Court rejects SEC rule on oil company payments

A federal judge handed the oil industry a big win on Tuesday, when he tossed out a new financial disclosure rule that would require companies to reveal what they pay foreign governments in exchange for mineral rights.

In vacating the disclosure rule and sending it back to the Securities and Exchange Commission, District Judge John Bates said the regulation spurred by the 2010 Dodd-Frank financial law had “serious” problems.

“The commission misread the statute to mandate public disclosure of the reports,” Bates said, adding that the SEC also acted arbitrarily and capriciously when it opted against providing any exemption for cases where foreign governments bar the disclosures.

Forcing companies to reveal foreign payments in other countries, even when those nations bar such disclosure, “drastically increased the rule’s burden on competition and cost to investors,” Bates found.

The SEC’s transparency rule, adopted last August, required some 1,100 publicly traded oil, gas and mining companies to report payments exceeding $100,000 made to other countries “to further the commercial development” of the host nations’ resources.

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Sen. Ben Cardin, D-Md., and former Sen. Dick Lugar, R-Ind., led the charge to get the requirement added to the 2010 Dodd-Frank law. Human rights groups, led by Oxfam America, say such disclosures are essential to discourage graft, expose bribes and deter corruption in resource-rich nations where oil and mineral wealth isn’t trickling down.

But the oil industry, led by the American Petroleum Institute, has argued the requirement to provide financial details for specific projects rather than whole countries at a time would give their rivals a competitive advantage, since similar disclosure isn’t required for foreign state-owned oil companies or privately held U.S. firms.

Harry Ng, API’s vice president and general counsel, called Tuesday’s decision “a win for American jobs, for our economy and for international transparency.”

Ng said the SEC rule, if left intact, would have jeopardized “transparency efforts already underway,” including the Extractive Industries Transparency Initiative, which is being implemented in 36 countries.

And Karen Harbert, president and CEO of the Chamber of Commerce’s Institute for 21st Century Energy, said the SEC missed an opportunity to simply require companies to file confidential reports, rather than insisting on public disclosure.

“The SEC’s ‘extraction rule’ would have placed American oil and natural gas companies at a huge disadvantage around the world by forcing them to turn over their playbooks for how they bid and compete against foreign, state owned companies,” Harbert said.

But Ian Gary, Oxfam’s senior policy manager, said the court got it wrong — particularly when it came to the question of whether to allow exemptions in some countries with contradictory bans on payment disclosure.

“Despite the court’s conclusions, the SEC balanced the potential costs and benefits of granting exemptions,” Gary said. “The decision that exemptions weren’t warranted is adequately supported by analysis, and the oil industry has never been able to clearly show the existence of host country prohibitions against payment disclosure.”

The rule now goes back to the SEC, which could add an exemption or choose to reenact a similar measure with additional justification. Gary noted that nothing in the court’s decision says the SEC can’t require public reporting while denying exemptions; “it just says that the SEC needs to use its discretion and provide a fuller analysis.”

The SEC or Oxfam — which intervened in the case — might seek to appeal the decision to a higher federal court. Gary said the human rights group was considering its options.

The lawsuit challenging the SEC rule was brought by the API, the Chamber of Commerce and two other trade groups.

US District Court ruling, API v SEC