SEC Proposes Rules on Disclosure of Payments by Resource Extraction Issuers
The SEC is proposing Rule 13q-1 and an amendment to Form SD to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”) relating to disclosure of payments by resource extraction issuers. Section 1504 of the Dodd-Frank Act added Section 13(q) to the Securities Exchange Act of 1934. Section 13(q) directs the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to payments made to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. Section 13(q) 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. In addition, Section 13(q) requires a resource extraction issuer to provide information about those payments in an interactive data format.
The SEC initially adopted Rule 13q-1 and amendments to Form SD on August 22, 2012. Those rules were vacated by the U.S. District Court for the District of Columbia on July 2, 2013. On June 27, 2016, the Commission adopted a revised version of Rule 13q-1 and amendments to Form SD which are referred to as the 2016 Rules. On February 14, 2017, the revised rules were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act, or CRA. Although the joint resolution vacated the 2016 Rules, the statutory mandate under Section 13(q) of the Exchange Act remains in effect.
Similar to the prior rules, the proposed rules, would require resource extraction issuers to submit on an annual basis a Form SD that includes information about payments related to the commercial development of oil, natural gas, or minerals that are made to governments. Given the requirements of Section 13(q), certain elements of the proposed rules are also in the 2016 Rules. Nevertheless, the SEC believes that the proposed rules, considered as a whole, are not in substantially the same form as the 2016 Rules and therefore in compliance with the CRA’s restriction on subsequent rulemaking.
In this regard, the proposed new rules include several significant changes to the core provisions of the 2016 Rules. Specifically, the proposed rules would:
- revise the definition of the term “project” to require disclosure at the national and major subnational political jurisdiction, as opposed to the contract, level;
- revise the definition of “not de minimis” to include both a project threshold and an individual payment threshold;
- add two new conditional exemptions for situations in which a foreign law or a pre-existing contract prohibits the required disclosure;
- add an exemption for smaller reporting companies and emerging growth companies;
- revise the definition of “control” to exclude entities or operations in which an issuer has a proportionate interest;
- limit the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the SEC;
- add an instruction in Form SD that would permit an issuer to aggregate payments by payment type made at a level below the major subnational government level;
- add relief for issuers that have recently completed their U.S. initial public offerings; and
- extend the deadline for furnishing the payment disclosures.
Section 13(q) defines a resource extraction issuer in part as an issuer that is “required to file an annual report with the Commission.” The SEC believes this language could reasonably be read to include or to exclude issuers that file annual reports on forms other than Forms 10-K, 20-F, or 40-F. The SEC is therefore using its discretion and proposing to cover only issuers filing annual reports on Forms 10-K, 20-F, or 40-F. Specifically, the proposed rules would define the term “resource extraction issuer” to mean an issuer that is required to file with the Commission an annual report on one of those forms pursuant to Section 13 or 15(d) of the Exchange Act and that engages in the commercial development of oil, natural gas, or minerals.
As with the 2016 Rules, the SEC believes that covering issuers that provide disclosure outside of the Exchange Act reporting framework would do little to further the transparency objectives of Section 13(q) but would add costs and burdens to the existing disclosure regime governing those categories of issuers. The proposed definition would therefore exclude issuers subject to Tier 2 reporting obligations under Regulation A and issuers filing annual reports pursuant to Regulation Crowdfunding. In addition, investment companies registered under the Investment Company Act of 1940 (“Investment Company Act”) would not be subject to the proposed rules.
Contact Steve Quinlivan for more information.