ARRC endorses CME 12-month Term SOFR
On May 19, 2022, the Alternative Reference Rates Committee unanimously endorsed using the CME 12-month Term SOFR.
On December 16, 2020, the US Securities and Exchange Commission (SEC or Commission) adopted rules requiring resource extraction issuers to disclose payments to governments related to the commercial development of oil, natural gas or minerals (the Rules). The Rules, which become effective 60 days after publication in the Federal Register, implement Section 13(q) of the Securities Exchange Act of 1934 (the Act), which Congress enacted in 2010 as part of the Dodd-Frank Act.
The Rules are the Commission's third attempt at implementing Section 13(q)'s mandate. In 2013, a federal court struck down the Commission's 2012 version of the rules. Then, in 2017, Congress rejected the Commission's 2016 version under the Congressional Review Act (CRA) over concerns about compliance costs and anti-competitive effects. Despite these actions, Section 13(q)'s statutory mandate remained, which left the Commission obligated to promulgate final rules.
The Rules apply to any domestic or foreign issuer that: (1) is required to file an annual report on SEC Form 10-K, Form 20-F, or Form 40-F; (2) is engaged in the commercial development of oil, natural gas or minerals; and (3) makes payments to the US federal government or a foreign government related to this commercial development. The Rules exclude foreign private issuers that are exempt from the Act's registration and reporting obligations pursuant to Rule 12g3-2(b). The Rules define a "foreign government" as the national government of a foreign country, as well as any department, agency, or instrumentality of the national government, or a company at least majority-owned by the national government. The definition includes a foreign country's subnational governments, such as a state, province, county, district, municipality or territory. The Rules state that the phrase, "commercial development of oil, natural gas, or minerals" includes only those activities directly related to commercial development, including exploration, extraction, processing, and export, or the acquisition of a license for those activities.1 The Rules require resource extraction issuers to disclose payments made not only by the issuer itself, but also by any subsidiary or entity under the issuer's control.
Resource extraction issuers must disclose non-de minimis payments made to a government that directly relate to the commercial development of oil, natural gas or minerals, by project, identifying: (1) the type of resource being developed (i.e., oil, natural gas or a specified type of mineral); (2) the method of extraction (e.g., well, open pit, underground mining); and (3) the major subnational political jurisdiction where the activity is taking place (e.g., state, province, district, region, territory). A payment is not de minimis if it equals or exceeds, individually or as a series of related payments, US$100,000 (or the equivalent in the issuer's reporting currency). Payment categories include taxes, royalties, fees (including licensing fees), production entitlements, bonuses, dividends, payments for infrastructure improvements and community and social responsibility (CSR) payments, including in-kind payments, required by law or contract.
Resource extraction issuers must furnish Section 13(q) disclosures through the searchable, online EDGAR system in section 2 of amended Form SD (Specialized Disclosure Report), and within 270 days following completion of the issuer's fiscal year.2 Since the Rules provide a two-year transition period, companies will not be required to provide Section 13(q) disclosures until at least two years after the Rules become effective (60 days following publication in the Federal Register). Further, the Rules deem Section 13(q) disclosures as being furnished to, but not filed with, the Commission, thereby avoiding Section 18 liability, which extends to any person who makes or causes to be made any false or misleading statement of material fact in any document required to be filed under the Act. The disclosures do, however, remain subject to the Act's general antifraud provisions.
In Exhibit 2.01 to Form SD, resource extraction issuers must provide a report of the following information, electronically tagged in the eXtensible Business Reporting Language (XBRL) format:
The Rules provide some narrow, well-defined exemptions necessitating documentation, including:
The Rules exempt disclosure if it would violate the laws of the jurisdiction where the project is located. The issuer must disclose the jurisdiction it has excluded, the law preventing disclosure, the issuer's efforts to seek and use exemptions or other relief under such law, and the results of those efforts. The issuer must also provide a legal opinion supporting the issuer's position that disclosure would violate foreign law.
The Rules exempt disclosure if it is prohibited under the terms of a pre-existing contract (i.e., one existing prior to the Rules' effective date). Again, to avail itself of this exemption, the issuer must disclose the excluded jurisdiction, the particular contract terms preventing disclosure, the issuer's efforts to seek consent or other contractual relief and provide a legal opinion supporting the issuer's position that disclosure would breach pre-existing contractual terms.
The Rules exempt smaller reporting and emerging growth companies to the extent the company is not subject to disclosure under an alternative reporting regime. A company subject to disclosure under an alternative reporting regime remains obligated to make Section 13(q) disclosures, though as explained below, may rely on approved foreign reports to comply with its reporting obligations. The Commission defines a "smaller reporting company" as a registrant with a public float of less than US$250 million, as well as a registrant with annual revenues of less than US$100 million for the previous year and either no public float or a public float of less than US$700 million. It defines an "emerging growth company" as an issuer that had total annual gross revenues of less than US$1,070,000,000 during its most recently completed fiscal year.
Issuers may also apply for exemptions on a case-by-case basis using the procedures set forth in the Act. Generally, the issuer must submit a written request describing the disclosures it seeks to omit, along with the specific facts and circumstances warranting an exemption, including the particular costs and burdens posed by disclosures.
An issuer may delay reporting payments related to exploration activities until the issuer furnishes payment disclosures for the fiscal year following the exploration activities. The Commission considers payments as related to exploration activities if they relate to: (1) identifying areas that may warrant examination; (2) examining specific areas that are considered to have prospects of containing oil and gas reserves; or (3) conducting a mineral exploration program. The Rules limit exploratory activities to those actually conducted prior to commercial development.
The Rules do not require issuers to make Section 13(q) disclosures for newly acquired or controlled entities if, in the prior fiscal year, the newly acquired or controlled entity had no Section 13(q) obligations or similar disclosure obligations under an alternative reporting regime. However, the issuer must disclose its reliance on this exemption in Form SD and begin reporting Section 13(q) disclosures for the acquired company in the first full fiscal year following the acquisition's effective date.
An issuer that has completed an IPO in the United States does not need to provide Section 13(q) disclosures until the first full fiscal year following the IPO's completion.
If the Commission has determined that a foreign reporting regime satisfies Section 13(q)'s transparency objectives, the Rules authorize a resource extraction issuer to comply with Section 13(q) by furnishing a report that complies with the foreign reporting regime. To rely on a foreign report, the issuer must submit notice to the Commission on Form SD on or before the due date of the issuer's Section 13(q) disclosures. The notice must indicate the issuer's intent to submit a foreign report using the foreign jurisdiction's reporting deadline. Then, the issuer must submit the foreign report as an exhibit to Form SD, including an English translation if necessary, within seven business days of the foreign jurisdiction's reporting deadline. If the issuer fails to submit timely notice of its intent to rely on an approved foreign report, or submits such a notice but fails to submit the foreign report within the required seven business days, the issuer may not rely on the foreign reporting provision for the following fiscal year.
The Commission currently has deemed the following disclosure regimes as satisfying Section 13(q)'s transparency objectives: (1) the European Parliament and Council of the European Union (EU) Accounting Directive and the EU Transparency Directive; (2) the United Kingdom's (UK) Reports on Payments to Governments Regulations 2014 (which remains effective following the UK's withdrawal from the EU); (3) Norway's Regulations on Country-by-Country Reporting; and (4) Canada's Extractive Sector Transparency Measures Act. Resource extraction issuers, governments, industry groups, and trade associations may request that the Commission recognize additional alternative reporting regimes.
The Rules are likely to provide the SEC with another enforcement tool against corruption globally. When the Commission proposed the rules, Commissioner Allison Lee stated, "[the] disclosure requirement is about fighting global corruption through transparency." (Commissioner Lee voted against the Rules because they allow aggregation of payment information, which Lee views as "severely restrict[ing] the transparency and anti-corruption benefits that the disclosures might provide.") The SEC, along with the Department of Justice, already enforces the Foreign Corrupt Practices Act (FCPA), which prohibits making corrupt payments to foreign government officials to obtain or retain business for an inappropriate business advantage. The FCPA also tasks issuers with maintaining accurate books and records and accounting controls. While issuers are unlikely to disclose corrupt payments publicly, a failure to make a Section 13(q) disclosure, which alone may not carry criminal exposure, is likely to implicate criminal exposure under the FCPA, among other potential criminal statutes. Resource extraction issuers should begin planning compliance now in order to ensure sufficient time to prepare and test internal controls and reporting systems while the two-year transition period is in effect. Issuers may also need to weigh options for addressing previously unforeseen concerns pertaining to payments to government entities.
On May 19, 2022, the Alternative Reference Rates Committee unanimously endorsed using the CME 12-month Term SOFR.
A federal grand jury has indicted the operator and management personnel of a Wisconsin corn mill where a May 2017 explosion killed five workers and injured many more.
© Norton Rose Fulbright LLP 2021