Friday, May 25, 2012

Group Asks Federal Court to Order SEC Issuance of Regulations Implementing Dodd-Frank Sec. 1504; Senators Comment on Proposed Regs

International relief and development organization Oxfam America has filed a lawsuit in the US District Court for the District of Massachusetts asking the court to order the SEC to issue regulations implementing Section 1504 of the Dodd-Frank Act, which requires companies in the extractive industries to periodically disclose information pertaining to certain categories of payments made to the governments of the countries in which they operate. The group claims that the SEC has unlawfully delayed the issuance of the final regulations under Section 1504, known as the Cardin-Lugar provision after its two senatorial sponsors, Senators Ben Cardin (D-MD) and Richard Lugar (R-IN).

Congress set a deadline of April 17, 2011 for the SEC’s promulgation of the final regulations needed to effect the Section 1504 mandate, noted the group, adding that the SEC has now missed this statutory deadline by over one year. In an April 16 letter to the SEC, Oxfam America said that it would file suit if the Commission did not issue a final rule within 30 days. The federal court complaint states that the extractive payment disclosures that Congress mandated nearly two years ago will not take place unless and until the SEC issues final regulations. Unfortunately, said the group, the SEC’s pattern of delay gives no assurance that it will ever promulgate final regulations without the involvement of a federal court.

In its April 16 letter, the group claimed that the Commission's failure to issue final regulations implementing Section 1504 places the agency in violation of the Administrative Procedure Act, which requires agencies to conclude matters presented to them with due regard for the convenience and necessity of the parties and in a reasonable time. The group further claims that this lapse constitutes unreasonable delay and unlawful withholding of agency action actionable under Section 706(1) of the APA.

In a January 31, 2012 letter to the SEC, Senator Cardin, along Senators Charles Schumer (D-NY) Patrick Leahy (D-VT), Carl Levin (D-MI) and John Kerry (D-MA), expressed concern that final regulations implementing  Section  1504 had not yet been adopted. They cautioned that to repropose the regulations at this point would violate the clear statutory deadline provided by Congress.

The Senators emphasized that Section 1504 is critical to providing information of great value to investors as they assess the commercial, political and reputational risk faced by companies in often volatile locations. In addition, the greater transparency will discourage corruption, reduce conflict and enhance stability, secure energy supplies, and ensure a more predictable operating environment for extractive companies. They pointed out that investors with over $1 trillion in assets under management wrote to the SEC in support of strong rules, including the largest public pension fund in the United States, and asset managers for the third largest pension fund in Europe.

The Senators urged the SEC to resist pressure to release weak regulations that do not follow the clear statutory language and legislative intent of Section 1504. To accurately reflect the letter and intent of the law, they emphasized, the final regulations should apply to all countries and companies with no exemptions. They should also define the terms project and payment in ways that do not create reporting loopholes, particularly with regard to the threshold amount for reporting.

Moreover, the SEC should require the compilation of the payment data to be in addition to, and not in lieu of, the data produced by companies. The Senate leaders said that reporting data that is of high quality, and understandable and usable for investors and the general public is crucial to the efficacy of Section 1504. For this reason, requiring issuers to "file" the Section 1504 disclosures, which would provide investors with a private right of action, would not only complement the SEC's own enforcement efforts, but would lead to more accurate and reliable data.

Further, any exemptions, including exceptions for conflicting host country laws, would not only encourage other countries to enact laws reducing transparency and start a race to the bottom, the Senators warned, but would also create a dangerous precedent by making the U.S. lawmaking process subservient to governments around the world, including dictators who do not share a commitment to transparency, good governance, and the rule of law. Such an exemption would not only distort the plain meaning of the law, but would also undermine the Congressional intent and the spirit of Section 1504.

In a separate letter to the SEC, Senators Lisa Murkowski (R-Alaska) and John Cornyn (R-TX) said they were troubled that the SEC’s proposed definition of ``project’’ could result in US companies disclosing information allowing foreign state-owned oil companies an unfair competitive advantage for operations in the host country. The Senators said that Section 1504 authorizes the SEC to define ``project’’ in a way that promotes international transparency while protecting US companies from competitive harm.

They posited that a definition of ``project’’ allowing companies to aggregate data from multiple agreements in a particular country, geologic basin, or province would mitigate the potential for competitive harm. In addition, the Senators said it is imperative that the final regulations require disclosure of payments only for material projects and allow an exemption for operations in countries prohibiting the disclosure of payment information. Without this exemption, warned Senators Cornyn and Murkowski, US companies could be forced to shut down profitable operations.