The Issues of Contention in Interpreting and Implementing Section 1504 of Dodd-Frank Act That Would Have an Impact on Transparency

Law in the Pipeline in Foreign Countries

Dong Keun Lee

May 24, 2012

This is a draft suitable neither for an official use nor for a circulating purpose. Citation was intentionally omitted when it was only to avoid plagiarism, and does not always follow Bluebook format, either. If you need further information on this note, please, email me at adiosme@gmail.com

Page 2 is Intentionally Left Blank

Introduction (4) What is behind Section 1504 (4) Resource Curse (4) Investor Protection (5) Global Trend of Transparency (6)

A History of Development on Transparency Movement (7) Overarching Issues in Interpreting and Implementing Section 1504 (9) (i) Competitive Concern (ii) Cost-efficiency Concern (10) (iii) Effectiveness Concern (iv) EITI Standards Concern (11)

Legislative Intent of Section 1504 (12) The Protection of Local People (13) The Protection of Investors

Companies Subject to the Mandatory Disclosure under Section 1504 (13) Commercial Development of Oil, Natural Gas or Mineral Exemption to Smaller Reporting Companies, Foreign Private Issuers, and Government-Controlled Issuers (14) The Types of Payments (15) Payments for Infrastructure, Social/community, and Security Arrangements (16) Tax (17) Compilation (18)

De Minimis (18) The Project-Level Disclosure (19) The Exemption When Prohibited by Law and/or Contract (21) Conclusion (22) The Language of 15 USCS 78m(q) (24)
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Introduction The Dodd-Frank Wall Street Reform and Consumer Protection Act1 ("Dodd-Frank Act"), which was enacted on July 21, 2010 primarily in response to the financial crisis beginning in 2007, was a victory for civil society organizations that have campaigned for transparency in the extractive industries for decades. Under section 1504 of Dodd-Frank Act2 (Section 1504), oil, gas and mining companies are required to disclose what they pay to governments in the countries where they operate as part of their annual filings to the U.S. Securities and Exchange Commission (SEC). Through this transparency law that mandates the disclosure of payments information, it provides the poorest people in resource-rich developing countries (Local People) with information necessary to combat oil and mineral sector corruption and demand government accountability for responsible resource use. It also provides investors with information that is useful in socially responsible investing and that helps them assess risk associated with resourceproducing operating environment. This brief note3 introduces the most contentious issues in interpreting and implementing Section 1504 that are currently debated in the SECs rule-making process. Once resolved, they would have a significant implication for future legislations of the kind in the pipeline both in European Union4 (EU) and Republic of South Korea5 (Korea) by creating a new global standard, as Section 1504 is the first of the kind that mandates the disclosure of payments information at the project level. To be clear, this note is not intended to present a deep analysis of the issues that could lead you one way or the other, in part because of a lack of authoritative literature that delves into them enough to determine the credibility of conflicting factual evidence produced by competing interest groups. The primary sources of this note are comments6 submitted to SEC throughout its rule-making process by a wide range of stakeholders, notably industries and advocates. What is Behind Section 1504 Resource Curse The transparency movement arose out of concerns about resource curse that refers to the seeming paradox that large reserves of oil or other resources that could be a pathway to poverty reduction and stable economic growth if properly managed, often negatively affect a countrys economic growth, corruption level and stability7 like in Nigeria and Sudan. How does the transparency
1 2

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). Dodd-Frank Act 1504(2)(A) (amending Section 13 of the Securities Exchange Act of 1934), codified at 15 U.S.C. 78m(q)(2)(A). 3 The purpose of citation, here, is to help you with further research, as opposed to avoiding plagiarism. Please, no plagiarism charges. If I see a possibility of publishing or circulating this note, formal citation would be adopted. 4 EU is close to making a transparency law. See PWYP International, Pace gathers for strong extractive transparency laws in Europe, January 26, 2012, http://www.publishwhatyoupay.org/resources/pace-gathers-strongextractive-transparency-laws-europe. 5 About eleven Congressmen in Korea proposed a legislation pursuing transparency like Section 1504, which failed to make it to Congress floor. 6 http://www.sec.gov/comments/s7-42-10/s74210.shtml. 7 The Petroleum and Poverty Paradox: Assessing U.S. and International Community Efforts to Fight the Resource Curse, S. PRT. NO. 110-49 (2008) (Paradox Report), p. (v).

movement embodied in Section 1504 alleviate the impacts of resource curse? With little to no information available publicly about the revenues received from natural resource extraction, easy opportunities arise for unscrupulous rulers and officials to pocket the money for their own private use and for crooked companies to engage in corrupt practices.8 When oil revenue in a producing country can be easily tracked, that nations elite are more likely to use revenues for the vital needs of their citizens and less likely to squander the wealth for self-aggrandizing projects.9 Using the payments information is not a silver bullet, but the most effective and viable way as a necessary ingredient for accountability. Why should the U.S. intervene in the situation, however deplorable, taking place thousands miles away with no American involved? The U.S. is the primary beneficiary of multinational corporations (MNCs), as Americans account for less than 5% of the world population, but consume 25% of the world oil production at a price cheaper than it should be. Furthermore, overcoming the impacts of this curse also serves the interest of the U.S. by helping promote U.S. policy goals of poverty alleviation, good governance and energy security.10 The transparency movement promotes energy security, because supplies are more reliable and risk premiums are diminished, when political organization in oil-rich states becomes stable.11 It was in this spirit that President Obama in his September 22, 2010 speech at the United Nations Millennium Development Goals Summit said, Thats why we now require oil, gas and mining companies that raise capital in the United States to disclose all payments they make to foreign governments. And its why I urged the G20 to put corruption on its agenda and make it harder for corrupt officials to steal from their own people and stifle their nations development.12 The U.S. addresses this curse by regulating corporations, one of two parties of contracts for resource extraction, because they are the only relevant stakeholder that may be subject to the U.S. regulatory jurisdiction. Under the principle of sovereign equality,13 it may not impose legal restrains on producing countries, the other party of the contracts. The Local People have little to no recourse in the U.S.14 under the principle of non-intervention in domestic affairs,15 and are left without any domestic remedy in the country of their nationality where the court systems and other means of policing violations are ineffective the very situation MNCs are exploiting. Oil and gas industries are often accused of turning blind eyes to resource curse and working closely with governments of producing countries. Investor Protection
8

Henry Parham, Mabel van Oranje, Publishing What We Learned: an Assessment of the Publish What You Pay Coalition, Publish What You Pay, 2009, at 27. 9 The Petroleum and Poverty Paradox: Assessing U.S. and International Community Efforts to Fight the Resource Curse, S. PRT. NO. 110-49 (2008) (Paradox Report), p. (v). 10 Id. p.(v). 11 Id. p. (vi). 12 Remarks by the President at the Millennium Development Goals Summit in New York, New York, The White House, http://www.whitehouse.gov/the-press-office/2010/09/22/remarks-president-millennium-development-goalssummit-new-york-new-york. 13 U.N. Charter art. 2(1). 14 Corporate aiding and abetting cases under the Alien Tort Statute involve individual(s) who sustained damage inflicted by specific acts of corporations, whereas transparency movement takes a structural approach. 15 U.N. Charter art. 2(7).

The other group of beneficiary is investors who need payments information for risk-assessment as well as socially responsible investing. It is not difficult to make intuitive sense of the linkage between payments information and prudent investments -- the investors choose a project in which the payments for it that are made public under transparency law benefit a society as a whole. It needs further explanation, however, to make logical sense of the use of payments information in risk-assessment. Resource-producing operating environments have unique exposure to material country-specific, tax and regulatory, and reputational risks that current reporting required of resource extraction issuers does not address adequately. The risks extend to the operations of resource extraction issuers in relatively stable developed countries as well, because financial risks associated with unanticipated natural resource tax and policy changes including resource nationalization persist.16 The exposure to country-specific risks include political risks, such as the production disruptions due to conflict and the expropriation of assets or economic risks involving changes in exchange rates and inflation.17 Understanding a companys taxation, royalty and other related obligations is particularly important in the extractive industries. First, these rates are often higher and subject to more complex regulation than in other sectors. Second, without a country-level appreciation of the tax regime, analysts may have difficulty forecasting the cost curves necessary to estimate when the extraction of a resource will become uneconomical. This is more so where government mismanagement or corruption are prevalent or industry regulations involving taxes and licensing may otherwise be subject to unexpected change. For example, in 2006 the government of Venezuela abruptly raised royalty rates in the countrys Orinoco fields from 1 percent to 16.67 percent. A companys reputation and financial prospects can be harmed if it is perceived as not paying its fair share to a host government or through association with corrupt government practices. For example, the tax exemption offered by Guatemala to a Canadian gold mining company Glamis Gold in 2003 was vacated in 2006, following intense global criticism that the company was not making a sufficient contribution to the economy of Guatemala. Global Trend of Transparency Section 1504 can be seen as part of global trend of increasing prevalence of environmental, social and governance data in financial reporting. As demand for the data necessary to assess the impact of corporate policies and programs regarding environmental, social and governance issues is increasing, the United Nations-backed Principles for Responsible Investment Initiative,18 a network of international investors, has called for disclosure of information such as that required by Section 1504 due to its importance in their investment analysis and decisionmaking processes. The International Accounting Standards Board is considering an International
16

See, e.g., Juan Forero, Argentina Takes Over Spanish Energy Firm YPF, National Public Radio, May 3, 2012, http://www.npr.org/2012/05/03/151915909/argentina-takes-over-spanish-energy-firm-ypf. 17 See, e.g., Mbachu, Dulue and Kwiatkowski, Alexander, Shells Nigerian Exports Face 5th Month of Disruption, Bloomberg. June 17, 2009, http://www.bloomberg.com/apps/news?pid=20601085&sid=a__xSA7yEMDA. 18 http://www.unpri.org/.

Financial Reporting Standard requiring country-by-country royalty and tax reporting by companies in the extractive industries.19 While both resource curse and investor protection are driving force behind Section 1504, it piggybacked on the global trend of transparency to which I will turn as part of an effort to offer a historical backdrop to the implementation of transparency movement in the U.S. context. The History of Development on Transparency Movement Section 1504 is a culmination of decades-long transparency movement in a sense that it is the first of the kind that requires -- rather than encourages resource extraction issuers to disclose disaggregated information about payments. How did the transparency movement get started? Like the Love Canal disaster20 led to the Comprehensive Environmental Response Compensation and Liability Act, Angola became the focus of the first ever multi-stakeholder discussion on revenue transparency, as much of the original non-governmental organization (NGO) researches originated out of Angola. Those researches21 investigated the role of oil companies and private banks in Angolas civil war, and concluded a large portion of Angolan revenues from multinational oil companies enrich a small class of ruling political elites rather than supporting development in Angola. As such, several NGOs effectively made the case for revenue transparency in Angola and, thereby, laid out much of the ground work for the establishment of Publish What You Pay22 (PWYP) in June 2002, a global network of civil society organizations that has taken the lead in campaigning for transparency in extractive industries. It played the most active role in the legislation of Section 1504, participated in the SEC rule-making process by submitting a host of comments, and is currently working closely with EU legislators to enact transparency law that would serve the best interest of Local People and investors. Interestingly, George Soros, a founder and chairman of the Open Society Institute, was instrumental in the establishment of PWYP by serving as its public spokesperson23 and providing financial support.24

19

International Accounting Standards Board, Discussion Paper on Extractive Activities, April 10, 2010, http://www.iasb.org/NR/rdonlyres/735F0CFC-2F50-43D3B5A10D62EB5DDB99/0/DPExtractiveActivitiesApr10.pdf. 20 Eckardt C. Beck, The Love Canal Tragedy, http://www.epa.gov/history/topics/lovecanal/01.html. 21 See, e.g., Global Witness, A Crude Awakening: The Role of the Oil and Banking Industries in Angola's Civil War and the Plunder of State Assets, 1999, http://www.globalwitness.org/sites/default/files/pdfs/A%20Crude%20Awakening.pdf; Human Rights Watch, The Oil Diagnostic in Angola: an Update, March 1, 2001, http://www.hrw.org/news/2001/03/01/oil-diagnostic-angolaupdate; Oxfam International, Angolas Wealth: Stories of War and Neglect, September 2001, http://policypractice.oxfam.org.uk/publications/download?Id=364651&dl=http://oxfamilibrary.openrepository.com/oxfam/bitstr eam/10546/114083/1/bp02-angola-wealth-060901-en.pdf. 22 http://www.publishwhatyoupay.org/. 23 See Publish What You Pay International, George Soros and NGOs call for rules to require corporations to disclose payments, June 13, 2002, http://www.publishwhatyoupay.org/fr/resources/george-soros-and-ngos-callrules-require-corporations-disclose-payments. 24 See Publish What You Pay, How is Publish What You Pay funded?, http://www.publishwhatyoupay.org/about/funding; see also Open Society Foundations, OSI's Revenue Watch Program Becomes Independent Institute, June 30, 2006, http://www.soros.org/initiatives/cep/news/rwi_20060630.

George Soros wrote to then-UK Prime Minister Tony Blair to encourage him to take a lead on this subject, and apparently caught his attention. The UK government took action at the World Summit on Sustainable Development in Johannesburg in September 2002 by announcing the establishment of the Extractive Industries Transparency Initiative25 (EITI) in an effort to bring together the relevant stakeholder groups to develop joint solution to resource curse.26 The initiative was launched in 2006 with a sophisticated multi-stakeholder governance and accountability structure. The EITI guidelines27 provide a global, voluntary framework through which companies publish what they pay and governments publish what they receive in an EITI report. Eighteen countries28 and sixty of the largest oil, gas and mining companies29 are committed to supporting the EITI. What I consider to be the biggest accomplishment of EITI in terms of the direction in transparency movement is that recourse curse, which used to remain within the realm of civil society, made it to the agenda of institutions. Through the process of creating, implementing, and adjusting EITI guidelines, though a voluntary measure, the EITI set a platform for discussions on resource curse and investor protection among governments, companies, civil society groups, investors, and international organizations30 relevant stakeholders. The continuous discussion created, kept up, and intensified the momentum for payments information disclosure, which knocked the door of U.S. Congress in 2008. In the context of the U.S., at the G8 Summit 2004, the U.S. endorsed EITI31 only to create symbolic meaning. It did not bring revenue transparency to the attention of public at the domestic level nor did the U.S. government make an effort to take a follow-up step. A transparency law was first introduced in September 2008 in the House of Representatives Financial Services Committee as the Extractive Industries Transparency and Disclosure Act32 (H.R. 6066). In September 2008, the Senate held two hearings on the issue of natural resource extraction and accountability -- the first one titled Resource Curse or Blessing? Africa's Management of Its Extractive Industries33 and the other Extracting Natural Resources: Corporate Responsibility and the Rule of Law.34 In September 2009, the Energy Security

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http://eiti.org. For the history of EITI in general, http://eiti.org/eiti/history. 27 For EITI Rules, http://eiti.org/files/2011-11-01_2011_EITI_RULES.pdf. 28 http://eiti.org/supporters/countries. 29 http://eiti.org/supporters/companies. 30 See, e.g., the International Monetary Fund, Guide on Resource Revenue Transparency, 2007, http://www.imf.org/external/np/fad/trans/guide.htm; World Bank Group, World Bank Group and Partners Launch EITI++, April 12, 2008, http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21727772~pagePK:34370~piPK:34424~t heSitePK:4607,00.html; Strengthening Transparency in Industries, U.N. Doc. A/RES/62/274 (September 26, 2008), http://www.un.int/azerbaijan/pdf/N0748015_transp.pdf. 31 http://www.g8.utoronto.ca/summit/2004seaisland/corruption.html. 32 https://org2.democracyinaction.org/o/5399/images/HR6066_EITD%20Act_May15_2008.pdf. 33 http://www.foreign.senate.gov/hearings/resource-curse-or-blessing-africas-management-of-its-extractiveindustries. 34 http://www.judiciary.senate.gov/hearings/hearing.cfm?id=e655f9e2809e5476862f735da1415b38.

through Transparency Act35 (S. 1700), on which Section 1504 is modeled, was introduced by Senators Ben Cardin (D-MD) and Dick Lugar (R-Ind). Section 1504 set the specific parameters on payments information disclosure more stringent than EITI standards. For example, the country level disclosure is sufficient under EITI standards, whereas the project level disclosure is required under Section 1504. SEC proposed a rule implementing Section 1504, Disclosure of Payments by Resource Extraction Issuers36 (Proposed Rule) in December 2010, which was by and large hailed by civil society organizations. In an effort to make a Final Rule more business friendly than the proposed one, industries have vigorously participated in the process of final rule-making by submitting barrels of comments to SEC. In the meanwhile, SEC keeps delaying issuing a Final Rule, which is more than one year overdue.37 Advocates in civil society organizations have concerns about the delay: (i) SEC might step back from its initial position and come out with a Final Rule favoring business interests; (ii) if so, it can ignite domino effect on EU and other transparency laws in the pipeline; (iii) and, regardless, the delay itself allows industries to buy time. Overarching Issues in Interpreting and Implementing Section 1504 In interpreting and implementing Section 1504, industries and advocates seem to agree to the ambitious goal of creating a disclosure model that would achieve the revenue transparency objectives, whilst also being practical to implement and meaningful to users of the information. Faced with each point of contention, however, they take different often opposing positions that reflect the interest of each stakeholder. There are four claims I believe underlie almost every position taken by industries on each issue: (i) the required disclosures will create competitive asymmetry by forcing regulated issuers to reveal sensitive information to their competitors and by making companies not subject to its reporting requirements more attractive to resource-rich countries who do not want their payments disclosed; (ii) the cost to comply collect and report payments information amounts to a unilateral sanction on U.S.-listed companies without offering any corresponding benefit in terms of transparency; (iii) given that non-U.S.-listed companies now dominate global energy markets, adopting an expansive view of Section 1504 would likely yield less transparency; and (iv) EITI standards should be adopted as closely as possible. (i) Does Section 1504 unfairly put U.S.-listed companies at a competitive disadvantage? Industries made two distinct claims: first, companies subject to this disclosure regime under Section 1504 will be less attractive in the eyes of foreign governments who do not want their payments disclosed, or, in the alternative, the release of commercially sensitive information will
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http://www.gpo.gov/fdsys/pkg/BILLS-111s1700is/pdf/BILLS-111s1700is.pdf. 75 Fed. Reg. 80,978 (Dec. 23, 2010), http://www.sec.gov/rules/proposed/2010/34-63549fr.pdf. 37 EarthRights International (ERI) wrote a letter to SEC, warning that a suit will be filed against SEC for delay in issuing a Final Rule implementing Section 1504 after thirty days of the date of the letter, April 15, 2012 when SEC has missed the statutory deadline by 365 days, http://www.sec.gov/comments/s7-42-10/s74210-384.pdf; see also ERI Files Revenue Transparency Lawsuit on Behalf of Oxfam America, EarthRights International, May 16, 2012, http://www.earthrights.org/legal/eri-files-revenue-transparency-lawsuit-behalf-oxfam-america.

allow competitors to utilize this information in unfair competition with issuers subject to Section 1504. In response to the first claim, advocates argue, as I will further explain later in the effectiveness concern, that a vast majority of multinational oil companies are subject to Section 1504 and that the executive will successfully encourage U.S. trading partners to pass similar legislation as was the case with Foreign Corrupt Practices Act (FCPA). In response to the second, advocates argue that the information to be disclosed is not commercially sensitive one, such as existing contract, contract terms, business models, proprietary technology, or confidential communications. Payments information is just one of a wide array of complex factors in the commercial realities of deal-making in the extractive industries. The success of companies with robust voluntary disclosure practices suggests that disclosure practices in general are unlikely to weigh heavily among the range of factors upon which competition is based. Advocates also argue that detailed information on bonus payments and lease fees is already readily available within industry circles, such as confidential industry databases maintained by Wood Mackenzie38 and public databases maintained by the US Department of the Interior.39 (ii) Is Section 1504 a cost-efficient measure to promote transparency? The arguments put forward by industries are two-fold. First, it is a misunderstanding that companies must already record most or all of the information on which these disclosures would be based for their own reporting purposes. The other one is that the cost to comply will be much more than SEC estimates. Advocates have three level responses. First, the evidence to support the arguments by industries is not sufficient. Industries should provide more specific evidence that shows SECs estimation of cost to comply is wrong. Second, the burden of compliance costs associated with project-level reporting, including those related to necessary updates to internal controls and an expanded auditing system, is unlikely to outweigh the public and investor interests served by the disclosure of payment information under Section 1504. Lastly, civil society does not demand beyond business practice. The most logical interpretation of the term project is to equate it to the origination of the payment streams to be reported under Section 1504. (iii) Can Section 1504 be effective given the dominance by non-U.S.-listed companies of global energy markets? Industries argue that Section 1504 fails to capture payments made by non-SEC registrants which have significant influence on the global energy market. A comment from industries suggests multinational oil companies now control less than 10% of the worlds oil and gas resource base, whereby the disclosure under Section 1504 is only assured of reaching 10% of the global energy sector. Another comment suggests only 60% of the largest companies within extractive industry, based on the Forbes Global 2000, are U.S. listed companies. Furthermore, some U.S. listed companies, such as Chinese national oil company with capacity to attract domestic fund, are likely to deregister because of the intrusiveness of Section 1504.

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http://www.woodmacresearch.com/cgi-bin/wmprod/portal/corp/corpAboutUs.jsp. http://www.blm.gov/wo/st/en/info/newsroom/Energy_Facts_07/statistics.html.

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On the other hand, advocates maintain most leading international oil companies are subject to reporting obligation under Section 1504.40 Deregistration is unlikely, they also maintain. Companies deregister not because of an unwillingness to comply with new regulations, but because they are poor performers, have lower growth opportunities, and have a financing surplus.41 As such, the factual question of how much portion of companies are subject to Section 1504 is also contested. Advocates put forward a fallback argument by taking an example of FCPA. The executive successfully pursued an international treaty and encouraged U.S. trading partners to pass similar legislation as FCPA to further mitigate any possible disadvantage, which in turn served to level the playing field. Basically advocates expect that the same thing will happen to Section 1504. Denying that FCPA leveled the playing field, industries cited a report42 prepared by the Commerce Department that said U.S. business continued to find themselves outflanked in international competition as a result of the broader scope of US anti-bribery laws, resulting in the loss of billions of dollars in exports and an untold number of US jobs. (iv) How closely should EITI standards be adopted? The strongest claim industries made is that SEC should adopt EITI standards, which are less intrusive than reporting requirements under Section 1504, as closely as possible, basing its claim on the explicit reference to EITI in Section 1504.43 Industries also pointed out advantages of adopting EITI standards from a policy perspective. For starter, EITI guidelines rose to wellsettled international standards widely accepted and supported by all relevant stakeholders, including governments, companies, civil society groups, investors, and international organizations. It would be fair to say EITI guidelines currently serve as corporate best practice. With the success of EITI guidelines in mind, industries emphasize the advantage of having a single international standard, such as comparability of information across companies and governments, leveling playing field, and avoiding incurring additional costs to put in place multiple systems of disclosure in different jurisdictions. In the U.S. context, EITI guidelines were agreed to by U.S. government and NGOs which participated in what was an open EITI process. Going beyond EITI guidelines is inconsistent with Congress long-standing admonition to pursue a multilateral approach. Advocates basically undercut the status of EITI guidelines as a well-established reporting system, and justify Section 1504 should be more intrusive than EITI guidelines. For starter, advocates make a clarification that EITI guidelines provide a floor, not a ceiling. Congress did not intend for EITI to be determinative of the form and extent of the disclosure under Section 1504. Senator
40

See, e.g., 156 Cong. Rec. S3316 (daily ed. May 6, 2010) (statement of Sen. Cardin in support of Amendment No. 3732 to Restoring American Financial Stability Act (S. 3217)). 41 Craig Doidge et al., Why Do Foreign Firms Leave U.S. Equity Markets? (Fisher Coll. of Bus., Working Paper No. 2009-03-003, Mar. 2009), http://ssm.com/abstract=1376450. 42 U.S. Department of Commerce, Addressing the Challenges of International Bribery and Fair Competition 2004 The Sixth Annual Report Under Section 6 of the International Anti--Bribery and Fair Competition Act of 2998 (July, 2004). 43 15 U.S.C. 78m(q)(1)(C)(ii) ( consistent with the guidelines of the Extractive Industries Transparency Initiative (to the extent practicable) ).

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Cardin has clearly stated Congress intent on the matter: EITI is a minimum reporting standard, and the intent of Section 1504 was to go beyond these requirements.44 The impact of broad deference to EITI standards would be to weaken the reporting system clearly called for in Section 1504. EITI guidelines are not widely supported in practice. As of March 2011, twenty nine resourceexporting countries have begun implementing the EITI; two countries have completed implementation; and forty six of the worlds largest oil, gas and mining companies have committed to support the EITI.45 In March 2010, EITI Secretariat announced 20 of the 22 implementing countries missed the first-ever validation deadline.46 The EITI is not yet a well-established single reporting standard. While these voluntary disclosures are exemplary, the inconsistent auditing of the data, irregular intervals, and different forms in which the disclosures are made may be detrimental to the EITIs credibility as a reporting standard.47 The inconsistency makes the data the EITI produces much less useful in country-by-country comparison and benchmarking of companies. Some investors argue that EITI guidelines are short of best corporate practices in that the information disclosed under Section 1504 sets a useful but limited precedent for the type of disclosure necessary for investors to account for regulatory, taxation, political, and reputational risks. In conclusion, advocates believe the mandatory disclosure under Section 1504, rather than a deviation from well-established norm, will take the lead in developing single and effective international standards. Legislative Intent of Section 1504 The back and forth on almost all issues of contention tend to rely on the legislative intent to support each position. It is worthwhile to clarify the intent of Congress behind Section 1504. Senator Dodd stated the purposes of Section 1504 are: (i) to protect investors who have begun to consider more seriously ethical and socially responsible implications of their investments and/or who seek access to sufficient information, such as risk associated with their investments, and (ii) to promote a broad international effort to combat corruption, poverty, hunger and disease throughout resource-rich countries with oppressive regime.48 In short, Section 1504 is to promote transparency thereby protecting Local People and investors.

44

See comment letter, Dec 1, 2010, by Senator Benjamin Cardin, available at http://www.sec.gov/comments/df-titlexv/specializeddisclosures/specializeddisclosures-94.pdf. 45 http://eiti.org/candidatecountries. 46 Peter Eigen, Decisive period for the first wave of countries implementing the EITI, EITI Press Statement, March 15, 2010, http://eiti.org/blog/decisive-period-first-wave-countries-implementing-eiti. 47 See Anwar Ravat and Andre Ufer, Toward Strengthened EITI Reporting: Summary Report and Recommendations, the World Bank, January 2010, http://siteresources.worldbank.org/EXTOGMC/Resources/3369291266963339030/eifd14_strengthening_eiti.pdf. 48 156 Cong. Rec. S3817 (daily ed. May 17, 2010) (statement of Senator Dodd).

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Senators Cardin and Lugar were the prime movers in passing Section 1504 into law. Senator Cardin stated the central purpose of Section 1504 was to provide information important to citizens seeking to hold their government accountable for extractive revenues.49 Industries raise questions regarding SECs jurisdiction and function of the U.S. securities laws, arguing that the protection of Local People has little to do with the protection of U.S. investors against fraud and the fair and efficient operation of U.S. capital market. Senator Cardin, presenting the legislative amendment that became Section 1504, explained: Investors have a right to know. If you are going to invest in an oil company, you have a right to know where they are doing business, where they are making payments. I would think this is information that may affect your decision as to whether you want to take this risk in investing in that company. So this amendment provides greater disclosure for investors to be able to make intelligent decisions as to whether to invest in an oil or gas or mineral company.50 Given the financial, regulatory and reputational risks that resource extraction issuers must face in their operations in the U.S. and abroad, the disclosure under Section 1504 will help investors diversify away from these risks. Companies Subject to the Mandatory Disclosure under Section 1504 Commercial Development of Oil, Natural Gas or Mineral The terms resource extraction issuer means an issuer that engages in the commercial development of oil, natural gas, or minerals.51 The term "commercial development of oil, natural gas, or minerals" includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity.52 The Proposed Rule excludes transportation activities unless they are for the purpose of export.53 By way of background, upstream activities refer to the exploration and production of resources; midstream activities refer to the trading and transport of resources; and, downstream activities refer to the refining, processing and marketing of resources. In essence, industries limit commercial development of oil, natural gas, or minerals only to upstream activities, excluding downstream ones, such as transportation, processing and export,
49

See comment letter, Dec 1, 2010, by Senator Benjamin Cardin, available at http://www.sec.gov/comments/df-titlexv/specializeddisclosures/specializeddisclosures-94.pdf. 50 156 Cong. Rec. S5872 (daily ed. July 15, 2010) (statement of Senator Cardin) (emphasis added); see also Statement of Senator Cardin in support of Amendment No. 3732 to the Restoring American Financial Stability Act (S3217), 156 Cong. Rec. S3316 (daily ed. May 6, 2010) (cited in Proposed Rule at 80,992 n.151); comment letter, February 1, 2011, by Senator Levin (It is critical for investors to understand the extent of a companys exposure when operating in countries where the company may be subject to expropriation, political or social turmoil, pressure from corrupt officials or reputational risks. Increased transparency with respect to the payments made by such companies to government officials, by country and by project, will provide critical financial information, deepen investor understanding, promote competition, and encourage analysis of country-specific, regional, and sector-wide activities.). 51 15 U.S.C. 78m(q)(1)(D). 52 15 U.S.C. 78m(q)(1)(A). 53 Proposed Rule, at 17.

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whereas advocates suggest a broad interpretation of Section 1504 to include activities they consider to be critical in assessing business-related risks and holding governments accountable, particularly transportation. Industries give five reasons for their position: First, the terms commercial development of oil, natural gas, or minerals are well understood within industries to only include upstream activities. Second, activities beyond upstream are not directly associated with oil and gas producing nor typically conducted at the drilling site. Third, activities beyond upstream are undertaken by issuers not engaged in resource extraction. Fourth, the focus of EITI is on upstream activities. Lastly, under rules issued by SEC, the terms refer to upstream activities.54 Invoking the legislative intent of Section 1504 the protection of investors and Local People advocates argue that payments related to entire operations of resource extraction, including transportation, are elements of meaningful disclosure necessary to assess risk and monitor human rights abuses. Speaking of transportation, for example, pipelines and other forms of transport security arrangements associated with a pipeline have been the catalyst for flagrant and destabilizing instances in the extractive industries.55 Advocates also point out the growing number of instances where the disclosure of payments related to transport operations is required.56 The trend indicates that these types of payments are part of the commonly recognized revenue stream. Exemption to Smaller Reporting Companies, Foreign Private Issuers, and GovernmentControlled Issuers The Proposed Rule made no categorical exemption.57 In general, industries as well as advocates oppose a categorical exemption to the three groups of companies with the exemption of foreign private issuers more debated than that of other two companies. It makes logical sense, because an entitys exposure to risks and the associated potential economic loss is not correlated to the scale of the entitys investment in a particular country, the place of incorporation and headquarter of the entity, or the identity of controlling shareholders of the entity. It also makes practical sense, because a categorical exemption will likely hamper the effort to level the playing field. However, foreign private issuers are somewhat differently situated in that it makes economic sense to exempt them in case disclosure requirements under Section 1504 duplicate those of home country.

54 55

See, e.g., Oil and Gas Producing Activities under Rule 4-10 of Regulation S-X. See Andrew Walker, Blood Oil Dripping from Nigeria, BBC News, July 27, 2008, http://news.bbc.co.uk/2/hi/africa/7519302.stm (illegal bunkering or the diverting of fuel from pipelines for resale is estimated to cost the government of Nigeria $5 billion a year); see also ERI, Total Impact: The Human Rights, Environmental, and Financial Impacts of Total and Chevrons Yadana Gas Project in Military-Ruled Burma, September 2009, http://www.earthrights.org/publication/total-impact-human-rights-environmental-andfinancialimpacts-total-and-chevron-s-yadana. 56 Nigeria requires disclosure of these types of payments under its own EITI programs. Similarly, the World Banks International Finance Corporation (IFC) has required disclosure of these types of payments in connection with the Peru LNG Project and the Baku-Tbilisi-Ceyhan (BTC) Pipeline. 57 Proposed Rule, at 12.

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Strongly opposing any categorical exemption, advocates add that they find nothing in the plain language of Section 1504 or in its legislative history that provides a reasonable basis for such exemption. It was very unlikely that Congress intended to grant SEC the discretion to cut the effective implementation of Section 1504 by a significant percentage of issuers.58 Exempting a category of issuers deprives investors and the public of access to information necessary to assess the extent to which such issuers are exposed to risks as well as information necessary to hold governments accountable for the related revenue they take in, thereby subverting Congresss commitment to international transparency. Those in favor of exemption to smaller reporting issuers argue that the disclosure mandate may have a proportionately higher impact on smaller issuers, while the influence of smaller issuers on global energy market is of little significance. Advocates counter that smaller companies are generally exposed to greater equity risk than larger ones; that they often take on greater risk due to the nature of their operations; and that many smaller issuers are already compelled to make disclosures similar to those mandated by Section 1504. As long as home country has disclosure requirements similar to those under Section 1504, industries propose an exemption to allow foreign private issuers to follow their home country rules and disclose in their Form 20-F the required home country disclosures.59 Advocates are against such exemption, simply because they failed to find any other national extractive disclosure regulatory regime equivalent to the project-level disclosure standard required by Section 1504. They would agree to offer an exemption to foreign private issuers if home country rules require disclosure of at least as much information, to at least as great a level of detail, as the rules under Section 1504. When the scope, nature, and quality of the disclosures vary significantly from home country to home country, this lack of consistency would undermine both global transparency initiatives and investors ability to adequately compare and assess risks. The Types of Payments The term payment is defined as being made to further the commercial development of oil, natural gas, or minerals.60 The types of payments include taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the guidelines of the Extractive Industries Transparency Initiative (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.61 Under the Proposed Rule, a payment for infrastructure improvements is not included in the types of payments even if it is a direct cost of engaging in the commercial development of resource, because it is not clear that this payment would be covered by the specific list of items in Section 1504 or otherwise would be a part of the
58

For example, out of the 1,101 issuers that SECs Paperwork Reduction Analysis estimates will be covered, 166 over fifteen percent are foreign private issuers. Of the approximately 798 Form 10-Ks that a NGO estimates were filed by issuers in the resource extractive industry in 2010, 508 over sixty percent were filed by smaller reporting companies. 59 For example, Hong Kong Exchange and London Exchange adopted country level disclosure requirements. 60 15 U.S.C. 78m(q)(1)(C)(i)(I). 61 15 U.S.C. 78m(q)(1)(C)(ii).

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commonly recognized revenue stream;62 a payment for social/community is not expressly included in the types of payments;63 and a payment for security arrangement is not specifically mentioned in the Proposed Rule. Payments for Infrastructure, Social/community, and Security Arrangements Industries acknowledge that the list of types of payments is largely consistent with the benefit streams listed on pages 27-28 in the EITI Source Book.64 Among the types of payments, hotlydebated is the question of whether payments for infrastructure, social/community, and security arrangements are the commonly recognized revenue stream. Answering in the negative, industries provide four reasons. First, such payments are not directly and materially made to further the commercial development of resources. For example, when a mining firm voluntarily donates funds for construction of a school, hospital, or public road for use by members of a local community, those payments do not directly relate to, or materially further, the process of moving ore form ground to smelter. Second, they are not within the definition of benefit stream on page 46 of the EITI Source Book.65 Third, they are generally of a de minimis nature when compared to the overall costs of resource development. Lastly, they are not considered as commonly recognized revenue stream within extractive industry. Furthermore, payments for infrastructure and social/community are voluntary, and paid to private parties, not government agencies. An adequate reporting mechanism for social/community payment is corporate social responsibility reporting. Advocates base their counter-arguments on legislative intent the protection of investors and Local People. Payments for infrastructure, social/community, and security arrangements are of great interest to investors for risk-management and precisely the payment streams that are often most significant to local groups advocating for equitable returns on resources extracted from their communities. It is because such payments are often associated with major abuses or are otherwise relevant to the stability of investments. Such payments are significant in amount, ongoing in terms of frequency, and viewed generally as part of the cost of doing business so that they can be considered as commonly recognized revenue stream. Indeed, an increasing number of multinational extractive industries are beginning to disclose information about such payments. Infrastructure payments are often contractually obligated and crucial for the export of natural resources once developed, particularly in Africa where transportation infrastructure is nonexistent.66 Social/community payments serve to build a strong relationship with local communities, which are equivalent to social license to operate. Payments for security
62 63

Proposed Rule, at 24. Proposed Rule, at 25. 64 http://eiti.org/files/2011-11-01_2011_EITI_RULES.pdf. 65 http://eiti.org/files/2011-11-01_2011_EITI_RULES.pdf. 66 For example, Simandou in Guinea, one of the worlds largest Iron Ore deposits, is landlocked. The railway, known as the Trans Guinean, has been a crucial element of all negotiations over rights to the Simandou deposits.

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arrangements are significant and ongoing expenses that companies incur from the exploration phase all the way through the lifetime of a project.67 There is sort of middle way approach. The payments should be considered part of the commonly recognized revenue stream to the extent that they constitute part of the issuer's overall relationship with the government pursuant to which the issuer engages in the commercial development. Conversely, payments made on a voluntary basis for infrastructure improvements should be excluded. Tax Under the Proposed Rule, resource extraction issuers are required to disclose taxes on corporate profits, corporate income, and production, excluding taxes levied on consumption, such as value added taxes, personal income taxes, or sales taxes.68 Supporting the Proposed Rule overall, industries complain that income tax payments are typically made at the legal entity level, which may comprise numerous projects. In addition, tax credits and deductions may result from one set of projects and be utilized against the earnings from other projects, making reporting of income tax payments by individual project very difficult. Industries use this mismatch between the level of disclosure and that of taxing to justify the country-level disclosure and/or aggregation of payments information. While staying with the project-level disclosure and disaggregation of payments information in principle, advocates agree to make an exception of allowing resource extraction issuers facing the mismatch to report and disclose taxes at such level as are levied. Because of the cost of compliance that would soar if the project-level disclosure is strictly observed, advocates do not demand beyond business practices. Thus, tax may be reported at the country level if the central government levies the tax. Regarding the exception of consumption taxes, industries agree, because those payments have no specific connection to the commercial development of natural resources, but are instead generally applicable to any business activity. A middle way approach is that those payments should be included if they are discriminatory taxes targeted at specific industries. Advocates argue those payments are part of commonly recognized revenue stream, because they can be a major component of the revenue, and are frequently in country reporting templates within the EITI.69
67

Expenditures by Freeport McMoran in projects in Indonesia illustrate payments to military and police. See, e.g., Freeport McMoran Copper & Gold Inc. Form 10K, 2009, http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9NDI3MjR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 (PT Freeport Indonesias share of support costs for the government provided security, currently involving approximately 3,000 Indonesian government security personnel located in the general area of our operations, was $10 million for 2009, $8 million for 2008 and $9 million for 2007.)
68 69

Proposed Rule, at 22. See, e.g., EITI reports of Azerbaijan (2008), Central African Republic (2006), Democratic Republic of Congo (2007), Guinea (2005), Kazakhstan (2008), Kyrgyzstan (2008), Liberia (2008-09), Mali (2006), Mongolia (2008), and Timor Leste, (2008).

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Compilation While acknowledging that the list of types of payments is largely consistent with the benefit streams listed on pages 27-28 in the EITI Source Book,70 industries suggest to aggregate payments at a reasonable level e.g., at the country level to avoid competitive harm that comes from commercial sensitivity of individual amounts. For example, payments of signature bonuses or entry fees related to original lease concessions or lease extensions are particularly sensitive in that they may provide information to competitors in bidding on surrounding blocks. Industries differ over specific ways of aggregating payments: (i) aggregating the types of payments for both reporting and disclosure purposes, (ii) keeping the current list of types of payments for the reporting purpose and making a compilation for the purpose of disclosure, and (iii) aggregating types of payments into three categories royalties and taxes, production entitlements, and other payments. In strong support for the project-level disclosure of disaggregated payments information, advocates first rely on the plain language of Section 1504 that explicitly enumerates types of payments. Section 1504 does not contemplate that issuers would aggregate project-level data, nor does it contemplate that project-level data would be obscured through aggregation.71 Lump sum payment disclosure would make it easier for illegitimate payments to be hidden among legitimate payments. They also emphasize that the types of payments are largely consistent with EITI guidelines. De Minimis The payments subject to Section 1504 should be not de minimis.72 The Proposed Rule defines de minimis as lacking significance or importance, and went on to clarify that not de minimis does not mean materiality.73 Nonetheless, industries take pains to persuade SEC to change its position on the meaning of de minimis. In so doing they first take a textual approach, and argue that the plain meaning of not de minimis is material, because the antonym of de minimis is material. Second, Congress directed SEC to consider other material benefits, not other benefits. The use of the term material in Section 1504 implied that not de minimis is equivalent of materiality. Third, they noted that page 48 of the EITI Source Book defines the term payment as all material oil, gas and mining payments made by companies to governments. Fourth, the concept of materiality is well-established in extractive industries, whereas not de minimis standard may be subject to varying interpretations. Lastly, if a project is immaterial to a company, then there is no reason to believe that investors would typically be concerned with payments to governments in relation to that immaterial project. In support for the Proposed Rule, advocates simply highlight the fact that the text of Section 1504 used not de minimis instead of materiality standard, though it could have used
70 71

http://eiti.org/files/2011-11-01_2011_EITI_RULES.pdf. See comment letter, Dec 1, 2010, by Senator Benjamin Cardin, available at http://www.sec.gov/comments/df-titlexv/specializeddisclosures/specializeddisclosures-94.pdf (stating that Section 1504 purposefully requires reporting at the project level, disaggregated by payment stream). 72 15 U.S.C. 78m(q)(1)(C)(i)(II). 73 Proposed Rule, at 27.

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materiality like in EITI standards. While de minimis is defined as so insignificant that a court may overlook it in deciding an issue,74 an item is material when it would elicit a reasonable investor to act differently.75 The use of not de minimis clearly indicates that Congress dismissed the materiality approach and sought a greater amount of disclosure than what would occur under a material payments regime. One comment suggested a bright line standard, e.g., a dollar amount threshold of 10,000 (or about $15,000) consistent with the London Stock Exchanges Alternative Investment Market standard. Industries in support of materiality approach are against using a threshold, arguing that the fixed amount of threshold is inconsistent with existing and accepted materiality guidance. A dollar amount threshold can be too low for large companies and, at the same time, too high for smaller companies. A percentage threshold, another bright line standard, was dismissed, because industries will not know the denominator of the percentage. The Project-Level Disclosure Section 1504 requires total amount of payments made for each project to be disclosed.76 Neither Section 1504 nor the Proposed Rule,77 however, defines the term project. Industries first interpret the term project to somehow mean the country level disclosure. Alternatively, they argue that the disclosure is limited to material project. Advocates dismiss the interpretation and argument, and focus their attention on efforts to define the term project in a way that reflects business practices and that provides useful information to investors and Local People. To interpret the term project to equate at the project level with at the country level, industries provide six reasons. First, because of no agreed upon definition of project, the term can have many different meanings at different levels within a group and in different part of the group. The ambiguity might require an issuer to assign payments arbitrarily at a higher level of granularity than that at which it manages its payments to governments, which is typically at the country level. Second, the country level disclosure aligns with EITI methodologies that do not require the project level disclosure. Third, a significant proportion of the payments are made on a centralized basis in a county, and are negotiated at the entity level in practice. Fourth, corporate taxes are paid at the corporate entity or country level. The project level disclosure results in an arbitrary allocation method for taxes that are actually paid at a legal entity level. Fifth, it is preferable for industry to have a global approach to reporting payments to host governments. It is only under Section 1504 that the project level disclosure is required. Lastly, the precise projectlevel payment disclosure could allow groups or individuals to target a specific project in order to significantly affect a countrys revenues. Handing terrorists in conflict areas the financial equivalent of a roadmap to the U.S. listed firms personnel and most significant capital assets would be unwise.

74 75

Blacks Law Dictionary, 8th Ed., (2004), at 464. Staff Accounting Bulletin No. 99, 17 CFR Part 211. 76 15 U.S.C. 78m(q)(2)(A)(i) (emphasis added). 77 Proposed Rule, at 32.

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Advocates begin by taking a textual approach. 15 U.S.C. 78m(q)(2)(A)(i) and (ii) require issuers to report both "the type and total amount of such payments made for each project of the resource extraction issuer" and "the type and total amount of such payments made to each government." If project" and "government" were interpreted as synonymous, the second of these provisions would be rendered redundant. In addition, Congress' inclusion of an interactive data reporting standard78 would make little sense had Congress not wanted issuers to make granular reports entailing significant disaggregation of data. In this sense, Senator Cardin clarified that [r]eporting under Sec. 1504 is designed to complement reporting done under the [EITI], but does not mimic it, and purposefully requires reporting at the project level, disaggregated by payment stream.79 The project level disclosure of disaggregated information serves purposes of Section 1504. Issuer can and do engage in a multitude of activities in a host country and investors need to know which of these activities pose the greatest risk. For example, large payments for a particular project indicate that the success of that project, at least in part, relies on the stability and reliability of the relevant government. The same goes for the protection of Local People. The project level reporting allows citizens to more accurately assess current and future production of oil, gas, and mining activities. The burden of compliance cost associated with the project-level reporting is not undue, because these disclosure requirements would not require the companies to collect any new information, but to report publically financial figures they already maintain.80 Many issuers are already subject to reporting requirements at a project level. In Indonesia, for example, the proposed EITI reporting template requires reporting at the PSC-level.81 Answering the security concern, advocates counter that it is unlikely that the location or fiscal importance of significant projects would otherwise be unknown to citizens within a country. Energy production is typically activities publicized by governments to gain public favor and attract further investment. In addition, the physical footprint of significant extractive industry projects, such as associated infrastructure, is highly visible. Thus, security concerns have little to do with the project level disclosure. In response to the alternative argument by industries that the project should be limited to material project, advocates also begin with the plain language of Section 1504, which makes no mention of the term material in relation to the term project. Congress, instead, chose to use the qualifier not de minimis with respect to payments. Furthermore, applying a materiality standard would result in unequal treatment of issuers and would impose a degree of relativity not contemplated by the statute. A project that is material to a smaller issuer might not be material to a larger issuer. A materiality standard would also breed inconsistency in the disclosures.
78 79

15 U.S.C. 78m(q)(2)(C). See comment letter, Dec 1, 2010, by Senator Benjamin Cardin, available at http://www.sec.gov/comments/df-titlexv/specializeddisclosures/specializeddisclosures-94.pdf. 80 Floor remarks by Senator Lugar, Congressional Record S9746, September 23, 2009. 81 See Indonesian Petroleum Association News, Update on EITI Activities, February 2, 2011, http://www.ipa.or.id/news_detail.php?page_id=67&page_category_id=7&news_id_send=81.

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The definition of the term project is one of the most hotly-debated issues. The most logical interpretation of the term is to equate it to the origination of the payment streams to be reported under Section 1405. In other words, the project definition relate to a lease, license or other concessionary contract which might take the form of a Production Sharing Agreement (PSC) or a risk-sharing agreement or to an issuer in the event that payment obligations for a given set of extractive activities are levied at the entity level. Here is the latest version of definition of the term project put forward by advocates: a project is equivalent to activities governed by a licence, concession or similar legal agreement. Where any payment liabilities are incurred on a different basis, reporting shall be on that basis.82 It basically says project is the level at which contract is made; if the contract is made at country level, information will be disclosed as such. The Exemption When Prohibited by Law and/or Contract Industries claim that the disclosure under Section 1504 would conflict with confidentiality clause and/or host country restrictions an exemption for issuers who have entered into confidentiality agreements with host countries, or where the host countrys laws prohibit the publication of the information envisioned by Section 1504. Where host country law may prohibit public disclosure of payments information, SEC should not put reporting companies in a position where they have to breach local laws in the area of their operations in order to comply with the Proposed Rule. For example, Angola, Cameroon, China, and Qatar have such laws in place. It is reasonable to assume that Congress did not express an intent to interfere with foreign relations by eschewing comity and due respect for the valid laws of foreign sovereign nations. Regarding the issue of disclosure against confidentiality clause, industries argue that the sanction for such disclosures involves termination of the contract and liability for any damages that accrue as a result of the breach. There is no such exculpatory clause as was claimed by advocates of intrusive disclosure to be included in international contracts to excuse breaches compelled by law. Advocates first cast strong doubt that the conflict with confidentiality clause and/or host country restrictions exists, saying that no detailed evidence of contracts or specific laws within the few countries mentioned was provided. Their review of various confidentiality provisions and prohibitive disclosure provisions in foreign laws around the world has found no explicit prohibition of payment disclosure as contemplated by Section 1504. Below are reasons advocates doubt there is a prohibitive disclosure provision in Cameroon, Angola, Qatar, and China. The claim that revenue disclosure is illegal in Cameroon is simply wrong. The Application Decree of June 30th, 2000 of Cameroons new Petroleum Code (1999) sets out most of the regulation for the petroleum sector. Articles 105-110, which lays down the confidentiality provisions of the law, has no mention of revenue in the section.83 The government of Angola has previously and unilaterally disclosed information similar to that called
82 83

A letter sent by Publish What You Pay to the U.K. government on March 19, 2012. See also Article 25.3 of Cameroons Model Production Sharing Agreement of 2007 contains the same contractual provisions allowing disclosure if required by stock exchanges in article XII.

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for by Section 1504. In addition, Angolan law implies a general principle of allowing opt-outs from confidentiality clause for legal compliance purposes. Qatar is supportive of the EITI and hosted the 4th EITI Global Conference in Doha in 2009. Given the public commitment to EITI made by the government of Qatar at the EITI conference, and the operating relationship between Qatar Petroleum and several EITI supporting companies, it is reasonable to assume that the government would be amenable to granting a waiver, or in some other fashion, accommodate disclosure by these companies. For the last several years, the Chinese government has been signaling its support for transparency in general and EITI in particular.84 A recent research also suggests that most resource-extraction contracts include exceptions for home country disclosure requirements. Columbia University School of Law concluded, after a global survey of over 140 resource extraction investment contracts, that boilerplate language in most contracts included an explicit exception for information that must be disclosed by law, and that where such language is not explicit it generally would be read into any such contract.85 Section 1504 has no mention of exemption on the grounds of such conflict. Neither the text nor the unambiguous intent of Section 150486 can be reconciled with the exemption. From a policy perspective, it is precisely in countries that prevent transparency and disclosure of information where the greatest investment risk lies. Such an exemption could constitute a perverse incentive for countries to create such laws, thereby undermining the purpose and intent of the statute to provide information to investors and promote international transparency. As a policy recommendation, advocates encourage SEC to request assistance from the U.S. agencies to inform all foreign governments impacted by these regulations of the intent and wide implications of these disclosure requirements. Conclusion What is interesting about analyzing the comments submitted by each side industries and advocates to SEC in the process of SECs rule-making is that not many comments cite legislative history to support its position on each contentious point. It has much to do with the paradox: Section 1504, which is a culmination of transparency movement, was passed into law in a very non-transparent way. The inclusion of Section 1504 in the Dodd-Frank Act took many by
84

See, e.g., the 2008 UN General Assembly Resolution, which emphasized that transparency should be promoted by all Member States; the 2008 G20 Leaders Statement supporting participation in the EITI; and, the 2008 Joint Statement of G8 Energy Ministers, which signaled support for EITI implementing countries. 85 Peter Rosenblum and Susan Maples, Contracts Confidential: Ending Secret Deals in the Extractive Industries, Revenue Watch Institute, at 27, http://www.revenuewatch.org/publications/contracts-confidential-ending-secretdeals-extractive-industries. 86 See comment letter, Dec 1, 2010, by Senator Benjamin Cardin, available at http://www.sec.gov/comments/df-titlexv/specializeddisclosures/specializeddisclosures-94.pdf (The language of Sec. 1504 is very clear: there should be no exemptions for confidentiality or for host-country restrictions. It would be too easy for countries who want to avoid disclosures to simply pass their own law against disclosure. The purpose of Sec. 1504 is to not allow for exemptions for confidentiality or other reasons that undermine the principle of transparency and full disclosure); see also comment letter, Feb 1, 2011, by Senator Carl Levin, Chairman of the Permanent Subcommittee on Investigations, available at http://sec.gov/comments/s7-42-10/s74210-19.pdf.

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surprise. It somehow came out of conference negotiations without prior discussion.87 The relative lack of legislative history leaves SEC a considerable room for its discretion in rule-making. The discretion turned out to be exercised by and large in favor of civil society at the stage of the Proposed Rule. It remains to be seen whether SEC turn the ship of rule-making 180 degrees at the stage of a final rule-makings.

87

Because we have not yet been able to hold hearings on this measure this year I am not sure we have all the precise details and the language exactly right, but the thrust is exactly right and, therefore, in my view, the amendment by Senators CARDIN and LUGAR ought to be adopted. We can work on the details, if we have to, later on, but we should not miss this opportunity provided by this legislation. 156 Cong. Rec. S3818 (daily ed. May 17, 2010) (statement of Sen. Dodd).

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15 USCS 78m 78m. Periodical and other reports (q) Disclosure of payments by resource extraction issuers. (1) Definitions. In this subsection-(A) the term "commercial development of oil, natural gas, or minerals" includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the Commission; (B) the term "foreign government" means a foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission; (C) the term "payment"-(i) means a payment that is-(I) made to further the commercial development of oil, natural gas, or minerals; and (II) not de minimis; and (ii) includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the guidelines of the Extractive Industries Transparency Initiative (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals; (D) the term "resource extraction issuer" means an issuer that-(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals; (E) the term "interactive data format" means an electronic data format in which pieces of information are identified using an interactive data standard; and (F) the term "interactive data standard" means standardized list of electronic tags that mark information included in the annual report of a resource extraction issuer. (2) Disclosure. (A) Information required. Not later than 270 days after the date of enactment of the DoddFrank Wall Street Reform and Consumer Protection Act [enacted July 21, 2010], the Commission shall issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals, including-(i) the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals; and (ii) the type and total amount of such payments made to each government. (B) Consultation in rulemaking. In issuing rules under subparagraph (A), the Commission may consult with any agency or entity that the Commission determines is relevant. (C) Interactive data format. The rules issued under subparagraph (A) shall require that the information included in the annual report of a resource extraction issuer be submitted in an interactive data format. (D) Interactive data standard.
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(i) In general. The rules issued under subparagraph (A) shall establish an interactive data standard for the information included in the annual report of a resource extraction issuer. (ii) Electronic tags. The interactive data standard shall include electronic tags that identify, for any payments made by a resource extraction issuer to a foreign government or the Federal Government-(I) the total amounts of the payments, by category; (II) the currency used to make the payments; (III) the financial period in which the payments were made; (IV) the business segment of the resource extraction issuer that made the payments; (V) the government that received the payments, and the country in which the government is located; (VI) the project of the resource extraction issuer to which the payments relate; and (VII) such other information as the Commission may determine is necessary or appropriate in the public interest or for the protection of investors. (E) International transparency efforts. To the extent practicable, the rules issued under subparagraph (A) shall support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals. (F) Effective date. With respect to each resource extraction issuer, the final rules issued under subparagraph (A) shall take effect on the date on which the resource extraction issuer is required to submit an annual report relating to the fiscal year of the resource extraction issuer that ends not earlier than 1 year after the date on which the Commission issues final rules under subparagraph (A). (3) Public availability of information. (A) In general. 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 issued under paragraph (2)(A). (B) Other information. Nothing in this paragraph shall require the Commission to make available online information other than the information required to be submitted under the rules issued under paragraph (2)(A). (4) Authorization of appropriations. There are authorized to be appropriated to the Commission such sums as may be necessary to carry out this subsection.

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