In December 2019, the SEC issued a proposed rulemaking to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). Enacted nearly a decade ago as Section 13(q) of the Securities Exchange Act of 1934, Section 1504 directs the SEC to make rules to mandate transparency by SEC-reporting companies in the resource extraction sector (oil and gas and mining) of the payments they make to governments. The SEC has tried to implement rules under Section 13(q) twice in the past: the first rulemaking was vacated by federal courts, and the second time the SEC's rules were overturned by Congress shortly after the start of the Trump Administration. Given this rocky history, doubts remain whether the third time really will prove the charm. In the meantime, Canada and the EU have adopted government payments transparency rules substantially similar to what the SEC had originally proposed.
The proposed rules would require "resource extraction issuers", meaning issuers that are required to file annual reports on Forms 10-K, 20-F or 40-F with the SEC and that engage in the commercial development of oil, natural gas or minerals, to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas or minerals that are made to a foreign government or the U.S. federal government. The SEC is proposing to exempt the following companies from the disclosure requirements:
- newly public companies until the fiscal year immediately following the year their IPO registration statement became effective;
- emerging growth companies; and
- smaller reporting companies.
The proposed new rules include several significant changes compared to the SEC's prior rulemaking attempt (see our client publication summarising the 2016 rule), intended to ease the compliance burden on companies and address concerns that companies would be compelled to disclose potentially competitively sensitive information. For example, the proposed rules would:
- revise the definition of the term "project" to require aggregated disclosure at the national and subnational (eg, state or provincial) level, as opposed to for each contract;
- revise the "de minimis" threshold below which disclosure is not required to include both a project threshold and an individual payment threshold;
- add two new conditional exemptions for situations in which a foreign law or a contract in place prior to the new rule's effective date prohibits the required disclosure;
- add an exemption for smaller reporting companies and emerging growth companies;
- revise the definition of "control" to exclude entities or operations in which an issuer has a proportionate interest;
- limit the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the SEC;
- add an instruction in Form SD that would permit an issuer to aggregate payments by payment type made at a level below the major subnational government level;
- add relief for issuers that have recently completed their U.S. initial public offerings; and
- extend the deadline for furnishing the payment disclosures—companies with a December 31 fiscal year-end would have until March 31 in the second calendar year following their most recent fiscal year to file their reports under Form SD.
The SEC is also proposing to recognise the equivalence of similar transparency regimes adopted by other jurisdictions. If, for example, the SEC were to determine that the Canadian or EU extractive industry payments disclosure rules satisfy the transparency objectives of Section 13(q), companies subject to those rules would be able to file the reports they prepare under the alternative disclosure regime in satisfaction of their obligations under the SEC rules.
Extractive industry companies subject to the new rules would be required to submit government payments reports starting with the first fiscal year ending no earlier than two years after the new rule's effective date.
The 60-day public comment period on the proposed rule is currently underway. The new rules will not take effect until after the SEC publishes a final rule.
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