Q&A: Company Disclosures Under Dodd-Frank Section 1504

In July 2010, Section 1504 of the Dodd-Frank Act was signed into United States law. A landmark step for transparency, the law requires oil and mining companies registered with the Securities and Exchange Commission (SEC) to publicly report how much they pay governments for natural resources. This information will shed light on a critical source of income for resource-rich countries around the world, helping governments to collect what they are owed and citizens to realize the full benefits of their resource wealth. The SEC implemented Section 1504 in regulatory requirements on August 22, 2012.

What is Dodd-Frank Section 1504?
In July 2010, Congress signed into federal law the Dodd-Frank Wall Street Reform and Consumer Protection Act, marking the most significant change to U.S. financial regulation since the Great Depression. Created to improve transparency and accountability in the financial system, the law includes mandatory reporting requirements for oil, gas and mining companies in Section 1504.

Section 1504 requires U.S.-listed companies engaged in the commercial development of oil, gas and minerals to publish a detailed account of what they pay the U.S. and foreign governments on a country-by-country and project-by-project basis.

On August 22, 2012 the U.S. Securities and Exchange Commission adopted final rules to implement Section 1504.

What motivated these new rules?
Resource revenues are a critical part of the world economy. Approximately $2 billion of petroleum are traded daily worldwide. In 2011, oil production reached more than 83 million barrels per day, representing 15 percent of the global commodity trade. Yet two-thirds of the world’s poorest live in countries with substantial natural resource wealth. The majority of the bottom billion live in countries rich in oil, gas and mining.

This gap results in part from a lack of transparency surrounding the deals made between companies and governments. Historically, this secrecy has enabled large-scale corruption, allowed companies to operate without proper public oversight, and kept citizens and investors in the dark on the true value and risks of resource development.

In passing Section 1504, the U.S. Congress took a historic step to counter these trends, acting to help developing countries make the most of the money they earn from natural resources, discourage corruption, reduce conflict and enable enhanced investor analysis.

Where did Section 1504 come from?
Revenue Watch and a broad coalition of development and good governance organizations, along with investors and producing country stakeholders, worked for years to promote the transparency reforms that became Section 1504, in partnership with the global Publish What You Pay coalition.

Section 1504 was co-authored by U.S. Senators Richard Lugar (R-Ind.) and Ben Cardin (D-Md.). It passed into law under Dodd-Frank following a long, public bipartisan Congressional effort, and thanks to sponsorship from leaders like Sens. Lugar and Cardin, Senator Chris Dodd (D-Conn.), Senator Patrick Leahy (D-Vt.) and Congressman Barney Frank, then Chairman of the House Financial Services Committee.

What, broadly, does Section 1504 require?
The SEC specifies that, under the law, companies must report payments related to the "commercial development of oil, natural gas or minerals," defined in final rules "to include the activities of exploration, extraction, processing, and export, or the acquisition of a license for any such activity," in every country of operation and for each project. In sum, a vast amount of extractive sector activities are covered by the U.S. law.

What kinds of payments will company reports include?
Under the SEC’s final rules, companies must disclose taxes, royalties, fees, production entitlements, bonuses, dividends and payments for infrastructure improvements. Fees to be reported include rental fees, entry fees, and concession fees; bonus payments are specified to include signature, discovery, and production bonuses.

Are all payments, of any size, covered?
In issuing final rules, the SEC determined companies must report “any payment (whether a single payment or a series of related payments) that equals or exceeds $100,000” in a fiscal year. Importantly, the SEC explicitly decided that in order to further the transparency objectives of Section 1504, the threshold used to determine which payments will be reported should account for their impact on host countries, rather than their size relative to companies’ global balance sheets.

Are payments to all levels of government, both foreign and domestic, covered?
Section 1504 and the final rules implemented by the SEC require companies to report payments made to the U.S. federal government and all foreign governments, including subnational governments such as governments “of a state, province, county, district, municipality or territory under a foreign national government.” Payments to U.S. state governments are not covered.

How do to the rules define “project” for purposes of project-level reporting?
The SEC provided clear guidance on how “project” is to be understood for the purposes of reporting under Section 1504. While the final rules do not explicitly define “project” in order to offer flexibility to companies applying the term in different business contexts, the SEC noted that the term is commonly understood within industry, and determined that “project” reporting should—in general—be linked to the “contractual arrangements” that define the relationship and payments made between companies and governments.

The SEC rejected the idea that multiple activities within an individual country could be collectively considered to be a single “project” and the suggestion made by some companies that only “material” projects should trigger a reporting requirement.

Which companies will have to report?
Over half of the world’s total value of extractive industry market capitalization is found on U.S. exchanges, and a large share of international oil, gas and mining companies are registered with the SEC.

According to the SEC over 1,100 companies will be covered by the information disclosure requirements under Section 1504, including a majority of the most profitable international oil companies (e.g. Chevron, Exxon, BP, Shell and Total), the largest global mining companies (Rio Tinto, Vale and BHP Billiton) and certain state-owned entities (Petrobras, Sinopec and Petrochina).

Are there any significant exemptions from reporting, for example, where companies argue that particular dislosures are sensitive in nature?
No. Final rules for Section 1504 do not offer exemptions of any kind—not for foreign companies or smaller companies, and not in deference to producing country laws or contracts that might prohibit companies from disclosing the information required by the final rules. The SEC also noted that companies may not evade reporting simply because they are “subject to similar reporting requirements under home country laws, listing rules, or an EITI program.”

This means all companies covered by the law will report the same information in every country they operate in, ensuring that data reporting under Section 1504 will be comprehensive, of comparable type and mandatory, as Congress intended. The SEC’s decision not to allow for exemptions where governments might object is especially important. The fact that final rules contain no loophole for governments averse to transparency will prevent these governments from passing laws to minimize the impact of reporting under1504, and ensure that citizens living under even the most secretive regimes will have access to information on the value of their natural resource.

When will we see the first reports under the new rules?
Companies must file the new disclosures within 150 days of the end of their fiscal year. Companies reporting on a calendar-year basis will begin reporting in 2014 on payments made between October and December of 2013. The first full-year company reports under Section 1504 are anticipated in 2015.

How will this information add to existing reporting under the Extractive Industries Transparency Initiative?
The Extractive Industries Transparency Initiative (EITI)—a voluntary reporting framework that compares what oil, gas and mining companies pay governments with what governments say they receive—is a crucial transparency standard and important forum for public oversight of the extractive industry.

However the quality, timeliness and usefulness of EITI reporting varies greatly by country, and the data delivered isn’t always sufficient for investor analysis. Additionally, EITI doesn’t cover enough ground quite yet. Case in point: while over 35 countries have adopted EITI, Shell operates in over 90 countries and Total in over 130.

Section 1504’s requirements were designed to complement EITI reporting by building on its reporting framework to deliver more detailed coverage of companies and countries. Under Section 1504, companies will produce comprehensive, regular and standardized data useful to investors and citizens in producing countries, including those lacking the political will to implement EITI.

What is the added value of Section 1504’s requirement for project-level reporting?
The increasing availability of country-level payment data is a major step forward for transparency, but the story this data can tell is still rather limited. Not only are oil, gas and mining activities highly site-specific, but the legal and fiscal terms of extraction, risks and anticipated returns, and entitlements delivered directly to affected governments and/or communities often vary greatly between different projects in the same country.

Project-level information therefore helps investors properly assess risk, governments fully track company compliance, and citizens monitor development activities that impact their lives and livelihoods. Producing communities, in particular, need access to project-specific information to assess whether they are receiving their fair share, ensure funds are managed responsibly, and build the trust essential to reducing conflict and instability in resource-rich areas.

Project reporting is not a new concept within the industry. Some companies, such as Newmont and Statoil, which disclose payment information on a voluntary basis, have published revenues related to specific projects. The World Bank’s IFC requires project reporting and the publication of related contracts as a lending condition, and a number of EITI countries, including Indonesia, Burkina Faso and Timor-Leste, either explicitly or implicitly incorporate project-level disclosures in their EITI reports.

Will these rules harm the competitiveness of companies covered by Section 1504?
These rules require the reporting of only payments to governments, not general proprietary information or that which can be construed as trade secrets. Companies covered by the law win business for their superior technical expertise, capitalization and strong track records working in challenging environments around the world—not because they have a commitment to secrecy. There is no evidence to suggest that companies that already publish payment information, such as Norway’s Statoil or Newmont, have suffered for their transparent practices.

The fact that so many internationally active companies are already covered by Section 1504 further deteriorates the argument that these companies will suffer in the global marketplace as a result. Those companies worried about competitive effects should be focused on compliance and encouraging broader coverage of companies across markets to level the playing field and ensure all companies are held to the same standard.

Will information disclosed under Section 1504 really be used?
Section 1504 received tremendous support from a variety of international stakeholders. Investors with over $1.2 trillion under management have informed the SEC that the law will aid their risk analyses and help strengthen markets. Government officials from producing countries and key centers for the oil, gas and mining industry have publicly supported Dodd-Frank disclosures, highlighting how strong international transparency standards can help resource-rich countries finance their own development and contribute to the growth of open and competitive markets. Citizen coalitions from resource-rich countries around the world have testified that Section 1504 will support their work to monitor companies and governments, reduce violence and increase stability in producing areas, and put an end to corruption.

Ideally, payment disclosures under Section 1504 will be used alongside existing reporting and analyzed with contract information and data on government receipts, budgets and expenditures to encourage accountability throughout resource development.