SEC adds key disclosure requirements

In yet another victory for Wall Street reform that the SRI industry fought hard for, the Securities and Exchange Commission (SEC) last month announced that it has adopted final rules to require companies that develop oil, natural gas, and minerals to disclose any payments they make to governments. These payments, often done in secret, can directly conflict with and hinder U.S. foreign policy interests and may expose shareholders to geopolitical risks that can directly affect share value. From an ethical perspective, the payments can also prop up oppressive regimes and dictatorships, which often use the payments to grow their leaders’ personal coffers while hindering the democratization of those countries.

The rules were one of many elements of corporate financial reform mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The following year, President Obama specifically targeted resource extraction as an industry in need of greater international transparency.

Though the rules were initially written in 2012, the SEC was mired in legal challenges by the extraction industry and the U.S. Chamber of Commerce. As a result of a lawsuit, the U.S. District Court for the District of Columbia vacated the rule as originally written, but Oxfam America subsequently sued the SEC for failure to write the rules as mandated by the Dodd-Frank law; last September, a federal judge sided with the plaintiff, and the SEC proposed a modified rule last December. No additional lawsuits challenging the rule have yet been filed.

Corporate transparency has long been a policy priority of the SRI industry’s primary trade organization, USSIF, on whose policy committee I sit. Corporate political disclosure remains our top priority. In 2012, the SEC also issued final rules regarding disclosure of “conflict minerals” that derive from the Republic of Congo. Legislation requiring disclosure of extraction industry payments has already caught on elsewhere. In the past few years, the European Union and Canada have adopted transparency initiatives, and there are 48 countries that currently belong to the international Extractive Industries Transparency Initiative, which the U.S. finally joined in 2014. Over 200 extraction companies worldwide participate, which is critical to developing global consensus on the expectation of corporate transparency on this issue.

In the new SEC rule, companies that engage in the commercial development of oil, natural gas, or minerals must now disclose annual payments of over $100,000 to the U.S. federal government or a foreign government, as part of their regular annual reports to the SEC.  The company must also disclose payments by a subsidiary or entity controlled by the company, and the rule defines commercial development of oil, natural gas, or minerals as including the activities of exploration, extraction, processing, and export, or the acquisition of a license for any such activity.

Payments that must be disclosed are: taxes; royalties; fees (including licenses); production entitlements; bonuses; dividends; payments for infrastructure improvements; and, if required by law or contract, community and social responsibility payments.  The disclosure must be made at the project level.

Opponents of such reporting have suggested that such payments are made by many countries and are considered a normal cost of business. They also suggest that disclosure will give American companies a competitive disadvantage against the likes of China and Japan. That being said, the trend across the world is disclosure, and the global goal should be to raise the bar for all nations, not succumb to the lower standards of business practice by some countries. As we know, there are things that matter just as much or more than profitability, such as human rights.

In the U.S., many companies are already voluntarily engaged in such disclosure to our federal government. In 2015, the U.S. Extractive Industries Transparency Initiative (USEITI, a partnership of industry, civil society, and government) produced its first annual report, which details the payments made by 31 of the 45 major extractive companies to the U.S. government. This information shows all types of leases and taxes paid, as well as disbursements made from these fees to local governments and for conservation and preservation. The information is readily available to the public via a user-friendly Department of Interior database:

Extending this disclosure to cover payments to other governments around the world will provide a valuable tool for social and environmental justice watchdog groups as well as for those within companies that are in agreement with the need to raise the bar on these issues. Resource extraction issuers are required to comply with the new disclosure rules starting with their fiscal year ending no earlier than September 30, 2018.

Of course, transparency is only the first, and some would suggest politically expedient, step in the process of getting companies to behave with greater ethical responsibility. The goal of transparency is to make the public aware of companies doing business with countries that have poor social or environmental standards or entrenched internal graft, so that they will in turn: (1) pressure the companies (as shareholders) to adopt better practices and prohibit unethical ones; and (2) pressure Congress to prohibit such practices. Given the current state of Congress, the latter option is unlikely, while shareholder engagements on the issue typically fall on deaf ears with company management and the majority of shareholders that blindly vote with them.

Oddly enough, these common-sense measures of the Dodd-Frank law would likely not have been possible without the deep harm of the Great Recession. Dodd-Frank itself only passed because the Democrats still controlled the Senate, so we are fortunate that the under-funded and oft-targeted SEC has hung tough and done its job. The trend towards disclosure of corporate environmental, social, and government practices continues. One day it will be mandatory for all public companies in every industry.


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Michael Kramer

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