BILL ANALYSIS Ó
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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