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Section 1504 of the Dodd-Frank Act: Implementation and Pending Litigation

By Kel Jack, Esq.
November, 2012

On August 22, 2012, the Securities and Exchange Commission (“SEC”) issued its final rules on the implementation of Section 1504 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), often referred to as the “Publish what You Pay Section or the “Cardin-Lugar Amendment” after Senator Ben Cardin and Senator Dick Lugar, who spearheaded the effort. This new disclosure requirement was included in the Dodd-Frank Act with the aim of increasing the transparency of payments made to governments for natural resources extraction. Specifically, Section 1504 requires publicly traded oil, gas and mining companies to make annual project-level disclosures of payments made to governments around the world involved in the commercial development of oil, natural gas or minerals. The disclosure requirement was well received by non-governmental organizations (“NGOs”) and citizens of developing countries, especially those in Africa who have dealt with the effect of the “resource curse.” As noted by Bill Gates, Microsoft co-founder and chairman of the Bill and Melinda Gates Foundation, which has provided significant funding to assist in the development of Africa, “in Africa and elsewhere, natural resources represent the best chance to finance development and reduce poverty . . . Transparency of financial flows is critical.”

According to Transparency International, the new disclosure requirement will affect approximately 1,100 companies. Compliance with the new rules is required for fiscal years ending after September 30, 2013. The required disclosures are to be provided on a new specialized disclosure form, Form SD, that will be due 150 days after the end of each fiscal year. Additionally, companies are mandated to file the disclosures as opposed to merely furnishing them, which is a crucial distinction because the filing requirement provides a vehicle for investors to potentially litigate if allegations of false reporting exist.

The rule applies to either a single payment or a series of payments equal to or greater than $100,000, including payments such as taxes, royalties, fees, production entitlements, bonuses, dividends, and infrastructure improvements made by an issuer’s consolidated subsidiaries and other entities controlled by the issuer, which must be disaggregated and reported by category.

Proponents of Section 1504, including NGOs such as Global Witness, note that it “will shine a light on billions in payments to governments from extractive companies which have previously remained secret, enabling corrupt government officials to siphon off or misappropriate natural resource revenues. As a result, citizens of resource-rich countries will have more power to track the money being paid to governments to combat oil and mineral sector corruption.” However, American Petroleum Institute (API) and natural resource companies such as ExxonMobil and Rio Tinto have opposed the implementation of Section 1504 on the basis that by becoming more transparent, they stand to lose contracts in countries where the host government either legally eschews disclosure or prefers to work with companies that are not subject to payment disclosure. Additionally, they argued that significant costs would be incurred in meeting the disclosure requirements of the rule. In this connection, on October 10, 2012, API, U.S. Chamber of Commerce, Independent Petroleum Association of America and the National Foreign Trade Council filed lawsuits against the SEC both in the District Court for the District of Columbia and the United States Court of Appeals for the District of Columbia challenging the validity of the rule. The CEO of API noted that “the rule as written would impose enormous costs on U.S. firms and put them at a competitive disadvantage against government-owned oil giants not subject to the rule.”

Supporters of Section 1504, including Senator Cardin, responded by noting that “increased transparency will not put companies that comply at a competitive disadvantage but will reduce the risks for U.S. investors and it will allow citizens in resource-rich countries to hold their leaders accountable. API wants to push us back to a time when the U.S. had few tools to add accountability and stability to the inherently unstable energy sector.”

This important case will ultimately determine how natural resource companies disclose information to the public and will continue to be closely watched by all parties.


Kel Jack is a New York licensed attorney with a focus on International Economic Law. He is a graduate of Georgetown University Law Center.