On July 2, 2013, the United States District Court for the District of Columbia vacated Securities and Exchange Commission (SEC) Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The court found:
- the SEC erroneously read the statutory language as requiring public disclosure of these payments; and
- the SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.
Rule 13q-1 was promulgated in August 2012 pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1504 of Dodd-Frank directed the SEC to issue final rules that require each publicly traded issuer that engages in the commercial development of oil, natural gas, or minerals (a “resource extraction issuer”) to annually report information relating to any payment made to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas or minerals. In this annual report, the issuers must disclose the type and total amount of payments made for each project and to each government. Under Section 1504 of Dodd-Frank, the payment information must be “submitted in an interactive data format” and “[t]o the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted [in the annual report].”
In October 2012, the American Petroleum Institute and other trade groups filed a lawsuit challenging the Rule under the First Amendment and the Administrative Procedures Act
The court rejected the SEC’s position that the “annual report” language of Section 1504 of Dodd-Frank compelled a public filing of each resource extraction issuer’s annual report of payment information. Further, the “compilation” of information to be made available online under Section 1504 of Dodd-Frank referred only to a summary or anonymous subset of payment information submitted privately to the SEC, rather than a complete collection of independent, unedited and identifiable reports of each resource extraction issuer.
The court also found that the SEC made another serious error by denying an exemption for countries that prohibit payment disclosure. Commenters to the rule expressed concern about potential losses of many billions of dollars in four countries —Angola, Cameroon, China, and Qatar — which prohibit disclosure of payment information. The SEC argued that it declined to adopt an exemption for countries prohibiting disclosure because such an exemption would be inconsistent with the structure and language of Section 1504 of Dodd-Frank. The court found that given the burdens on competition and investors associated with its decision to decline an exemption for these four countries, and the fact that billions of dollars were on the line, the SEC should have undertaken a more specific analysis with respect to the exemption for these four countries rather than rely on what the SEC perceived to be the broad purpose of Section 1504 of Dodd-Frank. Therefore, the court found that the SEC’s decision to deny the exemption was arbitrary and capricious and not the product of reasoned decision making.
Based on the above mentioned reasons, the court vacated the rule and remanded it to the SEC for revision consistent with the Court’s opinion; i.e.:
- no public disclosure of a resource extraction issuer’s annual report of payments, and
- consideration by the SEC of an exemption for countries that prohibit payment disclosure.
- For all resource extraction issuers, the rule is vacated in its entirety and will not have to be complied with until it is reissued by the SEC.
- For all resource extraction issuers, when the rule is reissued, it will no longer require public disclosure of its annual report regarding the type and total amount of payments to foreign governments or the U.S. government for purpose of resource extraction. This will preserve the confidentiality of sensitive commercial information.
- For resource extraction issuers doing business in Angola, Cameroon, China and Qatar, the SEC will consider an exemption to the Rule for payments made to these countries. If the SEC includes this exemption when it reissues the Rule, resource extraction issuers will not be forced to withdraw from these countries and will be able to retain billions of dollars of business.
- For all other private and public companies, the SEC is in the process of defending its conflict minerals rules issued under Section 1502 of Dodd-Frank in front of the same Court and using many of the same arguments as it did in its defense of the Rule. This decision provides some insight into the Court’s thinking and may foreshadow the Court’s ruling on the challenge to the conflict minerals rules.