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House Bill Seeks to Add to List of Social Issue Disclosure Rules

A member of the House of Representatives recently introduced a bill that would add to the growing list of socially oriented disclosure requirements for U.S. public companies. Given the political gridlock in Washington, the bill has little chance of becoming law in this session of Congress, but it follows along the same lines of a law California enacted four years ago.

A member of the House of Representatives recently introduced a bill that would add to the growing list of socially oriented disclosure requirements for U.S. public companies.

H.R. 4842,¬†the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014,¬†seeks to add a provision to the reporting requirements in Section 13 of the Securities Exchange Act of 1934 and have public companies with $100 million in annual sales file yearly reports with the SEC in which they describe the steps they’ve taken to identify suppliers that may be using slaves, forced labor, or children to produce goods.

The reports would have to state whether a company has a policy for monitoring its suppliers about their use of slavery or human trafficking and if they prohibit employees or suppliers’ employees from using minors for prostitution.

“By requiring companies with more than $100 million in worldwide receipts to be transparent about their supply chain policies, American consumers can learn what is being done to stop horrific and illegal labor practices,” said the bill’s sponsor, Rep. Carolyn Maloney, a New York Democrat, in a statement. “This bill doesn’t tell companies what to do, it simply asks them to tell us what steps they are already taking.”

The legislation is similar to a law enacted in California in 2010. Both the House bill and the California law require independent audits of suppliers, although the House bill requires more detailed reports and information about subcontractors.

Given the political gridlock in Washington and the looming midterm election campaigns, the bill’s prospects are uncertain. It’s also all but guaranteed to face some stiff opposition from the businesses that would be affected.

“Courts have found that such scarlet letter disclosures violate the First Amendment provisions protecting free speech,” said Thomas Quaadman, vice president for the U.S. Chamber of Commerce’s Center for Capital Market Competitiveness. “While the intent of the Maloney bill is laudable, we believe that the SEC disclosures run afoul of the first amendment.”

The Chamber has mounted court challenges against some SEC rules mandating disclosures on somewhat similar issues. Business groups have maintained that the disclosure requirements on social issues distract the SEC from its primary responsibility of regulating the financial markets.

The Maloney bill’s amendment to the Exchange Act in Section 13s follows other disclosure rules on social issues mandated by the Dodd-Frank Act for reporting about conflict minerals in Section 13p and the rules about payments made by energy production and mining companies in Section 13q.

Section 13 mainly deals with the requirements for public companies’ quarterly and annual filings with the SEC and reporting rules by large shareholders. In recent years, its provisions have been broadened and now include reports about financial derivatives and off-balance-sheet transactions.