New Corporate Compliance Functions Resulting from the SEC's Increasing Interest in Hydraulic Fracturing
Submitted by: Jeffrey C. Torres, Law Office of Jeffrey C. Torres, P.C.
It should come as no surprise that oil and gas companies engaged in "fracking" are subject to increasing regulatory scrutiny as regulators at every level are focused on ways to force detailed disclosures of risks associated with hydraulic fracturing in underground shale deposits. Today, Arkansas, Michigan, Montana, Pennsylvania, Texas and Wyoming require the disclosure of hydraulic fracturing chemicals, and other states are considering requiring such disclosure. What may come as a surprise to compliance professionals -- already focused on these state requirements and federal regulatory activity initiated by the Environmental Protection Agency, the U.S. Department of Interior, and the U.S. Department of Energy -- is that the Securities & Exchange Commission has apparently aimed its considerable oversight authority on hydraulic fracturing.
The source of the SEC's concern with hydraulic fracturing apparently arises from shareholder proposals seeking greater hydraulic fracturing disclosures from oil and gas companies. These shareholders are seeking greater disclosure by submitting resolutions for proposals for inclusion in annual proxy statements, pursuant to Rule 14a-8 under the Securities Exchange Act of 1934. Submitters of these proposals tend to be institutional funds and shareholder action organizations. Other supporters of broader disclosures include proxy advisory companies such as Institutional Shareholder Services which, on October 18, 2011, announced a policy encouraging voting in favor of proposals requesting greater disclosure.
Earlier this year, the SEC's Division of Corporate Finance began to evaluate disclosure issues involved with hydraulic fracturing through staff comments to filings by companies including QEP Resources, Inc. and SandRidge Permian Trust. Quicksilver Resources, Inc. and Exco Resources, Inc. also received SEC subpoenas requesting additional information regarding shale gas well production. Although the SEC does not formally regulate hydraulic fracturing activities, the agency's comments and requests for additional technical information can and should be viewed as the beginnings of an informal attempt to regulate the industry. While the propriety of the SEC's recent actions is for lawmakers charged with the agency's oversight, the reality is that compliance professionals should be prepared to make these types of disclosures in the foreseeable future.
Once faced with the requirement to disclose, the question then becomes what to disclose. Public companies are required to disclose information that is material, based on the specific circumstances, but there are no bright-line rules for disclosure where the potential risks and liabilities of a newer technology are unknown or have not yet been demonstrated. Thus, oil and gas companies engaged in "fracking" operations should enjoy some latitude in the near future as to the scope of information provided to the SEC, particularly in Items 101 (Description of Business), 103 (Management Discussion & Analysis), and 503(c) (Risk Factors), in their disclosures required by SEC Regulation S-K. At a minimum, these disclosures should discuss new governmental regulations and policies related to the impact of hydraulic fracturing chemicals on drinking water sources, and the companies' handling of wastewater. Given the SEC's recent involvement, the risk of failing to report other known or suspected environmental risks should weigh against increased liability resulting from governmental action as well as shareholder action.
Jeffrey Torres can be reached at torresjeffrey@yahoo.com or 888-992-5557.
