District Judge Sends Transparency Rule Back to the SEC for Revisions
The D.C. District Court ruled yesterday that the SEC must provide better justifications for certain aspects of the transparency regulations it issued under Section 1504 of the Dodd-Frank Act. Under yesterday’s decision, the rules are vacated and return to the SEC for review.
The rules in question require oil, gas, and mining companies listed on U.S. exchanges to publish the payments they make to the governments of the countries where they operate, for each extractive project. The American Petroleum Institute and the U.S. Chamber of Commerce, along with two other trade associations, sued the SEC, claiming that it had made a number of procedural errors in promulgating the rules. These groups also insisted that Section 1504 violates oil companies’ First Amendment free speech rights.
Yesterday’s opinion focused on two of the central issues in the case: whether companies’ reports should be made public, and whether the SEC should have granted exemptions based on the oil industry claim that some countries prohibit disclosure of the information required under the law. The SEC’s decision to publish all reports and deny exemptions was based partially on its belief that it was required to do so by the wording and structure of the law – in other words, that it lacked the discretion to choose otherwise.
The court disagreed; according to the opinion, nothing in the statute prevented the SEC from keeping the reports confidential or granting exemptions. The court did not, however, decide whether the SEC should have required public reporting or denied exemptions. It also declined to rule on the First Amendment challenge, noting that the rule could change upon SEC review and would therefore present different constitutional issues.
ERI and Oxfam disagree with the decision in a number of important respects. First, it’s clear from the statute and its legislative context that companies’ reports are meant to be public. The SEC would have been acting contrary to the intent of Congress had it allowed companies to withhold their reports. Second, the SEC gave ample justification for denying exemptions – in particular, the fact that exemptions would tend to give a “tyrants’ veto” to countries that seek to evade U.S. transparency requirements.
All that said, the effect of this decision is relatively narrow: the SEC must now review the record of public comments and decide whether its decisions on public reporting and exemptions were justified. Nothing prevents the Commission from reissuing the exact same rules, but with a fuller analysis of the potential costs and competitive burdens. The parties have two months to decide whether to appeal the District Court’s decision.
For the companies that would have had to report under Section 1504, the outcome is hardly a game changer. The European Union recently adopted new transparency rules with similar requirements to those invalidated today, and Canada has announced an intention to follow suit. The State Department has adopted rules requiring the reporting of payments by large investors to the Government of Myanmar. Most U.S.-listed companies will be forced to report under one of these regimes even in the absence of U.S. rules. Progress on an international standard for global transparency in the extractive industries marches on; it will just take a bit more time for the U.S. to catch up.