While the conflict minerals rule litigation has garnered a great deal of attention, much less focus has been placed on another of the “miscellaneous” provisions of Dodd-Frank, specifically Section 1504, and the resource extractive industries provision. As discussed in earlier posts (here, here), Section 1504--the Cardin-Lugar Amendment--and the rules promulgated thereunder require publicly traded resource extractive industry issuers—those involved in oil, gas and mining--to make project-level disclosures on a new Form SD (separate from the annual report) of payments in excess of $100,000 made to governments around the world for the purpose of commercial development of natural resources.
The resource extractive industries rule (“Rule”) originally adopted by the SEC was invalidated by the U.S. District Court for the District of Columbia in July 2013 in response to a lawsuit brought by four trade groups, including the American Petroleum Institute. The Court invalidated the Rule for two reasons. The Court found that (1) the SEC required public disclosure of issuer payments based on a misreading of Dodd-Frank Section 1504 (the statutory provision directing the SEC to draft the rule) and (2) that the decision by the SEC to deny any exemption to the disclosure requirements of the rule was arbitrary and capricious.
That invalidation left the SEC with the obligation to take further action to fulfill the Congressional mandate of Section 1504, which required the SEC to adopt a rule pursuant to the Section.
Whether the SEC actually will take action on the resource extractive industries rule in the time projected remains to be seen. The Regulatory Flexibility Act requires federal agencies to, twice a year, submit a list of significant rule making items they expect to pursue over the next 12 months for inclusion in the Office of Management and Budget Office of Information and Regulatory Affairs' unified agenda. However, simply because an item is included on the agenda of an agency, does not mean that the agency guarantees the action will happen; some argue that the agenda is more aspirational than realistic.
There is real hope that action will be forthcoming, as support for it is coming from unusual sources, including issuers who will be subject to the rule. In a letter dated May 1, Royal Dutch Shell and Exxon Mobil urged agency action on the issue in part because the EU is moving on the issue with legislation planned to come into effect at the end of 2014.
"[W]e believe implementation of the EU Accounting & Transparency Directives, in particular the fast-track schedule being pursued in the U.K., increases the urgency of our industry's request for the Commission to consider [Section] 1504 in 2014 and to work towards publishing proposed rules as soon as possible and in any event before year-end. We strongly believe that the public interest of achieving a coordinated and harmonized global transparency regime, which will best serve the interests of all stakeholders, depends upon it."
If the SEC were able to indicate their willingness to consider the proposed new rules under 1504 before the U.K. legislation is finalized, the U.K. government could take the SEC approach into account in implementing its own transparency legislation. Since the U.K. will be the first EU Member State to implement the EU Accounting & Transparency Directives, thus setting a precedent for other EU Member States’ implementation, this is especially important for purposes of “equivalency” between the EU and U.S. reporting regimes.
Similarly, Chevron Corp. and the American Petroleum Institute have both asked for a re-proposed Rule to be issued as quickly as possible.
With much rule-making under Dodd-Frank still incomplete or under challenge, the resource extractive industries rule may not seem to be the most important item on the SEC’s proposed agenda, but for those subject to its mandate (and global regulations soon to come) the fate of the Rule matters a lot.