Earlier this summer, the U.S. Securities and Exchange Commission adopted a new rule requiring disclosure of payments made by “resource extraction issuers” to governments. Securities Exchange Act Rule 13q-1 will require SEC-registered public companies that engage in the development of natural resources to file a report with the SEC disclosing payments to the U.S. federal government or to any foreign government for the commercial development of oil, natural gas, or minerals. Resource extraction issuers must comply with this rule for fiscal years ending on or after September 30, 2018. For calendar year companies, the first reports will be due at the end of May, 2019.
This is the SEC’s second attempt at resource extraction payment disclosure. In 2010, the U.S. Congress passed legislation that directed the SEC to require this type of disclosure, and the Commission initially adopted Rule 13q-1 in 2012. The American Petroleum Institute and the U.S. Chamber of Commerce filed a lawsuit challenging the rule. In 2013, the U.S. District Court for the District of Columbia held that the rule was invalid because the SEC had failed to properly justify its decision to require that Rule 13q-1 reports to be available to the public (as opposed to filed confidentially with the SEC). In particular, the court held that the SEC had given inadequate consideration to the fact that, in some cases, public disclosure could cause the reporting company to violate the law of the country in which the resource extraction payment was made.
Despite this decision, new Rule 13q-1, like the 2012 version, will require public disclosure. In the release announcing adoption of the rule, the SEC explained that it had concluded that public disclosure of resource extraction payments “is necessary to achieve the U.S. interest in providing a level of payment transparency that will help combat corruption and promote accountability in resource-rich countries.”
Some key points of the new rule include –
- Disclosure is required of payments (including those made by subsidiaries and other controlled entities) to a foreign government or to the U.S. federal government to further the commercial development of oil, natural gas or minerals. “Commercial development” means exploration, extraction, processing, and export, or the acquisition of a license for any of those activities.
- Discloseable payments also include taxes, royalties, fees (such as license fees), production entitlements, and bonuses. In addition, community and social responsibility (CSR) payments that are required by law or contract, dividends, and payments for infrastructure improvements are included (CSR payments are intended to further social purposes, such as the construction of schools).
- All payments that are not de minimis must be disclosed. “Not de minimis” means any payment or series of related payments that equals or exceeds US$100,000 during a fiscal year.
- A foreign government includes a department, agency, or instrumentality of a non-U.S. government, or a company owned by such a government. It also includes foreign state/provincial and local governmental units. However, in the U.S., only payments to the federal government are subject to disclosure.
- Although resource extraction payment disclosures will be available to the public, companies may seek confidentiality on a case-by-case basis by showing that, without confidentiality, the company will suffer substantial commercial or financial harm.
The SEC recognized that certain other laws already require some companies to make this type of disclosure and took steps to avoid duplicate reporting. Resource extraction issuers may comply with Rule 13q-1 by using “alternative reports” – that is, reports prepared for other bodies – provided the SEC determines that the requirements applicable to those reports are substantially similar to the SEC’s rules. The Commission has determined that the current resource extraction payment reporting requirements of the European Union, the Canadian Extractive Sector Transparency Measures Act, and the U.S. Department of the Interior’s U.S. Extractive Industries Transparency Initiative meet this standard.
The SEC estimates that 775 reporting companies will be affected by the new rule – 192 of which will also be subject to other resource extraction payment disclosure rules. Although further litigation challenging the rule is possible, U.S. and non-U.S. companies that will potentially be required to make resource extraction payment disclosure to the SEC should start taking steps to prepare for compliance. This may involve:
- Creating data collection procedures and instituting disclosure controls to make sure that all payments that must be disclosed, including those made by affiliates, are identified.
- Determining whether the company is already subject to reporting under an alternative disclosure regime that can be used to satisfy the requirements of Rule 13q-1.
- Identifying any local laws that may be violated by public disclosure of resource extraction payments in that country and developing a strategy to deal with the conflict.