BILL ANALYSIS                                                                                                                                                                                                    






                                                       Bill No:  SB 
          861
          
                 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                       Senator Roderick D. Wright, Chair
                           2011-2012 Regular Session
                                 Bill Analysis
          

          SB 861  Author:  Corbett
          Amended:  April 7, 2011
          Hearing Date:  April 12, 2011
          Consultant:  Paul Donahue


           SUBJECT:   Public contracts: Ineligibility of scrutinized 
          companies  

           SUMMARY:   Prohibits specified companies against whom an 
          enforcement action has been filed by the SEC from bidding 
          on or submitting a proposal for a contract with a state 
          agency to provide goods or services. 

           Existing law  :  Authorizes contracting between state 
          agencies and private contractors and sets forth 
          requirements for the procurement of goods and services by 
          state agencies, and the various responsibilities of state 
          agencies and the Department of General Services (DGS) in 
          implementing state contracting procedures and policies.

           This bill  :

          1) Prohibits a "scrutinized company," as defined, from 
          bidding on or submitting a proposal for a contract with a 
          state agency to provide goods or services.

          2) Defines a "scrutinized company" as a person that is 
          required by federal law to disclose information relating to 
          specific "conflict minerals" originating in the Democratic 
          Republic of the Congo (DRC), or adjoining countries, and 
          the company has  either  :

               a) Filed an "unreliable determination" as defined by 
               federal law;

               b) Reported false information in its report required 





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               by federal law; 

               c) Failed to file a report as required by federal law; 
                and  

               d)  The Securities and Exchange Commission (SEC) has 
               taken civil action by filing a complaint with a US 
               District Court, or has taken administrative action 
               through the administrative proceeding process, or 
               both, against a person for violations of the reporting 
               requirements.

          3) Specifies that the provisions of the bill would become 
          inoperative when the disclosure requirements expire 
          pursuant to federal law.<1> 
           COMMENTS:
           
          1)  Purpose and intent  :  The author notes that embedded in 
          the financial reform measure that President Obama signed 
          was a truly historic regulatory provision pertaining to the 
          DRC.  In an effort to choke off funding for the armed thugs 
          and rebel militias who have killed more than 5 million 
          people and turned the Congo into the rape capital of the 
          world, federal law now requires publicly traded companies 
          to disclose whether their products contain minerals from 
          rebel-controlled mines in the Congo.  Greed for the Congo's 
          mineral wealth has been a prime cause of the atrocities and 
          conflict, and multiple armed groups use mass rape as a 
          strategy to intimidate and control communities as they 
          profit from the illicit trade of conflict minerals. Many of 
          these same conflict minerals end up in our electronic 
          devices such as cell phones, laptops, and digital cameras.
           
          2)  Background  :  On July 21, 2010, the President signed into 
          law the Dodd-Frank Wall Street Reform and Consumer 
          Protection Act <2>(Act). Section 1502 of the Act directs 
          the SEC to promulgate new disclosure rules for SEC 
          reporting companies for whom "conflict minerals are 
          necessary to the functionality or production of a product 
          manufactured by such persons." The new disclosure rules are 
          to include submission of annual disclosure to the SEC and a 
          more detailed report that will be subject to audit. The SEC 
          -------------------------
          <1> The conflict minerals provision in federal law sunsets 
          in July, 2015.
          <2> H.R. 4173, Pub.Law.111-203. 






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          is required to promulgate rules to implement these 
          disclosure requirements by April 17, 2011, although the SEC 
          has announced that it won't meet that deadline.

          3)  Conflict minerals  : The term "conflict minerals" for 
          purposes of the Act includes columbite-tantalite (coltan), 
          cassiterite, gold, wolframite or their derivatives, or any 
          other mineral or its derivative determined by the U.S. 
          Secretary of State to be financing conflict in the DRC or 
          an adjoining country.<3> 

          Conflict minerals are used widely by many industries. For 
          example, wolframite is the main source of the metal 
          tungsten, which is used to make cutting tools for various 
          industries.  Tungsten is also used to make filaments in 
          light bulbs, turbine engines for aircraft and energy 
          generation and in various electronic components. 
          Cassiterite is used in the production of tin, which, in 
          turn, is used in the solder that joins electronic 
          components together and as an alloy for other metals to 
          prevent corrosion. Columbite-tantalite is used mainly in 
          the manufacture of condensers and micro-electronic 
          technology (chips and processors), cell phones and nuclear 
          reactors. It is also used in the production of certain 
          varieties of steel.

          4)  Is this bill premature  ?  Recent amendments to this bill  
          confines the universe of companies that would be prohibited 
          from bidding on state contracts to those against whom the 
          SEC has filed an administrative or court action under the 
          Act.  But it remains unclear how the SEC will interpret the 
          disclosure and audit requirements of the law that could 
          trigger an enforcement action against publicly traded 
          companies.  

          If the SEC adopts the broadest possible interpretation of 
          Section 1502, then SEC reporting companies in a multitude 
          of industries would be subject to these requirements 
          because "conflict minerals" are used widely. In addition, 
          whether a product manufactured by a subsidiary of a 
          reporting company would trigger the new disclosure 
          requirements will need clarification in the SEC rules. 
          -------------------------
          <3> Adjoining countries are defined as countries that share 
          a border with the DRC, and include Angola, Burundi, the 
          Central African Republic, the Republic of the Congo, 
          Rwanda, Sudan, Tanzania, Uganda and Zambia.





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          Also, it appears that there is no test to determine when a 
          conflict mineral is "necessary to the functionality or 
          production" of a manufactured product.

          Moreover, the federal Act does not specifically define the 
          terms "manufacture", "product" and "derivatives."  
          Theoretically, any company that incorporates conflict 
          minerals in its products or in its production processes, or 
          any company that sells or processes conflict minerals, 
          could become subject to these requirements. 

          Because there is no final SEC rule, there is no indication 
          yet of what a company should do if it is unable to 
          ascertain with certainty the origin of the relevant 
          minerals. For example, if a conflict mineral had been used 
          as an alloy for a steel vat used in a company's 
          manufacturing process, it may be impossible to trace the 
          source of the mineral that was used to create the alloy.  
          Likewise, the source of gold may be impossible to trace 
          because gold mined in the DRC is chemically identical to 
          gold mined anywhere else in the world since gold is an 
          element in the periodic table. 

          5)  Filing of SEC enforcement action triggers ineligibility 
          to bid on state contract  :  Recent amendments to the bill 
          specify that if the SEC has filed a civil lawsuit or an 
          administrative enforcement action against a company for 
          violating the conflict minerals reporting law, that company 
          is precluded from contracting with the State of California, 
          and from submitting a bid or a proposal for a state 
          contract.  While this provision limits the applicability of 
          the contract bidding prohibition, issues remain concerning 
          initiation of the ban, its duration, etc. 

               a)  Filing of enforcement action versus final 
          disposition  :  The bill says that a "scrutinized company" 
          cannot bid on or submit a proposal for a state contract if 
          the SEC has taken a specified enforcement action against a 
          company.  Because the SEC rules have not yet been adopted, 
          it remains unclear what the SEC enforcement policy will be 
          concerning violations of the Act.  For example, it is 
          conceivable that the SEC could commence an administrative 
          enforcement action against a company for missing a 
          reporting deadline, only to drop the action upon receipt of 
          the required report.  Strictly speaking, such a company 
          would nevertheless be precluded from submitting a bid or a 





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          proposal on a state contract.

          The Committee may wish to consider an amendment clarifying 
          that a scrutinized company cannot bid on a state contract 
          only if the SEC has obtained a judgment or admission of 
          liability for a violation of the conflict minerals law.

               b)  Duration of state contracting prohibition  : The bill 
          does not specify the length of time during which the 
          scrutinized company is not allowed to submit a bid or a 
          proposal for a contract with the state.  Thus, if a company 
          is judged liable for, say, failure to file a conflict 
          minerals report to the SEC, neither the company nor the 
          state agency would know how long the prohibition remains in 
          effect, or if it is to remain in effect indefinitely. 

          In addition, the bill does not specify a method by which a 
          scrutinized company could cure its scrutinized status with 
          the State of California. Often the terms of a settlement 
          agreement or judgment will indicate what steps can be taken 
          by the company to lift the sanctions that have been 
          imposed.  For example, a consent decree signed by the SEC 
          and a violator could specify that, upon submission of 
          specified documents or audits at the next annual SEC 
          reporting period, the company will again be in good 
          standing with the SEC.  But there is nothing in the bill 
          that would offer the opportunity for such a company to 
          become eligible to submit bids or proposals for contracts 
          with the state.         

          The Committee may wish to consider amendments that specify 
          the length of time during which a scrutinized company 
          remains ineligible to bid on state contracts. 

          6)  Opposition  :  Opponents state that they are sympathetic 
          to the plight of victims of human rights violations in the 
          DRC and the adjoining countries, and that they agree with 
          the goals of the federal law that this bill draws upon.  
          While the goals of SB 861 are admirable, they are concerned 
          that the bill goes beyond federal law, punishes companies 
          for actions that are beyond their control, and may 
          ultimately raise the cost for state and local governments 
          to contract for goods and services at a time when all 
          levels of government are facing severe budget shortfalls.

          They state that the California business community 





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          collectively opposes slavery and other human rights 
          violations in the DRC and other parts of the world.  
          However, SB 861 seeks to punish companies over a very 
          difficult issue that is best handled on the federal and 
          international levels.  "It goes beyond federal law, which 
          contains only a reporting requirement to inform and educate 
          the public about which companies source their conflict 
          minerals from the DRC and surrounding countries."

          7)  Related legislation  :

           SB 1231 (Corbett, 2010)  .  Would have enacted various 
          substantive and clarifying changes to existing provisions 
          of the Public Contract Code (Section 6108) related to the 
          "sweatfree" procurement policy and code of conduct. 
          (Vetoed)

           SB 657 (Steinberg, 2010)  . Enacted the California 
          Transparency in Supply Chains Act of 2010.  Beginning 
          January 1, 2012, retail sellers and manufacturers doing 
          business in the state are required to disclose their 
          efforts to eradicate slavery and human trafficking from 
          their direct supply chains for goods offered for sale in 
          the state. (Chap. 657, Stats. 2010)

           AB 1650 (Feuer, 2010) .  Prohibits persons engaging in 
          investment activities in Iran's energy sector, as 
          specified, from bidding or entering into contracts with a 
          public entity for goods or services (Chap. 573, Stats. 
          2010)

           AB 498 (Hernandez, 2008).  Requires a company that bids or 
          submits a proposal for a contract for goods and services 
          with a state agency to self-certify that it is not a 
          scrutinized company engaged in specified activities in 
          Sudan. (Chap. 272, Stats.2008)

           AB 221 (Anderson, 2007)  .  Requires CalPERS and CalSTRS to 
          sell or transfer any investments in a company with business 
          operations in Iran. Also, requires annual reports to the 
          Legislature from the retirement systems on the status of 
          their investments in any company with business operations 
          in Iran beginning in 2009. (Chap.671, Stats. 2007) 

           AB 1089 (Hernandez, 2008)  .   Would have required DGS to 
          identify a list of companies that the state has, or could 





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          have, a contract with that also conducts business 
          operations in Sudan.  Also, would have prohibited state 
          agencies from entering into contracts with such companies. 
          (Held in Senate Appropriations Committee)

           AB 2941 (Koretz, 2006)  .  Prohibits CalPERS and CalSTRS from 
          investing in a company with active business operations in 
          Sudan and requires the boards of these retirement systems 
          to sell or transfer any investments with these companies. 
          (Chap. 442, Stats. 2006)

           SB 1285 (Watson, 1994)  and  AB 2448 (W. Brown, 1994)  .  
          Repealed laws prohibiting investment by specified state 
          entities in South Africa, and indemnified specified parties 
          from suit for prior decisions not to invest in South Africa 
          pursuant to the repealed statutes. (Chap. 30 & 31, Stats. 
          1994)
           
           SUPPORT:   

          Action Evangelique En Prison, Democratic Republic of the 
          Congo
          Africa Faith and Justice Network
          Amnesty International
          California Coalition Against Sexual Assault
          California Commission on the Status of Women
          California National Organization for Women
          Coalition for Free and Democratic Elections in Congo
          Coalition to Abolish Slavery and Trafficking
          Consumer Federation of California
          Earth Rights International
          Enough!
          Falling Whistles
          Feminist Majority
          Free the Slaves
          Global Witness
          Human Rights Watch
          Program for Torture Victims
          Responsible Sourcing Network
          St. Mark Presbyterian Church, Newport Beach
          Stop Genocide Now
          Union for Democracy and Social Progress

           OPPOSE:   

          California Chamber of Commerce





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          California Chapter of the American Fence Association
          California Fence Contractors Association
          California Manufacturers and Technology Association
          California Retailers Association
          Consumer Electronics Association
          CTIA
          Engineering Contractors Association
          Flasher Barricade Association
          Marin Builders Association

           FISCAL COMMITTEE:   Yes


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