United States: SEC Re-Proposes Disclosure Rules For Payments By Resource Extraction Issuers

The SEC recently published for public comment proposed Rule 13q-1 under the Securities Exchange Act of 1934 (Exchange Act) and proposed revisions to Form SD. Together, these proposals would require a public company that qualifies as a "resource extraction issuer" to publicly disclose in an annual report on Form SD information relating to any single "payment" or series of related "payments" made by the issuer, its subsidiaries or controlled entities of $100,000 or more during the fiscal year covered by the Form SD to a "foreign government" or the U.S. federal government for the "commercial development of oil, natural gas, or minerals" on a "project"-by-"project" basis. The SEC's proposing release can be found here. References in this alert to the "rules" or the "proposed rules" mean proposed Rule 13q-1 and the proposed revisions to Form SD.

The proposed rules would implement the disclosure provisions of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC previously adopted rules to implement Section 1504, but those rules were challenged and ultimately vacated and remanded by the United States District Court for the District of Columbia (D.C. Circuit) in July 2013.1 When the SEC did not take action on the remanded rules, Oxfam America filed a lawsuit challenging the SEC's failure to adopt final rules. Earlier this year, a federal court ordered the SEC to expeditiously finalize the rules. The SEC informed the court that it proposed to hold a vote on the adoption of final rules by June 27, 2016, which the SEC indicated was "an extremely expedited timeframe within which to complete this rulemaking." As a result, it remains to be seen whether the SEC will comply with this deadline for adopting final rules.

The proposed rules are in many ways similar to payment disclosure rules adopted by the European Union and Canada, and are substantially similar to the SEC's prior rules. However, the proposed rules contain a few important differences from the SEC's prior rules:

  • resource extraction issuers could apply for, and the SEC would consider, exemptive relief on a case-by-case basis, but if an issuer is already making the disclosures under another regulatory disclosure regime, it would have a heavy burden to demonstrate that an exemption is necessary;
  • resource extraction issuers could comply with all or part of the rules by publicly filing on Form SD a report prepared to comply with foreign reporting requirements or the U.S. Extractive Industries Transparency Initiative (USEITI) if the SEC determines those alternative requirements are substantially similar to the SEC's proposed rules;
  • the term "project" is defined to mean operational activities governed by a single legal agreement that forms the basis for payment liabilities with a government and contemplates that multiple agreements may be treated as a single project under certain circumstances; and
  • the list of payment information that would be required to be disclosed in XBRL is increased to include (1) the particular resource that is the subject of commercial development and (2) the subnational geographic location of the project.

Based on the D.C. Circuit's comments regarding the SEC's lack of responsiveness to issuers' concerns in connection with the prior rules, affected issuers should consider providing comments on the proposed rules. Initial comments are due by January 25, 2016. Reply comments, which may respond only to issues raised in the initial comment period, are due by February 16, 2016. In developing the final rules, the SEC may rely on both new comments and comments that have been received to date, including those provided in connection with the SEC's prior rules. Based on the volume of SEC comment requests contained throughout the proposing release, the final rules may vary significantly from the proposed rules.

Resource extraction issuers generally would be required to comply with the rules starting with their first fiscal year that ends no earlier than one year after the effective date of the final rules. When the SEC adopts final rules, it intends to select a specific compliance date that corresponds to the end of the nearest calendar quarter. 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 (the SEC's hypothetical selected compliance date) or later would be required to file its first resource extraction payment report no later than 150 days after its fiscal year end.

Despite the SEC's intentions to adopt a final rule by June 2016, any rule that is adopted could be subject to challenge. The likelihood of challenge is increased by the fact that the SEC retained the public disclosure requirement for the required payment information, which was one of the reasons that the D.C. Circuit vacated the prior rules. The D.C. Circuit's other grounds for vacating the prior rule – the SEC's decision to deny any exemption where the disclosure was legally prohibited was arbitrary and capricious – was not fully addressed either. The SEC again did not provide a blanket exemption from the rules where disclosure is legally prohibited, but did indicate that it would consider using its exemptive authority to provide disclosure relief, where warranted. Only time will tell if the proposed rules and the SEC's rationale will satisfy those that challenged the prior rules or whether the newly adopted rules will be challenged again on First Amendment or other grounds. Based on a public statement by one of those challengers, the American Petroleum Institute, following the SEC's proposal,2 the SEC could again face a legal challenge once it adopts the final rules. The inclusion of "savings language" in the proposing release (i.e., that if any aspect of the final rules or the application of those rules is held invalid, such invalidity would not affect other provisions of the rules or the application thereof) indicates that perhaps the SEC is preparing for a challenge and the possibility that a challenge may be successful, at least in part.

The remainder of this client alert provides additional detail on the proposed rules and practical considerations for issuers to consider.

Proposed Rules

Who would be subject to the rules? Any domestic or foreign private issuer, including any smaller reporting company, emerging growth company or government-owned issuer, that (1) is required to file an annual report with the SEC on Form 10-K, 20-F or 40-F and (2) engages in the "commercial development of oil, natural gas, or minerals" (referred to as a "resource extraction issuer"). A resource extraction issuer would be subject to the rules regardless of its size, ownership, foreign private issuer status or the extent of its business operations constituting the commercial development of oil, natural gas or minerals.

The rules do not apply to (1) foreign private issuers that are exempt from Exchange Act registration pursuant to Exchange Act Rule 12g3-2(b) as they are not required to file annual reports with the SEC, (2) investment companies required to file reports pursuant to Rule 30d-1 under the Investment Company Act of 1940 and (3) issuers subject to Tier 2 reporting obligations under Regulation A.

What activities would constitute the "commercial development of oil, natural gas, or minerals?" The following activities:

  • exploration;
  • extraction, meaning the production of oil and natural gas and the extraction of minerals;
  • processing, including, but not limited to, (1) midstream activities, such as (a) the processing of gas to remove liquid hydrocarbons, (b) the removal of impurities from natural gas prior to its transport through the pipeline and (c) the 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 and (2) crushing and processing of raw ore prior to the smelting phase, but excluding the downstream activities of refining or smelting;
  • export, meaning the movement of a resource across an international border from its country of origin to another country by an issuer with an ownership interest in the resource, but excluding (1) cross-border transportation activities by an issuer that is solely a service provider with no ownership interest in the transported resource and (2) removal of resources from the extraction site to the refinery, smelter or first marketable location; or
  • the acquisition of a license for any of these activities.

Transportation activities made for a purpose other than export, marketing activities and security support activities would not constitute commercial development.

Whether an issuer is engaged in commercial development would depend on its specific facts and circumstances. The SEC noted that the commercial development definition is intended to capture only activities that are directly related to the commercial development of oil, natural gas or minerals, and not activities that are ancillary or preparatory to commercial development. Consistent with interpretive guidance the staff of the SEC's Division of Corporation Finance issued for the SEC's prior rules,3 the SEC noted that it would not consider an issuer providing only services that support the exploration, extraction, processing or export of resources to be a resource extraction issuer. For example, the following issuers would not be considered a resource extraction issuer: (1) an issuer that manufactures drill bits or provides hardware to help companies explore and extract and (2) an issuer engaged by an operator to provide hydraulic fracturing or drilling services.

The rules include an anti-evasion provision that requires disclosure of an activity that, although not in form or characterization of one of the specified categories of commercial development activities, is part of a plan or scheme to evade the disclosure requirements. For example, an issuer could not avoid disclosure by re-characterizing an activity that would otherwise constitute commercial development as transportation.

Are there any exemptions from the rules? The rules do not provide any exemptions from the disclosure requirements, including exemptions that had been sought by certain commentators for:

  • situations where foreign law may prohibit the required disclosure;4
  • situations where an issuer has a confidentiality provision in a relevant contract;
  • commercially or competitively sensitive information, regardless of the existence of a contractual confidentiality provision; or
  • situations where disclosure would jeopardize the safety and security of an issuer's operations or employees.

However, the SEC noted that under its existing exemptive authority it would address, on a case-by-case basis, any situations where confidential treatment may be warranted based upon the issuer's specific facts and circumstances. For example, if a resource extraction issuer were operating in a country that enacted a law that prohibited the detailed public disclosures required under the rules, the SEC could potentially issue a limited exemptive order (in substance and/or duration). The order could be tailored to either require some form of disclosure that would not conflict with the host country's law and/or provide the issuer with time to address the factors resulting in non-compliance.

An issuer seeking an exemption would be required to submit to the SEC a written request for exemptive relief, describing the particular payment disclosures that it seeks to omit and the specific facts and circumstances that warrant an exemption, including the particular costs and burdens it faces if it discloses the information. The SEC would be able to consider all appropriate factors in making a determination whether to grant requests, including any legal analysis necessary to support the issuer's request (e.g., the SEC would expect an opinion of counsel in support of any claim that a foreign law prohibits the disclosure of the information), whether the disclosure is already publicly available and whether (and how frequently) similar information has been disclosed by other companies, under the same or similar circumstances. If an issuer is already making the disclosures under another regulatory disclosure regime, the SEC anticipates that the issuer would have a heavy burden to demonstrate that an exemption is necessary. The SEC generally expects to provide public notice of an exemptive request and an opportunity for public comment.

Where would the disclosure be made? In an XBRL exhibit to a Form SD that would be publicly filed with the SEC within 150 days after the end of the issuer's most recent fiscal year. Disclosure would not be required in registration statements.

Disclosure would be required in the body of the Form SD, which would reference that the payment disclosure is provided in an exhibit to the report. Unlike annual reports on Form 10-K, 20-F and 40-F, Form SD would not require chief executive officer and chief financial officer certifications. However, the Form SD would be signed by an executive officer, but not by an issuer's directors.

If a resource extraction issuer is controlled by another resource extraction issuer, the controlled issuer would not be required to separately provide the required disclosure if the controlling entity discloses that information in its Form SD, identifies the controlled entity and notes that it is filing the required disclosure for the controlled entity. However, the controlled issuer would be required to file a notice on Form SD about where the required disclosure is made.

Can an issuer satisfy the rules with similar reports filed under an alternative reporting regime? In a welcome change from the SEC's prior rules, a resource extraction issuer may satisfy the rules by including as an exhibit to its Form SD a report complying with the reporting requirements of any foreign jurisdiction or the USEITI if the SEC deems the alternative reporting requirements to be substantially similar to the SEC's payment disclosure rules. An issuer relying on this accommodation would be required to state in the body of its Form SD that it is relying on this accommodation, identify the alternative reporting regime for which the report was prepared and specify where the report was originally filed.

The SEC did not indicate in its proposing release whether any foreign jurisdiction's or the USEITI's disclosure requirements were "substantially similar" to the SEC's rules, but the SEC expects to make such determinations either unilaterally or pursuant to an application submitted by an issuer or a jurisdiction. The SEC would then publish the determinations in an SEC order.

What would resource extraction issuers disclose? "Payments" made (1) during the fiscal year covered by the Form SD (2) by a resource extraction issuer, any of its subsidiaries or any controlled entity5 (3) to a "foreign government"6 or the U.S. Federal government (4) for the purpose of the commercial development of oil, natural gas or minerals. Subsidiary and controlled entity "payments" are subject to disclosure if that entity's financial information must be consolidated or proportionately consolidated7 under the accounting principles applicable to the issuer's financial statements included in its Exchange Act reports (i.e., GAAP or IFRS).

To identify the foreign governments that received payments, the SEC believes that an issuer should identify the administrative or political level of subnational government that is entitled to a payment under the relevant contract or foreign law. Unlike payments made to foreign governments, disclosure is not required for payments made to subnational governments in the United States (e.g., state and local governments).

What constitutes a "payment?" An amount paid that:

  • is made to further the commercial development of oil, natural gas or minerals;
  • is "not de minimis," meaning any single payment or series of related payments of $100,000 or more (or the equivalent in the issuer's reporting currency) during the fiscal year covered by the Form SD;8 and
  • falls under one or more of the following categories:
    • taxes, including taxes levied on corporate profits, corporate income and production, but not taxes levied on consumption such as value added, personal income or sales taxes;
    • royalties;
    • fees, including license fees, rental fees, entry fees and other considerations for licenses or concessions;9
    • production entitlements;
    • bonuses, including signature, discovery and production bonuses;10
    • dividends, including those paid in lieu of production entitlements or royalties, but excluding those paid to a government as a common or ordinary shareholder under the same terms as other shareholders; and
    • payments for infrastructure improvements, such as building a road or railway to further the development of oil, natural gas or minerals, whether the payments are required by contract or undertaken voluntarily.11

The rules do not require disclosure of social or community payments, including payments to build a hospital or school. Although the SEC provided illustrative examples of what would be included under certain of the rules' payment categories, resource extraction issuers would need to consider whether their payments fall within the payment categories.

The rules include an anti-evasion provision that would require disclosure of a payment that, although not in form or characterization of one of the payment categories, is part of a plan or scheme to evade the disclosure requirements. Thus, an issuer could not evade the disclosure requirements by changing the way it makes payments or by re-categorizing an activity covered under the definition of commercial development.

Similarly, if a resource extraction issuer makes a "payment" to a third party to be paid to the government on its behalf, whether at the direction of a foreign government or otherwise, or if a service provider makes a "payment" to a government on behalf of a resource extraction issuer, disclosure of such payments would be required by such resource extraction issuer.

Would in-kind payments be disclosed? The monetary value of in-kind payments would be disclosed along with how the monetary value was calculated. In-kind payments may be reported at cost or, if cost is not determinable, fair market value.

What payment information would be disclosed? The following payment information would be required to be disclosed in XBRL:

  • the type and total amount of payments made for each "project" of the issuer relating to the commercial development of oil, natural gas or minerals;
  • the type and total amount of payments for all "projects" made to each government;
  • the total payment amounts (for each category discussed above under "What constitutes a "payment?");
  • the currency used to make the payments;
  • the financial period (i.e., the fiscal year) when the payments were made;
  • the "business segment" of the issuer that made the payments;12
  • the governments (including any foreign government or the U.S. federal government) that received the payments and the country where each government is located;
  • the "project" of the issuer related to the payments;
  • the particular resource that is the subject of commercial development; and
  • the subnational geographic location of the project, which must be sufficiently detailed to permit a reasonable user of the information to identify the project's specific subnational geographic location using either subnational jurisdictions (e.g., a state, province, county, district, municipality, territory, etc.) and/or a commonly recognized subnational, geographic or geological description (e.g., oil field, basin, canyon, delta, desert, mountain, etc.), perhaps considering how the relevant contract identifies the project's location.

"Project" would mean operational activities governed by a single contract, license, lease, concession or similar legal agreement that forms the basis for payment liabilities with a government. Multiple agreements may be treated as a single project where the agreements are "operationally and geographically interconnected" without requiring that the agreements have substantially similar terms. When determining whether agreements are "operationally and geographically interconnected," an issuer should consider the following non-exclusive list of factors, no single one of which would be determinative:

  • whether the agreements relate to the same resource and the same or 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.

Payments made for governmental obligations levied at the entity, rather than project, level (e.g., tax or dividend) may be disclosed at the entity level.

What currency should be used to report the payment information? The payment information would be required to be reported in either U.S. dollars or the issuer's reporting currency. Issuers making payments in other currencies or in multiple currencies may convert those payments into either U.S. dollars or the issuer's reporting currency, as applicable, and would be required to disclose which of the following methods was used to calculate the conversion:

  • translating expenses at the exchange rate existing at the time the payment is made;
  • using a weighted average of the exchange rates during the period; or
  • using the exchange rate as of the issuer's fiscal year end.

Must the payment disclosure be audited or provided on an accrual basis? No.

Is the payment disclosure deemed "filed" with the SEC? Yes, and therefore it would be subject to liability under Section 18 of the Exchange Act for false or misleading material statements. Section 18 does not impose strict liability, as an issuer would have the standard defense to Section 18 claims if the issuer can prove it acted in good faith and had no knowledge that the statement complained of was false or misleading.

Is the payment disclosure incorporated by reference into other issuer filings? The payment disclosure would not be deemed incorporated by reference into any filing under the Securities Act of 1933 (e.g., a registration statement) or the Exchange Act, unless a resource extraction issuer specifically incorporates the information by reference into such filing.

Practical Considerations

While the final rules may vary significantly from the proposed rules outlined above, issuers engaged in the commercial development of oil, natural gas or minerals should consider taking the following actions in advance of the adoption of final rules.

  • Determine whether they are a resource extraction issuer that would be subject to the rules by examining whether, based on their facts and circumstances, they are involved in any activities that constitute the "commercial development of oil, natural gas, or minerals." If so, evaluate how they would be impacted if the rules are adopted as proposed, including:
    • whether they expect to have any "payments" to disclose;
    • whether they have any subsidiaries or controlled entities whose payments would require disclosure, including how to collect the payment information from such entities;
    • whether they will have to report under any alternative reporting regime that they may be able to re-produce to satisfy part or all of their disclosure obligations under the SEC's rules;
    • whether any countries where they operate prohibit disclosure of the payment information and, if so, whether those laws would require them to cease operations in the impacted countries or incur penalties to comply with the rules; and
    • whether any existing commercial agreements prohibit disclosure of the payment information and how future commercial agreements may be impacted as a result of the rules.
  • Determine whether to comment (either individually or as part of a trade or industry group) on the proposed rules by responding to the SEC's numerous general and specific questions contained in the proposing release.
  • If they are a resource extraction issuer, determine whether existing data gathering systems would need to be modified to track and collect information about the different types of payments across projects, governments, countries, subsidiaries and other controlled entities and, if so, how and the timeline for implementing the modifications.
  • If they are a resource extraction issuer, determine whether existing disclosure controls and procedures would need to be modified in order to record, process, summarize and report the required payment information and, if so, how and the timeline for implementing the modifications.


1. Please see our client alert dated July 5, 2013, D.C. District Court Vacates Dodd-Frank Disclosure Rule for Payments by Resource Extraction Issuers.

2. See API, Press Release, SEC disclosure proposal a step back for international competitiveness (Dec. 11, 2015), available at http://www.api.org/News-and-Media/News/NewsItems/2015/December-2015/API-SEC-disclosure-proposal-a-step-back-for-international-competitiveness.

3. See SEC Div. of Corp. Fin., Dodd-Frank Wall Street Reform and Consumer Protection Act Frequently Asked Questions - Disclosure of Payments by Resource Extraction Issuers (May 30, 2013), available at http://www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm. Although most of the staff's guidance should still be applicable under the proposed rules, the staff will likely need to update this guidance once final rules are adopted to modify certain aspects of the guidance.

4. Some commentators have stated that the laws of Angola, Cameroon, China and Qatar would prohibit the required payment disclosures.

5. In a change from the prior rules, the proposed rules would define the terms "subsidiary" and "control" based on accounting principles rather than using the definitions of those terms provided in Exchange Act Rule 12b-2. "Subsidiary" is defined to mean an entity controlled directly or indirectly through one or more intermediaries.

6. "Foreign government" is defined to include foreign national and subnational governments (i.e., governments of a state, province, county, district, municipality or territory under a foreign national government), departments, agencies and instrumentalities of foreign national and subnational governments and companies at least majority-owned by foreign national and subnational governments.

7. Where a resource extraction issuer would be required to disclose payments made by a proportionately consolidated entity or operation, the payments must be disclosed on a proportionate basis and must describe the proportionate interest.

8. In any arrangement providing for periodic payments or installments, a resource extraction issuer would be required to consider the aggregate amount of the related periodic payments or installments to determine whether the $100,000 payment threshold has been met and whether disclosure is required.

9. The SEC notes that the illustrative fee list is not exhaustive.

10. The SEC notes that the illustrative bonus list is not exhaustive.

11. For example, if a resource extraction issuer is obligated to build a road rather than pay the host country government to build the road, the issuer would be required to disclose the cost of building the road as a payment to the government so long as the payment is "not de minimis."

12. "Business segment" means a business segment consistent with the reportable segments used by the resource extraction issuer for financial reporting purposes.

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.

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