In December 2015, the Securities and Exchange Commission (the “SEC”) re-proposed Rule 13q-1 under the US Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would require all resource extraction issuers who file annual reports with the SEC to disclose payments made to governments (US and foreign) for the purpose of the commercial development of oil, natural gas or minerals.
The proposed rule seeks to promote transparency and combat corruption related to resource development and is similar to recent EU Directives requiring disclosure of specified payments to governments. The UK has implemented early rules for DTR issuers (ie. issuers with securities admitted to trading on a regulated market where the UK acts as home Member State), active in the extractive or logging of primary forest industries, to prepare and publish reports annually on payments made to governments.
The re-proposed rule
Under re-proposed Rule 13q-1, resource extraction issuers will need to disclose information on Form SD (which is the same form used for conflict minerals reporting) about payments related to the commercial development of oil, natural gas, or minerals made to a foreign government or the United States Federal Government. This would include payments made by the issuer’s subsidiaries and other entities under its control. Under the proposed Rule, these disclosures must be filed no later than 150 days after the end of the issuer’s fiscal year.
The original Rule 13q-1 was adopted by the SEC in August 2012 but the rule was vacated in July 2013 by the US District Court for the District of Columbia. In vacating the old Rule 13q-1, the Court found that the absence of any statutory exemptions from the disclosure rules to be arbitrary and capricious.
For the purposes of the Rule:
- a “resource extraction issuer” means all US and foreign companies that are required to file annual reports pursuant to section 13 or 15(d) of the Exchange Act which are engaged in the commercial development of oil, natural gas, or minerals;
- “commercial development of oil, natural gas, or minerals” includes exploration, extraction, processing, export or the acquisition of a license for any such activity. This captures activities that are directly related to the commercial development of oil, natural gas, or minerals and not activities that are ancillary or preparatory to such commercial development. For example, an issuer that manufactures drill bits or provides hardware to help companies explore and extract; and
- “payment” means a payment that (i) is made to further the commercial development of oil, natural gas, or minerals; (ii) is not de minimis (i.e. any payment, whether a single payment or a series of related payments, that equals or exceeds US$100,000 during the most recent fiscal year; and (iii) includes taxes, royalties, fees (including license fees), production entitlements and bonuses, consistent with section 13(q) of the Exchange Act.
The payment information would need to be disclosed on Form SD (which is the same form used for conflict minerals reporting), with detailed payment information in an exhibit, identified in an interactive data format using electronic tags which identify:
- the total amounts of payments, by category;
- the currency used to make the payments;
- the financial period in which the payments were made;
- the 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 requiring disclosure of payments at project level, the SEC has highlighted that such disaggregated information may be useful in helping local communities and subnational governments combat corruption by enabling them to verify that they are receiving the resource extraction revenue allocations from their national government that they may be entitled to under law.
Exemptions from disclosure
The proposed Rule does not include any express exemptions, even in circumstances where public disclosure of payment by the resource extraction issuer would violate the laws of a foreign jurisdiction. That being said, to address an issue raised by the US District Court decision in 2012, the SEC has provided that resource extraction issuers could apply for, and the SEC would consider, exemptive relief on a case-by-case basis “if and when warranted”. The SEC has indicated that it would approach requests for exemptive relief taking into consideration whether the requesting issuer would suffer substantial commercial or financial harm if the exemptive relief were not granted.
Also, in light of international developments, as well as the progress made by the U.S. Extractive Industries Transparency Initiative (USEITI), the proposed rules would allow issuers to use a report prepared for foreign regulatory purposes or for the USEITI to comply with the proposed rules if the Commission determines the requirements are substantially similar to the proposed rules.
Information disclosed under the proposed Rule would be “filed” rather than “furnished”, which is an important distinction, as this means that disclosures are subject to liability under section 18 of the Exchange Act. Under section 18, investors who actually purchase or sell a security may sue for any fraudulent statement in a company’s filings with the SEC.
Initial comments were due by 25 January 2016 with the SEC issuing reply comments by 16 February 2016. However, on 21 January 2016, the SEC extended the initial comment period to 16 February and the SEC’s reply comments are now due on 8 March 2016. A vote on the final rules is due to take place by June 2016.