Did we say transparency? Never mind

Just as Canadian miners are reporting payments to governments for the first time under ESTMA, the new Republican administration has done a full 180. The U.S., once a disclosure leader, is now bucking the trend
By Diane Peters

Pilot to copilot: President Donald Trump and House Speaker Paul Ryan are keen to roll back regulations. Among the first: payment disclosure rules for mining and energy firms

Irony is great when it turns up in novels or movies. But when it surfaces where it doesn’t belong—in connection with legislation governing the business and reporting practices of international mining and resources companies, say—things can get awkward. Or worse.

“We’ve known this was coming for some time,” says Stuart Olley, senior partner at Gowling WLG in Calgary and head of the firm’s natural resources group. The “this” he’s referring to is the onset of the first formal reporting period under Canada’s Extractive Sector Transparency Measures Act (ESTMA). Passed in late 2014 by the Harper government, ESTMA requires mining and resources companies that are listed or doing business in Canada to disclose all payments greater than $100,000 made to foreign and domestic governments—and those rules kicked in for the fiscal 2016 reporting year.

Nothing ironic there, of course—except that at precisely the same time companies here were getting ready to report, the new Republican-led U.S. Congress began the month of February by voting to rescind nearly identical Securities and Exchange Commission foreign payments disclosure regulations for American-listed companies. Those rules were supposed to take effect in 2019. Yet as soon as Congress’s veto received President Donald Trump’s signature, it became official.

“The issue of transparency within the extractive sectors has been an issue for a long time. And the U.S. was one of the leaders in this area,” says Olley. “In fact, it’s fair to say Europe and Canada have extractive legislation now largely because of a push from the U.S. to ensure that there was comparability among international companies and that U.S. companies would not be at a disadvantage. So there’s a certain amount of irony in the fact that now the U.S. is going to back away from it.”

The consequences of this 180-degree reversal are still being debated. As to what it holds for Canadian-listed companies, opinions vary greatly—from very little impact to significant negative repercussions when competing with American firms in foreign markets. A regulatory imbalance could also affect foreign firms’ calculus when it comes to listing on Canadian exchanges or bidding on Canadian-based projects since, under ESTMA, foreign firms listed or doing significant business here must also disclose all payments they make worldwide.

The obvious, immediate consequence for Canadian firms is the effort and cost of reporting. “It creates another layer of regulatory burden on Canadian companies that U.S. companies will not have,” says Michael Pickersgill, a partner at Torys LLP in Toronto. Josh Jantzi, a partner in the regulatory and energy litigation group at Dentons Canada LLP in Calgary, agrees. “This is going to benefit sole U.S. reporters. The cost of making these reports is actually quite high.”

Stuart Olley predicts this could result in companies lobbying the Canadian government “to revisit what we’re doing here.” But he doesn’t expect any changes. For that matter, unlike his counterparts, he doesn’t think the regulatory burden is that onerous. “That’s a bit of a straw man,” he says.

What is potentially much more significant, Olley says, are the strategic advantages U.S.-reporting companies will gain in being able to see what their Canadian-reporting competitors are paying to governments worldwide in taxes, royalties and fees. “Under ESTMA, the way you have to report the sectoral specificity and the amount you’ve paid in each particular jurisdiction can potentially give competitors [who don’t have to disclose that information] insight into how you have bid on particular projects. Likewise, in some countries when you bid for licenses or blocks, you actually provide what you’re going to pay in royalties. This sort of disclosure will give competitors clear insight into what you have bid,” he says.

A growing web of international payment transparency rules may offset some of this concern. Under the global standard Extractive Industries Transparency Initiative (EITI), for example, similar financial information will be disclosed. The United States is one of 51 countries to sign on to the EITI, though only 25 companies’ payments are covered in its disclosures to date. Another limiting factor: data is also only published in aggregate form. “It’s not the same level of detail,” say Olley. “And because it is a voluntary system, you only get picked up on that if the country in which you are doing work has signed on to the initiative. So it’s much more hit and miss.”

Another important wild card, of course, is what other changes might be in store for U.S. regulations. Trump, for instance, has selected “business-friendly” Wall Street lawyer Jay Clayton to replace Mary Jo White as SEC Chair. Of interest to miners, one of the outstanding files on his desk will be SEC proposals unveiled last summer to modernize and harmonize U.S. mining disclosure rules, related chiefly to reserves reporting (see sidebar at bottom). Trump’s also issued an executive order asking for a review of all regulations tied to the Dodd-Frank financial reform legislation. The foreign payments regulation was initially a part of that, of course, but when it failed a 2012 court challenge, the SEC had to rewrite it and it only passed in late June of last year. That timeline is how the GOP were able to strike it down so quickly, invoking a little used provision under the Congressional Review Act that applies to any regulation passed after June 13, 2016. The bulk of Dodd-Frank predates that, so other wholesale changes will require new legislation in Congress.

Whatever Trump does, Olley says it’s unlikely to trigger a wave of transparency legislation repeals beyond the U.S. border. “When you look at the trend over the last 15 years, it has been to greater and greater transparency. And while the U.S. certainly initiated that, you now have tremendous force behind lobby groups like the EITI, Publish What You Pay, all of these things. I think there’s just a momentum there globally that people are going to say, ‘Well, the U.S. is going to do what they do under the Trump administration but we’re going to push forward on those agendas.’ ”

If Olley’s right, Pickersgill says the discrepancy could raise concerns for folks running the Toronto Stock Exchange if it makes the U.S. a more attractive location for miners and other resources companies to list. “In theory, it’s a business opportunity,” he says. “This does open up the New York Stock Exchange to be an alternative home for some of those companies.”

Adam Givertz, a partner with Toronto- and New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, isn’t so sure. He doesn’t see the repeal of U.S. transparency legislation as being “terribly significant” overall. And when it comes to the listings business, he says the infrastructure of analysts, lawyers and venture capitalists in mining capitals like Toronto, Sydney and London matters more than simplified disclosure. “It may make U.S. companies more easy to understand next to other companies in the world,” he says, “but are U.S. capital markets going to take business away from the TSX? With such a strong Canadian capital market base, I don’t think so.”

Sidebar: New rules for reserves
Proposed SEC changes to harmonize reserve reporting are still in the cards

Last June, at about the same time the now-defunct U.S. foreign payments disclosure regulation was being passed into law in Washington, D.C., the Securities and Exchange Commission released a draft of proposed revisions to the country’s 30-year-old disclosure rules for the mining sector.

The changes were “long overdue,” says Torys’ Pickersgill. “They will make disclosures more consistent and make it easier for issuers and investors.”

Interestingly, the new rules are designed to bring the U.S. more closely in line with current industry and global practices, including the Committee For Mineral Reserves International Reporting Standard guidelines and Canada’s National Instrument 43-101, the “blue-chip” standard in mining disclosure.

Domestic and foreign companies registered with the SEC will have to comply, but Canadian multijurisdictional disclosure system (MJDS) companies get an exemption, so only small number of Canadian firms will be affected.

The most important aspects of the new rules allow for more complete disclosure of mineral reserves, says Lee Hodgkinson, national industry leader in mining at KPMG. Previously, “you were not able to disclose the full picture.”

It’s not clear how close the SEC is to finalizing the changes. Despite the GOP’s reversal of the payment disclosure law, most observers believe these changes will go through once Clayton, Trump’s nominee as the new SEC chair, takes office. “The Trump administration is pro-business and less regulation. The modernization of the reserve disclosure would be welcome by the U.S. mining industry,” says Hodgkinson.

Olley of Gowling WPG agrees. “When analysts and companies report reserves, there’s an enormous benefit if they’re all reporting based on the same standards, because it makes comparability between companies much easier.” —D.P.

Photography: Joshua Roberts/Reuters

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