Yesterday, the SEC announced that it had adopted final rules, mandated by Section 1504 of Dodd-Frank, that require disclosure on Form SD of certain payments made to the federal and foreign governments by resource extraction issuers in connection with commercial development of oil, gas and mineral rights. The adopting release indicates that Section 1504 was enacted “to increase the transparency of payments made by oil, natural gas, and mining companies to governments for the purpose of the commercial development of their oil, natural gas, and minerals…. [T]he legislation reflects U.S. foreign policy interests in supporting global efforts to improve transparency in the extractive industries. The goal of such transparency is to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.” Resource extraction issuers will be required to comply with the new rules starting with their fiscal years ending no earlier than September 30, 2018.

As you may recall, the rules to implement Section 1504 have had a long and troubled history. Originally adopted in 2012 at the same time as the conflict minerals rules, the resource extraction rules faced an immediate challenge in litigation brought by the American Petroleum Institute (API) and the Chamber of Commerce. They had contended that the rule compelled U.S. resource extraction companies to engage in speech in violation of their First Amendment rights. (Sound familiar? See this PubCo post and this PubCo post .) They also maintained that the SEC had misinterpreted the mandate of the statute which, they argued, required only a compilation of aggregate information, not a separate report for every foreign project. As a result of this misinterpretation, they contended, the rule required U.S.-based companies to disclose sensitive commercial information that competitors could use to their benefit. (See this news brief.) The U.S. District Court, in a fairly scathing opinion, vacated the SEC’s rule, contending, among other things, that the SEC fundamentally “misread” the requirements of the statute by mandating public disclosure of each report (rather than a compilation of reports) and that, in rejecting companies’ request for an exemption from disclosing payments to countries that prohibited disclosure of payment information, the SEC was “arbitrary and capricious.” (See this news brief. ) The SEC declined to appeal the ruling, accepting the conclusion that it would need to rewrite the rule. (See this news brief.) However, the timetable for a new rule proposal was delayed several times, and last year, Oxfam America sued the SEC in the U.S. District Court for the District of Massachusetts to compel the SEC to complete the rulemaking. Oxfam succeeded. (See this PubCo post.) The Court ordered the SEC to file an expedited schedule for promulgating the final rule, and that schedule required the SEC to issue proposed rules before year end. (See this PubCo post.) In October, 2015, the SEC filed a Notice of Proposed Rulemaking, indicating that it proposed to hold a vote on the adoption of a final rule on or before June 27, 2016. (See this PubCo post.) And the SEC appears to have done precisely that.

The final rules were adopted substantially as proposed in December 2015 (see this PubCo post), with a few significant changes. Under the final rules, publicly held resource extraction issuers (including subsidiaries under their control) would need to disclose, on a project-by-project basis, payments — including taxes, royalties, fees (including license fees), production entitlements, bonuses, community and social responsibility payments that are required by law or contract (a change from the proposal), dividends and payments for infrastructure improvements — that are made to further the commercial development of oil, natural gas or minerals. The final rules also require disclosure with respect to an activity (or payment) that, although not within the categories included in the rules, is part of a plan or scheme to evade the required disclosure. There is an exclusion for de minimis payments, defined as one or a series of related payments that is less than $100,000 during the most recent fiscal year. The payment information need not be audited and must be made on a cash basis. Under the final rules, an issuer must disclose the payments made by entities that are consolidated, or its proportionate amount of the payments made by entities or operations that are proportionately consolidated, in its consolidated financial statements as determined by applicable accounting principles. (In that regard, the SEC notes that Rule 12b-21 provides that required information need be given only insofar as it is known or reasonably available to the registrant, subject to certain conditions.) Under the final rules, “project” means 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 as a single project. The report must be publicly filed on EDGAR, data-tagged using XBRL, no later than 150 days after the end of the issuer’s fiscal year. In addition, a separate public compilation of the payment information submitted in the Form SD filings will be made available online by SEC staff.

The rules include two exemptions that provide a longer transition period for recently acquired companies that were not previously subject to reporting under the final rules and a one-year delay in reporting payments related to exploratory activities. Although no blanket exemption was provided in the event of disclosures prohibited by foreign law, the SEC emphasized that resource extraction issuers may apply for, and the SEC will consider, exemptive relief for other situations on a case-by-case basis under Rule 0-12 of the Exchange Act. Specifically, “issuers may seek exemptive relief when foreign laws may prohibit the Section 13(q) disclosures. This exemptive process should help mitigate the final rules’ potential adverse effects on issuers while still preserving the transparency objectives of the statute.” (Notably, the absence of an express exemption in the prior version of the rules previously led the Court to view the SEC’s rulemaking as arbitrary and capricious.)

The final rules permit a resource extraction issuer to use a report prepared for other disclosure regimes to comply with the rules if the SEC determines that the requirements applicable to those reports are substantially similar. In a separate order, the SEC determined 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 U.S. Extractive Industries Transparency Initiative (USEITI) are substantially similar to the SEC’s rules, subject to certain conditions specified in the order and in the final rules. The SEC observes that “all three regimes require annual, public disclosure, including the identity of the filer; do not provide for any blanket exemptions; include the same or similar activities when defining commercial development of oil, natural gas, or minerals; require project-level reporting at the contract level (or in the case of the USEITI, calls for project-level reporting consistent with the European Union and Commission definitions of ‘project’); cover similar payment types; cover similar controlled entities and subsidiaries; and require foreign subnational payee reporting.” However, as a result of some limitations of the USEITI reporting regime (e.g., not covering payments to foreign governments and use of calendar year, instead of fiscal year, reporting), USEITI reports will satisfy Rule 13q-1 only for payments made to the U.S. federal government, not to foreign governments, and issuers will need to supplement their USEITI reports appropriately on Form SD.

Not surprisingly, some of the provisions were controversial. In particular, the adopting release indicated that there was “strong disagreement” from some commenters over the level of granularity that should be adopted for the definition of “project.” Nevertheless, the SEC remained “persuaded that the definition of project that we proposed is necessary and appropriate to achieve a level of transparency that will help advance the important anti-corruption and accountability objectives underlying Section 13(q).” In their comments, the API and certain industry-affiliated commenters challenged the appropriateness of the contract-based definition of “project”: the API asserted that the requirement that resource extraction issuers “disclose payments at the contract-level is unmoored from the statute.” One of the principal criticisms of this definition was that “contract-specific disclosure actually frustrates Section 13(q)’s transparency objective.” In support of this argument, the API proposed its own alternative standard, contending that the rule would just result in disclosure overload, not transparency: “Section 13(q)’s goal of transparency is best served by a definition of project that aggregates payments to a more useful—i.e., higher—level of generality, instead of burying the public in an avalanche of data that is irrelevant to the law’s avowed purpose.” The SEC, however, did not share the API’s view, relying instead on arguments and evidence provided by civil society organizations and related actors, as well as the SEC’s own experience with the FCPA, indicating that a more granular approach was necessary. The API’s view of the purpose of the rules, the SEC contended, was “unduly narrow”: “We believe that Section 13(q)’s anti-corruption and accountability goals are broader and include, among other things, providing transparency to members of local communities so that they can hold their government officials and others accountable for the underlying resource extraction agreements to help ensure that those agreements themselves are not corrupt, suspect, or otherwise inappropriate. To cabin Section 13(q)’s goals as the API would do, in our view, would severely limit the potential transparency and anti-corruption benefits that the disclosures might provide to citizens of resource-rich countries.”

The adopting release emphasizes that, in developing the final rules, the SEC sought to balance the need to provide transparency to help combat corruption and promote accountability, with the need to consider competition, efficiency, capital formation and costs: “For example, with regard to the appropriate definition of project and the public disclosure of each issuer’s annual reports—two discretionary decisions that, in many respects, are central to the transparency regime being adopted—we determined that the anticorruption and accountability concerns underlying Section 13(q) will be significantly advanced by the public disclosure of each issuer’s contract-based payment data. In making these discretionary decisions, we were mindful of the potential economic consequences that issuers might experience. As another example of our consideration of the various policy interests at stake, given the potential for competitive harm to issuers, we are adopting a targeted exemption to permit issuers to delay reporting payment information in connection with certain exploratory activities for one year….Similarly, we have adopted a revised definition of control and allowed for issuers to satisfy the rules’ requirements by providing reports prepared in compliance with other jurisdictions’ reporting requirements, which should help lower direct compliance costs for issuers.”

Will that attempt at balanced rulemaking in the final rules deter another court challenge? When the District Court initially vacated the rule, the API observed that “the rule ‘would have jeopardized transparency efforts already underway,’ and that the API looked forward to working with the SEC to rewrite the rule ‘in a way that recognizes these existing efforts’ without harming U.S. firms.” The final rules appears to address some, but certainly not all, of the issues raised in the earlier litigation. For example, the disclosure would still be required to be publicly made on a project basis and still stops short of providing the industry-desired blanket exemption where disclosure is legally prohibited. And, as discussed above, the API is unlikely to be satisfied with the SEC’s definition of “project.” However, the rules do leave room for the disclosure to meet requirements by complying instead with the referenced industry initiative or foreign requirements, suggesting that standards of practice have further evolved.

Whether the Chamber of Commerce or the API accept the new rules or renew their efforts to challenge them on First Amendment—one of the Chamber’s favorite new strategies — or other grounds remains to be seen. In a press release issued yesterday, an API representative certainly indicated that a new challenge was possible: the new rules failed “to strike the right balance between informing foreign citizens of government revenues and protecting the competitiveness of American companies. There appears to be no meaningful difference between this rule and the previous rule struck down by the Courts, so our concerns remain the same. The SEC’s rule forces U.S. companies to disclose proprietary information to its competitors while foreign entities do not. This can give some large industry players an advantage on future business projects, and can fundamentally harm American jobs. The SEC ignored industry efforts to disclose information, but to do so in a way that doesn’t give competitors an unfair advantage. The industry actively supports the Extractive Industries Transparency Initiative which takes a global approach and already includes 51 countries that promote transparency and puts all companies on equal footing. We need to take a closer look at the impact of the new rule on our operations and determine our next steps. The prior court case held that the SEC’s initial rule was arbitrary and capricious.”

Stay tuned.