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SEC Refuses to Postpone Effectiveness of Extraction Payments Rule

Joe Mont | November 12, 2012

The Securities and Exchange Commission will not voluntarily postpone the implementation of a recent rule requiring oil, gas and mining companies to disclose payments made to governments for extraction rights.

On Oct. 25, the American Petroleum Institute, the Independent Petroleum Association of America, the National Foreign Trade Council, and the U.S. Chamber of Commerce hand-delivered a Motion for Stay to the SEC demanding that it defer the rule's Nov. 13 effective date while their challenge remains in litigation.

The SEC's order denying the stay was issued a week after a Nov. 1 deadline the groups demanded. In doing so, it said the movants failed to demonstrate imminent harm. Because of the court of appeals' expedited briefing and argument schedule, which may yield a determination on Rule 13q-1's validity as soon as the spring, less than a year before the first Form SD filings would be due, it is “likely that the court will render a decision on the rule's validity well before these alleged harms could occur.”

The motion to stay followed an Oct. 10 complaint filed by the four associations with the U.S. District Court for the District of Columbia, and a petition for review filed with the U.S. Court of Appeals for the D.C. Circuit. Rule 13q-1, approved in August by a 2-1 vote of the SEC and requires registered oil, gas and mining companies to disclose any payment, or series of related payments, totaling $100,000 or more that are made during the course of a fiscal year to the U.S. or foreign governments in exchange for extracting resources. The rulemaking was required of the Commission by the Dodd-Frank Act. 

The legal challenge claims the rule violates the Administrative Procedure Act, on the grounds that it is “arbitrary and capricious,” as well as the Exchange Act of 1934. They made the case that the SEC failed to conduct an adequate cost-benefit analysis, as required by law, and that it “grossly misinterpreted its statutory mandate” to make a compilation of information available to the public. The stay is necessary, they said, to stem the “irreparable harm” the rule would have on contract negotiations, competitiveness and through excessive compliance costs.

Among the reasons given for its decision, the SEC said the dissenting groups failed to demonstrate that the initial compliance costs would constitute irreparable harm. It estimated that small issuers (with market capitalization under $75 million) are estimated to face initial compliance costs that range from a $10,180 to $106,890, it estimates. For an “average large issuer” (market capitalization at or exceeding $75 million), the total initial compliance cost is likely to range between $90,080 and $945,840.

The SEC also dismissed claims of a competitive disadvantage in bidding and negotiating new contracts as “too speculative and unsupported by evidence.” The detrimental effects on existing contracts and operations where the host country's law may prohibit disclosures, were also dismissed because any such harm would not occur until Feb. 28, 2014 at the earliest, which will likely be after the court of appeals has reached a decision on the rule's validity and “any risk of harm is actual and not speculative.”