SEC Adopts Rules Change to Resource Extraction Disclosure

On December 16, 2020, the Securities and Exchange Commission adopted new rules regarding resource extraction payments made by public companies per Section 1504 of the Dodd-Frank Act. This is the third rule attempt governing resource extraction payments adopted by the Commission, as the two previous attempts were reversed by District Courts and overturned by Congress using the Congressional Review Act.

SAF supports the Commission’s updated rules, which ease compliance burdens, amend several definitions that better reflect how resource industries operate and enhance alternative reporting standards. The final rule will:

• Offer exemptions where there are conflicts with foreign law.
• Allow an alternative reporting requirement giving businesses the option to disclose resource payments on behalf of any foreign jurisdiction.
• Exclude reporting of payments by entities in which an issuer only has a proportionate interest, meaning that companies will not have to report on business projects where they do not have any decision-making authority.
• Clarify the requirements for describing the location of an offshore project.
• Institute a three-tiered approach to more appropriately define “projects” and simplify the compliance process.
• Amend the definitions of “control” and “subsidiary” to comply with those of Generally Accepted Accounting Principles, a common accounting standard among all publicly listed American companies.
• Reduce the de minimis threshold to $100,000. Payments that meet the threshold are required to be disclosed.

The resource extraction disclosure mandate was attached to the Dodd-Frank Wall Street Reform and Consumer Protection Act when it was enacted into law in June 2010. Although resource extraction had nothing to do with the 2008 financial crisis, the provision was included in Dodd-Frank as a legislative priority among certain members of Congress among several other “Miscellaneous Provisions.” These “Miscellaneous” provisions include disclosure requirements on individuals selling products containing conflict minerals from the Democratic Republic of Congo, securities issuers that are engaged in the commercial development of oil, natural gas, or minerals, and health and safety disclosures for mine operators.

Section 1504 of the Dodd-Frank Act required the SEC to adopt a rule for the disclosure of resource extraction payments made to foreign governments by April 2011, less than a year after Dodd-Frank went into law. The Commission, inundated by the volume of rulemaking stemming from Dodd-Frank, managed to adopt a rule by August 2012. However, challenged by industry trade associations, the rule was thrown out by the District of Columbia Federal District Court in July 2013. The SEC tabled this mandate until a lawsuit filed by Oxfam in 2014 compelled the SEC to begin writing a new rule.

The Commission issued a new rule in June 2016 that was ultimately disapproved by Congress in February 2017 using the Congressional Review Act (CRA), an legislative oversight tool that allows Congress to overturn recently finalized rules issued by federal agencies. The CRA also forbids the agency or regulator from promulgating a “substantially similar” rule in the future.

After the CRA, the challenge for the Commission was to write a new rule that also aligned with Section 1504 while remaining substantially different from the 2016 disapproved rule. In 2019, the Commission proposed new rules which differed from the 2016 rules and reduced Congress’s main concern of the high cost of compliance and anti-competitive effects of the law. The most significant difference between the two rules is the revision of the term project to require disclosure at the national and sub-national political level rather than single contract-level project disclosures. This difference reduces the regulatory burden on companies, allowing payment information to be aggregated when activities are conducted under the same political jurisdiction. For example, if a company were to have ten independent projects in one country, they would have had to file ten different reports. The new rules would only require one report, reducing the regulatory burden and costs while fulfilling the Dodd-Frank mandate.  

SAF submitted comments to the SEC in March supporting the proposed resource extraction rules. The Commission did not adopt the de minimis threshold SAF of  $750,000 with an additional payment threshold of $150,000 as suggested in the proposed rule. This would have help put smaller and larger companies on equal footing in the proposed rule. The Commission adopted a reduced de minimis payment threshold of $100,000, mirroring the 2016 proposal.  SAF is happy to see the exemptions provided for conflicts with foreign law, the alternative reporting provision, the clear and explicit definition of a project, and the alignment of control and subsidiary definitions with GAAP metrics.