On June 27, the Securities and Exchange Commission (“SEC”) issued a new rule requiring extractive sector companies (oil, gas, and mining) to disclose the payments that they make to governments for the commercial development of oil, gas, or minerals.
The rule was enacted pursuant to Section 1504 of the Dodd-Frank Act, which directed the SEC to issue a rule requiring extractive sector companies to disclose payments to governments, including both foreign governments and the U.S. federal government. As discussed in previous posts, the SEC originally issued a rule implementing Section 1504 in August 2012. This rule was subsequently vacated in July 2013 by the U.S. District Court for the District of Columbia after a lawsuit challenging the rule was filed by the American Petroleum Institute and other business groups.
The revenue transparency rule as adopted is largely unchanged from the proposed rule issued last December. 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 must make annual disclosures regarding payments made by the issuer, the issuer’s subsidiaries, or any entity under the control of the issuer.
The rule requires companies to file a Form SD on an annual basis disclosing information about payments related to the commercial development of oil, natural gas, or minerals, including “exploration, extraction, processing, export and the acquisition of a license for any such activity.” The rule specifically requires:
- The disclosure of payments, including both single payments and a series of related payments within a fiscal year, that are equal to or greater than $100,000; and
- The disclosure of payments on a project-level basis.
The specific payments that must be disclosed include:
- Fees (including licensing fees);
- Production entitlements;
- Payments for infrastructure improvements; and
- If required by law or contract, community and social responsibility payments.
The addition of legally required community and social responsibility payments is a change from the proposed rule and is consistent with the guidelines issued by the Extractive Industries Transparency Initiative.
Companies subject to the rule must make disclosures with regard to fiscal years ending on or after September 30, 2018. The Form SD must be filed with the SEC no later than 150 days after the end of the issuer’s fiscal year and there is no audit requirement associated with the filings.
The final rule includes two notable exemptions:
- A company that acquires another company that was not previously covered by the rule will not be required to file payment information for the acquired company for the first fiscal year after the acquisition; and
- Information regarding payments related to exploration activities may be withheld for one year.
Companies also may petition for case-by-case relief from the reporting requirements based on specific facts and circumstances that may make reporting untenable.
Notably, pursuant to the final rule, a company may comply with the relevant reporting requirements by filing a report prepared in connection with an alternate reporting regime. In a separate order issued on the same day as the new rule, the SEC stated that it has determined that the current reporting requirements of the European Union Accounting and Transparency Directives, Canada’s Extractive Sector Transparency Measures Act, and the U.S. Extractive Industries Transparency Initiative are “substantially similar” to the final rule. Reports filed pursuant to those reporting regimes may be used to meet the SEC’s reporting requirements, subject to certain conditions.