Extractive Issuer Disclosures — Understanding the SEC’s New Rule

Extractive Issuer Disclosures — Understanding the SEC’s New Rule

Client Alert


On December 16, 2020, the Securities and Exchange Commission (SEC) voted to approve a Final Rule requiring companies to annually disclose information about payments they made to the U.S. government or any foreign government in connection with the commercial development of oil, natural gas or minerals.1 The highly anticipated Final Rule implements Section 13(q) of the Securities Exchange Act, added by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).2 The Final Rule is intended to fulfill the Dodd-Frank Act’s objective of increasing transparency.3

Pursuant to the Final Rule, resource extraction issuers that are required to file reports under Section 13 or 15(d) of the Securities Exchange Act will be required to annually disclose “project-level” payment information for the issuer and any subsidiaries or entities under the issuer’s control.4 The Final Rule defines “project” to include the type of resource and the method of extraction and to “require disclosure at the national and major subnational political jurisdiction, as opposed to the contract, level.”5 A project, therefore, could include multiple contracts for work being carried out within a political jurisdiction. The Final Rule also requires disclosure of “not de minimis” payments, defined to include payments to governments, whether made individually or in a series, that equal or exceed $100,000.6 

The Final Rule contains several exemptions, including an exemption for issuers “subject to the resource extraction payment disclosure requirements of an alternative reporting regime” deemed to satisfy the objectives of Section 13(q).7 The Final Rule will allow those resource extraction issuers to satisfy their disclosure obligations by submitting proof of their compliance with the alternative regime.8 Additionally, the Final Rule includes exemptions for smaller reporting companies and emerging growth companies. The Final Rule defines smaller reporting companies to include “registrants with a public float of less than $250 million . . . as well as registrants with annual revenues of less than $100 million for the previous year and either no public float or a float of less than $700 million.”Under the Final Rule, an emerging growth company is “an issuer that had total annual gross revenues of less than $1.07 billion.”10 

After a two-year transition period, resource extraction issuers will be required to submit Form SD, containing any required disclosures of these payments, within 270 days of the end of their most recently completed fiscal year.11 The Final Rule will become effective after publication in the Federal Register, subject to a 60-day public comment period.12 

Issuance of the Final Rule completes the rulemaking process, which has been drawn out over almost a decade. A first version of the rule, adopted by the SEC in 2012, was defeated in court by associations of oil, natural gas and mining companies, which successfully argued that the rule would have put their members at a competitive disadvantage because it provided no exemptions for disclosure.13 In 2016, the SEC then adopted a second version of the rule, which allowed companies to pursue case-by-case exemptions for commercially sensitive information or to comply with foreign laws against disclosing the payments. But Congress disapproved those rules by a joint resolution under the Congressional Review Act (CRA) in 2017.14 Congress’s use of the CRA to invalidate the rule placed the SEC in the difficult position of being statutorily required to issue a new rule in compliance with the express language of the Dodd-Frank Act, while being prohibited from issuing a rule substantially similar to the 2016 version. 

In comparison to the prior proposed rules, the final version is more favorable to extractive industry companies—softening key definitions; adding exceptions to some of the rule’s requirements; and altering reporting obligations to lower the overall compliance burden, including by requiring that disclosures be furnished to, not filed with, the Commission. Most notably, the Final Rule allows public disclosure of reports regarding payments by oil, gas and mining companies to be aggregated at a subnational or national level instead of on a contract-by-contract basis, as had been required in the 2016 version of the rule.15 Despite issuance of the Final Rule, the effort remains controversial, and opponents have indicated their intent to launch a new legal challenge to the rule. 

Further, the two Democratic commissioners who voted against the Final Rule issued dissenting opinions, arguing that the latest proposal is too weak and will not advance anti-corruption goals.16 Commissioner Allison Herren Lee said the new rule does not effectuate Congress’s intent, ensure disclosure that will help citizens combat corruption, provide sufficiently granular data to inform investors, heed calls from issuers who asked the SEC to harmonize its rules with international rules or help the SEC and the United States lead in the global fight against corruption.17 She explained that the Final Rule allows a much higher level of payment aggregation, which will not result in the type of granular disclosure that the SEC has determined is “necessary to advance in a meaningful way the statute’s anti-corruption and accountability objectives.”18

 In the end, even the Republican commissioners who voted for the rule were not satisfied. Despite the Dodd-Frank requirement that the SEC adopt such a rule, the Republican commissioners said they did not believe that it was the Commission’s place to do so. At the hearing, commissioner Elad Roisman stated that “This rulemaking task is simply not in my expertise, nor does it further our mission.”19 SEC Chair Clayton also commented that the rule, resulting from a long, drawn-out process, is likely to be unsatisfactory to those interested in combating corruption in the international extractive resources industry. And he voiced concern that the SEC may not be the ideal agency to employ such a rule because what the rule addresses is outside the Commission’s area of expertise and jurisdictional authority, warning that the SEC should be wary of straying too far from its focus on supporting investor interests.20

Many in the industry generally welcomed the Final Rule, though some voiced support for disclosing payments on a contract-by-contract basis (as already required by other jurisdictions, including the EU and Canada). Ultimately, some companies may choose to report their payments on a contract by contract basis even though such granularity is not required under the Final Rule. In addition, as noted, anticorruption advocates have disapproved of the agency’s effort as too lenient and insufficiently transparent, and these critics may challenge the Final Rule in court. Yet, there is some question as to the utility of the required rule in the first place from an anticorruption transparency standpoint. Given that most international corruption is effectuated through payments or other arrangements with third parties such as agents, consultants and distributors, a rule requiring disclosure of payments directly to governments by issuers, subsidiaries and entities under their control may not provide meaningful information to those seeking to identify illicit payments. 

Putting aside the goals of the rule and its potential effectiveness in combating corruption, extractive industry companies should be mindful of the changes the Final Rule brings and prepare to adjust their disclosures accordingly. WilmerHale’s Energy, Environment and Natural Resources and White Collar Investigations and Criminal Litigation groups are closely tracking the implementation of and challenges to the Final Rule and will continue to provide updates.