Dodd-Frank and the SEC’s New Rule for Disclosure of Payments by Natural Resource Investors

January 14, 2016

Following legislation, a court case, and much behind-the-scenes wrangling, the US Securities and Exchange Commission has at last published its new proposed rule as mandated by Dodd-Frank in 2010 to require all SEC-registered companies to disclose payments made to governments for the commercial development of oil, natural gas, or minerals. While there is no guarantee that this version of the rule will go forward, the SEC has addressed the two issues on which the US District Court of the District of Columbia vacated the rule the SEC earlier issued in 2012.

The overall objective of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Cardin-Lugar Transparency Provision, contained in Section 1504, is to promote greater transparency in payments made by international natural resource investors, allowing citizens to hold their governments accountable for revenue received from US-registered extractive companies—preventing corruption, and ideally, limiting the resource curse. The provision directs the Securities and Exchange Commission to issue a rule to govern how the Cardin-Lugar Transparency Provision will be implemented.

The original rule issued by the SEC in 2012 was challenged in a court case brought by a coalition of industry associations led by the American Petroleum Institute, the US Chamber of Commerce, and the National Foreign Trade Council. In its 2013 ruling, the District Court vacated the SEC rule, holding: first, that the Commission had misread the provision to compel the public disclosure of the issuers’ reports; and second, that the Commission’s explanation for not granting an exemption for when disclosure is prohibited by foreign governments was arbitrary and capricious.

How the new SEC proposed rule addresses each of these issues is  almost certain to be the subject of renewed controversy.  

Public Disclosure

The District Court acknowledged that Congress had mandated disclosure of payments made by investors to governments in the annual report of the company, but found that the SEC’s conclusion “that the statute unambiguously requires a public filing is a climb up a very steep hill.” 

In response to the Court’s objections, the Commission examined the legislative history of the objective of the Cardin-Lugar Transparency Provision: to advance the US national foreign policy interest in supporting global efforts to improve the transparency of payments made in the extractive industries. The SEC also consulted with the US Department of State, the US Agency for International Development, and the US Department of the Interior about the means to ensure the appropriate measure of transparency. The SEC noted that the United States has since 2013 become a candidate member of the Extractive Industry Transparency Initiative (EITI), which is now considered the global model of how to promote open and accountable management of natural resources, and whose rules for membership now require project-by-project public disclosure of all payments. Finally, the SEC noted that the European Union and Canada have adopted transparency directives and laws that are based on a common understanding of the need for project-by-project public disclose of extractive industry payments by all companies (including US companies) operating within their jurisdictions. 

On the basis of this reexamination of the purpose and intent of Cardin-Lugar Transparency Provision of Dodd-Frank, the SEC reasserted its interpretation of what must be publicly disclosed, and proposed a standard form and electronically tagged format for reporting that will be interchangeable with those required of resource investors for US EITI compliance and those required of all resource investors (including US investors) by EU and Canadian authorities. In short, the SEC says that its interpretation of what the law requires to accomplish its objective is accurate, and the District Court’s objection is not correct.

Disclosure Exemptions

In their suit, the American Petroleum Institute, the US Chamber of Commerce, and the National Foreign Trade Council argued that the laws of some countries (for example, China, Cameroon, Qatar, and Angola) prohibit disclosure of these payments. Oxfam and others argued that no foreign laws specifically prohibit these disclosures. Despite this difference on the facts, the second reason given by the District Court for vacating the original SEC rule was that it did not allow exemption to disclosure when disclosures were prohibited by local law.

In its new proposed rule, the SEC addresses the exemption issue by allowing the Commission to grant exception to the reporting requirement on a case-by-case basis, while avoiding any blanket exemptions. In doing so, the SEC recognizes that in cases where local laws might forbid disclosure of payments, some companies covered by Dodd-Frank could suffer substantial losses if they had to terminate their operations and dispose of their assets under fire-sale circumstances.

The SEC reasoning about how to deal with the possible need for an exemption is subtle. One option, suggests the SEC, might be to provide a blanket exemption for companies operating in countries that have a law prohibiting the required disclosure. But if the SEC were to provide a blanket exemption, this could create a stronger incentive for individual governments to pass laws (or issue regulations) that prohibit such disclosure. Further, if the SEC were to award blanket exemptions, this might also remove incentive for investors to diligently negotiate with host authorities to permit disclosure. By contrast, argued the SEC, “the tailored case-by-case exemptive approach we are contemplating would provide a more flexible and targeted mechanism for the Commission to address potential cost concerns” without creating these perverse incentives.

In fact, the SEC reserves the right in the proposed case-by-case approach to issue a time-limited exemption that could serve to motivate extractive investors to push for changes in host country regulations. This would place the burden of proof on extractive companies to show that they have tried their best to create circumstances in which they can comply with the rule, no matter where they choose to operate.

The SEC requests comments directed specifically at more than eighty questions raised in its discussion of how to interpret and implement the rules by January 25, 2016, and a second round of reply comments by February 16, 2016.



CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.