US oil industry body sues SEC over Dodd-Frank Act disclosure rules

A coalition of US oil and business organisations is suing the Securities & Exchange Commission (SEC) for ‘overstepping’ its authority in requiring companies to disclose payments to foreign government when seeking to exploit new oil and gas fields.

The American Petroleum Institute (API) claims in a filing to the federal court in Washington DC that the SEC’s implementation of section 1504 of the Dodd-Frank Wall Street Reform & Consumer Protection Act is anti-competitive and goes “well beyond what was necessary to support transparency”.

And in the move, also supported by the US Chamber of Commerce and other business groups, the API describes the SEC’s approach to the Act’s “well-intentioned” provision as “arbitrary and capricious”.

But the lawsuit, filed last month, has been condemned as “contemptible” by Global Witness director Simon Taylor, who added: “It shows how out of touch the industry has become.”

The Dodd-Frank Act mandates the SEC to issue rules on disclosure for companies listed in the US and is designed to help eradicate corruption and allow citizens in oil-rich countries to hold their governments to account. Section 1504 requires companies to disclose payments made to the US or foreign governments to further the commercial development of oil, natural gas or mineral extraction.

The rules define ‘commercial development’ to include exploration, extraction, processing and export, or the acquisition of a license to do so. The rules refer to any payment of taxes, royalties, fees, production entitlements, bonuses, dividends and infrastructure improvements, whether single or as part of a series, of $100,000 or more in any fiscal year.

The SEC says its definition of the payments to be disclosed is in line with that of the Extractive Industries Transparency Initiative (EITI), a voluntary project which many oil companies subscribe to. Congress specifically referenced the EITI in defining the payments to be covered by the law.

However, the SEC is also required to balance the costs and effects of its regulations, and the API claims the regulator has “disregarded its clear legal obligations to limit the costs and anti-competitive harm of the rule”.

The API also claims it will give foreign companies listed outside the US a clear advantage because they will have access to this sensitive information without facing any disclosure requirement themselves.  

“The oil and natural gas industry strongly supports payment transparency,” said API president and CEO Jack Gerard. “We’ve been working hard to increase transparency for a decade, but this rule could interfere with ongoing efforts by making US firms less competitive against state-owned firms in China and Russia that have no interest in transparency.”

Gerard said the oil industry is working with civil society groups and the Obama administration to implement the EITI, which he believes would increase transparency more effectively without harming competitiveness. The EITI reports on payments made in 36 countries.

The industry opposes disclosure on specific projects, but supports disclosure at country or province level. It also wants exemption from reporting where foreign governments prohibit disclosure. The SEC rejects both demands, saying the Dodd-Frank Act requires companies to go deeper than country-level reporting.

“The rule as written would impose enormous costs on US firms and put them at a competitive disadvantage against government-owned oil giants not subject to the rule,” Gerard said.

“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,” he added. “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.”

But Simon Taylor, of civil society group Global Witness, disputes this: “Their arguments don’t stack up. It seems what they really want is to continue to operate in an opaque environment – which can only aid and abet the transfer of massive and often illicit payments.”

SEC spokesman John Nester told the Wall Street Journal: “While we are still reviewing the suit, we believe our legal interpretation and economic analysis are sound, and we look forward to defending the rule that Congress directed us to write.”