Federal Court Vacates SEC's "Extraction Rule" in American Petroleum Institute v. SEC and Oxfam America
Commentary by Bob Zwirb
A federal district court upheld a challenge by four trade associations (American Petroleum Institute, Independent Petroleum Association of America, U.S. Chamber of Commerce, and National Foreign Trade Council) ("API") to SEC Rule 13q-1 ("Disclosure of Payments Made by Resource Extraction Issuers"), which requires resource extraction issuers to annually disclose payments made to a foreign government in connection with the issuer's commercial development of oil, natural gas or minerals. The court granted API's motion for summary judgment, vacated the SEC's rule, and remanded it to the SEC for further proceedings.
The Court found that the SEC committed several errors. First, the SEC misread the statute to mandate public disclosure of the annual reports notwithstanding the fact that the statute, as the Court pointed out, "speaks of 'disclosure' and 'an annual report,' not 'public disclosure' and not a 'publicly filed annual report.'" Second, the SEC erred in insisting that all information be disclosed verbatim, even though the statute only called for "a compilation" of such information to be made publicly available. Third, the Court faulted the SEC for refusing to grant exemptions to companies conducting business in countries that prohibited public disclosure, finding that such refusal in the face of the Commission's general exemptive authority was arbitrary and capricious. Finally, the SEC ignored language in the statute authorizing it to impose these requirements only "to the extent practicable."
See: Memorandum Opinion: American Petroleum Institute v. SEC, Order: American Petroleum Institute.
Related News: "Trade Associations' Reply Brief to U.S. Court of Appeals for D.C. Circuit Regarding Review of SEC Rule 13q-1" (January 29, 2013).
Commentary
The SEC's approach to its rulemaking authority regarding extraction is similar to that of the CFTC regarding its position limits rulemaking. It is possible, therefore, that the courts will find similar problems with the CFTC's position limits rulemaking. Like the CFTC, the SEC argues that it has no discretion to be more reasonable because Congress mandated that it issue the extraction rule, notwithstanding the fact that the statute qualifies such mandate with the words "to the extent practicable." This is comparable to language in the Commodity Exchange Act that requires the CFTC to establish position limits only "as appropriate" and only "as the Commission finds are necessary" to diminish, eliminate, or prevent the burdens arising from excessive speculation. In rejecting the SEC's argument, the Court makes an important point that deference is owed to an agency's interpretation of its statutory authority "only . . . when the agency has exercised its own judgment, not when it believes that [the] interpretation is compelled by Congress."
Likewise, both this rulemaking and the position limits rulemaking will impose enormous costs and burdens. Here the SEC, unlike the CFTC, tried to assess the costs of its proposed action, acknowledging that they would be substantial - $1 billion in start-up costs and $200 to $400 million in annual compliance costs - and would compromise commercially sensitive information and prevent U.S. firms from doing business in certain countries (Angola, Cameroon, China, and Qatar). Nevertheless, like the CFTC in similar circumstances, the SEC insisted that it must go ahead and impose these burdens anyway, notwithstanding that they exceeded any benefits, in order to further the "purpose of the Act." But the Court makes clear that general invocations of a statute's apparent purpose (here to make certain foreign transactions more transparent and in the CFTC's case to further Dodd-Frank goals) will not work where the purpose is "conceived more broadly than the statutory text, which emphasizes practicability."