Last week, and after years of delay, an initial rule, and legal challenges, the United States Securities and Exchange Commission (SEC) finally issued a proposed rule on oil and mining payment disclosure. This rule when finalized should give citizens of developing countries the information they need to hold their governments and also extractive companies accountable for the exploitation of state-owned resources.
In 2010, a crucial provision aimed at improving openness in the extractive industries was included by the U.S. Congress as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1504 of Dodd-Frank tasked the SEC with writing a rule to require oil, gas, and mining companies listed on U.S. stock exchanges to disclose the billions of dollars in payments that they make to governments around the world in exchange for the right to extract precious natural resources.
After a significant delay, the SEC issued an implementing rule for Dodd-Frank 1504 in August 2012; the rule was celebrated around the world as a strong blueprint for an international transparency standard and as a model for other countries to follow. However, in a blow to transparency, an industry lawsuit led by the American Petroleum Institute (API) resulted in a judge dismissing that rule in July 2013, before a single company disclosed information under that law.
In June 2014 we published a blog post describing how Europe (including the key market of the United Kingdom) had leapfrogged the U.S. in terms of oil and mining transparency and urged the once-groundbreaking U.S. to catch up. Since then Canada has joined the list of leading countries. Now, 18 months later, the U.S. finally appears to have made a significant step towards regaining the ground it has lost.
Last Friday, two and a half years after the 2013 court ruling and thanks to legal pressure by Oxfam America (Oxfam sued the SEC to end the delay), the commissioners voted by 3-1 to adopt a proposed rule to implement Section 1504 of Dodd-Frank. Below we discuss the new rule and its implications for transparency.
How might this rule complement current pushes for transparency?
This development is hugely important. Around the world there is inadequate access to detailed information on the payments made to governments by extractive companies. This hinders the ability of investors to manage risk and of civil society actors and think tanks to monitor extractive companies and governments effectively—a prerequisite to making them more accountable. As stated in the SEC’s proposed rule on Friday, “the public disclosure of resource extraction payments that are made to foreign governments can become an important step towards combating the information asymmetries that can foster corruption and a lack of governmental accountability.”
In the traditionally opaque natural resource sector, enhancing transparency and fighting corruption is a very real challenge, as illustrated by the long-running Shell and ENI controversy in Nigeria. The improved corporate accountability by the extractive industry that should come about as a result of mandatory disclosure ought not be underestimated: Watchdogs inside and outside of governments will likely be better equipped to identify tax avoidance strategies such as transfer mis-pricing.
Beyond the mandatory requirement focused on companies, there is also an important (and voluntary) initiative in the sector that has been operating for over a decade—called the Extractive Industries Transparency Initiative (EITI), which includes 49 member countries. Unfortunately many resource-rich countries (think Russia, Libya, or Angola) have not joined EITI yet, while many members still provide suboptimal data that are partial or of poor quality. Further, EITI requires more from governments than from industry. Hence, complementary legal measures mandating companies to report, as is the case with Dodd-Frank 1504 and the EU directives, are also warranted.
In fact, the recent failure by a number of major U.S. oil companies to disclose their corporate tax payments as part of the first U.S. EITI report is one of the clearest examples for why complementary regulations such as the contemplated SEC rule or European and Canadian laws are essential. For companies like ExxonMobil and Chevron, the fact that they both sit on the U.S. EITI Advisory Committee and the EITI Global Board (which agreed unequivocally on the need for company-specific tax disclosure) does not seem to have made a difference to their refusal to report their taxes publicly in the U.S. It seems that a stick in the form of a legal obligation through Dodd-Frank 1504 will succeed where other carrots have failed.
Our early analysis of the just-released SEC’s proposed rule provides insight into a number of key questions. Overall, the proposed rule looks positive. The SEC notes that it is “proposing to require company-specific, project-level, public disclosure of payment information as the means best designed to advance the U.S. Government’s interests in reducing corruption and promoting accountability and good governance.” We agree with that sentiment wholeheartedly.
In this rule, the SEC emphatically sided with citizens in resource-rich countries as well as investors by proposing that companies’ individual filings would need to be made public in order to have the desired impact. The SEC has rejected the API’s preference for “anonymous” disclosure and has sent a strong signal to API member companies such as ExxonMobil and Chevron that they will not be able to hide payments to governments under a so-called “compilation” approach. As the commission wrote in its proposed rule, “permitting issuers [companies] to submit payment information confidentially would not support, and in fact could undercut, that statutory purpose [of the law].”
Once the SEC rule has been finalized—and assuming the SEC remains in line with the proposed rule—these companies will simply have no choice but to disclose if they wish to continue raising capital on U.S. markets.
The disclosure of payment information connected to specific extraction projects is critically important to often-poor citizens of developing countries in their quest to ensure that they receive a fair share of the benefits from ventures in their backyards. Investors also need this information to manage risk. (Large investors representing assets under management amounting to trillions of dollars explicitly wrote to the SEC in support of a strong rule.) Although the Dodd-Frank statute requires project-level reporting, the SEC’s 2012 rule did not define the term “project.” This time, however, the SEC has clearly looked to authorities in other jurisdictions, who have all defined projects at a granular level. The SEC has importantly chosen a contract-based definition of project, inspired by the definition of project in the EU and Canadian draft reporting specifications, as this will provide the type of detailed information that communities need to demand accountability.
The SEC also rejected the API’s approach to project-level reporting (under which an entire subnational jurisdiction, such as the oil-producing Delta State in Nigeria, could have been treated as one “project”). Such an approach, the commission noted in its proposed rule on Friday, “would not provide local communities with payment information at the level of granularity necessary to enable them to know what funds are being generated from the extraction activities in their particular areas” and “residents in Aceh [Indonesia] and the Niger Delta would be unable to ensure that they are receiving the funds from the national and subnational government that they might be entitled to.”
Given that no one has provided evidence of the need for exemptions to the requirement (for example in circumstances where contracts or foreign governments allegedly prohibit disclosure of such information), authorities in the EU and Canada saw no reason to provide for any exemptions to companies operating in some undemocratic countries (which would have abetted the so-called “tyrant’s veto”). In the case of the SEC’s proposed rule, the commission has rejected wholesale categorical exemptions. Yet the proposed rule notes that the SEC may use its existing authority to grant exemptions under some specific circumstances, even though previously the SEC had found the industry’s arguments for country exemptions “unpersuasive.” Exemptions are unnecessary, out of line with the approach in other countries, and counterproductive.
Equivalent disclosure regimes
Now that there are other laws in place around the world, the SEC is proposing that companies could use a report prepared for foreign regulatory purposes (for example a report prepared under Canadian or U.K. law) or even provide partial disclosure through submitting information related to a U.S. EITI report. The SEC notes that the equivalent reports would need to be substantially similar. This is a welcome new element to the SEC rule (assuming the commission rigorously defines “substantially similar”), added in recognition of the progressive laws in Europe and elsewhere and in the name of international harmonization that is to everyone’s benefit—not least that of large companies that have disclosure obligations in multiple jurisdictions.
As with the old 2012 rule, the eXtensible Business Reporting Language (“XBRL”) electronic format for reporting looks like it will offer impressive accessibility options. The SEC is proposing to require companies to list some extra information about projects including the particular resource (e.g., oil, coal, natural gas) and the specific subnational geographic location of the project. The U.S. will be setting a high bar on open data if it follows through with this type of accessibility requirement. This is important because use of this new data by all stakeholders is how transparency will engender real accountability.
Public comment period ahead
A vote on a final rule, building on the one proposed last Friday, will be held by June 2016, so there is still some time before we know the definitive contents of the rule, which could be further shaped by the important public comment period ahead. Indeed, in its 202-page proposed rule, the SEC has asked the public to respond to no less than 82 individual questions by January 25, 2016. We at NRGI and our partners look forward to examining the proposed rule in detail and responding to the request for public comment. Assuming that the SEC adopts a final rule by June 2016, we are likely to see companies filing their first reports with the SEC in the first half of 2018.
Nevertheless, we are encouraged by what appears to be a positive step forward by the SEC. The introduction of laws in Europe and Canada seem to have had a major influence in the SEC’s thinking.
How will industry react?
Regrettably, the American Petroleum Institute (API, the U.S. lobbying group for oil companies) does not seem to have altered its longstanding stance of protecting opacity on behalf of oil giants. It has put out another dismissive statement on the proposed rule including the misleading “anti-competitiveness” assertion that only U.S companies are subject to such disclosure obligations—blissfully ignoring the legal developments on disclosure in Canada and Europe recently, or that a number of state-owned companies are also obliged to report in this way. Whether the API will attempt to litigate again to block implementation of this final transparency rule remains to be seen.
However, there is no unified position against transparency by the corporate sector. Indeed, Tullow Oil, Kosmos Energy, and Norwegian giant Statoil in the oil sector, and majors like Rio Tinto and BHP Billiton in the mining sector, have proactively provided detailed disclosures already, attuned to the realities of the 21st century. These companies rightly reckon that full transparency has the potential to bring an enormous development dividend to the countries where they operate and in turn to their own bottom lines. Given this new proposed rule, surely it is time for the API and some of its key members like ExxonMobil and Chevron to embrace rather than oppose genuine transparency.
: This blog reflects the views of the authors only and does not reflect the views of the Brookings Institution.