The Securities and Exchange Commission (the “SEC”) recently adopted rules implementing the disclosure of payments by issuers to foreign governments or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals required by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).1 The SEC has adopted a new Form SD for use by covered issuers in disclosing the information required by the new rules. These rules were adopted contemporaneously with the SEC’s new rules regarding conflict minerals disclosure, which also requires disclosure on the new Form SD. The new disclosure requirements apply regardless of whether covered payments are material to the business of the issuer. This client alert reviews the new disclosure requirements and provides practical recommendations for preparing the required information and complying with the new rules.
The rules require resource extraction issuers to include in an annual report information relating to any payment made by the issuer, or by a subsidiary or another entity controlled by the issuer, to a foreign government2 or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals. The disclosure will require details regarding:
- the total amount of payments;
- the governments that received the payments; and
- the projects to which the payments relate.
Resource extraction issuers will be required to file a Form SD for fiscal years ending after September 30, 2013. For the first report filed for fiscal years ending after September 30, 2013, a resource extraction issuer may provide a partial year report if the issuer’s fiscal year began before September 30, 2013. The information to be included in the new Form SD will be filed with, not furnished to, the SEC and, therefore, is not subject to liability under Section 18 of the Exchange Act.
The rules apply to each resource extraction issuer, defined as an issuer that is required to file an annual report with the SEC and engages in the commercial development of oil, natural gas or minerals, regardless of the size of the issuer or the extent of business operations constituting commercial development of oil, natural gas or minerals, and each subsidiary or other entity controlled by the issuer. At a minimum, any consolidated entity will be deemed controlled by the issuer, and the issuer may need to provide disclosure for entities for which it provides proportionately consolidated financial information based on a facts and circumstances determination of whether the issuer has control of such entity. The rules do not provide any exemptions from the disclosure requirements, even if foreign law prohibits the required disclosure or where the issuer is subject to a confidentiality provision in an existing or future contract.
The term “commercial development of oil, natural gas or minerals” includes exploration, extraction3, processing and export4 of oil, natural gas or minerals, or the acquisition of a license for any such activity. The definition is intended to capture only activities that are directly related to the commercial development of oil, natural gas or minerals, as opposed to activities that are ancillary or preparatory to such commercial development. In an example used by the SEC, a manufacturer of drill bits or other machinery used in the extraction of oil would not fall within the definition of commercial development. However, the SEC indicated that whether an issuer is a resource extraction issuer will depend on its specific facts and circumstances. The rules do not require a resource extraction issuer to disclose payments made for transporting oil, natural gas or minerals for a purpose other than for export. However, issuers are specifically prohibited from recharacterizing activities in order to evade the disclosure provisions of the rules.
Under the rules, “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 and also includes the crushing and processing of raw ore prior to the smelting phase. The SEC does not believe “processing” was intended to include refining or smelting.
A “payment” under the rules means an amount paid that:
- is made to further the commercial development of oil, natural gas or minerals;
- is not de minimis5; and
- includes taxes, royalties, fees, production entitlements, bonuses, dividends and payments for infrastructure improvements.
The rules include an instruction clarifying that a resource extraction issuer will be required to disclose payments for taxes levied on corporate profits, corporate income and production but is not required to disclose payments for taxes levied on consumption, such as value added taxes, personal income taxes or sales taxes.
The rules include an instruction clarifying that fees include rental fees, entry fees and concession fees.
The rules include an instruction clarifying that bonuses include signature, discovery and production bonuses.
The rules clarify in an instruction that a resource extraction issuer generally need not disclose dividends paid to a government under the same terms as other shareholders. However, the issuers will be required to disclose any dividends paid to a government in lieu of production entitlements or royalties.
Under the rules, the resource extraction issuer is required file Form SD not later than 150 days after the end of the issuer’s most recent fiscal year. Form SD will require issuers to include a brief statement in the body of the form in an item entitled, “Disclosure of Payments By Resource Extraction Issuers,” directing the user to detailed payment information provided in an exhibit to the form. The required exhibit must provide the information using the XBRL interactive data standard. A separate non-XBRL form of the exhibit will not be required. The issuer will be required to submit the payment information using electronic tags that identify, for any payments6 made by a resource extraction issuer to a foreign government or the U.S. federal government:
- the type and total amount of such payments made for each project7 of the resource extraction issuer relating to the commercial development of oil, natural gas or minerals;
- the type and total amount of such payments made to each government;
- the total amounts of the payments, by category8;
- 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; and
- the project of the resource extraction issuer to which the payments relate.
Resource extraction issuers are required to disclose payments of the types identified in the rules that are made in-kind. The rules specify that issuers may report in-kind payments at cost, or if cost is not determinable, fair market value, and provide a brief description of how the monetary value was calculated.
Practical Considerations and Convergence with Preexisting FCPA Requirements
Resource extraction issuers should strive to incorporate compliance procedures dedicated to the new disclosure requirement into their currently existing compliance program framework. Pursuant to the Foreign Corrupt Practices Act (“FCPA”), issuers are already under an obligation to maintain accurate books and records and internal controls and to prevent bribery of foreign government officials. Given the nature of the company information that must be tracked and monitored in order to comply with the resource extraction disclosure requirement, resource extraction issuers should integrate the new disclosure compliance procedures with existing protocols designed to identify and prevent those activities proscribed by the FCPA. Similar to the FCPA, resource extraction issuers must also consider compliance protocols for disclosures required for subsidiaries and controlled entities.
In general, issuers should consider implementing the following procedures in order to initiate a formal practice of compliance with extraction resource disclosure requirements:
- Direct the existing compliance team to conduct a thorough analysis to determine whether the issuer (including its subsidiaries and controlled entities) comes within the definition of “resource extraction issuer” and is thus subject to the disclosure requirements;
- Task the appropriate compliance personnel to coordinate with affected business units in order to adopt tracking mechanisms to collect the data required to appropriately comply with the disclosure requirements (e.g., payment amounts, receiving foreign government, projects to which the payments relate);
- Train compliance and operations personnel on the new disclosure requirements and internal compliance procedures;
- Coordinate internal monitoring protocols and system checks for resource extraction disclosure requirements with the existing FCPA compliance framework to avoid potential compliance blind spots; and
- Regularly update these procedures and notify new relevant personnel of the disclosure requirements.