SEC Proposes Rules for Resource Extraction Issuers Under Dodd-Frank Act

The Securities and Exchange Commission today voted to propose rules that would require resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments for the commercial development of oil, natural gas or minerals.  The proposed rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to further the statutory objective to advance U.S. policy interests by promoting greater transparency about payments related to resource extraction.

Under the proposed rules, an issuer would be required to disclose payments made to the U.S. federal government or a foreign government if the issuer is required to file annual reports with the Commission under the Securities Exchange Act.  The issuer would also be required to disclose payments made by a subsidiary or entity controlled by the issuer.

“These proposed rules would implement a statutory mandate and require disclosure consistent with other payment transparency disclosure regimes around the world,” said SEC Chair Mary Jo White.  “We appreciate the valuable input that we have received from companies, industry groups, civil society organizations, foreign governments, and other federal agencies that helped inform the Commission and shape these proposed rules.”

The disclosure would be made at the project level similar to the approach adopted in the European Union and proposed in Canada.  The disclosure required by the proposed rules would be filed publicly with the Commission annually on Form SD.

Initial public comments on the proposed rules are due by January 25, 2016.  Reply comments, which may respond only to issues raised in the initial comment period, are due on February 16, 2016. 

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FACT SHEET

Disclosure of Payments by Resource Extraction Issuers

SEC Open Meeting

December 11, 2015

Action

The Commission will consider whether to propose rules that would require resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments for the purpose of commercially developing oil, natural gas or minerals.  The proposed rules, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would seek to carry out the statutory objective to advance U.S. policy interests and promote international efforts for greater transparency of payments made to governments for extractive activities.

Highlights of the Proposed Rules

Who Must Disclose:

The proposed rules would require a domestic or foreign issuer to disclose payments made to governments if:

• The issuer is required to file an annual report with the Commission under the Securities Exchange Act (Exchange Act); and
• The issuer engages in the commercial development of oil, natural gas, or minerals.

In addition, a resource extraction issuer would be required to disclose payments made by a subsidiary or another entity controlled by the issuer. For purposes of the rule, control would be determined by reference to financial consolidation principles that the issuer applies to the audited financial statements in its Exchange Act annual reports. 

What Must Be Disclosed:

Under the proposed rules, a resource extraction issuer would be required to disclose certain payments made to a foreign government, including foreign subnational governments, or the U.S. federal government.

Resource extraction issuers would need to disclose payments that are:  made to further the commercial development of oil, natural gas, or minerals; “not de minimis”; and within the types of payments specified in the rules.

The proposed rules would define commercial development of oil, natural gas, or minerals to include exploration, extraction, processing, and export, or the acquisition of a license for any such activity.  The proposed rules would define “not de minimis” as any payment, whether a single payment or a series of related payments, which equals or exceeds $100,000 during the same fiscal year.

The types of payments related to commercial development activities that would need to be disclosed include:  taxes; royalties; fees (including license fees); production entitlements; bonuses; dividends; and payments for infrastructure improvements.

The proposed rules would clarify the types of taxes, fees, bonuses, and dividends that are required to be disclosed and how they should be disclosed.  This list of payment types would be consistent with the requirements of the European Union, Canada, and the Extractive Industries Transparency Initiative. 

The proposed rules would 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 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.

The proposed rules would define “project” using an approach that is focused on the legal agreement that forms the basis for payment liabilities with a government.  This definition could also include operational activities governed by multiple legal agreements.

The proposing release notes that the Commission could provide exemptive relief from the requirements of the proposed rules on a case-by-case basis using its existing authority under the Exchange Act.  Also, in light of international developments, as well as the progress made by the U.S. Extractive Industries Transparency Initiative (USEITI), the proposed rules would allow issuers to use a report prepared for foreign regulatory purposes or for the USEITI to comply with the proposed rules if the Commission determines the requirements are substantially similar to the proposed rules.

How It Must Be Disclosed:

The proposed rules would require a resource extraction issuer to publicly disclose the information annually using Form SD.  The information would be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.

When It Must Be Disclosed:

A resource extraction issuer would be required to file the Form SD with the Commission no later than 150 days after the end of its fiscal year.

Background

Section 13(q) was added to the Exchange Act in 2010 by Section 1504 of the Dodd Frank Act.  It directs the Commission to issue final rules that require each resource extraction issuer to include in an annual report information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the federal government for the purpose of the commercial development of oil, natural gas, or minerals.  Among other things, Section 13(q) specifies that to the extent practicable, the rules shall support the commitment of the federal government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.

Rule 13q-1 was initially adopted by the Commission on August 22, 2012, but it was subsequently vacated by the U.S. District Court for the District of Columbia.  Since then, the European Union and Canada have adopted transparency initiatives similar to the rules the Commission previously adopted. 

What’s Next?

If approved for publication by the Commission, the proposed rules will be published on the Commission’s website and in the Federal Register.  Initial comments will be due on January 25, 2016.  Reply comments, which may respond only to issues raised in the initial comment period, will be due on February 16, 2016.