District Court Vacates SEC Rules Requiring Resource Extraction Payment Disclosure
On July 2, 2013, the United States District Court for the District of Columbia vacated the rules requiring the public disclosure of certain payments made to governments by resources extraction issuers. The Securities and Exchange Commission (SEC) acted pursuant to mandates in the Dodd-Frank Wall Street Reform and Consumer Protection Act when promulgating these rules last year, which were set to require disclosure for such issuers starting with fiscal years ending after September 30, 2013.
Rule 13q-1 (the “Rule”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), would have required resource extraction issuers to file publicly available annual reports, on the new Form SD, disclosing information regarding any payments made to a foreign government or to the U.S. federal government for purposes of the commercial development of oil, natural gas, or minerals. The SEC failed to provide any exemptions or exclusions from such public disclosure rules although noting that “the rules will impose a burden on competition” and that there could be a “significant impact on [the] profitability and competitive position” of some issuers.
The Court vacated the Rule based on two “substantial errors” made by the SEC. First, the Court found that the SEC erred in interpreting that Section 13(q) of the Exchange Act required resource extraction issuers to publicly disclose such payment information, noting that “section 13(q) expressly addresses public availability of information…establishing a different and more limited requirement for what must be publicly available than for what must be annually reported [by resource extraction issuers].” Second, the Court ruled that the SEC’s denial of an exemption from the payment disclosure obligations for countries that prohibit such disclosure was arbitrary, capricious and independently invalidates the Rule.
The Rule is now void and issuers need not comply with the annual disclosure requirements. The Court has remanded the Rule to the SEC, which can choose to appeal the Court’s decision or conduct further proceedings to promulgate a new rule in accordance with the Court’s opinion and in order to implement the requirements of Section 13(q) of the Exchange Act.
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