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Judge Vacates SEC Rule Regarding Resource Extraction Disclosure Provisions

The day after Congress passed the massive Dodd-Frank Act in July 2010, I  published this [1] post regarding Section 1504 (“Disclosure of Payments by Resource Extraction  Issuers”), a “miscellaneous” provision tucked into the bill at the last moment.  I predicted that Section 1504 was sure to cause much angst and substantially  increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.  I noted that Section 1504 was akin to swatting a flay with a bazooka and that just because bribery and corruption are bad, does not mean that every attempt to  curtail bribery and corruption is good or represents sound policy.

I further noted that in passing Section 1504, Congress(as if most members of Congress likely even knew that the miscellaneous provisions was tucked into the massive Dodd-Frank Act) was revisiting an issue sensibly put to rest many years ago in passing the FCPA.

The background is as follows.

The FCPA as enacted in 1977 contained (and still contains) an outright prohibition on improper payments to “foreign officials” to obtain or retain business (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.  The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including most notably Senator Proxmire (D-WI – a Congressional leader on what would become the FCPA), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate. Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report on what would become the FCPA is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected): “Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

Back to Section 1504 of Dodd-Frank.

Numerous prior posts have highlighted the judicial challenge to the SEC rule implementing Section 1504.  Yesterday U.S. District Court Judge John Bates vacated the SEC’s rule.  (See here [2] for the decision).  The decision was not as to the merits of Section 1504, rather as to the SEC’s rule implementing Section 1504, and the decision is thus focused on administrative law specifics.

Regardless, I applaud the decision.

Feel good legislation that regulates an area that is already subject to criminal prohibitions while imposing significant compliance burdens on companies (the SEC itself estimated that the provision would cost U.S. public companies at least $1 billion in initial compliance costs and
$200 to $400 million in ongoing compliance costs) does not represent sound public policy.

For additional coverage of the decision, as well as links to other commentary, see here [3] from Samuel Rubenfeld at Wall Street Journal Risk & Compliance Journal.