SEC proposes rules on resource extraction, mine safety and conflict mineral use - International Law Office

Rules for resource extraction issuers
Specialised disclosure on mine safety
Specialised disclosure on the use of conflict minerals

On December 15 2010 the Securities and Exchange Commission (SEC) proposed new rules for resource extraction issuers, on mine safety and on the use of conflict minerals. Final comments on each of these initiatives are due by January 31 2011.

Rules for resource extraction issuers

Under the proposed rules for resource extraction issuers, publicly traded company engaged in the commercial development of oil, natural gas or minerals are required to disclose any payments made to the US or foreign governments.(1) The types of payment related to commercial development activities that must be disclosed include:

• taxes;
• royalties;
• fees (including licence fees);
• production entitlements; and
• bonuses.

The proposed rules would require resource extraction issuers to provide the following information about payments made to further the commercial development of oil, natural gas or minerals:

• type and total amount of payments made for each project;
• type and total amount of payments made to each government;
• total amounts of the payments, by category;
• currency used to make the payments;
• financial period in which the payments were made;
• business segment of the resource extraction issuer that made the payments;
• the government that received the payments and the country in which the government is located; and
• the project of the resource extraction issuer to which the payments relate.

The resource extraction issuer would be required to provide the information in its annual report.

Specialised disclosure on mine safety

The proposed rules on mine safety outline the way in which mining companies that are US public companies as well as foreign private issuers must disclose certain information about mine safety and health standards.(2) The new rules would implement Section 1503 of the Dodd-Frank Act, which requires mining companies to include information about mine safety and health standards in their annual and quarterly reports filed with the SEC. Mining companies would additionally be required to file a Form 8-K with the SEC when they received certain notices from the Mine Safety and Health Administration (MSHA) regarding requirements under the Federal Mine Safety and Health Act of 1977. Specific disclosures would include:

• the total number of significant and substantial violations of mandatory health or safety standards under Section 104 of the Mine Act for which the operator received a citation from the MSHA;
• the total number of orders issued under Section 104(b) of the Mine Act;
• the total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health and safety standards under Section 104(d) of the Mine Act;
• the total number of flagrant violations under Section 110(b)(2) of the Mine Act;
• the total number of imminent danger orders issued under Section 107(a) of the Mine Act;
• the total dollar value of proposed assessments from the MSHA;
• a list of the mines that have been notified by the MSHA of a pattern of violations or a potential to have a pattern of violations under Section 104(e) of the Mine Act;
• pending legal actions before the Federal Mine Safety and Health Review Commission; and
• the total number of mining-related fatalities.

The proposed rules would also provide instructions to mining companies about the information required to be disclosed about penalty assessments and pending legal actions.

Finally, the SEC is proposing to add a new item to Form 8-K which would require domestic mining companies to file Form 8-K within four business days of receiving from the MSHA three types of notice specified by the Dodd-Frank Act:

• an imminent danger order under Section 107(a) of the Mine Act;
• written notice of a pattern of violations under Section 104(e) of the Mine Act; or
• written notice of the potential to have a pattern of such violations.

Specialised disclosure on the use of conflict minerals

On December 15 2010 the SEC voted to prepare revisions that would require new disclosure by reporting issuers concerning conflict minerals that originated in the Democratic Republic of Congo or an adjoining country.(3)

Specifically, issuers would be required to disclose annually whether they use conflict minerals that are "necessary to the functionality or production" of a product that they either manufacture or contract to be manufactured, and that originate from the Democratic Republic of Congo or adjoining countries. Conflict minerals include cassiterite, columbite-tantalite, gold and wolframite, or their derivatives. The proposed rules would apply to an issuer if:

• the issuer files reports with the SEC under the Exchange Act; or
• conflict minerals are "necessary to the functionality or production" of a product manufactured or contracted to be manufactured by the issuer.

An issuer would be considered to be 'contracting to manufacture' a product if:

• it has any influence over the product's manufacturing; or
• it offers a generic product under its own brand name or a separate brand name, regardless of whether the issuer has any influence over the manufacturing specifications of the product, provided that the issuer has contracted to have the product manufactured specifically for itself.

The requirements would apply equally to domestic and foreign issuers and to smaller reporting companies.

For further information on this topic please contact Jeff Sherman at Fulbright & Jaworski LLP by telephone (+1 212 318 3000), fax (+1 212 318 3400) or email (jsherman@fulbright.com).

Endnotes

(1) www.sec.gov/news/press/2010/2010-247.htm.

(2) www.sec.gov/news/press/2010/2010-246.htm.

(3) www.sec.gov/news/press/2010/2010-245.htm.