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House Votes to Nullify SEC Resource Extraction Rule

Commentary by Steven Lofchie and Nihal Patel

By a vote of 235 to 197, the House of Representatives passed a joint resolution (H.J. Res. 41) to nullify an SEC final rule regarding the disclosure of payments by resource extraction issuers, Exchange Act Rule 13q-1 (the "Resource Extraction Rule"). The Resource Extraction Rule was mandated under Section 13(q) of the Securities Exchange Act, which was added by Section 1504 of the Dodd-Frank Act. The rule requires issuers to disclose certain payments made to government entities for the commercial development of oil, natural gas or minerals.

Commentary

For a long time, the Resource Extraction Rule had been criticized by Republicans as inadequate to achieve its intended purpose and irrelevant to the mission of the SEC. Seee.g.SEC Commissioner Gallagher Speaks on the Priorities and Mispriorities of the SEC (with Lofchie Comment).

Commentary

This rulemaking could form the basis of a great case study for an administrative law treatise. To give the (brief) background:

  • In Section 13(q)(2)(A) of the Exchange Act, Congress directed the SEC to adopt rules to require the relevant disclosures not later than 270 days after July 21, 2010.

  • In September 2012, the SEC adopted Rule 13q-1 to implement the statutory mandate.

  • In 2013, the District Court for the District of Columbia vacated the final rule in American Petroleum Institute v. SEC, 953 F. Supp. 2d 5 (D.D.C. 2013), on the grounds that the SEC had misconstrued the statute and denied exemptions in an arbitrary and capricious manner.

  • In September 2015, the SEC again lost in court, this time in the District of Massachusetts. In a somewhat unusual decision, the court found that the SEC "unlawfully withheld agency action" (op. at 12), and required it to file an "expedited schedule" for promulgating the final rule. The SEC declined to appeal the decision, though then-SEC Commissioner and now-Acting Chair Michael Piwowar supported such an appeal.

  • In June 2016, the SEC adopted Rule 13q-1 again. The rule was not adopted at an open meeting, and no dissents from SEC Commissioners are on record (though Commissioner Piwowar did dissent from the re-proposal of the rule in 2015).

If Congress goes through with disapproving the rulemaking via the Congressional Review Act mechanism, then the SEC will be left in the position of being subject to a statute that directs it to adopt a rule and federal court decision that found the SEC had "unlawfully withheld" action on that rulemaking already.

This is an example of how the Congressional Review Act remedy can become an imperfect solution to a policy problem. Perhaps the SEC can find a way to adopt a rule that satisfies the statute and public, judicial and congressional desires. But after seven years of effort, that does not seem especially likely. The better result would be for Congress to push for a bill to either repeal Section 13(q) entirely or modify it to make congressional desires clearer.

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