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On December 11, 2015, the Securities and Exchange Commission (the “SEC”) re-proposed 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 and minerals (the “proposed rules”). The proposed rules are mandated by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), 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.”1
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.2 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”3 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:
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:
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 (“EDGAR”) no later than 150 days after the end of its fiscal year (Form S-D 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:
Specifically, the following information must be filed by the issuer as an exhibit to Form SD using the eXtensible Business Reporting Language (“XBRL”) electronic format and the electronic tags identified in Item 2.01 of Form SD:
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 would be able to use reports prepared for foreign regulatory purposes or for USEITI to comply with the proposed rules, provided the SEC deems the foreign jurisdiction’s applicable requirements or the USEITI reporting regime to be substantially similar to those of the SEC.
Comment periods
Initial comments on the proposed rules are due on January 25, 2016. Reply comments, which are those comments which respond to issues raised in the initial comment period, are due on February 16, 2016. A vote on the final rules is targeted to take place by 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.
1 SEC Release Release No. 34-76620.
2 The court vacated the rules because they contained two “substantial errors”: (i) the rules compelled the public disclosure of the payments when they shouldn’t have; and (ii) the rules failed to provide exemptions for countries where such payment disclosure is illegal.
3 See Oxfam America, Inc. v. United States Securities and Exchange Commission, Civil Action, No. 14-13648 (DJC), 2015 WL 5156554 (D. Mass. Sept. 2, 2015).
