On December 16th, the Securities and Exchange Commission (SEC) passed 3-2 a rule purporting to increase transparency in the oil, gas and mineral industries and combat the so-called “resource curse” that plagues developing countries. In actuality, this rule sets the disclosure bar in the U.S. lower than the international standard and deprives whistleblowers of a strong standard for reporting corruption.
“It’s hard to understand who we are serving with this final rule,” said Commissioner Allison Herren Lee in her dissenting statement. “We are not taking the opportunity to further the SEC’s and the United States’ tradition as leaders in the fight against global corruption.”
The 2010 Wall Street Reform and Consumer Protection (Dodd-Frank) Act included a bipartisan amendment sponsored by Senators Richard Lugar (R-IN) and Ben Cardin (D-MD) 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.
Two previous SEC attempts to implement the provision, known as Section 1504, were derailed, first by the American Petroleum Institute, a powerful industry association that filed suit in federal district court to stop its approval, and then by Congress, which rolled back a finalized rule in 2017 under the Congressional Review Act (CRA).
Though the CRA mandates that new rules must be “substantially” different from the ones rolled back under its jurisdiction, transparency advocates argued that the latest iteration of the rule was so weak that it would “severely undermine the anti-corruption measures included in Dodd-Frank,” as Senator Elizabeth Warren wrote in a Dec. 15 letter to Clayton. Senator Cardin, one of the original sponsors of the amendment, similarly objected in a Dec. 11 letter. All comments submitted about the rule, the majority of which urger stronger language, can be found here.
The rule’s main flaw is that it permits companies to aggregate the payments made to governments rather than disclosing payments for each project and entirely exempts payments under $150,000. The Commission actually found in its economic analysis of the 2016 rule that contract-level project disclosure was necessary to fulfill Section 1504’s transparency objectives but disavowed the findings in its analysis of the current rule.
Chairman Jay Clayton and commissioners Hester Pierce and Elad Roisman repeatedly argued that the SEC should never have taken on Section 1504, because it doesn’t advance the SEC’s mission to protect investors, maintain fair markets, and facilitate capital formation. They also argued that information on extractive payments was not “material” to protecting investors.
This is concerning in light of current efforts to strengthen disclosure of the financial risks posed to investors by climate change. As NWC has pointed out, both whistleblowers and financial regulators have key roles in exposing financial fraud that results from the failure to disclose climate risk. Weakening Section 1504 deprives investors and oversight bodies of information they need to reduce that risk.
The intended level of disclosure of Section 1504 has already been embraced by some 30 countries, including the European Union, Canada, and Norway, creating a new international standard. The U.S. will need to reverse today’s decision to avoid being perceived as a laggard in the global campaign against corruption in the fossil fuel sector.
That’s why the National Whistleblower Center is committing to work with anti-corruption allies to reverse the rule in the coming year. Combined with the U.S.’s potent – and transnational – whistleblower protections, joining the new international standard of transparency would make the U.S. a true leader in fighting global corruption.
