[Updated January 18, 2020]
On December 18, 2019, the Securities and Exchange Commission (the “SEC”) released proposed rules (available here) relating to the disclosure of payments by resource extraction issuers. The SEC’s release sets forth the tortured more-than-seven-year history of this rulemaking (see previous Gibson Dunn posts regarding this topic in 2015, 2013 and 2010). The SEC is proposing these rules by mandate pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) after having earlier adopted versions of the rules vacated in 2012 by the U.S. District Court for the District of Columbia, a ruling which the SEC declined to appeal, and disapproved in 2016 by Congress pursuant to its authority under the Congressional Review Act. While Congress disapproved of the adopted rules in 2016, it did not repeal Section 1504 of the Dodd-Frank Act, so the SEC’s rulemaking mandate remained in place. Revised rules cannot be substantially similar to the ones disapproved by Congress under the Congressional Review Act. As such, the newly proposed rules substantially differ from the previously adopted rules, and the differences are discussed in more detail below.
Under the proposed rules implementing Section 13(q) of the Securities Exchange Act of 1934, as amended, domestic or foreign “resource extraction issuers” (the definition of which is discussed below) would have to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas or minerals that are made to a foreign government or the U.S. federal government.
The proposed rules would require disclosure of company-specific, project-level information, including the following:
• the type and total amount of payments for each project of the resource extraction issuer, for all projects made to each government and by payment type;
• the currency used to make the payments;
• the fiscal year in which the payments were made;
• the business segment of the issuer that made the payments;
• the governments that received the payments and the country in which each such government is located;
• the specific projects to which such payments relate;
• the resources that are being developed;
• the method of extraction used in the project and the major sub-national political jurisdiction of each project; and
• the payments made by a subsidiary or entity controlled by the issuer.
The submission deadline for an issuer’s Form SD with a fiscal year ending on or before June 30 would be no later than March 31 in the calendar year following its most recent fiscal year, and for an issuer with a fiscal year ending after June 30, the submission deadline would be no later than March 31 in the second calendar year following its most recent fiscal year.
As mentioned above, the proposed rules differ from the rules disapproved by Congress in 2016 in several significant respects, including by:
• revising the definition of “project” to require disclosure not at the contract level, but at the national and major subnational political jurisdiction;
• revising the definition of “not de minimis” to include both a project threshold and an individual payment threshold so that disclosure with respect to payments to governments that equal or exceed $150,000 would be required when the total of the individual payments related to a project equal or exceed $750,000;
• adding new conditional exemptions in the event that a foreign law or a pre-existing contract prohibits the required disclosure;
• revising the definition of “control” to exclude entities or operations in which an issuer has a proportionate interest;
• allowing the payment information disclosure to be furnished to, rather than filed with, the SEC;
• permitting an issuer to aggregate payment by payment type made at a level below the major subnational government level;
• adding exemptions for smaller reporting companies and emerging growth companies;
• providing relief for issuers that have recently completed their U.S. initial public offering; and
• extending the deadline for furnishing the payment disclosures.
The proposed rules apply to resource extraction issuers, which is defined as an issuer that is “required to file an annual report with the [SEC]” that engages in the commercial development of oil, natural gas or minerals. The proposed rules do not alter the definitions of certain key terms such as “extraction,” “processing” and “export” that make up the definition of commercial development of oil, natural gas or minerals from that announced in the adopting release for the final rules in 2016. The proposed definition “would capture only those activities that are directly related to the commercial development of oil, natural gas, or minerals, and not activities ancillary or preparatory to such commercial development.” Therefore, this definition would exclude, for example, manufacturers of drill bits, hardware providers and operators that provide hydraulic fracturing or drilling services. According to the release, midstream service providers, however, may be subject to disclosure while companies involved in downstream activities, such as refining or smelting, would not. All companies with activities tangentially related to the development of oil, natural gas or minerals, even if it is not their primary business line, should be aware of this definition and the guidance provided so far to determine whether or not they will be subject to further disclosure requirements if and when the rules are implemented.
As fitting for rules that are now on their third iteration, the SEC Commissioners have provided interesting commentary on the proposal, which the Commissioners approved by a 3-2 vote, with Commissioners Robert J. Jackson Jr. and Allison Herren Lee dissenting. Commissioner Jackson, while praising the SEC’s Staff for their extensive work and dedication, said in his statement that he was most concerned that “the [SEC] will further weaken the rule by allowing issuers to file confidential disclosures rather than providing the public accountability that Congress intended when enacting Section 1504.” In support of this position, Commissioner Jackson cited three risks: (1) aggregated, anonymized disclosure would not properly incentivize corporate insiders to be accountable for payments to foreign governments; (2) confidential submission and anonymized reporting would not provide investors sufficient information on which to make investment decisions; and (3) the proposed rules are contrary to the SEC’s longstanding position that confidential disclosures and an anonymized reporting would not satisfy Section 1504, which Congress has chosen not to repeal. He also objected to the revised de minimis threshold that “will keep payments in the dark.”
Commissioner Lee expressed concern in her statement that, as revised, the proposed rules do not achieve the objective of Section 1504, which is the fight against global corruption through transparency. In particular, Commissioner Lee commented that requiring project-level, rather contract-level, disclosure excessively limits the benefits of such disclosure and that the proposed de minimis thresholds are not supported by data and allow for the exclusion of too much information from disclosures.
Unlike Commissioner Lee, Commissioner Hester M. Pierce found the proposed rules to be “markedly better” than their predecessors and noted the significant changes from the 2016 rulemaking. Commissioner Pierce, however, emphasized in her statement that she is concerned the SEC rulemaking process is becoming “the vehicle of choice for achieving laudable objections that are outside the SEC’s normal remit.” Similarly, Commission Elad L. Roisman noted in his statement that the rules have “no pretense of furthering the SEC’s tripartite mission: protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” He also emphasized how the Staff spent a non-de minimis amount of time attempting to define “not de minimis” and noted that ultimately the Staff sought input on setting a threshold from the federal securities laws community through the comment process.
Given the significant revisions in the proposed rules as compared to the rules previously disapproved by Congress in 2016, it will be interesting to review the written comments submitted by industry and business groups, such as the American Petroleum Institute and the Chamber of Commerce, that so vehemently opposed the rules proposed on this topic in the past. Additionally, the responses to the SEC’s request for comment on whether these types of disclosures can be made on a confidential, anonymized basis should be noteworthy. It is likely that interest groups in favor of the comprehensive disclosure of payments to governments related to resource extraction projects, echoing the concerns of Commissioners Jackson and Lee, would strongly oppose allowing companies to submit that information on a confidential and anonymous basis.
Regardless of the outcome of the SEC’s comment process, companies involved in the commercial development of oil, natural gas or minerals should closely monitor developments with respect to these proposed rules as additional disclosure burdens are likely on the near-term horizon, even if such burden is less than it was under previous rule proposals.
The latest proposed rules are subject to a 60-day public comment period following publication in the Federal Register. Comments may be submitted via: (1) e-mail to firstname.lastname@example.org; (2) the SEC Internet comment form (http://www.sec.gov/rules/proposed.shtml); or (3) paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-24-19. This file number should be included on the subject line if email is used.