On July 2, 2013, the U.S. District Court for the District of Columbia vacated a rule promulgated by the Securities and Exchange Commission (“SEC”) that would have required energy companies to publicly disclose payments to U.S. and foreign governments in connection with the commercial development of oil, natural gas, or minerals. The American Petroleum Institute (the “API”), the national trade association representing the oil and gas industry, challenged the rule under the First Amendment and the Administrative Procedure Act (“APA”). In a 30-page Memorandum Opinion, found here, Judge John D. Bates decided the issue in favor of the API, holding that the SEC had “misread the statute to mandate public disclosure of the reports.”
The statute in question is the Dodd-Frank Act’s section 13(q), which directs the SEC to promulgate a rule requiring companies listed on a U.S. stock exchange and engaged in commercial resource extraction to “include in an annual report … any payment made … to a foreign government or the [U.S.] Government for the purpose of the commercial development of oil, natural gas, or minerals.” In September 2012, largely ignoring the comments from the companies affected by section 13(q), the SEC promulgated a final rule requiring public disclosure of payments to foreign and U.S. governments, even where the foreign country’s laws prohibit such disclosure. Without reaching the constitutional issue, the court rejected the SEC’s interpretation of the statute, and found fault with the fact that the SEC declined to adopt an exemption for foreign law prohibitions. Clearly siding with the API, the court noted that, “given the proportion of the burdens on competition and investors associated with this single decision, a fuller analysis [is] warranted.”
The ball is now back in the SEC’s court to promulgate a different rule pursuant to section 13(q), and it remains to be seen whether the new rule will be any less onerous for energy companies. The Commission previously acknowledged that public disclosure of payments to government entities would burden competition and harm investors. If the SEC had viewed itself as powerless to address that harm because of its interpretation of Congress’s mandate, this recent decision may clear the way for a new rule requiring only confidential disclosure to the SEC. If, however, the SEC continues to take an aggressive stance, it could re-promulgate an identical rule pursuant to its own discretionary authority and supported by a better explanation for its refusal to allow exemptions. Alternatively, it could decide to redraft the rule to provide exemptions for the foreign countries with conflicting laws.