Background

The U.S. Securities and Exchange Commission (SEC) has adopted a final rule that requires SEC-reporting resource extraction issuers to disclose payments to the U.S. federal government and foreign governments relating to the commercial development of oil, natural gas or minerals. These annual disclosure requirements are substantially similar to those under Canada’s Extractive Sector Transparency Measures Act (ESTMA) which apply to all issuers listed on a Canadian stock exchange and certain other issuers with connections to Canada. Resource extraction issuers that are SEC registrants must comply with the new U.S. disclosure requirement beginning with their fiscal year ending on or after September 30, 2018. Canadian companies will be able to satisfy the new U.S. disclosure requirement by filing their Canadian ESTMA report with the SEC but eXtensible Business Reporting Language (XBRL) tagging of the ESTMA report will be required.

Rule 13q-1, as adopted under the U.S. Securities Exchange Act of 1934, as amended (U.S. Exchange Act), applies to all resource extraction issuers that file annual reports with the SEC, including Canadian issuers reporting on Form 40-F under the Multijurisdictional Disclosure System, Form 20-F or Form 10-K. The purpose of the rule is to promote greater transparency to help combat corruption related to resource development and to help citizens of resource-rich developing countries hold their governments accountable for the wealth generated by those resources. Rule 13q-1 was initially adopted by the SEC in August 2012 to implement section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), but the 2012 rule was vacated by the U.S. District Court for the District of Columbia in July 2013 on the basis that the SEC misread the Dodd-Frank Act when compelling public disclosure of issuers’ reports. The Court further held that the SEC’s explanation for not granting an exemption when disclosure is prohibited by foreign governments was arbitrary and capricious. The SEC re-proposed the rule on December 11, 2015 in a form substantially similar to the 2012 rule, except that the SEC included certain concepts from Canada’s ESTMA, which came into force on June 1, 2015, and the EU Accounting Directive and EU Transparency Directive (EU Directives), which came into effect in October 2013. The SEC’s re-proposed rule also addressed the issues identified in the U.S. court decision vacating the 2012 rule. The final rule is substantially similar to the re-proposed rule with a few key differences summarized below.

Summary of the final rule

The Dodd-Frank Act added section 13(q) to the U.S. Exchange Act, which directs the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, its subsidiaries or any entity controlled by the issuer 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 information about the type and total amount of such payments made for each project relating to the commercial development of oil, natural gas or minerals, and the type and total amount of payments made to each government. The information must be provided in an interactive data format. The final rule establishes the details relating to these requirements.

Who must make the disclosure?

Under the final rule, similar to the re-proposed rule, the term “resource extraction issuer” includes all U.S. and foreign companies that engage in the commercial development of oil, natural gas or minerals and are required to file an annual report with the SEC on Forms 10-K, 20-F or 40-F. Foreign private issuers that rely on U.S. Exchange Act Rule 12g3-2(b) are not subject to the new disclosure requirement, as they are not required to file annual reports with the SEC. However, there are no exemptions for smaller issuers, unlike ESTMA which provides an exemption for issuers not listed on a stock exchange in Canada if they do not meet certain size-related criteria based on a combination of the value of their assets or revenues, or the number of their employees. The term “commercial development” means exploration, extraction, processing and export, or the acquisition of a licence to do so and is not intended to capture activities that are ancillary or preparatory to commercial development (such as operators providing hydraulic fracturing or drilling services), downstream activities (refining and smelting) or export services provided by issuers with no ownership interest in the resource.

What payments must be disclosed

Similar to the re-proposed rule, the final rule requires resource extraction issuers to provide project-level disclosure of payments that are “not de minimis” and that they have made to a foreign government (including a foreign national, state, provincial, county, district, municipal or territorial government, or a company that is majority-owned by such governments) or the U.S. federal government to further the commercial development of oil, natural gas or minerals. A payment that is not de minimis includes any payment, whether a single payment or a series of related payments, of US$100,000 or more during the most recent fiscal year. In contrast, the threshold for required reporting under ESTMA is CDN$100,000. In addition to payments it makes directly, a resource extraction issuer will be required to disclose payments made by its subsidiaries or other entities under its control (as determined by applicable U.S. GAAP or IFRS accounting principles).

The types of payments that must be disclosed include taxes (other than consumption-based taxes, such as sales taxes), royalties, fees (including licence fees), production entitlements, bonuses, dividends (other than those paid under the same terms as other shareholders) and payments for infrastructure improvements. Resource extraction issuers must also disclose community and social responsibility (CSR) payments that are required by law or contract. In the re-proposed rule in December 2015, the SEC explicitly excluded CSR payments on the basis they were not required to be disclosed under the EU Directives or ESTMA. In the adopting release for the final rule, the SEC concluded that CSR payments are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals and noted that CSR payments must be disclosed under the Extractive Industries Transparency Initiative (EITI), a voluntary coalition of oil, natural gas and mining companies, national governments, international organizations and other stakeholders committed to strengthening accountability and transparency for revenues paid to resource-rich countries.

In requiring detailed project-level payments disclosure, the SEC focused on how disaggregated information may help local communities and subnational governments combat corruption by enabling them to verify that they are receiving resource revenue allocations from their national government that they may be entitled to receive under law. The final rule largely mirrors the guidance and technical reporting specifications under ESTMA, issued on March 1, 2016, and the EU Directives in defining a “project” as operational activities that are governed by a single contract, licence, 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. However, unlike the definition under ESTMA and the EU Directives, the SEC’s final rule does not require the agreements to have “substantially similar terms” to be treated as a single project.

The following items must be publicly disclosed under the SEC’s final rule, unless one of the two exemptions discussed below applies:

  • the type and total amount of payments for all projects made to each government
  • the total amounts of the payments, by category
  • 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
  • the government that received the payments and the country in which the government is located
  • the project of the resource extraction issuer to which the payments relate
  • the particular resource that is the subject of commercial development
  • the subnational geographic location of the project

How and when the payments information must be disclosed

The disclosure required by the final rule must be publicly filed as an exhibit to the SEC’s Form SD, which was amended by the SEC in connection with issuing the final rule. Form SD is also the form used to disclose information mandated by the SEC’s “conflict minerals” rules. Resource extraction issuers are required to comply with the final rule beginning with their fiscal year ending on or after September 30, 2018 and must file the Form SD annually thereafter no later than 150 days after the end of their fiscal year. For example, a resource extraction issuer with a December 31 fiscal year end will be required to file its first resource extraction payment report no later than 150 days after December 31, 2018, which is May 30, 2019. The payments information disclosed in Form SD must be electronically tagged using the XBRL format. The Form SD will be “filed” for U.S. Exchange Act purposes, meaning that resource extraction issuers will be subject to liability under the U.S. Exchange Act for the accuracy of the required payments information.

Exemptions from disclosure

The final rule includes two exemptions to the reporting obligations:

  • A resource extraction issuer that has acquired a company not previously subject to the final rule 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.
  • Issuers can delay reporting payments related to exploratory activities in Form SD until the fiscal year following the fiscal year in which the payments were made. Payments are considered to be related to exploratory activities if they are 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 as part of a mineral exploration program. However, exploratory activities are limited to activities conducted prior to the development or extraction of the oil and gas or minerals that are the subject of the exploratory activities. Furthermore, this targeted exemption is not permitted for payments related to exploratory activities on the property or any adjacent property once the issuer has commenced development or extraction activities anywhere on the property, on any adjacent property, or on any property that is part of the same project.

In addition to the two prescribed exemptions, issuers may apply for exemptive relief that the SEC will consider based on a case-by-case assessment of whether the requesting issuer would suffer substantial commercial or financial harm if the exemptive relief were not granted. The SEC indicated that it would also consider granting exemptive relief in situations where disclosure would conflict with the terms of a material preexisting contract, reveal commercially sensitive information not otherwise available to the public, or have a substantial likelihood of jeopardizing the safety of an issuer’s personnel, although it noted that this is not an exhaustive list.

Accommodation for foreign reporting regimes

The SEC acknowledged that several countries, including Canada, have already implemented resource extraction payment disclosure laws. To reduce compliance burdens, the SEC has adopted an accommodation that allows issuers to meet the requirements of Rule 13q-1 by providing disclosures that comply with another country’s rules if the SEC determines that those rules or requirements are “substantially similar” to the final rule. In conjunction with adopting the final rule, the SEC issued an order recognizing Canada’s ESTMA, the EU Directives and the United States EITI as substantially similar disclosure regimes, subject to certain conditions for United States EITI reports. A resource extraction issuer relying on the alternative reporting accommodation must file its foreign report as an exhibit to Form SD with XBRL tags and provide an English translation if the report was prepared in a foreign language. An issuer filing a report prepared pursuant to a foreign reporting regime is permitted to follow the reporting deadline in the foreign jurisdiction, but it must submit a notice on Form SD-N on or before the due date of its Form SD indicating its intent to submit the foreign report using the foreign jurisdiction’s deadline. If an issuer fails to submit such notice on a timely basis, or submits such a notice but fails to submit the foreign report within two business days of the alternative jurisdiction’s deadline, it will become ineligible for the alternative reporting accommodation for the following fiscal year and must follow the requirements of the SEC’s final rule.

Canadian implications

While the SEC’s final rule applies to all Canadian resource extraction issuers that file annual reports with the SEC, Canadian issuers subject to ESTMA will be able to satisfy all of the requirements of Rule 13q-1 by filing a Form SD with an English version of the Canadian ESTMA report attached as an exhibit, with the required XBRL tagging added. It is not clear from the adopting release for the final rule whether Canadian resource extraction issuers will be permitted to exclude CSR payments, as permitted under ESTMA, or whether they will be required to calculate their CSR payments in order to add them to the XBRL aggregate payment field.

From a timing perspective, issuers subject to ESTMA in Canada will be required to file their first reports under ESTMA at least two calendar years ahead of their first filing deadline under Rule 13q-1. For an issuer with a fiscal year ending December 31, 2016, its report under ESTMA will be due in May 2017 covering payments made in 2016, whereas its report under Rule 13q-1 will not be due until May 2019 covering payments made in 2018.

Resource extraction issuers that are not listed on a stock exchange in Canada may not be subject to ESTMA because of a combination of their limited asset or revenue size, or small number of employees. These issuers should bear in mind that there is no corresponding size-based exemption under the SEC’s rule, so if they are subject to SEC reporting obligations they will be required to file reports under Rule 13q-1 even though they do not have to report under ESTMA.