The SEC Prevails In the D.C. Circuit

The Dodd-Frank provision requiring the disclosure of certain payments made to foreign governments relating to the commercial development of oil, natural gas, or minerals has proven controversial. It has also given the SEC a rare win in the D.C. Circuit.

The Section was apparently inserted into the Wall Street reform statute to resolve what has become known as the “resource curse.” Poor countries having these resources can experience corruption, wasteful spending and military adventurism. Capital flowing into the countries tended to make imports cheap and undermine domestic production and growth. At the same time the cash flows tended to insulate authoritarian governments from internal and external pressure.

To address the resource curse, Congress turned to the time tested disclosure approach on which the securities laws are based. Section 13(q) was added to the Exchange Act. It requires disclosure and directs the Commission to write rules. Under these provisions issuers are required to submit an annual report to the SEC detailing their payments. The Commission is required to make a compilation of the information available.

With the addition of the provision to the Exchange Act, the controversy moved from Congress to the Courts. The American Petroleum Institute, the Chamber of Commerce, the Independent Petroleum Association and the National Foreign Trade Council filed suit challenging not just the Commission’s rules but the Section. The business groups attacked the disclosure requirements on First Amendment grounds. They also sought review of the cost benefit analysis for the rules done by the Commission. Suit was filed in the district court and the Court of Appeals.

The SEC prevailed in the Circuit Court. The Court did not, however, reach the substance of the issues. Rather, it concluded that jurisdiction to challenge the provisions is vested in the district court in the first instance. American Petroleum Institute v. SEC, No. 12-1398 (D.C. Cir. Decided April 26, 2013).

The choice of which court has jurisdiction to review agency action is reserved for Congress, the Court began. In the D.C. Circuit the normal “default rule” is that review of agency action should be brought in the district court in the first instance. In contrast, initial review can be in the Court of Appeals only when specifically authorized by statute.

Here the key provision is Exchange Act Section 25. It provides in subsection (a) that a “person aggrieved by a “final order of the Commission entered pursuant to this chapter may obtain review of the order in the United States Court of Appeals . . . for the District of Columbia Circuit.” (emphasis added). Subsection (b) specifies that a “person adversely affected by a rule of the Commission promulgated pursuant to [specific, designated sections] may obtain review of this rule in the United States Court of Appeals . . . for the District of Columbia Circuit.” (emphasis added). Read together the two subsections define when the initial suit can be filed in the Circuit Court – if there is a final order or a rule predicated on one of the sections specified. All other suits must first be brought in the district court under the Administrative Procedure Act.

Section 25 provides the definitive answer to the question here, according to the Court. Petitioners’ suit should have been initiated in the district court, not the Circuit Court. The suit does not challenge an agency order and the rules at issue were not promulgated pursuant to one of the specific provisions cited in Section 25(b).

Nevertheless, Petitioners claimed that Section 25(a) supports jurisdiction in the Court of Appeals because the term “order” means not just an order but any agency action which can be reviewed based on the administrative record. While it is true, the Court noted, that under different statutory schemes this approach has been utilized, here the text of Section 25 is clear — only orders or rules based on certain specified Sections can be challenged in the first instance in the Court of Appeals. To adopt Petitioner’s supposition, drawn from a different statutory scheme, would run counter to Section 25. Indeed, as initially promulgated in 1934 Section 25 was intended to “insulate rules and regulations of the Commission from judicial review,” not expand the category. And, here Congress chose not to include the enabling provision for Exchange Act Section 13(q) in the list of Sections specified in Section 25(b) when drafting Dodd-Frank. Thus, although seeking review in the district court when development of the record may not be required can be inefficient, it is in accord with Exchange Act Section 25 and the Administrative Procedure Act. Accordingly, the petition was dismissed without prejudice. It will proceed in the district court.