share the goal of the legislation to end the trade in the minerals that benefit the militias...We also must make sure that the rule does not unintentionally benefit our foreign competitors, particularly in China, and harm our small businesses.”

 

On August 10, 2012, a bipartisan group of 51 members of Congress sent a letter regarding these proposed rules to Mary Schapiro, Chairman of the SEC.  The letter notes that Section 1502 of the Dodd-Frank Act was hastily slipped into the 2,315-page bill on the final night of deliberations by a House-Senate Conference Committee, that it concerned subject matter that is outside the expertise of the SEC, and that Congress held no hearings to consider how the section would be implemented.  In closing, the letter stated, “while the legislative process was seriously flawed, it is critical that [the SEC is] deliberate and careful in crafting regulations to implement Section 1502 so the Rule does not have further unintended negative consequences on American companies or the people of the Congo.”