Background

In August 2012, the United States Securities and Exchange Commission (the “SEC”) adopted rules that require each “resource extraction issuer” (including foreign issuers and smaller reporting companies that file annual reports with the SEC) to annually disclose payments that they have made to foreign governments and the U.S. federal government in connection with the commercial development of oil, natural gas or minerals. The SEC adopted these new rules as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to address the United States’ participation in the “Extractive Industries Transparency Initiative”, or EITI.

The EITI was first announced in 2002 by then-U.K. Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg, South Africa. The EITI has developed a voluntary framework under which governments publicly disclose their revenues from oil, gas, and minerals and companies make parallel disclosures regarding payments that they are making to obtain access to publicly owned resources. The EITI disclosure framework was designed to foster integrity and accountability in the development of the world’s natural resources. Following his signing the Dodd-Frank Act into law, in September 2011, U.S. President Barack Obama announced the “Open Government Partnership” to enhance transparency into various U.S. government activities. As part of the U.S. National Action Plan for the Open Government Partnership, the U.S. re-affirmed its commitment to implementation of the EITI.

New SEC “Form SD”

To comply with the new rules, resource extraction issuers must file a “Form SD” that contains the information that is required to be disclosed, prepared in the form of an exhibit and electronically tagged in the SEC’s “eXtensible Business Reporting Language” format (XBRL). The Form SD must be filed within 150 days following the end of each fiscal year that ends after September 30, 2013. For issuers that report on a December 31 fiscal year, the first filing must be made no later than May 30, 2014. In addition, for the first report only, resource extraction issuers with fiscal years that start before September 30, 2013 (i.e., issues that use a December 31 fiscal year end) need only disclose payments made after September 30, 2013.

These new disclosure requirements apply to all cash or in-kind payments made to foreign governments or the U.S. federal government by Exchange Act reporting oil, natural gas, and mining companies, domestic and foreign, in connection with the commercial development of oil, natural gas, or minerals.

Who is Covered

The new disclosure requirements apply to domestic and foreign companies, including smaller reporting companies, that file Form 10-K or Form 20-F annual reports with the SEC, and that are engaged in the commercial development of oil, natural gas, or minerals. A “resource extraction issuer” is an issuer required to file annual reports on Form 10-K or 20-F AND that “engages in the commercial development of oil, natural gas or minerals.”

As used in the rules, the term “commercial development” includes exploration, extraction, processing, and export of oil, natural gas, or minerals, or the acquisition of a license for any such activity.

Information Required

The new rules and Form SD require disclosure of any “payment” (or series of related payments) that exceeds $100,000 that is made by a resource extraction issuer or a subsidiary or other entity controlled by it that is made to the United States federal government or a foreign government (whether national or sub-national, and including a department, agency, or instrumentality thereof, or a company owned thereby). A “payment” is defined as an amount paid to further the “commercial development” of oil, natural gas or minerals. The SEC has stated that the types of payments related to commercial development activities that need to be disclosed include:

• taxes (including income taxes);
• royalties;
• fees (including license fees);
• production entitlements;
• bonuses;
• dividends; and
• infrastructure improvements.

Further, the disclosure must provide the following information about these payments:

• 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; and
• the project of the resource extraction issuer to which the payments relate (except that income taxes and other taxes and fees payable at the entity level do not need to be disclosed on a project basis).

Uncertain Application to Shipowners

The new SEC reporting regime certainly applies to those that are engaged in the exploration, extraction and export of oil, natural gas and minerals (e.g., the major oil companies). The SEC goes on to note in its release that the new rules “could require companies that may only be engaged in exporting oil, natural gas, or minerals and that may not have engaged in exploration, extraction, or processing of those resources to provide payment disclosure”, leaving open the question of whether a vessel owner who charters-out its vessels to a user would be deemed to be engaged in commercial development activities and subject to the new rules solely by virtue of being involved in the chain of cargo transportation. In its rule release, the SEC explicitly states that transportation activities are not a focus of the EITI, which focuses on exploration and production activities. While the SEC has excluded certain types of transportation from commercial development activities (such as internal transportation from a mine to a refining facility), it has not excluded transportation activities that relate to export. As such, it remains unclear as to whether, and to what extent, the chartering activities of shipowners would require Form SD disclosure.

We have been in contact with the SEC staff, who has advised us that they are in the process of collecting and formulating a response to various questions raised by industry participants that relate to these regulations, and that further interpretive guidance will be forthcoming. We will keep you advised of these and other developments.

If you have questions about the SEC’s new rules applicable to resource extraction issuers, please contact your Seward & Kissel attorney.