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From Securities Regulation Daily, September 4, 2013

SEC to rewrite resource extraction rules, authors of Section 1504 urge haste with eye to EU

By Jim Hamilton, J.D., LL.M.

With the financial press reporting that the SEC plans to rewrite the Dodd-Frank resource extraction rules and forego an appeal of a federal district court’s vacating of those rules, the SEC appears to have heeded the guidance of the senatorial authors of Section 1504 of the Dodd-Frank Act, the resource extraction provision. In a letter to the SEC in the wake of the district court’s decision, Sen. Ben Cardin (D-Md.) and former Sen. Richard Lugar (R-Ind.), the co-authors of Section 1504, urged the Commission to promptly revise the rules implementing the statute to take into account the court’s decision and to ensure that implementation stays on track and that the U.S. retains its leadership role in this important anti-corruption and anti-tax evasion effort. The letter was also signed by Sens. Carl Levin (D-Mich.), Ed Markey (D-Mass.) and Patrick Leahy (D-Vt.).

Section 1504 of the Dodd-Frank Act, codified as Section 13(q) of the Exchange Act, directed the SEC to adopt regulations requiring resource extraction issuers engaged in the development of oil, natural gas, or minerals to disclose, in an annual report, payments made to the federal government or foreign governments.

Senatorial guidance. The senators advised that the revised rules should continue to make all reports public and should not allow for host-country exemptions. They believe that the SEC has both the discretion and the authority to retain both of these key aspects of the initial rules, so long as sufficient analysis and jurisdiction is provided in the rulemaking process.

The senators also urged the SEC to be guided by events in the European Union, particularly the timing of the UK and French transposition of parallel European law on the disclosure of resource extraction payments. The UK process aims to have a national requirement in place by October 2014, with disclosures likely in 2016. Securities regulators in other EU nations are expected to roll out implementation soon after the UK and France. All of this speaks to a global priority towards greater corporate transparency in the resource extraction industries, noted the senators, accompanied by a growing international consensus that investors and citizens should have ready access to information about corporate payments to governments on a country-by-country basis.

District court opinion. In American Petroleum Institute v. SEC, federal judge vacated and remanded the SEC regulations implementing the resource extraction payment disclosure provisions of the Dodd-Frank Act because the Commission misread the statute to mandate public disclosure, and its decision to deny any exemption from the disclosure requirement was, given the limited explanation provided, arbitrary and capricious. The Commission fundamentally miscalculated the scope of its discretion at critical junctures, said the court, viewing itself as shackled by the words “report” and “compilation,” when neither could be read to limit its authority. Now informed that it does have more authority under the statute than it thought it had, the Commission may well strike a different balance.

European Union. The European Parliament and the EU Council earlier this year reached agreement on legislation requiring resource extraction companies to disclose payments to governments on a country and project basis. The vehicle to require disclosure of such payments was legislation amending the Accounting Directive. According to Commissioner for the Internal Market Michel Barnier, this change to the directive puts the EU on a level playing field with the U.S., which mandated such disclosure in Section 1504 of the Dodd-Frank Act.

Firms will have to provide this information for each country and each project. There will be no exemptions, even if such a disclosure is not permitted by the host country's criminal law. This means that there will be no loopholes for large companies and that all financial resources for each project worth more than €100,000 will have to be disclosed.

While the EU legislation is broadly similar to the Dodd-Frank Act requirements, it goes further in two respects. First, the EU logging industry is within the scope of the reporting requirement, in addition to the oil, gas, and mining industries; Section 1504 of Dodd-Frank targets only the oil, gas and mining sectors. Second, the EU regulations would apply to large unlisted companies, as well as to listed companies, while the Dodd-Frank Act requirements are restricted to listed extractive companies. The legislation defines a large company as one that exceeds two of the following three criteria: (1) total assets of €20 million; (2) turnover of €40 million; and (3) 250 employees.

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