On July 2, 2013, the United States District Court for the District of Columbia vacated the Securities and Exchange Commission’s rule requiring SEC-reporting companies to disclose payments made to governments if they engage in the commercial development of oil, natural gas or minerals. Mandated by the Dodd-Frank Act, the SEC had promulgated the rule in August 2012 and was to be effective for fiscal years ending after September 30, 2013. The rule would have required a resource extraction issuer to publicly disclose the information in an annual filing through EDGAR on the new Form SD. For a more complete discussion of the rule, please see our August 2012 Client Alert entitled “SEC Adopts Final Rules Regarding Conflict Minerals and Resource Extract Payment Disclosures” available here.

The court vacated the SEC’s payment disclosure rule and remanded the matter to the SEC for further action, finding that:

  • the SEC had “misread the statute to mandate public disclosure of the reports”; and
  • the SEC’s decision to deny any exemption for countries which specifically prohibit disclosure of payment information was “arbitrary and capricious.”  

On the first point, the court noted that (1) the plain language of the statute was silent on any public filing of the reports, (2) the words “annual report” or “report” contained in the statute do not imply any public filing, and (3) where the statute does require public disclosure, it did so explicitly. On the second point, the court found that the SEC’s failure to undertake a fuller analysis with respect to the high potential costs and burdens on competition associated with not providing any exemptions under the rule “does not satisfy the requirement of reasoned decisionmaking.” Finding the rule invalid based on the above points, the court did not reach a verdict on plaintiffs’ other arguments, including a First Amendment challenge to the public disclosure requirement.  

As the Dodd-Frank Act mandates that the SEC adopt a rule regarding the disclosure of certain payments by resource extraction issuers, the SEC will need to either appeal the decision, or propose a new rule that reflects the court’s decision. In any case, the expected implementation of the disclosure rule for fiscal years ending after September 30, 2013 will likely be delayed significantly.

A complete copy of the Court’s decision can be found here.