Background and Overview of the Rules
On June 27, 2016, the Securities and Exchange Commission reissued final rules to implement Section 13(q) of the Securities Exchange Act of 1934 mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring resource extraction issuers to disclose certain payments to foreign governments or the U.S. federal government. The adopting release states that “Section 13(q) reflects the U.S. foreign policy interest in supporting global efforts to improve the transparency of payments made in the extractive industries in order to combat global corruption and promote accountability.”1 The Commission previously adopted rules to implement Section 13(q) in August 2012, but those rules were subsequently vacated and remanded to the Commission by an order of the U.S. District Court for the District of Columbia in July 2013. A summary of some of the more significant changes included in the reissued rules, as compared to the prior rules, is included later in this discussion.
Under Rule 13q-1, a resource extraction issuer will generally be required to publicly file an annual report on Form SD no later than 150 days after the end of its fiscal year. The Form SD is required to include information relating to any payment (other than de minimis payments of less than $100,000) made during the fiscal year covered by the report by such resource extraction issuer, or any entity under its control, to a foreign government or the U.S. federal government, for the purpose of the commercial development of oil, natural gas or minerals. The resource extraction issuer must provide a statement in the body of the Form SD that the specified payment disclosure is included in a required exhibit, and the following information must be included in the exhibit (which must also be submitted in XBRL format using electronic tags):
- the type and total amount of the payments, by payment type, for each project,
- the type and total amount of the payments, by payment type, made to each government,
- the total amount of the payments by payment type,
- the currency used to make the payments,
- the fiscal year in which the payments were made,
- the business segment of the resource extraction issuer that made the payments,
- each government that received the payments and the country in which each such government is located,
- the project to which the payments related,
- the particular resource that is the subject of commercial development, and
- the subnational geographic location of the project.
A “resource extraction issuer” is defined as an issuer that:
- is required to file an annual report on Form 10-K, Form 20-F or Form 40-F with the Commission, and
- engages in the commercial development of oil, natural gas or minerals.
The “commercial development of oil, natural gas or minerals” means exploration, extraction, processing and export of oil, natural gas or minerals, or the acquisition of a license for any such activity.
The adopting release, consistent with guidance previously issued by the Commission, clarifies that the “commercial development of oil, natural gas or minerals” does not capture activities that are ancillary or preparatory to such commercial development, such as the provision of products or services that support the exploration, extraction, processing or export of such resources. Thus, issuers that manufacture drill bits or provide hardware to help companies explore and extract resources and issuers that provide hydraulic fracturing or drilling services are not considered resource extraction issuers. However, a resource extraction issuer must disclose any payments made by a service provider on its behalf that would otherwise be required by the rules.
The adopting release clarifies that the “processing” of resources does not include downstream activities such as refining and smelting and that the “export” of resources does not include payments related to either transportation on a fee-for-service basis across an international border by a service provider with no ownership interest in the resources or commodity trading-related activities.
- taxes (including those levied on corporate profits, corporate income and production, but excluding those levied on consumption, such as value added taxes, personal income taxes or sales taxes),
- production entitlements,
- 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),
- payments for infrastructure improvements, and
- community and social responsibility payments that are required by law or contract.
A resource extraction issuer must include any payments made by a “subsidiary” or an entity under the “control” of the resource extraction issuer, which terms are defined by reference to accounting principles. A resource extraction issuer that proportionally consolidates an interest in an entity would need to disclose such issuer’s proportionate amount of that entity’s payment and the issuer’s proportionate interest.
The final rules require disclosure of any payments made to a “foreign government,” which includes a department, agency or instrumentality of a foreign government, or a company at least majority owned by a foreign government. A foreign government includes a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality or territory under a foreign national government. Payments to the U.S. federal government have to be disclosed, but the rules exclude state, local and other subnational governments within the United States.
The payment information contained in the Form SD need not be audited and generally must be reported on a cash basis. In-kind payments that meet one of the covered payment types described above are required to be reported at cost, or if historical costs are not reasonably available or determinable, fair market value, together with a brief description of how the monetary value is calculated. In-kind payments could include production entitlements, building a road or school, refurbishing a government building and numerous other activities that do not involve providing monetary payments to the host country government.
The rules also contain an anti-evasion provision, which provides that disclosure is required where an activity or payment is not within the categories or activities specified in Form SD, but is part of a plan or scheme to evade the disclosure required under Rule 13q-1.
The Form SD is required to be “filed” with the Commission, not “furnished,” so the disclosures will be subject to liability under Section 18 of the Exchange Act. Since the Form SD is filed under Section 13(q) of the Exchange Act, it is not automatically incorporated by reference into a registration statement on Form S-3. The late filing of a Form SD will also not affect an issuer’s eligibility to file a registration statement on Form S-3.
Changes from the Prior Rules
The revised final rules are generally similar to the rules adopted in 2012 but include several changes in response to the federal district court’s order and other updates. Below is a summary of some of the more significant changes in the reissued rules.
Instead of filing an annual report on Form SD, a resource extraction issuer may use alternative reports to comply if the Commission determines the requirements applicable to those reports are substantially similar to the Commission’s requirements. In the adopting release, the Commission provided that it has determined that the current reporting requirements of the EU Accounting Directive and the EU Transparency Directive, Canada’s Extractive Sector Transparency Measures Act and the U.S. Extractive Industries Transparency Initiative are substantially similar to the Commission’s final rules. Issuers, governments, industry groups and trade associations may submit applications for additional alternative reporting determinations to the Commission.
A resource extraction issuer may satisfy its disclosure obligation under alternative reporting by including, as an exhibit to Form SD, a report complying with the reporting requirements of the approved alternative jurisdiction. The issuer also must:
- state in the body of the Form SD that it is relying on the alternative reporting provision,
- identify the applicable alternative reporting regime,
- describe how to access the publicly filed report in the alternative jurisdiction, and
- specify that the payment disclosure required by Form SD is included in an exhibit to the Form SD filing.
An English translation of the entire report must be filed if the report is in a foreign language. The alternative report must be provided in XBRL format. If the submission deadline for an approved alternative report is later than the deadline for the Form SD, the issuer may file a notice on Form SD-N on or before the due date of its Form SD indicating its intent to file the alternative report using the alternative jurisdiction’s deadline.
Resource extraction issuers may apply for, and the Commission will consider, exemptive relief from the new rules on a case by case basis using the procedures set forth in Rule 0-12 of the Exchange Act. The Commission considered, but ultimately rejected, blanket exceptions from the disclosure requirement in particular cases where the required payment disclosure is prohibited under the host country’s laws, conflicts with the terms of existing contracts or reveals commercially sensitive information.
A resource extraction issuer may delay disclosing payment information related to exploratory activities until the Form SD filed for the fiscal year immediately following the fiscal year in which the payment was made. For example, a payment made for exploratory activities in 2018 would not have to be disclosed until the Form SD filed with respect to 2019, which would be filed in 2020. Payment information related to exploratory activities includes payments made as part of the process of:
- identifying areas that may warrant examination,
- examining specific areas that are considered to have prospects of containing oil and gas reserves, or
- a mineral exploration program,
in each case limited to exploratory activities that were commenced prior to any development or extraction activities by the issuer on the property, any adjacent property or any property that is part of the same project.
In addition, a resource extraction issuer that has acquired (or otherwise obtained control over) an entity that has not been obligated to provide disclosure under Rule 13q-1 or another “substantially similar” jurisdiction’s requirements in such entity’s last full fiscal year will not be required to disclose payments with respect to such entity until the issuer’s Form SD filed for the fiscal year immediately following the year of the effective date of the acquisition.
Compliance Date for Reissued Rules
Resource extraction issuers will be required to comply with the new rules beginning with any fiscal year ending no earlier than September 30, 2018. Accordingly, the deadline for filing the first Form SD under the new rules would, for most issuers, be May 30, 2019.