U.S. court vacates SEC Resource Extraction Issuer Disclosure Rules

July 8, 2013

While it was recently announced that new Canadian transparency rules are expected for mining and oil and gas companies, on July 2, 2013, the U.S. District Court for the District of Columbia (the Court) vacated the resource extraction issuer disclosure rules (Rule 13q-1 under the Securities Exchange Act of 1934) adopted last year by the Securities and Exchange Commission (SEC) pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disclosure rules adopted by the SEC in August 2012 required “resource extraction issuers” to file and publicly disclose annual reports with information relating to taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits paid by such issuer, a subsidiary of the issuer or another entity under the issuer’s control to certain governments in connection with the commercial development of oil, natural gas, or minerals, beginning with fiscal years ending after September 30, 2013.

The disclosure rules were challenged by way of a motion for summary judgment by the American Petroleum Institute, among other associations of oil, natural gas, and mining companies whose members were subject to the rules. The Court found that the SEC “misread the statute to mandate public disclosure” of the reports of each resource extraction issuer. The Court also determined that the SEC’s “decision to deny any exemption” under the disclosure rules “was, given the limited explanation provided, arbitrary and capricious”.

The Court remanded the disclosure rules back to the SEC, which will need to decide whether it will appeal the decision or amend or rewrite the rules. Until the SEC adopts new disclosure rules, resource extraction issuers have no obligation to comply with Section 13(q) of the Securities Exchange Act of 1934.

In a separate matter, the disclosure requirements under the conflicts minerals rules (Section 13(p) of the Securities Exchange Act of 1934) adopted by the SEC pursuant to Section 1502 of the Dodd-Frank Act are also currently subject to a challenge in the Court, with oral arguments in that case having been heard on July 1, 2013. The conflict minerals rules require companies to disclose use of minerals that originated in the Democratic Republic of the Congo or an adjoining country. Companies subject to the conflict minerals rules should monitor developments in this ongoing matter.

The impact of the resource extraction decision on the legal challenge to the conflict minerals rules remains uncertain.

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