Commentary: SEC re-proposes rules for resource sector under Dodd-Frank

On Dec. 11, 2015, the U.S. Securities and Exchange Commission (SEC) re-proposed rules requiring that resource extraction issuers disclose payments made to the U.S. federal government or foreign governments for commercially developing oil, natural gas and minerals. The proposed rules are mandated by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the SEC states that the rules are intended to advance “U.S. foreign policy interests in supporting global efforts to improve transparency in the extractive industries.”

Background

The SEC had originally adopted disclosure rules regarding payments to governments by resource extraction issuers in 2012. In 2013, however, the rules were struck down by the U.S. District Court for the District of Columbia. A year later, in September 2014, Oxfam filed an action to compel the SEC to issue revised proposed rules. In responding to the action, a federal court judge found that “the commission unlawfully withheld agency action by not promulgating a final rule” as mandated under Dodd-Frank and, in September 2015, ordered that the SEC file an “expedited schedule” for re-proposing and finalizing the rules.

Who must disclose?

Under the proposed rules, both domestic and foreign resource extraction issuers must disclose payments made to the U.S. federal government and foreign governments if:

• The issuer is required to file an annual report with the SEC under the Securities Exchange Act of 1934; and

• The issuer engages in the commercial development of oil, natural gas or minerals.

A resource extraction issuer would also be required to disclose payments made by its subsidiaries and other entities under its control, including those payments included in its consolidated financial statements made by entities that are consolidated or proportionately consolidated, as determined by applicable accounting principles.

Under the proposed rules, the following terms would have the following meanings:

• “Resource extraction issuer” would mean all U.S. companies and foreign companies (including foreign private issuers and MJDS companies) that are required to file annual reports pursuant to Section 13 or 15(d) of the Exchange Act, and are engaged in the commercial development of oil, natural gas or minerals;

• “Commercial development of oil, natural gas or minerals” would mean exploration, extraction, processing and export, or the acquisition of a licence for any such activity; and

• “Foreign government” would mean a foreign (non-U.S.) 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.

Form SD and types of payments to be disclosed

Under the proposed rules, resource extraction issuers would be required to disclose the payments on a Form SD, and include as an exhibit to Form SD, information relating to payments made to the U.S. federal government and foreign governments during the fiscal year.  The resource extraction issuer would be required to file the Form SD on the Commission’s Electronic Data Gathering, Analysis and Retrieval System no later than 150 days after the end of its fiscal year (Form SD is also used for conflict mineral disclosures required under separate and unrelated rules).

The term “payment” would mean payments that are made to further the commercial development of oil, natural gas or minerals, and are “not de minimis” (the SEC proposes defining “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), and include:

• Taxes;

• Royalties;

• Fees (including licence fees);

• Production entitlements;

• Bonuses;

• Dividends; and

• Payments for infrastructure improvements.

Specifically, the following information must be filed by the issuer as an exhibit to Form SD using the eXtensible Business Reporting Language electronic format and the electronic tags identified in Item 2.01 of Form SD:

• The type and total amount of payments made for each project;

• The type and total amount of payments for all projects made to each government;

• The total amounts of the payments, by category;

• The currency used to make the payments;

• The financial period in which the payments were made;

• The 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 SEC proposes to define the term “project” in a manner similar to the EU Directives, using an approach focused on the legal agreement that forms the basis for payment liabilities with a government. In certain circumstances, this definition would also include operational activities governed by multiple legal agreements.

Exemptive relief?

The proposed rules would not include any express exemptions. Instead, resource extraction issuers could apply for — and the commission would consider — exemptive relief on a case-by-case basis.

Reliance on foreign filed regulatory reports

In addition, in light of recent developments abroad, as well as the developments with the U.S. Extractive Industries Transparency Initiative (USEITI), resource extraction issuers could use reports prepared for foreign regulatory purposes or for USEITI to comply with the proposed rules, provided that the SEC deems the foreign jurisdiction’s applicable requirements or the USEITI reporting regime is substantially similar to those of the SEC.

Comment periods

Initial comments on the proposed rules are due on Jan. 25, 2016. Reply comments, which are those comments which respond to issues raised in the initial comment period, are due on Feb. 16, 2016. A vote on the final rules is targeted for June 27, 2016. Under the proposed rules, resource extraction issuers would be required to comply with the rules starting with their fiscal year, ending no earlier than one year after the effective date of the adopted rules.

— Steven I. Suzzan is a securities and mergers and acquisitions (M&A) partner with Norton Rose Fulbright, based in New York. His practice focuses on corporate and securities matters, including M&A, private equity transactions,  corporate finance  and  corporate  governance.

Chris Hilbert is a transactional lawyer and business law advisor. He is a partner at Norton Rose Fulbright’s New York office.

Trevor Zeyl is an associate at the New York office, his practice covers a variety of areas of corporate and commercial law, with a focus on public and private M&A, securities law and corporate finance.