The Extractive Payments Rule adopted by the SEC last week was notable because all five commissioners published explanatory statements along with their votes. Those statements, in turn, are notable for their dueling messages about business conduct and what counts as material information for investors under federal securities law.
Compliance officers should give this conflict some attention, because the Extractive Payments Rule is just the first of these fights we’re going to see. Many more are looming in 2021.
To recap the rule itself: Starting in 2024, businesses in the oil, gas, and mining sectors will need to make annual disclosures of how much money they pay foreign governments for extraction rights in those countries. The rule implements Section 1504 of the Dodd-Frank Act, and is intended to be an anti-corruption measure. If companies need to disclose how much money they’re giving to sketchy countries such as Russia or Saudi Arabia, the thinking goes, then companies will look for ways to give less money to those countries.
This is the SEC’s third effort to adopt an Extractive Payments Rule, and as we noted in our post last week, all five commissioners dislike the measure they finally approved — but for starkly different reasons. Which brings us to those explanatory statements the commissioners published along with their votes.
Republican View on Disclosure
The three Republican commissioners all said, in one way or another, that as laudable as fighting corruption may be, the SEC’s corporate disclosure rules aren’t the venue to advance that objective. Their thesis is that corporate disclosures are supposed to help investors make investment decisions, and a company disclosing its payments to foreign governments doesn’t help with that task — so don’t require it.
Consider SEC chairman Jay Clayton’s statement first:
This rule is employing our world-leading, highly effective, investor-oriented, rigorous disclosure regime to address the interests of non-investors or parties for whom investing is not their primary interest. This posture runs the risk of our disclosure framework subordinating the interests of investors to other interests.
Or this statement from commissioner Hester Peirce, the SEC’s resident libertarian:
[The Extractive Payments 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.
Note the assumption in their thinking: that investors and people who care about anti-corruption are separate groups of people. And since the SEC’s mission is to support investors, it has no specific duty, authority, or capability to support that other group who care about anti-corruption.
Of course, that assumption doesn’t work in the real world. Lots of investors care about anti-corruption, and lots of people who care about anti-corruption are investors. Those interests can’t be distilled into neat, separate groups of people. You can pretend as much to satisfy theories of securities law (Clayton and Peirce do), but that doesn’t change the reality that many people blend their views on business conduct and investment decisions into a single, fused whole.
Does that carry some messy implications for corporate disclosure? You bet. Commissioner Elad Roisman’s statement frames them nicely:
While some investors may choose to invest based on certain idiosyncratic interests and values, our mandate has never been understood to include requiring disclosures of all information that any investor might want to know, particularly for making an investment decision. And for good reason. It would burden companies, investors, and other market participants with immense disclosure and review obligations and enmesh the Commission in all manner of social policy judgments and disputes.
That’s the Republican view, at least: social engineering via corporate disclosure is not a good thing.
And the Democratic View
Don’t die of surprise, but Democrats see little conflict in advancing certain broader social goals via corporate disclosure requirements. Measures like the Extractive Payments Rule can both help investors make decisions and advance anti-corruption objectives at the same time, they say, with nowhere near the compliance costs that critics fear.
Consider this statement from Allison Herren Lee, the senior Democratic commissioner:
In connection with the passage of Section 1504, Congress made specific findings about the reputational and operating risks to companies that flow from “opaque and unaccountable management of natural resource revenues by foreign governments” and concluded that the “effects of these risks are material to investors” … Under the law, materiality is to be gauged by investor views, from the standpoint of a reasonable investor. There is nothing remotely unreasonable about investors wanting to scrutinize and understand the risks to their capital arising from otherwise undetected, unchecked, and potentially unscrupulous payments.
In other words, dealing with corrupt business partners can bring material risk to a company (true), and reasonable investors may want to know the extent of that risk. Disclosing how much the business is paying to a possibly corrupt foreign government is one way to help them understand the risk.
The implicit point is that how a business conducts itself is a driver of corporate value — and that is something investors want to understand as fully as possible. So requiring disclosures about business conduct isn’t just legally permissible; it’s good policy.
Republicans would counter that a principles-based system of disclosure already addresses all these headaches: “Companies are required to disclose whatever would be material to reasonable investors, so if it’s not in the 10-K or the proxy, it mustn’t be material. Who are we to judge otherwise?”
That’s a gauzy way of looking at corporate conduct. Here in the real world, businesses lie about their risks, or misunderstand those risks, or disagree about what’s material to a reasonable investor. Investors — particularly institutional investors, with deep pockets and long-term objectives — want concrete, specific disclosures that apply across many companies, and that help the investors align their investment decisions with their ethical priorities. Like I said earlier, you can’t separate those things in the real world.
Why This Matters
I dwell on this question so much because by all indications, the Extractive Payments Rule isn’t the last time the SEC is going to grapple with this question — much more likely, this is only the prelude for 2021.
We know the Biden Administration wants to advance policy goals on climate change, systemic racism, and social equity. New corporate disclosure rules, delivered via SEC rulemaking, are one way the Administration is likely to do that. So we’re going to go through this debate about social policy and corporate disclosure several more times in the next several years.
For example, the SEC already has a rule requiring companies to disclose material risks from climate change — one that’s 10 years old, never been enforced, and following the same principles-based gauze that Republican commissioners embrace. I predict we’ll see the SEC push for a much more far-reaching rule, requiring companies to use a specific sustainability disclosure framework. We’ll also see the SEC do the same for its human capital disclosure adopted last year (see gauze, above; Republican’s favored approach).
The details of those rules-likely-to-come don’t interest me as much right now as the larger battlefield. Once Democrats have a majority on the SEC, we’re likely to see more tricky disclosure rules coming soon.
That’s going to keep corporate compliance officers tap-dancing, fast and furious.