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In Letter to SEC, Senator Cardin Clarifies Legislative Intent behind Dodd-Frank Provision Requiring Disclosure by Resource Extraction Companies

By Jim Hamilton

With the SEC readying rule proposals to implement Section 1504 of the Dodd-Frank Act, Senator Ben Cardin, a co-author of the provision, gave the Commission further context behind the provision in an effort to inform the rulemaking process. In a letter to the SEC, Senator Cardin said that the purpose of Sec. 1504 is to bring greater transparency to extractive-related payments made to governments by resource extraction issuers required to report to the SEC. This transparency will provide information important to investors as well as provide information important to citizens seeking to hold their government accountable for extractive revenues.

Sec. 1504 directs the SEC to issue rules requiring resource extraction issuers to include in their annual reports information relating to any payments made to foreign governments or the federal government for the purpose of the commercial development of oil, natural gas or minerals. While stating that the language of Sec. 1504 is clear, Senator Cardin wants the rulemaking comment process to especially focus on three areas.

The first is scope of coverage. In his view, the intent of Sec. 1504 is to provide the broadest possible meaning to the term "resource extraction issuer" to include all issuers, including foreign issuers, which have a reporting requirement to the SEC. For example, Congress expects to see payment information included in reports such as Forms 10-K, 20-F, 40-F or an Annual Report to Security Holders.

The second area of senatorial concern is the exemptions for confidentiality of contracts. Some industry comments have cited the need for broad reporting exemptions if a company has a confidentiality agreement or the law in the country in which they operate prohibits this reporting. But according to Senator Cardin, the language of Sec. 1504 is very clear that there should be no exemptions for confidentiality or for host-country restrictions. It would be too easy for countries who want to avoid disclosures to simply pass their own law against disclosure, he reasoned. The purpose of Sec. 1504 is to not allow for exemptions for confidentiality or other reasons that undermine the principle of transparency and full disclosure.

The third area is the project level reporting standard and relationship to EITI. Reporting under Sec. 1504 is designed to complement reporting done under the Extractive Industries Transparency Initiative (EITI), he noted, but does not mimic it, and purposefully requires reporting at the project level, disaggregated by payment stream. This is because ElTI is a minimum reporting standard, he said, and the intent of Sec. 1504 was to go beyond these requirements.

Indeed, the EITI encourages implementing countries to innovate, and current practice within EITI-implementing countries clearly demonstrates that countries willingly go beyond these requirements. For example, the senator noted that half of EITI implementing countries have decided to report on a disaggregated basis, by company and payment type. And many have expanded reporting to the sub-national level, as well as to other sectors, and many are considering reporting on social payments. Where possible, he emphasized that SEC rules should align with EIT1 disclosure practices, but Sec. 1504 is clear that reporting should go beyond the EITI's minimum reporting standards.

Recently, counsels to SEC Commissioner Luis Aguilar met with representatives of The American Petroleum Institute, who said that the improper implementation of Section 1504 could cause substantial harm to U.S. companies and end up undermining, rather than promoting, the goal of transparency. Specifically, the Institute cautioned that the required disclosure of commercially sensitive information could provide competitors with insight into bidding strategies, placing U.S. listed companies at a competitive disadvantage. In addition, disclosure of certain detailed information could cause U.S. registrants to violate the laws of foreign countries where they operate or breach existing contracts with host governments.

The Institute asked the SEC to provide an exemption from disclosing payments when foreign laws or regulations prohibit such disclosure, or where such disclosure would result in breach of an existing government contract, as well as an exemption from disclosing information that would result in competitive harm. The Institute also requests that disclosure be limited to material projects. The Institute would also like to see the SEC create a separate, non-audited annual reporting form for Section 1504 information that would not be due until 150 days after the end of a registrant's fiscal year.

Full post as published by Jim Hamilton's World of Securities Regulation on December 10, 2010 (boomark / email).