The Dodd-Frank Wall Street Reform and Consumer Protection Act (US) was passed in July 2010, following the US financial crisis. Its aim was to promote reform with financial institutions and improve accountability and transparency in the financial system generally.
Under section 1504 of the Act, the US Securities Exchange Commission (SEC) adopted a new resource extraction rule, which required resource extraction issuers to file a new form on the SEC’s public database for its financial year ending after 30 September 2013. The new form required detailed information on payments made by companies to US or foreign governments.
The rule was recently vacated by a District Court for the District of Columbia who referred it back to the SEC for further proceedings, one assumes for amendment. So while it is currently of no force or effect, it is likely that the rule, in some form, will be reinstated. In light of this, companies should take advantage of the brief hiatus, note the requirements of section 1504 and prepare for substantial disclosures under an amended resource extraction rule.
Intention of the resource extraction rule under section 1504
The main aim of the resource extraction rule was to increase accountability and transparency between governments and resource extraction issuers. It was designed to help local communities in resource rich countries expose corrupt practices, and hold governments accountable to use revenues properly toward further development.
Companies that section 1504 applied to
The resource extraction rule under section 1504 applied to companies:
- engaged in the commercial development of oil, natural gas or minerals, and
- that needed to file annual reports with the SEC under the SecuritiesExchange Act 1934 (US).
These included companies involved in exploring, extracting, processing, exporting or ‘other significant actions’ relating to oil, natural gas or minerals, or who obtain a licence for any of those activities. The size of the company or the extent of their commercial development activities in oil, natural gas or minerals was irrelevant. Payments made by a subsidiary or another entity controlled by the issuer also needed to be disclosed.
Details of disclosures required
Companies needed to disclose certain payments made to the foreign governments, including the US government. The term 'foreign government' included state, provincial and municipal governments, as well as any company which is majority-owned by a foreign government.
Under section 1504, companies needed to disclose payments:
- made to further the commercial development of oil, natural gas, or minerals
- 'not de minimis' (defined by the rules to mean any payment, whether a single payment or a series of related payments, that equals or exceeds US$100,000 during the most recent financial year), and
- within the types of payments specified in the rules.
The following details were to be included:
- 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 payments, by category
- the currency used to make the payments
- the financial period in which the payments were made
- the business segment of the company that made the payments
- the government that received the payments, and the country in which the government is located, and
- the project to which the payments relate.
Form of disclosure
Companies needed to disclose the required information annually by filing a new form, Form SD, on the SEC's public database EDGAR. The information was to be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.
A resource extraction issuer was to file its first Form SD within 150 days of its financial year ending after 30 September 2013. All payments after 1 October 2013 were to be reported.
For the first report, most companies could have provided a partial report disclosing only those payments made after 30 September 2013. After that, a Form SD was to be filed annually, within 150 days of the company's financial year.
What needs to be done now
The US District Court for the District of Columbia vacated the rule on 2 July 2013, and referred it back to the SEC. The SEC may appeal the court’s ruling. Even if it does not and instead reconsiders and redrafts it as directed by the court, a resource extraction rule in some form is likely to be promulgated, with regular disclosures of payments to foreign governments probable. Several advocacy groups are strongly encouraging prompt action by the SEC.
As the rule was to commence in early 2014, many companies have already started work on determining how to comply with its disclosure requirements. While the rule is currently of no effect, companies should not cease their preparations for disclosure under a newly formulated version of the rule.
Companies should act now to check that their current data capture and reporting processes properly record this information in detail. They should also set up compliance programs, train staff and update IT systems where needed. Appropriate governance systems involving senior personnel should also be put in place to ensure that detailed information on payments to foreign governments is captured, so that future reporting requirements under a newly formulated resource extraction rule can be properly complied with.