Five Years On, SEC Moves to Regain High Ground on Extractives Transparency

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UPDATE: A significantly expanded version of this post subsequently appeared on the Brookings Institution blog on 15 December. Read it here.

The U.S. Securities and Exchange Commission (SEC) voted today on a proposed rule to implement Section 1504 of the 2010 Dodd-Frank Act. The law requires US-listed oil, gas and mining companies to disclose the billions of dollars in payments that they make to governments around the world in exchange for the right to extract precious natural resources.

In a 3-1 vote in favor of the proposed rule, which the SEC has just released, the commissioners have set the U.S. on a path to regain its place as a leader in transparency—leadership lost recently as the EU (including the UK here), Norway and Canada moved ahead with implementation of similar laws, while the US law was held up by industry lawsuits and regulatory delays. It should be noted that a vote on a final rule, building on the one proposed today but nevertheless subject to change, will be held by June 2016.

Today the SEC provided insight into three key questions surrounding the rule:

First, will the individual reports submitted by companies be made public?
Today the SEC emphatically sided with citizens in resource-rich countries as well as investors by proposing that companies’ individual filings would need to be made public in order to make a difference. The SEC has rejected the American Petroleum Institute’s preference for “anonymous” disclosure and has sent a strong signal to API member companies such as ExxonMobil and Chevron that they will not be able to hide their payments to governments under a so-called “compilation” approach. Once the SEC rules have been finalized - and assuming the SEC remains true to its proposed rule - these companies will simply have no choice but to disclose if they wish to continue raising capital on U.S. markets.

The recent failure by a number of major US oil companies to disclose their corporate tax payments as part of the first U.S. Extractive Industries Transparency Initiative (US EITI) report, is one of the clearest examples we have seen yet for why complementary regulations such as the contemplated SEC rules or European and Canadian laws are essential. For companies like ExxonMobil and Chevron, neither having a seat on the US EITI Advisory Committee nor sitting on the EITI Global Board (a board which agreed unequivocally on the need for company-specific tax disclosure) seems to have made a difference to their refusal to report their taxes publicly in the U.S. For some things, it seems that a legal obligation is the only language they will listen to.

Second, how will the SEC deal with the crucial issue of project-level disclosure?

The publishing of payment information connected to specific extraction projects is critically important to often-poor citizens of developing countries in their quest to ensure that they receive a fair share of the benefits from ventures in their backyards—and also to investors seeking to manage risk. Although the Dodd-Frank statute requires project-level reporting, the SEC’s 2012 rule did not define the term “project.” This time, however, the SEC has clearly looked to authorities in other jurisdictions (e.g., the EU, Canada), which have all defined projects at a granular level on the basis of the legal agreements between companies and governments.

Third, will the SEC tackle the issue of whether to grant exemptions in circumstances where contracts or foreign governments allegedly prohibit disclosure of such information?

Given that no evidence of the need for exemptions has been provided to date, the EU and Canada saw no reason to allow exemptions in their rules (indeed, to do so could perversely incentivise transparency-averse governments to put in place disclosure prohibitions). While the SEC seems to have rejected wholesale categorical exemptions, the commissioners did today make reference to the SEC’s pre-existing authority to grant exemptions, and signalled that companies may be able to apply for exemptions on a case-by-case basis. It will be important to examine this area of the proposed rule closely. (The SEC had previously found that the evidence of foreign legal prohibitions on Section 1504 submitted by some companies was unpersuasive.) Allowing exemptions is unnecessary, out of line with the approach in other countries, and potentially very counterproductive.

To conclude, it is worth emphasising that there is an important public comment period ahead, and NRGI and partners look forward to examining the proposed rule in detail and responding more fully. Subject to closer examination of the just-released proposed rule, we are encouraged by what appears to be a positive step forward by the SEC. The introduction of laws in Europe and Canada seem to have had a major influence in the SEC’s thinking today.

Daniel Kaufmann is President and CEO of the Natural Resource Governance Institute

Joseph Williams is Senior Advocacy Officer at the Natural Resource Governance Institute