U.S. oil companies will still be able to keep their payments (read: bribes) to foreign governments secret from the public because a federal judge last week struck down new federal regulations mandating public disclosure. The Securities and Exchange Commission (SEC), which wrote the rule under authority granted by the 2010 Dodd-Frank financial reform law, may now rewrite it or appeal the decision to the Court of Appeals for the District of Columbia Circuit.

Congress enacted Section 13(q) of Dodd-Frank as a way to combat what international development experts call the “resource curse,” in which the exploitation of abundant natural resources found in underdeveloped countries fails to ameliorate the living conditions of the masses because of rampant official corruption, bribery, mismanagement and conflict. The relevant language states as follows:

“the Commission shall issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made … to a foreign government … for the purpose of the commercial development of oil, natural gas, or minerals.”

The statute sets forth the following “public disclosure” rules: 

“To the extent practicable, the Commission shall make available online, to the public, a compilation of the information required to be submitted under the rules.”

The SEC read the latter provision as requiring public disclosure of the annual reports, and wrote a rule that compels oil, natural gas and mining companies to reveal payments made to governments related to projects in their countries, such as money for taxes, royalties or permits, with the intent that the resulting transparency regarding the payments would discourage those that appeared unreasonable or out of line.

The transparency rule was challenged by groups representing oil companies and other corporations. Oil companies over the years have often been sued, and paid millions of dollars in settlements, for paying bribes overseas to secure contracts.

In his opinion last Tuesday, U.S. District Judge John D. Bates ruled that the SEC misread the statute. Deploying the so-called “plain language” method of statutory analysis championed by conservative judges like Associate Justice Antonin Scalia, Bates, who was appointed by President George W. Bush in 2001, held that “The statute’s plain language poses an immediate problem for the Commission, for it says nothing about public filing of these reports.” (emphasis in original)

Bates stressed his view that the phrases “to the extent practicable” and “compilation” constitute limits on public disclosure, and then leapt much farther in his interpretation than had the SEC.

“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. The Commission points to nothing prohibiting that reading.”

But Judge Bates pointed to nothing in the statute or its legislative history to support his conclusion that a “natural reading” included so much solicitude for “shareholders and investors” that the entire scheme of public disclosure would have to be upended.

In order to reach his ruling, Bates had to ignore the actual legislative history of the provision, including Congressional hearings and pro-disclosure statements on the floor of Congress by its sponsors. Two of the principal sponsors of the law, Sen. Ben Cardin (D-Maryland) and Sen. Richard Lugar (R-Indiana), joined other Senators in submitting an amicus brief that cited that legislative history and argued that “only public disclosure…serves Congressional intent.”

Reacting to the ruling, Cardin insisted that “Congress was clear in the letter and the spirit of the law that this information should be in the public domain.”

The oil companies were represented by Eugene Scalia, son of Justice Antonin Scalia.

-Matt Bewig

To Learn More:

Judge Throws Out SEC Resource Transparency Rule (by Michael Smallberg, POGO Blog)

Judge Strikes Down Federal Disclosure Rule for Oil Companies (by Ben Geman, The Hill)

Big Oil Wins Demand to Chuck Reporting Rule (by Ryan Abbott, Courthouse News Service)

American Petroleum Institute v. SEC (Memorandum Opinion by Judge Bates) (pdf)

Oil Companies Try to Wriggle out of Law Requiring Disclosure of Payments to Foreign Governments (by Noel Brinkerhoff, AllGov)