SEC Proposes Third Iteration of Natural Resource Industry Disclosure Rule

Alerts / February 11, 2020

On Dec. 18, 2019, the U.S. Securities and Exchange Commission (SEC) voted to propose another version of the resource extraction disclosure rule (Proposed Rule) as mandated under the Dodd-Frank Act of 2010 and Section 13(q) of the Securities Exchange Act of 1934 (Exchange Act). The SEC adopted the first iteration of the resource extraction disclosure rule in 2012, only to see it vacated by a D.C. federal court in 2013. In 2016, Congress disapproved the second rendition of the rule by joint resolution pursuant to the Congressional Review Act (CRA). Considering the CRA’s restrictions, the SEC was tasked with again promulgating a disclosure rule, in satisfaction of the agency’s mandate under the Dodd-Frank Act, that was not “substantially the same” as its flawed predecessor. The third iteration is described in a proposing release issued by the SEC on Dec. 18, 2019 (Proposing Release), a copy of which can be accessed here, and the substance of which is summarized below.

Covered Issuers

Section 13(q) of the Exchange Act charges the SEC with adopting rules that require a “Resource Extraction Issuer” to annually file with the SEC a report disclosing any payments made by the issuer (and any subsidiaries or controlled affiliates thereof) to any foreign governments, as well as those made to the U.S. federal government, in connection with a resource extraction project. Section 13(q)(1) defines the following terms:

  • “Resource Extraction Issuer” means a company that is required to file an annual report with the SEC and that engages in the “commercial development of oil, natural gas, or minerals.”[1]
  • “Commercial development of oil, natural gas, or minerals” includes exploration, extraction, processing, export and other significant activities involving oil, natural gas or minerals, or the acquisition of a license for any such activity.[2]

The disclosure required by the Proposed Rule would apply to both U.S. and foreign companies that meet the definition of a Resource Extraction Issuer. Unlike the 2016 version of the resource extraction disclosure rule, which applied regardless of the size of the issuer, the Proposed Rule would exempt smaller reporting companies and emerging growth companies.

Required Disclosure

The Proposed Rule would require that Resource Extraction Issuers report annually on Form SD any payment to a foreign government or the U.S. federal government that is:

  • made to further the commercial development of oil, natural gas or minerals, and
  • not de minimis.

Under the Proposed Rule, reports for issuers with a fiscal year ending on or before June 30 would be due by March 31 of the following calendar year. Issuers with a fiscal year ending after June 30 would be required to furnish the required information no later than March 31 in the second calendar year following the most recent fiscal year end.


The Proposed Rule lists the following types of payments required to be disclosed on Form SD:

  • Taxes, including taxes levied on corporate profits, corporate income and production, but excluding taxes levied on consumption, such as value-added taxes, personal income taxes and sales taxes.
  • Royalties, including unit-based, value-based and profit-based royalties.
  • Fees, including license fees, rental fees, entry fees and other consideration for licenses or concessions.
  • Production entitlements.
  • Bonuses, including signature, discovery and production bonuses.
  • Dividends, including dividends paid in lieu of production entitlements or royalties, but excluding dividends paid to a government as a common or ordinary shareholder of the issuer (as long as the dividend is paid to the government under the same terms as other shareholders).
  • Payments for infrastructure improvements.
  • If required by law or contract, community and social responsibility payments.

The Proposed Rule permits an issuer to aggregate payments by payment type made at a level below the major subnational government level. For example, fees paid to multiple counties or cities within the same province or state could be aggregated and reported as the same type of payment. However, the Proposed Rule does not appear to require issuers to treat such payments as a ‘series of related payments’ for the purpose of determining whether such payments are “not de minimis.”

‘Not de minimis’ and the ‘Project’ Concept

The Proposed Rule defines ‘not de minimis’ as any payment, or a series of related payments (e.g., monthly rental fees), that equals or exceeds $150,000 and relates to a ‘project’ for which the aggregate amount of payments or installments of related payments equals or exceeds $750,000. For example, a Resource Extraction Issuer that paid an aggregate amount of taxes, royalties, fees and bonuses relating to a project equal to $750,000 would be required to individually report any such payment or series of payments of $150,000 or more. If no single payment meets or exceeds the $150,000 threshold, the Resource Extraction Issuer would have nothing to report with regard to that project.

Determining whether payments relate to the same project involves a three-prong assessment that considers:

  1. the type of resource being commercially developed;
  2. the method of extraction; and
  3. the major subnational political jurisdiction where the commercial development of the resource is taking place.

The Proposed Rule permits a Resource Extraction Issuer to disclose payments at the entity level if the payments are for obligations levied on the issuer at the entity level rather than the project level. For example, if an issuer has more than one project in a host country, and that country’s government levies corporate income taxes based on the issuer’s income in the country as a whole – and not with respect to a particular project or operation in that country – the issuer may disclose the resulting income tax payment or payments without tagging a specific project or business segment. Although it is unclear from the Proposing Release, it appears that such payments would be reportable to the extent they exceed the de minimis threshold for individual payments ($150,000), and that they would not also count toward the de minimis threshold ($750,000) for any one project.

‘Foreign Government’ and the US Federal Government

The Proposed Rule defines “foreign government” as a foreign government, or a department, agency or instrumentality of a foreign government, or a company at least majority owned by a foreign government. For purposes of the Proposed Rule, foreign government includes a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality or territory of a foreign national government. The Proposed Rule covers payments made to the U.S. federal government only; it does not require disclosure of payments made to state governments in the United States.

Conditional Exemptions and Limited Relief

In addition to the exemptions available for smaller reporting companies and emerging growth companies noted above, the Proposed Rule includes certain other exemptions and limited relief. One exemption permits the exclusion of payments if an issuer is prohibited by law from furnishing the required information, provided, however, that the issuer has taken reasonable steps to seek an exemption under the applicable law and has been unable to obtain an exemption. Reliance on this exemption requires that the issuer (i) disclose on its report the particular law preventing the issuer from disclosing the payments made to such jurisdiction, (ii) describe the efforts employed by the issuer to seek an exemption or other relief under applicable law and (iii) furnish an opinion of legal counsel addressing the inability to provide such disclosure without violating the foreign jurisdiction’s law.

Another exemption permits an issuer to exclude payment information that the issuer is unable to provide without violating one or more contract terms that were in effect prior to the effective date of the rule as proposed, provided the issuer has taken reasonable steps to seek consent from its counterparties to disclose the payments despite the contractual restriction. Reliance on this exemption requires that the issuer (i) disclose the particular contract terms prohibiting disclosure of the payments, (ii) describe the efforts taken to seek consent from the issuer’s counterparties and (iii) furnish an opinion from legal counsel regarding the issuer’s inability to provide such disclosure without violating the contractual terms.

Additional exemptive relief may be granted by the SEC staff upon application and a case-by-case examination of the applicable facts.

The Proposed Rule provides limited relief by delaying the reporting period for payments relating to exploratory activities. These payments may be reported on the Form SD for the fiscal year following the fiscal year in which such payments were made. Additionally, the Proposed Rule provides that issuers do not need to report payment information for a company that an issuer has acquired until the Form SD for the first full year following the acquisition, as long as the acquired company was not previously required to disclose resource extraction payment information. Finally, the Proposed Rule provides that companies recently completing initial public offerings may delay compliance with the rule until the first full fiscal year following the IPO.

Submitting Reports on Form SD

The rules require a Resource Extraction Issuer to disclose the payment information annually by filing a Form SD on the SEC’s public database, EDGAR. An issuer must include the payment information in XBRL format in an exhibit to the form. The Proposing Release indicates that Inline XBRL will not be required.

Under the Proposed Rule, information submitted on Form SD relating to Resource Extraction Issuer payments would be deemed to be furnished to, but not filed with, the SEC. As a result, information so reported would not be subject to the liability provisions of Section 18 of the Exchange Act. Such information would neither be treated as incorporated by reference into the issuer’s filings under the Securities Act of 1933 nor be subject to potential liability under Section 11 of the same, unless otherwise expressly incorporated.

Although the Proposed Rule provides that reports on Form SD would be made public, the Proposing Release seeks comment on whether individual company reports should remain confidential, with only the compiled information made public.

Deadline for Comments

The Proposed Rule was published in the Federal Register on Jan. 15, and hence the period for public comment will run through March 16.

[1] Section 13(q)(1)(D), Exchange Act.
[2] Section 13(q)(1)(A), Exchange Act. The Proposed Rule defines “extraction” as the production of oil and natural gas as well as the extraction of minerals, and “processing” as including midstream activities such as removing liquid hydrocarbons from gas, removing impurities from natural gas prior to its transport through a pipeline and upgrading bitumen and heavy oil, through the earlier of the point at which oil, gas or gas liquids are either sold to an unrelated third party or delivered to a main pipeline, common carrier or marine terminal. “Export” is proposed to cover only transport from the country of origin to another country by a company possessing an ownership interest in the subject resource.

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