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Dodd-Frank Wall Street Reform and Consumer Protection Act
Frequently Asked Questions

Disclosure of Payments by Resource Extraction Issuers

May 30, 2013

In these Frequently Asked Questions (FAQs), the Division of Corporation Finance is providing guidance on various aspects of Exchange Act Section 13(q), Rule 13q-1 and Item 2.01 of Form SD, which require disclosure of certain payments made by resource extraction issuers to foreign governments or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals. For more information, please refer to Release No. 34-67717 (August 22, 2012). These FAQs are not rules, regulations or statements of the Commission. Further, the Commission has neither approved nor disapproved these FAQs.

(1) Question

An Exchange Act reporting issuer is a holding company and does not directly engage in any of the activities comprising commercial development of oil, natural gas or minerals.  Is it nevertheless required to provide the disclosure required by Section 13(q) and the related rules if either a subsidiary or another entity over which it has control engages in those activities and makes payments to governments to further those activities? 

Answer

Yes.  Section 13(q) and the rules issued thereunder require a resource extraction issuer to disclose payments made to governments by the issuer, a subsidiary of the issuer or an entity under the control of the issuer.  A reporting issuer that is not engaged in commercial development activities itself but whose subsidiary or entity under its control engages in those activities would be considered a resource extraction issuer and would be subject to the disclosure requirement.

(2) Question

Is a company that provides services associated with the exploration, extraction, processing and export of a resource considered a “resource extraction issuer”?

Answer

No.  A company providing only services associated with exploration, extraction, processing and export generally would not be considered to be a resource extraction issuer.  We recognize that many companies are involved in activities related to the commercial development of resources, but these companies may not be conducting activities that are considered to be one of the activities covered by Section 13(q) and the rules issued thereunder.  For example, we do not believe companies that provide hardware and logistics to help companies explore for or extract resources would be considered to be exploring for or extracting the resources even though their services are being used to explore or extract.  Similarly, we do not believe a company engaged by an operator to provide hydraulic fracturing services or drilling services for the operator, thus enabling the operator to extract resources, would be considered to be a resource extraction issuer.  We believe this view is consistent with the approach of the Extractive Industries Transparency Initiative (EITI) that only companies directly engaged in the extraction or production of oil, natural gas or minerals must disclose payments to governments.  We note that where a service provider makes a payment that falls within the definition of “payment” to a government on behalf of a resource extraction issuer, the resource extraction issuer must disclose such payments.   

(3) Question

What is considered to be a “mineral” for purposes of Section 13(q), Rule 13q-1 and Item 2.01 of Form SD?

Answer

For purposes of those provisions, disclosure would be required with respect to any material commonly understood to be a mineral, which would include any material for which disclosure would be required under Industry Guide 7, “Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations,” notwithstanding any test of materiality used for purposes of Guide 7.    

(4)  Question

If an issuer that does not have an ownership interest in a resource transports the resource from Country A into Country B, is the issuer considered to be “exporting,” thereby making the issuer a “resource extraction issuer”?

Answer

It depends on the circumstances.  The definition of “commercial development” in Rule 13q-1 includes “export,” but does not include transportation activities.  Transportation activities generally would not be included within the definition of “commercial development” unless the activities are directly related to the export of the resource.  Generally, we would view the movement of a resource across an international border from host Country A to Country B by a company with an ownership interest in the resource as export.  We generally would not view transportation activities by an issuer that does not have an ownership interest in the resource as directly related to the export of the resource, and therefore, the issuer would not be considered to be a “resource extraction issuer.”

(5)  Question

If a resource extraction issuer uses a majority-owned government transportation service to supply people or materials to an extractive job site, would the payments be covered?

Answer

No.  We would view these as payments made in connection with an activity that is ancillary or preparatory to the commercial development of oil, natural gas or minerals.

(6) Question

Are penalties and/or fines related to resource extraction paid to government agencies reportable as fees?

Answer

No.  Section 13(q) and Item 2.01 of Form SD require the disclosure of certain payments made to further the commercial development of oil, natural gas or minerals.  Section 13(q) defines a “payment” to include, among others, fees and other material benefits that the Commission determines, consistent with the EITI guidelines, are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.  Penalties and fines are not within the type of fees specifically mentioned in the EITI guidelines, and the Commission did not determine that penalties or fines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.    

(7)  Question

Would a resource extraction issuer be permitted to provide the payment information on an accrual basis?

Answer

No.  The rules contemplate the payment information to be presented on an unaudited, cash basis for the year in which the payments are made.

(8)  Question

A resource extraction issuer has many sources of income in a particular country and pays corporate level income tax on the consolidated amount.  Does the issuer have to segregate income from resource extraction activities and disclose taxes paid only on that income for purposes of Rule 13q-1 and Form SD?

Answer

No.  A resource extraction issuer is required to disclose payments made to governments to further its commercial development activities and is not required to disclose other payments made to those governments.  In this regard, a resource extraction issuer may elect to segregate income from exploration, extraction, processing and export from income earned on other business activities in a particular country and disclose income taxes paid solely on the income generated by the commercial development activities.  A resource extraction issuer that does not segregate the income information may disclose that the information includes payments made for purposes other than commercial development activities.

(9)  Question

Does the failure to timely file a Form SD regarding payments by resource extraction issuers cause an issuer to lose eligibility to use Form S-3? 

Answer

No.  In determining eligibility for use of Form S-3, the requirement that the registrant has filed in a timely manner all reports and materials required to be filed during the prior twelve calendar months refers only to Exchange Act Section 13(a) or 15(d) reports and Exchange Act Section 14(a) and 14(c) materials.  See Compliance and Disclosure Interpretation Question 115.04 under Securities Act Forms.  Form SD regarding payments by resource extraction issuers is required to be filed under Exchange Act Section 13(q).  Therefore, the filing of Form SD regarding payments by resource extraction issuers does not impact an issuer’s Form S-3 eligibility.   

http://www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm

Modified: 05/30/2013