On August 22nd, the SEC adopted Dodd-Frank mandated rules that will require certain oil and gas companies to disclose payments made to U.S. and/or foreign governments in the course of their commercial development of oil, gas and minerals projects. To date 20+ law firms have written alerts on the new rules and the clear consensus is summed up by Skadden’s warning that “although the deadline for the first Form SD is more than a year away, resource extraction issuers may have a significant amount of work to do in preparation.”
The headline numbers are these: 1,100 resource extraction issuers are expected to exceed a de minimis, project-based payment threshold of $100,000 and incur the obligation to spend an aggregate of $1 billion on initial compliance efforts. These efforts will culminate with an obligation to file payment disclosure with the SEC on a new Form SD for fiscal years ending after September 30, 2013.
The final rules are largely in line with proposals issued by the SEC in December 2010; which means that commenters fighting in the sector’s corner have come back relatively empty-handed. Among suggestions rejected by the SEC, were proposals that would have (i) provided relief to foreign private issuers and smaller reporting companies, (ii) provided an exemption for situations where foreign law or a contract prohibited disclosure and (iii) allowed disclosure included in the new Form SD to be considered “furnished” rather than filed (the furnished/filed distinction imbued with potentially significant liability ramifications).
Davis Polk notes a few technical, but not unimportant, wins. The SEC will not require disclosure to be included in a company’s Form 10-K or 20-F, but will instead give issuers 150 days from fiscal year end to file disclosure in their Form SDs. This will mean more time to file, less stress during 10-K/20-F season and, because it is separate from a company’s Form 10-K or 20-F, the Form SD will not be covered by [10-K or 20-F] CEO and CFO certifications or automatically incorporated into a company’s shelf registration statement.
On the tricky issue of disclosure which might otherwise be prohibited by law or contract, Davis Polk notes the SEC’s insistence that although “an exemption could force companies to choose between complying with U.S. law and complying with their obligations under foreign law or contract an exemption could simply result in the passage of laws prohibiting disclosure.” In short, if you find yourself stuck between Iraq and a hard place, tough.
O’Melveny & Myers raises a thorny point that will be familiar to companies striving to reach and maintain heightened compliance standards in the international marketplace: responsibility for 3rd parties. In addition to payments made directly by issuers, the new rules will require disclosure as to payments made directly or indirectly by a subsidiary or another entity they control; with “control” to be determined based on a consideration of all relevant facts and circumstances. How should one balance the commercial costs of over-disclosure vs. the liability risks inherent in under-disclosure? Exactly the sort of fuzzy mandate that drives lawyers and their clients to distraction.
Irked that you are ensnared by U.S. rules or relieved that you are not? It’s not such a bright line. K&L Gates views the rules as representative of “a global trend towards transparency and accountability in the oil, gas and minerals sectors. The Hong Kong Stock Exchange has already introduced mandatory disclosure rules for companies listed there; the European Union is likely to introduce similar legislation later this year for E.U.-listed companies; and the authorities in Australia and Canada are also considering similar proposals.”
Covington & Burling picks up on the international trend towards transparency in resource extraction, urging “larger resource extraction issuers [to] work towards developing internal protocols, redesigning global compliance programs and ensuring that regulatory disclosures are coordinated across jurisdictions.”
Miller Chevalier worries that the SEC may seek to extend the definition of a “resource extraction issuer” too deep into the exploration and production cycle. It is hard to argue with their point that the definition as it stands (ie any “U.S. and foreign issuer…engaged in the commercial development of oil, natural gas, or minerals”) remains wide open.
The last word? The now practically obligatory post script about a possible legal challenge. Noting the dissent of Commissioner Gallagher and his view that the SEC has over-stepped its authority, Davis Polk adds “a suit challenging the final rules could stall implementation, as happened following judicial challenges to the SEC’s rules mandating proxy access and independence standards for mutual fund boards.”