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From Securities Regulation Daily, April 29, 2013

No Original Appellate Review of Resource Extraction Row; But District Court Case Goes On

By Mark S. Nelson, J.D.

The U.S. Court of Appeals for the District of Columbia has dismissed a suit brought by the American Petroleum Institute (API) and others challenging the SEC’s final resource extraction issuer rule. The SEC’s final rule implements disclosure provisions contained in Dodd-Frank Act Section 1504. The appeals court dismissed the case without prejudice and without transferring it to the District of Columbia District Court, where the API had also filed suit (American Petroleum Institute v. SEC, April 26, 2013, Tatel, D.).

Background. Dodd-Frank Act Section 1504 added Exchange Act Section 13(q) to direct the SEC to adopt rules implementing a disclosure regime for resource extraction issuers. These companies are required to state in their annual reports any payments made by them to the U.S. government or to foreign governments regarding the commercial development of oil, natural gas, or minerals. These disclosures also must be posted online in compliance with SEC data standards.

According to the court’s review of Section 1504’s legislative history, the provision’s co-sponsor, former Sen. Richard Lugar (R-Ind), commissioned a 2008 study to determine if greater transparency about the resource extracting business could help less-developed countries avoid certain ill-effects of their dependency on extractive industries. Specifically, the study noted that oil and mineral revenues tend to distort these countries’ exchange rates, which allows them to buy cheap imports, but hurts local production and competition. The existing industry structure also may help to entrench authoritarian political regimes.

The SEC’s September 2012 final rule noted expected compliance costs: $1 billion in initial costs; ongoing costs of $200 to $400 million; and $12.5 billion in losses if issuers must divest interests in four countries that may not cooperate with the disclosure regime. The API suit alleged that the SEC’s final rule violated resource extraction issuers’ First Amendment rights and contained a defective cost-benefit analysis. The API filed suit in both the D.C. Circuit and the District of Columbia District Court to hedge against dismissal due to perceived ambiguities in the Exchange Act’s jurisdictional regime.

No original jurisdiction. The court explained that generally Congress decides which courts may hear certain matters. The court easily found that Exchange Section 25(a), at least facially, was inapt because petitioners did not challenge a “final order” issued by the SEC. Similarly, Exchange Section 25(b) was inapt because petitioners did not challenge a rule adopted by the SEC under the specified provisions.

Administrative review finite. The petitioners lost with respect to the express terms of Exchange Section 25, but still urged several novel theories for original appellate jurisdiction. First, the petitioners said the court had Section 25(a) original jurisdiction under the DC Circuit’s 1977 Investment Company Institute opinion. That case held that original appellate jurisdiction existed if an agency order is capable of review based on the administrative record.

The petitioners argued that “orders” in Section 25(a) means “orders” and “rules” in the Investment Company Institute context. However, the court noted that the API’s view was inconsistent with the congressional intent behind the Exchange Act’s jurisdictional framework, and Investment Company Institute dealt with another jurisdictional law. The court also credited intervenor Oxfam America’s argument that the API’s view would render Section 25(b) obsolete.

The court observed that the 1934 version of the Exchange Act only contained the Section 25(a) language. It was not until 1975 that Congress added Section 25(b) to give appellate courts original jurisdiction over some, but not all, SEC rules. The purpose of this limited grant of original appellate jurisdiction was to expedite cases where little fact-finding was required and which are likely to be appealed. The court also said Congress has periodically expanded original appellate jurisdiction over SEC rules. When Congress enacted the Dodd-Frank Act, however, it did not add Exchange Act Section 13(q) to Section 25(b).

The court also rejected the API’s claim that Congress had acquiesced in the Investment Company Institute opinion. The court again noted that that case focused on another jurisdictional provision. The petitioners also failed to cite any post-1975 cases holding that “order” includes “regulations.”

Moreover, the court rejected the API’s argument that the Supreme Court’s 1985 Lorion opinion required the court to resolve Exchange Act Section 25 jurisdictional ambiguities in favor of original appellate jurisdiction. The court said that the Exchange Act’s jurisdictional structure is clear and that original appellate jurisdiction exists only for “all final orders” and those rules adopted under provisions specified in Section 25(b).

However, the court had to address its own related theory based on Dodd-Frank Act scriveners’ errors, which the API had not pressed. According to the court, a possible ambiguity existed because the Dodd-Frank Act failed to update Section 25(b) to reflect that one of the provisions granting original appellate jurisdiction over SEC rules had been renumbered. However, the court observed that the Dodd-Frank Act contains many scriveners’ errors and that the ambiguities they create are not of the type contemplated in Lorion. As a result, the court dismissed the API’s suit without prejudice to the related district court case.

The case is No. 12-1398.

Attorneys: Thomas Michael Johnson, Jr. (Gibson, Dunn & Crutcher, LLP) and Harry Moy Ng (American Petroleum Institute) for American Petroleum Institute. Rachel Lee Brand (U.S. Chamber of Commerce National Chamber Litigation Center) for Chamber of Commerce of the United States of America, Independent Petroleum Association of America, and National Foreign Trade Council. Mark Raymond Pennington for the SEC.

Companies: American Petroleum Institute; Chamber of Commerce of the United States of America; Independent Petroleum Association of America; National Foreign Trade Council; Oxfam America

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