On August 22, 2012, the US Securities and Exchange Commission adopted new disclosure rules1 for oil, natural gas and mining companies that file annual reports with the SEC—defined in the rules as “resource extraction issuers.”

Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added subsection (q) to Section 13 of the Securities Exchange Act of 1934, mandating the SEC to adopt rules requiring resource extraction issuers to disclose annually certain information on payments they make to the US government and foreign governments for the purpose of the commercial development of oil, natural gas or minerals. Section 13(q)(2)(E) provides that the adopted rules should support the commitment of the US government to promote international transparency efforts relating to the commercial development of these natural resources

Section 13(q) references the guidelines of the Extractive Industries Transparency Initiative (EITI),2 a voluntary coalition of oil, natural gas and mining companies, foreign governments, investor groups and other international organizations. The EITI guidelines provide a process whereby government revenues generated by extractive industries—such as taxes, production-sharing profits, payments and royalties—are published in independently verified reports. Reports are based on information on payments made by companies and revenues received by the governments of resource-producing countries.3 Participants in the EITI, besides the implementing (reporting) countries, include numerous “stakeholders”: international oil and mining companies,4 developed countries, institutional investors and international organizations.

The SEC issued proposed rules to implement Section 13(q) in December 2010.5

The Final Rules

The final rules, like the proposed rules, largely track the language of Section 13(q).

Form SD. As proposed, the rules would have required the new disclosures to appear in annual reports filed with the SEC. However, as a result of comments from companies describing the difficulties they would have in preparing and timely providing the payment disclosure during the same time period for their annual reports, the adopting release provides that companies must file the information annually on a new Form SD.6 A resource extraction issuer will be required to file a Form SD not later than 150 days after the end of the issuer’s fiscal year.

Issuers must provide a brief statement in the body of the Form SD in an item entitled “Disclosure of Payments by Resource Extraction Issuers,” and direct investors to the payment information contained in an exhibit to the form. The exhibit must provide the payment information using the XBRL interactive data standard. In addition, the information is to be “filed” rather than “furnished,” making the disclosures subject to Exchange Act liability under Section 18. However, the information and documents filed in the Form SD will not be incorporated by reference into any filings made under the Securities Act of 1933 or the Exchange Act, unless the issuer specifically incorporates it by reference into a filing.

Item 2.01 of the new Form SD contains the substantive disclosure requirements mandated by the new rules as well as definitions of certain terms and instructions that assist in interpreting many of the critical terms used in the new rules. Under Item 2.01, the following information regarding the most recently completed fiscal year of the resource extraction issuer must be disclosed and filed annually:

  • The type and total amount of payments made for each project;
  • The type and total amount of payments made to each government;
  • The total amounts of the payments, by category
  • The currency used to make the payments;
  • The financial period in which the payments were made;
  • The business segment of the 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 issuer to which the payments relate.

Compliance Date. Resource extraction issuers will be required to comply with the new rules with respect to their fiscal years ending after September 30, 2013. As noted above, a Form SD must be filed with the SEC not later than 150 days after the end of the issuer’s fiscal year. Therefore, for resource extraction issuers having a calendar fiscal year, their first Form SD will be required to be filed on or before May 30, 2014. For the first report filed for a fiscal year ending after September 30, 2013, the report may cover only a partial year’s information. For example, a calendar fiscal year issuer having a December 31, 2013 fiscal year-end will only be required to file a report disclosing payments made from October 1 to December 31, 2013.

Rule 13q-1. The rules add a new Rule 13q-1 under the Exchange Act,7 which contains the basic requirement for resource extraction issuers to file their payment information reports on Form SD, and includes definitions of “resource extraction issuer” and “commercial development of oil, natural gas or minerals.”


The definition of “resource extraction issuer” in the final rules tracks the definition contained in Section 13(q). The rules apply to all resource extraction issuers that are required to file an annual report with the SEC and that engage in the commercial development of oil, natural gas or minerals, whether or not they are US companies. The rules contain no exemptions for smaller reporting companies or foreign private issuers.8


The final rules basically adopt Section 13(q)’s definition of “commercial development of oil, natural gas, or minerals,” as including “exploration, extraction, processing and export of oil, natural gas or minerals, or the acquisition of a license for any such activity.” The adopting release confirms that the definition is intended to capture only activities that are directly related to the commercial development of these resources, and not those that are merely ancillary or preparatory to commercial development. Thus, mining and oilfield service and equipment companies would not be considered to be engaged in commercial development of a covered resource, nor would transportation activities (such as natural gas transmission pipeline operations). However, payments with respect to post-extraction field processing of natural gas in order to remove chemical impurities from the gas and ready the gas for entry into the transportation pipeline, would be included.

The adopting release includes additional examples of what the SEC intends to be included by the terms “processing” and “export.” “Processing” is meant to include the crushing and processing of raw ore prior to smelting, but not the refining or smelting activities themselves. The adopting release states that “export” includes the export of oil, natural gas or minerals from the host country; an issuer engaged in the business of exporting any of these resources, but not engaged in any extraction activities, may be considered to be a “resource extraction issuer” required to provide payment disclosures. Recognizing the difficulty in drawing lines in this area (for example, payments made for transportation of the resources are not required to be reported unless they are transported for export purposes), the instructions to Item 2.01 of Form SD include an “anti-evasion” provision to cover situations where the characterization of a particular commercial development activity may be part of a plan or scheme to evade the disclosure requirements under the rules.

The adopting release points out that the definition of commercial development in Section 13(q) is broader than the activities covered by the EITI guidelines, and indicated that the SEC felt it important that the definition remained consistent with the scope of the statute.


“Payment” under the final rules is defined as a payment that is:

  • Made to further the commercial development of oil, natural gas, or minerals;
  • Not de minimis; and
  • Inclusive of taxes, royalties, fees, production entitlements, bonuses, dividends and payments for infrastructure improvements.

The final rules provide that only payments falling in the specified list of payment types are intended to be covered, recognizing that those payments are part of the “commonly recognized revenue stream” for the commercial development of resources as Section 13(q) contemplated.

Not de minimis. The proposed rules did not define “not de minimis.” In response to numerous comments, the final rules adopted a threshold of $100,000 (whether in a single payment or a series of related payments), below which companies are not required to disclose their payments. Where arrangements call for related periodic payments or installments, the issuer must consider the aggregate sum of the payments or installments in making its determination. The adopting release emphasizes that in any event, the standard of not de minimis is not intended to equate to a materiality standard.

Dividends and Payments for Infrastructure Improvements. “Dividends” and “payments for infrastructure improvements” were added to the list of payments requiring disclosure under the final rules. If dividends are paid to a host government in lieu of production entitlements or royalties (such as where a national oil company owns shares of a holding company formed to develop the resources), the dividends must be disclosed. However, dividends paid to governments that hold common or ordinary shares of the issuer need not be disclosed so long as the government is treated the same as the other shareholders. Payments for infrastructure improvements, such as roads or railways, were added because these types of payments, whether by contract or otherwise, often further the commercial development of the resource.9

Additional Instructions. Examples of types of “bonuses” (signing, discovery and production bonuses) and “fees” (license fees, rental fees, entry fees and other considerations for licenses or concessions) intended to be covered by the rules are provided in the instructions to Item 2.01 of Form SD. Another instruction clarifies that payments for taxes levied on corporate profits, corporate income and production are intended to be disclosed, but not payments for taxes levied on consumption, such as valueadded taxes, personal income taxes or sales taxes. Commenters had expressed concerns about the difficulty in allocating certain taxes paid that were levied at the issuer’s entity level to individual projects. The final rules contain an instruction that in those instances, issuers may disclose those payments at the entity level, and not at the project level.10

Additionally, the final rules include an instruction to Item 2.01 clarifying that resource extraction issuers must disclose in-kind payments—such as, making a payment to the host government expressed in quantities of crude oil. The issuer must determine the monetary value of the in-kind payment and tag the information required for currency disclosure as “in-kind.” The instruction permits the issuer to value the in-kind payment at cost or, if cost is not determinable, at its fair market value, and requires a brief description of how the issuer calculated the monetary value.

The instructions also permit the issuer to report the payments either in US dollars or in the issuer’s reporting currency. If payments are made in currencies other than US dollars or the issuer’s reporting currency, the issuer can choose one of three available methods of determining how the currency conversion should be calculated. The issuer must disclose the conversion method that it uses.

Financial Reporting. Consistent with Section 13(q) and the proposed rules, the final rules do not require the resource extraction payment information to be audited or provided on an accrual basis. In addition, final rules require that the business segment of the issuer that made the payments be identified and tagged in XBRL. A resource extraction issuer’s “business segment” is intended to be consistent with the reportable segments employed by the issuer for financial reporting purposes.

Payments by Subsidiaries. Disclosure is required for payments made by the resource extraction issuer, any of its subsidiaries or an entity under the control of the issuer.11 Whether an entity is under the “control” of an issuer is a fact-determinative question, but, at a minimum, if the subsidiary or other entity is included in the issuer’s consolidated financial statements filed with its Exchange Act reports, then the subsidiary or entity would be deemed to be a controlled entity for purposes of the rules.


A “foreign government” is defined in the final rules to include a department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as well as a subnational government, such as a state, province, district or territory. For resource extraction activities conducted in the United States, reporting would only be required with respect to payments to the US federal government, and not to states, counties or other subnational governments within the United States. The final rules clarify that if a company is at least majority-owned by a foreign government, that company falls within the definition of a foreign government.


The term “project” was left undefined in the final rules.12 As noted above, many commenters had expressed concerns that Section 13(q) requires disclosures at a per-project level, and the EITI does not, thereby placing SEC-reporting companies at a competitive disadvantage. Some argued that defining “projects” as “material projects” would be consistent with traditional SEC disclosure concepts and permit companies to aggregate data from multiple agreements and projects in a particular country, geologic basin or province. In this way, the potential for competitive harm could be mitigated, but still result in more granular disclosure than that required under the EITI.13

The fact that “project” is not defined in the adopted rules may give companies some leeway in their ability to apply the term to their particular business context, depending on factors such as the size of the company or the segment of the industry in which the company operates. The adopting release provides some guidance on what the SEC believes a project should be, noting that contracts for commercial development of oil, natural gas or minerals between a resource extraction issuer and a government routinely define the relationship and payment flows between them, and thereby provide a basis for determining the payments and required payment disclosure that would be associated with a particular project.14


Some companies expressed concerns that they were subject to contractual confidentiality obligations owed to certain host country governments, or that making the payment disclosures required by Section 13(q) was prohibited by the laws of certain foreign countries in which they operate. Many urged that an exemption be made in those cases, noting that the oil and gas reserves disclosure rules adopted by the SEC in 2008 had carved out an exemption for reserves disclosures in a country where disclosure of that country’s reserves was prohibited by law.15 However, the final rules did not include any such exemptions.

Practical Considerations

It remains to be seen whether these payment disclosure rules will competitively damage resource extraction issuers or result in greatly increased costs for them as a result of compliance costs and lost opportunities with host governments having non-disclosure laws. The adopting release had noted that the SEC staff was developing taxonomy for the payment information, and on August 29, 2012, the staff posted that it was seeking public comment on draft Form SD taxonomy, with comments due by October 31, 2012.16 Thus, resource extraction issuers have one more opportunity, albeit a limited one, to comment, and each issuer is advised to review the draft taxonomy carefully. Because the new rules define many of their critical terms broadly, there will be numerous questions regarding their interpretation. For example: when are payments of taxes and fees to a government by a natural gas pipeline company engaging in both host-country domestic and cross-border gas transmission activities considered payments made for the purpose of transporting the gas for export purposes? The adopting release points out that transportation activities are generally not included in the definition of “commercial development” unless those activities are directly related to the export of the covered resource.17

Many companies’ comments reflected concerns that there would be considerable start-up time and expense required in order to be ready to comply with the new rules. Some noted that implementation would include IT consulting, training, travel costs, establishing new reporting and accounting systems, training local personnel on tracking and reporting and developing guidance to ensure consistency across reporting units. Others noted that because their existing reporting processes and accounting systems were based on the accrual method of accounting and required certain payments to be capitalized, the rules will require their accounting groups to develop new information systems, processes and controls.

Filing the disclosures under the new rules will not begin until 2014 for most resource extraction issuers. However, companies should nonetheless begin a review of their systems and controls for financial accounting and financial reporting to determine what additional procedures and processes they may need in order to report the payments required to be disclosed under Section 13(q). Additional disclosure controls and procedures may need to be implemented in order to track payments by subsidiaries and controlled joint ventures to governments and government-controlled entities.

For many companies, existing procedures in place for tracking and recording subsidiaries’ payments to foreign governments for Foreign Corrupt Practices Act purposes may mean that only minor tweaks to existing controls and processes are necessary. On the other hand, if it appears that significant modifications to a company’s systems and controls are needed in order to capture and report the requisite payment data, then the lead time to be prepared to comply with the new disclosure requirements will be significantly longer.