On May 30, 2013, following numerous requests from the public, the U.S. Securities and Exchange Commission (SEC) issued answers to several questions regarding the disclosure of payments by resource extraction issuers (the Guidance).1 The Guidance provides muchneeded clarifications regarding several aspects of the scope and applicability of the rules regarding resource extraction payments under the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). While the Guidance does not answer all questions issuers will have under the new requirements, they are a helpful start from the SEC. The resource extraction filing requirements have also been the subject of litigation before D.C. federal courts.2

The Guidance provides invaluable insight into aspects of the SEC’s understanding of the obligations of filers under the SEC’s August 2012 rules implementing the Dodd-Frank Act’s provision. Over 1,000 companies that engage in the commercial development of oil, natural gas, or minerals are expected to file annual reports with the SEC. Issuers should bear this Guidance in mind when designing and implementing policies, controls, and procedures for identifying, tracking, and reporting covered resource extraction payments in anticipation of their filing requirements.

  1. Background: Disclosure Obligations for Resource Extraction Issuers

On August 22, 2012, the SEC adopted new rules to implement Section 1504 of the Dodd- Frank Act, adding Section 13(q) to the Securities Exchange Act of 1934 (the Exchange Act) which requires annual disclosures of certain payments made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to foreign governments or the U.S. government for the purpose of commercial development of oil, natural gas or minerals.3

The rules define a “resource extraction issuer” as (i) a company—foreign or domestic—that is required to file annual reports with the SEC,4 and (ii) engages in the commercial development of oil, natural gas or minerals.5

Covered entities must disclose the taxes,6 royalties, fees (including license fees),7 production entitlements, bonuses,8 dividends,9 and payments for infrastructure improvements made, whether paid directly or in-kind.10 However, these must only be disclosed if they are “made to further commercial development of oil, natural gas, or minerals,” and not de minimis (i.e., payments totaling US$100,000 or more per fiscal year must be disclosed).11

The annual disclosures—which are to be submitted on a “Form SD” provided by the SEC, and electronically tagged in eXtensible Business Reporting Language (XBRL) format— must include, among other things, the type and total amount of payment(s) made for each project, organized by each of the categories noted above; the particular government that received the payment(s); and the project(s) of the resource extraction issuer to which the payment(s) relate(s).

  1. The SEC’s May 30 Guidance

The Guidance provides helpful insight into four major areas: (a) the entities covered; (b) the covered activities; (c) the covered payments subject to disclosure; and (d) the mechanics of reporting.

  1. Entities Covered

The Guidance clarifies that extraction issuers must disclose payments made to governments made not only by the issuer, but also by subsidiaries or entities under the issuer’s control. Notably, “a reporting issuer that is not engaged in commercial development activities itself but whose subsidiary or entity under its control engages in those activities would be considered a resource extraction issuer” and as such, must meet the disclosure requirement.12

As the Guidance clarifies, however, companies providing only services associated with resource “exploration, extraction, processing and export generally would not be considered to be a resource extraction issuer” for purposes of the SEC’s rules.13 By way of example, the Guidance explains that “companies that provide hardware and logistics to help companies explore for or extract resources would [not] be considered to be exploring for or extracting the resources even though their services are being used to explore or extract.”14 Likewise, the Guidance notes, “a company engaged by an operator to provide hydraulic fracturing services or drilling services for the operator, thus enabling the operator to extract resources, would [not] be considered to be a resource extraction issuer.”15 This significantly narrows the companies subject to Section 1504 disclosures. However, even if not itself covered, where a service provider makes a covered payment (as described above) to a government on behalf of a resource extraction issuer, the resource extraction issuer must disclose such payments.

The Guidance also explores whether an issuer that merely transports the resource across borders, yet holds no ownership interest in the resource, qualifies as an exporter thereby making the issuer a “resource extraction issuer.” While noting that “it depends on the circumstances,” the Guidance asserts that “[t]ransportation activities generally would not be included within the definition of ‘commercial development’ unless the activities are directly related to the export of the resource.”16 As the Guidance makes clear, a key factor in determining whether a company qualifies as a “resource extraction issuer” is whether or not the company transporting the goods holds an “ownership interest in the resource.”17

  1. Covered Activities

One of the open questions relating to the August 2012 rule was what qualifies as a “mineral” for purposes of the reporting requirement. As the Guidance explains, for purposes of the disclosure requirements, “mineral” encompasses “any material commonly understood to be a mineral, which would include any material for which disclosure would be required under Industry Guide 7, ‘Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations,’ notwithstanding any test of materiality used for purposes of Guide 7.”18

  1. Covered Payments

The Guidance also clarifies aspects of the scope of payments that warrant disclosure. For instance, the Guidance explains that resource extraction issuers that use a majority-owned government transportation service to supply people or materials to an extractive job site would not have made qualifying payments, and therefore would not be required to report those payments under 1504, as these are “payments in connection with an activity that is ancillary or preparatory to the commercial development of oil, natural gas or minerals.”19

Likewise, it clarifies that penalties and/or fines paid to governments in relation to resource extraction do not qualify as reportable fees or payments, as “penalties or fines are [not] part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.”20

  1. Reporting Mechanics

Given that one of the types of payments that must be reported are the taxes paid on corporate profits, corporate income, and production, which are often based on a resource extraction issuer’s various sources of income within a country (i.e., not just qualifying extraction activities), the Guidance clarifies that, under these rules, the issuer is only required to disclose payments made to further commercial development activities, and not payments made for other purposes. As such, “a resource extraction issuer may elect to segregate income from exploration, extraction, processing and export from income earned on other business activities in a particular country and disclose income taxes paid solely on the income generated by the commercial development activities.”21 The issuer may, however, disclose the full figure without segregation.

The Guidance also makes clear that resource extraction issuers are not permitted to provide the payment information on an accrual basis, as the “rules contemplate the payment information to be presented on an unaudited, cash basis for the year in which the payments are made.”22

Finally, the SEC clarified that the failure to timely file a Form SD will not affect an issuer’s eligibility to file a Form S-3 (securities registration form), as the requirement for filing the latter is that the registrant has filed in a timely manner all reports and materials required to be filed during the prior twelve calendar months under Exchange Act Section 13(a) or 15(d) reports and Section 14(a) and 14(c) materials, and not Section 13(q), which is the resource extraction rule.23


While the Guidance is not binding on the Commission, it is nonetheless an invaluable tool for companies to better understand important aspects of the new, unprecedented, and burdensome disclosure obligations imposed by the SEC rules. Given that the rules are already in effect for the present calendar year, the Guidance is a much-needed first step to help clarify the significant doubts that have arisen as to the scope of the issuers that are covered, as well as the substantive scope of new disclosure requirements. All issuers involved in the commercial development of oil, natural gas, or minerals should use the rule and this Guidance to: (i) identify within their operations, as well as those of their subsidiaries and entities under their control any qualifying activities; and (ii) design and implement policies, controls, and procedures for identifying, tracking, and reporting covered payments.