Never Judge A Book By Its Cover: Disclosure Obligations of Resource Extraction Issuers in the Financial Reform Act

January 1, 0001


With a flourish of his pen on the 21st of July 2010, U.S. President Barack Obama signed and brought on to the U.S. statute books the Dodd-Frank Wall Street Financial Reform and Consumer Protection Act (the “Reform Act”). The general scope and principles encapsulated in the Reform Act are fairly well known, but what may not be noticed is the addition of a requirement tucked away in the miscellaneous provisions section at the end of the Reform Act for certain companies engaged in the oil, gas and minerals industry to disclose particular payments they make to all governments internationally. The broad coverage of these relatively unknown provisions means there is a high chance that companies (particularly those outside of the U.S.) may be caught by such a requirement and fail to comply for lack of awareness.


The Requirement: Disclosure of Payments By Resource Extraction Issuers

Section 1504 of the Reform Act amends section 13 of the Securities Exchange Act of 1934 (the “‘34 Act”) by adding a new subsection (q). This subsection requires that no later than 270 days after the enactment of the Reform Act, the U.S. Securities and Exchanges Commission (the “SEC”) shall issue final rules requiring all resource extraction issuers to include in their annual reports to the SEC information relating to any payment made by the issuer, subsidiary of the issuer or any entity controlled by the issuer to any government (U.S. and foreign) for the purpose of the commercial development of oil, natural gas and minerals.


Background to The Requirement: How Did Such A Requirement End Up In The Reform Act

One may wonder how such a requirement, which clearly does not sit within the sphere of financial reform or consumer protection, ended up in the Reform Act. The “Disclosure of Payments by Resource Extraction Issuers” provision was originally proposed to the U.S. Senate as a separate bill, the “Energy Security Through Transparency Act of 2009,” by Senators Richard Lugar and Benjamin Cardin. Both stated at the outset that their motives for introducing this extractive industries transparency initiative included (i) promoting political stability in foreign governments, (ii) providing additional investor information and (iii) preventing the so-called “resource curse” from corrupting governments in resource-rich, but underdeveloped, countries.

The proposed bill never made it out of the Senate Committee on Banking, Housing, and Urban Affairs, but, later, it was again proposed by Senator Lugar, but never adopted, as an amendment to the Senate’s Financial Stability Act (this Act being the Senate bill that ultimately served as the starting point for a compromise with the House of Representatives that resulted in the Dodd-Frank Act). Although details remain unclear, late in the conference committee proceedings, Senator Patrick Leahy, with urging from a number of senators, including Lugar and Cardin, successfully inserted the provision into the Reform Act.


Scope of Application: The Concept of Resource Extraction Issuers

The requirement applies to any company that (i) is required to file an annual report with the SEC and (ii) engages in the commercial development of oil, natural gas or minerals (such company being a “resource extraction issuer” under the Reform Act). The latter criterion will be determined by the SEC, and is stated in the Reform Act to include “exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity.”

With regard to the former criterion of filing an annual report, companies covered would include, in general terms:


  • any issuer (either U.S. or foreign) that has a class of securities listed on a U.S. securities exchange,
  • any U.S. issuer who has U.S.$10 million or more in assets on the last day of its most recent fiscal year, if any class of its securities is held by 500 or more persons, regardless of whether this issuer has any exchange listing, and 
  • any foreign issuer who has U.S.$10 million or more in assets on the last day of its most recent fiscal year, if any class of its securities is held by 500 or more persons worldwide, 300 or more of whom are resident in the U.S., regardless of whether this issuer has any exchange listing in the U.S. (subject to limited exemption under 12g3-2(b) of the ‘34 Act, which applies to a foreign issuer that has sponsored an American Depository Receipt program with respect to its outstanding shares but has not obtained a U.S. exchange listing).

The coverage is therefore potentially very broad, particularly in light of limb (iii) above, and no oil and gas or mineral company should assume that they will not be caught because they are not listed on a U.S. securities exchange.


Nature of Obligations: Disclosure of Payments Made to Government

The provision requires disclosure of any payment made by the resource extraction issuer, its subsidiaries and any entity controlled by it to any government for the purpose of the commercial development of oil, natural gas and minerals (which, as explained above, is broadly defined and can include acquisitions of interests in oil, natural gas and mineral projects). Until the SEC promulgates final rules regarding the provision, affected companies will have difficulty interpreting their future disclosure requirements regarding payments to government entities. Despite that, section 1504 states clearly that such disclosure will include (i) the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas or minerals and (ii) the type and total amount of such payments made to each government.

The term “payment” is defined as a payment (i) that is not de minimis and (ii) is made to further the commercial development of oil, natural gas or minerals. With regard to the first criterion, until the SEC provides additional guidance through its rulemaking process concerning this provision, it is unclear what amount of money, or value of material goods, will be considered de minimis. It should be noted, however, that unlike the Foreign Corrupt Practices Act (“FCPA”), which was enacted in 1977, the Reform Act requires that all payments to governmental entities be disclosed, not only those that are illegal. Thus, going forward, all companies that may reasonably fall within the SEC’s definition of “resource extraction issuer” should be diligent in tracking payments to governmental entities.

As to the types of such payments, these should include, but are not limited to, taxes, royalties, fees (including license fees), production entitlements, bonuses and other material benefits that the SEC (consistent with the guidelines of the Extractive Industries Transparency Initiative (the “EITI”) to the extent practicable) determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas and minerals. The EITI is a global, voluntary framework through which governments and extractive industries companies disclose their reciprocal payments, and promotes revenue transparency.


Consequences of Non-Compliance

The Reform Act does not impose specific sanctions for non-compliance with the disclosure obligations of section 1504. However, U.S. securities laws already provide for a variety of remedies for non-compliance with disclosure obligations under ’34 Act. Because the new disclosure obligations of section 1504 amend section 13 of the ’34 Act to add a new subsection (q), these remedies would be available to the SEC if an issuer failed to disclose required payments or made inaccurate disclosures.

Specifically, the SEC has the power under section 21 of the ’34 Act to issue cease-and-desist orders and seek injunctive relief or monetary penalties against any person violating the new disclosure obligations under the new subsection 13(q) the ’34 Act. Even unintentional violations of the disclosure requirements would therefore be subject to a penalty of up to US$65,000 per violation or the gross amount of pecuniary gain derived from the violation, whichever is greater. In the case of fraudulent disclosures or a deliberate disregard of disclosure obligations, the penalty could be as high as US$650,000 per violation or the gross amount of pecuniary gain derived from the violation, whichever is greater.

Additionally, because the Reform Act contemplates that the payment disclosures will be made publicly, false or incomplete disclosures could expose U.S.-listed issuers to private securities fraud suits under Rule 10b-5. Private securities fraud suits under Rule 10b-5 involving the purchase-and-sale of non-U.S. listed securities are now prohibited following the U.S. Supreme Court’s recent holding in Morrison v. National Australian Bank, although lower courts have yet to interpret the decision.


Effective Date

Resource extraction issuers will not be required to make disclosure in this regard until the SEC promulgates relevant final rules under section 1504 of the Reform Act. With respect to each resource extraction issuer, the final rules issued by the SEC will take effect on the date on which the resource extraction issuer is required to submit an annual report relating to the fiscal year of the resource extraction issuer that ends not earlier than 1 year after the date on which the SEC issues the final rules.