Securities Regulation Daily Third time’s the charm: SEC finally approves resource extraction rule
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Wednesday, December 16, 2020

Third time’s the charm: SEC finally approves resource extraction rule

By Jay Fishman, J.D.

Chair Clayton and a majority of the commissioners admitted that the resource extraction topic is beyond their expertise and that the final rule might be hard to enforce.

In a December 16, 2020, open meeting, SEC Chairman Jay Clayton broke a two-vote tie to approve a long-time-in-coming resource extraction rule mandating U.S. and foreign Exchange Act reporting company issuers to report the monetary amounts they pay to the U.S. federal government or to foreign governments for commercially developing oil, natural gas, and minerals in those respective countries. The first vote was on whether to adopt the final rule recommendation while the second vote required determining whether to adopt a release deeming issuers alternatively complying with international resource extraction rules to forego having to also comply with the Commission rule. On both votes, Commissioners Hester Peirce and Elad Roisman approved the items while Commissioners Allison Herren Lee and Caroline Crenshaw dissented (Disclosure of Payments by Resource Extraction IssuersRelease No. 34-90679Order Recognizing the Resource Extraction Payment Disclosure Requirements of the European Union, the United Kingdom, Norway, and Canada as Alternative Reporting Regimes that Satisfy the Transparency Objectives of Section 13(q) under the Securities Exchange Act of 1934Release No. 34-90680, December 16, 2020).

Dodd-Frank got the ball rolling. In 2010, Dodd-Frank Act Section 1504 mandated the SEC to adopt the above-described rule under Exchange Act Section 13(q), believing that payment disclosures on company financial statements would provide transparency to not only root out foreign corruption and money laundering but also protect investors wishing to invest in those companies and citizens too by allowing them to glean the lawfulness of resource extraction happening in their country. The SEC then, in 2012, promulgated its first resource extraction rule only to have a District of Columbia Circuit Court dismiss it in a 2013 case.

The Commission’s second rule requiring more granular disclosures came in 2016, but a joint resolution of Congress under the Congressional Rules Act (CRA) signed by President Trump disapproved it in 2017, challenging the SEC to adopt yet another rule that "cannot be the same or substantially similar to the disapproved rule" but without defining "substantially similar." The Commission’s Corporate Finance Division went back to the table because there was still the Dodd-Frank Section 13(q) mandate to comply with.

At this open meeting, Chair Clayton along with the commissioners applauded the Corporate Finance Division, the Division of Economic and Risk Analysis, and the SEC’s general counsel for bringing forth this third rule, which was approved to finally meet the 2010 Dodd-Frank mandate. Clayton was particularly happy about approving this rule at the end of 2020 after two previous Commissions tried but failed to adopt it because this open meeting would probably be his last time as chair.

The final rule specifically implements Section 13(q) by requiring resource extraction issuers (defined as oil, natural gas and mining companies required to file reports under Exchange Act Section 13 or 15(d)) to annually file a Form SD that includes payments related to the commercial development of oil, natural gas, or minerals that are made to a foreign government or to the U.S. federal government.

"We are not experts." Despite their slightly and, in some cases, significantly different views on the final resource extraction rule, Clayton and all the commissioners emphasized one theme: that setting forth this rule’s particulars was one of the most difficult efforts ever because resource extraction is not a topic of expertise for them. Clayton remarked that resource extraction involves much more than SEC disclosures; it involves many other departments in the U.S. executive branch, e.g., the Department of Energy and those departments concerned with foreign country interests, which are better equipped to work with those countries’ governments to help protect their citizens from foreign corruption. Clayton also pointed out his belief, to date, that unlike the SEC, other country counterparts have not done nearly enough to regulate the legitimacy of their residing companies resource extraction activities. Lastly, he stated that coming up with a rule is only words on paper if it is not enforced, and he’s not sure how enforced this or any similar rule will be in other countries. Nevertheless, he cast the deciding votes to approve both initiatives to, at last, satisfy the Dodd-Frank Act mandate.

Commissioners Peirce and Roisman approve the final rule. Commissioners Peirce and Roisman approved the final rule but only to satisfy the Dodd-Frank Section 13(q) mandate. In not supporting the substance of the final rule, the commissioners referred to a major change made to the final rule, namely the re-defining of a "project" from the 2016 rule to longer concern contracts. Peirce proclaimed that by amending this definition to abide by the congressional mandate that this rule not be substantially similar to the disapproved rule, the final rule, by eliminating the contract level for projects, removes the granularity of the material disclosures that would have otherwise provided the transparency Dodd-Frank sought, to prevent foreign corruption and to protect investors. And Roisman reiterated Clayton’s point that resource extraction is not an area of expertise for the Commission that should have been left to other executive branch departments and/or the legislative branch to get directly involved in resource extraction by enacting laws on the subject. Both commissioners closed their remarks by emphasizing that while they approve the rule to satisfy the Dodd-Frank mandate, the final rule (or any resource extraction rule) is beyond the scope of the SEC’s domain because it is primarily a societal issue, not an investor issue and, therefore, is not a rule that promotes the Commission’s mission to raise capital, protect investors, or ensure financial market integrity.

Commissioners Lee and Crenshaw dissent. Unlike Commissioners Peirce and Roisman, Commissioners Lee and Crenshaw stated that the Dodd-Frank Act mandate was not enough to permit their final rule approval. Commissioner Lee, in fact, disagreed with the chair’s and other commissioners’ takeaway that resource extraction is not an expert topic for the SEC. On the contrary, she declared that the resource extraction rule is precisely a disclosure rule well within the SEC’s regulatory scope. What she could not support, however, is exactly what Peirce and Roisman were concerned about with the final rule: the removal of "contract" from the project definition. But Lee also opposed a company argument, namely that the elimination of granular disclosures by virtue of removing the contract definition of a project will not harm their investors because those disclosures are already made. Lee adamantly argued that it is simply not true that the final rule’s redefining a project will, in fact, provide investors with the detailed degree of material disclosures they would have received from the 2016 rule.

Commissioner Crenshaw noted that the SEC never provided any rationale for re-defining a project to satisfy the CRA’s "not the same or substantially similar" requirement. She proclaimed that meeting this mandate by removing the contract level disclosures from the 2016 rule has not only left investors without important information from which to make investment decisions but has also defeated the Dodd-Frank desire for transparency into foreign country corruption and money laundering. Crenshaw lastly debunked industry’s global contention that requiring this detailed level of disclosure would put these disclosure-providing companies at a competitive disadvantage with those companies not having to comply. She pointed out that since 2016, the United Kingdom, the members of the European Union, and Norway, among other countries, now require their respective residing companies to make these detailed disclosures, which greatly weakens the "competitive disadvantage" argument.

The releases are No. 34-90679 and No. 34-90680.

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