Drilling for disclosure: resource extraction issuer disclosure and American Petroleum Institute v. SEC.

• Author: Magner, Andrew L.

1. INTRODUCTION II. BACKGROUND A. Introduction to Dodd-Frank Section 1504 1. The Dodd-Frank Act 2. A Brief History of Section 1504 3. History of Resource Extraction Transparency Initiatives B. Section 13(q) and the SEC's Rule 1. Section 13(q) 2. Comment Period 3. SEC's Final Rule 4. American Petroleum Institute Lawsuit III. ANALYSIS A. American Petroleum Institute v. SEC 1. Standard of Review 2. Court's Statutory Ambiguity Analysis 3. Rejection of Any Disclosure Exemption 4. API's Additional Claims and Conclusion B. Examining the Court's Decision 1. Limiting Deference to Administrative Action and the Chevron Test 2. Exemptions and Cost-Benefit Analysis C. Where Does the Judgment Leave the Interested Parties? 1. Resource Extraction Issuers a. Eventual Disclosure Requirements b. Financial Impact 2. The SEC IV. RECOMMENDATION A. Eventual Section 1504 SEC Rule 1. Court Deference 2. Public Disclosure Requirement 3. Exemptions B. Resource Extraction Issuers V. CONCLUSION I. INTRODUCTION

   In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) (1) in response to the 2008 financial crisis. While its primary purpose was to reform and regulate the financial industry, Dodd-Frank also contained a number of miscellaneous provisions, including a rule requiring disclosure of payments by overseas resource extraction issuers. Dodd-Frank's Section 1504 (2) was an attempt not only to protect investors but also to fight the resource curse that plagues resource-rich countries. The rule met stiff resistance from the resource extraction industry, and in July 2013, the U.S. District Court for the District of Columbia invalidated the SEC's final rule, declaring the rule outside of the agency's authority.

   This Note will discuss the background of Dodd-Frank and Section 1504, along with a brief history of resource extraction industry transparency initiatives and how the case ended up in court. This Note will then analyze the court's decision in light of administrative agency deference and where the decision leaves the interested parties. Finally, this Note will discuss developments after the court's decision and will offer a recommendation on both the final form of the Section 1504 rule and what resource extraction issuers should do to prepare for the eventual rule.

2. BACKGROUND

   1. Introduction to Dodd-Frank Section 1504

      While Section 1504 did not become law until it was included in the Dodd-Frank Act, discussion about disclosure by resource extraction issuers predated the Act. The discussion can be traced back to the "Publish What You Pay" movement within the industry, which dates back to the 1990s. This movement eventually culminated in Section 1504 becoming law in 2010.

      1. The Dodd-Frank Act

         As the smoke cleared from the financial crisis of 2008, it became apparent that extensive financial regulation was on the horizon. (3) Following the worst economic downturn since the Great Depression, (4) Congress enacted the Dodd-Frank Act. (5) This enormous act, over 845 pages long, covers everything from the creation of new government councils (6) to complete overhauls of the mortgage lending industry. (7) Among the Act's miscellaneous provisions was Section 1504, which added a new Section 13(q) to the Securities Exchange Act of 1934, requiring the Securities and Exchange Commission (SEC) to develop disclosure rules for resource extraction issuers operating in foreign markets. (8)

      2. A Brief History of Section 1504

         Congress introduced Section 1504 as an amendment to the proposed bill in 2010. (9) In discussing the bill, Senator Ben Cardin lauded the proposal for increasing transparency for both investors and companies, especially in regions of the world prone to political instability. (10) While Senator Cardin focused on the provision's potential to make U.S. firms more competitive, (11) Senator Richard Lugar voiced another rationale for the bill, one focused on addressing the "resource curse," the theory that a wealth of natural resources impairs economic development in many countries. (12) Senator Lugar argued that increasing transparency across the board was at the heart of the reform effort and that transparency would allow investors "sufficient information" to judge their investments. (13) This amendment was added to the final Dodd-Frank Act as Section 1504 under Title XV, "Miscellaneous Provisions." (14)

      3. History of Resource Extraction Transparency Initiatives

         Senators Cardin and Lugar's proposed framework was remarkably similar to a bill they proposed in 2009. (15) Even at the time of proposal, the Senators acknowledged that there is a similar, industry-led disclosure movement called the Extractive Industries Transparency Initiative (EITI). (16) The EITI, created in 2003, is the culmination of a late 1990's industry movement to "Publish What You Pay" for extraction. (17) The EITI is designed to allow the industry to collectively challenge countries that prohibited disclosure of payments through a collective international program. (18)

         The EITI allows countries to apply for admission to the standard and requires countries to adhere to a number of rules mandating transparency by their resource extraction issuers. (19) EITI allows protection in numbers for resource extraction issuers to prevent government abuse by creating a unified rule that applies to all members. (20) The United States was not a member of the EITI at the time Dodd-Frank was enacted. (21)

   2. Section 13(q) and the SEC's Rule

      Passing Section 1504 did not create an actual rule. It merely authorized the SEC to promulgate a functional rule that would meet the goals of Dodd-Frank. After soliciting comments from the public, the SEC issued the final functional rule in 2012, triggering industry litigation against the SEC.

      1. Section 13(q)

         Section 1504 did not itself create a mandate; instead, it created Section 13(q) as an amendment to the Securities Exchange Act of 1934. (22) Section 13(q) requires the SEC to create a rule for annual disclosure by resource extraction issuers. (23) Section 1504 requires resource extraction issuers to report their information in an interactive data format. (24) Finally, the rule contains a public disclosure provision: "To the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted." (25) Section 13(q) also allows the SEC to consult with anyone it feels is useful in generating the rule. (26)

      2. Comment Period

         On December 15, 2010, the SEC released the proposed rule for Section 1504. (27) Within the rule, the SEC requested comments on a number of issues including: possible exemptions for smaller companies, the issue of "not de minimis" payments, exceptions when disclosure would violate the host country's laws, and technical issues over the form of disclosures. (28) The SEC, however, never explicitly requested comments regarding the public availability of the disclosed information. (29) The window for comments closed on January 31, 2011, giving commentators approximately a month and a half to submit comments. (30)

         The comments revealed that the most contentious provisions included host country exemptions and public disclosure of entire reports. (31) Some commentators noted that the lack of exemptions could make eligible companies less competitive in the international market, (32) a complaint also levied against the public disclosure requirements. (33) While the SEC had considered the costs of implementation of the regime, (34) commentators felt the analysis overlooked the potential that the law would eventually lead to billions of dollars in losses by forcing companies to abandon investments in countries outlawing disclosure. (35)

      3. SEC's Final Rule

         Starting on November 30, 2012, the SEC rule would require any company that had to file a report with the SEC to include a report of its government payments. (36) The rule does not allow for an exemption to this requirement. (37) The disclosure rule would only apply to payments that are "not de minimis," which the SEC interpreted as payments in excess of $100,000. (38) The disclosure would be through a new form (Form SD), uploaded to the SEC's EDGAR online reporting platform. (39) Critically, all reports uploaded to EDGAR would be accessible in their entirety to the public. (40) The SEC decided that an EDGAR disclosure, available in its entirety, fit with Section 13(q)'s intent and that Congress did not intend the SEC to treat this disclosure differently than other Exchange Act disclosures. (41) The first reports would be due for fiscal years ending after September 30, 2013. (42)

      4. American Petroleum Institute Lawsuit

         During the comment period, few institutions offered more commentary than the American Petroleum Institute (API). (43) API is a trade association that "represents all aspects of America's oil and natural gas industry." (44) API's mission is quite broad, including advocacy, education, certification, standards, and research about the oil and natural gas industries in the United States. (45) Membership in the group includes companies involved at all stages of oil and natural gas production. (46)

         As part of its advocacy program, the API initiated two suits against the SEC's rule on October 10, 2012. (47) The suits, filed in both the Court of Appeals for the District of Columbia Circuit and in the District Court for the District of Columbia, addressed different jurisdictions but were materially similar. (48) After evaluation, the court of appeals had jurisdiction and the parties dismissed the district court complaint. (49)

3. ANALYSIS

   1. American Petroleum Institute v. SEC

      The court invalidated the SEC's final rule in 2013. (50) This ruling relied heavily on the SEC's admission that it was compelled to provide public disclosure with no exemptions as part of the rule. The court rejected this claim and remanded the rule to the SEC for further action.

      1. Standard of...