The Securities and Exchange Commission (SEC) voted by a 3-2 margin Wednesday in favor of a final rule that drastically expands the scope of government while benefiting state-owned companies in Russia and China. A provision of the massive 2010 Dodd-Frank financial reform law has the ability to turn the SEC into a global watchdog while potentially causing irreparable harm to U.S. energy interests.
Section 1504, a little-known provision of the Dodd-Frank bill, imposes extraneous reporting requirements on SEC-listed oil, gas and mining companies for reasons far beyond shareholder protection. The purpose of this rule is to try to hold foreign governments accountable to their citizens for the allocation of their resource wealth. This is an admirable goal, but it’s bad policy.
This rule has the potential to handcuff the U.S. oil and gas sector, one of the bright spots during the Great Recession. By requiring only a limited number of players and payments to be reported, Section 1504 has anti-competitive repercussions. State-owned national oil companies, which control 78 percent of all oil and gas reserves, would be able to access and use the data in the reports to their tactical advantage in maneuvering for coveted international contracts. Russia’s Gazprom and the China National Petroleum Co. — both not covered by Section 1504 — certainly will do so.
The SEC failed to implement a rule that protects SEC-listed companies and their investors by keeping data confidential and aggregated at country level. Valuable, commercially sensitive data is available to Russian, Chinese and other state-owned oil companies.
If the SEC’s final rule requires highly detailed project-level reporting, the SEC will be enriching state-owned companies. Multilateral efforts already in existence such as the Extractive Industries Transparency Initiative (EITI) — a global transparency standard supported by more than 60 oil and gas companies — should be the model for reporting requirements, not Section 1504.
The SEC’s mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. It should be focused on preventing another financial collapse and ensuring that entrepreneurs have access to capital.
U.S. companies should not be put in a position where they are forced to choose which law to break — but by the passage of this reporting requirement, that’s where they are.
At the same time, the State Department, through its Bureau of Energy Resources, should actively promote EITI abroad as it remains the only process that brings all stakeholders to the table, reconciles both sides of the ledger and is the best framework to promote transparency. By encouraging greater transparency in resource-rich countries through the EITI framework, the United States can take the lead internationally without hurting American oil and gas companies.
Brett Conrad is founder and managing partner of Longboard Capital Advisors LLC and has a petroleum engineering degree from the Colorado School of Mines.
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