US District Court Vacates SEC’s Extractive Industry Payment Disclosure Rule

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On 2 July, 2013, the US District Court for the District of Columbia (“DC District Court”) granted summary judgement in favour of a group of plaintiff’s in their challenge to the new transparency rules adopted by the US Securities and Exchange Commission (“SEC”) pursuant to the Dodd-Frank Act that would have required certain US reporting issuers to disclose annually payments of US$100,000 or more that they make to the US federal government or foreign governments for the purpose of the commercial development of oil, natural gas, or minerals (the “payment disclosure rules”)(1).  The court will issue a separate order vacating the SEC’s payment disclosure rules and remanding the matter to the SEC for further proceedings.
 
The SEC adopted the payment disclosure rules on 22 August, 2012, to give effect to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was passed by the US Congress in 2010 primarily to address the causes of the 2008 financial crisis and restore public confidence in the financial services industry.  Unlike the financial services provisions of the Dodd-Frank Act, the stated purpose of Section 1504 is to support international transparency promotion efforts for the extractive sector and to assist in combating bribery and corruption.
 
Following the adoption of the payment disclosure rules, the American Petroleum Institute, the Chamber of Commerce of the United States of America, the Independent Petroleum Association of America and the National Foreign Trade Counsel filed a complaint against the SEC in the DC District Court challenging the rule making process, as well as the content of the rules, on various grounds(2).
In granting summary judgment for the plaintiffs and vacating the payment disclosure rules, the DC District Court held that the SEC misread Section 1504 of the Dodd-Frank Act as requiring public disclosure of the reports containing the payment information to have been filed by US reporting issuers with the SEC, where no such public disclosure was mandated by the statute.  Essentially, the court held that Section 1504 permits the SEC to consider what portion of the payment disclosure filed by US reporting issuers with the SEC should be made public, and that the SEC should have exercised its discretion to make that determination when adopting the payment disclosure rules. 
 
The DC District Court also held that the SEC’s decision to deny any exemption from the payment disclosure rules was arbitrary and capricious.  The court’s decision did not deal with the substantive requirements of the payment disclosure rules, or whether the SEC could re-adopt essentially the same rules after exercising its discretion in connection with a new rule-making process.  The court explained that the SEC “fundamentally miscalculated the scope of its discretion at critical junctures, viewing itself as shackled by the [statute]…[T]he Court has no occasion, at this stage, to decide whether, if the Commission promulgated the same [rules] ‘as an exercise of its discretion…the same interpretation would be sustained.’ But (even aside from the gravity of the error) there is reason to think the [r]ule the [SEC] will promulgate on remand may take a substantially different form”.
 
As a result of the DC District Court’s decision, what Section 1504 will ultimately require of US reporting issuers is again uncertain.  The SEC must now determine how to proceed, which could include an appeal or new rule making proceedings to adopt rules under Section 1504 consistent with the court’s decision.
 
Of special note to Canada is the effect the US process may have on the initiative announced by Canada’s federal government on 12 June, 2013 relating to transparency of payments made by the extractive industry to domestic and foreign governments.  Government officials in Canada and the Canadian Extractive Resource Revenue Transparency Working Group will no doubt watch US developments very closely in order to properly implement the legislative and regulatory regime so as not to face similar challenges. 

(1) The requirements of the payment disclosure rules as adopted by the SEC are described in greater detail in the bulletinissued by Fasken Martineau on August 27, 2012.
(2)The plaintiffs also filed a simultaneous petition for review with the United States Court of Appeals for the District of Columbia Circuit.  The appellate court, however, held that the DC District Court had original jurisdiction over the claims.