SEC Adopts Final Rules on Payment Disclosure by Resource Extraction Issuers

Practical Law Legal Update w-002-7261 (Approx. 5 pages)

SEC Adopts Final Rules on Payment Disclosure by Resource Extraction Issuers

by Practical Law Corporate & Securities

Background

The SEC had adopted Rule 13q-1, the resource extraction rule, in August 2012, but, soon after, associations of oil, natural gas, and mining companies filed suit challenging the final rule on various grounds. In July 2013, the US District Court for the District of Columbia vacated the rule and remanded it to the SEC, ordering the agency to reformulate the rule. On September 18, 2014, following several postponements of an anticipated SEC rulemaking timeline, Oxfam America, Inc. sued the SEC to compel it to implement Section 13(q) of the Exchange Act. On September 2, 2015, the Massachusetts District Court held that the SEC's delay in adopting a final resource extraction rule constitutes unlawful withholding of the rule in violation of the Administrative Procedure Act and ordered the SEC to file with the court an expedited schedule for this rulemaking within 30 days. The SEC filed its expedited schedule with the court in October 2015 and issued proposed rules in December 2015.

Final Disclosure Requirements

The final rules require a company to disclose payments made to governments if it both:

Must file an annual report with the SEC.
Is engaged in the commercial development of oil, natural gas, or minerals. This includes exploration, extraction, processing, and exporting activities, or acquiring a license for any of these activities.

In addition to the payments an issuer makes directly, the final rules also require an issuer to disclose payments made by its subsidiaries or other entities under its control. Payments included in the issuer's consolidated financial statements that are made by entities that are consolidated or proportionately consolidated, as determined by applicable accounting principles, fall under this requirement.

The company must disclose any payment that is:

Made to further the commercial development of oil, natural gas, or minerals.
Not de minimis, meaning any payment or series of related payments that equals or exceeds $100,000 during the most recent fiscal year.
Within the types of payments specified in the rules, including taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, payments for infrastructure improvements, and, if required by law or contract, community and social responsibility payments.

The final rules require resource extraction issuers to disclose the following information about payments made to further the commercial development of oil, natural gas, or minerals:

Type and total amount of payments made for each applicable project.
Type and total amount of payments made to each government. This includes payments made to foreign governments, including foreign subnational governments, and to the US federal government.
Total amount of payments by category.
Currency used to make the payments.
Financial period in which the payments were made.
Business segment that made the payments.
The governments that received payments and the country in which each government is located.
The project for which payments were made.
The particular resource that is the subject of commercial development.
The subnational geographic location of the project.

The final rules define "project" as operational activities that are governed by a single contract, license, lease, concession, or similar legal agreement, which form the basis for payment liabilities with a government. Agreements that are both operationally and geographically interconnected may be treated by the resource extraction issuer as a single project.

Companies will be required to disclose information about these payments on Form SD no later than 150 days after the end of its fiscal year. Form SD will require issuers to include a brief statement directing users to detailed payment information provided in an exhibit and electronically tagged using eXtensible Business Reporting Language (XBRL) format.

Exemptive Relief

The final rules include two exemptions to the new reporting obligations that provide for transitional or delayed reporting in limited circumstances. They are:

A resource extraction issuer that has acquired a company not previously subject to the final rules, or the rules of a substantially similar jurisdiction, will not be required to report payment information for the acquired company until the filing of a Form SD for the first fiscal year following the acquisition.
A one-year delay in reporting payments related to exploratory activities.

In addition, resource extraction issuers may apply for, and the SEC will consider, exemptive relief for other situations on a case-by-case basis using its existing authority under the Exchange Act.

As a result of international developments and the progress made by the US Extractive Industries Transparency Initiative (USEITI), the final rules also allow issuers to use a report prepared for foreign regulatory purposes or for the USEITI to comply with the final rules if the SEC determines that the requirements are substantially similar to the final rules. On June 27, 2016, the SEC issued an order determining that the current reporting requirements of the European Union Accounting and Transparency Directives (as implemented in a European Union or European Economic Area member country), Canada's Extractive Sector Transparency Measures Act, and the USEITI are substantially similar to the final rules, subject to certain conditions specified in the order and in the final rules.

For more information about Section 13(q) of the Exchange Act and the related rulemaking and litigation, see Practice Note, Summary of the Dodd-Frank Act: SEC Authority and Selected Securities Act and Exchange Act Provisions.

SEC Adopts Final Rules on Payment Disclosure by Resource Extraction Issuers | Practical Law