Disclose- Just not Publicly: API Prevails in Suit Over Dodd Frank Transparency Rule
July 3, 2013
The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. Section 1504 of that law required the SEC (Securities and Exchange Commission) to issue rules compelling companies that extract oil, natural gas, or minerals to publish payments they make to governments. The purpose here was to lift what is known as the “resource curse”- where some of the most mineral rich nations suffer with some of the poorest populations. The solution: shine the light of transparency on nations led by regimes where mineral riches go to only multinational corporations and corrupt government officials who exploit their indigenous populations.
Here’s what the law says:
Securities Exchange Act Section 13(q) subsection (2)(A)-Disclosure, information required
Not later than 270 days after July 21, 2010, the Commission shall issue final rules that require each resource extraction issuer to include in an annual report…any payment made…to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals, including- (i) The type of total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals; and (ii) The type and total amount of such payments made to each government
Subsection (3)(A)-Public availability of information
To the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under the rules issued under paragraph (2)(A)
After the SEC published their rules, the industry promptly sued. This is not the first time litigants have asked courts to interpret an agency’s action in light of a Congressional statute. In 1984, the US Supreme Court provided the framework for us in Chevron USA Inc. v. Natural Resources Defense Council, Inc. It goes a little like this. Step 1: Does the statute speak directly to the precise question at issue? If so, the court defers to what Congress said. If not, please proceed to the next step. Step 2: If the statute is ambiguous, the Court must defer to the agency’s interpretation as long as it’s “based on a permissible construction”.
Looking at the statute, SEC argues we just need Step 1, probably because Congress actually called subsection (3)(A) public availability of information. Their reasoning is that by naming the subsection public availability of information, Congress spoke precisely to the question at issue- whether the SEC must make available to the public the subsection (2)(A) report.
The Court disagreed. Nothing in subsection (2)(A) says anything about making the information public. That comes later in subsection (3)(A). And by the time the statute mentions public availability, Congress limits the scope merely to what is practicable from a “compilation of the information” in the (2)(A) report. According to the decision:
A natural reading of th(ese) provision(s) is that, if disclosing some of the information publicly would compromise commercially sensitive information and impose high costs on shareholders and investors, then the Commission may selectively omit that information from the public compilation (at pg 12).
Another natural reading of these provisions, taken together, compels public disclosure in a crystal clear unambiguous way. SEC shall make rules and shall make information public. Shareholders and investors benefit from the public’s awareness that the companies they own do not support corruption. Congress realized corruption is bad for business. Further, publishing reports online happens all the time at a relatively trivial cost. This explains why the SEC makes publicly available most Section 13 reports.
Where Do We Go From Here?
In the end, SEC did not come even close to their 270-day deadline Congress prescribed back in 2010. For more than two years, the industry managed to delay promulgation of these rules. During that period, industry had ample opportunity to provide comments to the SEC, many of which they rehashed in court. On the legal front, SEC may have to go back to the drawing board and proceed all the way to Chevron Step 2. This way, SEC concedes the statute’s ambiguity forcing the Court to defer to the agency’s discretion. That is, instead of arguing about where the word “public “ appears or what “shall”, “compilation”, or “practicable” mean, or the overall clarity of the Congressional direction, SEC could just exercise its discretion. Or the SEC could provide stronger justifications for their rules.
US EITI –Why Litigation?
It’s bizarre the same folks suing over these rules also actively participate in US EITI (United States Extractive Industries Transparency Initiative), a voluntary disclosure regime where governments and extractive industries publish the payments between them. Many of the same disclosures in the SEC rule conform both to European Union law and the new rules for EITI. Pursuing this lawsuit undermines both the spirit and purpose of US EITI. Notwithstanding everyone’s right to pursue available legal options, talking out both sides of your mouth affects the industry sector’s credibility and impugns the collegial and consensus driven process USEITI represents.
For more information:
- Shreema's blog on API's lawsuit over the "conflict minerals" rule in Dodd-Frank
- Oxfam America's statement on the decision
- Super Bowl Champion Anquan Boldin on the resource curse
- Steptoe & Johnson legal analysis of SEC 1504 rules
- Carey L. Biron's story US Court Overturns Key Extractives Transparency Rule