On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or “the Act”) which called for broad financial and other regulatory reforms. Section 1504 of the Act imposed reporting requirements on members of the extractive industry (oil, gas and mining companies) to disclose all payments made to governments.
On August 22, 2012, the SEC adopted its final rules implementing section 1504. Specifically, new rule 13q-1 (“Rule 13q-1”) under the Securities and Exchange Act of 1934 (the “Exchange Act”) implements the section 1504 disclosure requirements. The final rules are currently being challenged in a suit filed by a number of industry groups, with other groups and members of Congress having intervened or filed amicus briefs in support of the rules. The SEC has declined to stay the effective date of the final rules.
According to the SEC’s adopting release (the “Adopting Release”), section 1504 was enacted “to increase the transparency of payments made by oil, natural gas, and mining companies to governments for the purpose of the commercial development of their oil, natural gas, and minerals”4. The “primary goal” of the increased transparency is to “help empower citizens of those resource-rich countries to hold their governments accountable for the wealth generated by those resources”.5
Section 1504 and 13q-1 are generally held to be consistent with the EITI. Whereas the EITI focuses on payments made in connection with exploration and production of oil, gas, and minerals, 13q-1 also includes processing and exporting (see paragraph below).
Who has to disclose?
Rule 13q-1 applies to all companies required to file annual reports with the SEC that are involved in the commercial development of oil, natural gas, or minerals (defined as “Resource Extraction Issuers”).
The term “Commercial Development” is defined all inclusively as “exploration, extraction, processing, and export of oil, natural gas, or minerals, or the acquisition of a license for any such activity”.
What has to be disclosed, how, and when?
Resource Extraction Issuers are required to disclose annually payments of $100,000 or greater as a single payment or series of related smaller payments made directly to the U.S. Federal Government or to a foreign government by the Resource Extraction Issuer, or by a subsidiary or other entity under control of the Resource Extraction Issuer for the purpose of the commercial development of oil, natural gas, or minerals.
The term “Foreign Government” includes a foreign government, a department, agency or instrumentality of a foreign government, or a company majority-owned by a foreign government, including state-owned oil companies.
Payments that require disclosure include taxes, royalties, fees (including concession fees), bonuses, infrastructure improvements, and production entitlements.
Subject companies must comply with 13q-1 within 150 days after the end of the issuer’s most recent fiscal year, beginning with fiscal years ending after September 30, 2013. All payment activity after October 1, 2013 must be reported. Reporting must be done on a project by project basis. The SEC left the term “project” undefined. Reporting must be done with electronic tags that identify:
- Total amounts of the payments, by category;
- Currency used to make payments6;
- Financial period in which payments were made;
- Business segment that made the payments;
- Government that receive the payments and country in which the government is located; and
- Project to which payment relates.
What are the penalties for non-disclosure?
While penalties are not specifically addressed in 13q-1, the SEC could suspend or revoke a company’s registration for failure to make required periodic filings with the SEC, under Section 13 of the Exchange Act. Further, a “false or misleading” statement in the disclosure filing could subject the issuer to liability under Section 18 of the Exchange Act.
What impact will these legislative measures have?
Transparency of payments to foreign governments and the resulting ability of a nation’s citizenry to hold governments accountable for those payments is the stated goal of the disclosure requirements. However, from a practical standpoint, the internal impact on the applicable industries will be multifaceted and will be administrative as well as operational.
On the administrative end, companies subject to the requirements will have to assess and most probably modify current accounting procedures or systems to efficiently and effectively comply with the reporting requirements.
Operationally those companies subject to the provisions will have to:
- Determine which aspects of their business are subject to the reporting requirements;
- Determine how to define “project” in all affected areas of the company and be consistent in the definition for tracking payments;
- Determine which payments within those segments are reportable; and
- Determine whether they need to report all of an amount where that amount includes some payments not subject to the reporting requirement. They will also need to consider the accurate identification of third party payments that fall within the requirements.
To be in a position to comply with these legislative provisions, companies in the applicable industries should have an initiative in place, led by a team that includes members from legal/compliance, audit, accounting, IT, and operations.
This article was co-authored by Marsha Gerber (Partner) and Cristina Lunders (Senior Associate) of Fulbright & Jaworski LLP.
- 78/660/EC and 83/349/EEC
- SEC Release No. 34-67717
- Id.(citing statement by Senator Richard Lugar, 156 Cong. Rec. S3816 (May 17, 2010).
- Payment must be reported in U.S. dollars or the issuer’s currency, thus conversion may be necessary. Rule 13q-1 sets out three methodologies for conversion, the issuer must state which method is used.