[co-author: Jung Hwa Song, Law Clerk]
After striking out in its first attempt to formulate a proposed rule to implement the extractive industry payments provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the Securities and Exchange Commission (SEC) is back at the plate with a new proposal. Both are efforts to implement Section 1504 of Dodd-Frank, which requires issuers involved in the commercial development of oil, natural gas and minerals to track and report certain payments they have made to the United States and foreign governments. Under the new proposed rule, such issuers would be required to file special disclosures (Form SDs) for payments that include taxes, royalties, fees (including licensing fees), production entitlements, bonuses and other material benefits, including certain dividends and infrastructure payments. This publicly available, detailed payment information can then be used by multiple stakeholders to increase the accountability of governments receiving payments for their countries’ natural resources and to help shine a light on potential corruption.
The SEC’s proposed rules also align U.S. efforts with those already undertaken in key international jurisdictions, in an effort to build a more coordinated global anticorruption initiative. The SEC draft language closely tracks similar rules that Canada, Norway and the European Union have issued. Those who follow trends in corporate social responsibility, ethical investing and anticorruption will recognize that these rules arise from coordinated transparency efforts among multiple stakeholders, particularly in amplifying the Extractive Industries Transparency Initiative (EITI) guidelines. Since its founding in 2002, the EITI—now a coalition of 49 governments, companies and civil society organizations—has worked to create a global standard for the collection and disclosure of certain information related to the extractive industries. Its aim is to strengthen the ability of citizens to ensure that revenue earned by their governments from natural resources is used for economic growth and social benefit, rather than siphoned off for corrupt purposes.
The SEC’s initial attempt to implement this reporting rule was stymied in July 2013, when the U.S. District Court for the District of Columbia vacated the rule at the behest of a coalition of oil industry associations led by the American Petroleum Institute, the U.S. Chamber of Commerce and the National Foreign Trade Council. The court ruled that the SEC had erred when it construed Dodd-Frank to mandate the public disclosure of the types of payments covered by the rule. The court also deemed that the SEC’s failure to create an exemption for resource extraction issuers operating in countries where domestic law prohibited the disclosure of information about these payments was arbitrary and capricious.
After more than a year passed since the decision to vacate the rule without the SEC releasing a replacement, Oxfam America, Inc. (Oxfam) filed suit against the SEC in September 2014 in the U.S. District Court of Massachusetts arguing that the SEC had not met its duty under Dodd-Frank to issue the rule. On September 2, 2015, the court agreed and ordered the SEC to issue a replacement rule on an expedited basis.
The SEC issued its proposed replacement rule on December 11, 2015, and has invited public comments in two rounds. The SEC requests initial comments by January 25, 2016, and a second round of reply comments by February 16, 2016, which may respond only to issues raised in the initial comment period. The public notice for the SEC’s proposed rule numbers over 200 pages and is footnoted with over 400 references to its prior rule and to public comments received about the rule both before and after its initial vacatur. Moreover, the SEC requests comments to over 80 specific questions regarding its proposed rules. Those affected by the rules will have some significant holiday reading to get through before they can begin to offer the detailed comments the SEC hopes to elicit and respond to before finalizing the rule.
