Misuse of Regulatory Authority to Sanction

Regulatory “Mission Creep”

A troubling pattern of regulatory mission creep has appeared in Congressional legislation under the banner of "transparency." These Congressionally legislated regulatory measures threaten to distort the historic mission of the U.S. Securities and Exchange Commission (SEC).

The SEC's mission reads: "The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain orderly and efficient markets, and facilitate capital formation…all of the SEC's actions must be taken with an eye towards promoting the capital formation that is necessary to sustain economic growth. … Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing."

In the wake of the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), ostensibly to bring federal regulation to bear on the unregulated aspects of the financial markets that gave rise to the crisis. Tucked into Dodd-Frank at the last moment of the Senate-House conference on the final bill, however, are two provisions that have no bearing on the mission of the SEC:
  • Section 1502 of Dodd-Frank requires companies that source minerals from the Congo-DRC and adjacent countries to disclose whether they use "conflict minerals," where militias engaging in gross human rights abuses are seen to benefit from the trade.
  • Section 1504 of Dodd-Frank requires the SEC to promulgate regulations directing all companies listed on the New York Stock Exchange to disclose detailed project-specific payments in the natural resources sector to foreign governments.

The intentions of such values-based legislation are inarguable; the practical consequences of mandating such transparency are not trivial. Plainly stated, the complex, global supply chain that includes minerals produced in the Congo-DRC is not susceptible to such disclosure. The infrastructure doesn't exist to permit self-certification by end-of-the-chain manufacturers and retailers.

In the case, of company payments to sovereign governments, the Extractive Industries Transparency Initiative (EITI), a multi-stakeholder, voluntary global standard initiative, is premised on equal treatment of all companies regarding disclosure. Section 1504, however, would mandate that those companies listed on the NYSE report all payments on a project-specific basis, without regard to their non-listed competitors.

Neither case accords with the historic mission of the SEC. Indeed, these provisions of Dodd-Frank will compel corporate practice without regard as to whether the results will achieve their intended objectives. In the case of conflict minerals, the facts of the supply chain do not permit substantive compliance. In the case of natural resource payments, NYSE listed companies would be immediately placed at a competitive disadvantage vis a vis state-owned competitors.