On June 27, 2016, the United States Securities and Exchange Commission (the "SEC") adopted final rules requiring 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 final rules were adopted mostly as proposed with only a few changes (as noted herein) since the proposing rule release was issued. The rules are intended to further the statutory objective to advance U.S. policy interests by promoting greater transparency about payments related to resource extraction in order to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.

As directed by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, similar resource extraction disclosure rules were initially adopted by the SEC on August 22, 2012 but were 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 SEC previously adopted.

Which Issuers Are Affected?

Under the rules, a domestic or foreign issuer is required to disclose payments made by the issuer, or by a subsidiary or entity controlled by the issuer, to the U.S. federal government or a "foreign government" if the issuer:

  • is required to file annual reports with the SEC pursuant to Section 13 or Section 15(d) under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
  • is engaged in the "commercial development of oil, natural gas, or minerals" (a "resource extraction issuer").

This information is not required to be audited, and the information must be provided on a cash basis.

The rules define a "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, as determined by the SEC. The rules define the terms "subsidiary" and "control" based on accounting principles rather than using the definitions of those terms provided in Rule 12b-2. A resource extraction issuer would "control" another entity when the resource extraction issuer consolidates that entity or proportionately consolidates an interest in an entity or operation under the accounting principles applicable to its financial statements included in the periodic reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. The SEC believes that using accounting principles to determine "control" will be less costly for a resource extraction issuer because issuers are currently required to apply the definition on at least an annual basis for financial reporting purposes.

What Payments Will Resource Extraction Issuers Be Required To Disclose?

Under the rules, a resource extraction issuer must 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.

Definition of "Commercial Development of Oil, Natural Gas, or Minerals"

The rules define "commercial development of oil, natural gas, or minerals" to include exploration, extraction, processing, and export of oil, natural gas or minerals, or the acquisition of a license for any such activity. The definition is not intended to include activities that are ancillary or preparatory to such commercial development.

"Extraction" is defined as the production of oil and natural gas as well as the extraction of minerals.

"Processing" includes, but is not limited to, midstream activities such as the processing of gas to remove liquid hydrocarbons, the removal of impurities from natural gas prior to its transport through a pipeline, and the upgrading of bitumen and heavy oil, through the earlier of the point at which oil, gas, or gas liquids (natural or synthetic) are either sold to an unrelated third party or delivered to a main pipeline, a common carrier, or a marine terminal. It also includes the crushing and processing of raw ore prior to the smelting phase. "Processing" does not include the downstream activities of refining or smelting.

"Export" means the transportation of a resource from its country of origin to another country by a resource extraction issuer with an ownership interest in the resource (with certain exceptions).

The rules also include an anti-evasion provision requiring disclosure with respect to an activity (or payment) that, although not within the categories included in the rules, is part of a plan or scheme by a resource extraction issuer to evade the disclosure required under the rules.

Definition of "Not de Minimis"

The rules 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.

Types of Payments

The types of payments related to commercial development activities that are required to be disclosed by a resource extraction issuer pursuant to the rules are those that represent material benefits that are part of the commonly recognized revenue and include:

  • taxes (taxes levied on corporate profits, corporate income, and production, but not taxes levied on consumption, such as value added taxes, personal income taxes, or sales taxes);
  • royalties (unit-based, value-based and profit-based);
  • fees (including license fees, rental fees, entry fees, and other considerations for licenses or concessions);
  • production entitlements;
  • bonuses (including signature, discovery, and production bonuses);
  • dividends (dividends paid to a government in lieu of production entitlements or royalties and not those paid to a government as a common or ordinary shareholder of the resource extraction issuer as long as the latter dividend is paid to the government under the same terms as other shareholders);
  • payments for infrastructure improvements (such as building a road or railway to further the development of oil, natural gas, or minerals); and
  • community and social responsibility payments that are required by law or contract.

The rules also clarify the types of taxes, fees, bonuses, and dividends that are required to be disclosed and how they should be disclosed. Under the rules, a resource extraction issuer must also disclose payments of the types identified in the rules that are made in-kind (at cost, or if not reasonably available or determinable, at fair market value). This list of payment types is consistent with the requirements of the European Union, Canada, and the Extractive Industries Transparency Initiative ("EITI").

What Information Must Be Provided About Such Payments?

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

  • the 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;
  • the type and total amount of such 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.

Disclosure at the "Project" Level

The rules require disclosure to be made by a resource extraction issuer with respect to each project, similar to the approach adopted in the European Union and in Canada. The rules define "project" using an approach that is focused on the legal agreement that forms the basis for payment liabilities with a government.

This definition may also include "operationally and geographically interconnected" activities governed by multiple legal agreements. Under the rules, the multiple legal agreements do not have to be substantially similar. The rules provide a non-exclusive list of factors to consider when determining whether agreements are "operationally and geographically interconnected" for purposes of the definition of "project," with no single factor necessarily being determinative. Those factors include:

  • whether the agreements relate to the same resource and the same or contiguous part of a field, mineral district, or other geographic area;
  • whether they will be performed by shared key personnel or with shared equipment; and
  • whether they are part of the same operating budget.

Is there Potential Relief Available?

The final rules include two exemptions that provide for transitional relief or delayed reporting in limited circumstances. These exemptions provide a longer transition period for recently acquired companies that were not previously subject to reporting under the final rules and a one-year delay in reporting payments related to exploratory activities.

The SEC may also provide exemptive relief from the requirements of the rules on a case-by-case basis using its existing authority under the Exchange Act.

In light of international developments, as well as the progress made by the EITI, the rules allow a resource extraction issuer to use a report prepared for foreign regulatory purposes or for the EITI to comply with the rules if the SEC determines the requirements are substantially similar to the rules.

In making the determination as to whether the EITI or a foreign jurisdiction's reporting requirements are substantially similar to that of the SEC, the SEC will consider, among others, the following criteria:

  • the types of activities that trigger disclosure;
  • the types of payments that are required to be disclosed;
  • whether project-level disclosure is required and, if so, the definition of "project";
  • whether the disclosure must be publicly filed and whether it includes the identity of the resource extraction issuer;
  • whether the disclosure must be provided using an interactive data format that includes electronic tags; and
  • whether disclosure of payments to subnational governments is required and whether there are any exemptions allowed and, if so, whether there are any conditions that would limit the grant or scope of the exemptions.

Under the final rules, an issuer may only use an alternative report for an approved jurisdiction or regime if the issuer is subject to the resource extraction payment disclosure requirements of that jurisdiction or regime and has made the report prepared in accordance with that jurisdiction's requirements publicly available prior to filing it with the SEC. An issuer choosing to avail itself of this accommodation must submit as an Exhibit to Form SD the same report (in English and in an XBRL format) that it previously made publicly available in accordance with the approved jurisdiction's requirement. The issuer must include a statement in the body of Form SD that it is relying on this accommodation and identifying the alternative reporting regime for which the report was prepared. An issuer may also follow the submission deadline of an approved alterative jurisdiction if it files a notice on Form SD on or before due date of its Form SD.

How and When Must the Information Be Disclosed?

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

A resource extraction issuer is also required to file (not furnish) the Form SD with the SEC no later than 150 days after the end of its fiscal year, and is required to comply with the rules starting with their fiscal years ending no earlier than September 30, 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.