Friday, February 17, 2012

House Members Urge SEC to Promptly Adopt Strong Regulations Implementing the Extractive Industry Revenue Transparency Provisions of Dodd-Frank

Rep. Barney Frank (D-Mass) and thirteen other House Members have urged the SEC to promptly adopt strong and effective regulations implementing the extractive industry revenue transparency mandate in Section 1504 of the Dodd-Frank Act. In a letter to the SEC, the Members said that the Commission should resist industry pressure to start the rulemaking process anew or release a watered down rule that does not reflect the legislative intent of Section 1504. They emphasized that public disclosure of extractive industry revenues and how they flow from industry to governments is fundamental to improving governance, curbing corruption, improving revenue management, and allowing greater accountability from governments for spending that serves the public interest. While sympathetic to the challenges the SEC faces due to capacity constraints, the Members are concerned that the Commission is far behind in meeting the statutory deadline of April 17, 2011 to adopt final regulations on Section 1504.

Section 1504 requires companies to report the type and total amount of payments made for each project as well as the type and total amount of such payments made to each government. This language clearly intends for project and government to represent different levels of payment reporting, said the Members, which means "payment" cannot be considered synonymous with "government" or "country." Thus, payments should not be allowed to be reported only at an aggregate, country level. The House Members rejected the suggestion by some commenters that a project could be defined in the same way as country for payment reporting purposes. While Congress entrusted the SEC to find the best fitting technical definition of project, the lawmakers clarified that a project is not equivalent to a country, and not an aggregate of all activities in a country or a geologic basin.

Indeed, the House Members viewed as ``deeply misguided’’ the idea that "project" could be defined by the SEC as all activities in a geologic basin. Multiple companies often conduct activities in a single geologic basin, they acknowledged, but Section 1504 requires disclosure by each resource extraction issuer and does not allow aggregation of payments by multiple companies. In addition, geologic basins may span more than one country, and in such cases, reporting at a geologic basin level would violate both the clear and separate company-by-company and the country-by-country requirements of Section 1504.

Further, any project definition should require the disclosure of payments on the level at which rights and fiscal obligations are assigned, which the Members understand to be the lease or license in the case of many payment streams. They endorsed the Department of Interior's request in its letter of August 4, 2011, which asks the SEC to support a project definition that is tied to a specific lease, which is the norm in the United States.

The final regulations should also define the terms "project" and "payment" in ways that do not create reporting loopholes, emphasized the House Members, particularly with regard to the threshold amount for reporting. Section 1504 requires any payment to be disclosed as part of country and project-level disclosures, except if it is de minimis.

Section 1504 does not reference materiality in regards to which payments or projects are to be disclosed. Congress knows how to impose a materiality requirement when it wants to, said the Members, noting that the Exchange Act contains numerous instances where Congress chose to qualify an otherwise required disclosure by the term material. Since Congress did not do so here, the Members believe that any inclusion of materiality to limit payments or projects to be disclosed would be in violation of Section 1504.

On the definition of de minimis, if the SEC were to provide a specific monetary threshold below which payments are not required to be reported, it would be very important not to set this threshold too high, posited the Members, as that would leave important payment streams undisclosed as well as encourage companies and governments to structure payments in future contracts in a way that would avoid the disclosure requirement.

The Members urged the SEC to make Section 1504 requirements applicable to all companies that raise capital in U.S. markets and report to the SEC, with no exemptions. In particular, companies should not be exempted from the reporting requirements by virtue of their status as foreign companies, nor should contractual provisions or foreign legal prohibitions be allowed to preempt US law.

More broadly, the Members said that extractive industry revenue transparency will be of great value to investors as they assess the commercial, political and reputational risk faced by companies in often volatile locations. In addition, this kind of mandatory disclosure can help diminish the political instability caused by opaque governments, which is a clear threat to investment. Since extractive industries are capital-intensive and dependent on long-term stability to generate returns, transparency of payments made to a government can help mitigate political and reputational risks and also allow shareholders to make informed assessments of opportunity costs, threats to corporate reputation, and a company's dependence on such ventures.