On December 11, 2015, the US Securities and Exchange Commission ("SEC") issued a proposed rule1 to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Section 1504 of the Dodd-Frank Act calls on the SEC to make rules requiring resource extraction issuers to disclose payments they make to governments for the commercial development of oil, natural gas or minerals.

The SEC originally adopted "publish what you pay" rules implementing Section 1504 of the Dodd-Frank Act in August 2012, but in July 2013 the SEC rule was vacated by US federal courts. In September 2015, a US federal court ordered the SEC to expedite its rulemaking process for adopting a final government payments disclosure rule. In the newly proposed rule, the SEC addresses the findings of the court that vacated its prior rule. In addition, the SEC indicates that it is endeavoring to more closely align its reporting regime with developments in extractive industry transparency in the European Union and Canada since its original rulemaking2, with a view to enhancing the consistency and comparability of the SEC rules with the disclosure requirements of these key jurisdictions.

Summary of Proposed Rule

The SEC's proposed rulemaking would add Rule 13q-1 under the Securities Exchange Act of 1934 (the "Exchange Act").

Which Companies Are Subject to the Rules?

This rule would apply to SEC reporting issuers that are required to file annual reports on Form 10-K, 20-F or 40-F and that engage in the commercial development of oil, natural gas or minerals. "Commercial development" includes:

  • exploration;
  • extraction;
  • processing;
  • export; and
  • the acquisition of a license for any such activity.

Such issuers would be required to file annually a specialized disclosure report on Form SD (the same form currently used to report conflict minerals disclosures) within 150 days after their fiscal year-end.

The proposed rule would clarify that "processing" activities include, among other things, midstream activities such as the processing of gas to remove liquid hydrocarbons, the removal of impurities from natural gas prior to its transport through a pipeline and 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. It would also include the crushing and processing of raw ore prior to the smelting phase. "Processing" would not include the downstream activities of refining or smelting.

"Export" would be defined as the transportation of a resource from its country of origin to another country by an issuer with an ownership interest in the resource. It would not include transportation on a fee-for-service basis by a service provider with no ownership interest.

The rule would not apply to ancillary or preparatory activities for the commercial development of oil, natural gas or minerals (e.g., the manufacturing of drill bits), nor would it apply to transportation (unless such transportation activities fall within the definition of "export").

Which Types of Payments Must Be Reported?

A payment would be required to be included in an issuer's government payments disclosure on Form SD only if it falls within one of the following categories:

  • taxes – includes taxes levied on corporate profits, corporate income and production, but excludes taxes levied on consumption (such as VAT, personal income taxes or sales taxes);
  • royalties;
  • fees (including license fees) – includes rental fees, entry fees and concession fees;
  • production entitlements;
  • bonuses – includes signature, discovery and production bonuses;
  • dividends – excludes dividends paid to a government as a common or ordinary shareholder under the same terms as other shareholders; and
  • infrastructure payments – e.g., building a road or railway to further the development of oil, natural gas or minerals.

Consistent with the approach taken by the EU, social or community payments (such as payments to build a hospital or school) would be expressly excluded from the scope of the rule.

In-kind payments would be required to be disclosed if they meet one of the covered payment types listed above. Issuers may report in-kind payments either at cost, or if cost is not determinable, at fair market value, and provide a brief description of how the monetary value was calculated.

Payments made for obligations levied at the entity level, such as corporate taxes, may be disclosed at the entity level, and are not required to be allocated at the project level.

The rule would include an exception for de minimis payments, which are payments under $100,000, or the equivalent in the issuer's reporting currency, whether made as a single payment or series of related payments.

Periodic payments, such as rental fees, would be required to be disclosed if the aggregate amount of such payments exceeds the $100,000 threshold.

Payments from Whom and to Whom?

The proposed rule would cover payments made by the issuer, as well as by any subsidiary or entity under the control of the issuer. "Subsidiary" and "control" for this purpose are aligned with the issuer's accounting principles. Therefore, an issuer would have to disclose payments made by any entity that is consolidated (including proportional consolidation of an interest in an entity or operation) under the accounting principles applicable to the issuer's financial statements filed as part of its Exchange Act reports. For entities that are proportionally consolidated, only the issuer's proportional interest in the payment need be disclosed.

As proposed, disclosure would be required for payments made to any "foreign government," which includes a department, agency or instrumentality of a foreign government or a company owned by a foreign government. The proposed rule would cover payments to foreign subnational governments, such as the government of a state, province, county, district, municipality or territory under a foreign national government. It would also cover payments made to state-owned enterprises that are at least majority-owned by a foreign government. In the United States, only payments to the US federal government would be in the scope of the rules, and payments to states or other subnational governments in the United States would be excluded.

Project-Level Disclosure

Section 1504 of the Dodd-Frank Act requires the reporting of payments made by resource extraction issuers to governments by type and total amount per project. The SEC's previous rulemaking attempt did not define "project" in the aim of providing greater flexibility. In the new proposed rules, the SEC has sought to align the definition of "project" to EU and Canadian standards. Under the proposed rule, "project" would be defined as 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. Issuers would be able to treat multiple agreements that are both operationally and geographically interconnected as a single project.

The SEC is proposing to provide a non-exhaustive list of factors to consider when determining whether agreements are "operationally and geographically interconnected," no single one of which would necessarily 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 they will be performed by shared key personnel or with shared equipment; and
  • whether they are part of the same operating budget.

The SEC specifically addresses the definition of "project" proposed by the American Petroleum Institute, which would aggregate payments by resource within a single subnational political jurisdiction. The SEC believes that a contract-based definition of "project" would provide greater transparency and consistency with the EU and Canadian rules.

Form and Timing of Disclosure

Issuers would be required to disclose government payments information annually in a specialized disclosure report on Form SD, no later than 150 days after the issuer's fiscal year end. The required disclosure would need to be filed on EDGAR in an electronically-tagged XBRL exhibit to Form SD. The final rules will take effect for a fiscal year ending not earlier than one year after the SEC issues the final rule. Assuming the final rule is adopted in June 2016, an issuer's first resource extraction payment report will be required for its first fiscal year ended on or after June 30, 2017. For issuers with a December 31 fiscal year end, calendar year 2017 would be the first year for which compliance is required.

For any payment required to be disclosed, the issuer will need to disclose and electronically tag (in XBRL format) the following information:

  • the total amounts of the payments, by category;
  • the currency used to make the payments;
  • the financial period in which the payments were made;
  • the business segment of the resource extraction issuer that made the payments (consistent with the reportable segments used for purposes of the issuer's financial reporting);
  • 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; and
  • the subnational geographic location of the project.

In addition, an issuer would need to provide and tag the type and total amount of payments made for each project and the type and total amount of payments for all projects made to each government.

In the July 2013 US federal court ruling vacating the SEC's prior attempt at adopting a final "publish what you pay" rule, the court determined that the statutory text of Section 1504 of the Dodd-Frank Act did not compel the SEC to require issuers to publicly file their annual government payments reports or to otherwise make such reports publicly available, in addition to the statutory requirement of the SEC to make publicly available a compilation of the information from such reports. While the court found fault with the SEC's rulemaking process, it clarified that the statute gives the SEC discretion whether to require public filing of the reports. In the new rulemaking, the SEC is proposing to exercise its discretion to require issuers to publicly file their government payments report on EDGAR, reasoning that this approach best accomplishes the purpose of the statute, including consistency with international transparency promotion efforts, such as the EU rules.

Exemptions and Recognition of Equivalency

In vacating the prior rule, the US federal court further held that the SEC had acted arbitrarily and capriciously in concluding that Section 1504 does not allow an exemption to the reporting requirements for payments to governments in countries where disclosure is prohibited by law (specifically, and currently, Angola, Cameroon, China and Qatar). In the new proposed rule, the SEC would permit issuers to apply to the SEC for exemptions on a case-by-case basis, rather than writing a blanket exemption into the rule. In such a request for exemptive relief, the SEC would expect an opinion of counsel in support of any claim that a foreign law prohibits the disclosure of the information in question.

In line with the EU and Canadian "publish what you pay" reporting regimes, which provide for recognition of foreign reporting regimes deemed equivalent, the SEC is proposing to allow issuers to comply with the SEC rule by using reports prepared in compliance with a foreign jurisdiction's rules or that meet the reporting requirements being implemented in connection with the United States acceding to the EITI, if the SEC has determined that those rules or requirements are substantially similar to the final rule adopted by the SEC.


The proposed rules, like the EU and Canadian regimes, would include an anti-evasion provision, which would require disclosure with respect to an activity (or payment) that, although not strictly within the covered activity or payment categories enumerated in the rule, is part of a plan or scheme to evade the disclosure requirements.

Request for Comments

Initial comments on the proposed rule are due on January 25, 2016. A second round of comments, responding to issues raised in the initial comment period, will be due on February 16, 2016. Comments may be submitted through the SEC's website.

Comparison of Reporting Regimes

The chart on the following pages gives a detailed comparison of the US, EU, Canadian and EITI reporting frameworks. A few caveats should be noted:

  • The information presented regarding the US rules is based on the proposed rule issued by the SEC on December 11, 2015.
  • The information presented regarding the EU rules is based on the EU Accounting Directive and, where noted, the UK Reports on Payments to Governments Regulations 2014. The implementation of the EU Accounting Directive in each Member State may differ in some aspects that are not reflected in the chart.
  • The information presented regarding the Canadian rules is based on the statutory text of the Extractive Sector Transparency Measures Act (Canada), together with the proposed implementation tools (the Guidance and the Technical Reporting Specifications), which have been subject to a public consultation process.

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

2 Directive 2013/34/EU, commonly referred to as the EU Accounting Directive, was adopted in June 2013 by the European Parliament and the Council of the European Union and required Member States to enact implementing legislation by July 20, 2015. In Canada, the Extractive Sector Transparency Measures Act entered into force on June 1, 2015.

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.