WASHINGTON A federal district judge on Friday questioned whether U.S. regulators could have narrowed a sweeping new rule that aims to shed more light on the payments that oil, gas and mining companies make to foreign governments.
The rule, which was adopted last summer by the Securities and Exchange Commission, would force the companies to disclose granular details about all of their projects anywhere in the world and how much they cost.
Trade groups for the companies, including the American Petroleum Institute and the U.S. Chamber of Commerce, are seeking to overturn the rule, saying it is too expensive and would put them at a major competitive disadvantage.
They have argued the SEC should have allowed the companies to privately disclose the data to regulators, and that any public disclosure should only be made through a more general compilation, or aggregation, of the payments.
Congress directed the SEC to adopt the rule through the 2010 Dodd-Frank Wall Street reform law, using language that the SEC said gave the agency very little wiggle room to scale back the level of disclosure required.
But in oral arguments at the U.S. District Court for the District of Columbia on Friday, Judge John Bates said that the law does not expressly call for public disclosure and pointed out that in past practice, the SEC has not always released entire reports it received from companies to the public.
He then asked the SEC why it could not simply require a compilation of the data, as the trade groups prefer.
"Why does a compilation in the SEC's view mean everything?" Bates asked.
"You have an extraordinary volume of information coming in for no identified purpose," SEC lawyer William Shirey responded. "If that information didn't go out to public ... or didn't get put into the compilation, that would be an absurd result."
"Not necessarily," quipped Bates. "A compilation, which is the word Congress used, includes I believe under dictionary definition editing and selection. The SEC said, 'No, no, no. We can't do that!' But why?"
Friday's oral arguments mark the second time the SEC has faced off in court against the trade groups, who are represented by Gibson, Dunn & Crutcher attorney Eugene Scalia, son of U.S. Supreme Court Justice Antonin Scalia.
Earlier this year, they squared off at the U.S. Court of Appeals for the District of Columbia.
Oxfam, a human rights group that backs the rule and is actively participating in the case, convinced the appeals court in April that the law required a lower court to hear the case first. That ruling effectively meant the battle had to start all over again.
Scalia has made a name for himself by successfully getting courts to overturn SEC rules, mostly on the grounds that the SEC failed to do a proper economic analysis.
Contrary to some of Scalia's prior rule challenges, though, the judge spent less time on Friday asking about the economic analysis and more time on whether the SEC properly interpreted the law and whether it should have used its exemptive powers to tailor the rule.
While Bates at times had some tough questions for the SEC, he did not make things easy for Scalia, either.
In particular, he raised some concerns about Scalia's claim that the rule would violate companies' First Amendment free speech rights because it will force them to engage in speech they do not want to make.
"This is indisputably compelled speech," Scalia argued.
But Bates openly questioned that assertion, and also raised doubts on whether the information disclosed is actually political in nature.
"There are tons of compelled disclosure requirements that the government has in place in all sorts of regulatory contexts," he said. "Just oodles and oodles of situations in which there are those requirements. Is this really going to be a situation where courts need to apply a heightened scrutiny and analysis every time the government requires new information to be submitted?"
Bates did not say when he might issue a ruling.
While it would most likely come sometime later this year, before companies must start complying with the new regulation in 2014, the case is not expected to end in the district court.
Whoever loses the case is widely expected to appeal, an action that would kick it back up to the same appeals court where the battle began.
That is something even Bates acknowledged at the beginning.
"You may just view me as a way station on the way back to the fifth floor," he said, referring to the appellate court.
(Reporting by Sarah N. Lynch; Editing by Phil Berlowitz)