April 24, 2015
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April 21, 2015
U.S. District Court Vacates SEC Rule on Extractive Industries Disclosure Requirements; Issuers Await Decision on Conflict Minerals Rule
Rule 13q-1 under the Securities Exchange Act of 1934 (the Exchange Act), adopted by the Securities and Exchange Commission (the Commission) in August 2012 as part of the Dodd-Frank mandate, was vacated by the U.S. District Court for the District of Columbia on July 2nd, 2013. The rule imposes annual reporting requirements on “resource extraction issuers” relating to payments made to a foreign government or to the U.S. federal government in connection with the commercial development of oil, natural gas or minerals. The court granted summary judgment in favor of the plaintiffs, The American Petroleum Institute and others, determining that “the Commission misread the statute to mandate public disclosure” and the Commission’s decision not to allow exemptions for foreign law disclosure prohibitions “was, given the limited explanation provided, arbitrary and capricious.” In particular, the court questioned the public disclosure requirements contained in the Rule, leaving room for the Commission to adopt a revised requirement limiting detailed disclosure to be submitted confidentially rather than filed publicly on EDGAR.
As a result of the court’s decision, the rule is now void and issuers have no obligation to comply with Section 13(q) of the Exchange Act until a new rule is adopted by the Commission. The Commission has not yet announced whether it intends to appeal the decision to the U.S. Court of Appeals. However, we anticipate that the Commission will not seek an appeal, but rather will devote its resources to proposing a new rule that addresses the deficiencies noted in the court’s ruling and enables it to fulfill its mandate under Dodd-Frank.
This decision does not impact disclosure requirements relating to conflict minerals under Rule 13p-1 under the Exchange Act, also adopted by the SEC under Dodd-Frank. The conflict minerals rule is subject to a similar challenge in the district court by the National Association of Manufacturers, the US Chamber of Commerce and the Business Roundtable. At oral arguments held on July 1st, 2013, the judge questioned whether the Commission properly used its powers to minimize any negative impacts when drafting the rule by not adopting a de minimis exception. This is similar to the challenge to the Commission’s refusal to use its exemptive authority in the resource extraction rules. In light of the ruling on extractive industries disclosures, issuers affected by the conflict minerals rule (together with the broader supply stream) may have additional reason to be hopeful that the rule will be struck down, at least in part, to lessen the anticipated high cost and burden of compliance.
A copy of the district court’s opinion can be found here.