As seen in the June issue of Coal People
magazine.
Think beyond compliance. Providing the right information will
enable smart operators to shape the message existing and potential
investors receive under the new specialized SEC disclosure
regime.
Mine operators who are public companies have recently become
subject to additional Securities & Exchange Commission
("SEC") disclosure burdens. These obligations extend to
all mine operators – coal and metal / non-metal.
The passage of the Dodd Frank Wall Street Reform and Consumer
Protection Act ("Dodd Frank"), specifically section 1503
therein, imposes a series of specialized disclosure obligations for
securities issuers who are mine operators or who have subsidiaries
who are mine operators. Prior to Dodd Frank, Mine Operators had
substantially greater discretion as to what information must be
disclosed in their periodic reporting. At that time, the central
principle was that information that investors would find material
to the total mix of information available must be disclosed. With
the enactment of these specialized disclosure requirements,
operators' discretion to decide what information is material
has been lost.
In the abstract, the obligation to report this information is not
terribly alarming. However, the new disclosure regime ignores
several realities in the relationship between the Mine Safety and
Health Administration ("MSHA") and mine operators.
Disclosure of the required information alone, discussed below, does
not account for the fact that a substantial proportion of
MSHA's enforcement actions are subsequently reduced or vacated.
The SEC has explicitly stated that violations must still be
disclosed, even if they are subsequently reduced or vacated.
Dodd Frank Section 1503 became effective August 20, 2010. Now every
operator subject to the periodic reporting requirements of the
Securities Exchange Commission ("SEC") must, in every
regular periodic reporting disclose "for each coal or other
mine" the following information for that reporting period:
- Any pending legal action before the Federal Mine Safety and Health Review Commission
- The total number of S&S citations
- The total number of 104(b) withdrawal orders
- The total number of 104(d) unwarrantable failures
- The total number of 110(b)(2) flagrant violations
- The total number of 107(a) imminent danger orders
- The total dollar value of proposed assessments from MSHA
- The total number of mining related fatalities
- A list of mines that:
-
- are placed on a "pattern of violations"
- receive notice from MSHA that they will potentially be placed on a pattern of violations
While the statute imposing this obligation have been in effect
since August 2010, the SEC recently released a proposed rule
clarifying the disclosures necessary for compliance and imposing
additional reporting burdens as well.
In addition to now being required to disclose information about a
mine's citation history and compliance record in its regular
quarterly and annual reporting, the occurrence of certain events
will trigger an obligation to file a Form 8-K supplemental report.
This report must be submitted to the SEC within four days of the
triggering event. The issuance of a 107(a) imminent danger
withdrawal order, receipt of a potential pattern of violations
letter, or placement on a pattern of violations all require an
operator to file an 8-K within 4 days of their occurrence.
There are several causes for concern. Between the designations of
gravity, S&S, unwarrantable failure, and negligence, all
citations have a great deal of subjectivity built in. The new
disclosure regime requires operators to provide quarterly and
annual totals for the different categories of citations. Most
troubling, and perhaps even misleading to the investors these
disclosures are intended to inform, is that even if a citation is
subsequently reduced, modified or vacated, the SEC has stated that
such citations must still be reported. Similarly, one of the
required disclosures for each period is the cumulative dollar
amount of penalties assessed against the operator; the SEC has
stated that this amount must include all citations that are being
contested.
Although these disclosure obligations are imprecise and can do
damage to an operator's reputation and stock price, there are
ways this damage can be mitigated. The SEC has stated that while
certain information must be provided, operators may
also provide additional information. It is up to the Operator
to provide the additional information necessary to ensure that the
information provided to investors accurately represents the
enforcement relationship. For example, operators are required to
provide cumulative totals of S&S and unwarrantable failure
violations for each reporting period. Per the SEC's guidance,
these totals must include citations that are subsequently modified
or vacated. Disclosing this information without further explanation
will give investors information that is inaccurate and is likely
more negative than in reality.
As discussed above, in addition to the disclosures required in
operators' regular quarterly and annual reporting, the
occurrence of certain events trigger an obligation to file a Form
8-K supplemental report within four days. One of these triggering
events is the issuance of a 107(a) imminent danger order. Like many
enforcement actions, 107(a) orders are sometimes improperly issued
and subsequently vacated. Under the new disclosure regime, the
damage will be done long before any expedited hearing could come
before the Federal Mine Safety and Health Review Commission. In
such situations, providing the right information is critical to
ensure that investors understand the operator's position and
ongoing commitment to safe mining operations.
These new burdens impose additional challenges in an already
complex industry. By being proactive, operators can ensure that
they are equipped to provide investors with the accurate,
comprehensive information needed to make the right investment
decisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.