SEC imposes two rules for corporate transparency under Dodd-Frank Act. Industry whines

SEC's new rule could make some of this go away by
forcing more transparency in the oil and mining industries. After a two-year delay and fierce opposition by some industry groups, the Securities and Exchange Commission this week adopted two natural-resource transparency rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. One requires U.S. mining and oil companies to disclose taxes, royalties and fees they pay foreign governments in an effort to stem corruption common in some nations.

The second rule requires companies to make "reasonable" attempts to determine whether the tin, tantalum, tungsten and gold they use in their manufactures came from Democratic Republic of Congo mines that support armed groups in that African country where warfare has taken as many at five million lives. In the SEC's original "conflict-metals" rule proposed in 2010, companies would have had to prove the metals used in their goods didn't come from the mines. Although the final rule was supposed to be imposed by April 2011, the SEC is giving companies two to four years to comply, something which has made human rights groups unhappy since the blood is being spilled now.

The SEC estimates compliance with the conflict-metals rule could cost $4 billion, which was one reason for the 3-2 vote. One of those opposed was Republican Commissioner Daniel Gallagher who said, 'I do not like to see social or foreign policy provisions engrafted onto the securities laws.' He also noted that the rule might not work to curtail the war that the conflict metals are, in part, funding.

Gallagher was also the lone vote against the transparency rule imposed on extractive industries, making the same argument about foreign policy and security laws. (Two commissioners recused themselves in that vote for conflict-of-interest reasons.)

The rule is required under Section 1504 of Dodd-Frank. SEC diluted it by limiting disclosures to projects under $100,000. The rule takes effect in 2014. The commission estimates it will cost around $1 billion for companies to comply.

Part of the delay in getting the rule passed came as a result of companies lobbying the commissioners for changes. Although some companies, mining operations in particular, support transparency rules, the foes argue that they will be put at a disadvantage against foreign companies, many of which are state-owned, that are not required to make the same disclosures and that they may be excluded from operating in countries, such as China, which explicitly prohibit the kind of disclosures the rule requires.

The American Petroleum Institute's chief economist, John Felmy, told reporters that the S.E.C. rule would force oil and gas companies to reveal secret, proprietary information about their expenditures and bidding strategies. 'With a few clicks of a mouse, state-owned foreign firms ' companies like China National Petroleum Company and Russia's Gazprom ' would plunder that information, which could help them determine their rivals' strategies and resource levels,' he said.

Advocates of the rule include the editorial boards at The Economist and The Financial Times, both of which view the objections as overblown.

Both the extractive industry and conflict-metals rules are likely to generate lawsuits to stop their imposition. API had hinted that it might sue even before the rule was passed, perhaps in hopes that just the threat would cause the SEC to weaken it. A lawsuit now would further delay implementation of the rule and possibly gain a court-ordered weakening of it.

The Brookings Institution, which has been labeled liberal, centrist, center-left, and conservative, depending on who is doing the naming, posted an opinion brief on the rule Tuesday in which it stated:

But how costly to the corporate sector would disclosure be? It would be naïve to suggest that every corporation would gain (or have no costs) from full disclosure, at least in the short term. This has little to do with the actual administrative expenses of data collection for disclosure, because the incremental cost for new data collection over what data the companies already collect for tax and internal purposes would be small.

Instead, the real reason that disclosure may be costly to some companies in the short term relates to a different strand of our research: there are two types of companies, those that focus on efficiency and innovation and can thrive in a competitive level-playing field, and those that derive gains from rent-seeking (and outright bribery), monopolistic behavior or tax avoidance. The latter group would have an interest in maintaining an opaque status quo and stand to lose from a more equitable environment resulting from effective transparency, while the former group would stand to gain, since the playing field would be leveled across all companies, benefitting the entrepreneurial and competitive firms.

Making it harder for companies to keep bribes, tax avoidance schemes and other shenanigans under wraps is exactly what the drafters of Dodd-Frank had in mind. It is no surprise that some of the richest companies on the planet are not eager for that to happen.