Section 1504 of the 2010 Dodd-Frank Act directs the Securities and Exchange Commission (SEC) to issue rules that would require extractive companies listed on US stock exchanges to publicly report the payments they make to governments for the commercial development of oil, natural gas, or minerals. The regulations are intended to shine a light on an industry that is notoriously opaque and vulnerable to corruption. They are meant to expose and deter corrupt deals, give investors better information to assess risk, and provide much-needed transparency for citizens of resource-rich countries to monitor revenue flows from projects in their backyards and demand accountable management of natural resource wealth. This is critical to fighting the “resource curse,” the phenomena whereby people living in countries that are richest in natural resource wealth are often among the world’s poorest.
But the SEC’s draft rules fall short and would fail to accomplish these objectives. The rules contain numerous loopholes that would serve to benefit corrupt governments, allow companies to continue to obscure information about the payments they make and get around the required disclosures, and would dramatically limit the utility of the information for citizens and investors alike. This week we submitted a joint comment with Oxfam America to the SEC outlining these shortcomings.
A long fight for extractive industry transparency
The regulations at issue have a long history. EarthRights and Oxfam International have been in this fight for a decade, both in the courtroom and during the administrative rulemaking process.
Congress first required the Commission to regulate in this space in the Dodd-Frank Act, the 2010 landmark transparency law, and the Commission finalized regulations in 2012. But following a lawsuit by the American Petroleum Institute (API)–in which EarthRights intervened to defend the rule on behalf of Oxfam America–the rule got sent back to the SEC for further proceedings. The API, together with Chevron and Exxon, have been the most vocal opponents of transparency over the last decade. After years of inaction, we sued the SEC on behalf of Oxfam for undue delay (for the second time) and won, forcing the SEC to act. After another rulemaking process, the SEC finally put out a strong final rule in July of 2016.
Unfortunately, the rule became the first victim of the Trump administration’s aggressive deregulatory agenda. Through the use of the Congressional Review Act (CRA), a little known law that sets up procedures for Congress to “disapprove” regulations, the rule was sent back to the SEC. As a result, the SEC is now in its third round of rulemaking.
Section 1504 requires a pro-transparency rule
The CRA states that a new regulation cannot be “substantially the same” as one that was disapproved but does not say what that means. Critically, the CRA does not amend or repeal Section 1504. The SEC is one of the first agencies to interpret the “substantially the same” language. The SEC appears to be taking the stance that it must weaken essentially every single feature of the rule and align nearly perfectly with the position of API and Exxon.
Our submission focuses on this legal context and shows the SEC’s approach is legally untenable, and the final rules will be vulnerable to challenge if the SEC does not strengthen them. We also point out critical shortcomings in the SEC’s economic analysis and argue the SEC must re-propose the rule to fix these problems. EarthRights is also an active member of the Publish What You Pay U.S. Coalition, which plays a key leadership role in pushing for strong rules, and we contributed to the coalition comment submitted last week.
The SEC’s rule must ensure the U.S. does not lag behind the rest of the world
Both the EarthRights-Oxfam submission and the PWYP submission emphasize the importance of ensuring the final rule aligns with the regulations in place in other markets. Congress, in the 2010 law, specifically directed the SEC to ensure its rule promotes international transparency efforts.
While the SEC’s rule has been egregiously delayed, the rest of the world has moved rapidly in the other direction, with Europe, the United Kingdom, Canada, and Norway all requiring project-level revenue transparency. Significant developments in industry transparency since the SEC’s last rulemaking have moved beyond payment transparency to now encompass beneficial ownership transparency and full contract transparency. Public reporting of all payments to governments, at the project-level, is now standard industry practice and a minimum expectation.
For three or more years, nearly 800 public, private and state-owned oil, gas, and mining companies have regularly made the disclosures that a small handful of U.S. companies are still fighting so hard to keep secret.
Major mining and oil companies such as BP, BHP Billiton, Total, and others, have voiced strong support for the transparency measures in Europe and Canada (which are modeled off of the 2012 and 2016 SEC rules) and have recently submitted comments to the SEC calling for the draft rule to be strengthened. They join the significant number of citizens and civil society groups, U.S. foreign policy and anti-corruption experts, and investors with $12 trillion in assets under management, who are all calling on the SEC to ensure a strong implementing rule, consistent with rules in other markets.
Exxon and Chevron, along with the API (many of whose members are already disclosing such payments and support stronger rules) are increasingly isolated in their resistance to such transparency. As more and more companies prove such transparency is both feasible and beneficial for companies, investors, governments, and citizens alike, their resistance becomes all the more questionable. We continue to ask: what are Exxon and Chevron hiding?
Michelle Harrison is a staff attorney at EarthRights International.