United States: US SEC Proposes Resource Extraction Issuer Payment Disclosure Rules … Again

Keywords: SEC, Securities and Exchange Commission,

On December 11, 2015, the Securities and Exchange Commission (SEC) proposed resource extraction issuer payment disclosure rules (the Proposal).1 The SEC proposed these regulations in response to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 13(q) to the Securities Exchange Act of 1934 (the Exchange Act), directing the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the federal government for the purpose of the commercial development of oil, natural gas, or minerals. This is the second time that the SEC has proposed such rules.

In August 2012, the SEC adopted resource extraction issuer payment disclosure rules, but those rules were vacated in July 2013 by the US District Court for the District of Columbia. In September 2015, the US District Court for Massachusetts ordered the SEC to file an expedited schedule for promulgating the final resource extraction issuer payment disclosure rules. According to the expedited schedule that the SEC proposed to the court, the SEC is to vote on the adoption of a final rule in June 2016.

The Proposal would require resource extraction issuers to disclose payments made to US federal or foreign governments for the commercial development of oil, natural gas or minerals. The Proposal includes a proposed Rule 13q-1 under the Exchange Act, as well as an amendment that would add a new Section 2 to Form SD, titled "Resource Extraction Issuer Disclosure and Report." (Form SD is the same form currently used for conflict minerals reporting.) Proposed Rule 13q-1 contains the basic requirement for resource extraction issuers to file their payment information reports on Form SD. The specific disclosure requirements for resource extraction issuer payment disclosure, as well as key definitions, are set forth in the proposed amendments to Form SD.

Required Disclosure

As proposed, resource extraction issuer payment disclosures would have to be filed annually on a Form SD not later than 150 days after the end of the issuer's fiscal year.

Issuers would have to provide a brief statement in the body of Item 2.01 of Form SD directing investors to the payment information contained in an exhibit to the form. The exhibit must provide the payment information using the XBRL interactive data standard. The proposed disclosure would be made at the "project" level.

Information that is disclosed pursuant to the Proposal would be "filed" rather than "furnished," making the disclosures subject to liability under Section 18 of the Exchange Act. However, the information and documents filed in the Form SD will not be deemed to be incorporated by reference into any filing made under the Securities Act of 1933 or the Exchange Act unless the issuer specifically incorporates it by reference into such filing.

Under proposed Item 2.01 of the Form SD, the following information regarding the most recently completed fiscal year of the resource extraction issuer must be disclosed and filed annually:

  • The type and total amount of payments made for each project;
  • The type and total amount of payments for all projects made to each government;
  • The total amounts of the payments made, by category;
  • The currency used to make the payments;
  • The financial period in which the payments were made;
  • The business segment of the issuer that made the payments;
  • The governments that received the payments, and the country in which each such government is located;
  • The project of the issuer to which the payments relate;
  • The particular resource that is the subject of commercial development; and
  • The subnational geographic location of the project.

The Proposal expressly permits a resource extraction issuer to satisfy its disclosure obligations under Item 2 of Form SD by including, as an exhibit, a report complying with the requirements of any alternative reporting regime that the SEC deems to be substantially similar to the requirements of Rule 13q-1.2 In this situation, the issuer would have to state, in the body of Form SD, that it is relying on the alternate reporting provision of Form SD, identifying the alternative reporting regime for which the report was prepared. The issuer would have to specify that the payment disclosure is included in an exhibit and state where the report was originally filed.

An activity or payment that does not fall within the categories specified in the Proposal would nevertheless need to be disclosed if it is part of a plan or scheme to evade the required disclosure.

Reporting Persons

All resource extraction issuers would have to make the proposed payment disclosures, without regard to whether they are domestic or foreign issuers. The Proposal defines "resource extraction issuer" as an issuer that is required to file an annual report with the SEC pursuant to Section 13 or 15(d) of the Exchange Act and that engages in the commercial development of oil, natural gas or minerals. "Commercial development of oil, natural gas, or minerals" is defined as exploration, extraction, processing and export of oil, natural gas or minerals, or the acquisition of a license for any such activity.

Resource extraction issuers would have to disclose payments made by a subsidiary or controlled entity, as well as direct payments made by the issuer. An entity is controlled if the issuer consolidates the entity or proportionately consolidates an interest in an entity or operation under the accounting principles applicable to the financial statements included in the resource extraction issuer's periodic reports filed pursuant to the Exchange Act.

According to the proposing release, the SEC would not consider an issuer providing only services that support the exploration, extraction, processing or export of such resources to be a resource extraction issuer. However, if the service provider makes a payment to a government on behalf of a resource extraction issuer, the resource extraction issuer would have to disclose such payments.

No Exemptions for Violations of Foreign Law or Categories of Issuers

The Proposal would require resource extraction issuers to disclose the payment information publicly, including the identity of the issuer. The Proposal does not include any express exemptions, even in situations where public disclosure of the payment by the resource extraction issuer would violate the laws of a foreign jurisdiction. Instead, the proposing release states that resource extraction issuers could apply for, and the SEC would consider, exemptive relief on a case-by-case basis under the SEC's existing authority under the Exchange Act "if and when warranted."

Similarly, there are no exemptions for categories of issuers that fall within the definition of resource extraction issuer. For example, no exemption has been proposed based on size, ownership, foreign private-issuer status or extent of business operations constituting commercial development of oil, natural gas or minerals.

Other Key Terms

"Payment" is defined under the Proposal as a payment that is:

  • Made to further the commercial development of oil, natural gas or minerals;
  • Not de minimis; and
  • One or more of the following: taxes, royalties, fees, production entitlements, bonuses, dividends and payments for infrastructure improvements.

While payments with respect to infrastructure improvements, such as building a road or railway to further the development of oil, natural gas or minerals, would be included as disclosable payments, the proposing release states that the Proposal would "not require a resource extraction issuer to disclose social or community payments, such as payments to build a hospital or school."

As set forth in Proposed Form SD, "not de minimis" means any payment, whether made as a single payment or a series of related payments, which equals or exceeds $100,000, or its equivalent in the issuer's reporting currency, during the fiscal year covered by the applicable Form SD. In the case of any arrangement providing for periodic payments or installments, a resource extraction issuer would have to consider the aggregate amount of the related periodic payments or installments of the related payments in determining whether the payment threshold has been met for that series of payments and, accordingly, whether disclosure is required.

For the purpose of the resource extraction issuer payment disclosure rules, a "project" means operational activities that are governed by a single contract, license, lease, concession or similar legal agreement, which form the basis for payment liabilities with a government. The definition expressly allows agreements that are both operationally and geographically interconnected to be treated by the resource extraction issuer as a single project. An instruction to Item 2.01 of Form SD provides the following non-exclusive list of factors to consider when determining whether agreements are operationally and geographically interconnected:

  • Whether the agreements relate to the same resource and the same or a contiguous part of a field, mineral district or other geographic area;
  • Whether the agreements will be performed by shared key personnel or with shared equipment; and
  • Whether they are part of the same operating budget.

The term "commercial development of oil, natural gas or minerals,"3 which is described above, plays a significant role in the Proposal, both in identifying a resource extraction issuer and for determining the payments that need to be disclosed. In turn, the terms export, extraction and processing are critical to an understanding of what constitutes commercial development of oil, natural gas or minerals.

The Proposal defines "export" as the movement of a resource across an international border from the host country to another country by a company with an ownership interest in the resource. Cross-border transportation activities by an issuer that is functioning solely as a service provider, with no ownership interest in the resource being transported, would not be considered to be export. "Extraction" is defined as the production of oil and natural gas, as well as the extraction of minerals.

While "processing" is not defined under the Proposal, an instruction to Item 2.01 of Form SD provides the following non-exclusive list of midstream activities that are included in the term:

  • Midstream activities such as the processing of gas to remove liquid hydrocarbons;
  • Removal of impurities from natural gas prior to its transport through a pipeline; and
  • Upgrading of bitumen and heavy oil, through the earlier of the point at which oil, gas, or gas liquids (natural or synthetic) are either sold to an unrelated third party or delivered to a main pipeline, a common carrier or a marine terminal.

According to this instruction, processing would also include the crushing and processing of raw ore prior to the smelting phase, but would not include the downstream activities of refining or smelting.

A "foreign government" is defined in the Proposal as a foreign a government, a department, agency or instrumentality of a foreign government, or a company at least majority owned by a foreign government. This term includes a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality or territory under a foreign national government.

Additional Instructions

The instructions to Item 2.01 of Form SD permit the issuer to report the payments either in US dollars or in the issuer's reporting currency. If payments are made in currencies other than US dollars or the issuer's reporting currency, the issuer can choose one of three available methods of determining how the currency conversion should be calculated. The issuer must disclose the conversion method that it uses.

The instructions provide examples of types of "bonuses" (signing, discovery and production bonuses) and "fees" (license fees, rental fees, entry fees and other considerations for licenses or concessions) intended to be covered by the rules. Another instruction clarifies that payments for taxes levied on corporate profits, corporate income and production are intended to be disclosed, but not payments for taxes levied on consumption, such as value-added taxes, personal income taxes or sales taxes. According to the instructions, if dividends are

paid to a host government in lieu of production entitlements or royalties (such as where a national oil company owns shares of a holding company formed to develop the resources), the dividends must be disclosed. However, dividends paid to governments holding common or ordinary shares of the issuer need not be disclosed so long as the government is treated the same as all other shareholders.

Additionally, the Proposal includes an instruction clarifying that resource extraction issuers must disclose in-kind payments — such as making a payment to the host government expressed in quantities of crude oil. The issuer must determine the monetary value of the inkind payment, and tag the information required for currency disclosure as "in-kind." The instruction permits the issuer to value the in-kind payment at cost or, if cost is not determinable, at its fair market value, and requires a brief description of how the issuer calculated the monetary value.


The SEC has requested comments on more than 80 specific topics. For example, the SEC has asked whether it should exempt categories of issuers, such as smaller reporting companies, emerging growth companies or foreign issuers, from the provisions of the rule. The SEC has also asked if its proposed case-by-case approach to exemptions where a host country has laws prohibiting the required disclosure is better than a rule-based blanket exemption. In addition, the SEC has requested comment on how "project" should be defined. The SEC has also sought input on letting issuers submit foreign reports in satisfaction of SEC requirements.

The SEC created a two-prong comment period. Initial comments on the Proposal are due by January 25, 2016. Reply comments, which are limited only to issues raised in the initial comment period, are due by February 16, 2016.

Compliance Date

Resource extraction issuers will be required to comply with the new rules with respect to their fiscal years ending no earlier than one year after the effective date of the adopted rules. As noted above, a Form SD must be filed with the SEC not later than 150 days after the end of the issuer's fiscal year. According to the proposing release, the SEC intends to select a specific compliance date that corresponds to the end of the nearest calendar quarter, such as March 31, June 30, September 30 or December 31. For example, if June 17, 2017, was one year after the effective date of the final rules, a resource extraction issuer with a fiscal year end of June 30, 2017, or later, would be required to file its first resource extraction payment report no later than 150 days after such fiscal year end.

Practical Considerations

SEC reporting companies involved in the oil, natural gas or mining industries, even if such activities are not the primary focus of their business, will need to carefully assess whether they may be subject to the Proposal's reporting obligations, particularly when they have foreign or offshore operations. While reporting companies that are engaged in exploration or extraction of oil, natural gas or minerals pursuant to a lease, license or concession granted by a foreign government or the US federal government are the most likely to be subject to the Proposal, companies engaged in related activities, such as processing (including midstream operations and the ownership or processing facilities) and export of oil, gas and minerals, should carefully review the nature of such activities and the nature of any payments made to government entities.

There may be considerable start-up time and expense required in order to be ready to comply with the rules once finalized. These could include IT consulting, training, travel costs, establishing new reporting and accounting systems, training local personnel on tracking and reporting and developing guidance to ensure consistency across reporting units. Some companies may need their accounting groups to develop new information systems, processes and controls.

Since the time the SEC originally adopted the resource extraction issuer payment disclosure rules that were subsequently vacated, other jurisdictions have adopted or proposed comparable payment disclosures rules. Nevertheless, it remains to be seen whether the proposed rules will competitively damage resource extraction issuers or result in greatly increased expenditures for them as a result of compliance costs and lost opportunities with host governments having non-disclosure laws.

The filing of the disclosures required by the Proposal is not likely to begin until 2018 for most companies. However, companies that fall within the definition of resource extraction issuer should nonetheless begin a review of their systems and controls for financial accounting and financial reporting to determine what additional procedures and processes they may need in order to report the payments required to be disclosed under the Proposal. Additional disclosure controls and procedures may need to be implemented in order to track payments by subsidiaries and controlled joint ventures to governments and government-controlled entities.

For companies with existing procedures for tracking and recording subsidiaries' payments to foreign governments for Foreign Corrupt Practices Act purposes, it is possible that only minor tweaks to existing controls and processes may be necessary. On the other hand, if it appears that significant modifications to a company's systems and controls are needed in order to capture and report the requisite payment data, then the lead time to be prepared to comply with the new disclosure requirements will be significantly longer.

Since Form SD is not part an issuer's annual report on Form 10-K, quarterly report on Form 10-Q or periodic report on Form 8-K,4 the resource extraction issuer payment disclosures would not be subject to certification by the chief executive officer and chief financial officer of the issuer.

Companies that are affected by the proposal should consider submitting comments to the SEC before the January 25, 2016, deadline. They should also review comments submitted by others since the SEC is permitting reply comments, in response to issues raised during the initial comment period, to be submitted by February 16, 2016.

The resource extraction issuer payment disclosure rules have been subject to litigation from both ends of the political spectrum, with litigation challenging the SEC's initial rules followed by litigation demanding that the SEC adopt rules in accordance with the Dodd-Frank mandate. It is possible that there could be additional litigation. However, as discussed above, there are steps companies should be taking to prepare for disclosure. Therefore, resource extraction issuers should not count on litigation delaying or overturning this Dodd- Frank mandate; they should use the time available now to prepare for compliance.


1. Available at http://www.sec.gov/rules/proposed/2015/34-76620.pdf.

2. In the proposing release, the SEC indicated that it expects that it will publish by order any determinations it makes about the similarity of any alternative reporting regime.

3. Section 13(q) of the Exchange Act defines "commercial development of oil, natural gas or minerals" as including 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.

4. Form 20-F, Form 40-F and Form 6-K, as applicable, in the case of foreign private issuers.

Originally published 22 December 2015

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© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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