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02 March 2021
Application to resource extraction issuers
Form and timing of disclosure
Exemptions from compliance and transitional relief
Alternative reporting regimes
The Securities and Exchange Commission (SEC) has adopted a final rule which requires US and foreign resource extraction issuers to disclose any payments made to the US federal government or foreign governments for the commercial development of:
The rule adopts Rule 13q-1 and amends Form SD to implement Section 13(q) of the Securities Exchange Act 1934. It will come into effect 60 days after its publication in the Federal Register.
This new rule implements the resource payment disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 and follows the SEC's effort in 2018 to modernise its disclosure requirements for mining company issuers, which came into effect for many issuers on 1 January 2021.(2)
The SEC also created an alternative reporting regime which enables issuers subject to certain foreign reporting regimes to comply with the new rules by providing copies of those foreign reports (see " Alternative reporting regimes" below).
The new disclosure rules apply to all 'resource extraction issuers', including all US and foreign issuers (including Canadian companies reporting through the multijurisdictional disclosure system) that:
Resource extraction issuers must disclose payments made to the US federal government or a foreign government that:
Issuers must report payments made by any subsidiary or entity under their control.(3) They must identify the particular recipient of payments at each government level, but can aggregate payments by type when disclosing payments rather than disclosing each payment individually.
The new rules require payments made by resource extraction issuers to governments to be reported by type and total amount per project. Under the new rules, a 'project' is defined by three criteria:
Commercial development activities using multiple resource types or extraction methods can be treated as a single project if they are in the same major subnational political jurisdiction.
Issuers must furnish to the SEC the required disclosure annually on Form SD no later than 270 days after the end of their most recently completed fiscal year. The required disclosure must be submitted on the Electronic Data Gathering and Retrieval System in an extensible business reporting language (XBRL) exhibit to Form SD.
The SEC also adopted provisions that permit delayed reporting of payments relating to exploratory activities to mitigate potential competitive harm. Issuers will not be required to report payments relating to exploratory activities until they submit a Form SD for the fiscal year following the fiscal year in which the payments were made.
The SEC adopted three exemptions from the reporting requirements of Section 13(q):
The SEC also adopted transitional relief that will permit:
Issuers may also apply for an exemption on a case-by-case basis by submitting a written request for exemptive relief to the SEC.
The SEC adopted provisions within the new rules that will allow issuers to meet the requirements of the Section 13(q) rules, in certain circumstances, by providing disclosures that comply with a foreign jurisdiction's reporting regime. To qualify, the SEC must have determined that the foreign jurisdiction requires disclosure that satisfies the transparency objectives of Section 13(q). In conjunction with the adoption of the new rules, the SEC issued an order which recognises the following alternative reporting regimes as satisfying these objectives:
Issuers using alternative reports must submit the alternative report as an exhibit to Form SD, translated to English (if applicable) and tagged using XBRL.
The SEC has adopted the new rules with a two-year transition period. As a result, issuers must comply with the new annual reporting requirement starting with their fiscal year ending no earlier than two years after the effective date of the final rules. For issuers with a 31 December fiscal year end, this is expected to be 30 September 2024 in respect of payments made in 2023.
For further information on this topic please contact Jason Lehner or Ryan Robski at Shearman & Sterling's Toronto office by telephone (+1 416 360 8484) or email (email@example.com or firstname.lastname@example.org). Alternatively, contact Marwa Elborai at Shearman & Sterling's London office by telephone (+44 20 7655 5000) or email (email@example.com). The Shearman & Sterling LLP website can be accessed at www.shearman.com.
Richard Alsop and Lona Nallengara, partners, and Iain Sneddon, associate, assisted in the preparation of this article.
(1) The new rules are the SEC's third attempt to adopt rules under Section 13(q). The SEC's initial rules, adopted in August 2012, were vacated by the US District Court for the District of Columbia in July 2013. The SEC's next set of rules, adopted in 2016, were subsequently disapproved under the Congressional Review Act, which ultimately required the SEC to draft new rules not "substantially the same" as the disapproved rules.
(2) For further details please see "SEC overhauls disclosure requirements for mining companies".
The issuer must also furnish as an exhibit to Form SD a legal opinion from counsel opining on the issuer's inability to provide the required disclosure without violating the foreign jurisdiction's law.
(5) The exemption will apply only to contracts in which such terms are expressly included in writing prior to the effective date of the final rules. Similar to the requirements to avail themselves of the conflict of laws exemption, issuers must provide specific disclosures about their eligibility for the exemption, including identifying the jurisdiction and furnishing a legal opinion.
(6) Issuers with a public float of less than $250 million or with annual revenues of less than $100 million for the previous year and either no public float or a public float of less than $700 million.
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