This morning, the SEC voted (with Commissioner Piwowar in dissent) to propose rules, mandated by Section 1504 of the Dodd-Frank, that would require disclosure on Form SD of certain payments made to the federal and foreign governments by resource extraction issuers in connection with commercial development of oil, gas and mineral rights. The release notes that the “the legislation reflects U.S. foreign policy interests in supporting global efforts to improve transparency in the extractive industries. The goal of such transparency is to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.”  Here is the press release

As you may recall, the rules to implement Section 1504 have had a long and troubled history. Originally adopted in 2012 at the same time as the conflict minerals rule, the resource extraction rules faced an immediate challenge in litigation brought by the American Petroleum Institute and the Chamber of Commerce. They had contended that the rule compelled U.S. resource extraction companies to engage in speech in violation of their First Amendment rights.  (Sound familiar? See this PubCo post and this PubCo post .)  They also maintained that the SEC had misinterpreted the mandate of the statute which, they argued, required only a compilation of aggregate information, not a separate report for every foreign project. As a result of this misinterpretation, they contended, the rule required U.S.-based companies to disclose sensitive commercial information that competitors could use to their benefit. (See this news brief.)  The U.S. District Court, in a fairly scathing opinion, tossed out the SEC’s rule, contending, among other things, that the SEC fundamentally “misread” the requirements of the statute by mandating public disclosure of each report (rather than a compilation of reports) and that, in rejecting companies’ request for an exemption from disclosing payments to countries that prohibited disclosure of payment information, the SEC was “arbitrary and capricious.” (See this news brief. ) The SEC declined to appeal the ruling, accepting the conclusion that it would need to rewrite the rule. (See this news brief.) However, the timetable for a new rule proposal was delayed several times, and last year, Oxfam America sued the SEC in the U.S. District Court for the District of Massachusetts to compel the SEC to complete the rulemaking. Oxfam succeeded.  (See this PubCo post.)   The Court ordered the SEC to file an expedited schedule for promulgating the final rule, and that schedule required the SEC to issue proposed rules before year end. (See this PubCo post.)

In a press release issued after the Massachusetts district court decision was handed down, Oxfam contended that “Section 1504 inspired a wave of similar mandatory sunlight provisions around the world, setting a new global standard for transparency. Today, 30 countries have adopted laws requiring public, company by company disclosure for each oil, gas and mining project following the US law, including the European Union, Canada and Norway. These laws give the SEC a clear standard to follow in implementation of Section 1504.”   The SEC seems to have attempted to do exactly that.

Under the proposal, publicly held resource extraction issuers would need to disclose, on a project-by-project basis, payments, including taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends and payments for infrastructure improvements, that are made to further the commercial development of oil, natural gas or minerals. There is an exclusion for de minimis payments, defined as one or a series of related payments that is less than $100,000 during the same fiscal year. Although no blanket exemption was provided in the event of disclosures prohibited by foreign law, it was emphasized that the SEC could provide exemptive relief on a case-by-case basis, tailored to the individual facts and circumstances. (Notably, the absence of an express exemption in the prior version of the rules previously led the Court to view the SEC’s rulemaking as arbitrary and capricious.)   In addition, in light of international developments, as well as domestic industry initiatives, the proposed rules would allow issuers to comply by using a report prepared for foreign regulatory purposes or for the U.S. Extractive Industries Transparency Initiative if the SEC “determines the requirements are substantially similar to the proposed rules.” As ChairWhite  observed, these approaches were intended to be responsive to concerns that the proposed disclosures could be prohibited under a host country’s laws or could cause competitive harm.

In his statement at the open meeting, Commissioner Aguilar detailed the advances made by other jurisdictions in their efforts to increase the transparency of resource extraction payments. He also noted that some companies have begun to provide project-level disclosure voluntarily.  He viewed the proposal to be “consistent with the emerging global consensus to fight corruption through enhanced disclosure of resource extraction payments to governments.”  Commissioner Stein praised the proposal’s flexibility in allowing resource extraction issuers to file a report “originally prepared for foreign regulatory bodies, thereby avoiding duplication and reducing issuer burden. Additionally, the proposal provides that resource extraction issuers could apply to the Commission for individualized exemptive relief from the specific filing requirements in certain circumstances.”

At the open meeting, Commissioner Piwowar was true to form in opening his statement with a quote, this time, believe it or not, from Eminem.

Sidebar: Remember Piwowar’s statement at his introductory open meeting, which began with a quote from A Tale of Two Cities. Not to malign Eminem, but from a literary perspective, it does seem like a bit of step down.  Not to mention that “rap devotee” would not be the first thing that springs to mind when thinking of any of the Commissioners.

In his view –Piwowar’s, not Eminem’s – Section 1504 and the rule proposal are both the unfortunate result of the efforts of special interest groups hanging their ornaments on a Christmas tree bill, Dodd-Frank. Piwowar views Section 1504 as having nothing to do with serving the interests of investors, and he found regrettable the acceleration of this rulemaking at the expense of others he views to be more critical to the SEC’s core mission.  In addition, he expressed concern that the proposal would harm the competitive position of domestic companies. Moreover, he worried that the required disclosure of sensitive, project-level payment information “might be used by third-party actors, including non-profit and non-governmental organizations, as a means to extract their own payments in return for not opposing various projects throughout the world.”

Will the new proposal see another court challenge? When the District Court initially vacated the rule, the API observed that “the rule ‘would have jeopardized transparency efforts already underway,’ and that the API looked forward to working with the SEC to rewrite the rule ‘in a way that recognizes these existing efforts’ without harming U.S. firms.” The new proposal appears to address some, but not all, of the issues raised in the earlier litigation.  For example, the disclosure would still be required to be publicly made on a project basis and still stops short of providing the industry-desired blanket exemption where disclosure is legally prohibited. However, the proposal could leave room for the disclosure to meet requirements by complying instead with the referenced industry initiative or foreign requirements.  Will the Chamber of Commerce or API accept the new rules as proposed or will they renew their efforts to challenge the proposed rules on First Amendment—one of the Chamber’s favorite new strategies — or other grounds?  According to The Hill, the API “said the standards would require drillers to reveal sensitive financial information about their operations and put them at a disadvantage because foreign firms wouldn’t need to file the same paperwork. ‘Not only could the rule hurt the millions of Americans who own shares in oil and natural gas companies, it could also cost jobs and damage America’s energy security by making it more difficult for U.S. firms to gain access to resources abroad,’” according to an API official. Reuters  also quoted the API as dissatisfied with the proposal: “’Our industry has been working hard to increase transparency for more than a decade, but this rule could interfere with ongoing efforts by making U.S. firms less competitive against state-owned firms not covered by this rule.’”  Looks like the battle isn’t over.