More reason, please

You’re an oil or mining company listed on the New York Stock Exchange, or, in Securities and Exchange Commission parlance, a resource extraction issuer. How candid do you have to be about the royalties, rents, taxes, production shares, infrastructure improvements and other things of value you deliver to governments in Africa and elsewhere as the price of conducting business?

Very, said the SEC in its first stab at writing rules to implement section 1504 of the Dodd Frank Act, U.S. Congress’ effort to reregulate Wall Street after the 2008 financial meltdown.

Any payment over $100,000 would need to be reported annually on a country by country and project by project basis and made available for public inspection on the SEC’s Edgar database. There were to be no exceptions made for companies operating in countries such as Angola, Cameroon, China and Qatar which bar such disclosure. That, the rule writers argued, would encourage others to adopt similar prohibitions and so vitiate section 1504’s purpose – to empower citizens against resource-trousering kleptocrats.

Big Oil, represented by the American Petroleum Institute, did not appreciate the SEC’s interpretation and went to court. Companies like ExxonMobil, BP and Royal Dutch Shell saw themselves being placed at a serious competitive disadvantage. Indeed, the SEC itself acknowledged that one unnamed US company stood to lose $12 billion in cash flow if forced out of Angola.

Through API, the companies argued that the regulator was violating their First Amendment right to freedom of speech by making them disclose what they would rather keep secret. They complained that the level of disclosure and the refusal to grant exemptions both went well beyond what Congress intended.

In July, a federal judge, sympathizing, found the SEC to have been “arbitrary and capricious” and told it to try again. The commission had until last week to decide whether to appeal or have another shot. It has chosen the latter course. In the meantime, implementation of the law in any form, which should have begun at the end of this month, has been indefinitely delayed.

Round one to to the resource extraction issuers, then, or at least to those of them that want section 1504 gutted. But the tide is running against them. Some have already broken ranks. Newmont Mining, for example, has said it can live with the SEC’s initial rule. Norway’s Statoil declined to join the API suit.

API prefers the voluntary Extractive Industries Transparency Initiative proposed by then British Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg in 2002. But the tide is running against the EITI as well. The EU has approved accounting and transparency rules very similar to the SEC’s interpretation of section 1504, which likewise allow no exceptions for companies operating in exposure-averse jurisdictions.

Transparency International calculates that if both the US and the EU adopt mandatory disclosure rules, 90% of the world’s major resource companies will be covered. That percentage could go even higher as others come to the party. Hong Kong already requires country by country reporting from all petroleum and mineral companies listed on its exchange. Canada is in the process of adopting new mandatory reporting standards.

Some argue that if President Barack Obama is really serious about encouraging US investment in Africa he should support repeal of Dodd-Frank sections 1504 and 1502. The latter requires US-listed companies to examine their supply chains and publicly disclose any use in their products of so-called “conflict minerals” originating in the Democratic Republic of Congo or surrounding nations. Unlike section 1504, 1502 has thus far withstood legal challenge. In any event, this is advice Mr. Obama is unlikely to take.

A group of 44 international investment funds with $5.6 trillion under management has written to the SEC’s new chair, Mary Jo White, urging the regulator not to retreat from its tough interpretation of 1504 when it rewrites the implementing rules. Full disclosure, they contend, is necessary for investors to assess the risks companies face operating in countries rendered unstable by thieving regimes.

The authors of the measure, led by Sen. Ben Cardin, Democrat of Maryland, and Sen. Richard Lugar, since defeated Republican of Indiana, are also urging the SEC to stand fast.

In vacating the SEC’s first effort, Judge John Bates does appear to have left room for a rule that does not permit exceptions. The regulator, he suggested, needed to do a more thorough job of explaining. “A general statement about incentive problems with a broad version of the exemption does not satisfy the requirement of reasoned decision-making, when by the commission’s own estimates, billions of dollars are on the line.”

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