In a letter to the SEC, Senator Carl Levin said that smaller companies should not be exempted from the Commission’s proposed regulations implementing Dodd-Frank provisions requiring the disclosure of payments to governments related to the commercial development of oil or natural gas. In the Senator’s view, creating issuer exemptions that have no statutory foundation would undermine the law and interfere with its objective of creating a level playing field with meaningful disclosures that will enable investors to understand what payments are being made by extractive industries to what governments.
The Senator added that, due to the nature of the extraction business, most U.S. resource extraction issues are large in size and it is therefore unlikely that many small companies would be covered by the rule. But to the extent that they are covered, he believes that disclosure would help provide investors with key information to assess the potential risks associated with those smaller companies. Moreover, if smaller companies are exempted, larger companies might attempt to engage in complex corporate maneuvers to create affiliates that quality for the exemption, creating administrative and compliance issues for SEC personnel charged with enforcing the disclosure requirements.
Section 1504 directs the SEC to issue rules requiring all resource extraction issuers to provide an annual report disclosing payments made to the U.S. or a foreign government related to the commercial development of oil, natural gas, or minerals. It requires those reports to be made available online to the public. Section 1504 also requires the SEC to issue rules that to the extent practicable support the commitment of the federal government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.
The SEC proposes to require issuers to furnish the report, rather than file it with the Commission. This wording is critical, explained Senator Levin, because furnished reports do not have to meet the same high standards as filed reports, and their disclosure obligations can be enforced only by the SEC rather than by a private right of action. The Senator believes that investors who purchase or sell a security based upon a statement produced under Section 1504 and then find the statement to be false or misleading should have the right to sue.
Without that right, given the SEC's budget constraints, recalcitrant issuers could ignore Section 1504's disclosure obligations and investors would have little or no recourse to ensure compliance with the law. Sen. Levin emphasized that Congress intended for Section 1504 to have a significant impact in line with the US commitment to international transparency in the commercial development of oil, natural gas, and mining resources. To achieve that objective, he urged the Commission to require that Section 1504 reports be filed rather than furnished to the SEC.
The Senator supports the fact that the proposal does not provide any reporting exceptions, including for companies operating in countries that ban disclosure of information related to their work in the jurisdiction. According to Sen. Levin, exemptions for companies where laws in the host country prohibit required reporting would contradict the purpose of the legislation and create an incentive for those countries who want to prevent transparency. Creating reporting exceptions would also risk creating loopholes that could undermine a level playing field for all covered issuers.
The proposal notes that the term "project" is not defined in Dodd-Frank and asks if a definition is needed. If Section 1504 is to create a level playing field among U.S. resource extraction issuers and produce meaningful comparable information, noted the Senator, this term needs to be defined because, without a definition, issuers are likely to define the term differently, produce information that is not comparable, and create many questions about the meaning of their disclosures.
While the term may have clear application in the case of royalty payments tied to a particular extraction effort, it is not clear how a company should report, for example, expenditures to build a road or hospital near a project, payments to lease office space near a project, payments to hire security guards for a project, hiring a vehicle, ship, or airplane to travel to a project, or capital contributions to create a joint business venture with a government official to distribute fuel from a particular project.
In addition, the oil, natural gas, and mining industry may have industry practices that warrant sector-specific rules to identify how particular payments should be treated. Without a definition, said Sen. Levin, these issues would lead to a variety of disclosure practices and produce a patchwork of information that will impede investor and public analysis of company-specific, regional, and sector-wide developments and trends.
In addition, without a definition, noncompliant governments may tell companies to provide payments in ways intended to defeat the statute's requirement for project-specific information. These considerations indicate that at least a general definition of "project," with subsequent work to refine the definition, is needed to produce meaningful and comparable disclosures from covered issuers.
A related issue is the definition of "payment," including payments made for "other material benefits." He noted that foreign governments and their officials have devised a host of creative ways to extract funds from oil, natural gas, and mining companies. It is unclear whether some of these payments will qualify as "part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals," even if they are widespread within a country.
He suggested that the regulations provide examples of payments that should be reported, including payments made to government agencies, corporations, funds, officials, their relatives, and associates, or to corporations, trusts, or other entities set up to conceal such payments. That list should include payments issuers are required to make for rent, security, food and water, use of roads or airports, the purchase of land, or other material benefits essential to operate in the jurisdiction.
The list should also include capital contributions or other funds that companies are required to provide for joint business ventures with government agencies, corporations, funds, officials, relatives, or associates. The proposed rule must clarify that covered issuers have to track and report all payments made to the government, a government entity or official, or a government official's relative or associate, in exchange for doing business in the country.
Section 1504 defines payments as "payments made to further the commercial development of oil, natural gas, or minerals" which "are not de minimis." The Senator suggested that the SEC adopt the de minimis reporting thresholds set by the London Stock Exchange's Alternative Investment Market, which currently sets a $15,000 minimum threshold for reporting.