Cross-Border Counselor

Dorsey’s Mining & Metals practice area and three mining partners, the most lawyers of any U.S. law firm, received a Band 1 recognition by Chambers and Partners in its Chambers Global 2024. The recognized attorneys from Dorsey’s Canada Cross-Border practice group include Kimberley Anderson, Chris Doerksen and Wells Parker – just in time for the Prospectors & Developers Association of Canada (PDAC) Convention! The Chambers Global Guide ranks the top lawyers and law firms in over 200 jurisdictions across the world. Each ranking is based on Chambers’ in-depth research conducted by its dedicated and experienced team of researchers. It annually collects hundreds of thousands of responses from clients. Learn more about Dorsey’s Mining practice group.

In the Fall of 2023, the Interagency Working Group on Mining Laws, Regulations, and Permitting (“IWG”) released its final report containing recommendations to reform how mining is conducted on public lands (the “Final Report”). The IWG was formed to convene experts across various agencies and receive input from the public in order to assess the adequacy of the existing regulatory scheme governing domestic hardrock mining, and to determine whether changes to that scheme were necessary to satisfy the goals set forth in the E.O. 14017 100-Day reviews. 87 Fed. Reg. 18811 (Mar. 31, 2022). The Final Report included a range of recommendations, including those which would require legislative action by Congress, those which would require Federal agencies to promulgate or amend existing regulations, and other recommendations that may be achieved by updating Federal or agency policies. Some of the key recommendations which substantially differ from current mining regulation include the following: Leasing System - The Final Report recommends replacing the current mine claim location system with a leasing system by amending the General Mining Law of 1872 to permanently end patenting of Federal lands, and developing for use a leasing system that would provide access to hardrock minerals on public lands. Id. at 99. Additionally, the IWG recommended that once a leasing system is established, a programmatic Environmental Impact Statement to incorporate mining into land use planning processes be prepared and adopted for the eleven contiguous Western states and Alaska. Id. at 97. Royalties - The Final Report recommends that Congress enact a royalty for hardrock mineral production from Federal lands, with a minimum of four percent and a maximum of eight percent. Id. at 104. The IWG is not taking a stance on whether such a royalty would apply only to new mines, expansions on existing mines, or on all new and existing mines and operations. Dirt Tax - In addition to the federal royalty approach to obtain fair compensation for taxpayers for those minerals extracted from Federal lands, the Final Report also includes a recommendation for Congress to adopt a 7-cent per ton fee on “material displaced by hardrock mining.” Id. at 105. The IWG notes that this fee could be applied in conjunction with other means of funding reclamation for abandoned mine lands. Permitting Reform - The Final Report recommends the project management process used by the Bureau of Land Management (“BLM”) Nevada state office be updated to reflect the additional recommendations made in the Final Report, and be made standard procedure nationwide for both BLM and the United States Forest Service (“USFS”). Id. at 107. The project management process as currently implemented is designed to provide consistency and coordination between the project proponent and State and Federal agencies and Tribes, and includes a number of Memorandums of Understanding between BLM and EPA, and BLM and USFS to coordinate the development of NEPA documents for proposed mining operations. Id. at 58. The Final Report also recommends the development of project schedules to be made public, and standardizing the information by BLM and USFS which is necessary for exploration plans, mine plans, and relevant permit applications and NEPA submissions. Id. at 108. Of note, the IWG does not address the additional directives for permitting reform as stated in the Infrastructure Investment and Jobs Act or in the Fiscal Responsibility Act. We will be monitoring Congressional action and regulatory proposals on the IWG recommendations and will report on further material developments.   If you have any questions or would like to learn more about the Final Report, please contact us.

In 2022, many SEC reporting companies with mineral resource assets completed their inaugural SEC annual report on Form 10-K or 20-F subject to the SEC’s mining disclosure rules in subpart 1300 of Regulation S-K (“subpart 1300”), and filed their inaugural subpart 1300 technical report summaries, if applicable. As 2023’s annual reporting season approaches, we outline for our readers some important factors to consider in preparing for Year 2 of subpart 1300 compliance.  Depending on the situation, an issuer may need to begin its preparations well in advance of its fiscal year end (“FYE”), or risk being in default of its reporting requirements. Overview Subpart 1300 requires an issuer with material mining assets that is filing a new Form 10-K or 20-F (“Annual Report”) to report mineral resources and reserves as of the end of the fiscal year, with a comparison to prior year figures. Determinations of mineral resources and reserves must be based on information provided by a qualified person (“QP). If an individual property is material to the issuer and the issuer will be disclosing any mineral resources or reserves for that property, the issuer must file with the SEC a technical report summary by a QP that complies with subpart 1300. For most issuers subject to subpart 1300, the first Annual Report for a year ended on or after December 31, 2021, filed in 2022, was the first report required to comply with subpart 1300 and to be accompanied by a subpart 1300 compliant technical report summary, where applicable. Accordingly, for most issuers subject to subpart 1300, preparing for its first Annual Report for a fiscal year ended on or after December 31, 2022, to be filed in 2023, will be the first time the issuer has needed to assess the requirements for updating subpart 1300 disclosure. An updated technical report summary is not required every year. In conversations with the Staff of the SEC, they expected most technical report summaries would be good for 3-5 years before updating was required, although material changes at a project (for example, a significant and sustained cost increase) would require that it be updated sooner. As part of subpart 1300 disclosure in Year 2 (and each year in the future), issuers will be required, among other things, to: reassess, as at the FYE, which mineral properties are material to the issuer; have a QP determine, as at the FYE, for each material property that has a previously-filed subpart 1300 technical report summary, whether all material assumptions and information set forth in the technical report summary, including assumptions relating to modifying factors, price estimates, and scientific and technical information (e.g., sampling data, estimation assumptions and methods), remain current; have a QP assess, as at the FYE, whether any changes have occurred in mineral resources or reserves, and explain the changes if any (including the comparison discussion required by Item 1304(e) of the current year’s mineral resources or reserves against the prior year’s mineral resources or reserves); determine which QP will update prior estimates of mineral resources and reserves as of the new FYE or confirm that the estimates remain current as at the FYE; if there are material changes to the information in a technical report summary, prepare the new technical report summary if required. Subpart 1300 does not require the use of the same QP who prepared the initial technical report summary; however, in some cases a consent may be required from the previous QP. Year 2 Reporting Disclosure For Annual Reports where the mineral reserves and mineral resources remain unchanged as of the FYE, the Staff of the SEC has indicated that they expect to see a statement in the Annual Report that the QP has determined that all material assumptions and information, including those related to price estimates, remain current as of the FYE. Year 2 Backup Documentation Except with respect to an updated technical report summary, there is no specified backup procedure or documentation for updating or confirming estimates in Year 2. We recommend some form of backup memo or certification from the QPs relating to the Year 2 disclosure as part of an issuer’s disclosure controls and procedures. Procedures For New Material Properties If any new material property is identified, the issuer may not disclose any mineral resources or mineral reserves for that property in the Annual Report unless the Annual Report is accompanied by a subpart 1300 compliant technical report summary. If a material property has an existing subpart 1300 technical report summary, but the QP is unable to determine that all material assumptions and information set forth in the report remain current as of the new FYE, the issuer similarly may not disclose any mineral resources or mineral reserves for that property in the Annual Report unless the Annual Report is accompanied by a new or updated subpart 1300 compliant technical report summary. We recommend that issuers begin their assessment of these matters prior to the FYE, because the preparation of any required new or updated technical report summaries may take significant time. If an issuer is unable to finalize any required new or updated subpart 1300 technical report summary by the date of the Annual Report, the Annual Report must report that the property has no mineral resources or reserves. While this approach may be permissible under the Annual Report form requirements, it may result in an adverse reaction from investors and analysts.  Depending on the circumstances, it may also require the issuer to suspend sales under certain SEC registration statements if it may constitute or result in a material misstatement or omission. Procedures For New Properties That Are Not Material Whether or not a property is material, the issuer may not disclose any mineral resources or mineral reserves for that property in the Annual Report unless those mineral resources or mineral reserves are determined in accordance with subpart 1300. For non-material properties that are discussed in the summary disclosure section, a technical report summary is not required but a QP must still conduct the required procedures to determine mineral resources or mineral reserves as of the FYE. Internal Controls Disclosure for Resource and Reserve Estimates in Year 2 We note that the language of Item 1305 relating to internal controls disclosure is open to significant interpretation by the reader.  In discussions with the Staff of the SEC, they noted the internal control disclosure was intended to be at the corporate level, not the project level.  In other words, are there board committees or members of senior management that are responsible for the oversight of mineral estimates?  What are the company’s procedures?  To see examples of this type of disclosure, keep in mind that oil and gas companies have been subject to this requirement for a number of years.

We are seeing a significant increase in cases where a qualified person (QP) or related engineering firm has prepared a technical report or other required disclosure for a mining company, but then resisted, or outright refused, to provide the written consent that the mining company is required to obtain in order to be permitted to disclose the name of the QP and the conclusions of the QP in a prospectus that forms part of an SEC registration statement for a public offering or for the mining company’s annual report that is filed with the SEC.  This can be costly and damaging to the mining company, because it may put the company in a position where it cannot satisfy both the SEC consent requirements and the requirements of Canada’s National Instrument 43-101 (NI 43-101) without having another QP redo the first QP’s work. The incidence of QPs taking this position seems to be increasing as the SEC’s new mining disclosure rules under subpart 1300 come into effect.  For companies that file with the SEC on non-MJDS forms (Forms 10-K, S-1 and S-3 for domestic issuers, and Forms 20-F, F-1 and F-3 for foreign private issuers), the subpart 1300 rules will impose new requirements on QPs that will increase their exposure to potential liability.  The subpart 1300 rules will not apply to MJDS forms.  For the many Canadian mining companies that file with the SEC under the MJDS system (e.g., Forms 40-F and F-10), their QPs will not be subject to any increased exposure.  Nevertheless, we are seeing QPs taking a more cautious approach to consents as they become more aware of the potential liability to which they have always been subject as “experts”. To avoid the potential for unpleasantness at a later date, mining companies that may require an SEC consent from a QP should raise this requirement with the QP as part of the process of initially engaging the QP and consider building the QP’s obligation to provide any required consents into the express terms of any written agreement with the QP.

On April 29, 2020, the SEC issued new Compliance & Disclosure Interpretations (the “New C&DIs”) that clarified the compliance deadline for many mining companies that file with the SEC on non-MJDS forms such as Form 10-K or Form 20-F to comply with the SEC’s new mining disclosure rules in Subpart 1300 of Regulation S-K. The New C&DIs follow closely on the heels of the National Mining Association having submitted a letter on April 24, 2020, to the SEC’s Chairman, Jay Clayton, requesting a one-year delay in the Subpart 1300 compliance deadline in light of the COVID-19 pandemic. The SEC’s adopting release for Subpart 1300 on October 31, 2018, had required that mining companies begin complying with the new rules, including the filing of technical report summaries, beginning with the annual report filed for the company’s first fiscal year beginning on or after January 1, 2021 (in other words, in early 2022 for calendar year companies, and later in 2022 or very early 2023 for other companies). However, that timeline was to be accelerated for new registrants and also, apparently, for companies accessing the public markets, with compliance required beginning January 1, 2021, for any registration statement filed on or after that date. The treatment of shelf takedowns from existing registration statements after January 1, 2021, was not specifically addressed. The New C&DIs provide much-needed clarity regarding the Subpart 1300 compliance deadline for many mining companies: For non-calendar year companies, Subpart 1300 will not apply until the beginning of the company’s first fiscal year on or after January 1, 2021. For example, a company with a June 30 fiscal year end will not in any circumstance become subject to Subpart 1300 until July 1, 2021. If a company files a Securities Act registration statement after the beginning of its first fiscal year on or after January 1, 2021, and prior to its annual report for such fiscal year,[1] it is not required to comply with Subpart 1300 in the Securities Act registration statement if the form being used permits incorporation by reference of information from a prior annual report that was not subject to Subpart 1300, and such disclosure is not otherwise prohibited under the SEC’s rules. For example, if a calendar-year end company files a Form S-3 or Form F-3 during 2021, it may incorporate its annual report on Form 10-K or Form 20-F for the fiscal year ended December 31, 2020, even if that report contains disclosure in accordance with SEC Industry Guide 7. As a result of the New C&DIs, many mining companies that are working on implementing Subpart 1300 will not be required to comply with the new rules until the date in 2022 when they file their annual report for their first fiscal year beginning on or after January 1, 2021. The exception to this rule will be companies that file an initial Exchange Act registration statement or a Securities Act registration statement that does not permit incorporation by reference[2] after the start of their first fiscal year beginning on or after January 1, 2021. Those filings will trigger early compliance with Subpart 1300. The New C&DIs are available at sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#section155. The SEC’s adopting release for Subpart 1300 is available at sec.gov/rules/final/2018/33-10570.pdf. Links for Dorsey's prior Q&A and webinar regarding Subpart 1300 are available at dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019 and dorsey.com/newsresources/events/videos/2019/02/webinar-playback-sec-new-mining-rules, respectively.   [1] Technically, the New C&DIs refer to the date on which audited financial statements for such fiscal year are required to be included in the Securities Act registration statement. [2] For example, Forms F-1 and S-1, the SEC’s equivalents to a “long form” prospectus, do not permit incorporation by reference if the company (i) is a new registrant, (ii) has not yet filed its SEC annual report for its most recently completed fiscal year, (iii) is delinquent in its SEC reports, (iii) is or was, or has a predecessor that was, within the last three years, a blank check company, a shell company, or a registrant for an offering of penny stock, or (iv) is registering a business combination. Forms F-4 and S-4, which are used to register business combinations, also include restrictions on incorporation by reference, depending on the nature of the registrant and the company being acquired.

For many mining and infrastructure projects in the United States, a primary cause of permitting uncertainty, expense, and delay is compliance with the environmental review process under the National Environmental Policy Act (NEPA). On January 10, 2020, the Council on Environmental Quality (“CEQ”) proposed comprehensive revisions to the regulations implementing the NEPA. 85 Fed. Reg. 1684. NEPA documentation is generally required for any project, public or private, that requires approvals from the federal government. The proposed revisions to the NEPA regulations are part of the Trump administration’s efforts to streamline their NEPA review processes. The proposed regulatory revisions include the following changes, among others: More Exemptions from NEPA Review – The proposed rules encourage expanded use of categorical exemptions, which exclude projects for the environmental review requirements of NEPA. In addition, the proposed rules require that the governmental agency making a permitting decision undertake a “threshold NEPA applicability analysis” to formally determine whether NEPA applies. The rules also propose to define a new category of “non-major” federal actions that have minimal federal involvement or funding and do not require NEPA review. Revisions to front-load public comments and strengthens waiver defenses – CEQ proposes to require agencies to solicit public input on alternatives, impacts, and information early in the process following the preparation of the Notice of Intent to Prepare an EIS (“NOI”). If commenters fail to provide information in response the NOI, they may be subject to a waiver defense if they try to bring up new issues they could have raised at the NOI stage. Limits on agency jurisdiction – The proposed rules provide that agencies are not required to analyze environmental effects and alternatives over which they have no jurisdiction or control. In addition, the new regulations would eliminate the distinction between “direct” and “indirect” effects, and require agencies to only analyze those impacts that have a “reasonably close causal connection to the proposed action and alternatives.” Elimination of Requirement to Analyze Cumulative Effects – CEQ proposes to eliminate the need to analyze cumulative effects, on the grounds that it is not required under the statute, and such analyses have been difficult, confusing, and unhelpful to decision makers. Timing and Page Limits – The new regulations would impose a 75 page/1 year time limit for Environmental Assessments, and a 300 page/2 year limit for EIS’s, which could only be waived in writing by agency official at the Assistant Secretary level or higher. Greater Role for Applicants and Contractors – The proposed regulations would eliminate many of the current restrictions on the role of the applicant and contractor(s) in preparing NEPA documents. Applicants and contractors would be able to directly prepare and submit draft NEPA documents for agency review, under agency guidance. The agency must still certify that it independently reviewed and adopted the information provided. The CEQ has requested public comments on the proposed regulations, which must be received by CEQ no later than March 10, 2020. The proposed rules and opportunity to comment present a valuable opportunity for Canadian companies with mining or infrastructure projects in the United States and other interested parties to help influence the revisions to the NEPA regulation. CEQ will be under significant political pressure to finalize the regulations before the 2020 election, and early enough to minimize exposure under the Congressional Review Act. Dorsey regularly represents companies in rulemaking processes through the submission of comments that communicate to the regulatory agencies our clients’ concerns and objectives. If you have any questions or would like to learn more about participating in this important comment process, please contact us.

In November 2018, the U.S. Securities and Exchange Commission (SEC) adopted new mining disclosure standards applicable to all SEC reporting companies, except those that report exclusively under the Multijurisdictional Disclosure System (MJDS). While the new rules will not take effect until 2021, that date is quickly approaching. Mining and mineral royalty companies should brook no further delay in their preparations. Below are a few of the important steps to get ready to comply with the new standards: Determining whether the company must or should comply with the SEC’s new requirements.  Does the company file a Form 20-F or Form 10-K annual report with the SEC? If the company files on MJDS Form 40-F, how certain is it that the company will remain MJDS eligible, will remain a foreign private issuer, and will not need to use any non-MJDS registration forms? Does the company envision a future U.S. registration and listing? Does it have joint venture or other partners that will require an SEC-compliant technical report? Will an SEC-compliant technical report be useful for other reasons, such as marketing the property, the company, or a royalty on the property? Updating technical reports, as necessary.  If an SEC-compliant technical report will be required, or useful, a company’s qualified persons (QPs) under Canada’s National Instrument 43-101 (43-101) will need to be advised. The company will need to confirm whether the existing QPs are eligible to be QPs under SEC standards and whether they have a sufficient understanding of the new SEC rules to update the technical reports as required. A timeline and budget will need to be agreed with the QPs. In updating the reports, the QPs will need to determine whether the methodology used and determinations made under 43-101 are consistent with the new SEC standards and add to the report all SEC-mandated disclosures. Companies that are commissioning new technical reports may avoid the need for amendments by ensuring the standards used for the initial report satisfy both 43-101 and the SEC rules. Evaluating the agreements between the company and its QPs regarding the provision of any necessary expert consents.  While QPs named in certain SEC filings have long been required to provide expert consents, this requirement will expand to additional forms. The passage of the SEC’s new rules has increased awareness among QPs and within large engineering firms of the potential liability associated with being named as a QP. Some engineering firms have already started to push back, in a manner similar to audit firms, requiring new engagements or assurance procedures as a condition to providing a consent or resisting consent in situations in which they feel exposed. Companies should evaluate any existing agreements with their QPs regarding the provision of expert consents and consider whether changes may be appropriate to help ensure that such consents can be reliably obtained for a reasonable cost. Planning for new disclosures in SEC filings.  Companies that file on non-MJDS forms such as Form 20-F or Form 10-K should begin to map out the other technical disclosures that will need to appear in their SEC annual reports and other filings. For companies not already subject to 43-101, this may include obtaining technical reports for the first time. Quality assurance.  Mining companies have long asked their Canadian counsel for assistance in working with QPs, reviewing draft technical reports, and reviewing other technical disclosures to help verify compliance with 43-101. Companies subject to the SEC rules should now involve U.S. counsel in a similar manner and allow additional time for review of the technical disclosure as a result of the newness of the rules.

You are invited to join us on February 26, 2019, at 11 am PT/2 pm ET, for a webinar discussing the SEC’s new mining disclosure rules. On October 31, 2018, the SEC adopted final rules effecting a complete overhaul of the technical disclosure requirements applicable to companies engaged in material mining operations, including royalties. Upon effectiveness in 2021, the new rules will replace the SEC’s decades-old guidelines, set forth in Industry Guide 7. The new rules will bring the U.S. reporting regime closer to global reporting standards, and will apply to all SEC reporting companies except those that report exclusively under the Canada-U.S. MJDS system. We will be providing an overview of the new rules, and how U.S. domestic, Canadian, other foreign, and even MJDS filers will be affected. The registration page and details about CLE/CPD credit are available here: dorsey.com/newsresources/events/event/2019/02/understanding-the-secs-new-mining-disclosure-rules. A written discussion of the SEC’s new mining disclosure rules (in Q&A format) is available here: dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019.

Canadian companies interested in cross-border natural resource projects should be aware of a regulatory development in the United States that significantly revises the jurisdictional scope of the Clean Water Act. On December 11, 2018, two federal agencies, the Environmental Protection Agency and the U.S. Army Corps of Engineers, proposed a new rule dramatically altering federal regulatory authority under the Clean Water Act (CWA) by redefining what constitutes a “water of the United States.” If enacted, the new rule proposes to limit and simplify the CWA’s jurisdictional analysis and provide regulatory certainty for resource development projects. Canadian companies with, or interested in, a cross-border project should follow, and consider participating, in the rule’s 60-day notice and comment period to ensure their interests are communicated to the agencies prior to the drafting of the final regulation. To learn more, see Dorsey's recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2018/12/clarifying-muddy-waters-epa.

On October 31, 2018, the United States Securities and Exchange Commission (the “SEC”) announced that it adopted rules to modernize mining property disclosure in order to harmonize SEC disclosure requirements with international standards. The SEC had proposed rules in June 2016 which received numerous comments and as a result a number of changes were made to the original proposed rules. A high level summary of the final rules and changes compared to the proposed rules can be found here: www.sec.gov/news/press-release/2018-248 The final rules provide for a two-year transition period so that a registrant will not be required to begin to comply with the new rules until its first fiscal year beginning on or after January 1, 2021. The new rules permit Canadian issuers who file reports with the SEC in accordance with the multijurisdictional disclosure system (“MJDS”) to continue to comply with the standards set forth in National Instrument 43-101 (“NI 43-101”). This includes issuers who file annual reports on Form 40-F or registration statements on Form F-10, Form 40-F or Form F-7. However, Canadian issuers who are not MJDS eligible (i.e. those who file annual reports on Form 20-F or who file registration statements on Form F-1, F-3 or F-4 that refer to the annual report on Form 20-F), or issuers who file using U.S. domestic issuer forms, will need to comply with the new rules and will not be able to include disclosure solely compliant with NI 43-101. Dorsey will provide a more comprehensive analysis on the new rules in the coming weeks and will be conducting a webinar to discuss the new rules in early 2019. The full rules are available here: www.sec.gov/rules/final/2018/33-10570.pdf

One of the principal sources of uncertainty, expense, and delay in the permitting process for many mining and infrastructure projects in the United States, especially those generating public controversy, is compliance with the environmental review process under the National Environmental Policy Act (NEPA). On June 20, 2018, the Council on Environmental Quality (CEQ) issued an advance notice of proposed rulemaking (ANPR) seeking public comment on potential revisions to its implementing regulations for the procedural provisions of NEPA. NEPA documentation is generally required for any project, public or private, that requires approvals from the federal government. The ANPR is a continuation of the Trump administration’s efforts to address inefficiencies in the federal permitting process and follows recent proposals from the Department of Interior and other agencies to streamline their NEPA review processes. The ANPR is significant because revisions to the CEQ’s NEPA regulations would apply government-wide, while the previous reform efforts have been on an agency-by-agency basis. Specifically, CEQ published a list of 20 questions for which it is seeking comments. These questions relate to ways to streamline the NEPA process, including potential revisions to the definitions of key terms, issues to be considered in NEPA documents, the range of alternatives that must be considered, the timing and preparation of NEPA documents, and interagency coordination. The ANPR presents a valuable opportunity for Canadian companies with mining or infrastructure projects in the United States and other interested parties to help shape revisions to CEQ’s NEPA regulations to ensure that the regulations serve NEPA’s purpose of informed decision making while minimizing unnecessary litigation, cost, and delay for project proponents. The deadline for submitting comments is July 20, 2018. Dorsey regularly represents companies in rulemaking processes through the submission of comments that communicate to the regulatory agencies our clients’ concerns and objectives. If you have any questions or would like to learn more about participating in this important comment process, please contact us. The Federal Register notice announcing the ANPR and requesting public comments is available at www.federalregister.gov/documents/2018/06/20/2018-13246/update-to-the-regulations-for-implementing-the-procedural-provisions-of-the-national-environmental.

Since January 1, 2016, the SEC has publicly released its correspondence relating to 60 comment letters sent to Canadian issuers with respect to annual reports filed on Form 40-F pursuant to the Canada-U.S. Multi-Jurisdictional Disclosure System (MJDS). We have analyzed the content and key takeaways from these letters, including: The SEC’s most common areas of focus; Recent trends; and Common errors to be avoided. Background The MJDS system allows Canadian issuers that satisfy certain market capitalization and other requirements to file an annual report with the SEC on Form 40-F. Except for a few items, a Form 40-F does not impose U.S. disclosure requirements upon a Canadian issuer and, instead, includes and relies upon the disclosures contained in the issuer’s annual information form, MD&A, and audited financial statements filed in Canada. The incremental requirements of Form 40-F include that the issuer’s financial statements comply with IFRS as issued by the IASB or be reconciled to U.S. GAAP, that the audit report meet certain requirements, that the auditor be independent, that certain disclosures be included with respect to the issuer’s disclosure controls and procedures and internal control over financial reporting, that certain officer certifications and third-party consents be included, and that certain additional MD&A disclosures be included. While the limited nature of Form 40-F reduces the number of areas in which the SEC may comment, Congress has directed the SEC to review the filings of SEC reporting issuers at least once every three years. For this reason, all companies that report with the SEC, even those that report under the MJDS, should expect their filings to be reviewed from time to time. If upon such review, the SEC has questions or believes that the issuer’s filing is deficient, it may provide comments to the issuer by letter. The issuer must then respond to the SEC’s comments, and may need to amend its filings to address the comments. Industry Breakdown The industry breakdown of the 60 most recent Form 40-F comment letters was: Twenty-four to companies involved in mining, mineral exploration, or the holding of mineral royalties or minerals; Five to energy companies; Five to technology and telecommunications companies; Four to life sciences companies; Four to banking and insurance companies; Three to real estate companies; and Six to companies involved in other industries, including transportation, manufacturing, entertainment, publishing, and professional services. Repeat Letters An issuer’s chance of receiving a comment letter may increase once the SEC has taken an interest in the issuer’s filings. The recipients of the comment letters included nine issuers who received a comment letter in both of the fiscal years covered by our review. Self-Inflicted Wounds Some comments could easily have been avoided. For example: Six letters noted technical problems with the audit report (missing auditor name, signature, date, or entire report; or failed to say financials comply with IFRS “as issued by the IASB”); Four noted technical problems with officer certifications or the internal control attestation report (wrong period, date, or content; or missing entirely); Four noted technical problems with the content of the controls sections of the Form 40-F; Three related to non-IFRS measures that the SEC considered misleading because terms were used inconsistently or the titles of the terms did not match the definitions (e.g., using the term EBITDA but calculating it in a manner inconsistent with market norms); Two noted technical problems with the contractual obligation table; and Two objected to an issuer’s conclusion that disclosure controls were effective when the issuer had disclosed that internal controls were ineffective. Paying Attention The SEC pays attention to an issuer’s website and earnings calls and may comment on inconsistencies between the Form 40-F and these other disclosures or raise other comments based on these disclosures. For example, several comment letters asked issuers about their business activities in sanctioned countries based on disclosures on their website. One letter questioned why management touted improvements in internal controls on the earnings call but disclosed no material change in internal controls in its Form 40-F. Another requested a different presentation of revenues based on sales information disclosed on an earnings call. Most Common Topics By far the most common topic of an SEC comment letter was the issuer’s financial disclosures. Forty-two of the 60 letters included comments relating to the issuer’s financial statements, audit report, auditor, or MD&A. These included, among others: Twenty-four with questions regarding revenue recognition policies, breakout of revenues by product (usually asking why further breakouts of revenue were not provided), methodology and disclosures around asset valuation and capitalization of expenditures, tax assets and rates, depletion/depreciation, or impairment analysis; Thirteen with questions about the accounting treatment of a specific other matter; and Nine requesting improvements to the disclosure of period-to-period changes, a particular accounting analysis, liquidity, cash flow, or other matters. Second-most common was comments relating to technical disclosure requirements for issuers involved in the mining or oil & gas industries, accounting for 13 of the 60 letters. Ten letters addressed mining company technical disclosures, including supplemental requests for copies of technical reports, studies, or other information in support of disclosures (the SEC does not require such reports to be publicly filed, unless also filed in Canada and material), and comments relating to: the issuer’s failure to comply with NI 43-101 (compliance with NI 43-101 is a pre-requisite for not complying with SEC Industry Guide 7); the issuer’s failure to update reserve calculations, for past production or more generally; and inconsistent or unclear disclosures. Three letters related to oil & gas company technical disclosures, all of which requested enhanced disclosures and alleged failures to satisfy FASB disclosure standards. The third-most common topic of the comment letters was comments relating to deficiencies in the officer certifications or disclosures relating to disclosure controls and internal controls. This topic was addressed in eight of the 60 comment letters, most of which related to failures to satisfy the form requirements. Fourth-most common was comments inquiring about the issuer’s business dealings in sanctioned countries (usually Sudan and Syria) or with companies known to operate in those countries and the adequacy of any related disclosures, usually triggered by the SEC’s realization that this may be relevant to the issuer. Seven of the 60 letters included such inquiries. Waves and Trends Comment letters have tended to come in waves. The letters from January 2016 through June 2017 dealt primarily with financial statement and MD&A issues; Two of the three letters issued to real estate companies were issued in the same week of September 2016; All of the letters issued to banks were issued in March 2017; All of the letters dealing with oil & gas technical disclosures were issued in the fourth quarter 2017; and Eight of the 10 letters dealing with mining technical disclosures were issued between June and December of 2017. It’s not yet clear if the shift toward commenting on mining technical disclosures is a trend. Lessons To reduce the likelihood of SEC comments, a Canadian issuer that files SEC annual reports on Form 40-F should attend to the technical compliance of its audit report, officer certifications, controls disclosures, and other Form 40-F mandated disclosures; include a robust and understandable MD&A; avoid the inconsistent or misleading use of non-IFRS terms; and, for resource extraction issuers, comply with the technical disclosure requirements applicable to it under Canadian and U.S. laws.  

The recent settlement agreement between Kinross Gold Company and the Securities and Exchange Commission is a reminder to Canadian cross-listed companies that it is not enough to adopt a parent-company level anti-corruption policy designed to promote compliance with the Foreign Corrupt Practices Act (FCPA). Effective implementation and monitoring at the operating level is also needed. In Kinross’ case, the SEC charged, in effect, that Kinross had acquired two African mining operations from a third party, was aware of deficiencies in the mines’ controls at the time of acquisition, failed to timely put in place appropriate controls, and then failed to maintain them once implemented. Specifically, SEC alleged that Kinross awarded a logistics contract to a company preferred by Mauritian officials, despite concerns that the awardee exhibited poor performance at high cost without going through Kinross’ own bidding procedures, and engaged in contracts with politically connected consultants without conducting necessary, heightened due diligence. The SEC found these deficiencies constituted a violation of books and records and internal auditing controls provisions of federal securities law. In order to resolve these charges, and without admitting SEC’s findings, Kinross agreed to pay the SEC a penalty of $950,000, comply with a cease-and-desist order, and undertake to report on remedial measures. For more details, see the April 2018 edition of our Anti-Corruption Digest, which is available at  https://www.dorsey.com/newsresources/publications/newsletters/2018/04/anti-corruption-digest-april-2018.

The SEC is aiming to finalize its new mining disclosure rules within the next year, according to statements made last week by William Hinman, Director of the SEC’s Division of Corporation Finance, at the Securities Regulation Institute. For more details regarding the SEC’s original 2016 proposal to revamp the rules, and reactions by industry, see our summary of the initial proposal (here: www.dorsey.com/newsresources/publications/client-alerts/2016/07/new-mining-disclosure-rules) and our last blog post (here: crossbordercounselor.com/status-check-on-the-secs-proposed-overhaul-of-the-mining-disclosure-regime/).  

About 18 months have passed since the U.S. Securities and Exchange Commission (SEC) published its bold attempt to modernize the disclosure requirements for mining companies that are listed on U.S. stock exchanges or otherwise report to the SEC. With final rules not yet adopted, the fight for a streamlined reporting regime continues. The SEC’s proposed overhaul was spawned by industry request – specifically, a request by the Society for Mining, Metallurgy & Exploration (SME), the leading professional society of mining professionals in the United States, that the SEC bring its disclosure requirements into the modern age and adopt a new disclosure regime based on the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) standards. CRIRSCO-based standards have been adopted in most countries with advanced mining disclosure regimes, including Canada and Australia. Industry was concerned that the existing rules under SEC Industry Guide 7, nearly 35 years old, were hampering the ability of U.S. mining companies and U.S. trading markets to compete by, among other things, prohibiting the disclosure of mineral resources that have not yet been determined to be mineral reserves. As a result, in June 2016, the SEC proposed a new CRIRSCO-based disclosure system that would bring U.S. disclosure requirements more in line with Canada and other jurisdictions. One might think that such a proposal, to modernize rules at the request of industry to benefit American business, would find easy adoption following the election of Donald Trump and the appointment of a Republican Chairman and majority to the SEC, but that hasn’t been the case. Overhauling a system that has been in place for 35 years is a difficult thing to do at any time. The election of Donald Trump likely delayed the process further. The President’s party controls the chairmanship and majority of seats on the SEC, so the election resulted in the resignation of the Democratic Chairman that had overseen the initial proposal. Months of uncertainty passed before her replacement was sworn in. The new Republican Chairman was not appointed until May 2017, seven months ago, without any background on the proposed new mining rules and undoubtedly bringing his own ideas and interests to the table. President Trump also campaigned on a platform of eliminating regulation, and while the proposals were intended to benefit industry, they require passing additional regulations. Finally, but perhaps most importantly, the proposals were not as well-received by the mining industry as the SEC had undoubtedly hoped. Most industry organizations, companies, and law firms that commented on the proposals were supportive of the idea of modernization, but felt that the SEC’s proposals were too prescriptive and varied in too many ways from CRIRSCO standards, thereby imposing an administrative burden on companies, especially those reporting in more than one jurisdiction. Worst of all for many of our Canadian clients, the new rules as proposed would have eliminated the ability of Canadian companies that file SEC reports on non-MJDS forms such as Form 20-F or 10-K from including National Instrument 43-101 (NI 43-101) information in their SEC filings, even if these disclosures were mere supplements to SEC disclosure. The SEC received a lot of feedback to digest. According to the staff, they are continuing to review and consider the comments received. While it’s not a secret, few are aware that the National Mining Association (NMA), the national trade organization of the mining industry, and the SME have teamed up to present the SEC with an alternative proposal for modernizing the SEC’s mining disclosure rules. The NMA and SME have proposed that instead of working from the framework of the SEC’s 2016 proposals, the SEC merely amend the content of Industry Guide 7. The NMA and SME have recommended that Guide 7, as revised, allow companies to disclose estimates of mineral resources in addition to mineral reserves, allow reserves to be established in a pre-feasibility study, not require disclosure to be attributed to a qualified person, limit required disclosures to those that are material, and limit the information required to be disclosed by those holding passive mining interests such as royalties, all without imposing the more detailed, prescriptive requirements contained in the SEC’s 2016 proposals. Of most interest to Canadian companies, the NMA/SME proposal would allow foreign companies that are subject to and required to disclose information in compliance with another CRIRSCO-based standard, such as NI 43-101, to comply with such other standard in lieu of, and in full satisfaction of, the SEC standards, subject only to a requirement to include a reconciliation of any material differences. The NMA/SME proposal includes a specific note that for Canadian companies subject to NI 43-101, reconciliation would generally not be required (due to the lack of material differences between NI 43-101 and the NMA/SME proposed version of Guide 7). If the SEC accepts the NMA/SME proposal, most smaller Canadian companies that do not satisfy the market capitalization requirements of the Multi-Jurisdictional Disclosure System (MJDS) will find it easier and less expensive to file with the SEC than in prior years. Whether the SEC will do so, we cannot say.

Financial assurance and reclamation bond requirements can be a significant cost and regulatory burden for Canadian issuers with mining projects in the United States. Over the last several years, companies with U.S. mining projects have waited while the U.S. Environmental Protection Agency (EPA) has considered expanding the financial responsibility requirements applicable to the hardrock mining industry. On December 1, 2017, EPA released a pre-publication version of a final rule determining that imposing CERCLA 108(b) financial responsibility requirements on the hardrock mining industry was unwarranted.[1] The Final Rule satisfies a court-ordered timeline and rejects a proposed rule, published in January 2017,[2] which proposed regulations imposing CERCLA 108(b) financial responsibility requirements on operators of hardrock mining facilities. Based on information provided during the public comment period and EPA’s re-evaluation of the rulemaking record, EPA determined that finalizing the proposed rule and establishing financial responsibility requirements for the industry was inappropriate because: “the degree and duration of risk associated with the modern production, transportation, treatment, storage or disposal of hazardous substances by the hardrock mining industry does not present a level of risk of taxpayer funded response actions that warrant imposition of financial responsibility requirements.”[3] EPA’s decision is significant for the mining industry, as EPA had estimated that the proposed rule would cost the industry approximately $111-171 million annually to address an estimated $15 million in annual unfunded clean-up costs.[4] For more information, see Ben Machlis’ recent eUpdate on the EPA’s Decision available here:  www.dorsey.com/newsresources/publications/client-alerts/2017/12/a-win-for-the-mining-industry   [1] Final Rule: Financial Responsibility Requirements under CERCLA Section 108(b) for Classes of Facilities in the Hardrock Mining Industry, EPA-HQ-SFUND-2015-0781, Pre-Publication Copy (Dec. 1, 2017). [2] Proposed Rule: Financial Responsibility Requirements under CERCLA Section 108(b) for Classes of Facilities in the Hardrock Mining Industry, 82 Fed. Reg. 3,388 (Jan. 11, 2017). [3] Final Rule, at 47. [4] Id. at 7.

One of the most difficult and costly aspects of developing mining projects in the United States is the permitting requirements under the Clean Water Act (CWA). The Trump administration is currently undertaking a rulemaking process to examine and redefine the scope of the CWA. Companies with mining projects in the United States should consider participating in the rulemaking process to assure that their interests are represented. In 2015, the U.S. Environmental Protection Agency (EPA) and the U.S Army Corps of Engineers (Corps) (collectively the Agencies) adopted final regulations redefining the term “waters of the United States,” which defines the scope of federal regulatory jurisdiction under the CWA. States, industry groups, and environmental organizations immediately challenged the rule in the federal courts, and a nationwide stay issued by the 6th Circuit Court of Appeals has prevented the Agencies from implementing the 2015 regulations. In light of the circumstances, and pursuant to an Executive Order from President Trump, dated February 28, 2017, the Agencies are currently reviewing the definition of “waters of the United States” under the CWA. The Agencies have proposed a two-step process for this review. First, in July, the Agencies proposed a rule to repeal the 2015 regulations and re-codify the regulations that existed prior to 2015. The public comment period for this proposed rule runs through September 27, 2017. Second, the Agencies will propose new regulations substantively redefining “waters of the United States” and the scope of CWA Jurisdiction. This rulemaking is particularly important for natural resource companies because the breadth of topographic features to which the CWA applies has a major impact on project permitting. Natural resources projects are generally subject to two types of CWA permits. Under Section 402 of the CWA, parties are required to obtain a National Pollutant Discharge Elimination System (NPDES) permit from the EPA, or a delegated state agency, for any point sources where pollution may enter into waters of the United States. Under Section 404 of the CWA, parties are required to obtain a 404 permit from the Corps prior to the discharge of dredge or fill material into waters of the United States. The cost and timing for permitting and the feasibility of natural resources projects can largely depend on whether topographic features within or near a project are considered “waters of the United States” and subject to these CWA permitting requirements. Thus, the Agencies review of the scope of the definition for “waters of the United States” should be of particular interest to anyone operating, permitting, or investing in natural resource projects in the United States. As part of their review process pursuant to the February 28th Executive Order, the Agencies recently announced they would hold 11 sessions this Fall to give stakeholders an opportunity to provide recommendations on a revised definition of “waters of the United States.” Nine of the 11 sessions will be tailored for specific industries, with the stakeholder session for “Mining” scheduled for October 31, 2017, from 1pm to 3pm ET. Registration for each of the stakeholder sessions will close one week prior to the scheduled date of the session. The Agencies will also be accepting written recommendations and comments on the rulemaking process, which should be submitted on or before November 28, 2017. Over the past several years, Dorsey has represented mining companies in rulemaking processes under the CWA and similar environmental statutes, through participation in stakeholder meetings and the submission of comments that communicate to the regulatory agencies our mining clients’ concerns and objectives. The Federal Register notice announcing the schedule of public sessions is available at www.gpo.gov/fdsys/pkg/FR-2017-08-28/pdf/2017-18214.pdf. Information on registering for the sessions is available at www.epa.gov/wotus-rule/outreach-meetings.

Citing concerns over economic harm, President Trump has targeted his predecessor’s climate change agenda. He has sought reversal of a number of key Obama regulations, directives, and other actions, including the Clean Power Plan and the U.S. participation in the Paris accords. The overall blueprint for these actions is found in his March 2017 Executive Order on Promoting Energy Independence and Economic Growth. This order lays out for the Environmental Protection Agency and Department of Interior, as well as other agencies, specific actions to take to promote the development and use of domestically produced oil, gas, coal, and nuclear power. The agencies are only now beginning to undertake these actions, which could have dramatic impacts on the expansion of the mining, oil and gas, and power sectors in the United States, as well as on Canadian companies investing in these sectors or trading in these fuels with the United States. Of course, the path forward will be somewhat uncertain as any actions will be challenged in court by a revitalized environmental community. For more information, see our partner Jim Rubin's recent article featured in Trends, a newsletter published by the American Bar Association Section of Environment, Energy, and Resources: www.americanbar.org/publications/trends/2016-2017/july-august-2017/trump-seeks-to-uproot-the-obama-climate-change-agenda.html

The Trump administration recently issued a presidential permit to TransCanada to operate and construct the Keystone XL pipeline. The presidential permit grants permission to construct, connect, operate, and maintain the pipeline facilities at the international border between the United States and Canada, covering approximately 1.2 miles of pipeline. The remaining 1,200 miles of Keystone XL must be approved by various regulatory bodies in the United States and Canada. The granting of the presidential permit is a big step forward for the pipeline, but many significant regulatory and legal steps remain before TransCanada can start construction of Keystone XL. Read more about the issuance of the presidential permit and the hurdles ahead for Keystone XL in our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/03/despite-trump-approval-keystone-pipeline

Canadian miners and oil & gas companies should be aware that on February 14, 2017, President Trump approved a joint resolution of Congress that disapproved a recent SEC rule requiring specific disclosure by resource extraction issues. The obligation to report was imposed by Rule 13q-1 under the Exchange Act. The rules would have required resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. See the full discussion from our partner Kimberley Anderson here.