Thursday, July 04, 2013

Federal Judge Vacates SEC Regulation Implementing Dodd-Frank Resource Extraction Payment Disclosure Provision

A federal judge vacated and remanded the SEC regulation implementing the resource extraction payment disclosure section of the Dodd-Frank Act because the Commission misread the statute to mandate public disclosure and its decision to deny any exemption from the disclosure requirement was, given the limited explanation provided, arbitrary and capricious. The Commission fundamentally miscalculated the scope of its discretion at critical junctures, said the court, viewing itself as shackled by the words “report” and “compilation,” when neither could be read to limit its authority. Now informed that it does have more authority under the statute than it thought it had, the Commission may well strike a different balance. American Petroleum Institute, et al. v. SEC, July 2, 2013, Bates, J.

Co-authored by Senators Ben Cardin (D-MD) and Richard Lugar (R-IN), Section 1504 of the Dodd-Frank Act, codified as Section 13(q) of the Exchange Act, directed the SEC adopted regulations requiring resource extraction issuers engaged in the development of oil, natural gas, or minerals to disclose payments made to the federal government or foreign governments.

Section 13(q) provides that the Commission must issue final rules requiring each resource extraction issuer to include in an annual report information relating to any payment made to a government for the commercial development of oil, natural gas, or minerals. The statute’s plain language poses an immediate problem for the Commission, noted the court, because it says nothing about public filing of these reports. Thus, the Commission’s argument that the statute unambiguously requires public filing is, in the court’s view, ``a climb up a very steep hill.’’

Section 13(q) also states that, to the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under the rules issued under the annual report provision. According to the court, a natural reading of this provision is that, if disclosing some of the information publicly would compromise commercially sensitive information and impose high costs on shareholders and investors, then the SEC may selectively omit that information from the public compilation. The Commission points to nothing prohibiting that reading.

Indeed, reasoned the court, the Commission’s approach reads the to the extent practicable limit out of the statute since, if it is not practicable to make a compilation available, it is likely impracticable to make all the information available through full disclosure of the annual reports themselves and, conversely, once the full reports were public, there would be little to make compilation of them online impracticable

Thus, the court concluded that Section 13(q) requires disclosure of annual reports but says nothing about whether the disclosure must be public or may be made to the Commission alone. Neither the dictionary definition nor the ordinary meaning of “report” contains a public disclosure requirement. And section 13(q) expressly addresses public availability of information by establishing a different and more limited requirement for what must be publicly available than for what must be annually reported. Topping things off, the Exchange Act as a whole uses the word “report” to refer to disclosures made to the Commission alone. If this is Congress’s way of unambiguously dictating that reports must be publicly filed, said the court, it is a peculiar one indeed.

Faced with these powerful indicia that Congress left the public availability of reports unspecified, the Commission offered no persuasive arguments that the statute unambiguously requires public disclosure of the full reports.

The Commission made another serious error that independently invalidates the regulation by the arbitrary and capricious denial of any exemption for countries that prohibit payment disclosure. Congress has endowed the Commission with authority to make exemptions from certain Exchange Act provisions, including Section 13(q), said the court. Aside from any statutory duty to act, moreover, an agency decision as to exemptions must, like other decisions, be the product of reasoned decision making.

The Commission’s primary reason for rejecting an exemption does not hold water, said the court. The Commission argued that an exemption would be inconsistent” with the structure and language of Section 13(q). But this argument ignores the meaning of “exemption,” noted the court, which, by definition, is an exclusion or relief from an obligation, and hence will be inconsistent with the statutory requirement on which it operates.