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Extractive Sector Transparency – SEC Adopts Rules Under Dodd-Frank Mandating Disclosure of Government Payments

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Mining and Corporate Social Responsibility Law Bulletin

On August 22, 2012, the US Securities and Exchange Commission (SEC) adopted new payment disclosure rules relating to the extractive industry that will require certain US reporting issuers to disclose annually payments of US$100,000 or more that they make to the US federal government or foreign governments for the purpose of the commercial development of oil, natural gas, or minerals (the “payment disclosure rules”). These new rules give effect to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was passed by the US Congress in 2010 primarily to address the causes of the 2008 financial crisis and restore public confidence in the financial services industry. Unlike the financial services provisions of the Dodd-Frank Act, the stated purpose of Section 1504 is to support international transparency promotion efforts for the extractive sector and to assist in combating bribery and corruption.

US Extractive Industry Payment Disclosure Rules

Which companies are subject to the new requirements?

As adopted, the payment disclosure rules require US, foreign and even small resource extraction issuers to disclose certain payments that they, or one of their subsidiaries or an entity under their control, make to the US federal government or a foreign government. A reporting company is a resource extraction issuer and subject to the new rules if:

  • the issuer is required to file an annual report with the SEC; and
  • the issuer engages in the commercial development of oil, natural gas, or minerals, regardless of the extent of business operations that constitute commercial development of oil, natural gas or minerals.

The determination of whether an entity is controlled by the issuer must be made based on a consideration of all relevant facts and circumstances. For purposes of the new rules, a foreign government includes a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality, or territory under a foreign national government.

Significantly, the new rules do not include any exemptions for any category of issuer, nor do they provide any exemption for situations in which foreign law or confidentiality obligations may prohibit the required disclosure, or where the resource extraction issuer is subject to similar requirements under the laws of its home jurisdiction, stock exchange rules or an Extractive Industries Transparency Initiative (EITI) program.

What types of payments must be reported?

The new rules require a resource extraction issuer to disclose certain payments made by the issuer itself or by one of its subsidiaries or an entity it controls if:

  • the payment is not de minimis (meaning that the payment, either as a single payment or a series of related payments, equals or exceeds US$100,000 during the most recent fiscal year); and
  • the payment is made to further the commercial development of oil, natural gas, or minerals.

The rules define commercial development of oil, natural gas, or minerals to include the activities of exploration, extraction, processing, and export, or the acquisition of a license for any of those activities. Payments that are deemed to be related to commercial development activities and that must be disclosed include: taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and infrastructure improvements.

What information is a resource extraction issuer required to disclose regarding payments?

A resource extraction issuer must disclose the following information regarding all payments that are not de minimis and that are made to further the commercial development of oil, natural gas, or minerals:

  • the total amount of 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 and country that received the payments; and
  • the project of the resource extraction issuer to which the payments relate.

The new rules also require the disclosure of the type and total amount of payments made for each project, and the type and total amount of payments made to each government, in interactive data format. Consistent with the proposed rules, the new rules as adopted do not define the term “project”. If a resource extraction issuer is required to make certain payments to a government at an entity level rather than at the project level (for example, taxes that are levied at an entity rather than project level), the issuer will be permitted to report that payment information at the entity level.

When and how must the disclosure be made?

The payment disclosure rules require a resource extraction issuer to disclose the information by filing a new Form SD with the SEC on EDGAR no later than 150 days after the end of its fiscal year. Resource extraction issuers will be required to comply with the new rules for fiscal years ending after September 30, 2013, but are permitted to provide a partial year report for the period from October 1, 2013 through its fiscal year end if the issuer’s first fiscal year subject to the reporting requirement begins before September 30, 2013. The information included in the Form SD must be electronically tagged using the eXtensible Business Reporting Language (XBRL) format.

Other Regimes to Promote Transparency

The disclosure requirements created by section 1504 of the Dodd-Frank Act and the payment disclosure rules reflect a US governmental response to an international movement to foster greater responsiveness by governments to their citizens by requiring public disclosure of the amounts paid to those governments by the extractive sector. Other industry, government and self-regulatory organization initiatives are described below.

Extractive Industries Transparency Initiative (the “EITI”)

The EITI is a voluntary coalition of extractive companies, foreign governments, investor groups and other international organizations dedicated to improving transparency and accountability in the extractive sector through the publication and verification of payments made by companies and revenues received by governments from oil, natural gas and mining. There are currently 35 implementing countries, 60 major international oil, gas and mining companies and hundreds of civil society group members of EITI[1].

Under the EITI, company payments are matched with government revenues by an independent auditor. The EITI is a minimum reporting standard which primarily focuses on exploration and production activities. Section 1504 of the Dodd-Frank Act and the payment disclosure rules go beyond the EITI by requiring disclosure for processing, export and other significant activities relating to the extractive sector as well as the acquisition of licenses for these activities. Further, the EITI only requires the disclosure of payments on a per country basis, whereas the new payment disclosure rules require disclosure both on a per country and per project basis.

While the EITI provides a framework for implementation, it allows countries to determine the scope of the program including the degree of aggregation data, and whether to include payments to subnational governments or social or community payments. Under the EITI, member countries may establish materiality levels based on the size of companies subject to disclosure or the payment size[2].

Hong Kong Stock Exchange

The Hong Kong Stock Exchange listing rules require a mineral company to include in its listing document, if relevant and material to the company’s business operations, information regarding payments made to host country governments on a country by country basis[3].

London Stock Exchange

The London Stock Exchange AIM rules for extractive companies’ Note for Mining and Oil & Gas Companies (June 2009) require in connection with a company’s initial listing disclosure of “any payments aggregating over ₤10,000 made to any government or regulatory authority or similar body made by the applicant or on behalf of it, in regards to the acquisition of, or maintenance of its assets.”[4]

European Commission

On October 25, 2011, the European Commission adopted legislative proposals which would require European Union-based extractive and forestry companies to disclose payments made to governments on a per project and per country basis[5].

International Finance Corporation (IFC)

The IFC requires its extractive industry clients to commit to disclosing payments such as dividends, royalties, taxes and signature bonuses which they make to host governments on a project or corporate basis[6].

Unanswered questions

Section 1504 requires that a reporting company disclose payments made by itself, its subsidiaries or any entity that it controls. The new rules do not specify whether a company must report its share of a joint venture’s payments to a covered government, but instead require the reporting issuer to make the determination on the basis of a facts and circumstances analysis.

Similarly, the new rules require disclosure of payments to subnational, as well as national, foreign governments. It is unclear whether this would include payments to foreign indigenous “governments”. If the definition of “foreign government” is ultimately determined to include indigenous groups or First Nations and similar governments, would the scope of the social or community payments exception be broader for payments to such governments than payments to foreign national and subnational governments?

As is the case with most new regulatory schemes, these and other questions will need to be worked out in the course of time as the SEC engages with issuers to find resolutions to fact specific disclosure matters as they arise. Regardless of the number of questions that remain, however, the adoption of the payment disclosure rules brings into force the most rigorous payment transparency disclosure requirements to date for companies operating in the extractive sector.


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