SEC Shines Light on Resource Extractor Payments
On August 22, 2012, the U.S. Securities and Exchange Commission (SEC) issued final rules on Section 1504 of the Dodd-Frank Act, which requires resource extraction issuers to publicly disclose certain payments made to the U.S. and to foreign governments that are more than $100,000 in a fiscal year. Payments must be detailed by type and total amount and must be reported on a project-by-project basis. Intended to bring greater transparency and accountability to the industry, these new rules are controversial and have raised concerns about the added cost of compliance and whether there are competitive disadvantages to issuers. Companies with reporting requirements under this new rule should begin as soon as possible to determine how and whether these new rules apply.
On Wednesday, August 22, 2012, the U.S. Securities and Exchange Commission (SEC, or Commission) adopted final rules to implement Section 13(q) of the Securities Exchange Act of 1934 (the Exchange Act), which was added by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Section 13(q) requires resource extraction issuers to publicly disclose payments made to the U.S. federal government and to foreign governments in connection with the commercial development of oil, natural gas and minerals. These new controversial disclosure requirements are intended to enhance the transparency of government payments made by U.S. resource extraction issuers. The Section 1504 final rules are consistent with the Extractive Industries Transparency Initiative (EITI), and in some instances go farther than EITI mandates.
The SEC’s final rules are similar in substance to the proposed rules the Commission issued on December 23, 2010, with minor changes intended to clarify affected issuers’ disclosure obligations. Consistent with the Commission’s proposed rules, the final rules do not exempt small entities from disclosure requirements. All companies meeting the definition of a resource extraction issuer, including companies considered “small businesses” or “small organizations,” are subject to Section 13(q)’s disclosure requirements. In addition, affected issuers are required to disclose payments made by a subsidiary or another entity controlled by the issuer.
In response to public comments, the Commission has established a quantitative threshold for disclosure of payments that are “not de minimis.” Under the final rules, a payment, or series of payments, must be disclosed when such payment(s) equal(s) or exceed(s) $100,000 in a fiscal year. In adopting a fixed quantitative threshold for “not de minimis” payments, the Commission expressly rejected commentators’ recommendations that the Commission use a materiality standard. Moreover, the final rules (unlike the draft rules) further include dividends and infrastructure improvements, along with taxes, royalties, fees (including license fees), production entitlements and bonuses as payments that need to be disclosed.
Although the term “project” remains undefined in the final rules, the rules make clear that resource extraction issuers are required to disclose more than payments to governments aggregated on a country level. Rather, in a divergence from the guidelines set forth by EITI that allow for payments to be aggregated on a country-wide basis, resource extraction issuers must report the type and total amount of payments made to each government for each project and the currency used to make the payments. While the definition of “project” will be based on a consideration of all relevant facts and circumstances, the Commission may look to the issuer’s contractual arrangement with the host country for the parties’ understanding of the term “project,” as is contemplated under the contract.
Contrary to the Commission’s proposed rules, the final rules require resource extraction issuers to make these disclosures on new Form SD (in XBRL format), to be filed on the SEC public database EDGAR, rather than including this information in their annual reports. Disclosure in HTML format is not required. Form SD will be due no later than 150 days after the end of the issuer’s most recent fiscal year for fiscal years ending after September 30, 2013. For the first report, filed for fiscal years ending after September 30, 2013, issuers may provide a partial year report if the issuer’s fiscal year began before September 30, 2013. The issuer will be required to provide a report for the period beginning October 1, 2013, through the end of its fiscal year.
Notably, the final rules do not provide an exemption for resource extraction issuers who are constrained from disclosing such payments due to host country confidentiality restrictions. The lack of such an exemption places these resource extraction issuers in the difficult position of potentially having to forfeit or abandon business opportunities in host countries that impose such confidentiality restrictions. In addition, the final rules potentially place resource extraction issuers at a competitive disadvantage if they are required to disclose confidential or competitively sensitive information. Such information may be used by their competitors who may be foreign state-owned oil companies, private or foreign companies whose ability to contract is in no way constrained by Section 13(q)’s disclosure requirements. The Commission has explained that providing an exemption for the disclosure of competitively or commercially sensitive information would frustrate Section 13(q)’s purpose of promoting greater transparency.
Ultimately, resource extraction issuers will have to take their disclosure obligations into consideration when negotiating future contracts with governments (and in some cases may need to renegotiate existing contracts that run afoul of these rules). In some contract negotiations, the issuer may face a difficult decision as to whether it can comply with the terms of the contract, which may incorporate the host country’s confidentiality restrictions by reference, and also satisfy its payment disclosure obligations under Section 13(q). Moreover, the new disclosure requirements will likely require resource extraction issuers to track additional data on their payments to governments, which may increase existing compliance costs that will be borne by issuers and their investors.
In the August 22, 2012, open meeting, the SEC also issued final rules relating to issuers’ disclosure of their use of so-called “conflict minerals.” For more details, see “SEC Issues Final Rules Requiring Issuers to Account for Use of Conflict Materials.”
Companies subject to these disclosure requirements should take care to begin to track the required payment information and take steps outlined in the 2012 Dodd-Frank Act Compliance Checklist for Resource Extraction Issuers and “Conflict Mineral” Manufacturers.