Court Strikes SEC Rule Requiring Disclosure by Resource Companies of Payments to Governments

On July 2, 2013, the U.S. District Court for the District of Columbia vacated the rule adopted by the Securities and Exchange Commission implementing the statutory provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act mandating disclosure by oil and gas and mining companies of payments to certain governments. The regulation required disclosure on a new Form SD for fiscal years ending after September 30, 2013. The matter was remanded back to the SEC to draft a new rule more consistent with the statutory intent.

The statute had been adopted with the stated Congressional intent of “supporting the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals”. On September 12, 2012, the SEC adopted its implementing rule, which was challenged by the American Petroleum Institute on a number of grounds, including violation of the First Amendment and of various Administrative Procedure Act (APA) provisions. The court decided the case based on APA grounds, stating that the SEC had (i) misread the statute as requiring public disclosure by resource companies of governmental payments, and (ii) acted in an arbitrary and capricious manner in refusing to grant requests from companies seeking to be exempt from disclosure of payments to foreign governments, such as China, Qatar, Angola and Cameroon, which prohibit disclosure of such payment information. According to the court, the statute left open the possibility that payment disclosures could be made confidentially to the SEC, with only summarized data being made public, and the SEC erred by refusing to consider that possibility. With respect to disclosures prohibited by foreign governments, while the SEC acknowledged that the competitive burden on companies doing business in these countries would be increased, it stated that an exercise of exemptive authority in these cases would defeat the Congressional intent. The court disagreed, reading the statute as requiring compliance with the disclosure mandate only “to the extent practicable,” and imposing an obligation on the SEC to exercise its discretionary authority and consider the costs and burdens on competition in its rulemaking.

The SEC has not announced whether it will appeal the decision or, if no appeal is forthcoming, what the timetable might be on a new rulemaking process. Given the public comment and other procedures required in connection with rule-making, it seems unlikely that rules could go into effect on the original timetable, which required filings on Form SD by May 2014. However, absent Congressional action, some form of reporting of government payments by resource issuers is likely to be mandated in the future.