Judge Tosses SEC's Resource Extraction Rule

By Cydney Posner

You might remember that the resource extraction rule was adopted at the same time as the conflict minerals rule (see my article of 8/22/12). The rule was adopted pursuant to Dodd-Frank and required resource extraction issuers to disclose, on new Form SD, payments to foreign governments in connection with oil, gas and mineral rights.

The Wall Street Journal is reporting that a U.S. federal judge has vacated the SEC's rule: The SEC "was wrong to require companies to publicly disclose each full report rather than a compilation of reports, U.S. District Court Judge John D. Bates argued in his opinion released Tuesday. ‘The commission misread the statute to mandate public disclosure of the reports,' Judge Bates said in an opinion that requires the agency to redo the regulations. Judge Bates also said that the SEC erred in rejecting companies' request for an exemption from disclosing payments to Angola, Cameroon, China, and Qatar—countries which prohibit disclosure of payment information." See also this article on CNBC, which quotes the judge as characterizing the SEC's "decision to deny any exemption [as], given the limited explanation provided, arbitrary and capricious."

The litigation was brought by the American Petroleum Institute and the Chamber of Commerce, represented again by Eugene Scalia (who successfully represented the Chamber in connection with proxy access). See my article of 10/1/12.

The CNBC article explains that the judge "was skeptical of the SEC's interpretation of the law and the meaning of the term ‘report' during oral arguments last month, saying Dodd-Frank did not expressly call for public disclosure of the payment data. The trade groups argued the SEC should have allowed the companies to privately disclose the data to regulators, and that any public disclosures should be made through a more general compilation of the payments, to protect their commercial interests. At the time, an SEC lawyer told Bates that public disclosure was clearly the will of Congress, and that requiring companies to privately turn over all of the data to the SEC did not make sense. But Bates rebuffed the SEC's legal rationale in his ruling. ‘Neither the dictionary definition nor the ordinary meaning of 'report' contains a public disclosure requirement,' Bates wrote. ‘If this is Congress's way of unambiguously dictating that reports must be publicly filed, it is a peculiar one indeed.'"

The article suggests that the "decision on Tuesday may not bode well for another pending legal challenge by the U.S. Chamber and other groups to a third Dodd-Frank regulation known as the 'conflict minerals' rule. The rule calls for manufacturers to disclose if their products contain certain minerals from the war-torn Democratic Republic of Congo. The case was argued in court on Monday, and the legal arguments against the rule are similar to some of the claims made in resource extraction case." It remains to be seen what, if any, impact the result in this case may have on the conflict minerals rules, but it would certainly be premature to call a halt to work on conflict minerals at this point.

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