Written by Eden Oliver, Kay She, Sharon Singh and Richard Stone
On July 27, 2016, the U.S. Securities and Exchange Commission (SEC) adopted revised rules requiring resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas, or minerals (the U.S. Rules). Disclosure is required for payments to any foreign government and payments to the U.S. federal government (U.S. states and other U.S. subnational governments are excluded).
Like Canada's efforts in passing the Extractive Sector Transparency Measures Act (ESTMA), the U.S. Rules, directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, are part of global international efforts to address corruption in resource-rich countries by providing transparency of resource extraction payments to governments.
Under the U.S. Rules, reporting entities must file reports starting with their first fiscal year ending on or after September 30, 2018. Reports can be made by filing the Form SD (a special disclosure report) with the SEC no later than 150 days after the end of the applicable fiscal year. For a reporting entity with a fiscal year end of December 31, the first filing deadline is May 30, 2019.
Reporting Entities under the U.S. Rules
All U.S. or foreign companies that are engaged in the commercial development of oil, natural gas or minerals and are required to file annual reports under section 13 or 15(d) of the Exchange Act (SEC Forms 10-K, 20-F or 40-F) are considered reporting entities under the U.S. Rules.
Canadian resource extraction issuers who make the above annual report filings in the U.S. are subject to the U.S. Rules whether or not they are subject to ESTMA. Unlike ESTMA, the U.S. Rules do not include a size threshold for the reporting requirements to be applicable.
Canadian Reports Generally Substitutable
Under the U.S. Rules, a reporting entity may file an alternative report used for an approved foreign jurisdiction if it is subject to the resource extraction payment disclosure requirements of that jurisdiction and has previously prepared and filed the report under that jurisdiction's requirements.
The SEC has determined that the current reporting requirements of the European Union Accounting and Transparency Directives and ESTMA are substitutable under the U.S. Rules, subject to the additional requirements outlined below.
A Canadian reporting entity that already complies with ESTMA and is also subject to the U.S. Rules, may, for its U.S. filing, use the same report it previously made publicly available under ESTMA. The Canadian entity must include a statement in the body of Form SD that it is relying on this substitution accommodation and identify the alternative reporting regime for which the report was prepared.
The Canadian Government is undertaking an assessment of the U.S. Rules to determine reciprocal substitutability of U.S. reports under ESTMA, but has not yet announced any decision.
Canadian reporting entities that use their ESTMA report for compliance under the U.S. Rules should note that the U.S. Rules require alternative reports to be tagged using XBRL format, which enables users to electronically search and extract information based on:
- total amounts of the payments, by category;
- currency used to make the payments;
- financial period in which the payments were made;
- business segment of the resource extraction issuer that made the payments;
- government and country of government that received the payment;
- project of the resource extraction issuer to which the payments relate;
- type and total amount of payments made for each project;
- type and total amount of payments for all projects made to each government;
- particular resource that is the subject of commercial development; and
- subnational geographic location of the project.
Depending on the facts and circumstances, for the purposes of identifying the subnational geographic location of a project, the requirements could include the name of the subnational government (such as a state or municipality, using International Organization for Standardization codes to standardize references) or the commonly recognized geologic location where the project is located (oil field, basin, etc.), or both.
Companies should also be aware, that unlike under ESTMA, all community and social responsibility payments that are required by law or contract are reportable.
Unlike ESTMA, the U.S. Rules provide that reporting entities may apply to the SEC for exemptive relief, which will be considered by the SEC on a case by case basis. Grounds for exemptive relief may include, but are not limited to, conflict of laws, protection of commercially sensitive information, safety of personnel, and disclosure that would result in substantial financial harm. There is also the possibility for exemption from filing reports for recently acquired companies not previously subject to the U.S. Rules.