Wednesday, August 22, 2012

SEC Adopt Regulations Implementing Dodd-Frank Resource Extraction Company Payment Disclosure Provisions

Implementing Section 1504 of the Dodd-Frank Act, the SEC adopted regulations requiring resource extraction issuers engaged in the development of oil, natural gas, or minerals to disclose payments made to the federal government or foreign governments.  The vote to adopt was 2-1, with Commissioner Gallagher in dissent. SEC Chair Schapiro and Commissioner Paredes were recused.

Section 1504 was co-authored by Senators Ben Cardin (D-MD) and Richard Lugar (R-IND). In an earlier letter to the SEC, Senator Cardin said that the purpose of Section 1504 is to bring greater transparency to extractive-related payments made to governments by resource extraction issuers required to report to the SEC. He said that this transparency will provide information important to investors as well as provide information important to citizens seeking to hold their government accountable for extractive revenues.

The SEC regulations would require a resource extraction company to disclose payments made to governments if it is required to file an annual report with the SEC and engages in the commercial development of oil, natural gas, or minerals. The company would be required to disclose payments made by a subsidiary or another entity it controls.  A resource extraction company would need to make a factual determination as to whether it has control of an entity based on a consideration of all relevant facts and circumstances.     

Resource extraction companies would be required to disclose payments made to a foreign government or the U.S. government that are made to further the commercial development of oil, natural gas, or minerals, not de minimis, and within the types of payments specified in the rules.   

Commercial development of oil, natural gas, or minerals is defined to include exploration, extraction, processing, and export, or the acquisition of a license for any such activity.  The regulations would define “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 types of payments related to commercial development activities that would need to be disclosed include taxes, royalties, license fees, production entitlements, bonuses, dividends, and infrastructure improvements. The new requirements clarify the types of taxes, fees, bonuses, and dividends that are required to be disclosed.  These types of payments generally are consistent with the types of payments that the Extractive Industries Transparency Initiative suggests should be disclosed.  Congress specifically referenced the EITI in defining “payment” in the law.

The rules would require a resource extraction issuer to provide the information about payments made to further the commercial development of oil, natural gas, or minerals, including type and total amount of payments made for each project and made to each government, total amounts of the payments, by category, the currency used to make the payments and the financial period in which they were made, the business segment of the resource extraction company that made the payments, the government that received the payments, and the project of the resource extraction issuer to which the payments relate.

The new rules leave the term “project” undefined to provide resource extraction issuers flexibility in applying the term to different business contexts. 

The regulations would require a resource extraction issuer to disclose the information annually by filing a new Form SD.  The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.  

Resource extraction issuers would be required to file the form on the SEC public database EDGAR no later than 150 days after the end of their fiscal year. A resource extraction issuer would be required to comply with the new rules for fiscal years ending after Sept. 30, 2013.  For the first report, most resource extraction issuers may provide a partial report disclosing only those payments made after Sept. 30, 2013.


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