The new rule states that firms engaged in the commercial development of oil, natural gas, or minerals that are otherwise required to file Forms 10-K or 40-F must annually submit Form SD and attach to it as an exhibit in XBRL format information concerning payments made by them (or their subsidiaries or other entities under their control) to the federal government or foreign governments related to resource development contracts during the fiscal year. This information includes the: 1) type and total amounts of such payments, broken down both by project and by each government; 2) total amounts of these payments; 3) currencies used to make the payments; 4) fiscal years in which the payments were made; 5) business segment of the firm that made the payments; 6) governments that received the payments and the countries where they are located; 7) projects to which the payments relate; 8) resource that is the subject of the development project; 9) method of extraction; and 10) major subnational political jurisdiction of the project. Firms should also be aware that the SEC expects to make the information disclosed publicly available online without anonymizing it via redactions.
The rule includes exemptions or abridgements to the reporting requirement, including where complying would conflict with other laws or preexisting contractual obligations, firms that completed their IPO or were acquired by a public company in the last fiscal year, and firms that already make similar disclosures under recognized alternative reporting structures. Each of these exceptions require submission of particular supporting information.
Among other things, this means that publicly traded firms should first assess whether making these disclosures would violate any existing contractual provision or otherwise conflict with law and, if so, prepare to submit an application for exemption to the SEC. Firms should also determine whether they are currently complying with a recognized alternative regime and, if so, plan to prepare the abridged submission permitted under the rule. For firms that must provide the full disclosure, they should take steps to make sure that they maintain accurate records of such payments, operate mindfully of the fact that they will be made public knowledge in the future, and engage counsel to assist in preparation of the disclosure.
The successful SEC vote follows multiple efforts since 2019 to meet its statutory obligation to promulgate a new version of the rule to replace an iteration dating from 2016 that had been struck down by a joint resolution of Congress pursuant to the Congressional Review Act.3 Before that, an even earlier version of the rule dating from 2012 had been struck down in federal court as “arbitrary and capricious.”4 The new rule, however, has been the subject of harsh criticism from both sides of the aisle, with Democrats complaining that the rule does not go far enough and Republicans suggesting that the SEC should not be in the business of promulgating such rules. For example, Senator Elizabeth Warren, a Democrat from Massachusetts who sits on the Committee for Banking, Housing and Urban Affairs, believes the new rule does not require sufficiently detailed reporting obligations to meet its anti-corruption objectives,5 and Democratic SEC Commissioner Caroline A. Crenshaw objected that the rule’s disclosure obligations are not “sufficiently granular” and failed to adopt a “more uniform global disclosure approach that w[ould] allow for comparability across issuers operating in the same country.”6 On the other side of the spectrum, Republican SEC Commissioner Elad L. Roisman argued that, while the goal of anti-corruption is laudable, promulgating such a rule is “simply not within our area of expertise.”7
The SEC’s Fact Sheet reflects that the new rule amounts to a measured relaxation of some of the provisions of the earlier versions. For instance, the term “project” is defined to require disclosure at the national and major subnational political jurisdictional level, rather than on a contract-by-contract basis. It further adds a number of conditional exemptions, and provides relief for U.S. resource extraction issuers that had recently completed their initial public offerings, among other things.8 The SEC also provided reassurance to those firms already making similar disclosures for the European Union, the United Kingdom, Norway, and Canada, as it issued an order recognizing those reporting regimes as valid alternatives satisfying the requirements of the transparency objectives of the Exchange Act.9
In light of the new rule, publicly traded companies engaged in resource extraction will need to begin aggregating critical information about government payments if they have not done so already. The new rule requires that such information will need to be disclosed, and companies should not count on this rule suffering the same fate as its predecessors. As always, companies should consider engaging competent counsel to guide them on the reporting requirements before the first reporting deadlines approach to ensure that the deadlines are met without any complications. It also behooves in-house and compliance counsel at oil and gas companies to undertake a thoughtful review of their firm’s practices and monitoring processes with respect to government payments now, so that they will not later find themselves in the position of having to self-report payments that enforcement agencies may view as violations of anti-corruption laws.
1 https://www.sec.gov/news/press-release/2020-318. The full text of the SEC’s decision and the associated rule are available on the SEC’s website.
2 Id. (“For example, if the rules were to become effective on March 1, 2021, the compliance date for an issuer with a December 31 fiscal year-end would be Monday, September 30, 2024 (i.e., 270 days after its fiscal year end of December 31, 2023).”)
3 Id.
4 Am. Petroleum Inst. v. SEC, 953 F. Supp. 2d 5 (D.D.C. 2013).
5 https://www.reuters.com/article/us-usa-sec-disclosure-resource-extractio/u-s-sec-relaxes-rules-on-company-resource-extraction-disclosures-idUSKBN28Q2CQ.
6 https://www.sec.gov/news/public-statement/crenshaw-statement-resource-extraction.
7 https://www.sec.gov/news/public-statement/roisman-resource-extraction-2020-12-16.
8 Supra note 1.
9 https://www.sec.gov/rules/other/2020/34-90680.pdf
