Bill Introduced to Require the SEC to Adopt Disclosure Rules Relating to Measures Taken to Identify and Address Unethical Labor Practices in the Supply Chain

July 8, 2014

In mid-June, Representative Carolyn Maloney, D-N.Y., introduced a bill, H.R. 4842, to adopt the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014, which would amend the Exchange Act to, among other things, require a significant number of public companies to disclose information describing measures taken to identify and address conditions of forced labor, slavery, human trafficking and child labor within the supply chain. A similar bill was introduced by Representative Maloney in 2011.

Similar in approach to the Conflict Minerals Rule, the intent of the proposed Act is to encourage ethical labor practices by requiring disclosure by public companies. The bill notes that, through publicly available disclosures, businesses and consumers can avoid inadvertently promoting or sanctioning child labor, forced labor, slavery and human trafficking through the production and purchase of goods and products that have been tainted in the supply chains. However, in part due to the difference in subject matter, the disclosure requirements under the proposed Act are significantly different than those under the Conflict Minerals Rule.

The proposed Act would add a new Section 13(s) to the Exchange Act. Section 13(s) would require the SEC, in consultation with the Secretary of State, to, within one year after the enactment of the Act, promulgate regulations requiring a “covered issuer” (as defined below) required to file reports with the SEC under Section 13 of the Exchange Act to annually disclose whether it has taken measures during the reporting year to identify and address conditions of forced labor, slavery, human trafficking and the worst forms of child labor within its supply chain and to disclose a description of the measures taken.

Issuers Covered by the Act

A “covered issuer” is defined in the proposed Act as an issuer that has annual worldwide global receipts in excess of $100 million. This reporting threshold is consistent with the California Transparency in Supply Chains Act adopted in 2010. The proposed universe of reporting issuers is narrower than that under  the Conflict Minerals Rule, which does not have a dollar threshold for reporting.

Key Definitions

The proposed Act defines the term “supply chain” broadly to include all labor recruiters and suppliers of products, component parts of products and raw materials used by a covered issuer in the manufacturing of its products, whether or not the issuer has a direct relationship with the supplier.

The terms “forced labor,” “slavery” and “human trafficking” are defined as any labor practice or human trafficking activity in violation of national and international standards, including International Labor Organization Convention No. 182, the Trafficking Victims Protection Act of 2000 and acts that would violate the criminal provisions related to slavery and human trafficking under United States Code, Title 18, Chapter 77 if they had been committed within the jurisdiction of the United States.

“The worst forms of child labor” means child labor in violation of national and international standards, including International Labor Organization Convention No. 182.

Issuer Disclosure Requirements

A covered issuer would be required to include under the heading “Policies to Address Forced Labor, Slavery, Human Trafficking, and the Worst Forms of Child Labor” information describing the following:

  • Whether it maintains a policy to identify and eliminate the risks of forced labor, slavery, human trafficking and the worst forms of child labor within its supply chain, and actions that it has taken pursuant to or in the absence of the policy. The disclosure would be required to include the text of the policy or a substantive description of the elements of the policy.
  • Whether it maintains a policy prohibiting its employees and employees of entities associated with its supply chain from engaging in commercial sex acts with a minor.
  • Its efforts to evaluate and address the risks of forced labor, slavery, human trafficking and the worst forms of child labor in the product supply chain. If these efforts have been made, the disclosure will be required to:
    • Describe any risks identified within the supply chain and the measures taken toward eliminating those risks;
    • Specify whether the evaluation was or was not conducted by a third party;
    • Specify whether the process included consultation with independent labor organizations (as defined in the National Labor Relations Act), workers’ associations or workers within workplaces and incorporates the resulting input or written comments from such constituencies, and, if so, the disclosure will be required to describe the entities consulted and specify the method of the consultation; and
    • Specify the extent to which the process covers entities within the supply chain, including entities upstream in the product supply chain and entities across lines of products or services.
  • Its efforts to ensure that audits of suppliers within its supply chain are conducted to:
    • Investigate the working conditions and labor practices of such suppliers;
    • Verify whether such suppliers have in place appropriate systems to identify risks of forced labor, slavery, human trafficking and the worst forms of child labor within their own supply chain; and
    • Evaluate whether such systems are in compliance with the policies of the covered issuer or efforts in the absence of such policies.
  • Its efforts to:
    • Require suppliers in the supply chain to attest that the manufacture of materials incorporated into any product and the recruitment of labor are carried out in compliance with the laws regarding forced labor, slavery, human trafficking and the worst forms of child labor of the country or countries in which the covered issuer is doing business;
    • Maintain internal accountability standards, supply chain management and procurement systems and procedures for employees, suppliers, contractors or other entities within its supply chain that fail to meet the covered issuer’s standards regarding forced labor, slavery, human trafficking and the worst forms of child labor, including a description of the standards, systems and procedures;
    • Train employees and management who have direct responsibility for supply chain management on issues related to forced labor, slavery, human trafficking and the worst forms of child labor, particularly with respect to mitigating risks within the supply chains of products; and
    • Ensure that labor recruitment practices at all suppliers associated with the supply chain comply with the issuer’s policies or efforts in the absence of policies for eliminating exploitive labor practices that contribute to forced labor, slavery, human trafficking and the worst forms of child labor, including by complying with audits of labor recruiters and disclosing the results of the audits.
  • The efforts of the covered issuer, where forced labor, slavery, human trafficking and the worst forms of child labor have been identified within the supply chain, to ensure that remedial action is provided to those who have been identified as victims, including support for programs designed to prevent the recurrence of those events within the industry or sector in which they have been identified. The proposed Act defines “remediation” and “remedial action” as “the activities or systems that an issuer puts in place to address non-compliance with the standards identified through monitoring or verification, which may apply to individuals adversely affected by the non-compliant conduct or address broader systematic processes.”

In addition to Exchange Act reporting, under the proposed Act, a covered issuer also would be required to include on its website a conspicuous and easily understandable link to the information included in its Exchange Act report that is labeled “Global Supply Chain Transparency.”

If an individual submits a written request to the covered issuer for the information, the covered issuer would be required to provide the individual with a written disclosure of the required information within 30 days of receipt of the request.

Disclosures by the SEC and Department of Labor

In addition to the disclosures required to be made by covered issuers, the proposed Act would require additional disclosures by the SEC and the Department of Labor.

Each of the SEC and the Department of Labor would be required to make available to the public in a searchable format on its website: (1) a list of covered issuers required to disclose any measures taken to identify and address conditions of forced labor, slavery, human trafficking and the worst forms of child labor within the supply chain; and (2) a compilation of the information submitted under the rules adopted pursuant to Section 13(s) of the Exchange Act.

In addition, the Secretary of Labor, in consultation with the Secretary of State and other appropriate federal and international agencies, independent labor evaluators and human rights groups, would be required to annually develop and publish on the DOL website a list of the top 100 companies adhering to supply chain labor standards, as established under relevant federal and international guidelines.

Take-Aways from the Bill

Notwithstanding the laudable humanitarian goals of the proposed Act, it is not expected to have the support necessary to become law. As noted above, similar legislation was also proposed in 2011.

However, even in the absence of additional SEC rule-making, public and private companies should be mindful of existing legislation pertaining to ethical labor practices in the supply chain, as well as other proposed rules in this area. For example, in September 2013, the Federal Acquisition Regulatory Council published a proposed rule that would impose significant additional requirements relating to human trafficking and forced labor in the supply chain on federal contractors and subcontractors. This rule is in the process of being finalized.

Furthermore, as with conflict minerals sourcing, ethical labor practices in the supply chain are receiving increasing attention from NGOs, socially responsible investors, the press, consumers, commercial customers and providers of corporate social responsibility (CSR) analytics. Therefore, even though it is premature for public companies and other supply chain participants to adopt procedures specifically designed to comply with the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014, as part of their CSR programs and values, and in light of this attention, public companies that have not done so recently should at a minimum assess their current policies and procedures relating to ethical labor practices in the supply chain and determine whether enhancements should be made.