On July 2, the US District Court for the District of Columbia vacated the resource extraction issuer disclosure rule that the Securities and Exchange Commission adopted last year in accordance with mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Rule 13q-1 under Securities Exchange Act of 1934, as amended, the resource extraction issuer rule, would have required an issuer engaged in the commercial development of natural gas, minerals and oil resources to publicly disclose, on new “Form SD,” detailed information about payments made by the issuer, a subsidiary of the issuer or another entity under the issuer’s control to the US federal government or foreign governments in connection with the development of such resources. The Court vacated and remanded the rules to the SEC, which may either appeal the Court’s ruling or promulgate a new rule in accordance with the Court’s ruling.
The Court cited two “substantial errors” by the SEC in making its ruling. First, the Court ruled as erroneous the SEC’s interpretation that Section 13(q) of the Securities Exchange Act of 1934, as amended, required public disclosure of an issuer’s resource extraction payments. Instead, the Court stated that Section 13(q) provided the SEC with discretion as to whether resource extraction payments should be made public, noting that the language of Section 13(q) only required public disclosure of a compilation of such payments “to the extent practicable.” The Court also indicated that the SEC may determine to revise the resource extraction issuer disclosure rules “in light of the flexibility it did not know that it had.”
Second, the Court ruled that the SEC’s failure to create an exemption from the rule relating to countries that prohibit payment disclosure was arbitrary and capricious. Citing the SEC’s statutory authority to make exemptions from certain Exchange Act provisions, the Court noted that the SEC did not properly consider the competitive burdens that the rule would have on issuers operating in countries where disclosure of resource extraction payments is prohibited. The lack of such an exemption, at the SEC’s admission, “drastically increased the Rule’s burden on competition and cost to investors.” By failing to adequately take into account these costs, the Court ruled that the SEC “abdicated its statutory responsibility to investors.”
Click here for the District Court’s opinion.