SEC finally adopts resource extraction payments disclosure rule
A new rule provides more exemptions, limits liability and requires less detailed disclosure than an earlier version.
Following years of court challenges and a Congressional repeal, the U.S. Securities and Exchange Commission (the “SEC”) has finally adopted a less-demanding version of the controversial resource extraction payments disclosure rule it first adopted in 2016. Among other things, the rule will:
- allow reports on Form SD to be “furnished” to, rather than “filed” with, the SEC, which will subject the disclosures to a lower level of liability;
- permit greater aggregation of payment disclosure;
- provide exemptions if the disclosure is prohibited by foreign law or preexisting contract terms;
- exempt emerging growth companies and smaller reporting companies (but not foreign private issuers); and
- not require disclosure of payments until the first fiscal year following the fiscal year in which an issuer has completed its initial public offering (“IPO”).
At the same time, the SEC also issued an order recognizing the resource extraction payment disclosure requirements of the European Union (“EU”), the UK, Norway, and Canada as “alternative reporting regimes” that satisfy the transparency objectives of Section 13(q) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). An issuer reporting under these approved alternative reporting regimes may submit the report it prepared under those foreign requirements instead on Form SD.
The final rule is effective 60 days after publication in the Federal Register, and there will be a two-year transition period for compliance. After the end of the transition period, an issuer must furnish the required disclosures on Form SD no later than 270 days after the end of its fiscal year.
Section 13(q), which was added to the Exchange Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, directs the SEC to require a “resource extraction issuer” to disclose annually information relating to payments made to a foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals (“resource extraction payments”). The section requires these issuers to provide information about the type and total amount of payments made for each of their projects related to the commercial development of oil, natural gas or minerals, and the type and total amount of payments made to each government.
The SEC issued a rule implementing Section 13(q) in 2016 (the “2016 rule”), but before it could become effective, the U.S. Congress voted to issue a joint resolution of disapproval of the rule under the Congressional Review Act (the “CRA”), which permits Congress to rescind agency rules that have been recently adopted. The CRA provides that a rule disapproved in such a manner may not be reissued in “substantially the same form,” unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule. Congress did not, however, repeal or amend Section 13(q), so the mandate to the SEC to issue a resource extraction payment disclosure rule remained outstanding.
Overview of final rule
Under the final rule, a “resource extraction issuer” is any issuer that is required to file annual reports on Forms 10-K, 20-F or 40-F, and engages in the commercial development of oil, natural gas, or minerals. A resource extraction issuer will be required to make annual disclosures on Form SD regarding its resource extraction payments that are “not de minimis.”
As with the 2016 rule, the final rule will define payments to include taxes, royalties, fees (including license fees), production entitlements, bonuses and other material benefits, that the SEC, consistent with the Extractive Industries Transparency Initiative’s (“EITI”) guidelines, determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals, as well as community and social responsibility payments that are required by law or contract, payments of certain dividends and payments for infrastructure.
Following criticism regarding its proposal of a higher “not de minimis” amount, the SEC chose to continue with the 2016 rule’s “not de minimis” definition to mean a payment that equals or exceeds US$100k, whether made as a single payment or series of related payments.
The disclosures must be furnished to the SEC on Form SD and will be publicly available on the SEC’s EDGAR system. The payment information must also be tagged using the extensible Business Reporting Language (“XBRL”) electronic format. The SEC considered, but ultimately decided against, allowing issuers to provide their disclosures to the SEC on a confidential basis.
The SEC is allowing a transition period of two years, meaning Form SD will not need to be filed for the first two years following the final rule’s effective date. After the transition period, Form SD must be furnished no later than 270 days after the end of the issuer’s fiscal year. For example, if the rules were to become effective on March 1, 2021, the compliance date for an issuer with a December 31 fiscal year end would be September 30, 2024 (i.e., 270 days after December 31, 2023).
To comply with the CRA’s requirement that the new rule not be “substantially the same” as the 2016 version, the final rule makes a number of substantial changes from that version, which will generally reduce the disclosure burden on companies. View the complete key changes in the PDF version to the right.
One key element that the final rule retains from the 2016 rule is the acceptance of alternative reporting. Under this provision, an issuer subject to similar disclosure requirements in certain approved foreign jurisdictions may submit the report it prepared under those foreign requirements in lieu of Form SD.
The final rule will permit this alternative reporting only if the SEC has determined that the foreign reporting regime requires disclosure that satisfies the transparency objectives of Section 13(q). An issuer will only be permitted to use an alternative report if the issuer was subject to the resource extraction payment disclosure requirements of that jurisdiction or regime and had made the report publicly available prior to submitting it to the SEC.
Further, the issuer will have to:
- disclose in the body of its Form SD that it is relying on the accommodation and identify the alternative reporting regime for which the report was prepared;
- tag the alternative report using XBRL; and
- provide a fair and accurate English translation of the entire report (not just a summary) if the report is not in English.
The issuer will be permitted to follow the submission deadline of an approved alternative jurisdiction if it submits a notice on or before the due date of its Form SD indicating its intent to submit the alternative report using the alternative jurisdiction’s deadline.
In conjunction with the final rule, the SEC also issued an order recognizing as alternative reporting regimes for the purposes of alternative reporting:
- the EU Directives;
- the UK’s Reports on Payments to Governments Regulations 2014;
- Norway’s Regulations on Country-by-Country Reporting; and
- Canada’s ESTMA.
We welcome the final rule as an improvement over the 2016 version in terms of reducing the disclosure burden on companies. We will continue to monitor developments in this area and welcome any queries you may have.