On August 22, 2012, the U.S. Securities and Exchange Commission (“SEC”) issued a final rule implementing Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). Section 1504 requires companies that file annual reports with the SEC and that are engaged in the commercial development of oil, natural gas, or minerals to disclose certain payments made to the U.S. government or foreign governments (including subdivisions of foreign governments, such as States, provinces or municipalities) in connection with the development of such resources.
Overview of the SEC’s Final Rule[i]
Which Companies are Affected?
The Final Rule applies to all “resource extraction issuers.” This includes all companies that are (i) required to file an annual report with the SEC, and (ii) engaged in the commercial development of oil, natural gas, or minerals. The Final Rule defines “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.
What Payments Must be Disclosed?
Resource extraction issuers must disclose payments made to the U.S. government or a foreign government (including subnational governments such as foreign States, provinces and municipalities) that are:
- made to further the commercial development of oil, natural gas, or minerals;
- are not de minimis; and
- are of the types specified in the Final Rule, namely taxes, royalties, fees (including licensing fees), production entitlements, bonuses, dividends and payments for infrastructure improvements.
An issuer is also required to disclose payments made by a subsidiary or another entity controlled by the issuer.
The Final Rule defines “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 Final Rule requires 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 amount of payments made for each project;
- type and total amount of payments 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; and
- the project to which the payments relate.
In kind payments must also be valued and reported. There are special rules relating to reporting of dividends and taxes imposed on the company (not a particular project).
The Final Rule leaves the term “project” undefined. According to the Final Rule, this was done to provide resource extraction issuers flexibility in applying the term to different business contexts.
How are Disclosures Made and When Does the Final Rule Take Effect?
The Final Rule requires resource extraction issuers to disclose the required information annually by filing a new form, Form SD, with the SEC. Resource extraction issuers are required to comply with the Final Rule for fiscal years ending after September 30, 2013. The form must be filed with the SEC no later than 150 days after the end of the issuer’s fiscal year. For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after September 30, 2013.
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In light of this new rule, mining and oil and natural gas development companies must ensure that they are aware of all payments covered by the rule to the United States government, or to foreign governments or subdivisions of foreign governments. (There is no need to report payments made to States or municipalities located in the United States.) Such companies should also consult with counsel as to the types of payments that are required to be reported, including payments made by subsidiaries and other entities which they control.
[i] The final rule was published by the SEC in Release No. 34-67717 (August 22, 2012).