Court Vacates SEC Rule on Resource Extraction Payments and Remands to Commission

In a decision issued earlier today, the U.S. federal district court for the District of Columbia vacated the SEC’s rule requiring reporting companies that engage in resource extraction to file annual disclosures on payments they make to governments and remanded the matter to the Commission. This will likely delay the implementation of the rule, which would otherwise have required disclosures beginning next year.

Below are some highlights.

• Section 1504 of the Dodd-Frank Act requires the SEC to adopt rules requiring reporting companies to disclose payments they make to governments in connection with the commercial development of oil, natural gas or minerals. After a long and controversial rule-making process, the SEC adopted a rule in August 2012. Reporting was to cover payments beginning October 1, 2013, and for companies with a December 31 fiscal year, the first reports were due to be filed with the SEC by May 30, 2014.
  
  
• In today’s decision, American Petroleum Institute et al. v. Securities and Exchange Commission, the court vacated the rule and remanded to the SEC for further proceedings. Judge Bates found that (1) the SEC wrongly concluded that the statute requires reports of resource extraction payments to be publicly available (citing the statutory language requiring the SEC to make public only “a compilation of the information required to be submitted” to the SEC “to the extent practicable”) and (2) the SEC’s failure to provide an exemption for payments in countries that prohibit disclosure was arbitrary and capricious. He did not rule on the other arguments the plaintiffs had advanced.
  
  
• The Dodd-Frank Act requires the SEC to adopt a rule, so it will now have to decide whether to appeal the decision or to proceed instead to reopen its rulemaking or commence a new rulemaking process. The Chair of the SEC, Mary Jo White, has joined the SEC since the rule was adopted in August 2012, and replacements for two of the other four Commissioners, whose terms have expired, have been nominated and are awaiting confirmation.
  
  
• For issuers subject to the rule, there will now be a substantial delay before any revised rule takes effect.

Separately, Section 1502 of the Dodd-Frank Act also requires the SEC to adopt rules requiring disclosure about use of “conflict minerals” in the manufacture of products, and the SEC adopted rules regarding conflict mineral disclosure in August 2012. Industry groups have also challenged the conflict minerals rule. Oral argument in that case, National Association of Manufacturers et al. v. Securities and Exchange Commission, which is before a different judge in the U.S. federal district court for the District of Columbia, was heard yesterday.