The U.S. Securities and Exchange Commission (SEC) has reproposed a rule that would require 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 would be substantially similar to those recently introduced 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.
The SEC’s proposed Rule 13q-1 under the U.S. Securities Exchange Act of 1934, as amended, (U.S. Exchange Act) would apply 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 proposed 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 proposed rule is substantially similar to the 2012 rule, except that the SEC has considered and adopted 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 force in October 2013. The SEC’s proposing release also addresses the issues identified in the U.S. court decision vacating the 2012 rule.
Summary of the Proposed 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 proposed rule establishes the details relating to these requirements.
Who Must Make the Disclosure
Under the proposed rule, the term “resource extraction issuer” would include 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. There are no exceptions or exclusions 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” would mean 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
The proposed rule would require 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. Such payments would 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 (but not including social or community payments).
A payment that is not de minimis would include 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 C$100,000. In addition to payments it makes directly, a resource extraction issuer would 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).
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 proposed rule largely mirrors the draft guidance and technical reporting specifications under ESTMA 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 proposed rule does not require the agreements to have “substantially similar terms” to be treated as a single project.
The following items would have to be publicly disclosed under the SEC’s proposed rule:
- 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 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
- 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 proposed rule would be filed as an exhibit to the SEC’s Form SD, which is also the form used to disclose information mandated by the SEC’s “conflict minerals” rules. Resource extraction issuers would be required to comply with the proposed rule beginning with their fiscal year ending no earlier than one year after the effective date of the proposed rule. Once the final rule becomes effective, extraction issuers would be required to file the Form SD annually no later than 150 days after the end of their fiscal year. For example, if Rule 13q-1 becomes effective during the 2016 calendar year, then a resource extraction issuer with a December 31 fiscal year end would be required to file its first resource extraction payment report no later than 150 days after December 31, 2017, i.e., by May 30, 2018. Issuers subject to the proposed rule and also subject to the SEC’s conflict minerals rules may have to file two separate Form SDs in light of the annual May 31 deadline for the Form SD containing conflict minerals disclosure. The payments information disclosed in Form SD would have to be electronically tagged using the eXtensible Business Reporting Language (XBRL) format. The Form SD would be “filed” for U.S. Exchange Act purposes, meaning that resource extraction issuers would be subject to liability under the U.S. Exchange Act for the accuracy of the required payments information.
Exemptions from Disclosure
The SEC acknowledged that the U.S court decision vacating its original 2012 rule was based in part on its failure to justify not providing exemptions from disclosure if making the required disclosure would be in conflict with the laws of other countries, and noted various commenters’ concerns in that regard. However, the SEC also noted the absence of disclosure exemptions under the EU Directives and ESTMA, and declined to adopt a blanket exemption for a foreign law prohibition under the proposed rule. Instead, the SEC indicated that it would approach requests for exemptive relief 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.
Use of Foreign Reports to Comply with the Proposed Rule
The SEC noted that several countries, including Canada, have already implemented resource extraction payment disclosure laws. To reduce compliance burdens, the SEC has proposed a provision that would allow issuers to meet the requirements of Rule 13q-1 by providing disclosures that comply with another country’s rules, such as Canada’s ESTMA, if the SEC determines that those rules or requirements are substantially similar to the proposed rule. In such cases, the issuer would file the substantially similar report as an exhibit to Form SD. It remains to be determined whether the SEC will permit Canadian resource extraction issuers to use reports prepared in accordance with the Canadian ESTMA standards to satisfy their Rule 13q-1 disclosure requirements on the basis that the ESTMA requirements are substantially similar to those of the proposed rule.
While the SEC’s proposed rule will apply to all Canadian resource extraction issuers that file annual reports with the SEC, given the extensive references to Canada’s ESTMA in the SEC’s proposing release it seems likely that the SEC will recognize ESTMA as substantially equivalent to Rule 13q-1 and permit Canadian issuers subject to ESTMA to satisfy all of the requirements of Rule 13q-1 solely by filing a Form SD with the Canadian ESTMA report attached as an exhibit. From a timing perspective, issuers subject to ESTMA in Canada will be required to file their first reports under ESTMA at least one calendar year ahead of their first filing deadline under Rule 13q-1.
Even if the SEC does not ultimately determine ESTMA to be substantially similar to Rule 13q-1, most if not all of the information and analysis required to comply with Rule 13q-1 will already have to be collected by Canadian resource extraction issuers subject to ESTMA, which should help to reduce any incremental compliance requirements for them. In most cases, Canadian issuers would only be required to convert the information they have already reported under ESTMA into the format required by Form SD and file that information as an exhibit to Form SD, including all required XBRL tagging. However, the difference between the Canadian reporting threshold of C$100,000 and the U.S. reporting threshold of US$100,000 warrants attention in the event that an issuer is subject to both ESTMA and Rule 13q-1 without an exemption from one being available based on compliance with the other.
Finally, despite having connections to Canada, smaller 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.