The new disclosure requirements pose another regulatory compliance function that energy and mining companies will need to undertake in order to ensure their future compliance with the federal securities laws.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which promises sweeping financial reform and increased regulatory oversight of the United States' banking and financial sectors. While the Dodd-Frank Act contains numerous provisions that will inevitably spark much debate and comment, it is Section 1504, a miscellaneous two-page provision tacked on the end of a voluminous 2,300-page bill, that is of particular importance to energy- and mining-related companies. Section 1504 requires that "resource extraction issuers" disclose payments they make to foreign governments and the federal government in annual reports that they file with the U.S. Securities and Exchange Commission (SEC).
Specifically, Section 1504 amends Section 13 of the Securities Exchange Act of 1934, and requires resource extraction issuers to disclose in their annual reports and disclose on their websites the following:
information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, gas, or minerals, including-
(i) the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals; and
(ii) the type and total amount of such payments made to each government.
Dodd-Frank Act, § 1504(2)(A). Section 1504 defines "payments" as those that are not de minimis and, among other things, are "made to further the commercial development of oil, natural gas, or minerals" as well as "taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits." Id. at §§ 1504(1)(C)(i)(I) and 1504(1)(C)(ii). Section 1504 further defines "commercial development of oil, natural gas and minerals" to include the "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, as determined by the Commission." Id. at § 1504(1)(A) (emphasis added).
Section 1504 appears intended to bring more transparency to the issue of payments made by energy and mining companies to the U.S. and foreign governments. However, there are aspects of this new legislation that will require further clarification. For example, Section 1504 defines a "resource extraction issuer" to be "an issuer that- (i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas or minerals." Id. at § 1504(1)(D). Thus, Section 1504 would clearly apply to a large energy or mining public company doing business abroad. However, what about a manufacturer of parts, or a company that provides services or labor to an intermediary or subsidiary of an energy company that ultimately uses these goods or services in its operations? Whether these companies are engaged in the "commercial development of oil, natural gas or minerals" or have otherwise taken a "significant action relating to oil, natural gas, or minerals" such that they need to track and publicly disclose government payments they have made is an area that must be more closely examined.
It should also be noted that the disclosure requirements under Section 1504 differ from the requirements under the Foreign Corrupt Practices Act (FCPA), which prohibits the offer of any payment or other thing of value to a foreign government official as a way to secure or retain business. For more information, see McDermott's On the Subject " DOJ and SEC Will Significantly Increase FCPA Enforcement Efforts." While the FCPA is confined to illegal payments or bribes to foreign officials, Section 1504 is broader and requires the disclosure of all payments to foreign governments (including those that are legal). The distinction is important because companies that have adopted comprehensive FCPA compliance plans to minimize their FCPA risks already spend significant time and resources to ensure compliance with the FCPA. These additional disclosure obligations may require companies to track additional data (all government payments) to comply with Section 1504's disclosure rules. Section 1502 of the Dodd-Frank Act includes further disclosure requirements for issuers that get certain minerals from the Democratic Republic of the Congo. For more information, see McDermott's On the Subject " The 'Conflict Minerals' Provision in the Dodd-Frank Act Imposes New Disclosure Requirements on Manufacturers." These new rules may further increase the cost of compliance.
While the SEC has 270 days to finalize rulemaking under Section 1504 (and will perhaps address some or all of these concerns), one thing is certain-these new disclosure requirements pose another regulatory compliance function that energy and mining companies will need to undertake in order to ensure their future compliance with the federal securities laws.
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