On July 2, 2013, the US District Court for the District of Columbia granted a motion for summary judgment vacating and remanding back to the Securities and Exchange Commission its approval of rule 13q-1, which would require the public disclosure of payments made by issuers to governments in connection with the commercial development of oil, natural gas, or minerals under Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (”Dodd-Frank”). The SEC has not yet commented on the decision. For our summary and discussion of the rule, as well as a discussion of recent SEC guidance regarding the rule, please see our prior Corporate Updates here and here. The full text of the decision can be found here and the full text of the final release promulgating the rule can be found here.
Before the SEC adopted the resource extraction issuer disclosure rule, commentators requested that the SEC exercise its exemptive authority to waive disclosure requirements for activities related to four countries—Angola, Cameroon, China and Qatar—which prohibit disclosure of payment information. The commentators argued that without such an exemption, issuers would be forced to withdraw from those countries or violate local law, resulting in considerable losses, greatly impacting their profitability and competitive position. The SEC admitted that the concerns of the commentators appeared warranted, but declined to adopt an exemption for disclosures prohibited by foreign law, stating that such a prohibition would be inconsistent with the structure and language of Section 13(q) of the Exchange Act and could encourage countries to adopt laws specifically prohibiting the required disclosure.
Following the promulgation of the rule, the American Petroleum Institute, along with several other plaintiffs, filed a petition challenging the rule in the US Court of Appeals for the District of Columbia Circuit and the District Court. In considering cross motions for summary judgment, the District Court determined that two substantial SEC errors required vacatur:
- The SEC misread Dodd-Frank to mandate public disclosure of the annual reports that issuers must file with the SEC disclosing payments to foreign governments, whereas the statute merely requires the SEC to compile issuers’ reports and make public such compilation (as opposed to the actual reports) to the extent practicable;
- The decision to deny any exemption for activities in Angola, Cameroon, China and Qatar was, given the limited explanation provided by the SEC, arbitrary and capricious.
In determining whether to vacate the rule, the District Court considered the seriousness of the rule’s deficiencies and the disruption caused by an interim change that may itself be changed. Because issuers were not yet required to make disclosures under the rule, the District Court determined that no disruption would result from vacatur. Additionally, the District Court described the rule’s deficiencies as “grave” and noted that “the Commission fundamentally miscalculated the scope of its discretion at critical junctures.” The Court determined that the SEC’s decision to deny any exemption for disclosures prohibited by foreign law was a “serious error.”
The SEC has 60 days to file a notice of appeal. If the SEC chooses not to appeal the decision, it will have to promulgate a new rule with different requirements or undertake additional analysis to support the current rule.