SEC's Resource Extraction Disclosure Rule Struck Down

On July 2, 2013, the District Court for the District of Columbia struck down Rule 13q-1 under the Securities Exchange Act of 1934. Adopted by the United States Securities and Exchange Commission (SEC) in August 2012, Rule 13q-1 required “resource extraction issuers” to file publicly available annual reports with information relating to any payments made to the U.S. federal or a foreign government for the purpose of the commercial development of oil, natural gas or minerals, beginning with fiscal years ending after September 30, 2013.

The District Court identified two substantial errors leading to its invalidation of the rule:

• contrary to the SEC’s interpretation, the SEC was not mandated to require the public disclosure of the issuers’ annual reports containing details of resource extraction payments. Instead, the relevant statute could be read to provide the SEC with discretion to require issuers to disclose that information to the SEC confidentially. The SEC could then publicly disclose only a compilation of the information; and
• the SEC’s decision to not include an exemption to the rule where disclosure of payment information is prohibited by the law of the host country was arbitrary and capricious because the lack of an exemption could potentially result in billions of dollars of additional costs to issuers who are subject to such prohibitions.

While the District Court’s decision effectively voids the current rule, a new rule relating to the disclosure of resource extraction payments must be promulgated by the SEC at some point. Therefore, the District Court’s decision simply delays the implementation of mandatory disclosure requirements relating to resource extraction payments.

This ruling comes at an interesting time for the Canadian resource industry.  As discussed in our Goodmans Update on June 13, 2013, the Canadian federal government recently announced its intention to adopt new mandatory reporting standards for payments made to foreign and domestic governments by Canadian extractive companies. It remains to be seen whether the District Court’s ruling will have any impact on whether such new mandatory reporting standards will be adopted in Canada or affect the
content of any mandatory reporting standards ultimately adopted.

The SEC’s rule requiring public companies to disclose their use of conflict minerals is also being challenged in the U.S. Courts. It is uncertain how the District’s Court’s decision relating to the disclosure of resource extraction payments will affect this challenge. However, for the time being, the SEC’s disclosure rules relating to conflict minerals are still in effect.