On July 2, the U.S. District Court for the District of Columbia vacated the rule implementing Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and remanded it to the Securities and Exchange Commission (“SEC”) for further consideration. Section 1504 requires Securities and Exchange Commission issuers involved in the extraction of oil, gas, and minerals to report on their payments to foreign governments and the U.S. federal government.
The lawsuit challenging the SEC’s rule was filed by the American Petroleum Institute (“API”) and other business groups. In yesterday’s decision, the District Court found that the SEC incorrectly determined that it was required to make issuers’ reports public. Moreover, the court ruled that the SEC’s decision to not grant exemptions for reporting on payments to governments that forbid such disclosure was arbitrary and capricious. The court did not reach the plaintiffs’ argument that the SEC’s rule compelled speech in violation of the First Amendment, nor did it rule on a number of other administrative law arguments that plaintiffs put forth.
The decision puts the SEC back in the position of needing to develop a rule as mandated by Section 1504. There are clear hints in yesterday’s decision as to the potential parameters of an acceptable rule. The court indicated that the SEC should at least consider exemptions that would allow companies not to report on payments to governments that have made such disclosures illegal. Moreover, the court suggested that the SEC could provide for the removal of commercially sensitive information before the contents of corporate reports are made public. Finally, the court implied that plaintiffs’ compelled speech argument — which seemed meritless to many when the case was filed — may well be meritorious, depending on the form of the final rule.
Overall, the ruling is favorable to industry and quite hostile to the SEC. But it does not change the fundamental fact that mandatory reporting is here to stay. Section 1504 is not going away; the court simply required that the SEC rewrite it. Notably, any final rule is unlikely to answer the tricky questions of interpretation with which companies have been grappling, such as the definition of a “project” or whether “fees” include those paid for normal electricity or water usage.
The API victory is no doubt significant, but the fight over Section 1504 is in some ways passé. Last month, Europe announced mandatory revenue reporting requirements for extractive companies that are slightly more demanding than Section 1504, and Canada announced that it will develop similar measures. The fight is no longer between a mandatory and voluntary approach to revenue transparency. What remains to be determined are the exact contours of the reporting requirements.