SEC Files Brief in Lawsuit Challenging Extractive Industry Transparency Rule

On January 2, the Securities and Exchange Commission (“SEC”) filed its brief (.pdf) in the lawsuit brought by the U.S. Chamber of Commerce, the American Petroleum Institute (“API”), the National Foreign Trade Council, and the International Petroleum Association of America that seeks to alter or overturn the SEC’s final extractive industry transparency rule.

The petitioners’ lawsuit made several key arguments, including the claims that:

  • the SEC should have incorporated three modifications to the final rule;
  • the SEC’s economic analysis was insufficient; and
  • the final rule violates the petitioners’ First Amendment rights.

The SEC’s brief addresses each of these claims, as summarized below.

Response to Petitioners’ Claim that the SEC Should Have Incorporated Three Modifications to the Final Rule

The SEC’s brief states that it did not act arbitrarily or capriciously when it rejected the three rule modifications that the petitioners sought.

  1. Regarding the petitioners’ argument that public reporting should be aggregated rather than company-by-company, the SEC argues that it was statutorily required to mandate detailed public reporting for each company at a project level, rather than aggregating industry data before making it public.
  2. The SEC’s brief also claims that the SEC adequately considered the petitioners’ urgings that the rule not mandate reporting in instances in which host government laws forbid such disclosures. Petitioners had argued that this might place issuers at a competitive disadvantage compared to extractive companies that are not listed in the United States. The SEC’s brief counters that Congress intended for Section 1504 to lead to the disclosure of payments made to intransigent governments, including those that have in place laws prohibiting such disclosure. The SEC’s brief quotes former Senator Richard Lugar (R-IN), an original sponsor of the provision, who noted: “The United States ‘cannot force foreign governments to treat their citizens as we would hope, but this amendment would make it much more difficult’ for these governments to ‘hide the truth.’”
  3. Regarding the claim that the SEC had not sufficiently defined “project,” the SEC claims that it had discretion regarding whether to define the term and had determined not to do so, due in part to the fact that one of the litigants, the API, had itself argued against defining the term.

Response to Petitioners’ Claim that the SEC Conducted an Inadequate Economic Analysis

The SEC has been perceived to be particularly vulnerable to the petitioners’ attack on its analysis of the rule’s economic impact. The SEC claims, however, that its economic analysis was sufficient because precedent only requires it to do the “best it can.” The brief argues that the SEC met this standard by using all available data.

The SEC’s brief also notes that companies had provided little information regarding costs during the rulemaking process despite the SEC’s requests for such data, and moreover emphasizes that the SEC’s cost analysis was in keeping with the limited figures that the API submitted during the rulemaking process. Additionally, the brief claims that the SEC’s identification of the benefits of the rule, although only qualitative in nature, was adequate because it was impossible to quantify such benefits due to a dearth of data.

Response to Petitioners’ Claim that the Final Rule Violates Petitioners’ First Amendment Rights

The petitioners argued that the final rule compelled speech in violation of the First Amendment. The SEC’s brief posits, however, that the petitioners waived their right to challenge the final rule as violating the First Amendment because petitioners had not raised this issue during the rulemaking. The brief adds that, in any case, the rule only requires factual disclosures, and therefore does not compel speech protected by the First Amendment.

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