On July 2, 2013, the United States District Court for the District of Columbia vacated the rule issued in 2012 by the Securities and Exchange Commission (SEC) implementing the extractive issuer disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).1 Section 1504 of Dodd-Frank aims to increase transparency in resource-rich countries by requiring extractive issuers to disclose payments made to governments to further commercial development of oil, natural gas, and minerals. The court struck down SEC Rule 13q-1 (the Rule), which would have required extractive issuers to publicly file annual reports disclosing, at a project and government level, all non-de minimis payments made to foreign governments and the US federal government for the purpose of commercial oil, gas, or mineral development.2
Plaintiffs, a group of oil, gas, and mining companies subject to the Rule, initially filed simultaneous complaints in the District Court for the District of Columbia and the District of Columbia Circuit Court of Appeals. After the DC Circuit ruled that original jurisdiction properly resided in the district court, the district court heard summary judgment motions based on briefs filed in the DC Circuit.3 Based on a carefully reasoned analysis grounded in statutory interpretation, the court held that Dodd-Frank Section 1504 did not require the SEC to make the disclosure reports publicly available, and that the SEC’s refusal to consider an exemption for payments to foreign governments located in states whose laws prohibit such disclosure was arbitrary and capricious. Because the court did not reach several of plaintiffs’ other arguments under the First Amendment, the Administrative Procedures Act (APA), and the Securities Exchange Act of 1934 (Exchange Act), it remains to be seen whether the SEC will revise other aspects of the Rule on remand. In the meantime, however, the court’s decision relieves extractive issuers from compliance with the Rule, which had been scheduled to take effect for payments made after October 1, 2013.
Public Disclosure of Issuers’ Reports Not Required by Dodd-Frank
The court found unpersuasive the SEC’s argument that it was bound by statute to require public disclosure of payment data, including information whose disclosure might be prohibited by foreign law or whose commercially sensitive nature might impose high costs on shareholders and investors. The court’s analysis focused on two provisions: First, 15 U.S.C. § 78m(q)(2)(A) required the SEC to issue final rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary, or an entity under its control to a foreign government or the US Federal Government for the purpose of the commercial development of oil, natural gas, or minerals, including the type and total amount of such payments made: (1) for each project; and (2) to each government. In addition, 15 U.S.C. § 78m(q)(3)(A), entitled “Public availability of information,” instructed the SEC to the extent practicable, to make available online, to the public, a compilation of the information required to be submitted under subsection (2)(A).
Examining the two provisions together and in the context of the Exchange Act more broadly, the court disagreed with the SEC’s conclusion that subsection (2)(A) required public disclosure of issuers’ 1504 annual reports. First, the court observed that the “plain language” of the provision is silent as to the public availability of the annual reports filed by extractive issuers with the SEC. Second, subsection (3)(A), in contrast, explicitly provides for the SEC’s compilation of information from annual reports – a narrower set of data – to be made publicly available.4 Further, while the court agreed with the SEC that the Exchange Act – in which Dodd-Frank Section 1504 is codified – is “fundamentally a public disclosure statute,” it disagreed that Congress’s inclusion of Section 1504 in the Exchange Act necessarily implies a public disclosure requirement, noting that the provision, “with its global political concern, differs significantly from a standard investor protection provision.”5Finally, the court identified several other provisions of the Exchange Act calling for “reports” to be filed only with the Commission, undermining the defendants’ assertion that all Exchange Act reports are necessarily intended for public filing.
Because the court disagreed with the SEC’s analysis that it was compelled by statute to make the annual reports publicly available, the court found that Chevron deference to the SEC’s interpretation was not warranted, and based its decision on its own analysis of the statute.6 It is unclear whether the court would have reached the same decision if the SEC had instead exercised its own judgment in requiring public disclosure,7 but the court’s reasoning strongly suggests it believes the statute cannot reasonably be read to call for public filing of the annual reports themselves. The court appears to encourage the SEC to use its discretion to include in the compilation only “a subset of the information, excising as impracticable particular details harmful to competition.”8
Exemption to Avoid Violation of Host Country Law Not Foreclosed by Statute
The court then moved to the SEC’s refusal to exempt from disclosure payment information where disclosure would violate host country law. In addition to the costs associated with preparing annual disclosure reports, plaintiffs and commentators during the rulemaking process asserted that withdrawal from four countries – Angola, Cameroon, China, and Qatar – whose laws prohibit disclosure, would cost tens of billions of dollars.9 Indeed, the SEC agreed that such fears “appear warranted,” but found the “competitive burdens” “necessary,” reasoning that an exemption from disclosure would incentivize other countries to adopt similar disclosure prohibitions, and thus, would not best serve Congress’ intent to promote international transparency efforts.10
Finding the SEC’s approach to this issue arbitrary and capricious, the court stated that statutory exemptions are inherently inconsistent with the goals of underlying legislation. Continuing with its approach of careful parsing of the statute, the court noted that other aspects of Section 1504 opened the door to exemptions so that it would not be inconsistent with the “structure and language” to grant one here.11 With respect to the SEC’s concern that other countries would follow the lead of the four cited countries in adopting disclosure prohibitions, the court suggested the SEC could have limited the exemption to those four countries or to countries that adopted such a prohibition by a particular date. Moreover, the court stated that the SEC’s wholesale prohibition on disclosure exemptions did not consider its competing statutory obligations, including “whether a certain country or certain issuer that represents a high portion of the burden on competition and on investors is sufficiently central to that purpose to make an exemption unwarranted.”12 Interestingly, in a footnote, the court suggested that China and Qatar, two comparatively wealthy countries with disclosure prohibitions, are unlikely victims of the “resource curse,” and thus that large costs associated with hypothetical withdrawals from those countries could be the basis of an exemption.13
Implications of the Decision
The court declined to rule on several of plaintiffs’ other grounds for challenging the Rule.14 For this reason, and because the decision gives the SEC several options for how to approach the two issues on remand, the contours of the Rule following remand to the SEC are unknown. Nonetheless, it is likely the SEC will take a fresh look at the Rule, perhaps accepting the court’s invitation to exercise its discretion to restrict disclosures and grant exemptions based on the burdens on issuers and what is “practicable.” Further, certain aspects of the opinion may be persuasive for courts considering separate challenges to the SEC’s rule implementing Section 1502’s conflict minerals provisions.
Notably, the court did not address plaintiffs’ argument that the SEC violated 15 U.S.C. § 78c(f) by failing to conduct a proper cost-benefit analysis, an argument that has been advanced by plaintiffs in the litigation challenging Dodd-Frank’s conflict minerals provisions as well.15 Nevertheless, the court emphasized the Rule’s burdens on issuers and investors in considering the public disclosure and exemption issues on which it ruled.16Similarly, the court highlighted the flexibility Congress accorded the Commission to determine what is “practicable” in implementing various aspects of Section 1504, a responsibility the court found the SEC had “abdicated” in its initial Rule.
In addition, the court seemed to suggest that disclosure provisions designed to address international social or political issues should be interpreted more narrowly than would the type of market regulation and investor protection provisions more commonly found in the securities laws.17 Such an approach would apply equally to the conflict minerals disclosure provisions contained in Dodd-Frank Section 1502.
Finally, while the court did not rule on many of plaintiffs’ other bases for challenging the Rule and, with respect to the issues on which it did rule, had “no occasion…to decide whether, if the Commission promulgated the same Rule ‘as an exercise of its discretion…the same interpretation would be sustained,'” there is reason to believe that at least aspects of the revised rule that emerges from remand to the SEC will be substantially different from the Rule. Indeed, the court appeared to invite the SEC to “materially alter the Rule in light of flexibility [the SEC] did not know it had.”18 In the meantime, however, the court’s vacatur and the uncertain timeline for rulemaking means resource extraction issuers have an indefinite respite from Dodd-Frank Section 1504’s disclosure obligations.