The day after Congress passed the massive Dodd-Frank Act in July 2010, I published this post regarding Section 1504 (“Disclosure of Payments by Resource Extraction Issuers”), a “miscellaneous” provision tucked into the bill at the last moment. (The post provides a general overview of Section 1504′s provisions). 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 indicated 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.
As highlighted by various posts since July 2010, the SEC’s final rules implementing Section 1504 were long-delayed and only came into effect this past August. (See here for the final rules).
Against this backdrop, it is little surprise that last week the following organizations – the American Petroleum Institute, the Chamber of Commerce, the Independent Petroleum Association of America, and the National Foreign Trade Council - filed a complaint (here) in the U.S District Court, District of Columbia, against the SEC: seeking a judicial declaration that Section 1504 violates the First Amendment and is thus null and void; and seeking to vacate Section 1504 on the grounds that the SEC acted arbitrarily and capriciously in violation of the Administrative Procedures Act in implementing Section 1504′s final rules.
In pertinent part, the complaint alleges that Section 1504 compels “U.S. oil , gas, and mining companies to engage in speech - in violation of their First Amendment rights – that would have disastrous effects on the companies, their employees, and their shareholders.” As to the SEC’s purported defense that its rules implementing Section 1504 were required by law, the plaintiffs allege that the SEC “grossly misinterpreted its statutory mandate” and paid “lip service” to the requirement that SEC rules factor in a cost-benefit analysis.
The complaint cites the SEC’s own estimate that Section 1504 will “cost U.S. public companies at least $1 billion in initial compliance costs and $200 to $400 million in ongoing compliance costs” and that it “could add billion of dollars of [additional] costs” through the loss of trade secrets and business opportunities. All this, the complaint states, for the purported benefit that Section 1504 “may result in social benefits” that “cannot be readily quantified with any precision” (citing to the SEC).
The SEC has experienced rough waters of late in the D.C. Circuit and that court is where several SEC rules have found their final resting place. The plaintiff’s attorney in many of those cases has been Eugene Scalia (Gibson Dunn – here). (See here for a recent Wall Street Journal article about Scalia and here for a recent Wall Street Journal op-ed by Scalia). Scalia is representing the Section 1504 plaintiffs and this judicial challenge will be interesting to follow.