SEC Adopts Final Rule Governing Payments to Governments by Resource Extraction Issuers

On August 22, 2012, the U.S. Securities and Exchange Commission (SEC) adopted new Rule 13q-1 under the U.S. Securities Exchange Act (Exchange Act) to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act).  Section 1504 imposes annual reporting obligations on resource extraction issuers for payments to the U.S. federal government or any non-U.S. government (including Canadian federal, provincial or local governments or any company that is at least majority-owned by a non-U.S. government) relating to the commercial development of oil, natural gas or minerals.  Originally proposed by the SEC in December 2010, the rule was subject to a lengthy and controversial public comment process. 

As adopted by the SEC, the rule addresses a number of issues that will be of particular interest to oil, natural gas and mining companies who file reports with the SEC.  Specifically, new Exchange Act Rule 13q-1 establishes a de minimis payment exemption limited to any payment or series of related payments of less than US$100,000 during the most recent fiscal year.  In addition, the SEC rejected calls by many industry commentators to provide an exception to the reporting obligations if a host country’s laws or contract terms prohibit the disclosure of such information.  Companies subject to the new rule must commence reporting applicable payments on new Form SD for fiscal years ending after September 30, 2013.  Companies with fiscal years starting before September 30 are permitted to disclose only payments made from October 1, 2013 until the end of their fiscal year in the first required Form SD filing.  The disclosure must be included in an exhibit to Form SD which is coded using XBRL tagging, even if the issuer is not yet subject to any other XBRL tagging requirements.  In light of the complexity of the new rule, issuers should begin immediately considering how their legal, audit and IT functions will need to adapt to the new reporting and disclosure requirements.  We offer at the conclusion of this article some recommendations to help start this process.

Resource Extraction Issuers Will Be Subject To Government Payments Disclosure Requirements

Section 1504 of the Act defines a “resource extraction issuer” to mean an issuer that is required to file an annual report with the SEC and engages in the commercial development of oil, natural gas or minerals.  As implemented by the SEC, the rule only encompasses projects that directly relate to commercial development activities, including exploration, extraction, processing, export or the acquisition of a license for any such activity; ancillary or preparatory activities, such as transportation activities or the manufacture of extraction equipment, are excluded.  The SEC left the term “project” undefined.  The rule requires a resource extraction issuer to disclose payments made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer to the U.S. federal government or any non-U.S. government (including Canadian federal, provincial or local governments or any company that is at least majority-owned by a non-U.S. government).  The rule does not require disclosure of payments made to subnational governments in the United States.

Payments

The Act defines “payment” to mean a payment made to further the commercial development of oil, natural gas, or minerals that is not de minimis.  The term “payment” includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the SEC determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.  Fees include rental fees, entry fees and concession fees, and bonuses include signature, discovery, and production bonuses.  Further, an issuer will be required to disclose payments for taxes levied on corporate profits, corporate income, and production, but will not be required to disclose payments for taxes levied on consumption, such as value added taxes, personal income taxes or sales taxes.  If a government levies a payment, such as a tax or dividend, at the entity level rather than on a particular project, an issuer may disclose that payment at the entity level.

The rule further provides that payments also include dividends and expenditures related to infrastructure improvement projects such as building a road or highway, but does not encompass community or social welfare expenditures, such as the construction of schools and hospitals.   

The SEC has adopted a definition of de minimis to mean any payment or series of related payments of less than US$100,000 during the issuer’s most recent fiscal year.

Information on payments must be disclosed in the following manner:

  • type and total amount of payments made for each project
  • type and total amount of payments to each government
  • total amounts of the payments, by category (Taxes; Royalties; Fees; Production Entitlements; Bonuses; Dividends; Infrastructure Improvements)
  • 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
  • government that received the payments and the country in which the government is located and
  • project of the resource extraction issuer to which the payments relate.

No Exemption From Local Law or Contractual Prohibitions on Disclosure of Payment Information

Industry commentators sought to have the SEC provide an exemption to the Section 1504 reporting obligations when an issuer’s reporting of its payments to a government would cause the issuer to violate the laws of that government.  These commentators noted that the SEC’s failure to provide for such an exemption would put resource extraction issuers subject to the rule in the untenable position of having to choose between violating U.S. laws (and potentially subjecting themselves to civil or criminal penalties) or abandoning operations in foreign countries that prohibited such disclosure.  Opponents of granting an exemption argued that it would provide corrupt foreign government officials a veto over U.S. law and undermine the express purposes of Section 1504 to promote transparency and counteract corruption.  In the end, the SEC adopted the position that no exemption from the payment reporting obligations would be provided in the case of any non-U.S. laws prohibiting such disclosure.  In addition, the final rule does not provide an exemption for an issuer bound by a confidentiality provision in an existing or future contract.

Uniform Disclosure Requirements

The rule establishes uniform treatment of all extraction issuers engaged in the commercial development of oil, natural gas or minerals.  No exemptions will be granted for smaller reporting companies or foreign private issuers.  In addition, the standards for compliance with the disclosure requirements are uniform for all extraction issuers, regardless of the size or extent of their business operations constituting the commercial development of oil, natural gas or minerals.

Disclosure Methods and Timing

A resource extraction issuer will be required to provide the mandated information about payments in a new report to be filed annually, rather than in the issuer’s existing Exchange Act annual report as originally proposed.

New Form SD will require issuers to include a brief statement in the body of the form in an item entitled, “Disclosure of Payments By Resource Extraction Issuers,” directing users to detailed payment information provided in an exhibit to the form.  The final rule will require resource extraction issuers to present the payment information in one exhibit to new Form SD rather than in two exhibits, as was originally proposed. The required exhibit must provide the information using the XBRL interactive data standard, similar to the XBRL tagging requirements now in effect for financial statements presented in U.S. GAAP.  All issuers will be required to provide the required disclosure with XBRL tagging, even if they do not report their financial statements in U.S. GAAP and are not otherwise subject to any other XBRL tagging requirements.  In addition, a resource extraction issuer must provide the type and total amount of payments made for each project and the type and total amount of payments made to each government in interactive data format.

Issuers required to file Form SD must do so for fiscal years ending after September 30, 2013.  For issuers making their initial filing that have a fiscal year that commences prior to September 30, they may disclose only those payments made between October 1, 2013 and the end of their fiscal year.  The final rule requires resource extraction issuers to file Form SD on EDGAR no later than 150 days after the end of the issuer’s most recent fiscal year.

Form SD Will Be Filed For Exchange Act Purposes

The final rule requires Form SD to be filed for Exchange Act purposes.  As a result, an issuer will be liable for any false or misleading statements, but it can avoid liability if it can demonstrate that it acted in good faith without knowledge that its Form SD contained false and misleading information.  In addition, the Form SD can be filed with the SEC without the need to be accompanied by the officer certification that applies to Form 10-K / 20-F / 40-F annual reports and Form 10-Q quarterly reports.  Finally,the information and documents in the Form SD will not be deemed to be incorporated by reference into any filing under the U.S. Securities Act or the Exchange Act, unless the issuer specifically incorporates it by reference into a filing under these acts.

Implications for Resource Extraction Issuers

Resource extraction issuers who file reports with the SEC will need to implement policies and procedures to collect and analyze data that will enable them to disclose accurately payments made to the U.S. federal government or non-U.S. governments (including Canadian federal, provincial or local governments or any company that is at least majority-owned by a non-U.S. government).  As a result, resource extraction issuers should immediately consider the following:

  • Whether any information systems need to be modified to gather the type of data necessary to the preparation of a report disclosing payments to the U.S. federal government or any non-U.S. government relating to the commercial development of oil, natural gas or minerals;
  • Whether any countries in which payments were made during the relevant reporting period have laws or regulations prohibiting the disclosure of any mandated information;
  • Whether any contracts to which it is a party contain a prohibition on the disclosure of any mandated information;
  • Whether any “Risk Factors” disclosure in filings with the SEC will need to be revised to indicate that (i) the issuer may be prohibited under the laws of various countries or individual contracts from disclosing certain mandated information and its failure to comply with such local laws or contractual obligations may subject the issuer to civil or criminal sanctions; (ii) the rule will require disclosure of sensitive commercial information that may place the issuer at a disadvantage relative to competitors not subject to the rule; and (iii) implementation of the rule may adversely affect its business, results of operations or financial condition; and
  • What the estimated legal, audit and IT expenses will be in the initial year to implement policies and procedures to address these issues.

Osler will continue to monitor and update our clients on any new issues related to Section 1504 of the Act.  We would also be pleased to discuss any aspect of Exchange Act Rule 13q-1 and Form SD discussed above.

For more information about these developments, please contact the authors of this article.


The authors gratefully acknowledges the contributions of Benjamin Metzler, Osler Summer Associate, in the preparation of this article.