Judge throws out SEC oil company foreign-payment rule

A U.S. Securities and Exchange Commission rule mandating disclosure of payments by oil and mining companies to foreign governments was thrown out by a federal judge in Washington who said the agency misread the law.

U.S. District Judge John Bates in Washington Tuesday ruled in favor of the American Petroleum Institute, the U.S. Chamber of Commerce and two other trade groups that argued the regulation would hobble companies’ competitiveness by forcing them to publicly disclose information that could be used to influence political events in other countries.

“The commission offers no persuasive arguments that the statute unambiguously requires public disclosure of the full reports,” Bates said in his 30-page opinion.

The rule, issued under the 2010 Dodd-Frank financial reform law, covers about 1,100 public companies engaged in oil, natural gas or mineral extraction. The contested regulation implements a provision of Dodd-Frank aimed at increasing transparency and thwarting corruption by giving citizens of resource-rich countries information about their governments’ oil and mineral revenue.

The rule, which the SEC estimated could cost the companies as much as $1 billion, required natural-resource companies such as Exxon Mobil Corp., BP and BHP Billiton Ltd. to disclose how they pay governments — including the U.S. — to tap their resources.

Billionaire backing

The payment reports, which required companies to disclose details about taxes, royalties and fees greater than $100,000, were backed by billionaires Bill Gates and George Soros, who wrote letters to the commission arguing that transparency will help investors assess risk. The commission adopted the regulation in a 2-1 vote in August, and companies were to start producing the disclosures for their fiscal year starting after Sept. 30, 2013.

The business groups, in a lawsuit filed in October, said the regulation violated the First Amendment of the U.S. Constitution and that the commission failed to properly consider the rule’s effects on competition.

The trade groups said the SEC “grossly misinterpreted” Congress’s directive by requiring each public company to file a report on the commission’s online database detailing each payment made to a foreign government.

Revealing secrets

A compilation of payments would have served the purposes of the law “without further burdening U.S. companies or revealing trade secrets or pricing strategies to consumers,” according to the complaint.

Bates’ ruling didn’t address the First Amendment challenge. He said the SEC’s rejection of an exemption for countries that prohibit payment disclosure was arbitrary and capricious. China, Qatar, Angola and Cameroon bar disclosure of payments.

John Nester, an SEC spokesman, said in a phone interview that the agency was reviewing the decision.

“The rule would have jeopardized transparency efforts already under way by making American firms less competitive against state-owned oil companies,” Harry Ng, API vice president and general counsel, said in an emailed statement.

Ian Gary, a senior policy manager for Boston-based Oxfam America, which intervened in the case in support of the SEC, said the ruling doesn’t preclude “the possibility that the rules will be reenacted in the same form, but with a stronger justification.”

A second lawsuit the groups filed in the federal appeals court challenging the rule was rejected in April. The appeals court said the case must first be considered by the lower court.

The case is American Petroleum Institute v. U.S. Securities and Exchange Commission, 12-cv-01668, U.S. District Court, District of Columbia (Washington).

With assistance from Dave Michaels and Andrew Zajac in Washington