On July 30, 2010, we informed you about provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that impose new disclosure requirements on publicly held mining companies. On December 15, 2010, the Securities and Exchange Commission (“SEC”) issued a series of releases setting forth proposed rules to implement the Dodd-Frank provisions on disclosure of payments by resource extraction issuers,1 along with conflict minerals1 and mine safety disclosure.1 The SEC is seeking public comment on the proposals, with a submission deadline of January 31, 2011.
The proposed rules on disclosure of payments by resource extraction issuers would implement Section 13(q) of the Securities Exchange Act of 1934, as amended, added by Section 1504 of Dodd-Frank. Section 13(q) directs the SEC to adopt rules requiring resource extraction issuers to disclose in annual reports information relating to payments made by them or entities under their control to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas or minerals.
The proposed rules would apply to any “resource extraction issuer,” defined as a company that is required to file annual reports with the SEC and engages in the commercial development of oil, natural gas or minerals. The rules would cover companies owned or controlled by governments, and would apply regardless of the extent of the company’s operations that constitutes commercial development of oil, natural gas or minerals. The SEC has not proposed to exempt smaller reporting companies or foreign private issuers from the definition, although it has requested public comment on this point.
“Commercial development of oil, natural gas or minerals” would be defined to include the activities of exploration, extraction, processing, export and other significant actions relating to oil, natural gas or minerals, or the acquisition of a license for any such activity. The SEC indicated that the proposed definition is intended to capture only activities that are directly related to commercial development, and not activities that are ancillary or preparatory to commercial development (such as transportation, or manufacture of components or machinery used in commercial development). “Other significant actions” is not defined in the proposed rules.
“Payment” would be defined to mean a payment that:
- is made to further the commercial development of oil, natural gas or minerals;
- is not de minimis; and
- includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the SEC, consistent to the extent practicable with the guidelines of the Extractive Industries Transparency Initiative (EITI), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.
The SEC indicated that the proposed rules are intended to capture payments made both in cash and in kind. Dividends and payments for infrastructure improvement are not included in the proposed definition. The proposed rules do not attempt to define “de minimis” or “other material benefits.” The SEC has requested comment on whether these aspects of the proposed rules are appropriate.
“Foreign government” would be defined to mean a foreign government, a department, agency, or instrumentality of a foreign government, or a company that is majority-owned by a foreign government, and would specifically include subnational governments (such as a state, province, county, district or municipality).
The proposed rules do not include a definition of the term “project,” although the SEC has requested comment on whether (and, if so, how) it should define this term.
Proposed Disclosure Requirement
Proposed new Item 105 of Regulation S-K would require a resource extraction issuer to provide in its Form 10-K information relating to any payment made by it, a subsidiary, or an entity under its control to a foreign government or the U.S. Federal Government during the fiscal year covered by the annual report for the purpose of the commercial development of oil, natural gas or minerals. The proposed rules also would amend Form 20-F and Form 40-F to require this information. The required disclosure would include:
- 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; and
- the project to which the payments relate.
Under the proposed rules, the required information would be set forth in two exhibits to the annual report, one of which would be in HTML or ASCII format, and the other of which would be in interactive data (XBRL) format. The issuer would be required to include in the body of its annual report a reference to the disclosure in the exhibits. The SEC has proposed that these exhibits would be furnished, rather than filed.
Unlike existing disclosure rules for oil and gas reserves, the proposed rules do not include any exceptions to the disclosure requirements to address confidentiality obligations or host country laws. The SEC has requested comment on whether the proposed rules could result in potential violations of law.
Section 13(q) requires the SEC to issue final rules governing payments disclosure by April 17, 2011. The final rules are to take effect for the fiscal year that ends not earlier than one year after the date that the SEC issues its final rules. As noted above, the deadline for submitting comments on the proposal is January 31, 2011. Affected companies should consider whether they wish to submit comments on the scope of the proposed definitions or disclosure requirements. As noted above, several terms used in the proposed rules remain undefined, and future interpretations of these terms may become critical to compliance. Companies also should begin planning now for the new disclosure obligations that will apply to them once the final rules become effective.