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The U.S. Securities and Exchange Commission (SEC) has adopted a final rule requiring U.S. and foreign resource extraction issuers to disclose any payments made to the U.S. federal government or foreign governments for the commercial development of oil, natural gas or minerals.[1] The rule adopts Rule 13q-1 and amends Form SD to implement Section 13(q) of the Securities Exchange Act of 1934 “the Exchange Act” and will come into effect 60 days following its publication in the Federal Register.
This new rule implements the resource payment disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and follows the SEC’s effort in 2018 to modernize its disclosure requirements for mining company issuers, which have come into effect for many issuers as of January 1, 2021 (see our discussion of such new mining disclosure requirements).
The SEC also created an alternative reporting regime allowing issuers subject to certain foreign reporting regimes to comply with the new rules by providing copies of those foreign reports (see Alternative Reporting Regimes below).
The new disclosure rules are applicable to all “resource extraction issuers,” which includes all U.S. and foreign issuers (including Canadian companies reporting through MJDS) that (1) are required to file an annual report with the SEC on Form 10-K, 20-F or 40-F and (2) engage in the commercial development of oil, natural gas or minerals. Commercial development includes exploration, extraction, processing and export of oil, natural gas or minerals or the acquisition of a license for any such activity.
Resource extraction issuers are required to disclose payments made to the U.S. federal government or a foreign government that:
Issuers must report payments made by any subsidiary or entity under the control of the issuer.[2] Issuers are required to identify the particular recipient of payments at each government level, but are permitted to aggregate payments by payment type when disclosing payments rather than disclosing each payment individually.
The new rules require reporting of payments made by resource extraction issuers to governments by type and total amount per “project.” Under the new rules, a project is defined by reference to three criteria:
Commercial development activities using multiple resource types or extraction methods can be treated as a single project if such activities are located in the same major subnational political jurisdiction.
Issuers will be required to furnish to the SEC the required disclosure annually on Form SD no later than 270 days following the end of their most recently completed fiscal year. The required disclosure must be submitted on EDGAR in an XBRL exhibit to Form SD.
The SEC also adopted provisions permitting delayed reporting of payments related to exploratory activities in order to mitigate potential competitive harm. Issuers will not be required to report payments related to exploratory activities until it submits a Form SD for the fiscal year following the fiscal year the payments were made.
The SEC adopted three exemptions from the reporting requirements of Section 13(q):
The SEC also adopted transitional relief that will permit:
An issuer may also apply for an exemption on a case-by-case basis by submitting a written request for exemptive relief to the SEC.
The SEC adopted provisions within the new rules that will allow issuers to meet the requirements of the Section 13(q) rules, in certain circumstances, by providing disclosures that comply with a foreign jurisdiction’s reporting regime. To qualify, the SEC must have determined that the foreign jurisdiction requires disclosure that satisfies the transparency objectives of Section 13(q). In conjunction with the adoption of the new rules, the SEC issued an order recognizing the following alternative reporting regimes as satisfying such objectives: (i) Canada’s Extractive Sector Transparency Measures Act (ESTMA); (ii) the EU Accounting Directive 2013/34/EU and EU Transparency Directive 2013/50/EU; (iii) the United Kingdom’s Reports on Payment to Governments Regulations 2014; and (iv) Norway’s Regulation on Country-by-Country Reporting.
Issuers using alternative reports are required to submit the alternative report as an exhibit to Form SD, translated to English (if applicable) and tagged using XBRL.
The SEC has adopted the new rules with a two-year transition period. As a result, issuers will be required to comply with the new annual reporting requirement starting with their fiscal year ending no earlier than two years after the effective date of the final rules, which, for issuers with a December 31 fiscal year end, is expected to be September 30, 2024 in respect of payments made in 2023.
Special thanks to Shearman & Sterling Associate Iain Sneddon for his contribution to this client publication.
[1] The new rules are the SEC's third attempt to adopt rules under Section 13(q). The SEC's initially adopted rules in August 2012 were vacated by the US District Court for the District of Columbia in July 2013. The SEC's next set of adopted rules in 2016 were subsequently disapproved under the Congressional Review Act (CRA), ultimately requiring the SEC to draft new rules not “substantially the same” as the disapproved rules
[2] Subsidiary and control for this purpose are aligned with the issuer’s accounting principles.
[3] To be eligible to claim this exemption, an issuer must take reasonable steps to seek and use any other available exemption or relief, failing which, issuer will have to disclose the foreign jurisdiction for which it has excluded disclosure, the law preventing disclosure, its efforts to seek and use exemptions or other relief under such law and the results of those efforts in the body of Form SD. Further, an issuer must also furnish as an exhibit to Form SD a legal opinion from counsel opining on the inability of the issuer to provide the required disclosure without violating the foreign jurisdiction’s law.
[4] The exemption will only apply to contracts in which such terms are expressly included in writing prior to the effective date of the final rules. Similar to the requirements to avail itself of the conflict of laws exemption, an issuer must provide specific disclosures about their eligibility for the exemption, including identifying the jurisdiction, and furnishing a legal opinion.
[5] Issuers with a public float of less than US$250 million or with annual revenues of less than US$100 million for the previous year and either no public float or a public float of less than US$700 million.
[6] Generally, an Issuer that had total annual gross revenues of less than US$1.07 billion during its most recently completed fiscal year.
