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SEC sued over rule making companies reveal payments
The American Petroleum Institute and other business groups are suing to try to block a new rule requiring oil and mining companies to disclose payments such as taxes and royalties to foreign governments.
The groups filed a 39-page lawsuit Oct. 10 in federal court in Washington, D.C., against the U.S. Securities and Exchange Commission.
The suit argues that the SEC’s new payment disclosure rule for resource extraction stock issuers is a violation of the First Amendment, as well as the Administrative Procedures Act.
The groups argue the reporting rule will be hugely expensive, will make companies reveal trade secrets to competitors, and could even force them to abandon projects in certain countries, costing the firms and their investors billions of dollars in lost business opportunity.
Other plaintiffs in the suit include the U.S. Chamber of Commerce, the Independent Petroleum Association of America and the National Foreign Trade Council.
International activists praise the new SEC rule as valuable to investors and a positive step for preventing government corruption in resource-rich countries.
Dodd-Frank origins “The rule as written would impose enormous costs on U.S. firms and put them at a competitive disadvantage against government-owned oil giants not subject to the rule,” API President Jack Gerard said in an Oct. 10 press release.
The lawsuit argues the SEC failed to meet its legal obligation to limit the costs and anticompetitive harm of the payment disclosure rule.
The SEC, which regulates publicly traded companies, adopted the rule on Aug. 22. The agency said the rule was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The rule requires resource extraction issuers — oil and gas and mining companies — to disclose certain payments made to foreign governments, as well as to the U.S. government. The companies must disclose the information annually by filing a new form, Form SD, with the SEC. These filings will be publicly available via the SEC’s online database, known as Edgar.
Companies will need to disclose payments of $100,000 or more that are “made to further the commercial development of oil, natural gas or minerals,” the SEC says. The types of payments to be disclosed include taxes, royalties, license and other fees, production entitlements, bonuses, dividends and infrastructure improvements.
The rule requires disclosure of the type and total amount of payments made for “each project,” the SEC says, as well as the type and amount of payments made to each government.
The rule doesn’t specify exactly what constitutes a “project.” The SEC says that was intentional, to provide resource extraction issuers “flexibility in applying the term to different business contexts.”
But the API and the other business groups say this ambiguity is one of the rule’s big problems.
Activists hail new rule The international development and relief organization Oxfam America, in an Oct. 11 press release, said it was disappointed that the oil industry has “decided to try to use the courts to keep investors and the public in the dark regarding payments to resource-rich countries.”
The new SEC rule will provide valuable information to investors and help prevent corrupt government officials from squandering oil and mineral wealth in resource-rich countries, Oxfam said.
The SEC “acted to lift the veil of secrecy on billions of dollars that flow every year from oil and mining companies to governments around the world,” said Ian Gary, senior policy manager of Oxfam America’s oil, gas and mining program. “The agency followed the letter of the law. Now it’s time for oil companies to comply with the final regulation, not fight it in the courts.”
Gary continued: “We call on companies, such as BP, Exxon, Chevron and Shell, who are hiding behind industry associations to do their dirty work while espousing transparency rhetoric, to disassociate themselves from the lawsuit.”
Oxfam added that some companies, such as Talisman Energy and Statoil, already disclose payments in every country of operation, in some cases at the project level.
Some countries forbid disclosures “The oil and natural gas industry strongly supports payment transparency,” API’s Gerard said. “We’ve been working hard to increase transparency for a decade, but this rule could interfere with ongoing efforts by making U.S. firms less competitive against state-owned firms in China and Russia that have no interest in transparency.”
The industry is working with civil society groups and the Obama administration to implement EITI, the Extractive Industries Transparency Initiative, a program that would more effectively increase transparency without harming competitiveness, Gerard said. The initiative already has been established in 36 countries, API said.
Under the new SEC rule, companies will be required to make the payment disclosures for fiscal years ending after Sept. 30, 2013.
The lawsuit says the rule presents major problems. By the SEC’s own reckoning, it will cost U.S. public companies at least $1 billion for initial compliance and $200 million to $400 million in ongoing costs, the suit says.
Worse, companies will be forced — against their First Amendments right to refrain from speaking — to give competitors access to sensitive commercial information, and to “abandon projects to foreign state-owned companies in countries that forbid the disclosures or that simply refuse to do business with U.S. companies because they do not wish the disclosures to be made.”
Countries including Angola, Cameroon, China and Qatar prohibit disclosures such as those the SEC is requiring, the lawsuit says.
The SEC is going too far in requiring public disclosure of company-specific payment information, the suit argues. That’s because Dodd-Frank “requires only that a ‘compilation’ or aggregation of payment information made by all U.S. companies to each foreign government and the federal government be made publicly available.”
—Wesley Loy
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