Proposed extraction sector payment disclosure rule falls short of transparency, SEC Democrats say

Oil, gas and mining firms would still be able to hide important information about their payments to governments under a proposed US Securities and Exchange Commission "transparency" rule setting requirements for publicly traded extraction companies to disclose such payments, the two Democratic members of the SEC said today.

"This rule is supposed to provide transparency to citizens of resource-rich countries so they can see the money that is being paid to their governments by the extractive industries," said Commissioner Allison Herren Lee. "The disclosure that would be required by this proposal does not provide that transparency."

The SEC voted 3-2 to propose an extraction industries disclosure rule, mandated by the 2010 Dodd-Frank Act, which would require the firms to annually report payments to a foreign government or the federal government related to the commercial development of oil, natural gas or minerals. The SEC has twice finalized such rules; the first was vacated by the US District Court for the District of Columbia in July 2013; the second was rescinded by a congressional resolution in February 2017.

"This crucial transparency initiative has had a too-long and too-trying history, context that we should keep in mind as this process moves forward," said Commissioner Robert Jackson, who joined Lee in voting against the proposal. "But today's proposal shines too little light on how American companies use investor funds to finance payments to foreign governments."

The proposed rule, which will enter a 60-day comment period once it's published in the Federal Register, requires SEC-regulated firms to submit an annual specialized disclosure form outlining their payments to governments for licenses, royalties and other outlays. In fundamental ways, the proposed rule is similar to other jurisdictions' rules that require reporting as an anticorruption measure and as a means of informing citizens of the resource-derived money being paid to their governments.

But Lee and Jackson said the proposed rule has wide loopholes and looming opacity.

The proposed rule deviates from the previous rules by allowing firms to report aggregate payments made at the national or political subdivision level rather than at the contract level. These national, provincial or other sub-national payments are the proposed rule's definition of a "project-level" payment.

But the proposed rule released today also raises the threshold at which the firms must report.

"First, we have introduced a project-level de minimis threshold — a concept that did not exist in the prior version of the rule — allowing for no disclosure whatsoever for any projects up to three-quarters of a million dollars, a number without support anywhere in the release," Lee said.

"It stretches credulity to call three quarters of a million dollars 'de minimis' in this context," she said.

Lee also criticized the proposal for raising the threshold for reporting a type of payment, from a prior SEC rule's minimum of $100,000 to $150,000.

Jackson said investors may wish to examine the amounts that firms pay to governments for the right to extract fossil fuels and minerals before trading the stocks of firms in those sectors, and that the proposed rule's changes from previous versions would thwart such an examination.

"But what concerns me even more about the proposal is its suggestion that the Commission will further weaken the rule by allowing issuers to file confidential disclosures rather than providing the public accountability that Congress intended when enacting Section 1504," he said, referring to the Dodd-Frank section mandating the rule. The proposed rule said the SEC would consider comments from the public about confidential reporting.

— Clayton statement —

SEC Chairman Jay Clayton said because the prior rule had been rescinded under the Congressional Review Act, the SEC had to include revisions because the CRA prohibits an agency from reissuing a replacement rule that is substantially the same as the disapproved rule.

"I believe today's recommendations are true to the requirements that Section 1504 places on the Commission and, thanks to the staff's good work, would effectively implement the statute's objective of promoting transparency of resource extraction payments to governments in a manner that responds to Congressional concerns about compliance burdens and potential competitive harms," Clayton said. "That said, I welcome comments on whether the proposed approach can be improved."

Some publicly traded companies already are disclosing resource-related payments they make to governments under EU rules.

— Extractive Industry Transparency Initiative —

Some are also voluntarily disclosing payments under the international Extractive Industries Transparency Initiative, administered by a non-governmental, international group of the same name.

The US withdrew as an implementing member of the EITI in November 2017, saying the Initiative's rules didn't comport with the US legal framework. This means the US isn't requiring companies or regulators to adopt EITI standards.

The US remains a supporting member, endorsing the Initiative's principles of transparency. The US has also made financial contributions to EITI.