The Securities and Exchange Commission (SEC) recently
re-proposed rules to create a new disclosure regime for payments
made to a government by domestic and foreign issuers that engage in
the commercial development of oil, natural gas and mining. The SEC
is accepting comments on the proposed rules until January 25,
Under the proposed rules, issuers required to file annual
reports with the SEC would be required to disclose payments made to
the U.S. federal government or a foreign government to further the
commercial development of oil, natural gas or minerals. The issuer
would also be required to disclose payments made by a subsidiary or
entity controlled by the issuer.
This is the SEC's second attempt to implement Section 1504
of the Dodd-Frank Act, which directs the SEC to create payment
disclosure rules for resource extraction issuers. On July 2, 2013,
the District Court for the District of Columbia struck down the
rules previously proposed.
The SEC had initially failed to adequately explain its refusal
to provide an exemption from disclosure for companies operating in
countries that prohibit the disclosures. To address this issue, the
SEC noted in the re-proposed rules that it would consider exemptive
relief from the requirements on a case by-case basis.
Highlights of the Proposed Rules
This development is of interest to the Canadian resource
industry. The rules have been proposed in consideration of the
recently enacted Extractive Sector Transparency Measures Act
(ESTMA), which imposes new mandatory reporting standards for
payments made by Canadian extractive companies, and to the rules
adopted by the European Union in the EU Accounting Directive and
the EU Transparency Directive (collectively, the "EU
Directives"). The proposed rules are meant to align
with these standards in the following respects:
The proposed rules define commercial
development of oil, natural gas or minerals to include exploration,
extraction, processing and export, or the acquisition of a license
for any such activity. This approach is meant to enhance
international transparency by covering activities similar to those
covered by ESTMA and the EU Directives.
The types of payments required to be
disclosed would include taxes, royalties, fees, production
entitlements, bonuses, dividends and payments for infrastructure
improvements. Payments (or a series of related payments) which
equal or exceed $100,000 during a fiscal year would have to be
Issuers would be required to provide
project-level reporting, with "project" defined as the
operational activities governed by a single contract, license,
lease, concession or similar legal agreement and that form the
basis for payment liabilities. The proposed definition of
"project" is intended to help reduce costs for issuers
listed in the U.S. and either Canada or the EU by not requiring
different disaggregation of project-related costs due to different
definitions of the term.
The required disclosure would include
(i) the total amount of payments to a government for each project,
(ii) the total amount of payments to each government in the
aggregate, (iii) the financial period in which the payments were
made, (iv) the business segment of the issuer, (v) the specific
projects to which such payments related, (vi) the resources that
are being developed, and (vii) the sub-national geographic location
of each project.
The proposed rules do not require the
disclosure of social or community payments.
The SEC has deviated from the standards established in Canada
and the EU by not requiring disclosure of payments to domestic
In recognition of international developments, issuers would be
able to satisfy the proposed disclosure requirements by filing a
report prepared for a foreign regulator or the Extractive
Industries Transparency Initiative as long as the report contains
information that is substantially similar to the disclosure
required by the proposed rules.
The proposed rules, along with ESTMA and the EU Directives, are
important global initiatives to promote greater transparency in
payments related to resource extraction in an effort to address
global corruption related to resource development in developed and
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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