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Court Vacates SEC Payment Disclosure Rule
A controversial rule by the U.S. Securities and Exchange Commission that would require oil and gas extraction companies to disclose government payments was vacated today by a Washington federal judge.
The agency "fundamentally miscalculated the scope of its discretion" and "abdicated its statutory responsibility to investors," Judge John Bates of U.S. District Court for the District of Columbia ruled in granting summary judgment to the American Petroleum Institute. The institute, with the U.S. Chamber of Commerce, the Independent Petroleum Association of America and the National Foreign Trade Council, sued the SEC after the agency issued its final rule in September.
Represented by Eugene Scalia of Gibson, Dunn & Crutcher, the plaintiffs claimed the rule, which would force publicly traded companies to disclose in SEC filings any payment to a foreign government or the United States that is "made to further the commercial development of oil, natural gas or minerals," violated their First Amendment rights and was arbitrary and capricious. The disclosure requirement covers taxes, royalties, fees, bonuses and “other material benefits.”
The SEC estimated the cost of compliance would be $1 billion initially, with ongoing costs of $200 million to $400 million. Companies also protested that disclosure would give an advantage to state-owned companies in China and Russia, since they are not required to divulge similar information.
In the name of efficiency, both the SEC and the trade groups wanted to skip district court review and proceed directly to the U.S. Court of Appeals for the D.C. Circuit. In late April, a three-judge panel held that the appellate court lacked original jurisdiction and that the matter had to begin in district court.
In a 30-page ruling, Bates today roundly rebuked the SEC’s rule, which was required by the Dodd-Frank Act.
Congress intended the rule to address the so-called resource curse, whereby “oil, gas reserves and minerals…can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism and instability, as then-Senator Richard Lugar (R- Ind.), co-author of the provision, put it. Legislators hoped increased transparency about corporate payments to various governments would help reduce this corruption.
During the SEC rulemaking, companies asked the agency to publish a compilation of financial information that would keep specific payments confidential. The SEC, however, concluded that that statute did not allow confidential disclosure.
Another problem: four countries—Angola, Cameroon, China and Qatar—specifically prohibit disclosure of payment information. The SEC, however, refused to adopt an exemption for countries with such prohibitions, concluding that doing so might undermine the statute.
Bates called both positions “substantial errors,” and vacated the rule without even reaching the First Amendment arguments.
He found that the statute’s plain language “says nothing about public filing of these reports. To state the obvious, the word ‘public’ appears nowhere in this provision. The statute speaks of ‘disclosure’ and ‘an annual report,’ not ‘public disclosure’ and not a ‘publicly filed annual report.’”
The SEC, Bates continued, “offers no persuasive arguments that the statute unambiguously requires public disclosure of the full reports…. All that is left of the Commission’s argument is that public filing of reports ‘is how we usually do it.’” Intervenor Oxfam also argued for full disclosure, but Bates found the group’s position “similarly unpersuasive.”
Instead, he concluded that the SEC could issue a compilation of information that could excise “particular details harmful to competition.”
Bates also said the SEC was arbitrary and capricious to deny companies a reporting exemption for payments made to countries with laws specifically banning disclosure.
Companies feared that as a result, they would be forced to withdraw from these countries, losing tens of billions of dollars. The SEC concurred that this “could be very costly,” but ruled that “adopting such an exemption would be inconsistent with the structure and language” of the statute, Section 13(q) of the Dodd-Frank Act.
Bates didn’t buy it. “The Commission’s primary reason for rejecting an exemption does not hold water,” he wrote, and “is simply incorrect.” (In a footnote, he also added that it “is unlikely that China and Qatar, hardly poor nations, are victims of the resource curse.”). He concluded that “given the proportion of the burdens on competition and investors associated with this single decision, a fuller analysis was warranted.”
In a news release, Karen Harbert, who heads the U.S. Chamber’s Institute for 21st Century Energy, applauded the decision, which she called “a victory for consumers and for America’s energy security.”
The rule “would have placed American oil and natural gas companies at a huge disadvantage around the world by forcing them to turn over their playbooks for how they bid and compete against foreign, state owned companies,” she said.
A spokesman for the SEC said the agency is reviewing the decision.
This article originally appeared as a post on The BLT: The Blog of Legal Times.