On December 11, 2015, the Securities and Exchange Commission (“SEC”) issued a new proposed rule to implement a key provision of the Dodd-Frank Act that targets corruption and increases transparency requirements for payments made to foreign governments by the oil, gas, and mining industries.
The SEC voted to re-propose rule 13q-1 and proposed an amended form SD to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC previously adopted a rule in August 2012 that was vacated and remanded on September 2, 2015 by the U.S. District Court for the District of Columbia . The District Court found that the SEC committed serious error by mandating public disclosure of the required annual reports and denying the possibility of exemptions for countries that prohibit payment disclosure. When the SEC delayed issuing a new rule, Oxfam America sued to compel the SEC to issue a final rule, and on September 2, 2015, the United States District Court for the District of Massachusetts ordered the SEC to comply with its statutory duty to promulgate a final rule under an expedited schedule.
As discussed in previous posts, Section 1504 directs the SEC to issue rules requiring corporations in the extractive sector (oil, natural gas, and mining companies) to disclose information on payments to foreign governments or the federal government that were made pursuant to certain upstream and midstream activities related to oil, natural gas, or minerals. The purpose of the disclosure requirements is to encourage public transparency and accountability and to help combat corruption in resource rich countries.
The proposed rule is similar to transparency measures already in place in the European Union (“EU”) and Canada and reflects considerations of recent developments in the Extractive Industries Transparency Initiative’s (“EITI”) approach. Issuers may be permitted to use a report prepared for the USEITI or a foreign regulatory requirement, such as those mandated by the EU or Canada, if the Commission determines the requirements are substantially similar to the proposed rule. In addition, the proposed rule takes into account the decision vacating the previous iteration of the rule by allowing issuers to apply for exemptions that would be considered on a case-by-case basis.
The disclosure requirements in the proposed rule apply to all domestic or foreign issuers engaged in the commercial development of oil, natural gas, or minerals that are required to file an annual report with the SEC under the Securities Exchange Act of 1934 (“Exchange Act”). Disclosures must be made for payments made by the resource extraction issuer, the issuer’s subsidiary, or any entity under the control of the issuer.
The proposed rule would require resource extraction issuers to file Form SD on an annual basis to disclose information about payments related to the commercial development of oil, natural gas, or minerals that are made to governments. The proposed rule defines “commercial development of oil, natural gas, or minerals” to include “exploration, extraction, processing, export and the acquisition of a license for any such activity.”
Payments that must be disclosed by resource extraction issuers under the proposed rule are :
- Payments made to further the commercial development of oil, natural gas, or minerals;
- “not de minimis”, or any payment, whether a single payment or series of related payments within a fiscal year, which is equal to or greater than $100,000 ; and
- Within the types of payments specified by the rules. This includes taxes, royalties, fees (including licensing fees), production entitlements, bonuses, dividends, and payments for infrastructure improvements.
The following information about payments must be disclosed under the proposed rule :
- 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.
- Type and total amount of such payments for all projects made to each government.
- Total amounts of the payments by category.
- Currency used to make the payments.
- Financial period in which the payments were made.
- 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.
Initial public comments are due on January 25, 2016 and reply comments to respond to issues raised during the initial comment period are due February 16, 2016. The SEC intends to vote on a final rule in June 2016.
Corporations that are impacted by the rule would be required to comply beginning in their fiscal year ending no earlier than one year after the effective date of the adopted rule. The updated form SD would need to be filed no later than 150 days after the end of the issuer’s fiscal year.