US District Court vacates SEC’s Resource Extraction Rule

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Yesterday, the US District Court for the District of Columbia ruled against the Securities and Exchange Commission on a motion for summary judgment related to the SEC’s resource extraction rule.  A copy of the court’s memorandum opinion can be found here. As a result of this decision, the SEC’s resource extraction rule has been vacated.


Acting pursuant to a provision of the Dodd-Frank Wall Street Reform Act and Consumer Protection Act, the SEC had promulgated a rule requiring certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or mineral resources.  The Rule spells out information that issuers must provide in annual reports and directs that the disclosure be made via a new form, Form SD, rather than in their existing Exchange Act annual report.  The Rule was challenged in court by a coalition of groups, including associations of oil, natural gas and mining companies, whose members were subject to the rules (the plaintiffs). 


The plaintiffs asserted that the Rule compelled speech in violation of the First Amendment and presented various challenges under the Administrative Procedures Act (APA), arguing that the SEC erroneously read provisions of the Dodd-Frank Act as requiring public disclosure of the reports, that the SEC was arbitrary and capricious in declining to grant an exemption for countries that prohibit disclosure and that the SEC’s cost-benefit analysis was flawed.


The court did not reach the plaintiffs’ First Amendment challenge or most of their APA arguments.  Instead, the court indicated that the SEC misread the Dodd-Frank Act to mandate public disclosure of the reports and that the SEC’s decision to deny any exemption was, given the limited explanation provided, arbitrary and capricious. 


The court noted that it was appropriate to vacate the Rule and remand to the SEC since “issuers have not yet been required to make disclosure under the Rule, so that no disruption will result from vacatur.”  The court opined that the Rule’s deficiencies were “grave” and that the SEC “miscalculated the scope of its discretion at critical junctures.”  The Court did not agree with the SEC’s view that in adopting the Rule, the agency was “powerless” to address the harm that issuers may have to deal with as a result of the Rule and that, as a result of the remand, the SEC “may well strike a different balance.” 


It is too soon to predict any actions the SEC is likely to take in light of the court’s decision.


It is noteworthy to point out that the court is also currently reviewing the SEC’s conflict minerals rule.  Our client alert on that rule can be found here.  Oral argument on the conflict minerals rule were held earlier this week. 


Please watch for our review and comments on these issues in the coming weeks.  We welcome your questions about the Rule and what it means for your business.


Sanjay Shirodkar

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