On May 30, the staff of the SEC’s Division of Corporation Finance published answers to nine frequently asked questions relating to Exchange Act Rule 13q-1, which requires U.S. and foreign “resource extraction issuers” to provide annual disclosures on Form SD regarding certain payments of $100,000 or more made to governments (including the U.S. federal government) and governmental entities in connection with the commercial development of oil, natural gas or minerals. Rule 13q-1 and Item 2.01 of Form SD set forth the disclosure requirements implementing Section 13(q) of the Exchange Act, which was added by Section 1504 of the Dodd-Frank Act.
The purpose of the disclosures is to increase the transparency of payments made to governments by issuers engaged in extraction activities in the oil, natural gas and minerals industry by requiring information about the type and total amount of all payments made for each project to each government. The disclosure requirements became effective on November 13, 2012 and first apply for fiscal years of resource extraction issuers ending after September 30, 2013. The disclosure on Form SD must be filed within 150 days after the end of the issuer’s fiscal year. For issuers whose fiscal year corresponds with the calendar year, the first report on Form SD is due by May 30, 2014 for the payment period from October 1, 2013 through December 31, 2013.
Resource extraction issuer
Rule 13q-1 defines a “resource extraction issuer” to mean any U.S. or foreign company that is required to file with the SEC an annual report on Form 10-K, Form 20-F or Form 40-F and that engages in the commercial development of oil, natural gas or minerals. This broad definition encompasses government-owned and government-controlled issuers. The staff provides guidance in its FAQs on the types of companies subject to the rule.
- Controlled entities included. An issuer that is not engaged in the “commercial development” activities listed in Rule 13q-1, but has subsidiaries or other entities under its “control” that are conducting such activities, is considered a resource extraction issuer. (FAQ 1)
- Service providers not included. An issuer that provides services associated with exploration, extraction, processing and export of a resource generally is not considered a resource extraction issuer. By way of example, the staff refers to issuers providing hardware and logistics to help a company explore for resources, or providing hydraulic fracturing or drilling services to help an operator extract the resources. The staff cautions, however, that if a service provider makes a payment on behalf of a resource extraction issuer that is within the rule, the resource extraction issuer must disclose the payment. (FAQ 2)
Scope of terms “minerals” and “export”
Rule 13q-1 requires issuers to disclose certain payments in connection with the “commercial development of oil, natural gas, or minerals,” which the rule defines to include the “exploration, extraction, processing, and export of oil, natural gas, or minerals, or the acquisition of a license for any such activity.” In the FAQs, the staff provides guidance on the scope of “minerals” and activities that constitute “export.”
- Scope of “minerals.” The staff clarifies in the FAQs that the term “minerals” encompasses “any material commonly understood to be a mineral.” The staff indicates that the term specifically includes any material for which disclosure would be required under the SEC’s Industry Guide 7, “Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations,” without regard to any test of materiality used for purposes of Industry Guide 7. (FAQ 3)
- Scope of “export.” The definition of “commercial development” refers to the “export” of oil, natural gas or minerals, but not to the transportation of the resources. The staff advises that an issuer that is merely transporting a resource from one country to another without an ownership interest in the resource generally is not considered engaged in exporting activity, and therefore would not be viewed by the staff as a resource extraction issuer. The issuer, however, will be considered engaged in the export of a resource it transports from one country to another if it has an ownership interest in the resource. (FAQ 4)
A resource extraction issuer must disclose covered payments made by it to a foreign government or the U.S. federal government during the fiscal year covered by the issuer’s annual report. The issuer is required to disclose any payment that (1) is made to further the commercial development of oil, natural gas or minerals, (2) is “not de minimis” and (3) is one of the types of payments listed in Item 2.01 of Form SD. The rule defines as “not de minimis” any payment, whether made as a single payment or a series of related payments, that equals or exceeds $100,000 during the issuer’s most recent fiscal year. The staff provides the following guidance on how to identify and disclose covered payments.
- Payments to governmental transportation services not included. Payments to a majority-owned governmental transportation service supplying people or materials to an extractive job site do not constitute resource extraction payments. Payments of this nature are considered “ancillary or preparatory” to the commercial development activities described in Rule 13q-1 and therefore do not trigger the disclosure requirements. (FAQ 5)
- Penalties and fines not included. The definition of the term “payment” includes fees and other material benefits determined by the SEC, consistent with the Extractive Industries Transparency Initiative (EITI) guidelines referred to in the Dodd-Frank Act and the SEC’s resource extraction rule release, to be part of the “commonly recognized revenue stream for commercial development of oil, natural gas and minerals.” Penalties and fines, however, are not specifically mentioned in the EITI guidelines. As a result, the staff advises that these payments are not subject to disclosure. (FAQ 6)
- No reporting of payment information on accrual basis. The staff advises that a resource extraction issuer is not permitted to provide the payment information on an accrual basis. The applicable disclosure provisions require the issuer to present payment information on an unaudited, cash basis for the year in which the payments are made. (FAQ 7)
- Flexibility to segregate commercial development income. A resource extraction issuer with multiple sources of income in a particular country may segregate income generated by commercial development activities (consisting of exploration, extraction, processing or export) in order to disclose only corporate-level income taxes paid on that income, but is not required to do so. An issuer that does not segregate its income from commercial development may disclose its aggregate income tax payments and indicate that the payments include payments made for purposes other than commercial development activities. (FAQ 8)
Late filings of Form SD
The staff also provides guidance concerning late filings of the Form SD report.
- Late filing does not affect Form S-3 eligibility. The staff confirms that failure to file the Form SD regarding payments by resource extraction issuers by the filing deadline will not cause an issuer to lose eligibility to use the Form S-3 short form registration statement for securities offerings. The requirement in Form S-3 that the issuer file in a timely manner all reports and other material during the prior twelve calendar months applies only to reports required to be filed under Section 13(a) or 15(d) of the Exchange Act and information required to be filed under Section 14(a) or 14(c) of the Exchange Act. Because the resource extraction payment disclosures in Form SD are required by Section 13(q) of the Exchange Act, a late Form SD filing will not affect an issuer’s ability to use Form S-3. (FAQ 9)