The United States District Court for the District of Columbia vacated and remanded the Securities and Exchange Commission (SEC)’s Disclosure of Payments by Resource Extraction Issuers rule in American Petroleum Institute v. SEC. The ruling found that the SEC misread the statute on one issue and failed to provide a rational for its interpretation on another issue. Either issue could have been fatal to the rule, but together left little doubt that the SEC will need to undertake much more work to complete the rule. The SEC’s incaution would have imposed substantial costs on many companies to little effect; now the SEC has a chance to rethink disclosure of extraction payments.
Dodd-Frank: Congress directed the SEC to issue rules that require a company listed on a U.S. stock exchange that “engages in the commercial development of oil, natural gas, or minerals,” “to include in an annual report of the resource extraction issuer information relating to any payment made . . . to a foreign government or the [U.S.] Government for the purpose of the commercial development of oil, natural gas, or minerals.” In this report, the issuers must disclose the type and total amount of payments made for each project and to each government. The SEC was required to make publicly available online a compilation of the information required to be submitted in the annual reports. This rule should not be confused with the SEC’s Conflict Minerals rule published the same day for related purposes.
The Rule: SEC promulgated the Disclosure of Payments by Resource Extraction Issuers rule requiring that companies submit information on a new form SD through the SEC’s EDGAR public filing system, rejecting the position taken by some that Dodd-Frank required only a confidential filing and a public release of composite information. In conducting statutory and discretionary benefit-cost analysis, the SEC calculated that the initial cost of compliance for all issuers is approximately $1 billion and the annualized ongoing cost would be between $200 million and $400 million.
Procedural Posture: Plaintiffs’ counsel, unsure of jurisdiction, wisely filed in both the United States Court of Appeals for the District of Columbia Circuit and the United States District Court for the District of Columbia – the former recently noting that the latter had jurisdiction in dismissing the petition for review. Plaintiffs and the SEC asked the District Court to consider their cross motions for summary judgment (i.e. judgment on the record) be decided based on the briefs already filed in the Court of Appeals – an efficient and effective negotiated suggestion to accelerate the proceedings. Thus, the court quickly reaches a disposition in its role as an appellate reviewer of the final agency action on the basis of the record made before the SEC.
Two Independent Reasons: Although plaintiffs made a number of arguments relating to the rule compelling speech in violation of the First Amendment of the Constitution, the court reached a much less lofty conclusion that two substantial errors required that the rule be vacated: the SEC misread Dodd-Frank to mandate public disclosure of the reports (rather than a compilation), and the SEC’s decision to deny any exemption based on conflicting laws of some other countries (barring disclosure of payments) was, given the limited explanation the SEC provided, arbitrary and capricious.
Disclosure by EDGAR: Two separate sections enacted in Dodd-Frank required
- reporting to the SEC of payments to governments; and
- disclosure by the SEC of a compilation of the information required to be submitted under the SEC rules.
The SEC took the position in the rule and before the court that requiring public disclosure of the filed reports was mandated by the clear language of the statute under traditional canons of interpretation – i.e. Chevron step 1 analysis. The court rejected such a reading – after a structured step-by-step analysis of the canons of construction – and found the former provision contained no clear requirement that the filings to the SEC be public; only the compilation by the SEC was required to be public.
The SEC provided no indication in the final rule of the contours of the public compilation. Rather, the SEC seems to have taken the position that EDGAR is such a compilation – pulling together in one place the reports and retaining their individual character. The court rejected that notion as too narrow and aliterate:
This rigid definition again improperly cabins the Commission’s discretion. To be sure, some compilations, like those of judicial opinions or Shakespeare’s sonnets, pull together the items compiled without editing them, and some compilations contain every item (e.g., each Shakespearean sonnet) in existence. But that is hardly the only meaning of “compilation.” As the Supreme Court explained in defining the word in the Freedom of Information Act context, “[a] compilation, in its ordinary meaning, is something composed of materials collected and assembled from various sources or other documents.”
Beginning with dictionary and common usage, and proceeding to context, the court rejected such a narrow concept for the SEC’s responsibility.
Exemption for Conflicting Law: Commenters and plaintiffs argued that Angola, Cameroon, China, and Qatar prohibit disclosure of payment information. The SEC, assuming without determining the correctness of the assertion that these countries prohibit disclosure, concluded that “commentators’ concerns that the impact of thereby leading to a conflict such host country laws could add billions of dollars of costs to affected issuers, and hence have a significant impact on their profitability and competitive position, appear warranted.” The SEC, declined, however, to adopt exemptions to mitigate such conflict of laws because the SEC found it would be contrary to the Congress’ intent.
Noting that the SEC’s broad authority to grant exemptions was discretionary, the court nonetheless found that that discretion can be structured by the SEC’s duty to “not adopt any … rule or regulation which would impose a burden on competition not necessary or appropriate in furtherance of the purposes of this chapter.” This issue is hardly new to SEC litigation – the economic analysis underlying SEC rules has long been a challenge.
The SEC lost on one ground, where another might have saved it, if it had made the argument correctly. (1) The SEC’s analysis of the statute was defective – the statute contemplated exemptions. (2) The SEC could and did argue that exemptions would undermine the statute by incentivizing foreign disclosure prohibition statutes, and this might satisfy, but the SEC “did not consider whether a certain country or certain issuer that represents a high portion of the burden on competition and on investors is sufficiently central to that purpose to make an exemption unwarranted.” The SEC could have considered exemptions for the four specified countries, or more generally, but did not do so. (3) The SEC did not make arguments (1) and (2) in the alternative and the court could not find that the SEC would have adopted rule on the basis of argument (2) along, for the SEC did not say so. Here the court relied on standing precedent that where
an agency “has relied on multiple rationales (and has not done so in the alternative), and [a court] conclude[s] that at least one of the rationales is deficient, [the court] will ordinarily vacate the [action] unless [it is] certain that [the agency] would have adopted it even absent the flawed rationale.”
More critical, though, the SEC’s argument that a concern for openness is consistent with Congressional intent was belied by the very language of the statute’s own limitation “to the extent practical.”
Remedy: The court found an easy balance of the seriousness of the rule deficiencies v. disruptive consequences of an interim change in favor of vacating the rule – particularly where the rule has not become effective.