SEC’s White: Wrong On Extractive Industries Rule

Seal of the U.S. Securities and Exchange Commi...

SEC Commissioner Mary Jo White, in a speech this week, had this to say about Dodd-Frank section 1504 rules.

But other mandates, which invoke the Commission’s mandatory disclosure powers, seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.

Sorry, that is wrong. Previous in the same speech, White recaps a previous rule-making exercise.

Interestingly, in its landmark 1977 report, the SEC’s Advisory Committee on Disclosure, chaired by Al Sommer, responded to these issues.  It recommended that “the Commission require disclosure of social and environmental information only when the information is material.”

Rather than argue against materiality as a criterion for disclosure, lets accept it ‘arguendo’.

Lets look at the case of Parker Drilling Co. (PKD). Parker, through dodgy intermediaries and vague accounting, paid for bribes to Nigerian government officials to expedite transactions related to offshore drilling rigs.  The amounts which Parker was fined by the Department of Justice and SEC, and other actions they agreed to take, are outlined briefly in their 10-Q, Note 11 – Contingencies.

What is material in this case? The amount of the bribe? The fine? The possible shareholder lawsuits? No, what is material is anything that might change the mind of a reasonable investor. By that standard, the mere existence of the problem is material.

Imagine the SEC existed in the time of slavery in the US. Would it rule that disclosure of slave ownership isn’t relevant unless the value of the slaves is ‘material’? Of course not! Even being open to the possibility of slave ownership would be material.

Commissioner White basically took this position herself in the paragraph previous to her comment above.

Seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share.

I am sure Commissioner White is a reasonable person, and I suspect that these concerns which she wholeheartedly shares could influence her decision to invest. As such, these disclosures meet the materiality requirement she herself quotes with approval.

This is all something of a tempest in a teapot, because the SEC has to implement Dodd-Frank, like it or not. They are struggling with doing that for section 1504. The final rule delivered last year was voided this past July by a judge in a lawsuit against the SEC brought by the American Petroleum Institute. The judgement decided that the SEC had misread the intent of the law. I disagree with the judge here. The SEC did a fine job of understanding the law, and the Form SD implementation was a good one.

(Full disclosure: Form SD would have used XBRL. Considering the multi-dimensional nature of the disclosure, this was, IMHO, the appropriate technology choice.)

The bottom line is that social and environmental disclosures are material, and it would be better for the US to step up to the disclosure responsibilities involved.

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