The Securities and Exchange Commission (“SEC”) recently adopted rules to implement Section 13(q) of the Securities Exchange Act of 1934, as amended, requiring resource extraction issuers to disclose certain payments made to the U.S. government or foreign governments (the “Section 13(q) Rules”). The Section 13(q) Rules, which are mandated by the Dodd-Frank Act, target resource extraction issuers, or companies engaged in the development of oil, natural gas, or minerals. Section 13(q) is intended to support the federal government’s commitment to international transparency efforts in the oil, natural gas, and mining industries, such as the Extraction Industries Transparency Initiative.
These new disclosure rules apply with respect to payments whether or not they involve corrupt activity. Nonetheless, the rules are viewed as adjuncts to U.S. anticorruption policies centered on the Foreign Corrupt Practices Act (“FCPA”).
The Section 13(q) Rules apply to all U.S. and foreign companies that are engaged in commercial development of oil, natural gas, or minerals and that are required to file annual reports with the SEC, regardless of the size of the company or the breadth of its business operations constituting the commercial development of oil, natural gas, or minerals. The rules require reporting to the extent that covered activity is being pursued by any of the issuer’s subsidiaries, any of its joint ventures, or other entities under the control of the issuer. This means that the disclosure requirements apply to an issuer even if its own business is not related to commercial development of oil, natural gas, or minerals, if a controlled entity is engaged in such development.
Resource extraction issuers are required to disclose payments that are: (1) made to further commercial development of oil, natural gas, or minerals; (2) “not de minimis” (defined as a single payment or series of payments that equals or exceeds $100,000 during the most recent fiscal year); and (3) among the types of payments specified in the rules (i.e., taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and infrastructure improvements). To satisfy these disclosure requirements, the Section 13(q) Rules require that covered issuers provide the following information on the new SEC Form SD:
- 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 resource extraction issuer that made the “payments.”
- The government that received the “payments” and the country in which the government is located.
- The “project” of the resource extraction issuer to which the “payments” relate.
The Dodd-Frank Act and the Section 13(q) Rules define “payment” as a payment that is not de minimis, that is made to further the commercial development of oil, natural gas, or minerals, and includes specified types of payments, as noted above. Thus, in determining whether disclosure is required, resource extraction issuers will need to consider whether they have made payments that fall within the specified types and otherwise meet the definition of “payment.”
“Foreign government” includes a foreign national government and a foreign subnational government, including states, provinces, counties, districts, municipalities, and territories. Notably, the Section 13(q) Rules specify that the term “foreign government” encompasses companies and enterprises in which a foreign government owns a majority stake. The FCPA, on the other hand, employs the term of art “foreign official” to identify individuals corrupt payments to whom are forbidden by that statute. The FCPA does not expressly establish that the term “foreign official” encompasses employees of government owned or controlled business enterprises, but U.S. authorities have generally construed the FCPA’s definition of “foreign official” to embrace such individuals.
The Section 13(q) Rules leave the term “project” undefined, which will give rise to uncertainty about how the rules apply in various contexts. The SEC has advised, however, that “project” could be defined by reference to a specific contract relating to the commercial development of oil, natural gas, or minerals.
The Section 13(q) Rules do not include an exception from disclosure requirements for payments to foreign governments when host country laws forbid disclosure as contemplated by the SEC rules. Commentators have advised that countries with respect to which disclosure-prohibition laws will present challenges include Angola, China, and Qatar. Assessments of this conflict-of-law issue–including possible application of the foreign sovereign compulsion doctrine–are ongoing.
The Section 13(q) Rules require resource extraction issuers to disclose the required information annually by filing a Form SD with the SEC beginning with fiscal years ending after September 30, 2013, and no later than 150 days after the end of the issuer’s most recent fiscal year. The information must be included as an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format. Because resource payment disclosures must be “filed with” rather than “furnished to” the SEC, they are subject to liability under Section 18 of the Securities Exchange Act of 1934.