On December 11, 2015, the Securities and Exchange Commission voted to propose a new rule implementing Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That provision directs the SEC to promulgate rules requiring “resource extraction issuer[s]” (i.e., issuers that extract natural resources) to disclose payments they make to the U.S. government or foreign governments for the commercial development of oil, natural gas, or minerals. The SEC’s latest action follows a ruling by a federal district court in Massachusetts directing the SEC to expedite its promulgation of a new rule implementing Section 1504.
This is the SEC’s second attempt to adopt a rule implementing that Section. The SEC’s prior rule, which was adopted in August 2012, was later vacated in 2013 by the U.S. District Court for the District of Columbia on the ground that it was arbitrary and capricious in two respects. First, the court determined that the SEC had incorrectly construed Dodd-Frank as requiring that the agency make each issuer’s reports available to the public; and, second, the SEC had failed to provide a reasonable explanation for its refusal to provide an exemption for companies operating in countries that prohibit the disclosures. Gibson Dunn represented the plaintiffs in that case.
Today’s proposed rule again seeks to require resource extraction issuers to publicly file an annual report that would disclose the issuer’s payments to the U.S. and foreign governments. And, like the first rule, the new proposed rule contains no exemptions for countries that prohibit the disclosures. The SEC made clear, however, that it would consider exemptions on a case-by-case basis under its existing authority under the Securities Exchange Act of 1934.
Based on the SEC’s statements today, we note the following additional points:
- The proposed rule requires project-level reporting, where the term project is defined as the operational activities governed by a single contract, license, lease, concession or similar legal agreement and that form the basis for payment liabilities.
- Under the proposed rule, resource extraction issuers would have to file an annual report that includes information regarding, among other things, the total amounts of payments to a government for each project, the total amount of payments to each government in the aggregate; the financial period in which the payments were made; the business segment of the issuer that made the payments; the specific projects to which such payments relate; the resources that are being developed; and the sub-national geographic location of each project.
- Issuers would also be required to disclose payments made by a subsidiary or entity controlled by the issuer.
- Issuers would be able to satisfy the proposed disclosure requirement by filing a report prepared for a foreign regulator or the Extractive Industries Transparency Initiative (EITI), so long as the report contains information that is substantially similar to the information required by the SEC’s rule.
- The report would be due 150 days after an issuer’s fiscal year-end, starting with the fiscal year ending no later than one year after the adoption of the final rule.
Chair White and Commissioners Stein and Aguilar voted in favor of the proposed rule, while Commissioner Piwowar dissented. The Commissioners’ statements on the proposal are available here; the proposing release is available here. Initial comments are due no later than January 25, 2016, and reply comments (which can only respond to comments raised in the initial comment period) are due no later than February 16, 2016.