The US Congress passed, the Securities and Exchange Commission has issued rules to implement, and Big Oil now wants to kill, a law enlisting Wall Street regulators as champions of the many in countries whose mineral wealth lines the pockets of the few.
The measure says that if you are in the oil, gas or mineral extraction game and wish to raise capital on Wall Street, you must annually disclose to the SEC, on a project by project basis, any royalty, fee, bonus, dividend or other payment above $100 000 you make to any government in the conduct of your business.
This applies equally to US and foreign issuers, including South African companies like AnglogoldAshanti whose stock is traded on the New York Stock Exchange via American Depository Receipts (ADRs), and goes well beyond the similarly intended but voluntary Extractive Industries Transparency Initiative (EITI) launched by Tony Blair in 2002.
The American Petroleum Institute, lobbyist for the US oil and gas industry, is asking the courts to declare both the law and the implementing rules unconstitutional on the grounds that by forcing companies to say things they would rather remain mum about, they violate the First Amendment’s freedom of speech guarantee.
The unkind, or those who believe the extractive sector has too long been accomplice to tyranny, might recommend appeal to a different amendment — the fifth, which grants the right to remain silent to avoid to self-incrimination.
Shorthand for the disclosure law is Section 1504, referring to the Dodd-Frank Act adopted in 2010 to prevent a repeat of 2008 and now under siege. As the Washington Post’s veteran business commentator Steven Pearlstein wrote on Sunday: “The depth and breadth of the industry campaign to gut Dodd-Frank is unlike anything I have seen.”
Section 1504’s authors included Indiana Senator Richard Lugar, former chairman the Foreign Relations Committee and a driving force behind the Comprehensive Anti-Apartheid Act of 1986. “It puts transparency – the key to citizens’ ability to hold their government to account – ahead of corruption,” he said.
Sadly, Republican voters held Lugar to account in May when he was beaten in a primary challenge by Tea Partisan Richard Mourdock. The latter went on to lose in the general election after declaring it God’s will that rape victims carry their babies to term. Among his largest contributors were ExxonMobil and Marathon Petroleum, which is active in Equatorial Guinea.
They and their fellow API members contend that disclosure at the granular level the SEC thinks Congress intended will not only entail significant administrative costs – ExxonMobil says $50 million in its case — but put them at a serious competitive disadvantage or worse.
A number of countries – Angola, Cameroon, China and Qatar are mentioned – prohibit disclosures of the type required. Others may now be tempted to join the club as a way of increasing their leverage in negotiations. The SEC itself concedes that one unnamed US oil company stood to lose $12 billion in cash flow if forced to end its projects in Angola.
But the commission also thinks the industry’s fears may prove exaggerated.
There was disagreement over the applicability of host country disclosure law, it said in gazetting the new rules. “Moreover, the widening global influence of the EITI and the recent trend of other jurisdictions to promote transparency, including listing requirements adopted by the Hong Kong Stock Exchange and proposed directives of the European Commission may discourage governments in resource-rich countries from adopting new prohibitions on payment disclosure.”
While it seems unlikely the courts will strike down the law as an affront to free speech, the plaintiffs may be on firmer ground arguing that the SEC was overzealous in its interpretation of Congress’ intent. One of the SEC’s five commissioners, Daniel Gallagher, an Obama appointee, is already on record supporting that view. He was the dissenter in the narrow 2-1 vote for the final rule.
The law is clear that the SEC is to require “resource extracting issuers” (the term of art for the target companies) to file annual reports detailing payments to governments by project and category. What’s hazy is whether everything submitted has to be shared with the public as part of company filings on the SEC’s online EDGAR database. Section 1504 only calls on the SEC to “make available…a compilation of the information required to be submitted”.
“Compilation” can cover a multitude of sins and would be closer to the EITI system under which levels of disclosure are determined in consultations between participating governments, NGO’s and companies, and which the API prefers.