Fate of U.S. agency rule on extractives hangs in the balance as two SEC regulators tilt toward industry

by Alia Dharssi and Ashley Renders
Tuesday, 25 February 2014 23:25 GMT

It is unknown how two out of the five SEC commissioners might vote on the final extractive transparency rule

Three-and-a-half years after Congress passed a law that would force oil, gas and mining companies to disclose what they pay foreign governments to drill and mine their land, the fight to give that law teeth is heating up at the U.S. Securities and Exchange Commission (SEC).

The SEC, which is responsible for writing the regulations, must take a second crack at drafting the disclosure rules after the U.S. District Court in Washington, D.C., threw out its first attempt as potentially too sweeping.  The  American Petroleum Institute (API) and U.S. Chamber of Commerce had argued that disclosing royalties, fees and other payments over $100,000 to foreign governments would damage the industry’s competitiveness.

Anti-corruption campaigners, however, say Congress has agreed that oil, gas and mining companies should publish the details of what they pay governments for  each of their projects. They say disclosure is critical to reducing poverty in poor countries rich in natural resources as a way to hold governments accountable  for how they use that money.

But the API, which represents more than 550 corporate members, is lobbying the SEC for rules that would keep information about payments anonymous.

The final rule hangs in the balance.  Two out of the five commissioners have made public statements that sound supportive of the API's position and another commissioner is firmly on the side of the anti-corruption campaigners.  The remaining two commissioners have made statements about what they see as the appropriate role of the SEC in government, but how they might vote on this issue is unknown.

In any case, the industry has already won an important concession.  Its court victory suspended application of the regulation, and their rewrite isn't on the SEC’s agenda for at least the next six months, letting business continue as usual without adhering to the transparency rules that were scheduled to take effect this year.

What seems like an obscure legal tussle is, in fact, central to the global campaign against corruption in resource-rich countries.  Over 1,100 companies, including industry giants such as Chevron, Exxon-Mobile, Shell, Rio Tinto and BHP Billiton, will be covered by the U.S. regulations, accounting for half of the world’s total value in resource extraction as measured by market capitalisation.  Meanwhile the European Union and Canada, whose stock markets are home to the most multinational oil and mining companies outside the United States, are working on their own “publish what you pay” rules.

Even though disclosure is moving ahead in these other jurisdictions, what the SEC does will have a big impact.  

“Part of that comes from those companies that aren’t listed elsewhere that are based in the US. Part of it comes from the sort of exceptional role that the U.S. has in the global commodities market. And part of it comes from just the diplomatic heft of the United States,” said Michael Ross, professor of political science at the University of California, Los Angeles.

The transparency regulations were mandated by Section 1504 of the Dodd-Frank financial reform act,  which re-wrote securities law after the 2008 economic crisis.  They are a crucial win in the fight for transparency led by Publish What You Pay (PWYP), a global network of 750 human rights, environmental, development and faith-based organizations, including Oxfam.   

Politicians, industry leaders and civil society generally agree that transparency is a good thing, says Jana Morgan, director of PWYP US.  The debate is over how much disclosure is too much, and where the SEC should draw the line.

Activists say companies should disclose all payments to all levels of governments on a project-by-project basis. If citizens know how much their governments get for projects in their communities, they can demand more be spent on local needs, said Jonathan Kaufmann, legal advocacy coordinator for Earth Rights International, a member of PWYP US.

The SEC's first set of rules followed this line of thought. But Stephen Comstock, manager of tax policy at API, said oil companies would suffer if this information was accessible to competitors, especially those not subject to such rules, and that they would risk breaking laws in countries where disclosure is illegal. Strong rules also would violate companies' freedom of speech under the First Amendment of the US Constitution by forcing them to release information for political reasons, he said.

The API submitted a proposal to the SEC in November for companies to privately report project-level payments to the SEC, which could then publish the total payments made to each province, state or territory by all companies operating in that region.

Activists object.  Such anonymization would make the information useless and blatantly disregards Congress’ intent for the bill, which is greater transparency, said PWYP’s Morgan.

It also would be a “non-starter” for investors, who can use project-level information to “make stronger investment decisions,” said Paul Bugala, senior sustainability analyst for extractive industries at the socially conscious fund Calvert Investments, which expressed support for strong rules in a letter to the SEC last August, along with a group of investors representing US$5.6 trillion.

SEC line-up changes

Since the SEC’s five commissioners approved the original rules in August 2012, three commissioners have been replaced-- Commissioner Elisse Walter, who voted in favor, and Chair Mary Schapiro and Commissioner Troy Paredes, who recused themselves due to conflicts of interest.

Two out of five of the current commissioners have now made public comments indicating that they may support the API's version of the rules.

In a speech to the U.S. Chamber of Commerce  on January 27, Republican  Commissioner Michael Piwowar, who joined the SEC in August after filling the role of Republican Chief Economist for the U.S. Senate Committee on Banking, Housing and Urban Affairs, said the SEC's core mission is being threatened by “special interests, from all parts of the political spectrum that are trying to co-opt the SEC's corporate disclosure regime to achieve their own objectives.”

That same day, he told a Reuters reporter that the SEC should “hold off” on the new rules until they “get a better sense” of where the Federal Court of Appeals will fall on a similar human rights regulation called Section 1502, which requires companies to disclose if their products contain minerals from the Democratic Republic of the Congo region.  A group of companies, which launched a case against the SEC, is claiming that this rule violates their freedom of speech by forcing them to disclose information for a political purpose. If that argument is supported by the court, Section 1504 on extractives could also be struck down. There is no indication of when the court will issue a ruling on Section 1502.

Commissioner Daniel Gallagher, who retains his post and previously voted against project-level disclosure, appears to tilt toward the industry view.  He told Reuters in January that he might support a rule that “didn't impose too many burdens” on companies.

The deciding vote could well come from SEC Chair Mary Jo White.  Her position is unknown but her recent comments indicate sympathy for  the industry arguments that disclosure to investors should not be used to achieve other political ends.

“As the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC's powers of mandatory disclosure to accomplish these goals,” she said in a speech at Fordham Law School on October 3.

White added that “information overload” could make it “difficult for investors to focus on the information that is material and most relevant to their decision-making...” A rule like Section 1504 might fall into that category.

Commissioner Luis Aguilar is the only remaining member who voted for the original set of rules, and he expressed his support for a strong rule in a speech to the SEC in August 2012.

As for Commissioner Stein, she has not announced her stance though she wants to get the rule done.  In a speech last week at the annual SEC Speaks conference at the Practising Law Institute, she said the SEC “should not be intimidated into backing off our obligation to implement the law,” even when the courts side with industry leaders.  "If a rule is rejected by a court, we should dust ourselves off, make the rule better and finish it."

Stein previously worked for Democratic Senator Jack Reed, one of the leading architects of Dodd-Frank, and helped write the Volcker rule, which restricts banks from making speculative investments.  

Given this line-up, it is unclear what the final set of rules will look like, or even when the SEC will take up the issue. “The SEC rule-making process is so opaque. It’s very hard to know what’s going to emerge and when it’s going to appear,” says Ross. 

None of the commissioners responded to multiple requests for an interview or comment.

Regardless, PWYP’s Morgan said the tide of history is toward disclosure and the SEC would have "a really difficult case to make if they issued a rule that wasn't in line with the rest of the world and didn't fulfill Congress' mandate."

“There is still a fight to be had, but the dominos are falling all around the world,” he added.

((Alia Dharssi and Ashley Renders are fellows in Global Journalism at the Munk School of Global Affairs, University of Toronto)) 

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