SEC Issues Resource Extraction Rule

by Cadwalader, Wickersham & Taft LLP

On August 22, 2012, the Securities and Exchange Commission ("SEC") issued its final rule regarding disclosure of payments made to governments for the commercial development of oil, natural gas, or minerals. The rule implements Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which was designed to improve transparency and empower citizens of resource-rich countries to hold their governments accountable for the management of revenues derived from natural resources.2 The disclosure requirements under Section 1504 are in addition to another final rule adopted on the same day, which implemented Section 1502 of the Dodd-Frank Act. As discussed in our August 2012 Business Fraud Advisor, that rule imposed reporting requirements on issuers in connection with their use of certain "conflict minerals."3

Rule Scope and Reporting Requirements

Covered Entities, Activities and Payments

The SEC's new resource extraction rule applies to U.S. and foreign companies that 1) are engaged in the commercial development of oil, natural gas, or minerals, and 2) are required to file annual reports with the SEC. The rule applies to all such companies, regardless of their size or the extent of their activities constituting the commercial development of oil, natural gas, or minerals.4

The SEC broadened the scope of the rule through adoption of an expansive definition of the term "commercial development." Under the rule, payments related to exploration, extraction, processing, and export, as well as the acquisition of a license for such activities, would all be covered. Thus, the rule encompasses not only the types of mining and drilling operations that are at the core of the natural resources industry, but also related activities such as surveying, refining, processing and shipping.5

Issuers that meet these requirements must complete a new annual report reflecting all payments (or series of related payments) of $100,000 or more. This threshold reflects the SEC's interpretation of the Dodd-Frank Act's requirement that the rule cover payments that are "not de minimis." In adopting this definition, the SEC rejected suggestions that it implement a more flexible, and potentially higher, "materiality" threshold, arguing that "'not de minimis' was not intended to equate to a materiality standard." However, the SEC also rejected proposals from commentators that sought a much lower threshold (down to $10,000 in at least one case), finding that the $100,000 requirement would avoid the increased compliance burden associated with a lower cut-off.6

In addition, the rule applies not only to payments made by the issuer itself, but also to payments made by a subsidiary of the issuer or an entity under the issuer's control. With respect to joint ventures and equity investments, the SEC commented that the rule is not limited to entities for which the issuer provides consolidated financial information. Rather, issuers must determine whether they have control over the entity "based on a consideration of all facts and circumstances."7

Payments to any foreign government are covered by the rule, as are payments to the U.S. government. And while payments to U.S. state or local governments are exempted, the term "foreign government" also comprises state, provincial, municipal and other subnational governments, as well as any company majority-owned by a foreign government.8

Finally, "payment" is defined to include the following payment types: taxes, royalties, fees, production entitlements, bonuses, dividends, and payments for infrastructure improvements. With the addition of "dividends" and "payments for infrastructure improvements," this list represents a modest expansion of the types of payments enumerated in the statutory language of the Dodd-Frank Act.9 The SEC declined to adopt a broader, non-exhaustive list of payment types, and also omitted a catch-all category for "other material benefits." Therefore, the rule requires companies to disclose only those payments that are covered by the above-mentioned list of payment types. However, the rule also includes an anti-evasion provision designed to prevent companies from concealing or mischaracterizing the true nature of payments that would otherwise require disclosure.10

Limited Exemptions

During the rulemaking process, a number of exemptions to the rule were considered but ultimately rejected. For example, there is no exemption for issuers that are subject to similar reporting requirements under home country laws or other mandates. Conversely, the rule does not provide an exemption for instances in which a foreign law prohibits a required disclosure. Accordingly, issuers cannot use the law of a resource-producing state as a shield against disclosure to the U.S. government. Rather, the SEC has, in effect, mandated that issuers disregard such foreign laws. Finally, the SEC's rule does not provide an exemption for confidentiality provisions in existing or future contracts that would otherwise prevent disclosure of commercially sensitive information.11

Form SD Requirements

Specific information required by the new report, designated "Form SD",12 includes:

  • The total amount of payments, by category;
  • The currency used for the payments;
  • The financial period in which the payments were made;
  • The business segment of the resource extraction issuer that made the payments;
  • The government that received the payments and the relevant country;
  • The projects to which the payments relate;
  • The type and total amount of payments for each project; and
  • The type and total amount of payments to each government.13


Companies covered by the rule will be required to file their first report for the period beginning October 1, 2013 through the end of the company's fiscal year, and annually thereafter.14 The Form SD must be filed within 150 days after the end of the issuer's fiscal year.15

Liability and Next Steps

Significantly, during the rulemaking process the SEC considered whether to require that resource extraction payments be "filed" or instead merely "furnished." The distinction amounts to more than mere semantics, as liability under Section 18 of the Exchange Act attaches only to false or misleading material statements and omissions that are filed in a report, application, or other document under the Exchange Act. Thus, by requiring payment information to be filed via Form SD, the SEC opened the door to lawsuits from persons who purchased or sold securities in reliance on any material misstatements or omissions contained in the new report. In addition, issuers could also face civil liability and significant penalties under Section 10(b)(5) of the Exchange Act for any misstatements or omissions of material fact.16

Furthermore, companies could face penalties and other repercussions overseas, as the European Union is expected to follow the U.S. government's lead and enact its own regulations. In fact, on September 18, 2012, the Legal Affairs Committee of the European Parliament approved draft legislation that requires the disclosure of resource extraction payments. In its current form, the draft law contains provisions similar to those of the SEC's final rule. For example, companies would be required to disclose payments of more than €80,000 (approximately $104,000), and would also have to disclose country and project-level information.17

In light of the potential consequences of non-compliance with resource extraction payment reporting requirements, companies should act quickly to update and implement necessary policies and procedures. In particular, companies should ensure that they are able to identify relevant government payments, as well as associated currency, country, project and other information. Companies should also stress the importance of compliance with the new rule to employees, and ensure that any efforts to circumvent the rule's reporting requirements are treated seriously. By the SEC's own measure, compliance with the new rule initially will cost the industry as a whole $1 billion, with additional ongoing costs of $200 to $400 million per year. 18 The costs of non-compliance, however, can be expected to be even more onerous, as alleged violators could face government investigations, penalties, and possible private litigation.

1 The Editors would like to thank James Treanor for his contribution to this Business Fraud Advisor.
2 Disclosure of Payments by Resource Extraction Issuers, Release No. 34-67717; File No. S7-42-10 (August 22, 2012) ("Final Rule Release") at 5-6,
3 Cadwalader, Wickersham & Taft LLP, SEC Issues Conflict Minerals Rule, Business Fraud Advisor (August 29, 2012),
4 Final Rule Release at 13.
5 The rule does not, however, cover ancillary or preparatory activities, such as the manufacturing of equipment and other products used in the commercial development of oil, natural gas, or minerals. Id. at 35.
6 Id. at 73-75.
7 Id. at 94.
8 Id. at 14-15.
9  Interestingly, the Commission appears to have rejected a requirement that bribes paid to foreign government officials in connection with resource extraction contracts be disclosed. As noted in the final rule, "[a]lthough one commentator submitted data regarding payments made by some oil companies for tuition, rent, and living expenses for the students [sic] and relatives of officials in Equatorial Guinea, those payments are not within the list of payments types specified by Section 13(q)." Final Rule Release at 75, fn 257 (emphasis added). This comment originated in a letter submitted by Senator Carl Levin, United States Senate Committee on Homeland Security and Government Affairs, to Elizabeth M. Murphy, Secretary, SEC, (February 1, 2011)
10 Final Rule Release at 58-66.
11 Id. at 13.
12 Form SD is also the reporting mechanism for information provided under the SEC's "Conflict Minerals" rule, issued under Section1502 of the Dodd-Frank Act.
13 Final Rule Release at 16-17.
14   Id. at 17.
15   Id. at 109-110.
16   Id. at 130, fn 477.
17  See Samuel Rubenfeld, European Parliament Panel Approves Extractive Transparency Legislation, Wall St. J. (September 18, 2012),
18 Final Rule Release at 140.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.