- SEC Issues Final Rules Requiring Disclosure of Payments to Governments by Resource Extraction Issuers
- September 18, 2012
- Law Firm: Troutman Sanders LLP - Atlanta Office
On August 22, 2012, the SEC adopted final rules mandated by the Dodd-Frank Act requiring a “resource extraction issuer” to disclose certain payments made to the U.S. federal government or foreign governments for the purpose of commercial development of oil, natural gas or minerals. A resource extraction issuer is required to comply with the new rules for fiscal years ending after September 30, 2013. The initial deadline for a calendar year end resource extraction issuer to file the required disclosure with the SEC is May 30, 2014. Given the cost and time the SEC has estimated for compliance, however, a public company that is involved in the commercial development of oil, natural gas or minerals should promptly implement policies and procedures to comply with these new disclosure obligations.
Who is Subject to the Government Payment Disclosure Rules
The new rules apply to a “resource extraction issuer,” which is a company that:
- engages in the “commercial development of oil, natural gas, or minerals;” and
- is required to file an annual report with the SEC.
The new disclosure requirements apply to all domestic and foreign resource extraction issuers, regardless of the size of the company or the extent of business operations constituting “commercial development of oil, natural gas, or minerals.” Importantly, there are no exemptions from disclosure prohibited by foreign law of commercially sensitive information or for situations where disclosure would violate a confidentiality provision of a contract. A resource extraction issuer is also required to disclose payments made by a subsidiary or another entity controlled by such issuer. A resource extraction issuer engaged in a joint venture or contractual arrangement must consider whether it has “control” of an entity based on a consideration of all relevant facts and circumstances to determine whether it must comply with the new disclosure rules. A foreign private issuer that is exempt from the registration and reporting requirements under the Securities Exchange Act of 1934 is not required to comply with the new rules because it is not required to file an annual report with the SEC. It is likely that the new rules also do not apply to voluntary filers (such as a debt-only issuer that files an annual report to comply with debt covenants) because such filers are not required to file an annual report with the SEC, but the SEC must provide guidance to clarify.
Commercial Development of Oil, Natural Gas or Minerals
The “commercial development of oil, natural gas, or minerals” includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas or minerals, or the acquisition of a license for any such activity.
The term “commercial development” is intended to capture only activities that are directly related to the commercial development of oil, natural gas or minerals. It is not intended to capture activities that are ancillary or preparatory to such commercial development. Accordingly, a manufacturer of a product used in the commercial development of oil, natural gas or minerals would not be engaged in the commercial development of the resource. For example, manufacturing drill bits or other machinery used in the extraction of oil would not fall within the definition of commercial development. Commercial development also does not include transportation or marketing.
The term “extraction” includes the production of oil and natural gas as well as the extraction of minerals. The term “processing” includes field processing activities, such as the processing of gas to extract liquid hydrocarbons, the removal of impurities from natural gas after extraction and prior to its transport through the pipeline, and the upgrading of bitumen and heavy oil. The term “processing” also includes the crushing and processing of raw ore prior to the smelting phase, but does not include refining or smelting. The term “export” includes the export of oil, natural gas or minerals from the host country, but does not mean the removal of the resource from the place of extraction to the refinery, smelter or first marketable location. Therefore, a company that is engaged in exporting oil, natural gas or minerals and not in the exploration, extraction or processing of such resources is subject to the rules. On the other hand, a company engaged only in the marketing or transportation of such resources would not be subject to the rules.
Types of Payments That Must be Disclosed
A resource extraction issuer must disclose payments, made to the U.S. federal government or a “foreign government.” A “foreign government” means a foreign government, a department, agency or instrumentality of a foreign government, or a company that is majority-owned by a foreign government, and includes foreign national governments and foreign subnational governments, such as the government of a state, province, county, district, municipality or territory under a foreign national government. Payments to U.S. state or local governments are not covered by the new rules.
The types of payments that must be disclosed are those that are:
- made to further the commercial development of oil, natural gas or minerals;
- “not de minimis,” which means any payment (whether a single payment or a series of related payments) that equals or exceeds U.S. $100,000 during the most recent fiscal year; and
- within the types of payments specified in the rules, which include:
- taxes (including taxes levied on corporate profits, corporate income, and production, but not including taxes levied on consumption, such as value added taxes, personal income taxes, or sales taxes);
- fees (including license fees, rental fees, entry fees and concession fees);
- production entitlements;
- bonuses (including signature bonuses, production bonuses and discovery bonuses);
- dividends (other than dividends paid to a government as a common or ordinary shareholder of the issuer as long as the dividend is paid to the government under the same terms as other shareholders); and
- payments for infrastructure improvements (including payments for building roads or railways to gain access to resources for extraction, but not including social or community payments, such as payments to build a hospital or school).
What Information Must be Disclosed
The rules require a resource extraction issuer to provide the following information about the applicable payments:
- type and total amount of payments made for each project;
- type and total amount of payments made to each government;
- total amounts of payments, by category;
- currency used to make the payments;
- financial period in which the payments were made;
- business segment of the resource extraction issuer that made the payments;
- the government that received the payments, and the country in which the government is located; and
- the project of the resource extraction issuer to which the payments relate.
In-kind payments must also be valued and reported.
How and When Information Must Be Provided
Resource extraction issuers are required to disclose the required information annually by filing a new Form SD with the SEC. The Form SD must be filed with the SEC no later than 150 days after the end of the resource extraction issuer’s fiscal year. The Form SD is filed (rather than furnished), therefore a resource extraction issuer could be subject to liability under Section 18 of the Securities Exchange Act of 1934 for false and misleading statements or omissions in the Form SD. The disclosure, however, will not be deemed to be incorporated by reference into SEC filings, including registration statements. In addition, the disclosure is not subject to CEO and CFO certifications under the Sarbanes-Oxley Act. For the initial Form SD, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013, and for calendar year end filers, the Form SD required to be filed on May 30, 2014, must include information for the period between October 1, 2013, and December 31, 2013. The disclosure must be included in an exhibit to Form SD and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.
The final rules are intentionally broad, therefore a resource extraction issuer likely will need to implement substantial changes to its current information collection systems to identify and collect relevant information and properly make the required disclosures. Moreover, a resource extraction issuer likely will need to adopt additional disclosure controls and procedures to properly track payments by its subsidiaries and controlled joint ventures to foreign governments and the U.S. federal government. In particular, because the SEC did not define “project,” — stating its intention to allow flexibility for different types and sizes of businesses — we recommend that a resource extraction issuer adopt a uniform standard for what constitutes a “project” for reporting purposes. In addition, while the final rules do not require resource extraction payment disclosures to be audited or provided on an accrual basis, a resource extraction issuer should consider whether additional controls and procedures can be implemented to provide such issuer additional comfort on its data collection efforts. A resource extraction issuer also should consider the consequences of the new rules under foreign law and under the resource extraction issuer’s contractual arrangements as well as the impact of releasing any commercially sensitive information.
As with the new conflict mineral disclosure rules, resource extraction issuers are well advised to work with their trade associations in order to determine whether their particular industry is developing a common approach to the ambiguities contained in the final rules. In light of antitrust concerns, we believe that working through a trade association where these concerns are carefully considered is more advisable that working directly with competitors.
We expect a range of practicable solutions to evolve over the next several months. As they do, we will keep you updated.