On July 2, 2013, the U.S. District Court for the District of Columbia1 (the “District Court”) vacated Rule 13q-1 (the “Rule”) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The Rule had required “resource extraction issuers” (“Extractors”) to file annual reports with the SEC detailing any payment over $100,000 related to the commercial development of oil, natural gas, or minerals made to the U.S. or a foreign government after September 30, 2013. Like other filings with the SEC, these annual reports would be available to the public.
Background
Congress enacted Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) to add Section 13(q) to the Exchange Act, which requires Extractors to disclose the type and total amount of payments made to each government for each extraction project. The Rule also required disclosures to be available to the public, and, most controversially, it required disclosure of payments to foreign governments even if such disclosure conflicted with the domestic law of a foreign country. On August 22, 2012, the Securities and Exchange Commission (the “SEC”) promulgated the Rule. For more information regarding the adoption of the rule, please click here.
Vacating the Disclosure Requirement
The American Petroleum Institute and others (collectively, the “API”) subsequently challenged the Rule and claimed, among other things, that the Rule “would [jeopardize] transparency efforts already underway by making American firms less competitive against state-owned oil companies” and would require U.S. companies to “report competitive information that [could be] used against them by global competitors.”
On cross motions for summary judgment, the District Court ruled in favor of the API and held that “the [SEC] misread the statute to mandate public disclosure” and made an “arbitrary and capricious” decision to deny exemptions for disclosures that conflicted with local prohibition against disclosure. Because Dodd-Frank requires the SEC to promulgate a payment disclosure requirement, the SEC must either appeal the decision or implement the Section 13(q) directive in a different manner.
Challenging the Conflict Minerals Rule
The SEC’s conflict mineral rule, which requires public companies to disclose their use of conflict minerals, was not the focus of the recent decision. However, it too has been challenged in District Court and the underlying rationale regarding the challenge to the Rule has surfaced with regard to the conflict minerals rule. During oral arguments on July 1, 2013, questions arose whether the SEC had taken enough steps to minimize the negative impact of the conflict mineral rule much like the SEC failed to do when it enacted the disclosure requirements of the Rule. We will provide further information when a decision on the conflict mineral rule is issued.
Conclusion
The future of the SEC’s disclosure requirements regarding the Rule is uncertain. While the recent decision eliminates the immediate burden of disclosure on Extractors, this relief may not be long-lived because Dodd-Frank requires the SEC to promulgate a payment disclosure requirement. The SEC could attempt to create a new rule or appeal the District Court’s decision, but it may face additional challenges for the new rule because the District Court did not address all of API’s claims in its decision.
In any event, for now Extractors may take comfort in the fact that the District Court rejected the Rule’s high burden and potentially anti-competitive effect. In addition, Extractors should carefully monitor the District Court’s upcoming decision on the conflict minerals rule because the SEC’s response to both decisions could have a major impact on the way Extractors conduct business in the U.S. and worldwide. We will continue to monitor the Rule and disclosure requirements that may be implemented pursuant to Dodd-Frank.
If you have any questions about this topic, please contact a member of our Capital Markets and Securities practice group.
Additional research assistance was provided by summer associates, Yvette Ferrer and Taylor Robertson.