Financial Reform Watch

Published — December 16, 2010 Updated — May 19, 2014 at 12:19 pm ET

SEC moves ahead on oil, mining, derivatives transparency


The Securities and Exchange Commission proposed new transparency rules today mandated by the Dodd-Frank reform law for mining companies, international oil producers, as well as companies that buy or use certain “conflict” minerals from Africa.

SEC Chairman Mary Schapiro, a former board director at Duke Energy Corp., did not participate in the commission’s vote to propose regulations that would require oil producers to annually report how much they pay to foreign governments in royalties, taxes, license fees, production entitlements, bonuses and other fees. The reporting requirement would also apply to international mining companies.

Schapiro recused herself, citing “personal stock holdings.” A financial disclosure form from January 2009 shows Schapiro received stock and deferred compensation from Duke, and that she held between $250,001 and $500,000 in Duke Energy shares. John Heine, an SEC spokesman, declined comment on Schapiro’s recusal.

Energy companies have already lobbied to weaken the requirement, saying it would put them at a competitive disadvantage. Proponents say making foreign payments public is important to investors and will help an international push to bridge the disconnect between the governments of developing countries that take in millions of dollars from energy companies and the population that sees few, if any, benefits.

Specifically, the SEC proposal would require companies to include in their annual reports to the agency:

  • Type and total amount of payments for each project;
  • Type and total amount of payments made to each government;
  • Total amounts of payments, by category;
  • Currency used for payments;
  • Financial period in which payments were made;
  • Business segment of the company that made payments;
  • Government that received payments;
  • Production project to which the payments relate.

“Because expertise about these events does not reside within the Commission or our staff, we have drafted these proposed rules carefully to follow the direction of Congress,” Schapiro said.

Conflict Minerals, Derivatives End-Users

SEC commissioners also voted to propose rules to disclose if they use so-called “conflict minerals” such as gold or wolframite from the Congo, where mines are controlled by rebel groups in a long-running and bloody civil war. The minerals are used to make jewelry, aerospace parts, computers, and other products. Manufacturing groups say it will be difficult to pinpoint any conflict minerals because of complex, lengthy supply chains.

Distinguishing between end-users of derivatives and those who use the sophisticated instruments to bet on price swings was also on the SEC’s agenda.

Commissioners unanimously voted to propose a rule requiring companies that use securities-based derivatives to notify the SEC when claiming an end-user exemption from mandatory clearing. Under the Dodd-Frank law, derivatives buying and selling must go through a clearinghouse that also monitors the trades — unless the transaction is for an end-user to hedge corporate costs or commercial risks.

Companies which claim the end-user exemption must also tell the SEC if they will use a credit agreement, pledged assets, or other resources to meet financial obligations for the derivatives contract.

The SEC said it is also considering creating a similar exemption for small banks, credit unions, and savings associations with total assets of $10 billion or less.

Regulation of the opaque $600 trillion derivatives market by the SEC and the Commodity and Futures Trading Commission is one of the main planks of the Dodd-Frank law. Over-the-counter derivatives trading by highly-leveraged speculators is viewed by many experts as a systemic risk to U.S. financial markets.

Banks, companies, consumer groups, and others have until Jan. 31 to submit comments and suggestions about the SEC’s proposed rules.

Read more in Inequality, Opportunity and Poverty

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