Judge Vacates SEC Dodd-Frank Rule for Extractive Industries, Remands to SEC
By Katy O'Donnell | July 2, 2022 10:58 am

U.S. District Judge John D. Bates today vacated a Securities and Exchange Commission rule requiring energy and mining companies to disclose payments to governments, a major setback for anti-corruption advocates and a victory for the oil industry.

The American Petroleum Institute had challenged the rule implementing Section 1504 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, bringing suit in federal court in Washington, D.C. It requires companies to disclose payments to foreign governments in connection with the commercial development of oil, natural gas or minerals.

Bates remanded it to the SEC to be redrafted, calling the agency’s interpretation of two key provisions “arbitrary and capricious.” The SEC issued its final rule last August after a lengthy consultation process marked by delays.

Under the rule, issuers must disclose payments to host governments in separate annual reports to the commission. As it formed the rule, the SEC rejected commenters’ appeals to make the disclosures private, arguing that the statute didn’t appear to allow confidential disclosures.

Oil industry advocates filed suit, arguing that the SEC should release an anonymized compilation of the disclosures to the public rather than the full disclosures of each company.

The Court today ruled that the SEC “misread the statute to mandate public disclosure of the reports, and its decision to deny any exemption was, given the limited explanation provided, arbitrary and capricious.”

Industry advocates had also commented during the rule-making process that public disclosure could compromise contracts in four countries—Angola, Cameroon, China, and Qatar—which prohibit disclosure of payment information.

The Court ruled today that the SEC “made another serious error that independently invalidates the Rule. The denial of any exemption for countries that prohibit payment disclosure was arbitrary and capricious.”

Keir Gumbs, a partner at Covington & Burling LLP who once served as Counsel to former SEC Commissioner Roel Campos, said the ruling could signal a growing “trend” of judicial scrutiny of the federal rule-making process. He pointed to a similar litigation fight currently underway over the section 1502 conflict minerals rule in National Association of Manufacturers v. SEC.

“A lot of people, including me, look at this as potentially an omen with respect to how that rule-making challenge is going to fare,” he said, noting that the last SEC rule to be successfully challenged was a proxy access rule that was also implementing a provision of Dodd-Frank. The proxy rule, struck down by a federal appeals court in July 2011, would have enabled shareholders to nominate company directors more easily.

The SEC, Gumbs added, was “in a bind” implementing the transparency payment rule.

“They had a statutory mandate,” he said. “But also recognizing the business realities — and of course they’re not experts in this industry — they probably viewed themselves as doing the best that they could and nevertheless had the rule invalidated.”

The plaintiffs also called the requirement for public filing of the reports “compelled speech” in a First-Amendment challenge to the rule. The Court noted that it did not need to address the First-Amendment argument because the two errors in interpretation already established grounds to vacate.

Section 1504, also known as the Cardin-Lugar provision, attempted to address the so-called “resource curse,” by which valuable resources such as oil and gas reserves “can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability,” as then-Sen. Richard Lugar (R-Ind.) put it at the time.

The House last week passed a bill, H.R. 1613, with a provision weakening disclosure requirements under Section 1504 of Dodd-Frank.

It was not immediately clear whether the SEC would appeal the ruling.

But for the oil industry, Gumbs said, “to say that this is a huge victory is an understatement.”

API praised the decision, which API Vice President and General Counsel Harry Ng called  ”a win for American jobs, for our economy and for international transparency.”

“The court has vacated the SEC’s requirement that U.S. companies report competitive information that can be used against them by global competitors,” Ng said in the statement.

Anti-corruption advocacy groups, unsurprisingly, had a different take.

Oxfam America, Inc., an intervenor in the case, issued a statement criticizing the ruling.

“Oxfam is disappointed with this decision and we strongly disagree with the Court in its finding that the SEC had discretion to withhold companies’ payment reports from the public,” Oxfam Senior Policy Manager Ian Gary said in the statement.

But the fight isn’t over, Gary continued.

“Although the Court has sent the rules back to the Commission, it has NOT precluded the possibility that the rules will be reenacted in the same form, but with a stronger justification,” Gary said (emphasis his).  ”Nothing in the decision says that the SEC may not require public reporting or deny exemptions — it just says that the SEC needs to use its discretion and provide a fuller analysis.”

Sen. Ben Cardin (D-Md.), one of the co-authors of Section 1504, also weighed in.

“I am disappointed with the District Court ruling,” Cardin said in a statement this afternoon. “The U.S. has been at the forefront of the transparency fight and this decision will delay implementation of vital transparency.”

Cardin took issue with the court’s analysis of ambiguity in the statute, siding with the SEC in its interpretation that the disclosures should be public.

“Congress was clear in the letter and the spirit of the law that this information should be in the public domain,” he said.

The industry groups were represented by Eugene Scalia of Gibson, Dunn & Crutcher LLP.

Senior Litigation Counsel William K. Shirey appeared for the SEC at oral arguments.

Previous Coverage from Just Anti-Corruption:

Friday, June 7, 2022
Friday, April 26, 2022
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