Third Time’s the Charm? SEC Adopts Final Disclosure Rules for Resource Extraction Issuers

On December 16, 2020, the US Securities and Exchange Commission (SEC), by a 3-2 vote, adopted final rules requiring annual disclosure on Form SD of payments by SEC reporting companies engaged in the commercial development of oil, natural gas or minerals (resource extraction issuers) to certain governmental entities. The final rules implement Section 13(q) of the Securities Exchange Act of 1934 (Exchange Act), which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Section 13(q) directs the SEC to issue rules requiring resource extraction issuers to submit an annual report containing information about payments “made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals…”

This is the third time the SEC has adopted rules under Section 13(q). The SEC initially adopted rules in August 2012, but the rules were challenged in court and vacated in July 2013 by the US District Court for the District of Columbia. The SEC again adopted rules in June 2016, but those rules were subsequently disapproved by Congress and the president under the Congressional Review Act (CRA), which had the effect of vacating the adopted rules and requiring the SEC to draft new rules not “substantially the same” as the disapproved rules. The SEC proposed new rules intended to address the concerns underlying Congress’s action under the CRA on December 19, 2019 (the proposed rules). The final rules adopted on December 16, 2020, are largely the same as the proposed rules.

Specifically, resource extraction issuers will be required to report certain types of payments (defined by the rule) that are “not de minimis” and made in furtherance of the commercial development of oil, natural gas or minerals. Disclosure is required at the project level, with “project” defined by three criteria:

 “(i) The type of resource being commercially developed;

 (ii) The method of extraction; and

 (iii) The major subnational political jurisdiction where the commercial development of the resource is taking place.”

Notably, in a change from the proposal, a payment is defined as “not de minimis” if the payment—either made as a single payment or as a series of payments—is equal to or greater than $100,000. The proposal had instead proposed a $150,000 disclosure threshold but only if the total payments for a project were equal to or greater than $750,000.

The information required by the rules must be furnished, and not filed, which limits the resource extraction issuer’s liability under Section 18 of the Exchange Act. The rules also provide for two conditional exemptions to the disclosure obligation in situations where the required disclosure is prohibited by a foreign law or a pre-existing contract.

In addition to approving the adopting release, the SEC also adopted an order that provides an enumerated list of five alternative disclosure regimes that resource extraction issuers may rely on to satisfy their SEC reporting obligation under new Rule 13q-1. Adopting a separate order provides future Commissions with the convenience of more easily amending the order to remove or add alternative disclosure regimes without having to amend the adopting release itself.

 A copy of the final rules, the order, and our prior Legal Update summarizing the proposed rules can be found here, here and here, respectively.

The new rules are not without controversy. The SEC voted to adopt the final rules at an open meeting, with each member of the Commission providing remarks expressing fundamental concerns with this rulemaking. Commissioners Crenshaw and Lee voted against the rules principally due to the new rules not providing the sort of transparency they believe is necessary to fulfill the objectives of Congress under Dodd-Frank—i.e., empowering citizens of foreign countries with the information they need to fight governmental corruption. Chairman Clayton and Commissioners Peirce and Roisman voted in favor, expressing the view that the SEC is taking a reasonable approach to satisfying the requirements of Section 13(q) of the Exchange Act within the constraints of the CRA, while clarifying that the SEC disclosure regime—which is intended to provide material information to investors—is perhaps not the best means to combat governmental corruption, as laudable as that policy goal may be.

Practical Implications

Compliance with the new rules will be required two years after the effective date of the rule, which is 60 days after publication in the Federal Register. Following the two-year transition period, the Form SD reporting these payments must be furnished within 270 days after the end of the resource extraction issuer’s fiscal year. For calendar-year companies, this will likely mean filing their first Form SD reporting payments under the new rules within 270 days after fiscal year end 2023 (i.e., September 2024). Smaller reporting companies and emerging growth companies are exempt from the reporting requirements unless subject to similar requirements under an alternative reporting regime. Companies that complete an initial public offering (IPO) obtain further relief in that they are not required to comply until the fiscal year following the year in which the IPO is completed.

Despite the fact that the SEC has adopted final rules under Section 13(q) of the Exchange Act twice before, companies would be well advised to prepare to implement the most recently adopted rules. Accordingly, to the extent they have not previously done so, SEC reporting companies involved in the oil, natural gas (including in export, midstream and processing) or mining industries should carefully assess whether they are subject to the reporting obligations of the rules—particularly if they have foreign or offshore operations and even if such activities are not the primary focus of their business—and begin compliance planning as soon as possible. For more information on the reporting requirements of Form SD and suggestions about what planning for compliance might encompass, see our prior Legal Update on this topic, here.