On July 2, the U.S. District Court for the District of Columbia
invalidated on summary judgment the resource extraction rules
adopted by the SEC pursuant to the Dodd-Frank Wall Street Reform
and Consumer Protection Act ("Dodd-Frank"). The resource
extraction rules, adopted in August 2012, would have required
certain companies to publicly disclose, in a new annual report,
payments made to the U.S. federal government or to foreign
governments in connection with the commercial development of oil,
natural gas, or minerals. Trade groups, including the American
Petroleum Institute and U.S. Chamber of Commerce, filed a legal
challenge to the resource extraction rules in October 2012 arguing,
among other issues, that the SEC erroneously read the statute as
requiring public disclosure of the new annual report, that the SEC
was arbitrary and capricious in declining to grant an exemption for
countries that prohibit disclosure of such payment information, and
that the SEC's cost-benefit analysis was flawed. The court
agreed, adding criticism of the SEC's effort, ruling that (i)
the SEC misread the statute to mandate public disclosure of the
reports, (ii) the SEC's decision to deny any exemption was,
given the limited explanation provided, arbitrary and capricious,
and (iii) the SEC failed to address the burden on companies and
investors.
The court highlighted several deficiencies in the SEC's
analysis and adoption of the resource extraction rules. First, the
court determined that, counter to the SEC's interpretation, the
statute did not compel the SEC to require the public disclosure of
the payment information. The SEC, the court reasoned, could have
read the statute to require public disclosure of only a compilation
of such information. Because the public disclosure requirement
contained in the resource extraction rules was not based on the
SEC's own judgment, but rather on the SEC's assumption that
it was required by the statute, the court held that the resource
extraction rules must be declared invalid, even though the SEC
might have been able to require the public disclosure in the
exercise of its discretion.
Second, the court determined that the SEC's decision to deny
any exemption in the resource extraction rules where countries
prohibit payment disclosure was arbitrary and capricious. Noting
that the lack of an exemption could potentially result in billions
of dollars in costs to affected companies, the court found that the
SEC failed to adequately consider the potential burden on
competition and investors.
Finally, although the court noted that other portions of the
resource extraction rules were flawed, the court found that there
was no need to rule on the plaintiffs' other arguments or their
First Amendment challenge to the resource extraction rules at the
present time. The court invalidated the resource extraction rules
and remanded the matter to the SEC for further proceedings.
The court's decision to invalidate the resource extraction
rules is a victory for public companies and their shareholders.
Further, it is a reasoned and welcome relief, albeit perhaps a
temporary one, from a recent trend of using the public company
reporting regime for the purpose of serving public policy
objectives that may not be material to shareholders and are
achieved only at considerable expense.
For now, it would be prudent for companies that are affected by the
statute to continue to compile the information that would have been
required to be disclosed pursuant to the invalidated rules. The
push for public disclosure of payments made in connection with the
commercial development of oil, natural gas, or minerals is likely
not over. Because the court's decision was based solely on
administrative grounds, this setback for the SEC may be only a
temporary delay in the implementation of the statutory
requirements. The SEC could craft revised rules requiring public
disclosure or it could adopt revised rules requiring the submission
of the same information to the SEC on a confidential basis. It is
unclear whether the SEC will appeal the court's decision or
immediately pursue another rulemaking initiative in light of its
already heavy workload and the fact that many of the other
Dodd-Frank rulemaking projects are considerably behind schedule. In
any event, it is likely that implementation of resource extraction
disclosure rules will be delayed rather than halted but, as a
result of this ruling, any subsequent rules will take a different
form.
Plaintiffs, including the U.S. Chamber of Commerce, are also
challenging the SEC's rules implementing another provision of
Dodd-Frank that requires public companies to publicly disclose
their use of certain "conflict minerals." Although this
challenge is a separate case, the legal arguments against the
conflict minerals rules are similar to some of the claims made in
the case against the resource extraction rules.
Andrew C. Thomas, an associate in the Cleveland Office, assisted in the preparation of this Alert.
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