Bloomberg News

SEC Rule on Foreign Oil Payments Questioned by Judges

March 22, 2013

A U.S. regulation requiring public companies engaged in oil, natural gas or mineral extraction to disclose payments to foreign governments was questioned by appeals court judges, who asked whether it violates the right to free speech.

U.S. Securities and Exchange Commission attorney William Shirey said today that requiring the reporting of factual information has never been viewed as a violation of the U.S. Constitution’s First Amendment.

Circuit Judge David Sentelle of the U.S. Court of Appeals in Washington asked at a hearing what legal authority Shirey could cite in support of that position.

“We don’t have any direct authority on that,” Shirey told the three-judge panel. Still, he said, mandatory disclosures of facts aren’t viewed as compelling speech.

“The First Amendment doesn’t protect factual data,” he told the court.

The ruled is being challenged by the U.S. Chamber of Commerce, the American Petroleum Institute and two other business trade groups. No lower court has ruled on the matter yet.

Dodd-Frank

The regulation implements a provision of the 2010 Dodd- Frank financial reform law aimed at increasing transparency and thwarting corruption by giving citizens of resource-rich countries information about their governments’ oil and mineral revenue.

“It allows them to hold governments accountable,” Ian Gary, senior policy manager for extractive industries for Oxfam America, said in a phone interview before the hearing. “Citizens can have a conversation with their own governments about how to use the money.”

Oxfam America intervened in the case in support of the SEC.

The rule obligates oil, gas and mining companies to disclose payments of $100,000 or more on a form filed to the SEC’s Edgar public database for fiscal years ending after Sept. 30.

It also requires companies to disclose payments made to the U.S. government.

Overall Payments

Circuit Judge David Tatel questioned Shirey about whether companies should be forced to report just overall payments to governments, or on a project-by-project basis, as the rule requires.

Project-by-project reporting is critical, Shirey said, because it reveals “what resources are generating the funds and where those funds ultimately go into the government.”

Government-level reporting “only gives you the second piece of it,” he said.

Complying with the rule, which applies to 1,100 companies, will cost about $1 billion, the SEC estimates.

Eugene Scalia, an attorney for the plaintiffs, argued that the rule will cost “more than $14 billion” and yield uncertain benefits.

Cost-Benefit Analysis

“They cannot defend this rule by walking away from the cost-benefit analysis,” said Scalia, the son of Supreme Court Justice Antonin Scalia and a partner at Gibson, Dunn & Crutcher LLP in Washington.

Tatel noted that $12.5 billion of the amount asserted by Scalia was the cost of lost business in countries with laws purportedly barring disclosure and the SEC “wasn’t convinced that those countries in fact prohibit disclosure.”

Shirey said Congress had decided that promoting “transparency in resource rich countries” would be a worthwhile foreign policy benefit.

As for costs, Shirey said the SEC tried to hold them down by not requiring disclosure of payments under $100,000 and not requiring auditing of payment data.

Under the SEC rule, payments that need to be disclosed include taxes, royalties, bonuses, fees, dividends and infrastructure improvements.

The regulation was backed by billionaires Bill Gates and George Soros, who wrote letters to the commission arguing that transparency will help investors assess risk.

TIAA-CREF, the manager of retirement accounts for employees of non-profit institutions, and California Public Employees’ Retirement System, the largest U.S. public pension fund, also submitted comments during rulemaking in support of the disclosure proposal.

Joining the Chamber and API in the court challenge to the rule were the Independent Petroleum Association of America and the National Foreign Trade Council.

All four groups filed a similar complaint in federal district court in Washington because of uncertainty over which court had authority to rule on the complaint.

The appeals court panel today asked several questions about jurisdiction, indicating some uncertainty about their own authority to decide the case.

The case is American Petroleum Institute v. U.S. Securities and Exchange Commission, 12-1398, U.S. Court of Appeals for the District of Columbia (Washington).

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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