United States: U.S. Final Rules Requiring Disclosure Of Payments By Resource Extraction Issuers

Background

The U.S. Securities and Exchange Commission (SEC) has adopted a final rule that requires SEC-reporting resource extraction issuers to disclose payments to the U.S. federal government and foreign governments relating to the commercial development of oil, natural gas or minerals. These annual disclosure requirements are substantially similar to those under Canada's Extractive Sector Transparency Measures Act (ESTMA) which apply to all issuers listed on a Canadian stock exchange and certain other issuers with connections to Canada. Resource extraction issuers that are SEC registrants must comply with the new U.S. disclosure requirement beginning with their fiscal year ending on or after September 30, 2018. Canadian companies will be able to satisfy the new U.S. disclosure requirement by filing their Canadian ESTMA report with the SEC but eXtensible Business Reporting Language (XBRL) tagging of the ESTMA report will be required.

Rule 13q-1, as adopted under the U.S. Securities Exchange Act of 1934, as amended (U.S. Exchange Act), applies to all resource extraction issuers that file annual reports with the SEC, including Canadian issuers reporting on Form 40-F under the Multijurisdictional Disclosure System, Form 20-F or Form 10-K. The purpose of the rule is to promote greater transparency to help combat corruption related to resource development and to help citizens of resource-rich developing countries hold their governments accountable for the wealth generated by those resources. Rule 13q-1 was initially adopted by the SEC in August 2012 to implement section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), but the 2012 rule was vacated by the U.S. District Court for the District of Columbia in July 2013 on the basis that the SEC misread the Dodd-Frank Act when compelling public disclosure of issuers' reports. The Court further held that the SEC's explanation for not granting an exemption when disclosure is prohibited by foreign governments was arbitrary and capricious. The SEC re-proposed the rule on December 11, 2015 in a form substantially similar to the 2012 rule, except that the SEC included certain concepts from Canada's ESTMA, which came into force on June 1, 2015, and the EU Accounting Directive and EU Transparency Directive (EU Directives), which came into effect in October 2013. The SEC's re-proposed rule also addressed the issues identified in the U.S. court decision vacating the 2012 rule. The final rule is substantially similar to the re-proposed rule with a few key differences summarized below.

Summary of the final rule

The Dodd-Frank Act added section 13(q) to the U.S. Exchange Act, which directs the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, its subsidiaries or any entity controlled by the issuer to a foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals. The resource extraction issuer must provide information about the type and total amount of such payments made for each project relating to the commercial development of oil, natural gas or minerals, and the type and total amount of payments made to each government. The information must be provided in an interactive data format. The final rule establishes the details relating to these requirements.

Who must make the disclosure?

Under the final rule, similar to the re-proposed rule, the term "resource extraction issuer" includes all U.S. and foreign companies that engage in the commercial development of oil, natural gas or minerals and are required to file an annual report with the SEC on Forms 10-K, 20-F or 40-F. Foreign private issuers that rely on U.S. Exchange Act Rule 12g3-2(b) are not subject to the new disclosure requirement, as they are not required to file annual reports with the SEC. However, there are no exemptions for smaller issuers, unlike ESTMA which provides an exemption for issuers not listed on a stock exchange in Canada if they do not meet certain size-related criteria based on a combination of the value of their assets or revenues, or the number of their employees. The term "commercial development" means exploration, extraction, processing and export, or the acquisition of a licence to do so and is not intended to capture activities that are ancillary or preparatory to commercial development (such as operators providing hydraulic fracturing or drilling services), downstream activities (refining and smelting) or export services provided by issuers with no ownership interest in the resource.

What payments must be disclosed

Similar to the re-proposed rule, the final rule requires resource extraction issuers to provide project-level disclosure of payments that are "not de minimis" and that they have made to a foreign government (including a foreign national, state, provincial, county, district, municipal or territorial government, or a company that is majority-owned by such governments) or the U.S. federal government to further the commercial development of oil, natural gas or minerals. A payment that is not de minimis includes any payment, whether a single payment or a series of related payments, of US$100,000 or more during the most recent fiscal year. In contrast, the threshold for required reporting under ESTMA is CDN$100,000. In addition to payments it makes directly, a resource extraction issuer will be required to disclose payments made by its subsidiaries or other entities under its control (as determined by applicable U.S. GAAP or IFRS accounting principles).

The types of payments that must be disclosed include taxes (other than consumption-based taxes, such as sales taxes), royalties, fees (including licence fees), production entitlements, bonuses, dividends (other than those paid under the same terms as other shareholders) and payments for infrastructure improvements. Resource extraction issuers must also disclose community and social responsibility (CSR) payments that are required by law or contract. In the re-proposed rule in December 2015, the SEC explicitly excluded CSR payments on the basis they were not required to be disclosed under the EU Directives or ESTMA. In the adopting release for the final rule, the SEC concluded that CSR payments are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals and noted that CSR payments must be disclosed under the Extractive Industries Transparency Initiative (EITI), a voluntary coalition of oil, natural gas and mining companies, national governments, international organizations and other stakeholders committed to strengthening accountability and transparency for revenues paid to resource-rich countries.

In requiring detailed project-level payments disclosure, the SEC focused on how disaggregated information may help local communities and subnational governments combat corruption by enabling them to verify that they are receiving resource revenue allocations from their national government that they may be entitled to receive under law. The final rule largely mirrors the guidance and technical reporting specifications under ESTMA, issued on March 1, 2016, and the EU Directives in defining a "project" as operational activities that are governed by a single contract, licence, lease, concession or similar legal agreement, which form the basis for payment liabilities with a government. Agreements that are both operationally and geographically interconnected may be treated by the resource extraction issuer as a single project. However, unlike the definition under ESTMA and the EU Directives, the SEC's final rule does not require the agreements to have "substantially similar terms" to be treated as a single project.

The following items must be publicly disclosed under the SEC's final rule, unless one of the two exemptions discussed below applies:

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

How and when the payments information must be disclosed

The disclosure required by the final rule must be publicly filed as an exhibit to the SEC's Form SD, which was amended by the SEC in connection with issuing the final rule. Form SD is also the form used to disclose information mandated by the SEC's "conflict minerals" rules. Resource extraction issuers are required to comply with the final rule beginning with their fiscal year ending on or after September 30, 2018 and must file the Form SD annually thereafter no later than 150 days after the end of their fiscal year. For example, a resource extraction issuer with a December 31 fiscal year end will be required to file its first resource extraction payment report no later than 150 days after December 31, 2018, which is May 30, 2019. The payments information disclosed in Form SD must be electronically tagged using the XBRL format. The Form SD will be "filed" for U.S. Exchange Act purposes, meaning that resource extraction issuers will be subject to liability under the U.S. Exchange Act for the accuracy of the required payments information.

Exemptions from disclosure

The final rule includes two exemptions to the reporting obligations:

  • A resource extraction issuer that has acquired a company not previously subject to the final rule will not be required to report payment information for the acquired company until the filing of a Form SD for the first fiscal year following the acquisition.
  • Issuers can delay reporting payments related to exploratory activities in Form SD until the fiscal year following the fiscal year in which the payments were made. Payments are considered to be related to exploratory activities if they are made as part of the process of identifying areas that may warrant examination, examining specific areas that are considered to have prospects of containing oil and gas reserves, or as part of a mineral exploration program. However, exploratory activities are limited to activities conducted prior to the development or extraction of the oil and gas or minerals that are the subject of the exploratory activities. Furthermore, this targeted exemption is not permitted for payments related to exploratory activities on the property or any adjacent property once the issuer has commenced development or extraction activities anywhere on the property, on any adjacent property, or on any property that is part of the same project.

In addition to the two prescribed exemptions, issuers may apply for exemptive relief that the SEC will consider based on a case-by-case assessment of whether the requesting issuer would suffer substantial commercial or financial harm if the exemptive relief were not granted. The SEC indicated that it would also consider granting exemptive relief in situations where disclosure would conflict with the terms of a material preexisting contract, reveal commercially sensitive information not otherwise available to the public, or have a substantial likelihood of jeopardizing the safety of an issuer's personnel, although it noted that this is not an exhaustive list.

Accommodation for foreign reporting regimes

The SEC acknowledged that several countries, including Canada, have already implemented resource extraction payment disclosure laws. To reduce compliance burdens, the SEC has adopted an accommodation that allows issuers to meet the requirements of Rule 13q-1 by providing disclosures that comply with another country's rules if the SEC determines that those rules or requirements are "substantially similar" to the final rule. In conjunction with adopting the final rule, the SEC issued an order recognizing Canada's ESTMA, the EU Directives and the United States EITI as substantially similar disclosure regimes, subject to certain conditions for United States EITI reports. A resource extraction issuer relying on the alternative reporting accommodation must file its foreign report as an exhibit to Form SD with XBRL tags and provide an English translation if the report was prepared in a foreign language. An issuer filing a report prepared pursuant to a foreign reporting regime is permitted to follow the reporting deadline in the foreign jurisdiction, but it must submit a notice on Form SD-N on or before the due date of its Form SD indicating its intent to submit the foreign report using the foreign jurisdiction's deadline. If an issuer fails to submit such notice on a timely basis, or submits such a notice but fails to submit the foreign report within two business days of the alternative jurisdiction's deadline, it will become ineligible for the alternative reporting accommodation for the following fiscal year and must follow the requirements of the SEC's final rule.

Canadian implications

While the SEC's final rule applies to all Canadian resource extraction issuers that file annual reports with the SEC, Canadian issuers subject to ESTMA will be able to satisfy all of the requirements of Rule 13q-1 by filing a Form SD with an English version of the Canadian ESTMA report attached as an exhibit, with the required XBRL tagging added. It is not clear from the adopting release for the final rule whether Canadian resource extraction issuers will be permitted to exclude CSR payments, as permitted under ESTMA, or whether they will be required to calculate their CSR payments in order to add them to the XBRL aggregate payment field.

From a timing perspective, issuers subject to ESTMA in Canada will be required to file their first reports under ESTMA at least two calendar years ahead of their first filing deadline under Rule 13q-1. For an issuer with a fiscal year ending December 31, 2016, its report under ESTMA will be due in May 2017 covering payments made in 2016, whereas its report under Rule 13q-1 will not be due until May 2019 covering payments made in 2018.

Resource extraction issuers that are not listed on a stock exchange in Canada may not be subject to ESTMA because of a combination of their limited asset or revenue size, or small number of employees. These issuers should bear in mind that there is no corresponding size-based exemption under the SEC's rule, so if they are subject to SEC reporting obligations they will be required to file reports under Rule 13q-1 even though they do not have to report under ESTMA.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions