SEC Rules For Disclosure of Resource Mineral Payments Vacated
The SEC lost another rule writing case. This time the court vacated its Dodd-Frank rules requiring certain companies to make disclosures regarding payments to foreign governments in connation with the commercial development of oil, natural gas or minerals. Unlike earlier losses, the court did not fault the Commission’s economic analysis. Rather, it concluded that “the Commission misread the statute to mandate public disclosure of reports, and its decision to deny any exemption was, given the limited explanation provided, arbitrary and capricious.” American Petroleum Institute v. SEC, Civil Action No. 12-1668 (D.D.C. Opinion issued July 2, 2013).
The case focuses on rules written by the SEC to implement Section 13(q) of the Exchange Act, added under Dodd-Frank. The section was intended to address what is known as the “resource curse,” that is, the situation where poor countries with abundant natural resources such as oil suffer continued impoverishment and corruption because money paid for the resources ends up “lining the pockets of the rich or is squandered on showcase projects instead of productive investments . . . “ according to Congressional findings made at the time.
Section 13(q) provides in Subsection (2)(A) that: “Not later than 270 days after July 21, 2010 the Commission shall issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer . . . to a foreign government . .. . for the purpose of the commercial development of oil, natural gas, or minerals . . . “ Subsection (3)(A), concerning the public availability of this information, states in part that “To the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under the rules issued under paragraph (2)(A).” (emphasis added).
The Commission drafted rules implementing the Section. Those rules provide, in part, that the annual report required by Subsection (2)(A) be made public. The Commission rejected comments noting that this would require the disclosure of commercially sensitive information. In doing so the agency stated that under the statute it was “bound to require public filing . . . “ The SEC also rejected a request for an exemption regarding four countries – Angola, Cameroon, China and Qutar – where such disclosures are prohibited by law. The SEC acknowledged that declining the request could “add billions of dollars of costs to affected issuers, and hence have a significant impact on their profitability and competitive position . . .” Nevertheless, the agency declined the request for an exemption because it viewed it as inconsistent with the structure and purpose of the statute.
The American Petroleum Institute challenged the rules, filing suits in the Court of Appeals and the District Court. The Court of Appeals held that suit should be brought in the first instance in the district court. On cross- motions for summary judgment, the district court ruled in favor of plaintiffs and against the Commission. The court viewed the resolution of the motions as a question of law for which no deference to the SEC is due. While deference to an administrative agency is due under Chevron USA, Inc. v. natural Res. Def. Cuncil, Inc., 467 U.S. 837 (1984), that only applies to the question of the agency’s interpretation of the statute if “Congress has not directly spoken to the precise question at issue . . . “ Here the Commission viewed it self as bound by the statute. Accordingly, since Congress has specifically addressed the question, according to the SEC, no deference is due under Chevron.
Turning to the first question regarding the reports filed with the SEC and whether they must be made public, the court found the plain language of the section dispositive: “The statute’s plain language poses an immediate problem for the Commission, for it says nothing about public filing of these reports. To state the obvious, the word ‘public’ appears nowhere in this provision.” Indeed, there is nothing in Subsection (2)(A) which mandates filing an annual report which specifies that it is to be made public.
The court buttressed this reading of the statute by citing Subsection (3)(A). That Subsection discusses public availability in the form of a “compilation of the information,” not an annual report, which is made available only to the “”extend practicable.’” The “natural reading of this provision, is that, if disclosing some of the information publicly would compromise commercially sensitive information and impose high costs on shareholders and investors, then the Commission may selectively omit that information from the public compilation. The Commission points to nothing prohibiting that reading.”
Finally, the court concluded that the “denial of any exemption for countries that prohibit payment disclosure was arbitrary and capricious.” The Commission’s claim that such an exemption would be inconsistent with the Act ignored the provisions of that Act, according to the court: “But this argument ignores the meaning of ‘exemption,’ which by definition, is an exclusion or relief from an obligation, and hence will be inconsistent with the statutory requirement on which it operates.” While it might be reasonable for the Commission to find that a request for an exemption for a “certain issuer or about a certain country goes to the heart of the provision’s goal, and that the burden reduction is not worth this loss . . . [here] the Commission impermissibly rested on the blanket proposition that avoiding all exemptions best furthers section 13(q)’s purpose.” In doing so the agency failed to specifically consider the situation regarding a specific country or issuer. A “fuller analysis” is warranted rather than just a general statement. Accordingly, the court vacated the rule and remanded to the Commission.