In the prior post we described the SEC’s new Rule 13q-1 that took effect on Monday (September 26). In this post, we discuss steps covered companies should take to comply with the rule.
To review: Rule 13q-1 requires 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 must 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).
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 (some companies will qualify for a longer transition period and an additional one-year delay in reporting payments related to exploratory activities).
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Compliance with Rule 13q-1 will require comprehensive payment tracking and diligence protocols to allow covered companies to accurately identify and describe covered payments.
Covered companies must disclose payments made by third parties on their behalf, meaning that the diligence processes will need to extend throughout their supply chains and include partners in their projects.
Many companies are going to want to, and in some cases may need to pursue case-by-case exemptions from the SEC in order to avoid disclosing commercially-sensitive information, and in some cases to avoid running afoul of blocking statutes enacted by resource-rich countries to prevent companies from disclosing resource extraction-related payments to those countries’ governments.
Per the Federal Register notice promulgating the final Rule 13q-1, commenting companies have posited that compliance with the new rule could cost anywhere from $500,000 to $50 million for individual companies. While the truth likely lies in the middle for most companies, compliance will surely come at some cost in terms of designing payment tracking and diligence protocols, investing in the manpower needed to implement those protocols, and carrying out the rock-breaking of compiling, analyzing and presenting the necessary disclosures.
Along the way, some companies will surely stumble as they closely review their history of payments to and for the benefit of governments and government officials in connection with certain projects. They will undoubtedly discover irregularities, control and documentation problems, and examples of the corruption that has long plagued the process of pulling hydrocarbons and minerals from the ground in developing countries towards the bottom of the Corruption Perceptions Index rankings.
For all these reasons, companies impacted by Rule 13q-1 should already be taking steps to prepare for their future disclosures. Steps to consider, particularly for companies not already subject to a similar disclosure requirement outside the U.S., include:
- For some companies, confirming whether they are or by fiscal year 2018 could be covered by the rule. As the SEC has explained, “whether an issuer is a resource extraction issuer ultimately depends on the specific facts and circumstances,” and “extraction” and “processing” are sufficiently broad to include midstream production activities such as removal of liquid hydrocarbons from gas, and crushing and processing raw ore, although they do not include downstream activities such as refining and smelting.
- Identifying the systems, records and personnel needed to identify, track, document and accurately describe covered payments.
- Developing and testing the diligence protocols that will support the company’s annual Rule 13q-1 disclosure process.
- Conducting a disclosure diligence “dry run” during the course of fiscal year 2017 to ensure the company has adequately designed its protocols, has adequately resourced the process and does not have any significant issues lurking in its payment history.
- Engaging with the SEC now to the extent the company knows of or can reasonably identify payments or categories of payments likely to require pursuit of a disclosure exemption in the future.
Throughout this process, companies would be well-advised to seek guidance from internal or external resources with anti-bribery and anti-corruption compliance expertise to ensure the process is properly calibrated to identify red flags indicating potential payment irregularities, internal control weaknesses or other indicia of possible corruption.
Only by investing in diligence and compliance efforts now will companies subject to Rule 13q-1 be adequately prepared when its requirements first come due.
Failure to act could catch them unaware and unprepared, and may even lead to the speculated new rash of FCPA enforcement actions sweeping across the extractive industries as a result of this disclosure requirement.
Alex Brackett is a partner in the Richmond office of McGuireWoods LLP. 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.