In a blow to U.S. securities regulators and human rights groups, a U.S. district court judge on Tuesday tossed out a new rule requiring oil, gas and mining companies to disclose payments to foreign governments.
The U.S. Securities and Exchange Commission's extractive resources rule was added to the 2010 Dodd-Frank Wall Street reform law. Proponents, including Oxfam America, say it would help combat corruption and wasteful spending in resource-rich nations.
Trade groups, including the American Petroleum Institute and U.S. Chamber of Commerce, filed a legal challenge to the new regulation.
Their lawsuit laid out a litany of allegations, including claims the agency misinterpreted the law by forcing the public disclosure of detailed data on payments. They also said the SEC had failed to consider tailored exemptions to reduce regulatory burdens and protect U.S. business interests.
In a harshly worded 30-page opinion, U.S. District Judge John Bates in the District of Columbia agreed with a handful of the groups' claims.
"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.
This marks the second major defeat of an SEC rule stemming from the Dodd-Frank law.
In 2011, the U.S. Chamber and the Business Roundtable succeeded in overturning another 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 regulation.
SEC spokesman John Nester declined to comment on the latest decision, which vacated the rule and sent it back to the agency.
Bates was skeptical of the SEC's interpretation of the law and the meaning of the term "report" during oral arguments last month, saying Dodd-Frank did not expressly call for public disclosure of the payment data.
The trade groups argued the SEC should have allowed the companies to privately disclose the data to regulators, and that any public disclosures should be made through a more general compilation of the payments, to protect their commercial interests.
At the time, an SEC lawyer told Bates that public disclosure was clearly the will of Congress, and that requiring companies to privately turn over all of the data to the SEC did not make sense.
But Bates rebuffed the SEC's legal rationale in his ruling.
"Neither the dictionary definition nor the ordinary meaning of 'report' contains a public disclosure requirement," Bates wrote.
"If this is Congress's way of unambiguously dictating that reports must be publicly filed, it is a peculiar one indeed."
The decision on Tuesday may not bode well for another pending legal challenge by the U.S. Chamber and other groups to a third Dodd-Frank regulation known as the "conflict minerals" rule.
The rule calls for manufacturers to disclose if their products contain certain minerals from the war-torn Democratic Republic of Congo.
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