Dodd-Frank: Another Rule Bites The Dust

by Crista Huff

(originally published on February 6, 2017 and updated on February 13, 2017)

 

A costly Dodd-Frank-related rule affecting the energy industry — the Securities and Exchange Commission’s resource extraction rule — is heading toward repeal. The final version of the rule, which was approved in June 2016 for enforcement beginning in 2018, required “resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas or minerals.” This rule affected public companies — companies that trade on the stock exchange — but did not affect their private company competitors, nor many foreign competitors, creating an unbalanced playing field.

Sen. Jim Inhofe (R-OK) and Rep. Bill Huizenga (R-MI) co-sponsored a resolution that nullifies the resource extraction rule, which passed the House and Senate last week. President Trump is expected to sign the resolution in the near future.

Opponents of the repeal will characterize the payments to foreign governments as corrupt bribes, thereby casting aspersions on the energy industry. In reality, the rule applied to many normal costs of doing business: taxes, fees, royalties, payments for infrastructure improvements and more.

The rule did not seek to prevent these routine payments to foreign governments. It simply demanded that these payments be itemized to the U.S. government. And therein lies the eternal problem with government regulations. Compliance costs companies lots of money, because they need to hire new employees and attorneys who are devoted to doing the research and paperwork.

The Street reported “significant expenditures for compliance would have likely [been] incurred in 2017 and 2018,” totaling anywhere from $55 million to $575 million or more per year; and Sen. Inhofe cited a cost of $600 million per year. It should be noted that the bulk of these payments would already have been reported on corporate income tax returns, and easily flushed out in I.R.S. audits.

It is already illegal for U.S. companies to pay bribes to foreign governments. Ironically, if bribes were being paid to foreign governments, they would not likely appear as balance sheet items that were to be reported to the I.R.S. or S.E.C. Therefore, the resource extraction rule was pointless as a means to ferret out bribes. In reality, the formation of the S.E.C. rule was politically-motivated, with the goal of financially punishing energy companies for their very existence.

Left in the dust are Canadian and European companies whose governments enacted similar legislation, subsequent to U.S. adoption of the resource extraction rule. Those companies are now obligated to pay for expensive documentation, while their U.S. competitors are now free to focus time and money on energy exploration and production.

 

Source:

“SEC Adopts Rules for Resource Extraction Issuers Under Dodd-Frank Act”, U.S. Securities and Exchange Commission press release, June 27, 2016.

“Sen. Inhofe Discusses CRA Overturning Rule on Resource Extraction” — YouTube, February 2, 2017

 

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Crista Huff is a stock market expert, and an advocate for balanced trade and a strong U.S. economy. Send questions and comments to research@goodfellowllc.com.