Plaintiffs Challenge Resource Extraction Disclosure Rules

News Brief
October 11, 2012

By Cydney Posner

Predictably, the same folks (Chamber of Commerce, represented again by Eugene Scalia, plus some newcomers such as the American Petroleum Institute) that sued the SEC over proxy access have now sued the SEC in connection with its implementation of Dodd-Frank, according to this piece in Law360. Interestingly, though, the subject matter is not conflict minerals or derivatives, but rather the rules regarding disclosure of payments by resource extraction issuers (see News Brief dated 8/22/12). 

According to the article, the plaintiff groups charge that the SEC exceeded its authority in implementing the relevant provision of Dodd-Frank because the rules "will force companies to reveal sensitive information to competitors and to abandon projects in countries that forbid the disclosures or refuse to do business with U.S. companies because they don't want the disclosures to be made. ‘The net result would be to compel U.S. oil, gas and mining companies to engage in speech — in violation of their First Amendment rights — that would have disastrous effects on the companies, their employees, and their shareholders,' the complaint said….[T]he SEC had misinterpreted the mandated requirements of the rule, the complaint said. The mandate had only required a compilation of aggregate information be made available, not a separate report for every foreign project, according to the complaint. As a result of this misinterpretation, the rule will unfairly force U.S.-based oil and mining companies to allow competitors access to sensitive commercial information, the complaint said. The rule also fails to allow for exemptions from its requirements when foreign countries forbid the required disclosures by law, when the SEC had previously allowed similar exemptions ‘scores of times,' according to the complaint."

The article reports that, although the SEC had quantified some potential costs, the complaint charges that the SEC "did not properly consider the costs and benefits of the rule when implementing it and had failed to adequately protect investors in the companies subject to the rule.…" (Sound familiar?  The same basis was used successfully to invalidate proxy access, although proxy access was only authorized by statute, not mandated, as are these rules regarding extractive payment disclosures.) In addition, charged the plaintiffs, the SEC's rationale "for the rule is to ‘give people of other nations information regarding their governments' revenues' and help protect public welfare in those countries, which is not essential to any U.S. regulatory or enforcement program and does not advance the SEC's required investor protection role, according to the complaint." (This argument was prefigured in the remarks by the two dissenting SEC Commissioners, as discussed in my email.) The complaint requests, among other things, that the rule be vacated.

Although it would probably be a tougher case to win, given all of the diligence conducted by the SEC in drafting the rules, you have to ask if the conflict minerals rules will be next…

The case is American Petroleum Institute et al. v. Securities and Exchange Commission, case number 1:12-cv-01668, in the U.S. District Court for the District of Columbia.

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