On Tuesday, July 2, 2013, the U.S. District Court for the
District of Columbia vacated a Securities and Exchange Commission
(SEC) rule requiring oil, gas and mining companies to report
payments in excess of $100,000 to foreign governments. The
rule originated as part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act's (Dodd-Frank) amendments to the
Securities Exchange Act of 1943, 157 U.S.C. §
78m(q).
The rule was advanced largely by human rights and anti-corruption
interests targeting corruption in developing countries with
significant oil and mining resources and proved a costly compliance
burden for extractive companies with global operations.
Indeed, a coalition of oil industry associations led by the
American Petroleum Institute, U.S. Chamber of Commerce and the
National Foreign Trade Council filed the lawsuit challenging the
rule, American Petroleum Institute v SEC, No. 12-1668
(D.D.C.). The lawsuit asserted that the SEC misinterpreted
Dodd-Frank by forcing public disclosure of detailed data on
payments, and failed to consider associated competitive effects,
including risks associated with revealing trade secrets and pricing
strategies.
The Court agreed. Finding that the SEC misread Section 1504
of Dodd-Frank to mandate public disclosure of all taxes, fees,
royalties, production entitlements, bonuses, dividends, and
infrastructure improvements, Judge John Bates remanded the case
back to the SEC for further action. The Court also agreed
with the Plaintiffs that the SEC erred by denying exemptions for
countries with laws prohibiting payment disclosure, such as China
and Qatar, characterizing the SEC's decision as "arbitrary
and capricious."
Section 1504 of Dodd-Frank directs the SEC to implement rules
requiring firms to report payments made to foreign officials.
The SEC rule had broadly defined "commercial development"
to include all exploration, extraction, processing, export, and the
requisite acquisition of licenses. The rule, which was set to
take effect on September 30, 2013, will now be reexamined by the
SEC pursuant to the Court's remand order.
It is unlikely that the SEC will appeal the ruling because
legislation that passed the House of Representatives last week and
is currently pending in the Senate would implement lesser
disclosure requirements pursuant to Section 1504. H.R. 1613,
the Outer Continental Shelf Transboundary Hydrocarbon Agreements
Authorization Act, narrows the scope of the reporting requirement
by creating an exemption for "actions taken by a public
company in accordance with any transboundary hydrocarbon
agreement." During the SEC rulemaking process preceding
issuance of the final rule in August 2012, industry stakeholders
had advocated that the SEC issue an anonymous compilation report of
company disclosures rather than company- and country-specific
disclosures. While the immediate reporting requirement may
have passed, it is expected that the SEC may come back with
proposed rules that attempt to reach a middle ground – so
stay tuned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
