New CDIs Regarding Payments by Resource Extraction Issuers

News Brief

By Cydney Posner

The SEC has also issued some new CDIs regarding the resource extraction rules.

  • An Exchange Act reporting holding company that does not directly engage in any activities related to commercial development of oil, natural gas or minerals, but has a controlled subsidiary that does, is required to provide the disclosure required by Section 13(q) and the related rules. Section 13(q) requires a resource extraction issuer to disclose payments made to governments by the issuer, a subsidiary of the issuer or an entity under the control of the issuer. In this case, the holding company would be considered a resource extraction issuer and would be subject to the disclosure requirement.
  • A company providing only services associated with exploration, extraction, processing and export generally would not be considered to be a resource extraction issuer. Many companies are involved in activities related to the commercial development of resources, but these companies may not be conducting activities that are considered to be one of the activities covered by Section 13(q) and related rules. For example, companies that provide hardware and logistics to help companies explore for or extract resources would not be considered to be exploring for or extracting the resources even though their services were being used to explore or extract. Similarly, a company engaged by an operator to provide hydraulic fracturing services or drilling services for the operator, thus enabling the operator to extract resources, would not be considered to be a resource extraction issuer. The SEC considers this view to be consistent with the approach of the Extractive Industries Transparency Initiative (EITI) that only companies directly engaged in the extraction or production of oil, natural gas or minerals must disclose payments to governments. Note, however, that where a service provider makes a payment that falls within the definition of "payment" to a government on behalf of a resource extraction issuer, the resource extraction issuer must disclose those payments.
  • For purposes of Section 13(q), Rule 13q-1 and Item 2.01 of Form SD, a "mineral" would be 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.
  • Whether an issuer that does not have an ownership interest in a resource but just transports the resource from Country A into Country B is considered to be "exporting" -- and thereby a "resource extraction issuer" -- depends on the circumstances. The definition of "commercial development" in Rule 13q-1 includes "export," but does not include transportation activities. Transportation activities generally would not be included within the definition of "commercial development" unless the activities are directly related to the export of the resource. Generally, however, the movement of a resource across an international border by a company with an ownership interest in the resource is export. In contrast, transportation activities by an issuer that does not have an ownership interest in the resource is not directly related to the export of the resource, and therefore, the issuer would not be considered to be a "resource extraction issuer."
  • Payments by a resource extraction issuer to a majority-owned government transportation service for supplying people or materials to an extractive job site would not be payments covered by the rule. The payments would instead be viewed as payments made in connection with an activity that is ancillary or preparatory to the commercial development of oil, natural gas or minerals.
  • Penalties and/or fines related to resource extraction paid to government agencies are not reportable as fees under the rule. Section 13(q) and Item 2.01 of Form SD require the disclosure of certain payments made to further the commercial development of oil, natural gas or minerals. Section 13(q) defines a "payment" to include, among others, fees and other material benefits that the SEC determines, consistent with the EITI guidelines, to be part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals. Penalties and fines are not within the type of fees specifically mentioned in the EITI guidelines, and the SEC did not determine that penalties or fines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.
  • A resource extraction issuer would not be permitted to provide the payment information on an accrual basis. The rules contemplate the payment information to be presented on an unaudited, cash basis for the year in which the payments are made.
  • A resource extraction issuer has many sources of income in a particular country and pays corporate level income tax on the consolidated amount. The issuer does not have to segregate income from resource extraction activities and disclose taxes paid only on that income for purposes of Rule 13q-1 and Form SD. The issuer is required to disclose payments made to governments to further its commercial development activities and is not required to disclose other payments made to those governments. In this regard, an issuer may elect to segregate income from exploration, extraction, processing and export from income earned on other business activities in a particular country and disclose income taxes paid solely on the income generated by the commercial development activities. An issuer that does not segregate the income information may disclose that the information includes payments made for purposes other than commercial development activities.
  • The failure to timely file a Form SD regarding payments by a resource extraction issuer would not cause the issuer to lose eligibility to use Form S-3. In determining eligibility for use of Form S-3, the requirement that the registrant has filed in a timely manner all reports and materials required to be filed during the prior 12 calendar months refers only to Section 13(a) or 15(d) reports and Section 14(a) and 14(c) materials. (See CDI 115.04 under Securities Act Forms.) Form SD regarding payments by resource extraction issuers is required to be filed under Section 13(q). Therefore, the filing of Form SD regarding payments by resource extraction issuers does not affect an issuer's eligibility to use Form S-3.
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