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Practice Note: How to prepare for the SEC’s Resource Extraction Disclosure Rule

After a long and tortured route through the courts, the SEC’s final rule implementing Dodd-Frank’s Resource Extraction Payment Disclosure requirement took effect today (September 26).

Many have watched and commented on the new Rule 13q-1, and for good reason. It is likely to have a significant impact — at least in the short term — on the companies required to make disclosures under it. 

While it does present some risk of unearthing corrupt payments that could lead to anti-bribery and anti-corruption voluntary disclosure decisions or even enforcement actions, Rule 13q-1 presents a more immediate and pressing diligence and compliance challenge that resource extraction companies and their service providers need to begin addressing now.

Rule 13q-1 will require issuers involved in the commercial development of oil, natural gas and minerals to disclose payments they, their subsidiaries and other companies under their control make to the U.S. federal government and to non-U.S. governments in connection with their resource extraction activities. 

Covered companies will have to disclose the type and total amount of payments made on a project-by-project basis, and on a country-by-country basis. 

The rule covers companies directly involved in exploration, extraction, processing, export and the acquisition of licenses for any such activity, with ancillary activities excluded (e.g., shipping, provision of tools and equipment, or working as a service provider to an operator).  

The covered payments include taxes, royalties, fees, production entitlements, bonuses, community and social responsibility (CSR) payments, dividends and payments for infrastructure improvements. 

By including this disclosure requirement in Dodd-Frank, Congress sought to improve transparency in industries that have been historically beset by corruption issues, with the hope that it would force impacted companies to address anti-bribery and anti-corruption compliance shortcomings lest they be required to publicly disclose improper payments to government officials. 

As a result, legal writers have touted the new disclosure requirement as likely to trigger a fresh wave of voluntary disclosures, investigations and enforcement actions under the Foreign Corrupt Practices Act and other similar legal regimes outside the United States. That is certainly a risk, particularly as companies begin to stand up the diligence procedures necessary to comply with Rule 13q-1. 

The likelihood of increased FCPA activity depends on whether those Rule 13q-1 compliance efforts unearth instances of bribery or books and records issues, as well as whether companies feel eager to voluntarily disclose those potential violations under DOJ’s FCPA Pilot Program. However, other factors may limit the FCPA impact of Rule 13q-1 compliance, including:

  • The disclosure requirement effects a relatively small population of companies that are publicly-traded in the United States and engaged in the commercial development of oil, natural gas or minerals. The SEC estimates that Rule 13q-1 will directly impact 755 companies. While many of these companies will have a multinational presence, some may be involved only in resource extraction within the United States or may have few if any payments crossing the de minimis payment threshold discussed below.
  • Covered companies are required to make their first disclosure filings within 150 days after the end of their fiscal year ending on or after September 30, 2018, with some companies qualifying for a longer transition period and an additional one-year delay in reporting payments related to exploratory activities. That window provides covered companies precious time to organize their diligence processes—and to clean up their acts.
  • Rule 13q-1 sets a de minimis threshold of $100,000 before any payment or series of related payments made during a fiscal year must be disclosed, which will allow any number of significant payments to be excluded.  As it is fairly typical for FCPA enforcement actions to be grounded on a large volume of relatively small corrupt payments being made to foreign officials over a period of time, the $100,000 threshold could well be the proverbial exception that swallows the rule.
  • Corrupt payments tend, by their nature, to be concealed and difficult to identify. Although compliance with Rule 13q-1 will surely result in many improper payments being identified, some may go undetected if compliance efforts fail to thoroughly investigate the nature and intent of government payments.

We should learn soon whether this assessment is correct. Other countries, such as the UK, have enacted rules similar to Rule 13q-1, and covered companies are already required and have begun to make disclosures regarding covered payments.

EU countries and Canada will begin requiring substantively similar disclosures in the near future. 

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Regardless of whether FCPA enforcement activity increases because of Rule 13q-1, covered companies and companies in their supply chains need to begin preparing for other significant impacts from the rule.

In the next post, we’ll talk about steps to take to prepare for Rule 13q-1.


Alex Brackett is a partner in the Richmond office of McGuireWoods LLP and co-head of the firm’s Strategic Risk & Compliance team. His practice focuses primarily on advising and supporting corporate and individual clients in the areas of white-collar criminal defense and internal investigations. Ryan Bonistalli is an Associate in the Richmond office of McGuireWoods LLP. His practice focuses on white-collar criminal defense and complex litigation matters.

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