SEC adopts Dodd-Frank rule requiring disclosure of payments to governments by US resource extraction issuers

11 Sep 2012

The SEC has recently adopted (http://sec.gov/news/press/2012/2012-164.htm?intEmailHistoryId=778390&intEmailListId=133&intEmailId=60099&intExternalSystemId=1) rules requiring all US-listed firms engaged in the energy sector to file a supplementary form with them disclosing information relating to certain payments made to either the US or a foreign government. The new rules, which implement section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, apply to companies that are engaged in the development of oil, natural gas or minerals and will require annual submissions to be made to the SEC starting in the 2014 financial year. The new rules apply to “resource extraction issuers” if:

• the issuer is required to file an annual report with the SEC; and

• the issuer engages in the commercial development of oil, natural gas or minerals.

The rules apply to both US and foreign issuers and to smaller reporting companies that fall within the definition of “resource extraction issuer”. Payments made to governments by subsidiaries and other entities controlled by a qualifying issuer will also need to be disclosed. For the purposes of the rules, “government” is defined as including a department, agency or instrument of a foreign government, or a company owned by a foreign government as determined by the SEC.

Issuers will need to disclose all payments related to commercial development activities that are:

• made to further the commercial development of oil, natural gas or minerals;

• not “de minimis” – i.e. a single payment or series of payments that equals or exceeds $100,000 during the most recent fiscal year; and

• within a specified category of payments – including taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends and infrastructure payments.

Submissions to the SEC under the new rules should be completed on the designated form (SD form) and should be submitted no later than 150 days after the end of the issuer’s financial year.

Some commentators have welcomed these new rules, stating that increased transparency will serve to reduce the risk of bribery and corruption in the energy sector. Concerns have, however, been raised that the rule will force companies to divulge secret commercial strategies and may therefore damage companies who are subject to the rule.