A Small Entity Compliance Guide[1]

Introduction

On July 20, 2016, the Securities and Exchange Commission (“SEC” or “Commission”) adopted amendments to its disclosure rules to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 1504 added Section 13(q) to the Securities Exchange Act of 1934 (the “Exchange Act”), which requires the Commission to issue rules requiring resource extraction issuers to include in an annual report on Form SD information relating to certain payments made to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. The Commission adopted Exchange Act Rule 13q-1 and amended Form SD[2] to implement the disclosure requirements.

Definition of “Resource Extraction Issuer” and Application of the Disclosure Requirements

Under the rules, a “resource extraction issuer” is defined as an issuer, including a smaller reporting company, that:

• is required to file an annual report with the Commission pursuant to Section 13 or 15(d) of the Exchange Act; and
   
• engages in the commercial development of oil, natural gas, or minerals.

The disclosure requirements apply to both U.S. and foreign companies that meet the definition of resource extraction issuer, regardless of the size of the company or the extent of business operations constituting commercial development of oil, natural gas, or minerals.

To determine whether it meets the definition of “resource extraction issuer,” an issuer must consider whether it is engaged in the commercial development of oil, natural gas, or minerals. “Commercial development of oil, natural gas, or minerals” means exploration, extraction, processing, and export of oil, natural gas, or minerals, or the acquisition of a license for any such activity. Form SD and the adopting release provide additional guidance regarding these activities. The definition of “commercial development” is intended to capture only activities that are directly related to the commercial development of oil, natural gas, or minerals. It is not intended to capture activities that are ancillary or preparatory to commercial development.

Disclosure Required

A resource extraction issuer must disclose information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control[3] of the issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals.

Under the disclosure requirements, a resource extraction issuer must disclose payments that are:

• made to further commercial development of oil, natural gas, or minerals; and
   
• not de minimis.

In addition, the rules specifically identify the types of payments that an issuer must disclose, which include taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, payments for infrastructure improvements, and, if required by law or contract, community and social responsibility payments. The rules clarify the types of taxes, fees, bonuses, royalties, and dividends that an issuer must disclose. A resource extraction issuer must disclose payments made for:

• taxes levied on corporate profits, corporate income, and production, but not for taxes levied on consumption, such as value added taxes, personal income taxes, or sales taxes;
   
• fees, including license fees, rental fees, entry fees, and other considerations for licenses or concessions;
   
• bonuses, including signature, discovery, and production bonuses;
   
• royalties, including unit-based, value-based, and profit-based royalties; and
   
• dividends, including dividends paid in lieu of production entitlements or royalties, but not dividends paid to a government as a common or ordinary shareholder of the issuer as long as the dividend is paid to the government under the same terms as other shareholders.

A resource extraction issuer must disclose in-kind payments if the payments fall within the types of payments identified in the rules.

Definition of “Not de Minimis”

The rules define “not de minimis” to mean any payment, whether a single payment or a series of related payments, that equals or exceeds $100,000 during the most recent fiscal year. The rules provide that in the case of any arrangement providing for periodic payments or installments, a resource extraction issuer must consider the aggregate amount of the related periodic payments or installments of the related payments in determining whether the payment threshold has been met for that series of payments, and accordingly, whether disclosure is required. For example, a resource extraction issuer obligated to pay royalties to a government annually and that paid $10,000 in royalties on a monthly basis to satisfy its obligation would be required to disclose $120,000 in royalties.

Definition of “Foreign Government” and “Federal Government”

The rules define “foreign government” as a foreign government, a department, agency, or instrumentality of a foreign government, or a company at least majority owned by a foreign government. For purposes of the rules, “foreign government” includes a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality, or territory under a foreign national government. In addition, the release clarifies that “Federal Government” means the United States Federal Government. Thus, the rules do not require disclosure of payments made to subnational governments in the United States.

Information Required About Payments

The rules require a resource extraction issuer to provide the following information about payments made to further the commercial development of oil, natural gas, or minerals:

• type and total amount of payments made for each project;
   
• type and total amount of payments for all projects made to each government;
   
• total amounts of the payments, by payment type;
   
• currency used to make the payments;
   
• fiscal year 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; and
   
• the subnational geographic location of the project.

The information must be electronically tagged in eXtensible Business Reporting Language (XBRL) format. To the extent that payments, such as corporate income taxes and dividends, are made for obligations levied at the entity level, the rules permit an issuer to omit certain electronic tags that may be inapplicable for those payment types as long as it provides all other electronic tags, including the tag identifying the recipient government.

Treatment of “Project”

The term “project” means 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.  Agreements that are both operationally and geographically interconnected may be treated by the resource extraction issuer as a single project.  The instructions to Form SD provide a non-exclusive list of factors to consider when determining whether agreements are operationally and geographically interconnected: (a) whether the agreements relate to the same resource and the same or contiguous part of a field, mineral district, or other geographic area; (b) whether the agreements will be performed by shared key personnel or with shared equipment; and (c) whether they are part of the same operating budget.

The rules permit a resource extraction issuer to disclose payments at the entity level if the payment is made for obligations levied on the issuer at the entity level rather than the project level. For example, if an issuer has more than one project in a host country, and that country’s government levies corporate income taxes on the issuer with respect to the issuer’s income in the country as a whole, and not with respect to a particular project or operation within the country, the issuer may disclose the resulting income tax payment or payments without specifying a particular project associated with the payment.

Anti-Evasion Provision

The rules include an anti-evasion provision to address the potential for circumvention of the disclosure requirements. A resource extraction issuer must disclose payment information with respect to activities or payments that, although not in form or characterization of one of the categories of activities or payments specified in Form SD, are part of a plan or scheme to evade the disclosure requirements under Section 13(q).

Alternative Reports

A resource extraction issuer may use a report prepared for other disclosure regimes to comply with the rules if the Commission determines that the requirements applicable to those reports are substantially similar.  The Commission has determined that the current reporting requirements of the European Union Accounting and Transparency Directives (as implemented in a European Union or European Economic Area member country), Canada’s Extractive Sector Transparency Measures Act, and the U.S. Extractive Industries Transparency Initiative are substantially similar to the Commission’s rules, subject to certain conditions specified in an order issued concurrently with the rules and in Form SD.  Applications for recognition of a regime as substantially similar must be filed using the procedures set forth in Rule 0-13 of the Exchange Act.

Exemptions

The rules include two targeted exemptions to the reporting obligations. One exemption provides that a resource extraction issuer that has acquired a company not previously subject to the rules will not be required to report payment information for the acquired company until the filing of a Form SD for the first fiscal year following the acquisition. Another exemption provides a one-year delay in reporting payments related to exploratory activities.

How and When the Information Must Be Disclosed

The rules require a resource extraction issuer to disclose the payment information annually by filing a Form SD on the SEC’s public database, EDGAR. An issuer must include the payment information in XBRL format in an exhibit to the form.

The rules require a resource extraction issuer to file the form on EDGAR no later than 150 days after the end of the issuer’s most recent fiscal year.

A resource extraction issuer will be required to comply with the rules for fiscal years ending after September 30, 2018.

Other Resources

The adopting release for the rules implementing Section 1504 of the Dodd-Frank Act can be found on the SEC’s website at https://www.sec.gov/rules/final/2016/34-78167.pdf.

The order issued by the Commission recognizing the resource extraction payment disclosure requirements of the European Union, Canada and the U.S. Extractive Industries Transparency Initiative as substantially similar to the requirements of Rule 13q-1 can be found at https://www.sec.gov/rules/other/2016/34-78169.pdf.

Section 1504 of the Dodd-Frank Act can be found at http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.

Contacting the SEC

The SEC’s Division of Corporation Finance is available to assist small companies and others with questions regarding these rules. You can contact the Division for this purpose at (202) 551-3500 or https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning small companies may be directed to the SEC’s Office of Small Business Policy in the Division of Corporation Finance at (202) 551-3460 or  through the above online form.