On December 11, 2015, the Securities and Exchange Commission issued a proposed rule on disclosure of resource extraction payments, over two years after a federal court vacated a prior version of the rule. The new proposal is similar in many ways to the SEC’s original rule, adopted in August 2012 – in large part because the SEC is implementing a detailed congressional directive contained in Section 1504 of the 2010 Dodd-Frank Act. However, in addition to addressing the deficiencies the court found in the original rulemaking, the SEC has made other notable changes to reflect global developments in transparency for resource extraction payments, particularly in the European Union and Canada.
Section 1504 is one of the “specialized disclosure” requirements included in the Dodd-Frank Act, which use the SEC disclosure system to promote public policy objectives not directly related to the usual purposes of corporate disclosures. The other prominent example is the conflict minerals disclosure rule – requiring reporting companies to provide disclosure about the sources of specified minerals, with the aim of impeding the financing of armed conflict in the Congo.
The disclosure of resource extraction payments is also designed to promote a foreign policy interest. The SEC summarized the congressional intention this way: to support global efforts to improve transparency in extractive industries, to help combat corruption and to empower citizens of resource-rich countries to hold their governments accountable. To those ends, the statute requires the SEC to adopt rules under which any reporting company engaged in the commercial development of oil, natural gas or minerals must provide annual disclosure of amounts it pays to governments for that purpose.
The 2012 rule was vacated by the U.S. federal district court for the District of Columbia on two grounds. First, the rule required public filing of the disclosure, which the SEC had concluded was required under the statute. The court disagreed, finding that the SEC had discretion to consider whether the disclosure should be publicly filed or only provided confidentially to the SEC itself. Second, the rule had no exemption for payments in countries that prohibit disclosure, and the court found that failure was arbitrary and capricious.
In September 2014 (more than a year after the decision vacating the rule), the SEC had still not made a new proposal, and Oxfam brought an action in federal court to compel the agency to adopt a rule as required by the Dodd-Frank Act. In September 2015, the court held that the SEC had unlawfully withheld action by not promulgating a final rule, and in October 2015, the SEC filed with the court an expedited schedule to put a final rule to a vote by June 27, 2016. The December 11 proposal is the first milestone on that path.
In an unusual step, there are two separate deadlines for submitting comments on the proposed rule: initial comments are due on January 25, 2016, and reply comments, which may respond only to issues raised in the initial comment period, are due on February 16, 2016. The tight timing presumably results from the expedited schedule, while the additional period for responsive comments is an innovation that may reflect the intense and often adversarial interest in the rulemaking from both industry and proponents of resource transparency.
Below are some highlights of the proposal:
- Public disclosure. Like the 2012 rule, the proposed rule requires that disclosure be filed publicly with the SEC on EDGAR. The court found, in vacating the 2012 rule, that the SEC has discretion to require that the disclosure be filed either publicly or confidentially. In the proposal, after considering the question at length, the SEC concludes that public disclosure would best accomplish the purposes of the statute. The proposal emphasizes the asymmetry of information in the extractive industries and the important role of public disclosure in combatting corruption. This approach is also consistent with the public disclosure requirements for resource extraction payment information adopted in the European Union and Canada, as well as a revision to the public reports required under the Extractive Industries Transparency Initiative (EITI) standard to include payment disclosure by company.
- Exemptions for disclosure prohibited by local law. The proposed rule does not include an exemption for disclosures prohibited by foreign governments, the other flaw the court found in the 2012 rule. This time, however, the SEC says that it will consider using its existing authority to provide exemptive relief “if and when warranted.” The proposal argues this would permit the SEC to tailor the relief to the particular facts and circumstances presented. A company seeking relief would need to submit a written request describing the disclosures it seeks to omit and the reasons an exemption is warranted. Any requests for exemptive relief based upon disclosure prohibitions under local law would require an opinion of counsel. Other factors that would be considered include whether disclosure is already publicly available and the frequency with which similar information has been disclosed by other companies. The proposal indicates that the SEC would generally expect to make any requests for exemptive relief public and to provide an opportunity for public comment.
- Alternative reporting. The proposed rule provides that a company could meet its reporting obligations by providing disclosure that complies with requirements of any “alternative reporting regime” as an exhibit to its Form SD, if the SEC has determined that those requirements are “substantially similar” to the proposed rule. This framework – consistent with the approach taken in the European Union and Canada – would reduce compliance costs for companies reporting under multiple regimes. The release notes that the SEC also believes this approach would incentivize foreign countries contemplating adopting resource extraction disclosure rules to align their requirements with those of the United States.
Under the proposal, a company subject to the rule would be required to file resource extraction payment disclosures annually on Form SD (which is already used for conflict minerals disclosures) no later than 150 days after the end of its fiscal year. The first report would be for the first year that ends one year or more after the date on which the SEC issues the final rule. If the current timetable is met, and the rule is adopted in June 2016, a calendar-year filer would file its first report by May 2018 for the fiscal year ended December 31, 2017.
We are continuing to analyze the proposal and expect to publish a more detailed discussion soon. For additional information about the resource extraction rule, see our Alert Memos on the adoption of the 2012 rule, available here, and on the judicial decision vacating the 2012 rule, available here.