On August 22, 2012, the Securities and Exchange Commission (SEC) promulgated Rule 13q-1 (Rule),1 which requires certain mineral extraction issuers to file an annual report disclosing payments they have made to the U.S. government and foreign governments in connection with the commercial development of oil, natural gas, or minerals. In adopting the final Rule, the SEC implemented Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, which added Section 13(q) to the Securities Exchange Act of 1934 (Exchange Act). Companies subject to the Rule (the contours of which are further discussed below) must submit information about such payments to the SEC on new Form SD within 150 days of the end of each fiscal year that ends after September 30, 2013. If a company’s fiscal year began before September 30, 2013, its first report need only include information about payments made after October 1, 2013. Thereafter, each report for a fiscal year that started on or after September 30, 2013 must include payment information for the full year. The Rule generally tracks the language in Section 1504 and, except in limited cases, is consistent with the Extractive Industries Transparency Initiative (EITI), of which the United States is a member.
Issuers Affected by the Rule
The reporting requirement applies only to “resource extraction issuers,” which the Rule defines as any issuer that is required to file an annual report with the SEC and engages in the commercial development of oil, natural gas, or minerals. The Rule is broad in its reach, applying to issuers of any size, both foreign and domestic, regardless of how much of the issuer’s business operations involve commercial development of oil, natural gas, and minerals. Government-owned entities are also affected, reflecting the SEC’s concern that excluding those issuers “could raise competitiveness concerns.”
The Rule defines “commercial development” to include “exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the SEC.” While this definition is broad, in its commentary the SEC did add the qualification that it regards “commercial development” as limited to “activities that are directly related to the commercial development of oil, natural gas, or minerals,” thereby excluding “activities that are ancillary or preparatory” to such commercial development. As an example cited by the agency, the manufacturer of a tool used for extraction, such as a drill bit, would not be involved in “commercial development.” Notably, the definition of “commercial development” also excludes marketing and transportation activities, except for the exporting of oil, gas or minerals, which is covered and subject to disclosure under the Rule.
In response to requests for clarification, the SEC elaborated upon its understanding of “extraction,” “processing,” and “export”:
- Extraction: includes “the production of oil and natural gas as well as the extraction of minerals.”
- Processing: includes “field processing activities, such as the processing of gas to extract liquid hydrocarbons, the removal of impurities from natural gas after extraction and prior to its transport through the pipeline, and the upgrading of bitumen and heavy oil,” as well as “the crushing and processing of raw ore prior to the smelting phase,” but does not include smelting or refining.
- Export: includes “the export of oil, natural gas, or minerals from the host country.” The SEC rejected the suggestion that “export” should include the removal of resources from the site of extraction to the site of the refinery, smelter, or first marketable location. The SEC acknowledged that its definition of “export” brings issuers involved in exporting oil, natural gas, and minerals—but not in exploration, extraction, or processing— within the reporting requirement.
Finally, the Rule incorporates (through Instruction 9 to Form SD) an “anti-evasion” provision that requires the disclosure of those payments and activities that are characterized in a way intended to avoid falling within the scope of the Rule. Any steps that lead to new or altered actions for the issuers after the implementation of the Rule must be scrutinized to address possible implications of evasion (e.g., re-characterizing a covered activity or changing the name or method of making otherwise covered payments).
The Disclosure and Reporting Requirement
Resource extraction issuers subject to the Rule must disclose any payments made to a foreign government or the U.S. federal government by the issuer, a subsidiary, or an entity that it controls, which payments are (1) “made to further the commercial development of oil, natural gas, or minerals;” (2) “not de minimis;” and (3) taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and payments for infrastructure improvements.
Form SD further defines each of these terms. With respect to subsidiaries and entities under the issuer’s control, the Rule incorporates by reference the definitions under Exchange Act Rule 12b-2. Notably, whollyowned subsidiaries subject to the Rule may rely upon the disclosures incorporated in their parent entity report; however, they must nonetheless file a separate Form SD noting such reliance. In addition, application of the Rule to joint ventures will therefore require a careful facts-and-circumstances analysis to assess whether the elements of “control” exist. The term “foreign government'” includes national and subnational governments, such as provincial governments, as well as companies that are majority-owned by a national or subnational foreign government. However, as adopted, the Rule does not require issuers to report payments made to U.S. states or local governments. As to the term “not de minimis,” Form SD defines it as any payment or series of related payments equaling or exceeding $100,000 during a fiscal year.
Form SD includes additional instructions about each of the various types of payments that fall within the Rule. For example, although “taxes” includes income and corporate taxes, issuers need not report consumption or value-added taxes. Also, although issuers must report dividends, they need not report dividends paid to a government as a common or ordinary shareholder on the same terms as dividends paid to other shareholders.
The SEC declined to adopt several exemptions the business community had suggested in comments on the proposed rule. For example, the Rule does not allow issuers to satisfy the reporting requirement by fulfilling parallel disclosure requirements under foreign law or private industry initiatives. The Rule also does not allow for an exemption in situations where a foreign law or contractual confidentiality provision would otherwise prohibit the required disclosure, nor where the disclosure involves commercially or competitively sensitive information.
Contents of the Report
Once it is determined that a payment falls within the Rule, the issuer must report the following information on Form SD:
- Type and total amount of payments made for each project;
- Type and total amount of payments made to each government;
- Total amounts of the payments, broken down by the types of payments (e.g., taxes, royalties, etc.);
- Currency used to make the payments;
- Financial period in which the payments were made;
- 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.
The term “project” is undefined so as to allow issuers flexibility in applying the term in different business contexts. The SEC made clear, however, that the term “requires more granular disclosure than country-level reporting.” Guidance in the adopting release states that payments may be disclosed at the entity level subject to obligations being levied at such level rather than at the project level. Similarly, tax payments may be disclosed on an aggregate, rather than project basis, if consistent with the application of taxing regime within the host country.
Form SD is separate and distinct from an annual report on Form 10-K or Form 20-F; the first submission must be made no later than 150 days after the end of the issuer’s most recent fiscal year ending after September 30, 2013. Form SD requires a brief statement in Item 2.01 directing investors to the detailed payment information contained in XBRL-formatted exhibits, tagged for the information enumerated above. The information contained in the exhibits is not required to be audited or provided for on an accrual basis.
For purposes of Exchange Act Section 18 liability, Form SD is “filed” rather than “furnished.” Section 18 states that a person will not be held liable for misleading statements in a document filed under the Exchange Act if such person shows that he acted in good faith and without knowledge that the statement was false or misleading. Further, since Form SD is filed separate from the issuer’s Exchange Act annual report, the disclosures will not be included in the officers’ certificates under Exchange Act Rules 13a-14 and 15d-14.
New reporting requirements for any issuer must be analyzed based on the facts of the issuer’s business to ensure compliance with any new Rule. In some cases, the facts are straightforward and require little thought or effort, particularly if the issuer has a system of accurate internal reporting and recordkeeping in place. However, practice has shown that in the real world there are very few straightforward facts and, as undoubtedly will be the case with this new Rule, questions of interpretation will emerge as companies are left to implement the Rule’s requirements.