On August 22, the Securities and Exchange Commission ("SEC") voted two to one in favor of a final rule implementing Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Commissioners Schapiro and Paredes were recused from the vote. A copy of the final rule is available here (.pdf).
As discussed in previous posts, Section 1504 directs the SEC to issue rules requiring extractive companies (oil, gas, and mining companies) that report to the SEC to disclose their payments to foreign governments, as well as the U.S. federal government. The requirement applies to foreign issuers, and makes no exceptions for small or medium-sized enterprises.
Important aspects of the final rule include:
- In keeping with the statutory language, companies must report on a project basis on payments made to governments related to commercial development by the issuers, subsidiaries, or entities that they control. The SEC did not define “control,” and stated that the issuer should determine control based on all relevant facts and circumstances.
- “Commercial development” is defined according to the language in the statute, which is broader than the Extractive Industries Transparency Initiative (“EITI”), and includes exploration, extraction, processing, export, or the acquisition of licenses for any of these activities.
- The payment types are consistent with the EITI and include taxes, royalties, fees (including license fees), production entitlement payments, dividends, and payments for infrastructure improvements. Notably, dividends and payments for infrastructure improvements were not included in the draft rule.
- Companies must report “not de minimis” payments, which the final rule defines as payments or a series of payments equal to or exceeding $100,000 in a fiscal year.
- “Project” remains undefined. The SEC stated that it would release limited guidance on this point. The SEC commented that industry frequently uses the term “project,” and it has a commonly understood meaning. Additionally, the contractual arrangements between a company and the government typically define the scope of a project. The SEC added that the statute makes it clear that project is not simply defined at a country level, but rather is more granular. Additional written guidance should be forthcoming.
- There are no exemptions from or exceptions to from the rule for companies required to file annual reports with the SEC, even if contracts or foreign law proscribe the sharing of payment information.
- The report will be filed, not furnished, separately from the annual report in a new form, Form SD. Statements in Form SD are subject to the liabilities imposed under the Exchange Act
- If a company’s fiscal year ends after September 30, 2013, it must report on payments throughout the 2013 fiscal year. If a company’s fiscal year ends before September 30, 2013, it initially must report on payments made between October 1, 2013 and December 31, 2013. A company should file the form on the public EDGAR system no more than 150 days after the end of its most recent fiscal year.
- The SEC admitted that it did not have the expertise to quantitatively determine the benefits of implementing the rule. It estimated initial costs to fall between $44 million and 1 billion, and ongoing costs to be between $200 and 400 million. The SEC also stated that the rule may have significant effects on competition.
Notably, Commissioner Gallagher did not support the rule for two main reasons. First, he stated that the SEC did not use its discretion to adequately tailor the rule to adhere to the Commission’s purpose of supporting competition and protecting investors, while also meeting Congressional intent expressed in Section 1504. He particularly criticized the decision to define $100,000 as “not de minimis,” as he believes this amount is de minimis for the relevant issuers. He also argued that “project” should have been defined at the country level. Second, he expressed concern that the economic benefit analysis simply did not quantify the benefit of the rule and therefore was inadequate.
The final rule has elicited criticism, primarily from companies and business associations that fear the regulation will impede the competitiveness of public oil, gas, and mining companies operating around the world.