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SEC Commissioners Acknowledge That Anti-Corruption Policy Is Outside The SEC’s Area Of Expertise

SEC

Even though the Securities and Exchange Commission has a specialized Foreign Corrupt Practices Act unit, the FCPA’s legislative history is clear that the SEC never wanted any role in enforcing the FCPA’s anti-bribery provisions. (See here for the article “The Story of the Foreign Corrupt Practices Act).

However, congressional leaders at the time of the FCPA’s enactment had a high level of distrust with the Justice Department and insisted, against the SEC’s objections both when the FCPA was enacted in 1977 and when it was first amended in 1988, that it play a role in enforcing the FCPA’s anti-bribery provisions.

During Congressional hearings in the mid-1970’s, an SEC Commissioner stated:

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Friday Roundup

Roundup

Firtash extradition, scrutiny alerts and updates, spot-on observation, and refreshing words. It’s all here in the Friday roundup.

Firtash Extradition

In April 2014, the DOJ announced the unsealing of a criminal indictment charging six individuals “with participating in an alleged international racketeering conspiracy involving bribes of state and central government officials in India to allow the mining of titanium minerals.” (See here for the prior post).

Among those charged was Dmitry Firtash, a high-profile Ukrainian businessman.

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Resource Disclosure Extraction Provisions Reboot

reboot

As highlighted here, House Republicans plan to “take the ax to the Securities and Exchange Commission’s disclosure rule for resource extraction, which adds an unreasonable compliance burden on American energy companies that isn’t applied to their foreign competitors. This rule, which closely mimics a regulation already struck down by the courts, would put American businesses at a competitive disadvantage.”

The rule – based on Section 1504 of Dodd-Frank titled “Disclosure of Payments by Resource Extraction Issuers” – has been highlighted on these pages literally since 2009 (see here).

The usual suspects are aghast and have stated that “not only do [the administration and Congress] think corruption is perfectly acceptable, but that they intend to become proactive enablers of corruption.”

Seriously.

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Judge Vacates SEC Rule Regarding Resource Extraction Disclosure Provisions

The day after Congress passed the massive Dodd-Frank Act in July 2010, I  published this post regarding Section 1504 (“Disclosure of Payments by Resource Extraction  Issuers”), a “miscellaneous” provision tucked into the bill at the last moment.  I predicted that Section 1504 was sure to cause much angst and substantially  increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.  I noted that Section 1504 was akin to swatting a flay with a bazooka and that just because bribery and corruption are bad, does not mean that every attempt to  curtail bribery and corruption is good or represents sound policy.

I further noted that in passing Section 1504, Congress(as if most members of Congress likely even knew that the miscellaneous provisions was tucked into the massive Dodd-Frank Act) was revisiting an issue sensibly put to rest many years ago in passing the FCPA.

The background is as follows.

The FCPA as enacted in 1977 contained (and still contains) an outright prohibition on improper payments to “foreign officials” to obtain or retain business (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.  The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including most notably Senator Proxmire (D-WI – a Congressional leader on what would become the FCPA), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate. Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report on what would become the FCPA is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected): “Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

Back to Section 1504 of Dodd-Frank.

Numerous prior posts have highlighted the judicial challenge to the SEC rule implementing Section 1504.  Yesterday U.S. District Court Judge John Bates vacated the SEC’s rule.  (See here for the decision).  The decision was not as to the merits of Section 1504, rather as to the SEC’s rule implementing Section 1504, and the decision is thus focused on administrative law specifics.

Regardless, I applaud the decision.

Feel good legislation that regulates an area that is already subject to criminal prohibitions while imposing significant compliance burdens on companies (the SEC itself estimated that the provision would cost U.S. public companies at least $1 billion in initial compliance costs and
$200 to $400 million in ongoing compliance costs) does not represent sound public policy.

For additional coverage of the decision, as well as links to other commentary, see here from Samuel Rubenfeld at Wall Street Journal Risk & Compliance Journal.

Judicial Challenge Filed As To Resource Extraction Disclosure Provisions

The day after Congress passed the massive Dodd-Frank Act in July 2010, I published this post regarding Section 1504 (“Disclosure of Payments by Resource Extraction Issuers”), a “miscellaneous” provision tucked into the bill at the last moment.  (The post provides a general overview of Section 1504’s provisions).  I predicted that Section 1504 was sure to cause much angst and substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.  I indicated that Section 1504 was akin to swatting a flay with a bazooka and that just because bribery and corruption are bad, does not mean that every attempt to curtail bribery and corruption is good.

As highlighted by various posts since July 2010, the SEC’s final rules implementing Section 1504 were long-delayed and only came into effect this past August.  (See here for the final rules).

Against this backdrop, it is little surprise that last week the following organizations – the American Petroleum Institute, the Chamber of Commerce, the Independent Petroleum Association of America, and the National Foreign Trade Council – filed a complaint (here) in the U.S District Court, District of Columbia, against the SEC:  seeking a judicial declaration that Section 1504 violates the First Amendment and is thus null and void; and seeking to vacate Section 1504 on the grounds that the SEC acted arbitrarily and capriciously in violation of the Administrative Procedures Act in implementing Section 1504’s final rules.

In pertinent part, the complaint alleges that Section 1504 compels “U.S. oil , gas, and mining companies to engage in speech – in violation of their First Amendment rights – that would have disastrous effects on the companies, their employees, and their shareholders.”  As to the SEC’s purported defense that its rules implementing  Section 1504 were required by law, the plaintiffs allege that the SEC “grossly misinterpreted its statutory mandate” and paid “lip service” to the requirement that SEC rules factor in a cost-benefit analysis.

The complaint cites the SEC’s own estimate that Section 1504 will “cost U.S. public companies at least $1 billion in initial compliance costs and $200 to $400 million in ongoing compliance costs” and that it “could add billion of dollars of [additional] costs” through the loss of trade secrets and business opportunities.  All this, the complaint states, for the purported benefit that Section 1504 “may result in social benefits” that “cannot be readily quantified with any precision” (citing to the SEC).

The SEC has experienced rough waters of late in the D.C. Circuit and that court is where several SEC rules have found their final resting place.  The plaintiff’s attorney in many of those cases has been Eugene Scalia (Gibson Dunn – here).  (See here for a recent Wall Street Journal article about Scalia and here for a recent Wall Street Journal op-ed by Scalia).  Scalia is representing the Section 1504 plaintiffs and this judicial challenge will be interesting to follow.

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