Disclosure of Payments By Resource Extraction Issuers
A Small Entity Compliance Guide1
On August 22, 2012, 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 new 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 new Exchange Act Rule 13q-1 and amended new Form SD2 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 that:
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. The rules do not provide any exemptions from the disclosure requirements.
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” is defined to include the activities of exploration, extraction, processing, and export, or the acquisition of a license for any such activity. The adopting release provides additional guidance regarding the 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.
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 of the issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. A resource extraction issuer will be required to determine whether it has control of an entity for purposes of the disclosure requirements based on a consideration of all relevant facts and circumstances.
Under the disclosure requirements, a resource extraction issuer must disclose payments that are:
In addition, the rules specifically identify the types of payments that an issuer must disclose, which are taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and payments for infrastructure improvements. The rules clarify the types of taxes, fees, bonuses, and dividends that an issuer must disclose. A resource extraction issuer must disclose payments made for:
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 the terms “foreign government” and “Federal Government” for purposes of the disclosure requirements. “Foreign government” is defined to mean a foreign government, a department, agency, or instrumentality of a foreign government, or a company 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 rules clarify 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:
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 rules leave the term “project” undefined to provide resource extraction issuers flexibility in applying the term to different business contexts depending on factors such as the particular industry or business in which the issuer operates, or the issuer’s size. Individual issuers routinely provide disclosure about their own projects in their Exchange Act reports and other public statements. The Commission provided some guidance regarding the meaning of “project” in the release adopting the final rules. In doing so, it noted that resource extraction issuers routinely enter into contractual arrangements with governments for the purpose of commercial development of oil, natural gas, or minerals; the contract defines the relationship and payment flows between the resource extraction issuer and the government; and the contract generally provides a basis for determining the payments, and required payment disclosure, that would be associated with a particular “project.”
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.
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 specified under the rules, are part of a plan or scheme to evade the disclosure requirements under Section 13(q).
How and When the Information Must Be Disclosed
The rules require a resource extraction issuer to disclose the payment information annually by filing a new form, 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, 2013. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013.
The adopting release for the rules implementing Section 1504 of the Dodd-Frank Act can be found on the SEC’s website at http://www.sec.gov/rules/final/2012/34-67717.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://tts.sec.gov/cgi-bin/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 email@example.com.
1 This guide was prepared by the staff of the SEC as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.
2 The Commission adopted new Form SD when it adopted rules to implement the requirements of Section 1502 of the Dodd-Frank Act. See Conflict Minerals, Release No. 34-67716 (August 22, 2012), which can be found on the SEC’s website at http://www.sec.gov/rules/final/2012/34-67716.pdf.