The Republican-led US Congress is about to vote in favour of repealing the investor-backed implementation of Section 1504 of the Dodd-Frank Act 2010 ruled by the Securities and Exchange Commission in June 2016, after years of resistance from the American oil industry lobby.
The SEC’s disclosure rules aim at bringing transparency and fighting potential corruption by mandating US listed extractive companies to report on the payments made to the foreign governments where they operate.
The disclosure rules are in line with similar legal regimes that apply in the European Union, Norway and Canada (reporting any payment of $100,000 or more made at project level during one fiscal year) and compatible with the standard of the Extractive Industries Transparency Initiative (EITI).
The implementation of Section 1504 of the Dodd-Frank Act was supported by investors and sponsored by the bipartisan Cardin-Lugar coalition (led by and Democrat Senator Ben Cardin and former Republican Senator Richard Lugar).
Richard Lugar, now head of his nonprofit organization called the Lugar Center, told RI that a number of investors representing at least $10trn backed the SEC rule. “[They] favor Cardin-Lugar because it provides them with more information about whether those companies are contributing to unsustainable practices in those countries. Payment disclosure can give investors a better idea of the risk a company faces. Repeal of the rule would deprive investors of this information,” Lugar said.
Corinna Gilfillan, Head of US Office at campaign group Global Witness, concurred with Lugar telling RI that the rule under threat exists to deter US listed oil, gas and mining companies from cutting secretive deals with corrupt regimes.
“If this law goes, investors will lose information which is crucial to better assessing their exposure to corruption risks. Last week Shell and Eni lost a billion-dollar oil block following an investigation into a  crooked oil deal that investors knew nothing about. This law would have brought that deal into the open.”
The House of Representatives voted 235-187 on February 1 to repeal the bipartisan Cardin-Lugar Amendment, causing “dismay” at the US Forum for Sustainable and Responsible Investment (US SIF).
Pending the vote at the Senate initially scheduled for February 2 [although not yet held at the time of writing], Alya Kayal, Director of Policy and Programs at the US SIF, told RI that all investors want the ability to compare and analyse whether these payments or operations pose investment, regulatory, tax, reputational, political and social risks. “We ask the Senate to support this rule because investors need full disclosure to guide investment decisions.”
The repeal of the SEC rule was made on the grounds that is burdensome for companies and puts them at a competitive disadvantage because it forces them to disclose confidential information to their competitors, as stated by sponsors of the initiative, GOP Congressmen Bill Huizenga and James Inhofe.
The SEC rule has been successfully challenged in the courts by the American Petroleum Institute, a lobby group funded by the oil industry, before being redrafted in its final version in 2016.
Such delay has allowed the GOP to now trigger the oversight mechanism of the Congressional Review Act, which provides for the overturn of late-issued rules of an agency finalized by an outgoing administration.
The move has been welcomed by the Competitive Enterprise Institute. That’s the think-tank where climate change denier and Trump environmental transition team advisor Myron Ebell is Director of Global Warming and International Environmental Policy.
CEI officials said in a letter to Congress: “The SEC […] should not be promulgating rules implementing foreign policy objectives such as anti-corruption.Any such rules should come from clear foreign policy entities such as the Department of State.”
Heading the Department of State will be Rex Tillerson, the former Exxon Mobil CEO who’s a critic of Section 1504.
The current Acting Chair of the SEC Michael Piwowar (until Jay Clayton’s appointment is confirmed) issued a dissenting statement when the rule was drafted and put out for a consultation in December 2015.
Piwowar said that Section 1504 had nothing to do with helping investors: “It is yet another situation where politically-connected special interests are using shareholder resources to push their own agenda.”
Stuart Dalheim, Vice-President, Shareholder Advocacy at Calvert Investments, told RI that he was very disappointed with the vote in the House as investor protection rules such as Section 1504 should not be a partisan issue.
“The SEC rule requires disclosure that is consistent with similar EU directives and Canadian laws. [If the repeal goes ahead] We’ll get incomplete disclosures and different kinds of data. That will make it harder for investors to understand risks.”
Dalheim added that Calvert has been active with a coalition of investors to support transparency and despite not having an exact strategy regarding the repeal of Section 1504, this work will continue.
George Dallas, Policy Director at the International Corporate Governance Network (ICGN) told RI that from the perspective of a body representing investors managing over $26 trillions in assets, this is “problematic”.
“They say transparency is the best disinfectant. It would be very concerning if this would be withdrawn – who knows what it may excuse in terms behaviors that potentially can go undetected.”
Asked about the argument that the rule impairs the competitiveness of American companies, Dallas said:
“Well, the next thing we are going to see happen is that they want to take away the Foreign Corrupt Practices Act [which prohibits bribes to foreign officials to assist in obtaining or retaining business], for which the same argument can be used.”
Dallas added that there is a false assumption that investors are trying to implement foreign policy objectives. He said: “Long-term investors are increasingly focusing on systemic issues, conscious of trying to promote systemic stability. Those issues can include climate-risk, bribery, corruption and the need to promote transparency.”
Sasja Beslik, Head of Sustainable Finance at Nordea Wealth Management and EITI Board Member representing a constituency of 90 global investment institutions with $19 trillion AUM, told RI that the move could be symbolic for the new administration, but not for the rest of the world.
“It’s sad news that the new American administration is dismantling such an important rule. But it’s rather symbolic, in practice the American companies that attract capital from the rest of the world will still have to be transparent on these issues, otherwise they will have to face a lot of questions. Many of them are already disclosing this information and there is no reason for them to change that.”
A spokesperson for UBS Global Asset Management confirmed that the investment house was supportive of the transparency rule. Paul Clark, Global Head of Corporate Governance Services, was among the signatories of an investor coalition representing $5.6 trillion in AUM that commended the SEC for its leadership in implementing Section 1504.
The spokesperson said UBS is monitoring the developments in the US Congress but said it would “too early to comment and speculate about the outcomes of the repeal”.