BILL ANALYSIS Ó SB 861 Page 1 Date of Hearing: August 17, 2011 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair SB 861 (Corbett) - As Amended: July 13, 2011 Policy Committee: Business and Professions Vote: 8-0 Jobs 6-0 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill prohibits companies found in violation of federal law regarding the Democratic Republic of Congo (DRC) and "conflict minerals" disclosure from seeking state contracts. Specifically, this bill: 1)Prohibits a company from bidding on or submitting a proposal for a state contract for goods or services if the company has been found by the Securities and Exchange Commission (SEC) to be in violation, by final judgment or settlement, of provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requiring companies to annually disclose to the SEC whether they use "conflict minerals" that are "necessary to the functionality or production" of a product they manufacture, or contract to manufacture, and originate from the DRC or adjoining countries. 2)Stipulates that a company subject to (1) will no longer be prohibited from seeking a state contract under one the following circumstances: a) It is no longer deemed to be in violation per (1). b) Upon filing of an amended or corrective filing to the SEC that corrects a violation. c) After three years from the date of final judgment or settlement. 3)Requires the Department of General Services (DGS) to establish policies and procedures for state agencies to implement the SB 861 Page 2 bill's requirements, in the State Administrative Manual or the State Contracting Manual. 4)States that all of the above become inoperative on the termination date for the relevant disclosure requirements of the Dodd-Frank Act. FISCAL EFFECT 1)To the extent this bill reduces the number of prospective bidders on some state contracts, due to a company or companies being found in violation of the DRC-related provisions of the Dodd-Frank Act, there will be less competition for those contracts, which tends to increase state costs. The overall impact of this bill is unknown, and would depend on the number of companies unable to submit bids, but given the multi-billion volume of state contracting, costs could exceed $150,000 in any fiscal year. Because the bill is narrowly drawn, however, particularly when compared to recent similar legislation, the annual cost would likely not be significant. 2)DGS will incur minor one-time costs to establish the relevant policies and procedures and minor ongoing costs to monitor SEC rulings regarding violations of Dodd-Frank and to inform state agencies about companies ineligible to submit bids and when these companies regain eligibility to submit bids. COMMENTS 1)Purpose . According to the author's office, "Greed for the Congo's mineral wealth has been a prime cause of atrocity and conflict. Multiple armed groups use mass rape as a strategy to intimidate and control communities as they profit from the illicit trade of the Congo's conflict minerals, such as tin, tungsten, and tantalum. Many of these same conflict minerals end up in our electronic devices, such as cell phones, laptops, and digital cameras. "In order to encourage compliance with federal law, SB 861 prohibits publicly traded companies that have been found to be in violation of the reporting requirements under the Dodd-Frank Act by final judgment from obtaining procurement contracts with the state through the DGS until they comply with the law." SB 861 Page 3 2)Background . The DRC is Africa's third largest nation (71.7 million people), located in Central Africa, northeast of Angola, with a narrow strip of land that controls the lower Congo River. It is the only outlet to the South Atlantic Ocean. According to the World Fact Book, the DRC's economy has the potential of generating substantial wealth based on its reserves of natural resources. The country has, however, experienced decades of economic decline, brought on by long-standing internal conflicts and systemic corruption since its independence in 1960. For more than a decade, various federal and international government and nongovernmental organizations (NGOs) have expressed concern that the DRC is the site of one of the world's worst humanitarian crises. Since 1998, an estimated five million people have died as a result of this conflict. Sexual violence and rape are reportedly used to terrorize and control communities in the eastern region of the DRC to keep the mineral trade flowing and financing illegal armed groups and military forces. The term conflict minerals, for purposes of the DRC Act (those provisions of Dodd-Frank related to the DRC), 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. 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. The DRC Act requires new disclosures, as described in the summary above, by companies concerning their potential use of conflict minerals that originated in the DRC. In December SB 861 Page 4 2010, the SEC released draft rules of the implementation of DRC Act. Although due in April 2011, the final regulations have not been filed by the commission. 3)Prior Legislation . AB 1650 (Feurer)/Chapter 573 of 2010, prohibits companies engaged in investment activities in Iran's energy sector from seeking state contracts for goods or services. AB 498 (Hernandez)/Chapter 272 of 2008, requires companies seeking state contracts to certify that they are not engaged in specified activities regarding Sudan. Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081