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SEC Challenged on Extractive Disclosure Rule

Four trade associations last Tuesday filed a lawsuit challenging a Securities and Exchange Commission (SEC) rule requiring publicly traded domestic oil and natural gas producers to disclose to the public commercially sensitive information that could put them at a major disadvantage with foreign-owned energy companies.

The final rule, which cleared the Commission in August, requires producers to disclose in their annual reports payments of more than $100,0000 made to foreign governments for projects relating to the commercial development of oil, gas or minerals (see NGI, Aug. 27). The rule implements Section 1504 of the Dodd-Frank Wall Street Reform Act.

It would require the reporting of any payment, whether it is a single payment or a series of related payments, that equals or exceeds $100,000 during the most recent fiscal year. The types of payments related to commercial development that would need to be disclosed would include taxes, royalties, fees (including licensing fees), production entitlement, bonuses, dividends and infrastructure improvement costs. Companies would be required to comply with the new rule for the fiscal year ending after Sept. 30, 2013. However, only partial-year reporting would be required for the first year if a producer's fiscal year begins before Sept. 30, 2013. The rules would apply to about 1,100 companies.

The American Petroleum Institute (API), U.S. Chamber of Commerce, Independent Petroleum Association of America and National Foreign Trade Council contend the SEC failed to conduct an adequate cost-benefit analysis of the rule, grossly misinterpreted the Dodd-Frank mandate to make a "compilation" or aggregation of payment information available to the public, and violated the Constitution.

They called on the court to declare that Section 1504 and the so-called extractive industries rule violated the First Amendment, and to vacate and set aside the extractive rule.

The groups said the rule goes far beyond what Dodd-Frank required. "Section 1504 requires only that a 'compilation' or aggregation of payment information made by all U.S. companies to each foreign government and federal government be made publicly available. The Commission, however, grossly misinterpreted its statutory mandate to require that each U.S. company publicly file a report on the Commission's online electronic database detailing each payment made to each and every foreign government, for each and every 'project' relating to extractive industry.

"The Commission adopted this approach despite the fact that publication of a 'compilation' would have served the purposes of the statute without further burdening U.S. companies or revealing trade secrets or pricing strategies to competitors" overseas, they said.

"This misreading of the statute by the Commission exacerbated the infringement of First Amendment interests caused by the statute itself. Section 1504 forces U.S. public companies to engage in speech that they do not wish to make, in violation of their contractual and legal commitments," the associations said.

"The oil and natural gas industry strongly supports payment transparency...but this rule could interfere with ongoing efforts by making U.S. firms less competitive against state-owned firms in China and Russia that have no interest in transparency," said API President Jack Gerard.

Moreover, "the rule as written would impose enormous costs on U.S. firms and put them at a competitive disadvantage against government-owned oil giants not subject to the rule," he said. By its own calculation, the SEC has estimated that the rule will cost U.S. public companies at least $1 billion in initial compliance costs and $200-400 million in ongoing compliance costs.

"With reasonable changes, the SEC could have achieved the goal of increased transparency while also remaining faithful to its core mission to protect American investors," Gerard said. "The rule should allow our companies to report their payments confidentially to the SEC and allow the agency to aggregate that information and publicly report payments by country."

The "rule is harmful to our energy security and to American consumers and should not stand," said Karen Harbert, president of the Chamber of Commerce's Institute for 21st Century Energy. "American oil and natural gas companies must compete against foreign, state-owned oil companies for access to resources around the world. SEC's extraction rule will require them to turn over their playbooks for how they bid and compete. Their competitors are under no such obligation to do so, and compliance with this rule violates the law in several countries in which U.S. firms do business. Yet the SEC refused to craft an exception for that circumstance."

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