Conflict minerals weren't the only order of business for the Securities and Exchange Commission last week; mining and energy companies were also saddled with a new heap of disclosures to make about payments to governments—including our own.
That rule implements Section 1504 of the Dodd-Frank Act, also known as the Cardin-Lugar provision. Companies working in the development of oil, natural gas, or minerals (so-called “extraction businesses”) will now be required to disclose payments made to the U.S. or foreign governments, on a project-by-project basis, should those payments total $100,000 or more in a fiscal year. The payments can include taxes, royalties, license fees, production entitlements, bonuses, dividends, and infrastructure improvements.
Disclosures are required for fiscal years ending after Sept. 30, 2013, and be reported on the new Form SD (the same form to be used for conflict-mineral disclosure). The Form SD must be uploaded to the SEC's EDGAR database no later than 150 days after the end of each fiscal year.
The SEC estimates that the rule will apply to more than 1,100 companies, both domestic and based in foreign markets. The rule has no exceptions for small filers, nor any exception for payments that might be immaterial to the company's larger financial performance.
The disclosures are likely to bedevil mining and energy companies at multiple levels. For compliance officers trying to ensure accurate reports, even the $100,000 threshold may be too low. “For the large publicly traded energy, mining and oil companies, that is a very low threshold,” says Obiamaka Madubuko, who heads up the FCPA & International Anti-Corruption practice at law firm McDermott Will & Emery.
More broadly, however, such disclosures will expose sensitive corporation information that most oil and gas companies want to keep private. “How this is going to impact competitiveness, when they have large, state-owned oil companies elsewhere more than happy to see what their pricing information looks like and to adapt their prices accordingly,” will be a critical issue, Madubuko says.
One silver lining, so to speak: These payments should be much easier to track and report than anything required in the conflict minerals rule—from which, by the way, extraction companies will be exempt.
FACT SHEET EXTRACTION
The following is a selection from a “fact sheet” issued by the SEC on a new rule requiring the disclosure of payments by issuers engaged in companies engaged in the development of oil, natural gas, or minerals.
The new rules require a resource extraction issuer to disclose payments made to governments if:
The issuer is required to file an annual report with the SEC.
The issuer engages in the commercial development of oil, natural gas, or minerals.
The new disclosure requirements apply to domestic and foreign issuers and to smaller reporting companies that meet the definition of resource extraction issuer.
In addition, the issuer is required to disclose payments made by a subsidiary or another entity controlled by the issuer.
What Must Be Disclosed:
Under the new rules, a resource extraction issuer is required to disclose certain payments made to a foreign government (including sub-national governments) or the U.S. government.
Resource extraction issuers need to disclose payments that are:
Made to further the commercial development of oil, natural gas, or minerals.
“Not de minimis” (any payment, or a series of related payments, that equals or exceeds $100,000 during the most recent fiscal year).
The rules define commercial development of oil, natural gas, or minerals to include exploration, extraction, processing, and export, or the acquisition of a license for any such activity. The types of payments related to commercial development activities that need to be disclosed include: taxes; royalties; fees (including license fees); production entitlements; bonuses; dividends; and infrastructure improvements.
The rules require a resource extraction issuer to provide the following information about payments made to further the commercial development of oil, natural gas, or minerals:
Type and total amount of payments made for each project:
Type and total amount of payments made to each government.
Total amounts of the payments, by category.
Currency used to make the payments.
Financial period in which the payments were made.
Business segment of the resource extraction issuer that made the payments.
The government that received the payments, and the country in which the government is located.
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. However, the rule release provides some guidance on the Commission's view of what a project would be.
How It Must Be Disclosed
The new rules require a resource extraction issuer to disclose the information annually by filing a new form with the SEC (Form SD). The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format.
When It Must Be Disclosed
A resource extraction issuer would be required to file the form on the SEC public database EDGAR no later than 150 days after the end of its 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.
SEC Commissioner Daniel Gallagher was the lone vote against the extraction disclosure rule and also dissented on the conflict minerals rule. He had similar issues with both of the newly enacted Dodd-Frank Act requirements.
“We are charged with taking action to protect investors, and to promote efficiency, competition, and capital formation,” Gallagher said during the SEC's Aug. 22 meeting. He called both rules a “very indirect route to achieving any sort of global governmental accountability.”
“Using U.S. influence to promote good government around the world is an unimpeachably good and legitimate congressional objective,” he added. “Unfortunately, I do not think the SEC has any realistic prospect of achieving the desired result, although I'm fully convinced that we will impose significant costs on issuers—and thereby shareholders—in the process. The SEC just isn't the right tool for this type of social policy exercise.”
Gallagher also said forcing extraction companies to file Form SD runs the risk of violating a host country's law, “which may include national security laws not specific to the extractive industries.”
“It may even force companies to offend local sensibilities to such a degree as to put their employees and operations at risk, or it may cause companies to pull out of certain countries altogether,” he said.
The new rule drew praise from Oxfam America, an international relief and development organization that had sued the SEC over delays in the implementation of the Dodd-Frank requirement. The extraction disclosure rule was supposed to have been in place by April 2011.
At a press conference, Raymond Offenheiser, president of Oxfam America, commended the SEC for “not caving under intense industry pressure.” For example, the agency rejected appeals from industry by not allowing any exemptions to the disclosure requirements for covered companies.
Offenheiser said implementation of the law will put the United States in a position to influence a draft European Union law designed to complement Section 1504. The EU proposal requires both and private companies to disclose their payments to governments in countries where they do business.
Oxfam also addressed the common complaint about the new rule, that some countries prohibit disclosure. The problem: Nobody has actually identified one such country by name yet.
The organization said it “made it clear to the SEC that such prohibitions are not known to exist, and that creating such an exemption would invite foreign regimes to create new secrecy prohibitions.”