On December 18, 2019, the US Securities and Exchange Commission (SEC) proposed rules for the reporting of certain payments by resource extraction issuers (the "proposed rules").1 The proposed rules represent the third attempt by the SEC to promulgate rules mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 13(q) to the Securities Exchange Act of 1934 (Exchange Act), directing the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer to a foreign government or the US federal government for the purpose of the commercial development of oil, natural gas, or minerals.

The SEC first adopted rules under Section 13(q) in August 2012. 2 The 2012 rules were the subject of litigation and were vacated in July 2013 by the US District Court for the District of Columbia. 3 In response, the SEC adopted new disclosure rules in June 2016. 4 The 2016 rules were subsequently disapproved by Congress under the Congressional Review Act, or CRA, and the President in February 2017, which had the effect of vacating the 2016 rules and sending the SEC back to the drawing board, as under the CRA the SEC is not permitted to reissue the same rules in "substantially the same form" or issue new rules that are "substantially the same" as the disapproved rules. In crafting the proposed rules, the SEC considered the objections to the 2016 rules raised by members of Congress in connection with their disapproval under the CRA. In particular, the SEC took into consideration concerns that the rules would impose undue compliance costs on companies, undermine job growth, burden the economy and impose competitive harm on US companies relative to foreign competition.

In the proposed rules the SEC has endeavored to satisfy the requirements of the CRA, including by:

  • exempting smaller reporting companies and emerging growth companies from reporting;
  • lowering the burden, costs and competitive impacts associated with reporting by allowing disclosure at the national and major subnational political jurisdiction (as opposed to the contract level under the 2016 rules);
  • increasing the de minimis reporting threshold to include both a project threshold and an individual payment threshold;
  • adding two new conditional exemptions for situations in which a foreign law or preexisting contract prohibits disclosure;
  • eliminating reporting for entities or operations as to which the issuer has a proportionate interest; and
  • extending the deadline for reporting.

As was the case with the 2016 rules, the proposed rules will be set forth in new Item 2.01 of Form SD titled "Resource Extraction Issuer Disclosure and Report." Form SD is the same form currently used for conflict minerals reporting. In a departure from the 2016 rules, however, information reported under Item 2.01 will now be "furnished" rather than "filed," thus excluding the disclosures made from liability under Section 18 of the Exchange Act. The information and documents furnished in or with the Form SD will not be deemed to be incorporated by reference into any filing made under the Securities Act of 1933 or the Exchange Act unless the issuer specifically incorporates it by reference into such filing.

Comments on the proposed rule are due by March 16, 2020.

Compliance Date Extension and Subsequent Due Date

The proposed rules would require a resource extraction issuer to file a Form SD for fiscal years ending no earlier than two years after the effective date of the final rules. The SEC proposes to select a specific compliance date that corresponds to the end of the nearest calendar quarter following the effective date of the final rules. As an example, the proposing release explained that if the rules had been adopted, rather than proposed, on December 18, 2019, the compliance date for an issuer with a December 31, 2019, fiscal year end would have been Tuesday, May 31, 2022 (i.e., 150 days after its fiscal year end of December 31, 2021, taking into account the Memorial Day holiday).

After the transition period, the proposed rules provide for the Form SD to be due before March 31 in the following calendar year, for issuers with calendar years ending on or before June 30, and no later than March 31 in the second calendar year following the most recent fiscal year for issuers with fiscal years ending after June 30.

Reporting Persons

All resource extraction issuers will have to make the payment disclosures, without regard to whether they are domestic or foreign issuers. The definition of "resource extraction issuer" remains the same as previously, and means an issuer that is required to file an annual report with the SEC pursuant to Section 13 or 15(d) of the Exchange Act and that engages in the commercial development of oil, natural gas or minerals. "Commercial development of oil, natural gas, or minerals" is defined as exploration, extraction, processing and export of oil, natural gas or minerals, or the acquisition of a license for any such activity. However, under the proposed rules, smaller reporting companies and emerging growth companies are exempt from compliance. In 2018, the SEC amended the definition of "smaller reporting company" to significantly expand the number of registrants that qualify.5

Resource extraction issuers must disclose payments made by a subsidiary or other entity that it controls, as well as direct payments made by the issuer. In the proposed rules, the SEC defines "control" to mean that the issuer consolidates the entity under the accounting principles applicable to the financial statements included in the resource extraction issuer's periodic reports filed pursuant to the Exchange Act and eliminated the 2016 rules requirement that issuers also report proportionate payments made by an issuer's proportionately consolidated entities or operations.

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Footnote

1 Available at https://www.sec.gov/rules/proposed/2019/34- 87783.pdf

2 Available at https://www.sec.gov/rules/final/2012/34- 67717.pdf

3 Available at https://ecf.dcd.uscourts.gov/cgibin/ show_public_doc?2012cv1668-51

4 Available at https://www.sec.gov/rules/final/2016/34- 78167.pdf

5 See SEC Release No. 33-10513 (June 28, 2018) [83 FR 31992 (Jul. 10, 2018)] available at https://www.sec.gov/rules/final/2018/33-10513.pdf

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