On May 30, 2013 the Securities and Exchange Commission (SEC) provided guidance on several unresolved issues regarding the resource extractive industry issuers rule promulgated pursuant to Section 1504 of Dodd-Frank. (The rule is discussed in an earlier post). As it did with the conflict minerals rule guidance, the resource extractive industry guidance takes the form of answers to FAQs. Also like the conflict minerals guidance, these FAQs do not answer all of the open questions in regard to the disclosure requirements under Section 1504 but they do provide some (albeit limited) helpful information. The new resource extraction payment disclosure rules apply to issuers whose fiscal years end after September 30, 2013, which for calendar-year registrants means that the first report will be due no later than May 30, 2014, although an issuer whose fiscal year begins before September 30, 2013 will be able to file a partial-year report limited to payments made during a “stub” period beginning on October 1 and running through December 31, 2013. Thus, issuers who must file a Form SD for calendar year 2013 will want to pay particular attention to the FAQs.
In brief overview the FAQs address what (1) what issuers and activities are covered by the rule; (2) what payments must be disclosed and (3) how the required disclosures must be made.
1. Covered Issuers and Activities
he FAQs make it clear that the rule is intended to be wide- reaching. One of the open questions relating to rule was what qualifies as a “mineral” for purposes of the reporting requirement. (A resource extractive industry issuer is defined by the rule as an issuer who engages in the commercial development of oil, natural gas, or minerals.) The FAQs make clear that “mineral” encompasses any material commonly understood to be a mineral, which would include any material for which disclosure would be required under Industry Guide 7, ‘Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations,’ notwithstanding any test of materiality used for purposes of Guide 7.”
The FAQs also show the broad reach of the rule by stating that resource extraction issuers must disclose covered payments made by the issuer and by all subsidiaries or entities under the issuer’s control. , “[A] reporting issuer that is not engaged in commercial development activities itself but whose subsidiary or entity under its control engages in those activities would be considered a resource extraction issuer” and as such, must meet the disclosure requirement. However, issuers who only provide services associated with resource extraction are not covered. Examples of excluded services include (a) the provision of “hardware and logistics to help companies explore for or extract resources”; and (b) the provision of hydraulic fracturing or drilling services to an operator that enable the operator to extract any of the enumerated resources. Muddying the waters however, the SEC notes that a resource extractive issuer is obligated to report any covered governmental payments made on its behalf by a service provider that itself would not fall within the definition of a “resource extraction issuer” within the meaning of the new rules.
The FAQs also discusses whether an issuer who transports a resource from Country A into Country B is considered to be “exporting,” that resource thereby making the issuer a “resource extraction issuer.” The key factor to answering this question lies in the ownership interest the issuer has in the resource. Specifically, the SEC states: “[w]e generally would not view transportation activities by an issuer that does not have an ownership interest in the resource as directly related to the export of the resource, and therefore, the issuer would not be considered to be a “resource extraction issuer.”
2. Covered Payments
The FAQs do provide issuers some small relief when it comes to covered payments by expressly removing from the disclosure requirements payments made to a majority-owned government transportation service to supply people or materials to an extractive job site and penalties and/or fines paid to governments in relation to resource extraction.
3. Method of Reporting
Under the rule taxes paid on income generated from commercial development must be disclosed. Recognizing that an issuer may have many sources of income within a country the FAQs clarify that an issuer may segregate income earned from commercial development from any other income earned in a country and disclose only taxes paid on the commercial development income. This segregation is optional. An issuer is free to disclose that the income tax information presented in the Form SD includes payments made for purposes other than “commercial development” activities. All payments must be presented on an unaudited, cash basis for the year in which the payments are made (i.e. an issuer may not use an accrual basis).
Finally, the SEC clarified that, as with conflict minerals disclosure, the failure to timely file a Form SD will not affect an issuer’s eligibility to file a Form S-3.
The resource extractive industry FAQs, like the conflict minerals FAQs, do not resolve all of the complex and burdensome issues confronting issuers covered by the rule. They provide some useful information, but of course are not binding on the SEC and may prove moot if American Petroleum (and others) prevails in their suit challenging the rule. Oral argument was heard in the case on June 7th.