Third time’s a charm? SEC adopts controversial extraction rules

The rules had first been issued as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 but were knocked down in a 2012 lawsuit filed by the American Petroleum Institute (API). A second version of the rules was rescinded by Congress in 2017 using the Congressional Review Act (CRA). The SEC issued a third, revised set of rules in 2019 and made several tweaks in the final version passed Wednesday—most notably, by significantly extending the compliance deadline until 2024.

With the new version, the SEC attempted to thread the needle between the order from Congress that the rule be substantially different than its failed predecessors while also hearing criticism from good government and anti-corruption advocates who argued the disclosures would be too general to reveal much of value.

“The final rules are designed to achieve the statutory objective of promoting the transparency of resource extraction issuers’ payments to governments while adhering to the CRA’s limitation that the new rule not be substantially the same as the disapproved rule,” outgoing SEC Chairman Jay Clayton said in a press release.

As with many controversial votes before the SEC, passage of the measure was split along party lines. Clayton, nominally an independent member of the Commission, was joined by Republican Commissioners Hester Peirce and Elad Roisman in approving the measure. Democrats Allison Herren Lee and Caroline Crenshaw voted no.

In a separate statement, Clayton laid out the differences between the rule Congress rescinded in 2017 and the new version. The rules will require “public disclosure of company-specific, project-level payment information” but define project in a way that requires disclosure at the national and major subnational political jurisdiction, as opposed to the contract level.

This is one of the most controversial aspects of the new rule, said Carlo di Florio, a former FINRA and SEC regulator who is now partner & global chief services officer at ACA Compliance Group, a data analytics vendor.

“While the majority of the Commission felt this was necessary to address the mandate from Congress under the CRA, the dissenting commissioners felt the rule falls short because without contract-level disclosure, it will make identifying the source of corruption very difficult,” he said.

The rules allow companies to aggregate payments by payment type in their disclosures; offers conditional exceptions for disclosures that conflict with foreign law; and exempts small and “emerging growth” companies from making certain disclosures. This was another bone of contention among dissenters like Commissioners Lee and Crenshaw.

“These changes will reduce the number of companies required to disclose, reduce the amount of disclosure, reduce the liability that attaches to the disclosure, and reduce the promptness of the disclosure,” Lee said in her dissent.

While the revised rules become effective 60 days after publication in the Federal Register, they contain a two-year compliance grace period. Following those two years, companies would be required to make the disclosures 270 days from the end of their fiscal year. As a result, some companies would not have to make disclosures required by the law until September 2024, the SEC said.

Jay Dubow, a partner at the law firm Troutman Pepper, said even the revised rules will be burdensome for industries mandated to make the disclosures, “but not as burdensome as previous iterations.”

The rules, he said, strike a “good balance” between the demands of the industries affected and critics who say the revised requirements won’t allow investors to see the level of detail necessary to determine if improper payments are being made.

A prominent critic of the rules is Sen. Elizabeth Warren (D-Mass.), who said in a letter to Clayton dated the day before the SEC’s vote that the proposal “fails to combat corruption and hold bad actors accountable. Instead, the SEC’s proposal ‘would make such disclosures so general as to be of little value.’” Warren criticized Clayton for voting on the new rules “in the final few days of the Trump administration.”

Lee also criticized the rules for not requiring oil, gas, and mineral companies to disclose more about their payments to governments foreign and domestic.

“We are not ensuring sufficiently granular disclosure to enable citizens to combat corruption. We are not providing investors with the information that is material to their investment and voting decisions,” she said. “We are not heeding the numerous calls from issuers who have asked us to harmonize our rules with the international standard. And, most unfortunately, we are not taking the opportunity to further the SEC’s and the United States’ tradition as leaders in the fight against global corruption.”

Another critic of the rules, National Whistleblower Center Executive Director John Kostyack, said with its approval, “The SEC voted to ignore the will of Congress and instead to do the bidding of the fossil fuel industry.”

API, which sued to reverse the first iteration of the extraction disclosure rules, was complimentary of the latest version.

”The final rule provides clarity for U.S. issuers on this complex issue and our members, who have long supported transparency efforts, will be assessing how these final rules will work with their existing reporting systems,” said Stephen Comstock, API’s vice president of corporate policy.

Dubow said the rules “put some sunshine” on payments to governments by such companies, revealing in some cases “good deals” that companies struck with particular governments.

“Some governments would probably prefer that these disclosures not be made, because more favorable deals they made with one company would be revealed to another,” he said. “It might open the door to more negotiations,” which would be bad for the company that negotiated the good deal and good for that company’s competitors.