The Dodd-Frank Act has significantly affected the energy industry, with the ultimate implications of the Act’s reforms remaining to be seen. Recent discussion has surrounded Section 1504’s requirement that companies disclose the type and total amount of payments made to foreign (and the U.S.) governments in connection with projects for the commercial development of oil, natural gas, and minerals. Section 1504 of the Dodd-Frank Act amends Section 13(q) of the Securities & Exchange Act of 1934, requiring the Securities and Exchange Commission (“SEC”) to issue a final rule implementing the disclosure requirement. The SEC finalized its rule (the “Disclosure Rule”) nearly a year ago, mandating that companies publicly file a report disclosing such payments for fiscal years ending on or after September 30, 2013. The Dodd-Frank disclosure requirement and the SEC Disclosure Rule have been the targets of opposition in Congress and the judiciary. Earlier this month, the U.S. District Court for the District of Columbia issued a decision in American Petroleum Institute v. Securities & Exchange Commission, No. 12-1668, 2013 U.S. Dist. LEXIS 92280 (July 2, 2013), holding that the SEC’s Disclosure Rule must be vacated due to the SEC’s erroneous reading of the Dodd-Frank Act and its failure to properly consider granting exemptions to the Disclosure Rule. Just days before the Court issued its ruling in American Petroleum, the U.S. House of Representatives passed H.R. 1613, the Outer Continental Shelf Transboundary Hydrocarbon Agreements Authorization Act, which would put into force the terms of an agreement between the U.S. and Mexico on the governance of oil and natural gas exploration and development, and revenue sharing from these resources along the maritime border of the Gulf of Mexico. H.R. 1613 passed by bipartisan vote of 256-171 and contains what has been a controversial exemption from the Dodd-Frank disclosure requirement. What will energy companies ultimately be required to disclose now that the Disclosure Rule has been vacated and H.R. 1613 is facing Senate and Presidential approval?
The practice of disclosing information regarding payments made to foreign governments in connection with oil, natural gas and mining activities is not novel to the energy industry. Since 2003, the Extractive Industries Transparency Initiative (“EITI”) has served as a voluntary and confidential disclosure mechanism through which companies report payments made and almost forty countries report their receipt of payments related to oil, gas and mineral extraction and commercial development to an independent entity that verifies the data and publishes the data in varying formats to the public. Dodd-Frank’s disclosure requirement was meant to bolster transparency and accountability in the development of natural resources from countries that are rich in resources but have poor populations. But, the Disclosure Rule’s mandate that company and project-specific information be fully disclosed to the public, without exemption, was estimated to pose an increased burden on the energy industry and competition at a cost of tens of billions of dollars. The main concerns raised during the SEC rulemaking process included:
- annual reports should be filed confidentially with the Commission, and the Commission should make public only a compilation of the information disclosed in the confidential reports;
- the public filing of company and project specific payment data would have a detrimental effect on competition by releasing sensitive and potentially proprietary pricing information;
- the Commission should exercise its authority to exempt payments made to the countries of Angola, Cameroon, China, and Qatar from the disclosure requirement because the countries prohibit disclosure of payment information; and
- if no exemption were provided for countries that prohibit disclosure, companies may be forced to withdraw from those countries, which would cost them tens of billions of dollars.
During the SEC rulemaking, the EITI was offered as a guide-post for alternative mechanisms of reporting. In fact, the American Petroleum Court noted the SEC stated that it would follow the EITI except when Section 13(q) clearly differed from the EITI framework. The SEC acknowledged that the concerns raised regarding laws of countries prohibiting disclosure having a significant impact on companies’ profitability and competitive positions appeared to be warranted. The SEC also acknowledged that public disclosure of payment information would burden competition. Despite these concerns and the EITI’s confidential reporting framework, the SEC promulgated the Disclosure Rule based on its reading that the Dodd-Frank Act required such public disclosure and militated against allowing any exemptions.
The concerns raised during the SEC rulemaking process echo the sentiment of Representatives who voted to include the exemption from Dodd-Frank’s disclosure requirement in H.R. 1613. The Chairman of the House Committee on Natural Resources expressed that the waiver of Dodd-Frank’s disclosure requirement was necessary because Mexico had not yet finalized regulations regarding royalties earned under the agreement with the U.S., leaving open the possibility that Mexico could prohibit disclosure of payments. American companies and workers would suffer without an exemption to the disclosure requirement, as foreign energy companies could develop the resources without running afoul any Mexican prohibition on disclosure. A video and transcript of Chairman Doc Hasting’s comments during the hearing can be found here. The Dodd-Frank waiver in H.R. 1613 has been met with opposition. The White House announced in an Administrative Policy Statement that it could not support H.R. 1613 with the waiver included, calling it an “unnecessary, extraneous provision that seriously detract[s] from the bill” and stating that the Administration “strongly objects to exempting actions taken by public companies in accordance with transboundary hydrocarbon agreements from requirements under section 1504 of the Dodd-Frank Act and the Securities and Exchange Commission’s Natural Resource Extraction Disclosure Rule.” H.R. 1613 was received in the Senate and referred to the Committee on Energy and Natural Resources for consideration earlier this month, after the American Petroleum decision striking the SEC Disclosure Rule was rendered. Prior to American Petroleum, doubt was expressed as to whether H.R. 1613 would pass the Senate with the Dodd-Frank waiver intact.
So, what will become of the Dodd-Frank disclosure requirement post-American Petroleum? While at first glance, the Court appears to have rejected the concept of a public disclosure requirement without any exemptions, the Court’s reasoning for striking the SEC’s Disclosure Rule reveals that it struck down the SEC’s interpretation that the Dodd-Frank Act requires public disclosure and prohibits exemptions. Following American Petroleum, the SEC has discretion to consider allowing for confidential disclosures and/or exemptions to the disclosure requirement altogether. The American Petroleum ruling is grounded in the technical framework for the standard of judicial review of agency action set forth in the Administrative Procedures Act and Chevron USA Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under the Chevron analysis, deference to an agency’s statutory interpretation is appropriate only when the agency has exercised its own judgment, not when it believes that the interpretation is unambiguously required by Congress in the statute. This is where the Court made quick work of striking down the SEC’s Disclosure Rule, which was based on the SEC’s belief that the language of the Dodd-Frank Act requires full public disclosure of the reports and does not permit exemptions to be granted:
[I]t is black letter law that “an agency regulation must be declared invalid, even though the agency might be able to adopt the regulation in the exercise of its discretion, if it was not based on the agency’s own judgment but rather on the unjustified assumption that it was Congress’ judgment that such a regulation is desirable or required.” The Rule is invalid here for precisely that reason.
(Citation omitted). The Court found that “[t]he statute’s plain language poses an immediate problem for the Commission, for it says nothing about public filing of these reports” and in a separate section of the statute titled “Public Availability” the public availability of information is limited to “a compilation of the information,” and is required only “[t]o the extent practicable.” The Court reasoned that “[a] natural reading of this provision 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.” With respect to the SEC’s refusal to provide for any exemption from the disclosure requirement, the Court found that “[t]he Commission’s primary reason for rejecting an exemption does not hold water” and the statute provides for exemptions through its language that requires “a compilation only ‘[t]o the extent practicable’” and provides that the Commission’s rule must “’support the commitment of the Federal Government to international transparency promotion efforts’ to (and only to) ‘the extent practicable.’”
It is clear from American Petroleum that under the Court’s reading of the Dodd-Frank Act, the SEC has the discretion to limit what information is required to be filed publicly and can grant exemptions from the disclosure requirement based on foreign country prohibitions on disclosure. What also is clear, however, is that if the SEC in its discretion were to reissue the Disclosure Rule in the same format, the outcome of the Court’s ruling may not be the same: “the Court has no occasion, at this stage, to decide whether, if the Commission promulgated the same Rule as an exercise of its discretion . . . the same interpretation would be sustained.” (citations and quotations omitted). The Court’s opinion urges, however, that the SEC’s approach during the process of promulgating the Disclosure Rule suggests that the SEC might have provided for confidential disclosure and exemptions, but felt bound by its reading of Dodd-Frank:
But (even aside from the gravity of the error) there is reason to think the Rule the Commission will promulgate on remand may take a substantially different form. The Commission noted throughout the Rule that it will burden competition and harm investors, but viewed itself as powerless to address that harm. When informed that it does have the power, the Commission may well strike a different balance. Similarly, in describing its approach, the Commission stated that it will follow the EITI except when section 13(q) clearly deviates from its framework. But the statute “clearly” deviates from the EITI less than the Commission assumed, and this, too, indicates that the Commission may materially alter the Rule in light of flexibility it did not know it had.
(Citations and quotations omitted).
The question is whether the SEC will exercise its newly found discretion to ease the burden on energy companies by allowing confidential submission of disclosure reports and exemptions to the reporting requirement altogether, under some circumstances. With the possibility of the SEC carving out exemptions to the disclosure requirement, or limiting the public disclosure of information to compiled data that is not company specific, will the controversial exemption in H.R. 1613 continue to serve as a viable point of contention for the Senate or White House to impede passage of the legislation? We will keep you updated on Disclosure Rule and H.R. 1613 developments.