In a recent series of speeches, SEC Chair Mary Jo White and fellow Commissioner Daniel Gallagher Jr. have begun to make the case that the Securities and Exchange Commission (SEC) should not be burdened with oversight of companies non-financial disclosure obligations established by the Dodd-Frank Act. Unfortunately, their rationale that this regulatory obligation to compel companies to disclose their dealings in conflict-risk areas around the world detracts from the SEC’s oversight responsibilities is misguided to say the least.
At issue is Section 1502 of the Dodd-Frank Act that requires companies to disclose whether certain minerals used in the manufacture of various products is sourced from the Democratic Republic of the Congo or neighboring countries. “[T]he SEC should not be responsible for those reports and “many, if not most” of its Dodd-Frank mandated functions,” Commissioner Gallagher said in a speech yesterday at Fordham University School of Law in New York. “Those mandates distract from the SEC’s proper regulatory oversight and strap its limited resources,” according to the Wall Street Journal.
Previously, SEC Chair White recently spoke to a crowd at Fordham Law School where she noted that “[s]eeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share. But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.” Her reasoning is that “other mandates (the Conflict Minerals Rule), which invoke the Commission’s mandatory disclosure powers, seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.”
While no doubt that these statements will be used as fodder for the never-ending industry litigation seeking to halt the implementation of Dodd-Frank regulations, the Commissioner’s narrow view of material disclosure puts both companies and their investors in peril should the human rights risks arising out of undisclosed business activities come to fruition. Embracing for the moment the neoliberal-free market notion of ”letting the market decide,” disclosure of risks before they become a reality is at the core of the SEC mandate to bring about greater disclosure for investors – a lesson that we have learned from the mortgage crisis of 2008.
Today, a number of enlightened public companies are undertaking human rights due diligence processes aimed at circumventing risks arising out of business operations around the world. Assessments of non-financial risks, including impacts on local communities and people from the taking of land, implementing of security measures and human trafficking are increasing in industries once thought to be out of touch with respect to human rights concerns. The reason for this change is simple: Human rights impacts arising out of business activities are becoming material for the corporate enterprise and ignoring those risks put companies at financial risk. In referring to other provisions of the Dodd-Frank Act to which she is in agreement, Chairwoman White forcefully states that “[t]hese are measures directly aimed at making our financial system and the protections for investors stronger.” Such is the case with respect to human rights due diligence in business activities around the world and the Commission should heed their own words.