Republican state AGs call on SEC to require forced labor certifications

Sixteen Republican state attorneys general have sent a letter to the Securities and Exchange Commission (SEC) calling on the agency to require, as a condition of being listed on a U.S. securities exchange, that foreign-owned companies certify via a “truly independent” process that they are compliant with Section 307 of the U.S. Tariff Act. 

Section 307 prohibits importing into the United States any product manufactured wholly or in part by forced labor. The Republican state AG letter was written specifically in connection with the potential U.S. IPO of fast fashion retailer SHEIN and its China supply chain, although the letter proposes a broadly applicable certification requirement.

Should foreign companies listing in the U.S. expect a new forced labor certification requirement to be adopted? Extremely unlikely. The SEC isn’t likely to take up the Republican state AGs’ call. And such a certification requirement arguably would fall outside of the SEC’s three-part mission – (1) to protect investors, (2) maintain fair, orderly and efficient markets and (3) facilitate capital formation – although proponents would presumably take the view it comes within the first prong of the mission.

However, the SEC is, on its own, increasing its focus on China-related disclosures. In July, the SEC published a sample letter to companies focused on among other things (1) risk factor disclosure concerning oversight and discretion of the Chinese government over issuers’ operations and (2) MD&A disclosure regarding how issuers’ businesses are impacted by the Uyghur Forced Labor Prevention Act.

In addition, as we noted in another post, Jennifer Wexton (Democrat - Virginia) and Carlos Giménez (Republican - Florida) recently introduced the Uyghur Forced Labor Disclosure Act in the U.S. House of Representatives. That Act would require companies that are publicly traded in the United States to disclose information regarding links their products may have to China’s Xinjiang Uyghur Autonomous Region. Congresswoman Wexton introduced a similar bill in 2021. At present, we do not give the current bill good odds of becoming law this term.

Perhaps the most interesting question to speculate over is whether there will be a wave of China-related disclosure legislation proposed in the states. There is precedent for U.S. state-level corporate social responsibility disclosure requirements, including specific to forced labor. For example, in 2010, California adopted the country-neutral Transparency in Supply Chains Act, which requires large retailers and manufacturers doing business in California to disclose information regarding their efforts to eradicate human trafficking and slavery within their supply chains. 

More recently, California and New York also have proposed greenhouse gas emissions reporting requirements, as we previously discussed. Of a more substantive nature and specific to China, Florida recently enacted legislation restricting direct or indirect ownership of interests in real property by PRC investors (see the excellent Alert published by my colleagues Eric Requenez and David Kaye).

Criticism of China on human rights and national security grounds has popular support on both sides of the U.S. political aisle. Therefore, introducing and/or advocating for state-level legislation that requires China-related disclosures, or that is more substantively focused on China, may have upside for state politicians that want to burnish their China hawk credentials. In contrast to most calls for CSR legislation, if these bills materialize, they are more likely to come from red states, rather than blue states.

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