In 2012, a legal challenge defeated Disclosure of Payments by Resource Extraction Issuers, a Securities and Exchange Commission rule that would have required oil, gas, and mining companies to report the payments they make to foreign and domestic governments for extraction rights. Now, the SEC is resurrecting that effort with a revised edition of the rule. And while industry critics mull whether version 2.0 of this rule assuages their legal objections, companies face new compliance efforts that may be complicated, costly, and fraught with regulatory risk.

Among those praising the revised rule are two of the legislators who fought to include the mandate into the Dodd-Frank Act with the so-called Cardin-Lugar amendment.

During a conference call, Dick Lugar, the former Republican senator from Indiana, described the SEC’s revision as “a strong rule.”

“I am pleased that this rule is consistent with standards in the EU member states, Canada, and Norway,” he said. “It makes compliance easer because the same reporting information is required in both the United States and Europe.”

“Transparency is extremely important for investors,” said Sen. Ben Cardin (D-MD). “They are entitled to know what the companies they invest in are doing. It is critically important for the functioning and security of the energy market. It empowers citizens and shareholders to hold companies accountable … If it is done right, this rule will mean more stable governments and a more stable supply chain.”

A long road


The road to the new requirements was a winding one, slowed by numerous roadblocks. The SEC originally adopted a final rule on Aug. 22, 2012 and promptly faced a legal challenge by the American Petroleum Institute (API), the U.S. Chamber of Commerce, and other industry groups. The plaintiffs prevailed and, in July 2013, the U.S. District Court for the District of Columbia vacated the rule, opining that the SEC misread the congressional statute when it required the public filing of payment disclosures and that the failure to include an exemption for foreign countries that make payment disclosure illegal was “arbitrary and capricious” under the Administrative Procedure Act.

“The SEC did not originally allow for exemptions in supposed host country prohibitions. The Commission still doesn’t allow any categorical exemptions, but they are exerting their existing authority to grant exemptions if and when warranted.”
Jana Morgan, Director, Publish What You Pay-United States

Enter Oxfam America. In 2014, it sued the SEC to compel it into moving forward with a long-delayed rewrite. The U.S. District Court for the District of Massachusetts, in September 2015, sided with the activists and held the Commission to an expedited schedule for a final rule. The deadline: June 27, 2016.

The new rule

The final rule requires an issuer to disclose payments that are made to the U.S. federal government or a foreign government if it engages in the commercial development of oil, natural gas, or minerals. Companies are required to file annual reports with the SEC that include disclosures on payments made by a subsidiary or entity controlled by the issuer.

Covered companies must disclose payments 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. The final rules define commercial development of oil, natural gas, or minerals as exploration, extraction, processing, and export, or the acquisition of a license for any such activity.

The Commission defined “not de minimis” as a transaction, whether a single payment or a series of related payments, that equals or exceeds $100,000 during the same fiscal year. Among the payments that must be disclosed: taxes; royalties; fees; production entitlements; bonuses; dividends; payments for infrastructure improvements; and, if required by law or contract, community and social responsibility payments. The disclosure must be made at the “project” level.

The required disclosures will be filed publicly and annually on Form SD no later than 150 days after the end of a company’s fiscal year. The information must be included in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format. Resource extraction issuers are required to comply with the rules starting with their fiscal year ending no earlier than Sept. 30, 2018.

In a separate order, the Commission determined that the current reporting requirements of the European Union Accounting and Transparency Directives, Canada’s Extractive Sector Transparency Measures Act, and the Extractive Industries Transparency Initiative (a voluntary, global effort with a similar goal) are substantially similar to the Commission’s rules. An issuer may use a report prepared for those other disclosure regimes to satisfy SEC requirements.

What changed?

Are the differences between the 2012 rule and the new version enough to satisfy past legal concerns? That depends on whom you ask.

“There appears to be no meaningful difference between this rule and the previous rule struck down by the courts, so our concerns remain the same,” says Stephen Comstock, API’s director of tax and accounting policy. According to the API, the new rule fails to strike the right balance between informing foreign citizens of government revenues and protecting the competitiveness of American companies.

“The SEC’s rule forces U.S. companies to disclose proprietary information to its competitors while foreign entities do not,” Comstock said. “This can give some large industry players an advantage on future business projects, and can fundamentally harm American jobs. The SEC ignored industry efforts to disclose information, but to do so in a way that doesn’t give competitors an unfair advantage.”

The API has long advocated anonymized, aggregated reporting as an alternative to public disclosures.

Supporters of the rule, however, wave off talk of landing another unsuccessful day in court. “API has not been helpful through this whole process,” Cardin said. “There are many companies, however, that have already implemented [what the rule calls for]. This is the global standard, whether API is going to acquiesce to it or not.”

There were plenty of industry concessions in the final rule, says Jana Morgan, director of the advocacy group Publish What You Pay-United States.

“The SEC did not originally allow for exemptions in supposed host country prohibitions,” she says. “The Commission still doesn’t allow any categorical exemptions, but they are exerting their existing authority to grant exemptions if and when warranted. We still believe that all evidence points to the fact that exemptions for these host country prohibitions are completely unnecessary because there is no evidence that is even remotely compelling to indicate it is so. Of the supposed countries that prohibit disclosure—Angola, China Qatar, and Cameroon—we have seen reporting from companies in the European Union for three of those countries and there has been no negative result.”

The SEC also added specific exemptions. If a company acquires a business not previously subject to the rule, they will not be required to report payment information until the first fiscal year following acquisition. There is also a one-year delay for payments related to exploratory activity.

“We think both of those are unnecessary and big payments can be made in relation to exploration licenses, acquisitions, and taxes,” Morgan says.

Other changes:

• The SEC provided a two-year phase in period, longer than the original rule’s one-year allowance.

• The SEC previously encouraged the disclosure of social and community payments (for example, agreeing to build a hospital or school), but now requires them if they are required by law of contract.

• When companies report on projects, they need to include the sub-national geographic location.

• Specific resources that are extracted must now be disclosed.

Among the biggest changes is that the SEC now defines what a “project” is, rather than leaving that definition up to companies.


The following is from a Securities and Exchange Commission order that establishes substituted compliance with other regulatory requiring the disclosure of government payments for extracted resources.
The Commission hereby finds that the following resource extraction payment disclosure regimes are substantially similar to the disclosure requirements of Rule 13q-1 for purposes of the alternative reporting provisions of paragraph (c) of Item 2.01 of Form SD:

Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (EU Accounting Directive) as implemented in a European Union or European Economic Area member country;

Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 amending Directive 2004/109/EC on transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading and Commission Directive 2007/14/EC on the implementation of certain provisions of Directive 2004/109/EC (EU Transparency Directive) as implemented in a European Union or European Economic Area member country;

Canada’s Extractive Sector Transparency Measures Act (ESTMA)

The U.S. Extractive Industries Transparency Initiative (USEITI).
Issuers are advised that our determination of substantial similarity with respect to each of these four regimes may be subject to reconsideration if there should be any significant modifications to those regimes.

USEITI reports only satisfy a resource extraction issuer’s disclosure obligations under Item 2.01(a) of Form SD for payments made to the Federal Government.

A resource extraction issuer may not follow the USEITI submission deadline to the extent it differs from the 150 day deadline in General Instruction B.2 of Form SD and must provide the required payment information on a fiscal year basis.
Source: Securities and Exchange Commission

The final rule defines “project” as “operational activities that are governed by a single contract, license, lease, concession, or similar legal agreement, which form the basis for payment liabilities with a government.”

“Commenters continue to express strong disagreement over the level of granularity that should be adopted for the definition of ‘project’,” the Commission wrote. “After carefully considering the comments received, we remain persuaded that the definition of project that we proposed is necessary and appropriate to achieve a level of transparency that will help advance important anti-corruption and accountability objectives.”

“Such disaggregated information may help local communities and various levels of sub-national government combat corruption by enabling them to verify that they are receiving the resource extraction revenue allocations from their national governments that they may be entitled to under law,” it added. Project-level reporting at the contract level could “potentially allow for comparisons of revenue flow among different projects.”

What now?


SEC-reporting companies involved in the oil, natural gas, or mining industries—even if such activities are not the primary focus of their business—will need to carefully assess whether they are subject to the rule’s reporting obligations, says Bob Gray, a Houston-based partner at law firm Mayer Brown and co-leader of its corporate & securities practice. Companies engaged in related activities, such as processing (including midstream operations and the ownership of processing facilities) and export of oil, gas and minerals, should carefully review the nature of their activities and payments made to governmental entities.

“It’s a trap for the unwary,” Gray says. “For the large extractive companies it is pretty clear. “But, for example, transportation companies, if they own the gas or the hydrocarbons going through the pipe, they would be required to report if it went across the border and they paid a license fee to a government. If it is not their primary business, that could get caught up and have Section 18 liability under the Securities Exchange Act.”

Gray expects many companies to face significant start-up time and expense to comply and establish new reporting and accounting systems. “You have the training of people, IT systems to capture the information, IT consultants, and travel costs because somebody is probably going to have to go and dig out this information,” he says. “You have accounting systems, information systems, and process controls.”

“Now that the SEC has defined a project, there could be multiple projects in one country,” Gray adds. “If an issuer has Foreign Corrupt Practices Act compliance efforts in place to identify payments to foreign governments they may have that leg-up on some companies and have the internal controls and IT set up to capture that information. Almost no companies, however, prepare books on a project-by-project basis and, to a large extent, cannot rely upon their existing accounting management systems.”

While the rule allows for SEC exemptive relief if it determines disclosure requirements clash with foreign law is seen as a concession, Gray doesn’t think much of it. “We are still in a situation where the issuer would have to make an application for relief on a case-by-case basis ‘if and when warranted.’ That’s untenable,” he says. “You could be putting some of your employees in foreign countries at risk.”

“What we may end up getting is a bunch of no-action letters,” he adds. “I won’t rely on them because, by definition, every one is fact specific. They haven’t solved the problem.”

Some advice for companies from Michael Littenberg, a partner at law firm Ropes & Gray:

Assume that the rule will take effect, even if challenged. “It would be an over-statement to say the rule has been bullet-proofed against future litigation,” Littenberg says. “But I do think the SEC tried to do a good job in explaining why particular provisions were still appropriate to include in the rule.”

As a similar challenge to the SEC’s “conflict minerals” rule has shown, even if portions of the rule are challenged, “the application of the rule may not be stayed pending resolution of the challenge, or only discrete portions of the rule may be stayed,” he says.

Assess the applicability of the rule. “For a lot of companies, job one is going to be getting their arms around the rule, understanding it, and figuring out how it applies to them,” Littenberg says. “It is probably fair to say that very large resource extraction issuers have already done that, but most other companies—when you go the next level or multiple levels down—have not done that exercise yet. The de minimis threshold under this rule is very small, so you are going to have a lot of companies that are going to be subject to this rule that are not large companies.”

Once companies have determined that they have obligations under the rule, they will need “to determine what, exactly, they have to report and put in place the systems needed to capture and report the data out.”

“Job 1A is figuring out what you need to do internally to comply,” he says. “Do you collect the data in the right format, or do you need to modify or enhance your internal data collection reporting procedures?”

Review relevant contracts and modify contract procedures in the future. “Because the definition of ‘project’ is keyed off of the legal agreement that forms the basis for payment liabilities with a government, the effect, if any, of the contractual arrangement on what constitutes a project should be considered at the negotiation and drafting stage,” Littenberg says.

Assess communications risk and develop a strategy. “These are ‘name and shame rules.’ The whole point of these sorts of rules—whether it is the conflict minerals rule, this rule, the California Transparency in Supply Chains Act, the UK Modern Slavery Act, and others—is to put information out there that can be reviewed and evaluated by external stakeholders so they can decide which companies they feel are underperforming around a particular issue and decide whether to target or engage with them,” Littenberg says.

“Companies will want to assess what their risk profile is likely to be based on their disclosure, and what proactive steps they should be taking, if any, to mitigate that risk,” he adds. “That may be supplemental communications, more direct engagement with some NGOs to educate them about changes to, and enhancements of, internal practices. Companies shouldn’t view regulations like this solely as a compliance exercise.”