The U.S. District Court for the District of Columbia today vacated the SEC’s resource extraction rule adopted by the SEC to implement Section 1504 of the Dodd-Frank Wall Street Reform Act. The Court found that the SEC misinterpreted the law by forcing the public disclosure of reports detailing payments of oil, gas and mining companies to foreign governments. The Court also found that the SEC’s decision to deny any exemption for countries that prohibit payment disclosure was arbitrary and capricious.
The resource extraction rule was meant to increase transparency of payments made by oil, natural gas and mining companies to governments in an effort to aid citizens of those resource-rich countries to hold their governments accountable for the wealth generated by those resources. However, trade groups including the American Petroleum Institute and the U.S. Chamber of Commerce argued that the SEC should have allowed companies to submit payment information confidentially to the SEC with the SEC making public only a compilation of the information. The Court pointed to the fact that the word “public” appears nowhere in the statute and that public availability is limited to “a compilation of the information” that is only required “to the extent practicable.” The Court reasoned that a natural reading of this provision is that “if disclosing some of the information publicly would compromise commercially sensitive information and impose high costs on shareholders and investors, then the Commission may selectively omit that information from the public compilation.”
The Commission argued, among other things, that there would be nothing for it to do with the information except provide it to the public so a rule that required broader disclosure to the Commission than the public would be nonsensical. In dismissing this argument, the Court stated that the Commission has a significant responsibility to evaluate information to determine the extent to which disclosing it in a compilation would be practicable.
In deciding to vacate the rule, the Court found that the Commission made at least one other serious error by “denying, based on arbitrary and capricious reasoning, any exemption for foreign law prohibitions, a decision that, by the Commission’s own assessment drastically increased the Rule’s burden on competition and cost to investors.” The Commission argued that an exemption would be inconsistent with the language of the statute and that transparency would be best served by requiring disclosure from all resource extraction issuers. Finding that the Commission’s primary reason for rejecting an exemption “does not hold water,” the Court stated that the Commission did not consider whether a certain country or certain issuer that represents a high portion of the burden on competition and on investors is sufficiently central to the purpose of the statute to make an exemption unwarranted. Although the Court appeared sympathetic to the SEC’s second argument that providing an exemption would cause countries to simply prohibit disclosure of payments made to the respective foreign government, the Court emphasized that the burden on competition was so significant that the SEC’s failure to not grant an exemption did not satisfy the requirement of reasoned decision-making.
The SEC may appeal the decision to the D.C. Circuit Court of Appeals. Whether it will do so is unknown at this time. But if the D.C. District Court decision holds, there are several immediate considerations:
- Issuers will still be required to collect and report resource extraction payment information in the future: What is notable about the decision is that the Court took substantial issue with the public filing required by the resource rules. That issuers will need to devote some level of administrative attention to compiling and reporting resource extraction payment information—in whatever form—survives the decision.
- Details of resource extraction reports will likely be public in some form: The Court emphasized that the SEC failed to consider that a compilation of the resource extraction information could be made public rather than the annual reports required on Form SD. Thus, information which was required in Form SD may still become public, albeit at a different detail level than would have been required under the now vacated resource rules.
This decision may highlight weaknesses in another pending challenge to one more Dodd-Frank mandated SEC rule requiring companies to disclose if their products contain minerals extracted from the Democratic Republic of Congo- the “conflict minerals” rule. In yesterday’s oral arguments on the conflict minerals rule before the U.S. District Court for the District of Columbia the judge questioned whether the SEC properly used its powers to minimize any negative impacts when drafting the rule. That rule is being challenged by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable. These groups allege that the SEC did not properly weigh the costs and benefits of the regulation. The SEC argued that Congress did not intend to give a broad exemption from the rule for "de minimis" amounts of conflict minerals. The judge challenged this view, at one point telling the SEC attorney that the agency "seems to have not really performed the legal analysis correctly" and that the agency has an "inherent authority in every case" to issue an exemption.