Challenge to SEC Rules in the United States

In the U.S., Congress passed the Dodd Frank Act in 2010 to implement resource payment transparency. Section 1504 of that legislation required the SEC to make rules describing the specific mechanics for compliance. Interestingly, these rules only apply to public companies under the jurisdiction of the SEC. Private resource companies in the U.S. are therefore exempt from resource disclosure, in direct contrast to the rules in Canada and the EU.

The SEC finally got around to publishing these draft rules in July of 2012. The draft rules reflected the EITI model of project by project, company by company reporting, along the lines of the EU proposals. The draft rules called for each company to file a special disclosure report with the SEC and file it on EDGAR, the public electronic directory used by the SEC for a company’s public filings. These draft rules were the subject of a legal challenge by the American Petroleum Institute (API), in part on the basis that section 1504 did not give the SEC the jurisdiction to force companies to publicly disclose their resource payments. Rather, it only gave the SEC the authority to take each individual company report, then compile the aggregate results into a report, and then make just the summary report available. The Court agreed with the API arguments, and in July of 2013, it vacated the draft SEC rules and asked that the SEC redraft new rules in conformity with the findings of the Court. The SEC has not published any new replacement rules as of April 2015, even though it has stated that it would do so by March of 2015. The latest belief is that the SEC will not publish new replacement rules until the first quarter of 2016, and even that date is not certain.

After the Court decision, the API followed up with a submission in November of 2013. API proposed the so-called compilation report, which would have companies submit payment information to the SEC on a consistent basis for all companies. The SEC would then compile the payment information with all companies into one compilation report, and make such compilation report public. In essence, the API compilation model proposes a “what, how, where” method that would say define a project as “bitumen, oil sands, Alberta”, with no further breakdown. As pointed out in the API submission, this method would mean that each company would submit resource payment information on a consistent basis. The API submission also points out that it would be relatively easy to extract such information from their financial accounting systems.

The reaction from NGOs has been very strong. There have been a number of submissions by various NGOs (Oxfam, Global Witness, Earth Rights, PWYP etc), all of whom said they wanted the new replacement rule to be “a strong rule, substantially identical to the SEC’s earlier rule, that is consistent with the EU rules, and that requires project by project and company by company reporting with no country exemptions”. In effect, the NGO submissions are asking the SEC to ignore the Court ruling.

It would appear that the SEC has little interest in publishing replacement rules, since they likely feel they are caught between a rock and a hard place. It appears that the SEC is doing nothing because it faces a dilemma. If it comes out with a compilation rule model, it will incur the wrath of all the NGOs. On the other hand, if it comes out with a rule substantially similar to the 2012 rule, it will incur the risk that it will be sued again by the API, with a similar Court result that once again sets aside the replacement rules. Given this, it appears that the SEC has gone into radio silence.

This impasse represents a major obstacle to the implementation of resource payment disclosure around the world. The SEC has jurisdiction over a large number (and dollar amount) of companies. It will be very difficult for the EU and Canada to implement rules when the SEC has not passed any rules. It will also be very difficult for companies subject to SEC rules and other rules to comply. Needless to say, different rules for different jurisdictions will make it very difficult to understand any number, and likely result in endless attempts to reconcile numbers.

The bottom line of all this is that this extended delay in the publishing of new rules by the SEC may well delay implementation of resource payment rules in Canada and the EU. At the very least, it will delay implementation of the rules in the United States.