WASHINGTON A U.S. judge tossed out on Tuesday a new rule requiring oil, natural gas and mining companies to disclose payments to foreign governments, in a blow to U.S. securities regulators and human rights groups.
U.S. District Judge John Bates said the Securities and Exchange Commission erred in its interpretation of part of the 2010 Dodd-Frank Wall Street reform law that called for the rule and did not properly consider requests for relief.
Proponents of the resource extraction rule, including international relief organization Oxfam America, say it would help combat corruption and wasteful spending in resource-rich nations.
But business groups say it would cost billions of dollars and yield little shareholder benefit.
Trade groups, including the American Petroleum Institute and U.S. Chamber of Commerce, filed the legal challenge alleging the SEC misinterpreted the law by forcing the public disclosure of detailed data on payments.
The industry groups also said the SEC failed to include common-sense exemptions by forcing disclosure of payments to countries like China and Angola, where such disclosures are illegal.
Bates, in U.S. District Court for the District of Columbia, agreed.
"The Commission misread the statute to mandate public disclosure of the reports, and its decision to deny any exemption was, given the limited explanation provided, arbitrary and capricious," Bates wrote in a 30-page opinion.
API General Counsel Harry Ng said the decision was a "win for American jobs."
"U.S. companies are leading the way to increase transparency, but the rule would have jeopardized transparency efforts already underway by making American firms less competitive against state-owned oil companies," he said in a statement.
SEC spokesman John Nester said the SEC was reviewing Bates' decision, which vacated the rule and sent it back to the agency.
It was the second major defeat of an SEC rule stemming from the Dodd-Frank law. In 2011, the U.S. Chamber of Commerce and the Business Roundtable succeeded in overturning a "proxy access" rule that would have made it easier for shareholders to nominate directors to corporate boards.
In that case, a federal appeals court decided the SEC had failed to properly weigh the costs and benefits of the rule.
Both the proxy access and resource extraction rule challenges were argued by Gibson Dunn partner Eugene Scalia, the son of Supreme Court Justice Antonin Scalia.
In a statement, Oxfam senior policy manager Ian Gary said that while he was disappointed, his group hopes the SEC will be able to rewrite the rules in a way that preserves their intent and also takes into account the judge's criticisms.
"Nothing in the decision says that the SEC may not require public reporting or deny exemptions - it just says that the SEC needs to use its discretion and provide a fuller analysis," Gary said.
Last month, the European Union approved a similar but more expansive measure that would cover more industries and apply to both public and private companies.
Arlene McCarthy, a British Labour member of the European Parliament, said she was disappointed by the U.S. ruling.
"It clearly prioritizes the commercial interests of industry over the public and general interest of investors who are seeking this information in order to make informed investment decisions," she said.
Canadian Prime Minister Stephen Harper said last month that his government is planning a similar mandatory reporting regime.
The trade groups argued the SEC should have allowed companies to privately disclose the data to regulators. Public disclosures should only be made through a more general compilation of the payments, to protect their commercial interests, they said.
Bates, in his ruling, declined to address some of the industry groups' other arguments, including whether the SEC had properly weighed the costs and benefits of the rule, and whether the rule violated companies' free speech rights.
The U.S. Chamber of Commerce and others have challenged another Dodd-Frank-based regulation known as the "conflict minerals" rule, that calls for manufacturers to disclose if their products contain certain minerals from the war-torn Democratic Republic of Congo.
That case was argued in court on Monday before a different judge, but some of the arguments against the rule are similar to those in the resource extraction case.
(Reporting by Sarah N. Lynch; Additional reporting by Julie Gordon in Toronto and Barbara Lewis in Brussels; Editing by Karey Van Hall, Jeffrey Benkoe and Tim Dobbyn)