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From Securities Regulation Daily, July 2, 2013

Federal judge vacates SEC resource extraction payment disclosure provision

By Jim Hamilton, J.D., LL.M.

A federal judge vacated and remanded the SEC regulation implementing the resource extraction payment disclosure provisions 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 v. SEC, July 2, 2013, Bates, J.).

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

Public reports. There was no dispute that the Commission viewed itself as bound to make the annual reports on resource extraction payments publicly available. Since the SEC believed it had no discretion in this area, said the court, no deference to its interpretation was warranted. Deference to an agency’s statutory interpretation is only appropriate when the agency has exercised its own judgment, not when it believes the interpretation is compelled by Congress.

The court had to determine whether public disclosure of the full payment information is compelled by the statute, that is, in Chevron terms, whether Congress has directly spoken to the precise question at issue. If not, the Commission’s decision cannot stand.

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 the 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 must 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, noted the court.

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, continued the court, 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, observed 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. Rather than a compilation of the annual reports, explained the court, the statute requires a compilation of the information in the reports, weakening any inference that the reports themselves, unedited and retaining their independent character, must be pulled together. A compilation of something non-discrete, like information, data, or facts, normally entails substantial selection.

Rejecting the Commission’s argument that there is nothing for it to do with the information except provide it to the public, the court noted that the Commission has a duty to evaluate the information to determine the extent to which disclosing it in a compilation would be practicable, and then use it to make such a compilation. Similarly rejected was the intervenor’s contention that the senatorial proponents of Section 13(q) expressed the intent for public disclosure throughout the legislative and administrative process. Such a contention, posited the court, improperly rests on post-enactment comments by individual legislators. Post-enactment legislative history, which the court called a contradiction in terms, is not a legitimate tool of statutory interpretation.

Exemption. The Commission made another serious error that independently invalidates the regulation by its arbitrary and capricious denial of any exemption for countries that prohibit payment disclosure.

The Commission declined to adopt an exemption for countries prohibiting disclosure, explaining that such an exemption would be inconsistent with the structure and language of Section 13(q) and could undermine the statute by encouraging countries to adopt laws specifically prohibiting the disclosure required under the final rules or interpret existing laws as having the same effect.

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’s 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.

Applied more specifically, moreover, the Commission’s argument is simply incorrect. If the statutory provision itself must evidence some openness to exemption, explained the court, Section 13(q) does just that. It emphasizes practicability, requiring a compilation only to the extent practicable. And it provides that the Commission’s rule must support the commitment of the federal government to international transparency promotion efforts to (and only to) the extent practicable.

The Commission’s view of the statute’s purpose of international transparency at all costs, exemptive authority or not, thus contradicts what Section 13(q) says on the very question. That is not to say that Section 13(q)’s purpose is irrelevant to the exemption analysis, acknowledged the court, since it may be entirely reasonable for the Commission to conclude that requiring disclosure from a certain issuer or about a certain country goes to the heart of the provision’s goal, and that the burden reduction is not worth this loss. But here, the Commission impermissibly rested on the blanket proposition that avoiding all exemptions best furthers Section 13(q)’s purpose. It 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 court also acknowledged that a broadly written exemption could eviscerate Section 13(q) by allowing any country to avoid disclosure by enacting a law returning, in effect, to the EITI voluntary compliance regime Congress sought to augment. But the court hastened to note that this does not suffice to support a decision costing many billions of dollars and (in the Commission’s own analysis) burdening competition.

The Commission could have limited the exemption to the four countries cited by the commentators or to all countries that prohibited disclosure as of a certain date, fully addressing this concern. Given the proportion of the burdens on competition and investors associated with this single decision, said the court, a fuller analysis was warranted. A general statement about incentive problems associated with a broad version of the exemption does not satisfy the requirement of reasoned decision making when, by the Commission’s own estimates, billions of dollars are on the line.

Industry reaction. Following the district court’s decision, the U.S. Chamber of Commerce called the ruling a victory for consumers and for the nation’s energy security. The SEC’s resource extraction rule would have placed U.S. oil and natural gas companies at a huge disadvantage around the world by forcing them to turn over their playbooks for how they bid and compete against foreign, state-owned companies. In addition, compliance with the SEC rule would violate the law in several countries in which U.S. firms do business. The court ruled today that the SEC misread the statute to mandate public disclosure of reports regarding how companies operate, noted the Chamber; instead of publicly releasing information, for instance, the SEC could have simply required companies to file confidential reports.

The case is Civil Action No. 12-1668 (JDB)

Attorneys: Eugene Scalia, Gibson (Dunn & Crutcher) for plaintiffs American Petroleum Institute, Chamber of Commerce of the United States of America, Independent Petroleum Association of America and National Foreign Trade Council. John Peebles Sholar and William Shirey for defendant SEC.

Companies: American Petroleum Institute; Independent Petroleum Association of America

MainStory: TopStory DistrictofColumbiaNews DoddFrankAct PublicCompanyReportingDisclosure

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