Section 1503 of the Act requires: (i) issuers that are operators of coal or other mines to disclose certain specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities and (ii) issuers to file a Form 8-K disclosing the receipt of certain orders and notices from the Mine Safety and Health Administration ("MSHA"). (Release Nos. 33-9164; 34-63548).
Additionally, the SEC is proposing rules relating to Section 13(q) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which was added to the Exchange Act by Section 1504 of the Act. Section 13(q) requires resource extraction issuers: (i) to provide information about the type and total amount of payments made for each project related to the commercial development of oil, natural gas or minerals, and the type and total amount of payments made to each government and (ii) requires a resource extraction issuer to provide certain information regarding those payments in an interactive data format as specified by the SEC. The proposed SEC rules would require resource extraction issuers to include in an annual report information of any payment made by it, or by a subsidiary or another entity controlled by such issuer, to a foreign government or the U.S. Federal Government for the purpose of commercial development of oil, natural gas or minerals. (Release No. 34-63549)
The SEC is currently soliciting comments on the two releases, which may be submitted electronically on the SEC's internet comment form or in paper form. All comments will be available for public review on the SEC's website.
Mine Safety Disclosure Requirements
Periodic Report Disclosure
Section 1503(a) of the Act requires issuers that must file reports with the SEC pursuant to Sections 13(a) or 15(d) of the Exchange Act and that are operators, or that have a subsidiary that is an operator, of a "coal or other mine"1, to disclose specified information about mine health and safety in their periodic reports filed with the SEC based on the safety and health requirements applicable to mines under the Federal Mine Safety and Health Act of 1977 (the "Mine Act"). The SEC proposes to include smaller reporting companies and foreign private issuers within the scope of the rules implementing Section 1503 of the Act. The disclosure requirements would be for each distinct mine located in the United States, however to the extent mine safety issues are material under the SEC's current rules, disclosure would be required about foreign mines pursuant to Management's Discussion and Analysis of Financial Condition and Results of Operations (Regulation S-K, Item 303), Risk Factors (Regulation S-K, Item 503(c)), Description of Business (Regulation S-K, Item 101), or Legal Proceedings (Regulation S-K, Item 103).
The SEC is proposing amendments to require brief disclosure in Part II of Form 10-Q, Part I of Form 10-K and Forms 20-F and 40-F for applicable companies to note that they have mine safety violations or other regulatory matters to report in accordance with Section 1503 of the Act and then to provide that required information in an exhibit to the filing. The exhibit would include the detailed disclosure about specific violations and regulatory matters required by Section 1503 of the Act. Each Form 10-Q would include the required disclosures for any orders, violations or citations received, penalties assessed or legal actions initiated during the quarter covered by the report. Each Form 10-K would include disclosure covering both the fourth quarter of the issuer's fiscal year and cumulative information for the entire fiscal year. Further, each of Forms 20-F and 40-F would cover the issuer's fiscal year. Notably, the SEC is not proposing to permit issuers to exclude information about orders, violations or citations that were received during the time period covered by the report but subsequently dismissed or reduced in such period. However, the proposal would permit the inclusion of additional information to provide context to the required disclosure.
Section 1503(a) of the Act includes a list of disclosure items to be discussed in periodic reports, and, although the rules do not prescribe any particular presentation format, the SEC encourages issuers to use tabular presentations. The required disclosures are as follows:
- The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under Section 104 of the Mine Act for which the operator received a citation from MSHA. The SEC proposes to require disclosure under this first item of all citations received under Section 104 of the Mine Act that note a "significant and substantial" violation.
- The total number of orders issued under Section 104(b) of the Mine Act. These are violations that were previously cited under Section 104(a) and, upon follow up by MSHA, are found not to have been totally abated within the prescribed time period.
- The total number of citations and orders for unwarrantable failure of the mine operator to comply with the 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 term "flagrant" in this respect means "a reckless or repeated failure to make reasonable efforts to eliminate a known violation of a mandatory health or safety standard that substantially and proximately caused, or reasonably could have been expected to cause, death or serious bodily injury."
- The total number of imminent danger orders issued under Section 107(a) of the Mine Act.
- The total dollar value of proposed assessments from MSHA under the Mine Act. The SEC is proposing to require the issuer to disclose the total dollar amount of civil penalties and assessments proposed by MSHA during the time period covered by the report. Further, the SEC is proposing that the disclosure include the cumulative total of all proposed assessments of penalties outstanding as of the last day of the period covered by the report. As a result, the issuer would be required to disclose any dollar amounts proposed by the MSHA that the issuer is contesting, however, the issuer is permitted to include additional information noting that certain proposed assessments are being contested.
- The total number of mining-related fatalities. The SEC has interpreted this disclosure requirement to encompass mine-related fatalities only at mines subject to the Mine Act. The disclosure must include all fatalities that are required to be disclosed under MSHA regulations, unless the fatality is determined to be "non-chargeable" to the mining industry.
- A list of all mines for which the issuer or a subsidiary received written notice from MSHA of a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under Section 104(e) of the Mine Act.
- A list of mines for which the issuer or a subsidiary received written notice from MSHA of the potential to have such a pattern.
- Any pending legal action before the Federal Mine Safety and Health Review Commission involving such coal or other mine. The information included would cover the time period during which the legal action was initiated. This disclosure would include, but not be limited to, any actions brought by the issuer or a subsidiary of the issuer to contest citations or penalties imposed by MSHA. The new rules would require the information about pending legal actions to be updated in subsequent periodic reports if there are developments material to the legal action that occur during the time period covered by such report. This disclosure would cover the date the pending action was instituted and by whom, the name and location of the mine involved, and a brief description of the category of violation, order or citation underlying the proceeding.
- A brief description of each category of violations, orders and citations reported. The SEC is proposing this additional disclosure, not set forth in Section 1503 of the Act, that would require a brief description of each category of violations, orders and citations reported under new Items 106(a)(1) and 106(a)(2) of Regulation S-K (described above) so that investors can understand the basis for violations, orders or citations referenced.
Form 8-K Disclosure
Additionally, the SEC's proposed rules would revise Form 8-K to include a new Item 1.04, which would require the filing of Form 8-K within four business days of the receipt by the issuer (or a subsidiary) of:
- An imminent danger order under Section 107(a) of the Mine Act;
- Written notice from MSHA of a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of coal or other mine health or safety hazards under Section 104(e) of the Mine Act; or
- Written notice from MSHA of the potential to have a pattern of such violations.
The SEC believes that the plain language of Section 1503 of the Act requires such orders and notices to be reported both in issuers' Forms 8-K and their periodic reports. Issuers would also be required to include in new Item 1.04 the date of receipt of the order or notice, the category of order or notice, and the name and location of the mine involved.
An untimely filing of Form 8-K will not result in loss of Form S-3 eligibility as long as Form 8-K filing is current at the time the Form S-3 is filed. The SEC, however, is not proposing to include new Item 1.04 in the list of those items eligible for limited safe harbor from liability under Section 10(b) or Rule 10b-5 under the Exchange Act.
Disclosure of Payments by Resource Extraction Issuers
Additionally, the SEC has proposed rules relating to Section 13(q) of the Exchange Act to require a resource extraction issuer to include in an annual report for the fiscal year covered by the annual report any information relating to any payment made by it, a subsidiary of the resource extraction issuer or an entity under the control of the resource extraction issuer to a foreign government, including subnational governments, or the U.S. Federal Government for the purpose of commercial development of oil, natural gas or minerals. The new rules would apply to all U.S. companies and foreign companies that are engaged in the commercial development of oil, natural gas, or minerals, and that are required to file annual reports with the SEC, regardless of size or extent of business operations constituting commercial development of oil, natural gas, or minerals and also applies to companies whether or not they are owned or controlled by governments. A "resource extraction issuer" means an issuer that is required to file an annual report with the SEC and engages in the commercial development of oil, natural gas, or minerals. The "commercial development of oil, natural gas, or minerals" includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity as determined by the SEC. The new rules are intended to capture only activities that are directly related to the commercial development of oil, natural gas, or minerals and not activities that are ancillary or preparatory to such commercial development. Each issuer would be required to make a factual determination as to whether it has control of an entity based on a consideration of all relevant facts and circumstances. At a minimum, payments made by a subsidiary or entity under the control of an issuer would be subject to disclosure if the issuer must provide consolidated financial information for the subsidiary or other entity in the issuer's financial statements included in its Exchange Act reports.
New Item 105 of Regulation S-K would require each resource extraction issuer to submit payment information in an annual report in an interactive data format. For purposes of the proposed rules, payment is defined in reference to one international initiative, the Extractive Industries Transparency Initiative ("EITI"), and includes any payment that: (i) is made to further the commercial development of oil, natural gas, or minerals; (ii) is not de minimis; and (iii) includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the SEC, consistent with the guidelines of the EITI (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. The proposed rules do not attempt to determine "other material benefits" that should be classified as payments subject to disclosure. Further, the SEC does not propose to prescribe a standard for what amounts would be considered de minimis or not de minimis for purposes of the new disclosure requirement. It is important to note that Section 13(q) does not provide an exception to the disclosure requirements to disclose payments made to foreign governments for the purpose of commercial development for oil, natural gas, or minerals in circumstances where the host country prohibits the disclosure. There is also no exception for confidentially clauses in existing or future agreements.
The information should be set forth in the issuer's annual report for the fiscal year covered by the applicable annual report. The SEC proposes to add new Item 4(c) to Form 10-K where the issuer would direct investors to the detailed information regarding payments set forth in the two exhibits to the filing under the heading "Payments Made By Resource Extraction Issuers." One exhibit is required to be filed in HTML or ASCII format and another filed in XBRL format. The issuer is required to use electronic tags that identify the total amount of payment, by category; the currency used to make the payments; the financial period in which the payments were made; the business segment of the issuer that made the payment; the government that received the payment, and the country in which the government is located; and the project of the issuer to which the payments relate. Additionally, an issuer would be required to provide the type and total amount of payments made for each project and the type and total amount of payments made to each government. Notably, the SEC is not proposing to clarify the term "project" for purposes of the disclosure requirements. The proposal would amend Item 601 of Regulation S-K to add these new exhibits to Form 10-K for the required disclosure. Under the proposed rules, foreign private issuers will similarly be required to make such disclosures on Forms 20-F and 40-F, as amended, to include the same disclosure requirements.
The SEC is also proposing that the disclosure required by Section 13(q) of the Exchange Act would be "furnished" rather than "filed" and not be subject to liability under Section 18 of the Exchange Act, unless the issuer explicitly states that the resource extraction disclosure is filed under the Exchange Act. Issuers, however, who fail to comply with the rules would be subject to violations of Exchange Act Sections 13(a) or 15(d), as applicable.
The proposed rules further state that because the SEC must enact final rules under Section 13(q) t by April 15, 2011, the Act appears to require disclosure in an issuer's annual report relating to the fiscal year ending on or after April 15, 2012.
For questions or more information, contact one of the members of the firm's Securities/SEC Practice Group including:
Lewis U. Davis, Jr. — 412 562 8953 :: firstname.lastname@example.org
Jeremiah G. Garvey — 412 562 8811 :: email@example.com
Jennifer R. Minter — 412 562 8444 :: firstname.lastname@example.org
Brian S. North — 215 665 3828 :: email@example.com
Brian S. Novosel — 412 562 5266 :: firstname.lastname@example.org
1 The definition of "coal or other mine" is broad, including but not limited to, lands, excavations, underground passageways, shafts, slopes, tunnels and workings, structures, facilities, equipment, machines, tools, or other property including impoundments, retention dams, and tailings ponds, on the surface or underground, used in, or to be used in, or resulting from, the work of extracting such minerals from their natural deposits in nonliquid form, or if in liquid form, with workers underground, or used in, or to be used in, or to be used in, the milling of such minerals, or the work of preparing coal or other minerals, and includes custom coal preparation facilities.
2 Foreign private issuers are not required to file current reports or Form 8-K, but rather to file under cover of Form 6-K copies of all information that the foreign private issuer makes, or is required to make, public under the laws of its jurisdiction of incorporation, files, or is required to file, under any stock exchange rules, or otherwise distributes to its security holders. The SEC did not propose a change to these reporting requirements.