On December 16, 2020, the U.S. Securities and Exchange Commission (the “SEC”) adopted[1] Rule 13q-1 (the “Rule”)[2] which requires publicly traded resource extraction issuers (defined below) to disclose payments made to the U.S. federal government and foreign governments for the commercial development of oil, natural gas, or minerals. The rule became effective on March 16, 2021 and was subject to a two-year transition period that has since ended.[3] Resource extraction issuers with a December 31 fiscal year-end are now required to disclose payment information on Form SD by September 26, 2024 and on an annual basis thereafter. Other resource extraction issuers with later fiscal year-ends are required to file a Form SD not later than 270 days after their fiscal year ends.
Which Companies Are Subject to the Disclosure Requirement?
The Rule applies to “resource extraction issuers,” which includes all companies that (1) file annual reports (Form 10-K, 20-F, or 40-F) with the SEC and (2) engage in the “commercial development of oil, natural gas, or minerals.” Commercial development includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity. The term “commercial development” is intended to capture activities that are “directly related” to commercial development. Activities that are “ancillary or preparatory” to such development are not intended to be captured by the Rule. Whether activities are covered may depend on whether they are upstream, midstream or downstream of commercial development.[4]
What Has to be Reported on Form SD?
The Rule requires resource extraction issuers to disclose on Form SD[5] any payments made to the U.S. federal government and foreign governments relating to the commercial development of oil, natural gas, or minerals by type and total amount per project.
Payment Information
Payments must be reported, by category,[6] for each project and government. The payments that are subject to the Rule are:
- equal to or greater than $100,000;[7]
- made to the U.S. federal government or a foreign government;[8]
- to further the commercial development of oil, natural gas, or minerals; and
- in the form of taxes, royalties, fees (including license fees), production entitlements, bonuses, certain dividends, payments for infrastructure, community and social responsibility (CRS) payments, or in-kind payment of any of the above payments.[9]
Payments to foreign governments include payments to national and subnational governments, departments, agencies, and instrumentalities of the national government.[10] A company that is majority-owned by the national government of a foreign country is covered by this definition.
Resource extraction issuers must also disclose payments made by subsidiaries and entities controlled directly or indirectly by the issuer through one or more intermediaries.
Project Information
Along with payment information, resource extraction issuers must identify, for each project, (i) the type of resource extracted, (ii) the method used, and (iii) the “major subnational political jurisdiction” in which the paid-for activity took place. The SEC specifies the following for the three prongs:
- Type: The issuer must disclose whether the project relates to the commercial development of oil, natural gas, or a specified type of mineral. This prong does not require disclosure of the specific type or quality of oil or natural gas, nor distinctions between subcategories of the same mineral type.
- Method: The issuer must identify whether the resource is being extracted using a well, an open pit, or underground mining. Additional detail about the extraction method is not required.
- Major subnational jurisdiction: The issuer must also disclose the level of major subnational jurisdiction (e.g., state, province, district, region, territory) in which the resource extraction occurred. For offshore projects, the reporting requirement includes the smallest body of water (e.g., Gulf of Mexico) where the project is located and nearest major subnational jurisdiction.
Resource extraction issuers may aggregate payments made below the subnational jurisdiction level. But, for each subnational government payee, the amount of payment by payment type must be provided. Additionally, the subnational government payee must be identified. For example, the SEC stated that a hypothetical company with extractive operations in the three oil sands regions of Alberta, Canada (the Regional Municipality of Wood Buffalo, Northern Sunrise County, and the Municipality of Cold Lake), would be required to identify each subnational government entity and aggregate all payments to each entity.[11] Based on the SEC’s guidance, disclosure would be as follows: “Municipality of Wood Buffalo/Oil/Well; Municipality of Northern Sunrise County/Oil/Well; Municipality of Cold Lake/Oil/Well,” with payments reported for each of Wood Buffalo, Northern Sunrise County, and Cold Lake.
If activities that use multiple resource types or extraction methods are in the same major subnational jurisdiction, they may be treated as a single project. But, the Rule requires the issuer to describe each type of resource that is being commercially developed and each method of extraction used for that project. For example, the SEC stated that a hypothetical open pit and underground zinc mining project in Erongo, Namibia would be described as “ER/Zinc/Open Pit/Underground.”[12] If a project site crosses borders between major subnational political jurisdiction and generates multiple payment obligations, the issuer needs to treat the activities as separate projects.
XBRL Tagging
The following disclosures should be electronically tagged in XBRL format:
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Payment Information
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Project Information
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- Payment amount by category, for each project, and to each government
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- Currency used to make payments
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- Project type/resource extracted
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- Financial period payments were made
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- Method used to extract the resource
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- Business segment of the issuer that made the payment
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- Major subnational jurisdiction where the project is located
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- Government and country that received the payment
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Are There Any Exemptions?
Resource extraction issuers are exempt from the Form SD disclosure requirement if:
- the required disclosure is prohibited by foreign law;[13]
- the required disclosure would violate a contract term in effect before March 16, 2021;[14]
- the issuer is a smaller reporting company (SRC) or an emerging growth company (EGC);[15] or
- the issuer provides a disclosure report from one of the following alternative reporting regimes:
- Canada’s Extractive Sector Transparency Measures Act (ESTMA);
- EU Accounting Directive 2013/34/EU;
- EU Transparency Directive 2013/50/EU;
- UK Reports on Payment to Governments Regulation 2014; and
- Norwegian Regulation on Country-by-Country Reporting.[16]
Resource extraction issuers may delay disclosure of payments related to exploratory activities until the Form SD submitted for the fiscal year following the fiscal year in which the payments were made. Both newly acquired companies that were not previously obligated to disclose resource extraction payment information and companies that recently completed an initial public offering (IPO) in the United States may similarly delay reporting until the first full fiscal year following the effective date of the acquisition or IPO.
Additionally, a resource extraction issuer may apply for exemptive relief on a case-by-case basis.
What is the Scope of Liability?
The disclosures required by Rule 13q-1 on Form SD are furnished to, and not filed with, the SEC. As a result, issuers do not face liability for false statements for such disclosures under Section 18 of the Exchange Act. Disclosures are, however, subject to an anti-evasion provision in the Rule as well as the general anti-fraud provisions in Exchange Act Section 10(b) and Rule 10b-5 under that act. Disclosures are not incorporated by reference into Securities Act registration statements unless expressly done so by the issuer.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities and Capital Markets practice.
The authors also wish to acknowledge the contributions of Sam Olsson, a 2024 summer associate, to the development of this alert.
[1] See Disclosure of Payments by Resource Extraction Issuers, Release No. 34-90679 (Dec. 16, 2020) (“Final Rule”), available at https://www.sec.gov/files/rules/final/2020/34-90679.pdf.
[2] 17 C.F.R. § 240.13q-1.
[3] The Rule was the result of a decade-long effort by the SEC to adopt a resource extraction payment rule in the face of judicial and legislative setbacks. In 2010, the Dodd-Frank Act added Section 13(q) to the Securities Exchange Act of 1934, which directed the SEC to issue a rule requiring resource extraction issuers to disclose payments made to certain governments. The SEC adopted a rule to that end in 2012, but the U.S. District Court for the District of Columbia vacated the rule in 2013. The SEC adopted a second, revised version of the rule in 2016, but that rule was vacated in 2017 by a joint resolution of Congress pursuant to the Congressional Review Act, due to Congressional concerns about the rule’s compliance costs and whether the rule would place U.S. companies at a competitive disadvantage. The SEC proposed a third, revised version of the rule in 2019, which went into effect on March 16, 2021.
[4] For example, the SEC clarified that the following midstream activities would fall within the “processing” prong of the commercial development definition: removing liquid hydrocarbons from gas; removing impurities from natural gas prior to transport; upgrading bitumen and heavy oil, through the earlier of the point at which oil, gas, or gas liquids (natural or synthetic) are either sold to an unrelated third party or delivered to a main pipeline, a common carrier, or a marine terminal; and crushing or preparing of raw ore prior to the smelting or refining phase. Downstream activities that do not fall within the commercial development definition include refining or smelting. In addition, providing products or services that support the exploration, extraction, processing or export of oil, natural gas or minerals, such as manufacturing drill bits, providing hydraulic fracturing or drilling services to enable extraction, marketing activities and security-related activities will not result in the issuer being deemed a “resource extraction issuer.”.
[6] These categories are: tax, royalty, fee, dividend, entitlement, bonus, infrastructure payment, CRS payment, or in-kind payment of the aforementioned.
[7] Per Form SD, amounts less than $100,000 are considered de minimis and are therefore exempt. As explained in the adopting release, periodic payments or installments in the same fiscal year, however, must be aggregated when determining whether the payment threshold has been met.
[8] Payments to U.S. state, local and tribal governments are not subject to disclosure under the Rule. Conversely, payments to “foreign governments” include any subnational governments of a foreign country, including the governments of a
[9] Payment amounts need to be reported for each category on a cash (versus accrual) basis and do not need to be audited.
[10] Subnational governments of a foreign country include the governments of a state, province, county, district, municipality or territory, as well as aboriginal, indigenous or tribal governments that are subnational governments in foreign countries.
[11] See Final Rule, at 101.
[12] See Final Rule, at 48.
[13] To be eligible for this exemption, an issuer must have taken reasonable steps to seek and use exemptions in the foreign jurisdiction. Subsequently, the issuer needs to disclose the efforts made, results obtained, and foreign law and jurisdiction preventing disclosure. This information needs to be provided on Form SD along with a legal opinion from counsel, attached as an exhibit, regarding the issuer’s inability to comply with the Rule without violating foreign law.
[14] Similar to the conflict-of-law exemption, the issuer must take reasonable steps to obtain necessary consents from the relevant contractual parties and attempt to seek and use a contractual exemption for the disclosure. Failing those efforts, the issuer must disclose on Form SD the jurisdiction for which it is omitting information, the relevant contractual terms, the efforts taken, and the results. A legal opinion on the issuer’s inability to comply with the disclosure requirement without violating contractual terms must also be attached.
[15] As defined by C.F.R. § 240.12b-2.
[16] See Order Recognizing the Resource Extraction Payment Disclosure Requirements of Certain Jurisdictions, Release No. 34-90680 (Dec. 16, 2020), available at https://www.sec.gov/files/rules/other/2020/34-90680.pdf.
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