The Securities and Exchange Commission has enacted a new rule for what oil & gas and mining companies must disclose to investors about payments made to foreign governments — a weaker version of a rule the SEC was forced to repeal in 2017, and which drew sharp criticism from the SEC’s lead Democratic commissioner.
The SEC adopted the new rule on Wednesday, to implement Section 1504 of the Dodd-Frank Act. This latest attempt at an extractive payments rule is conceptually the same as the original, in that companies will need to disclose how much money they pay to foreign governments as part of extraction projects the companies might be developing in those countries.
The details of the 222-page rule, however, are quite different from the old. For example:
- Companies will need to disclose payments made at the national project level, rather than at the more detailed level of specific contracts.
- The information will be deemed as furnished to the SEC rather than filed, which means much less legal liability for inaccurate information disclosed to investors.
- Companies will be exempt from making the disclosure in situations where that would violate the law in a foreign country or the terms of pre-existing contracts.
- Smaller reporting companies (those with less than $250 million in market cap) and emerging growth companies ($1 billion or less in annual revenue and less than five years as a public company) are exempt entirely.
The SEC also gave a long lead time to implement the new rule: a two-year implementation period, and then a company would need to disclose the extractive payments detail on a Form SD within 270 days of its fiscal year end.
So for example, if the rules become effective on March 1, 2021, the compliance date for a company with a December 31 fiscal year-end would be Sept. 30, 2024. That is, 270 days after its fiscal year-end of Dec. 31, 2023.
Tortured History of This Rule
The extractive payments rule was one of several provisions included in the Dodd-Frank Act that were more about fighting corruption than they were about addressing the financial crisis of 2008. The logic was that if corporations had to be more forthcoming about payments they make to foreign governments to win lucrative oil, gas, and mining rights, they would be less eager to make those payments — which often went to notoriously corrupt regimes — in the first place.
Dodd-Frank was enacted in 2010, and the SEC adopted the first version of its Extractive Payments Rule in 2012. The oil & gas industry challenged that one in court, and the rule was vacated in 2013. So the SEC went back to the drawing board and adopted a second version of the rule in 2016. The following year, however, newly empowered Republicans in Washington used a legislative maneuver called the Congressional Review Act to overturn the 2016 rule.
Now comes the complicated part. The SEC is still subject to Section 1504 of Dodd-Frank, which directs the agency to adopt some sort of extractive payments rule. Under the Congressional Review Act, a regulator can re-issue a new version of the overturned rule — but the new rule cannot be “substantially the same” as the old one.
What does that mean, exactly? Nobody is quite sure, because the CRA has been used so rarely. The statute itself doesn’t define what “substantially the same” means, and courts have never ruled on that question. So the SEC punted, with a rather opaque statement in the final rule that —
[W]e believe that determining the path forward falls to the agency assigned to undertake the mandatory rulemaking and that the agency should exercise its reasoned judgment in shaping new rules, evaluating a reasonable range of potential responses, including by considering the statutory provision that compels the rulemaking, the administrative record, and the CRA’s requirements, among other things.
Anyway, here we are. This third version was adopted on a 3-2 vote, Republicans in favor and Democrats against.
Commissioners Unanimous in Their Dislike
Just because Republicans voted in favor of the rule, however, that doesn’t mean they liked it. On the contrary, all five SEC commissioners published statements expressing their dislike of this latest rule — Republicans wishing they didn’t have to adopt one at all, and Democrats complaining that the rule didn’t go far enough.
Republican commissioners Hester Peirce and Elad Roisman, for example, both said that while they support strong anti-corruption measures against foreign governments, they don’t believe that SEC disclosure rules are a proper tool to fight that battle. “As an SEC Commissioner, I am not best equipped nor should I be empowered to make rules to act on these views,” Roisman said. “This rulemaking task is simply not within my expertise nor does it further our mission.”
Along similar lines, Peirce said the rule “will lead to the publication of payment information of interest to individuals and organizations focused on holding governments accountable in connection with the commercial development of oil, natural gas, and minerals. As important as that job is, most of those people are not investors.”
More interesting to me, however, are what the Democrats had to say, because they laid out numerous arguments for why this latest rule is still flawed — which anti-corruption advocates might then use as fodder in litigation over this latest rule, if they want the SEC to go back and draft yet another version that might have more teeth.
For example, commissioner Allison Herren Lee noted that when this latest rule was proposed, one ostensible concern was the cost of compliance for oil & gas companies. Except, commenters on the proposal provided ample evidence that in other countries with extractive payment rules (the EU, Britain and Canada, for example) compliance concerns aren’t significant.
“Although the commission largely declined to analyze available data at the proposal stage, commenters supplied information derived from years of disclosures under foreign regimes indicating that significant compliance costs and anti-competitive effects simply have not arisen,” Lee said in her statement.
Hmmm. A commissioner is talking about data ignored, faulty analysis, and wrong conclusions about the costs and benefits of a rule. That sounds like “Somebody please sue us over this!” to me. Then new leadership at the SEC could quickly agree to withdraw and re-propose the rule.
Remember the Anti-Corruption Angle
My question is how this information about extractive payments will figure into FCPA enforcement.
Clearly any money that a company pays to a foreign government carries at least some risk, and that’s especially true for the corrupt regimes that tend to hold power in countries rich with oil, gas, and mineral resources. Yes, the FCPA does only prohibit payments to foreign government officials in exchange for favorable treatment, rather than payments to foreign governments; but that can be a thin line of distinction in many places.
Then again, I question how onerous the compliance costs would really be for this rule. For example, if the Justice Department sent a subpoena demanding to know what payments you’ve made to foreign governments — of course you’re going to reply with a number. A company that says it doesn’t know how much money it’s sending to foreign governments would quickly find that the Criminal Division is its new best friend.
The plain truth is that oil & gas businesses hate this rule because they hate the transparency it brings. Disclosure provides fuel for anti-corruption activists to turn up the heat on said companies in social media campaigns and at annual shareholder meetings, and the industry would rather avoid that. So it rallied its servants in the Republican Party to adopt a toothless rule.
Will that last during the Biden Administration that’s about to arrive? As a certain departing member of the Trump Administration likes to say, we’ll see.