Statement at SEC Open Meeting: Proposed Rules to Implement Section 1504 of the Dodd-Frank Act ("Disclosure of Payments by Resource Extraction Issuers")
Commissioner Daniel M. Gallagher
Aug. 22, 2012
Once again, our expert staff in the Division of Corporation Finance have tackled a difficult assignment — one they’d never have wished on themselves. I want to join in my colleagues’ thanks for those good efforts, noting Paula Dubberly’s leadership, and the expert lawyering of Tamara Brightwell, in particular. I also want to note with appreciation the efforts of the Risk Fin staff. And Michael Conley, our Deputy General Counsel, has done his usual extraordinary work to illuminate legal considerations in connection with this rulemaking.
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The underlying idea of this rule is that governments should be responsive to those they govern — a great and classic idea at the very heart of American democracy and one central among longstanding U.S. foreign policy goals. The Release puts it this way:
“Congress intended that the rules issued pursuant to section 13(q) would increase the accountability of governments to their citizens in resource-rich countries for the wealth generated by those resources. This type of social benefit differs from the investor protection benefits that our rules typically strive to achieve”1
The idea is that if U.S. registered resource extraction issuers make the disclosures we will require, the governments that receive their legitimate resource extraction payments will, to that extent at least, be more accountable to the people they govern.
It is, nevertheless, fair to point out that the SEC’s mission is more limited. We are charged with taking action to protect investors, and to “promote efficiency, competition, and capital formation.”2 This rule will be a very indirect route to achieving any sort of global governmental accountability. Still, using U.S. influence to promote good government around the world is an unimpeachably good and legitimate congressional objective. Unfortunately, I do not think the SEC has any realistic prospect of achieving the desired result, although I am fully convinced that we will impose significant costs on issuers — and thereby shareholders — in the process. As I said earlier, the SEC just isn’t the right tool for this type of social policy exercise, as we should know from past experience.3 As the Chairman stated when proposing the “Conflict Minerals” rulemaking nearly two years ago, "expertise about these events does not reside within the Commission.”4
As an independent agency, the SEC should have played a significant role in informing Congress about the pitfalls of mandating rulemakings that are not germane to our mission. In providing that advice, the Commission would make it clear when such mandates conflict with our mission, as well as our well-established obligation to conduct a thorough cost-benefit analysis in our rulemakings. With respect to Section 1504 in particular, the SEC would stress that in Section 23 of the Exchange Act, Congress prohibited us from promulgating rules — such as the rule we promulgate today — that burden competition for a purpose not necessary or appropriate in furtherance of the purposes of the Exchange Act. Assuming those discussions occurred, they obviously were unsuccessful — hence, our two-year-plus struggle with the Section 1504 mandate, to say nothing of Section 1502.
Some have pressed the argument that we have no choice here — that at the end of the day, we have to dutifully implement the congressional mandate without at the same time worrying about conflicts with our mission. To the contrary, we have considerable choice as to how we do nearly everything we do. That’s as true if the recommended action arises sua sponte from within the SEC, by external suggestion, or, as in this instance, out of a congressional mandate. Indeed, the release frequently notes that the Commission has had to exercise discretion in a variety of areas to arrive at the version of the rule we are asked to adopt this morning.
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Commenters provided many thoughtful reactions to the proposed rule. If you’ve read the comment file, you’ll know there’s a broad range of very strongly held views on how we should implement section 1504. A number of comment letters pointed out potential problems with the proposed rule. They raised concerns about making competitively significant information available to competitors. Issuers pointed out that they don’t keep the required information in the way we seemed likely to require it to be provided — and stressed the costs they would incur by assembling and providing it to us in a novel way. Some opined that the analysis of the economic effects of the proposed rule, notably the evaluation of its benefits against its costs, was thin and speculative. At least one commenter suggested that we re-propose for public comment a revised rule, and that the cost-benefit analysis should be much more rigorous. But we are not here today to re-propose a rule; that suggestion was rejected.5
With respect to the comments on our economic analysis, I would note that in conducting such an analysis, we cannot accept, untested, the benefits Congress seeks as justifying whatever decisions we make or burdens we impose. We are obligated to evaluate the various ways we could try to achieve any intended benefit. The courts have made that plain and, it seems clear by now, we ignore their repeated messages at our peril.
In any event, even if I had no objection in principle to efforts to achieve social and foreign policy objectives through the disclosure requirements of the securities laws, I am not able to support this rule today, because the analysis is incomplete. The costs this rule will impose are clear enough. Its intended benefits, by contrast, are socio-political and aspirational in nature, worthy but indeterminate — although they are presumed to justify all costs. And certain key discretionary choices made by the Commission’s rule will have the effect of increasing the rule’s burdens.
So I stress, once again, that we are not at liberty to ignore selectively the longstanding congressional mandate to consider the impact our rulemaking is likely to have on competition.6 We are not entitled merely to assume that the rules we adopt will “promote efficiency, competition, and capital formation.”7 Nor, for some rulemaking efforts, are we free to assume, first, the benefits themselves, then that they outweigh any costs entailed by the actions we may take. There is no legal basis for doing that. Congress has never said we should. The courts have been emphatic that we should not.
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From all of the key discretionary choices reflected in the text before us today, I want to highlight just a couple of the most significant — specifically the de minimis level and the meaning of project.
First, section 1504 provides that issuers need report “payments” only if they are “not de minimis.” So, several commenters asked, why shouldn’t the term “not de minimis” be defined to mean “material”? After all, nothing that is “de minimis” could also be “material.” And, by the same token, everything that is “material” is also “not de minimis.” Instead, today’s rule sets the “not de minimis” threshold at just $100,000 by payment category per fiscal year. The virtue of that, or any other dollar figure for that matter, is that it is clear. But it is very unlikely that there is any reporting company affected by this rule for which $100,000 is “material.” In other words, viewed from the standpoint of any extractive industries issuer, the release has defined “not de minimis” to mean “de minimis.”
The release neatly avoids this problem — or tries to — by assessing what is “not de minimis” from the standpoint not of the reporting issuer, but of the host country.8 Well, I don’t claim to know, but I’ll bet that there aren’t many, if any, resource-rich countries as to which a $100,000 payment stream per fiscal year would be anything other than de minimis — let alone material.
I am not at all persuaded that the statute’s use of the undefined term “not de minimis” excludes adopting a materiality standard.9 And, while it would have been reasonable to adopt the usual materiality standard viewed from the issuer’s perspective, it is certainly conceivable that a level below that amount might also have made some sense. But let’s be clear. As a practical matter, a $100,000 threshold reflects a decision to exclude nothing.
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Another core concern for commenters was the definition of "project," the unit for which issuers must disclose their payments. In light of the clear legislative purpose of section 1504, it would seem entirely appropriate to require resource extraction issuers to provide total payment information by country. A plain language reading of section 1504 to define project on a country level would eliminate much of the competitive risk companies will incur in furnishing the required payment information to the Commission pursuant to today’s rule. Many commenters that will be subject to this rule pointed out the competitive disadvantages they will incur if they have to make public the specific payments they report to us under the proposed rule. They told us that their negotiating positions and cost structure with respect to particular host governments would be made clear to their competitors, some of which would be foreign companies that do not file annual reports with the SEC.
And let’s be clear; we’re talking about real competition. Although it would be natural to assume that our large and familiar domestic oil and gas companies fill the list of the world’s top ten, that isn’t the case. State-owned oil companies, some of them truly huge even by reference to our largest domestic publicly held oil and gas companies, are major competitors. I am talking about national oil companies in Russia, China, Iran, and Venezuela among others. These companies do not operate in the highly transparent, intensely regulated world of U.S. issuers. And, they will reap competitive advantage through today’s rules.
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Section 1504 says: “To the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under the rules”10 — meaning what companies submit to the SEC pursuant to the section 1504 requirement. So, given the governmental accountability aims of section 1504, we should wonder why an SEC compilation would not be a public enough way to make resource extraction issuers’ country-payments public?
The release answers that particular companies’ specific payment streams must be made public, “because we believe Section 13(q) requires resource extraction issuers to provide the payment disclosure publicly and does not contemplate confidential submissions of the required information.”11 That’s in the “Economic Analysis” section under “costs.” But let’s take section 1504 on its actual terms. First, nothing at all in section 1504 requires that the information issuers furnish to us should be made public in the form provided to us. Nothing requires publicly linking particular companies with the payments they make. Doing so will not advance the statutory purpose at all, as compared to the eminently “practicable” solution of making the SEC’s compilation of such payments, aggregated by country, public, as is contemplated by the plain language of section 1504.
What a particular oil company paid for a particular concession or lease, or any specific “project,” regardless of how defined, is, in itself, irrelevant to achieving the overall statutory objective. What is important is knowing what that payment, along with all other similar payments covered by section 1504 adds up to, by country. Viewed in terms of the stated purpose of section 1504, what Congress thought would be useful was the aggregate number by country — the total amount a particular government was taking in from all resource extraction issuers for the privilege of extracting the nation’s resource patrimony. It’s that amount for which Congress sought to make particular governments, including ours, accountable to their citizens.
Again, making particular companies’ specific resource extraction-related payments public will, however, put them at a competitive disadvantage, especially as against major foreign competitors that do not file annual reports with the SEC. Foreign resource extraction issuers will get this competitive “leg-up” without incurring any correlative cost, either in terms of competitively sensitive information made public, or direct expenses of meeting the filing obligation — to say nothing of the Section 18 liability overhang that filers of Form SD will necessarily have to bear.
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This rule will, moreover, force companies that file Form SD with us under this rule to risk violating host country law — which may, it is important to remember, include national security laws not specific to the extractive industries. It may even force companies to offend local sensibilities to such a degree as to put their employees and operations at risk, or it may cause companies to pull out of certain countries altogether.12 That is what a number of commenters have told us. We did not need to do that.
We could have implemented section 1504 fully without taking those risks and imposing those costs on resource extraction issuers that file with the SEC. We could have required only that an SEC compilation of the relevant payments be made public.13
We have, in sum, rejected a plain language reading of section 1504 that would minimize the competitive risk and lower the costs of our rule, but that would fulfill in all respects the legislative intent manifest in the provision’s plain language. The cost-benefit analysis within the 70 pages headed “Economic Analysis” did not seriously consider that. And, given its complete absence in the proposing release, the Commission would have to re-propose to give the public a meaningful chance to consider its merits.
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With all that in mind, I want to be very clear: I care deeply about improving the accountability of governments — even our own — to those they govern. I do not, however, think the SEC is the right tool for that job. We have no expertise in that area. Congressional mandates cannot alter that fact. Conclusory policy statements are not enough. We are bound by statute and encouraged by abundant judicial precedent to demonstrate an empirically sound foundation for the actions we take. And we have no reason to think the SEC will succeed in achieving complex social and foreign policy objectives as to which the policymaking entities that do have relevant expertise have, to date, largely failed.
I am sorry that I cannot support this rule, however well intentioned it may be. And despite my “no” vote, I want, again, to recognize the unflagging good work and incredible professionalism of our staff.
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I have no questions.
1 Rel. at 142; see also Rel. at 146, text accompanying note 502.
2 Securs. Act, sec. 2(b); Exch. Act, sec. 3(f).
3 See, Commission Guidance Regarding Disclosure Related to Climate Change (Feb, 2, 2010).
4 Statement by Chairman Mary L. Schapiro, SEC Open Meeting, December 15, 2010 (“Specialized Disclosure”).
5 Rel. at 141 (“we do not believe that a re-proposal is necessary”). But see, e.g., letter from American Petroleum Institute (January 19, 2012), available at www.sec.gov/comments/s7-42-10/s74210-121.pdf.
6 Exch. Act, sec. 23(a)(2), 15 U.S.C. 78b. Section 23(a)(2) demands a critical analysis of whether a proposed rule “would impose a burden on competition not necessary or appropriate in furtherance of the purposes of” the Exchange Act. See also, Exch. Act, sec. 2 (specification of purposes of Exchange Act).
7 Exch. Act, sec. 3(f); Securs. Act, sec. 2(b).
8 Rel. at 75-76.
9 Rel. at 75.
10 Sec. 1504 at para. (2)(A).
11 Rel. at 159.
12 See, e.g., Rel. at 165, 203-07.
13 Sec. 1504 at (3)(A).