“Third Time’s the Charm?” SEC’s Latest Attempt to Pass a Disclosure Rule Could Create New Reporting Obligations for Oil & Gas Companies
Last week, the U.S. Securities and Exchange Commission (the “SEC”) initiated its third try to pass a rule on “Disclosure of Payments by Resource Extraction Issuers,”1 which would govern the disclosure of payments made by oil, natural gas, and mineral extractors to foreign governments — as required by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).2 The SEC’s first two attempts failed, but this third attempt may be the most meaningful attempt yet to add additional layers of oversight over multinational energy companies who seek valuable extraction rights abroad. If the rule passes, energy companies will need to comply with additional regulations or face the consequences.
On January 15, 2020, the SEC proposed a new rule on “Disclosure of Payments by Resource Extraction Issuers.”3 This new disclosure rule attempts to improve upon two previous attempts which were overturned by the courts and Congress. The first try failed when the United States District Court for the District of Columbia held that the SEC’s attempt to mandate disclosure requirements was not entitled to deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and held that the SEC misread Dodd-Frank to mandate public disclosure of reports, rendering the SEC’s action invalid.4 On the SEC’s second try, Congress passed a joint resolution under the Congressional Review Act to disapprove of a proposed rule because it imposed overly severe economic constraints.5 Now the SEC is back for a third “bite at the apple.”
The Proposed Rule, defines “resource extraction issuer” as an issuer that must file a Form 10-K, 20-F, or 40-F and engages in the commercial development of oil, natural gas, or minerals.6 However, the Proposed Rule will not apply to issuers subject to Tier 2 reporting under Regulation A or annual reporting under Regulation Crowdfunding.7 Likewise, the Proposed Rule excludes emerging growth companies, but applies to foreign private issuers.8
The Proposed Rule defines “commercial development of oil, natural gas, or minerals” as the “exploration, extraction, processing, and export of oil, natural gas or minerals, or the acquisition of a license for any such activity” — but not “preparatory” or “ancillary” activities.9 Accordingly, the Proposed Rule focuses on “extraction,” “processing,” and “export,” which are defined to primarily cover upstream and midstream activities; the SEC explains that it is focusing on upstream and midstream activities because those are the primary catalysts of payments to foreign governments.10
Under the Proposed Rule, payments to foreign governments must be disclosed if not de minimis — i.e., if there is a one-time payment equal to or greater than $150,000 (or its equivalent in foreign currency), and the aggregate payments for the “project” are equal to or in excess of $750,000.11 What constitutes a “project” will be determined by assessing: (1) the type of resource extracted; (2) the extraction method; and (3) the major subnational political jurisdiction where the extraction takes place (or, if offshore, the nearest such jurisdiction), keeping in mind the goal of focusing on upstream and midstream activities.12 Issuers will be required to disclose payments by any subsidiary or any other entity under its control, in accordance with and as determined by Generally Accepted Accounting Principles.13
The Proposed Rule creates an exemption — under some circumstances — to exclude disclosure of information on payments, if the law of the jurisdiction in which the project is located prohibits such disclosure.14 Likewise, the Proposed Rule will not require disclosure of payments when a preexisting contract prohibits such disclosure, provided that the contract is already effective when the Proposed Rule is adopted, and the issuer takes certain additional steps as set forth in the Proposed Rule.15 Furthermore, the Proposed Rule creates an exemption for exploratory activity, under which issuers may delay reporting payments relating to exploration until submitting their Form SD for the fiscal year following the fiscal year during which the payments were made — thereby avoiding competitive harm.16
What This Means For You
If it passes, the Proposed Rule would be a significant development for companies engaged in oil, gas, or mineral extraction abroad, and the reporting obligation would add to the many other important obligations with which companies have to comply. Upstream and midstream companies would be well advised to consult with counsel to determine what the likely obligations will be to avoid incurring sanctions or penalties that could arise from the failure to comply. In the near-term, companies may seek to raise any concerns directly to the SEC prior to the Proposed Rule’s adoption; comments on the Proposed Rule are due to the SEC no later than March 16, 2020.
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1 17 C.F.R. § 240 (the “Proposed Rule”).
2 15 U.S.C. 77m(q)(2)(a).
3 17 C.F.R. § 240 (the “Proposed Rule”).
4 See API v. SEC, 953 F. Supp. 2d 5 (D.D.C. July 2, 2013).
5 H.R.J. Res. 41, 115th Cong. (2017) (enacted).
6 Proposed Rule at 2528.
9 Id. at 2529.
11 Id. at 2534.
12 Id. at 2536.
13 Id. at 2535.
14 Id. at 2543.
15 Id. at 2544.
16 Id. at 2545.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.