SEC Proposes Revised Payment Disclosure Rules For Companies Engaged In Resource Extraction

The US Securities and Exchange Commission (the "SEC") has re-proposed Rule 13q-1 and an amendment to Form SD to implement Section 13(q) of the US Securities Exchange Act of 1934 (the "Exchange Act"), which was added by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"). The new rules would require "resource extraction issuers" to disclose annually payments that such companies (or their subsidiaries or entities under their control) make to a foreign government or the US federal government for the purpose of the commercial development of oil, natural gas or minerals. The SEC believes that these rules will increase the transparency of payments that resource extraction companies make to foreign governments and hold those governments accountable for their natural resource wealth. The rules would require companies to disclose the type and total amount of payments that they make to each government for each project.

Background of the payment disclosure rules

The SEC re-proposed these payment disclosure rules to replace rules it initially adopted in 2012 (the "2012 Rules"). In 2013, the US District Court for the District of Columbia (the "District Court") invalidated the 2012 Rules in a rare use of judicial oversight over the SEC's rulemaking. The District Court found that two aspects of the 2012 Rules were improper. First, it found that the SEC erred by stating that the Dodd-Frank Act required public disclosure and did not allow confidential disclosure, when, in fact, the statute gave the SEC discretion to decide whether to require public disclosure or permit confidential disclosure. Second, it found that the SEC acted arbitrarily and capriciously by failing to provide any exemption for resource extraction companies whose disclosure would violate a foreign law. The SEC chose not to appeal the District Court's decision and instead decided to rewrite and re-propose the resource extraction payment disclosure rules.

Overview of the new payment disclosure rules

The re-proposed rules are substantially similar to the 2012 Rules except that the SEC changed the rules to comply with the District Court's order. Nonetheless, even those changes are minor. Consistent with the 2012 Rules, the SEC used its discretion to require public, not confidential, disclosure, and there is still no blanket exemption for companies whose disclosure is prohibited by foreign law. Instead, the proposed rules allow companies to apply for exemptive relief on a case-by-case basis, which the SEC will consider based on several factors, which are discussed in greater detail below.

The SEC also added alternative reporting methods for companies who meet the requirements of other jurisdictions or disclosure regimes. The SEC noted in its proposing release that Canada and the European Union recently adopted resource extraction disclosure laws that reflect the 2012 Rules.1 Further, in 2014, the United States became a candidate country for the Extractive Industries Transparency Initiative ("EITI"), which is a voluntary coalition of oil, natural gas and mining companies, foreign governments and other organizations that is dedicated to improving transparency and accountability in countries rich with resources. Thus, under the proposed rules, if the SEC decides that other disclosure rules are substantially similar to the SEC's rules, companies could opt to comply with SEC reporting obligations in accordance with those reporting obligations rather than prepare a separate disclosure under the SEC's rules.

Companies covered by the rules

The disclosure requirements apply to all US and non-US companies that qualify as "resource extraction issuers", i.e., companies that are (i) required to file annual...