On May 30, 2013, the U.S. Securities and Exchange Commission (SEC) published a list of Frequently Asked Questions (FAQs) to provide guidance on the rule adopted to implement the Dodd-Frank Act requirements to disclose payments to governments made by resource extraction issuers (that is, issuers engaged in the commercial development of oil, natural gas or minerals) that publicly file reports with the SEC (Rule 13q-1).

Rule 13q-1 required issuers to make annual disclosure, both publicly and to the SEC, of payments made to the U.S. federal government or any non-U.S. government (including Canadian federal, provincial or local governments or any company that is at least majority-owned by a non-U.S. government), subject to an exemption for a payment or series of related payments of less than US$100,000 during the most recent fiscal year.  The rule required disclosure of applicable payments for fiscal years ending after September 30, 2013 to be made in an annual report filed as an exhibit to new Form SD, which was to be filed on EDGAR no later than 150 days after the issuer’s year end.  Information about the payments was to be coded using XBRL tagging (that is, in an interactive data format), even if the issuer is not yet subject to any other XBRL tagging requirements.  More detailed information about Rule 13q-1 can be found in our September 2012 edition of the Mining Review.

The FAQs provide guidance on a number of topics relating to Rule 13q-1:

  • an issuer is considered to be a resource extraction issuer if it or any of its subsidiaries, or any other entity under its control, engages in the commercial development of oil, natural gas or minerals, and the issuer must report on payments made both by the issuer and those other entities
  • an issuer providing services associated with exploration, extraction or processing and export of a resource is not considered a resource extraction issuer solely as a result of providing those services
  • in interpreting the use of the term “mineral” in Rule 13q-1 and Form SD, disclosure is required with respect to any material commonly understood to be a mineral
  • an issuer is considered a resource extraction issuer as a result of exporting a resource from one country to another, because exporting is captured by the definition of “commercial development”; however, if the issuer does not have an ownership interest in the resource, transportation of the resource internationally would generally not be viewed as export of the resource
  • payments that an issuer makes to a majority-owned government transportation service to supply people or materials to an extractive job site are not subject to disclosure, as they would not be viewed as ancillary or preparatory to the commercial development of oil, natural gas or minerals
  • fines and penalties related to resource extraction paid to government agencies are not reportable as fees
  • payment information must be provided on an unaudited, cash basis for the year in which the payments are made, and may not be provided on an accrual basis instead
  • an issuer may, but need not, segregate income tax it pays on income from resource extraction activities from income tax it pays on other income in a particular country; instead of segregating, an issuer may disclose that it is providing information that includes payments made for purposes other than commercial development activities
  • the failure to make a timely filing of Form SD does not cause an issuer to lose eligibility to use the Form S-3 “short form” registration statement form

On July 2, 2013, the U.S. District Court for the District of Columbia vacated Rule 13q-1 as adopted by the SEC, citing two reasons.  First, the Court determined that the SEC had erred in interpreting the Dodd-Frank Act as requiring public disclosure of resource payments by issuers.  In the Court’s view the SEC would have had the authority to make a rule requiring disclosure only to the SEC, rather than also requiring disclosure to the public.  Therefore, the SEC should be required to reconsider whether a public disclosure requirement is appropriate.  Secondly, the Court found that the SEC acted arbitrarily in denying any exemption from Rule 13q-1 in circumstances where the mandated disclosure would violate the laws of another country, because it had not sufficiently considered the competitive and other burdens that the absence of such an exemption would impose.

Although the SEC has not yet stated how it will respond to the Court’s ruling, there are a number of actions that it may take, including an appeal or revisions to the rule, that would allow either the original rule or a revised version of it to come into effect as scheduled.  Issuers should continue to assume that they will have to comply with some version of Rule 13q-1, even though the required report to the SEC may not ultimately be made publicly available, and some additional exemptions may ultimately be provided.

The Canadian federal government has also announced that it is planning to adopt its own reporting requirements for payments made to foreign governments by resource issuers, which are discussed in more detail here.

Conflict Minerals

On May 30, 2013 the SEC also published a list of FAQs to provide guidance on Rule 13p-1, the rule adopted to implement Dodd-Frank Act reporting obligations on the use of conflict minerals originating in the Democratic Republic of the Congo and adjoining countries (Covered Countries).  Rule 13p-1 requires an issuer to disclose the use of conflicts minerals if they are necessary to the functionality or production of products manufactured by the issuer.  Although the SEC has confirmed that mining is not considered “manufacturing,” miners of conflict minerals will be indirectly affected by the rule because of the impact it will have on the manufactures who ultimately purchase those minerals.

Rule 13p-1 requires issuers publicly filing reports with the SEC to file an annual report on Form SD by May 31 each calendar year if they have made use of conflict minerals during the prior calendar year, with the first required report due by May 31, 2014.  The rule requires a three-step process for determining the disclosure requirements that apply to an issuer. 

  1. The issuer must determine whether any conflict minerals are necessary to the functionality or production of a product it manufactures, and if not then no further action is required. 
  2. The issuer must determine whether or not any conflicts minerals it uses originated in Covered Countries and, if so, disclose the results of that determination on its website and in a report on new Form SD. 
  3. If the conflict minerals did originate in one of the Covered Countries, then the issuer must investigate the source and chain of custody of the conflict minerals.  The issuer must then report on whether they are “DRC conflict free,” following a recognized due diligence framework, and also obtain an independent private sector audit expressing an opinion on the design of the issuer’s due diligence measures.  

More detailed information about Rule 13p-1 can be found in our September 2012 edition of the Mining Review.

The FAQs provide guidance on a number of topics relating to Rule 13p-1:

  • an issuer engaged in activities customarily associated with mining is not considered to be “manufacturing” those minerals so it is not subject to the rule
  • all SEC filers must comply with the rule, including voluntary filers
  • issuers subject to the rule must report both on behalf of themselves and their consolidated subsidiaries
  • an issuer will not be considered to be manufacturing, or contracting to manufacture, a product solely as a result of etching its logo on a generic product manufactured by a third party
  • an issuer must report on conflicts minerals included in components of the products it manufactures, even if the component is “generic”
  • a conflict mineral necessary to the functionality or production of a package or container for a product is not necessary to the functionality or production of the product inside it, so reporting on conflicts minerals in packages or containers is only required if an issuer manufactures and sells packaging or containers so that they themselves are the product
  • there is no requirement to report on conflicts minerals in products that an issuer manufactures or contracts to manufacture in order for the issuer to be able to use that product itself to provide a service, rather than sell as a product to someone else
  • after it has used them itself, an issuer may sell tools, machines or other equipment it has manufactured or contracted to manufacture for its own use which contain conflict minerals, without them being considered a “product” of the issuer
  • issuers may determine what level of detail is appropriate to use when describing products in their Form SD report that are not found to be “DRC conflict free” or “DRC conflict undeterminable,” but must clearly state those findings
  • an issuer must still file a Form SD report, including an independent private sector audit, regarding products containing conflict minerals from the Covered Countries even if those products are found to be “DRC conflict free,” but need not disclose the products containing those conflicts minerals
  • following an IPO, the SEC Staff will not object if an issuer only starts reporting for the first calendar year that begins no sooner that eight months after the effective date of its IPO registration statement
  • the failure to make a timely filing of Form SD does not cause an issuer to lose eligibility to use the Form S-3 “short form” registration statement form

The SEC is currently defending a court challenge to the conflict mineral disclosure requirements that was initiated by The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable.  On April 30, 2013 the petitioners filed an unopposed motion to transfer the case from the United States Court of Appeals for the District of Columbia Circuit to the U.S. District Court for the District of Columbia, hoping to avoid a dismissal by the Court of Appeals for lack of jurisdiction.  The timing of any developments on this court challenge, and its ultimate outcome, remain unclear.  Pending further developments, issuers should continue to prepare to make their first required Form SD filing by its May 31, 2014 due date.