Client Update: Impact of new US disclosure law on resources companies
16 August 2010
In brief: Resources companies registered with the US Securities and Exchange Commission will have to comply with new US legislation requiring disclosure of certain payments to governments. Partners Marae Ciantar (view CV) and Darren Murphy look at the practical operation and effect of section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In our April 2010 Focus: Extractives – further international reporting demands, we reported that the US Congress was considering legislation that would require resource extractive companies registered with the US Securities and Exchange Commission (the SEC) to publicly disclose information relating to payments made to foreign governments. That legislation was passed in the form of section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). On 21 July 2010, US President Obama signed the Act into law.
Section 1504 of the Act will apply to your company as a 'resource extraction issuer' if it is registered with the SEC and engages in the commercial development of oil, natural gas or minerals (which includes exploration, extraction, processing, export and other significant actions1 relating to oil, natural gas or minerals, or the acquisition of a licence for any such activity, as determined by the SEC).
Section 1504 requires the SEC to issue rules that require resource extraction issuers to disclose in their annual report information about the type and amount of payments to foreign governments or the US Government for the purpose of the commercial development of oil, natural gas or minerals. These disclosures will be made public by the SEC.
Resource extraction issuers will be required to include in their annual reports information about any payment:
- made by them, any of their subsidiaries, or any entity under their control;
- to a foreign government (including a foreign government agency or a company owned by a foreign government, such as a State-owned petroleum or mining company) or the US Government; and
- for the purposes of the commercial development of oil, natural gas or minerals.
Such information will include 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
- to each government.
The term 'payment':
- means a payment that is made to further the commercial development of oil, natural gas or minerals and is not de minimis, and
- includes taxes, royalties, fees (including licence fees), production entitlements, bonuses, and other material benefits, which the SEC, consistent with the guidelines of the Extractive Industries Transparency Initiative (EITI) (to the extent practicable), determines are part of the commonly recognised revenue stream for the commercial development of oil, natural gas, or minerals.
Both the US and Australia are supporters of EITI, a status that means they support EITI initiatives (as opposed to being 'compliant' countries, a status requiring an independent assessment of whether key indicators have been met).
The cost of compliance should be relatively low, as the required information is generally readily available if not already compiled by affected companies. However, given the diverse fiscal and legal regimes applying internationally to commercial oil, natural gas and mineral operations, it may not always be easy for your company to determine whether specific payments associated with your operations must be disclosed. Examples of such uncertainty may include payments made to a foreign government for the purposes of employee training or general infrastructure development, or payments made to a State-owned company acting in a commercial capacity as a joint venture partner rather than a governmental or regulatory capacity.
The SEC will be required, to the extent practicable, to make available online a compilation of the information required to be disclosed under s1504.
If your company will be required to disclose information under the Act, you will need to review any confidentiality clauses in contracts or licences with foreign governments relating to your company's commercial oil, natural gas or mineral operations and, if necessary, negotiate amendments to such clauses.
Section 1504 of the Act requires that the SEC issue rules requiring disclosure as outlined above within 270 days of the Act's enactment. Under s1504(F), the SEC rules will come into effect in the next financial year following the year after the rules are issued. Therefore, resource extraction issuers filing with the SEC will be required to make the disclosures outlined above in their annual report to the SEC for the 2011-12 financial year.
- As we previously reported, the Extractive Industries Transparency Initiative 'is a coalition of governments, companies, civil society groups, investors and international organisations', that is directed at creating a global standard for revenue transparency in oil, gas and mining. See: Extractive Industries Transparency Initiative, The Initiative at 19 July 2010.
- Marae CiantarPartner,
Ph: +65 6535 6622
- Guy FosterPartner,
Ph: +61 2 9230 4798
- Tracey HarripPartner,
Ph: +61 7 3334 3215
- Kim ReidPartner,
Ph: +61 2 9230 4037