SEC extractive industries rule: more disclosure evasion hurting investors

by Laura Peterson, Senior Research Advisor

Published on December 11, 2020

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SEC extractive industries rule: more disclosure evasion hurting investors

The U.S. Securities and Exchange Commission (SEC) has just announced that it is due to vote next Wednesday, December 16th, on a long-contested rule intended to increase transparency in the fossil fuel industry that has serious implications for climate risk disclosure. Unfortunately, industry lobbying has so weakened the rule that in its current form, it will not shed any light on financial activity for investors.

The 2010 Wall Street Reform and Consumer Protection (Dodd-Frank) Act included a provision known as Section 1504, requiring companies to disclose payments given to foreign governments in exchange for developing their oil, gas or minerals. These payments, also known as “signature bonuses,” often function as  bribes in the opinion of anti-corruption experts, and have come under scrutiny for slipping through loopholes in laws like the Foreign Corrupt Practices Act.

Section 1504 was added via a bipartisan amendment sponsored by Senators Richard Lugar (R-IN) and Ben Cardin (D-MD), which is why it is often referred to as the Cardin-Lugar amendment. It aimed to neutralize what is known as the “resource curse,” an affliction in which “oil, gas reserves, and minerals…can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability,” in Lugar’s words. The amendment directed the SEC to issue a rule requiring companies to detail their payments in annual reports posted on the SEC website along with other public filings.

The initiative echoed similar steps taken by Canada, Norway, and the European Union, following an extensive civil society campaign. Many in the financial industry supported the effort because it would “provide investors with the information they need to understand corporate exposure to changes in host government policies and international operating conditions,” as Stu Dalheim, a Vice President at Calvert Investments, wrote in 2016.

But the U.S. oil and gas industry fought the initiative, claiming disclosures would put them at a competitive disadvantage with oil companies from other nations, particularly China and Russia. It also claimed the rule would jeopardize operations in a handful of countries that prohibit public financial disclosures, while imposing severe compliance costs.

These arguments derailed the SEC’s first attempt to implement the amendment with a rule proposed in 2010. The American Petroleum Institute, a powerful industry association, filed suit in federal district court to stop its approval, and the court sent the SEC back to the drawing board. Another rule proposed in 2016 made changes deferential to industry, but the 115th Congress rolled back the rule under the Congressional Review Act (CRA). Because the CRA requires new rules to be substantially different from the one rejected by Congress, the SEC was charged with crafting a rule that (1) didn’t resemble either of the first two proposed, while (2) preserving the intent of the Cardin-Lugar amendment.

The latest rule, unveiled in December 2019, achieved the first of those aims but utterly fails on the second. It redefines every standard of disclosure, allowing companies to report only the broadest level of engagement with foreign governments, while adding new exemptions and loopholes that will allow some companies to avoid disclosures altogether. Meanwhile, EU and Canadian laws more stringent than even the SEC’s original rule are in their fourth year of implementation and have successfully compelled disclosures from hundreds of companies.

“The information required to be disclosed through the Proposal would not adequately empower investors to make informed investment decisions, and will be of little value to other consumers of this information,” said Lev Bagramian, a policy analyst with the financial reform organization Better Markets. Bagramian helped draft the Dodd-Frank legislation as a staffer with the Senate Banking Committee. “This is directly contrary to Congress’s intent to require transparency in the resource extraction industry.”

SEC Commissioner Allison Herren Lee also critiqued the current rule, stating: “We are reversing course on nearly every significant feature of this rule and coming down squarely on the side of certain industry commenters in each instance.”

The rule’s long journey through the regulatory system is an object lesson in the industry’s antagonism toward transparency, to the detriment of investors and global health. Neutering Section 1504 has implications that extend beyond the borders of the foreign countries where oil companies operate. Several studies have shown that to meet the target set by the 2015 Paris Agreement, all new extractive exploration and production must stop: in fact, most of the estimated reserves from existing developments will probably have to stay in the ground. Yet an analysis by the oversight group Global Witness found that capital expenditures in oil and gas are expected to rise by $1 trillion over the next decade, with two-thirds of that stemming from investment in new fields. Some of that investment will likely take the form of multi-million-dollar payments to corrupt regimes—the kind the Cardin-Lugar Amendment was introduced to stop.

This refusal to come clean fits a pattern of financial opacity in the fossil fuel industry. The oil and gas industry in particular has gone to great lengths to hide the fact that it enjoys enormous tax breaks and other government subsidies. The entire sector also has shown an unwillingness to reveal internal projections about risks posed by climate change and the world’s transition away from fossil fuels. As the National Whistleblower Center pointed out in its July report, Exposing A Ticking Time Bomb, these deceptions could constitute fraud by withholding material information on climate risks. They also impact the health of the entire financial system and ultimately the planet, as fossil fuel industry consumes financial resources that could go toward low-carbon technologies.

U.S. whistleblower laws can be a powerful tool for stopping such deception. The Dodd-Frank Act legislated some of the most powerful whistleblower protections in the world, establishing an extremely successful whistleblower office at the SEC as well as strengthening protections for commodities and foreign bribery whistleblowers. Since the office’s creation in 2011, the SEC has levied more than $2 billion in financial remedies against corporate wrongdoers, with over $387 million awarded to whistleblowers for their role in achieving successful prosecutions.

Additionally, because Dodd-Frank’s jurisdiction extends to any company traded on U.S. markets and exchanges, whistleblowers located outside the U.S. and whistleblowers who report misconduct outside the U.S. are also eligible for rewards. The SEC has received tips from 123 countries outside the U.S. since the program’s inception.

Both whistleblowers and financial regulators have key roles in exposing financial fraud that results from the failure to disclose climate risk. Weakening Section 1504 of Dodd-Frank deprives investors and oversight bodies of information they need to stop that fraud, and deprives whistleblowers of an avenue to address the wrongdoing they see. That’s why the SEC should scrap this toothless rule and do whatever necessary to legislate the important aims of the Cardin-Lugar Amendment.

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