One of the Dodd-Frank Act’s many directives to the Securities and Exchange Commission (SEC) was to require annual disclosures by publicly listed “resource extraction issuers” of payments they make to the U.S. federal government or foreign governments, related to commercial development of oil, natural gas, or minerals. SEC thought it met this directive when it issued Rule 13q-1 and associated Form SD in August 2012. However, on July 2, 2013 a federal judge decided that SEC misapplied its authority, and so vacated these provisions and remanded the issue to SEC to try again (American Petroleum Institute v. SEC). Since Dodd-Frank required issuer reporting to begin no less than one year after SEC issued rules, the issuer reporting requirement is now on hold—but the statutory requirement remains in place so further rulemaking should be expected.
What’s the Issue?
Dodd-Frank added 1934 Act Section 13(q), to provide public reporting to “empower citizens of those resource-rich countries to hold their governments accountable for the wealth generated by those resources,” in support of U.S. and international efforts to expand transparency in commercial-governmental relations (Dodd-Frank makes specific reference to voluntary reporting efforts sponsored by the Extractive Industries Transparency Initiative). Depending on the political frameworks within each of these countries, the expectation is that transparency about government revenues will tend to encourage better use of those revenues on behalf of the citizenry. Section 13(q) therefore is less about protections for U.S. investors (SEC’s primary responsibility) than about using leverage from U.S. securities laws to support public understanding and engagement with their governments.
To accomplish this goal, Section 13(q) requires the SEC to:
Require each resource extraction issuer to include in its annual report (e.g., 10K) specified information relating to any payment made by the issuer or any subsidiary or controlled entity, to a foreign government or the U.S. federal government “for the purpose of the commercial development of oil, natural gas, or minerals.”
Post “a compilation of the information” online “to the extent practicable.”
What Were the Objections to SEC’s Approach?
SEC issued Rule 13q-1 and Form SD to meet Dodd-Frank’s mandate (I posted a summary of these requirements at the time in my blog). Soon thereafter, the American Petroleum Institute (API) filed suit claiming SEC had committed statutory and constitutional errors.
API traced most of its complaints to SEC’s stated position that Section 13(q) left the agency very little discretion to ease reporting requirements. In particular:
SEC determined that the agency had to require public disclosure of this information, rather than confidential reporting that might preserve trade secrets or politically sensitive information.
SEC noted commenters’ statements that national laws in Angola, Cameroon, China and Qatar prohibit such reporting, and that the conflict would require them to withdraw from those lucrative markets, but stated that it could not grant them reporting exemptions (and would be disinclined to do so anyway, anticipating that such exemptions might encourage other countries to enact similar prohibitions).
SEC determined that its responsibility to post “a compilation of the information” online meant it must compile and post the full text of all reports, without exclusions or aggregations to limit dissemination of information the issuers consider sensitive and/or proprietary.
What Did the Judge Decide?
Judge Bates of the federal District Court for the District of Columbia agreed fully with API’s arguments. He rejected SEC’s arguments that Section 13(q) prevented the agency from applying its discretion to ease the direct and indirect costs of detailed reporting and publication of all the information required in Rule 13q-1 and Form SD, and instead pointed to statutory provisions allowing for exemptions and noting that posting should be “to the extent practicable.” He also parsed the definition of “compilation” and determined that the term can include summaries and aggregations, and allow for editing and abridgements.
Ultimately, Judge Bates decided that SEC’s mistaken belief that it lacked discretion to tailor reporting requirements under Section 13(q) means that the agency failed to apply its judgment and discretion, rendering the rules “arbitrary and capricious.” Accordingly, he vacated them, and remanded them to SEC for further rulemaking that meets the agency’s statutory responsibilities.
Although SEC has not yet responded to the District Court order, Section 13(q)’s requirements remain in place. Public companies therefore should continue to prepare to meet these statutory requirements, in anticipation that SEC will proceed to issue new rules to implement them. Questions to ask include:
Is the organization publicly listed in the United States—the company itself, and/or a subsidiary, or a parent or holding company?
Does the company engage in “commercial development of oil, natural gas, or minerals” anywhere in the world?
Does the company already report payments made to national and sub-national governments in each country (perhaps through voluntary participation in EITI)?
Does the company have internal procedures for itemization and reporting of payments to governments related to commercial development of oil, natural gas and/or minerals?
Has the company considered which disclosures might reveal trade secrets or other confidential information, so it can prepare to seek confidential treatment of such information (either in SEC’s next rulemaking, or under conditions SEC might adopt)?
Where Can I Go For More Information?
Dodd-Frank Act Section 1504 enacted 1934 Act Section 13(q). The statute (all 848 pages) is available here.
SEC’s vacated rule was published along with very extensive agency discussion of issues and outside parties’ comments on the rulemaking, in the September 12, 2012 Federal Register. It’s available here.
The District Court decision (API v. SEC) is available on API’s website here.
EITI’s website contains a variety of information about the Initiative’s activities, and more generally about global efforts to increase transparency in commercial-governmental relations.
STP also publishes the following related guides:
- SEC Disclosures Checklists Including Financial Statement, MD&A, and Sarbanes-Oxley Checklists
About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 16 existing products, including Environmental Compliance: A Simplified National Guide, Greenhouse Gas Auditing of Supply Chains and The Complete Guide to Environmental Law.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
You may contact Mr. Elliott directly at: firstname.lastname@example.org.