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Tuesday, December 21, 2010

SEC Protest of Congo Atrocities To Hurt American Investors

The Dodd-Frank financial reform bill has led to the Securities and Exchange Commission proposing new rules that will hurt innocent American shareholders in order to make a protest statement against human rights abuses.

The SEC proposes new disclosure requirements for companies with publicly-traded stock which engage in commerce in so-called "conflict minerals." These requirements would force companies to disclose whether the minerals come from the Democratic Republic of Congo. 

These conflict minerals include gold and various ores from which many important electronic and electrical components in everyday products are made.  The conflict minerals include casserite, the ore from which tin is extracted and used in electronic circuits.  A conflict minerals disclosure could hurt public companies like Cisco and Intel, and any phone company. China is the world's leading tin producer. As reprehensible as the human rights abuses occurring in many parts of the world are, the disclosure requirements will only pose a risk to the disclosing companies that either (i) current shareholders will disapprove of any connection and sell their shares, or (ii) other participants in the market will avoid buying these shares. Both (i) and (ii) pose a serious risk of selling pressure on the stock, which in turn threatens to depress the stock price in an uncertain amount and for an uncertain duration. Current shareholders -- that is, entirely innocent American shareholders -- of the stock of these companies would thus face significant financial injury. Meanwhile, the rules are likely to (if that is not the actual purpose) deter other investors in the stock market from buying the shares of these companies, possibly at any price.  That does nothing to protect those market participants who never bought shares; it does hurt the companies doing business in the Congo, and it hurts their shareholders including individual American shareholders and mutual funds. 

Another conflict mineral is wolframite, an ore from which tungsten is extracted for use in electrodes and metal wires and contacts in lighting, electronic, electrical, heating and welding applications. This could affect, for example, General Electric.

Yet another mineral is columbite-tantalite, an ore from which tantalum is extracted.  Tantalum is used in electronic components for mobile phones, computers, videogame consoles and digital cameras. Issuers that could be affected could include Dell, GameStop (GME) and Kodak. (Major non-U.S. users: Nokia, Sony.) The Congo is the major producer; it is also found in Australia, Brazil, Canada and China.)

This is an example of political correctness that will hurt innocent shareholders. As laudable as a protest against human rights may be, the function of the Securities and Exchange Commission is to regulate the American capital markets and their participants -- that is, to protect American investors. 

It is not the job of the SEC to make humanitarian political statements that will harm American shareholders.

Eric Dixon is a New York lawyer who represents clients on legal and strategic consulting matters through Eric Dixon LLC.  Mr. Dixon has substantial experience in securities law compliance.  Mr. Dixon is available for consultation or comment at 917-696-2442 and via e-mail at

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