[Editor’s Note: The following update is authored by Arnold & Porter LLP]
On July 2, 2013, Judge John D. Bates of the U.S. District Court for the District of Columbia (the District Court) vacated a new rule promulgated by the Securities and Exchange Commission (the Commission) under the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) that required oil, gas, and mining issuing companies to include in an annual report information about certain payments made to foreign governments or the U.S. government for the purpose of commercial development of oil, natural gas or minerals (the Rule). In its 30-page decision, the District Court found the Commission had, inter alia, “misread the statute to mandate public disclosure of the reports.” Judge Bates also found the Commission’s refusal to waive the Dodd-Frank Act’s disclosure requirements for countries that prohibit disclosure of payment information was “arbitrary and capricious.” The District Court vacated the Rule in its entirety and remanded the matter to the Commission for further proceedings.
The District Court noted that in the cost benefit analysis it conducted before promulgating the Rule, the Commission calculated a total initial cost of compliance for all issuers of approximately US$1 billion. This ruling is thus a victory for issuers involved in the commercial development of oil, natural gas, or minerals who opposed this Rule, because it vacates the Commission’s requirement of public disclosure by filers of relevant payments to foreign governments, many of which would not otherwise have been disclosed to the general public, and as a result relieves them of possible friction and potential loss of business with foreign governments as the result of compliance.
The Dodd-Frank Act’s reporting requirement remains on the books, but its implementation has been remanded back to the Commission, which has some tough decisions to make. It needs to decide whether it will seek to appeal the District Court’s decision or, if not, how to promulgate a rule that complies with the District Court’s order. In the immediate aftermath of the ruling, the Commission said only that it was reviewing the decision.
Issuers must continue to monitor developments such as what the Commission will do on remand, and whether the District Court’s ruling will prompt Congressional action to clarify whether it intended that individual disclosures must be made public, how the Commission will handle exemptions to the Rule, and any other issues that might be of concern now that the District Court has unwound the Commission’s lengthy rulemaking process.
I. Background
On August 22, 2012, the Commission adopted new rules to implement Section 1504 of the Dodd-Frank Act, which added Section 13(q) to the Securities Exchange Act of 1934 (Section 13(q)). Section 13(q) requires annual disclosures of certain payments made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to foreign governments or the U.S. government for the purpose of commercial development of oil, natural gas or minerals.
On October 10, 2012, the American Petroleum Institute, the U.S. Chamber of Commerce, and several other groups filed parallel lawsuits challenging the Rule in the District Court, as well as in the U.S. Court of Appeals for the District of Columbia. Briefing proceeded first in the appeals court, which both the plaintiffs and the Commission agreed had jurisdiction over the challenge, during which time the District Court litigation was stayed. However, on April 26, 2013, agreeing with Oxfam, which had intervened as a defendant in the case, the D.C. Circuit held that it lacked jurisdiction to reach the merits of the case, ruling that the petitioners had erred in pursuing the case in the appeals court prior to obtaining a decision from the District Court. The District Court then lifted its stay on the litigation and on July 2, 2013 issued its decision invalidating the Rule.
II. The District Court’s Ruling
The plaintiffs challenged the Rule by arguing that the Commission misread Section 13(q) as requiring public disclosure of the reports and that the Commission’s denial of exemption from reporting for countries that prohibit disclosure was arbitrary and capricious. The District Court agreed, concluding that “the Commission 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.” These two arguments are explored in turn below. The plaintiffs made additional arguments, including a Constitutional challenge based on the First Amendment; the District Court did not reach these arguments because of its two rulings based on administrative law and its interpretation of the statute.
A. The “Public” Filing Requirement
A threshold issue faced by the District Court was whether the SEC was correct that Section 13(q) mandated that individual reports had to be filed publicly. The Commission contended that Congress unambiguously required “public disclosure of the issuers’ annual reports.” The District Court disagreed, finding that the Commission’s reliance on Congressional intent was due “no deference” because the statute did not contain an unambiguous requirement of public disclosure and the Commission had not exercised its “own judgment” to interpret the requirements that were written in the statute. Specifically, the District Court held that:
[t]he Statute’s plain language poses an immediate problem for the Commission, for it says nothing about the 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’.
Further, the District Court explained, the plain terms of the Statute limit the “public availability” requirement to “a compilation of the information,” which is itself required only “[t]o the extent practicable.”
The District Court similarly rejected the Commission’s argument that a failure to make each issuer’s disclosure public would lead to “an absurd result” whereby the Statute’s goal of transparency would be undermined, and the Commission would have little if any use for the information provided. In this respect, as summarized by the District Court, the Commission argued that “there is nothing for it to do with the information except provide it to the public, so a rule that requires broader disclosure to the Commission than to the public would be nonsensical.” The District Court rejected this argument, finding that even absent publication of each issuer’s disclosures to the general public, the Commission has significant responsibilities with respect to evaluating the information submitted by issuers, and that, in any case, Congressional goals of increased transparency could well be served through the statutorily required compilations.
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