Disclosure of Payments by Resource Extraction Issuers, 49359-49430 [2016-15676]
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Vol. 81
Wednesday,
No. 144
July 27, 2016
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249b
Disclosure of Payments by Resource Extraction Issuers; Final Rule
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Rules and Regulations
We are
adopting Rule 13q–1 1 and an
amendment to Form SD 2 under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’).3
SUPPLEMENTARY INFORMATION:
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34–78167; File No. S7–25–15]
RIN 3235–AL53
Disclosure of Payments by Resource
Extraction Issuers
Securities and Exchange
Commission.
AGENCY:
ACTION:
Final rule.
We are adopting Rule 13q–1
and an amendment to Form SD to
implement Section 1504 of the DoddFrank Wall Street Reform and Consumer
Protection Act relating to the disclosure
of payments by resource extraction
issuers. Rule 13q–1 was initially
adopted by the Commission on August
22, 2012, but it was subsequently
vacated by the U.S. District Court for the
District of Columbia. Section 1504 of the
Dodd-Frank Act added Section 13(q) to
the Securities Exchange Act of 1934,
which directs the Commission to issue
rules requiring resource extraction
issuers to include in an annual report
information relating to any payment
made by the issuer, a subsidiary of the
issuer, or an entity under the control of
the issuer, to a foreign government or
the Federal Government for the purpose
of the commercial development of oil,
natural gas, or minerals. Section 13(q)
requires a resource extraction issuer to
provide information about the type and
total amount of such 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.
In addition, Section 13(q) requires a
resource extraction issuer to provide
information about those payments in an
interactive data format.
SUMMARY:
Effective date: The final rule and
form amendment are effective
September 26, 2016.
Compliance date: A resource
extraction issuer must comply with the
final rule and form for fiscal years
ending on or after September 30, 2018.
FOR FURTHER INFORMATION CONTACT:
Shehzad K. Niazi, Special Counsel;
Office of Rulemaking, Division of
Corporation Finance, at (202) 551–3430;
or Elliot Staffin, Special Counsel; Office
of International Corporate Finance,
Division of Corporation Finance, at
(202) 551–3450, U.S. Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549.
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DATES:
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Table of Contents
I. Introduction and Background
A. Section 13(q) of the Exchange Act
B. The 2012 Rules and Litigation
C. International Transparency Efforts
1. European Economic Area
2. Canada
3. EITI
D. Summary of the Final Rules
II. Final Rules Under Section 13(q)
A. Definition of ‘‘Resource Extraction
Issuer’’
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
B. Definition of ‘‘Commercial Development
of Oil, Natural Gas, or Minerals’’
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
C. Definition of ‘‘Payment’’
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
D. Definition of ‘‘Subsidiary’’ and
‘‘Control’’
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
E. Definition of ‘‘Project’’
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
F. Definition of ‘‘Foreign Government’’ and
‘‘Federal Government’’
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
G. Annual Report Requirement
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
H. Public Filing
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
I. Exemption From Compliance
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
J. Alternative Reporting
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
K. Exhibits and Interactive Data Format
Requirements
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
L. Treatment for Purposes of Securities Act
and Exchange Act
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
M. Compliance Date
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1 17
CFR 240.13q–1.
CFR 249.448.
3 15 U.S.C. 78a et seq.
2 17
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1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
III. Economic Analysis
A. Introduction and Baseline
B. Potential Effects Resulting From the
Payment Reporting Requirement
1. Benefits
2. Costs
C. Potential Effects Resulting From Specific
Implementation Choices
1. Exemption From Compliance
2. Alternative Reporting
3. Definition of Control
4. Definition of ‘‘Commercial Development
of Oil, Natural Gas, or Minerals’’
5. Types of Payments
6. Definition of ‘‘Not De Minimis’’
7. Definition of ‘‘Project’’
8. Annual Report Requirement
9. Exhibit and Interactive Data
Requirement
IV. Paperwork Reduction Act
A. Background
B. Estimate of Issuers
C. Estimate of Issuer Burdens
V. Final Regulatory Flexibility Act
Analysis
A. Need for the Rules
B. Significant Issues Raised by Public
Comments
C. Small Entities Subject to the Rules
D. Reporting, Recordkeeping, and Other
Compliance Requirements
E. Agency Action To Minimize Effect on
Small Entities
VI. Statutory Authority
I. Introduction and Background
On December 11, 2015, we reproposed a rule and form amendments–
4 to implement Section 13(q) of the
Exchange Act (the ‘‘Proposing Release’’).
Rules implementing Section 13(q) were
previously adopted by the Commission
on August 22, 2012 (the ‘‘2012 Rules’’),5
but were vacated by the U.S. District
Court for the District of Columbia by
order dated July 2, 2013.6
A. Section 13(q) of the Exchange Act
Section 13(q) was added in 2010 by
Section 1504 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (‘‘the Act’’).7 It directs the
Commission to ‘‘issue final rules that
require each resource extraction issuer
to include in an annual report . . .
information relating to any payment
4 Exchange Act Release No. 34–76620 (Dec. 11,
2015), 80 FR 80057 (Dec. 23, 2015) available at
https://www.sec.gov/rules/proposed/2015/3476620.pdf.
5 See Exchange Act Release No. 67717 (Aug. 22,
2012), 77 FR 56365 (Sept. 12, 2012) available at
https://www.sec.gov/rules/final/2012/34-67717.pdf
(the ‘‘2012 Adopting Release’’). See also Exchange
Act Release No. 63549 (Dec. 15, 2010), 75 FR 80978
(Dec. 23, 2010) available at https://www.sec.gov/
rules/proposed/2010/34-63549.pdf (the ‘‘2010
Proposing Release’’).
6 API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013)
(‘‘API Lawsuit’’).
7 Public Law 111–203 (July 21, 2010).
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made by the resource extraction issuer,
a subsidiary of the resource extraction
issuer, or an entity under the control of
the resource extraction issuer to a
foreign government or the Federal
Government for the purpose of the
commercial development of oil, natural
gas, or minerals, including—(i) the type
and total amount of such payments
made for each project of the resource
extraction issuer relating to the
commercial development of oil, natural
gas, or minerals, and (ii) the type and
total amount of such payments made to
each government.’’ 8
Based on the statutory text and the
legislative history, we understand that
Congress enacted Section 1504 to
increase the transparency of payments
made by oil, natural gas, and mining
companies to governments for the
purpose of the commercial development
of their oil, natural gas, and minerals.
As discussed in more detail below, the
legislation reflects U.S. foreign policy
interests in supporting global efforts to
improve transparency in the extractive
industries.9 The goal of such
transparency is to help combat global
corruption and empower citizens of
resource-rich countries to hold their
governments accountable for the wealth
generated by those resources.10 Section
13(q) also defines several key terms,
such as ‘‘resource extraction issuer,’’ 11
‘‘commercial development of oil,
natural gas, or minerals,’’ 12 ‘‘foreign
government,’’ 13 and ‘‘payment,’’ 14 each
of which is addressed in detail below.
Section 13(q) provides that ‘‘[t]o the
extent practicable, the rules . . . shall
8 15 U.S.C. 78m(q)(2)(A). As discussed below,
Section 13(q) also specifies that the Commission’s
rules must require certain information to be
provided in interactive data format.
9 See Section I.C below.
10 See, e.g., 156 Cong. Rec. S3816 (daily ed. May
17, 2010) (Statement of Senator Lugar, one of the
sponsors of Section 1504) (‘‘Adoption of the CardinLugar amendment would bring a major step in favor
of increased transparency at home and abroad. . . .
More importantly, it would help empower citizens
to hold their governments to account for the
decisions made by their governments in the
management of valuable oil, gas, and mineral
resources and revenues. . . . The essential issue at
stake is a citizen’s right to hold its government to
account. Americans would not tolerate the Congress
denying them access to revenues our Treasury
collects. We cannot force foreign governments to
treat their citizens as we would hope, but this
amendment would make it much more difficult to
hide the truth.’’); id. at S3817–18 (May 17, 2010)
(Statement of Senator Dodd) (‘‘[C]ountries with
huge revenue flows from energy development also
frequently have some of the highest rates of poverty,
corruption and violence. Where is all that money
going? [Section 13(q)] is a first step toward
addressing that issue by setting a new international
standard for disclosure.’’).
11 15 U.S.C. 78m(q)(1)(D).
12 15 U.S.C. 78m(q)(1)(A).
13 15 U.S.C. 78m(q)(1)(B).
14 15 U.S.C. 78m(q)(1)(C).
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support the commitment of the Federal
Government to international
transparency promotion efforts relating
to the commercial development of oil,
natural gas, or minerals.’’ 15 In light of
this directive, we have considered
significant international initiatives in
connection with the final rules, such as
the Extractive Industries Transparency
Initiative (‘‘EITI’’) and the regulations
enacted by the European Union and
Canada.16
Pursuant to Section 13(q), the rules
we adopt must require a resource
extraction issuer to submit the payment
information included in an annual
report in an electronic data format in
which the information is identified
using a standardized list of electronic
tags.17 Section 13(q) lists certain
electronic tags that must be included in
the rules to identify specified
information 18 while also authorizing
the Commission to require additional
electronic tags for other information that
it determines is necessary or appropriate
in the public interest or for the
protection of investors.19
Section 13(q) further requires, to the
extent practicable, that the Commission
make publicly available online a
compilation of the information required
to be submitted by resource extraction
issuers under the new rules.20 The
statute does not define the term
compilation or describe how it should
be generated.
Finally, Section 13(q) provides that
the final rules ‘‘shall take effect on the
date on which the resource extraction
issuer is required to submit an annual
report relating to the fiscal year . . . that
ends not earlier than one year after the
date on which the Commission issues
final rules . . . .’’ 21
B. The 2012 Rules and Litigation
We adopted final rules implementing
Section 13(q) on August 22, 2012.22
U.S.C. 78m(q)(2)(E).
Section I.C below for a discussion of these
disclosure regimes, including why they are
significant. See also Proposing Release, nn.13–18
and accompanying text.
17 15 U.S.C. 78m(q)(1)(E), (1)(F), (2)(C), (2)(D).
18 These tags include: (I) the total amounts of the
payments, by category; (II) the currency used to
make the payments; (III) the financial period in
which the payments were made; (IV) the business
segment of the resource extraction issuer that made
the payments; (V) the government that received the
payments and the country in which the government
is located; (VI) and the project of the resource
extraction issuer to which the payments relate. 15
U.S.C. 78m(q)(2)(D)(ii).
19 15 U.S.C. 78m(q)(2)(D)(ii)(VII).
20 15 U.S.C. 78m(q)(3).
21 15 U.S.C. 78m(q)(2)(F).
22 We received over 150 unique comment letters
on the 2010 Proposing Release, as well as over
149,000 form letters (including a petition with
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16 See
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Subsequently, in October 2012, the
American Petroleum Institute (‘‘API’’),
the U.S. Chamber of Commerce, and two
other industry groups challenged the
2012 Rules.23 On July 2, 2013, the U.S.
District Court for the District of
Columbia vacated the rules.24 The court
based its decision on two findings: first,
that the Commission misread Section
13(q) to compel the public disclosure of
the issuers’ reports; and second, the
Commission’s explanation for not
granting an exemption for when
disclosure is prohibited by foreign
governments was arbitrary and
capricious. On September 18, 2014,
Oxfam America, Inc. filed suit in the
U.S. District Court for the District of
Massachusetts to compel the
Commission to promulgate a final rule
implementing Section 1504. On
September 2, 2015, the court issued an
order holding that the Commission
unlawfully withheld agency action by
not promulgating a final rule.25 The
Commission filed an expedited
schedule for promulgating the final rule
with the court on October 2, 2015.
Consistent with that schedule, the
Commission re-proposed rules and form
amendments on December 11, 2015. The
comment period for the re-proposal was
divided into an initial comment period
and a reply comment period. These
comment periods were subsequently
extended in response to a request by the
API.26 The Commission received 369
143,000 signatures). The letters, including the form
letters designated as Type A, Type B, and Type C,
are available at https://www.sec.gov/comments/s7-42
-10/s74210.shtml. In addition, to facilitate public
input on the Act before the comment periods for
specific rulemakings opened, the Commission
provided a series of email links, organized by topic,
on its Web site at https://www.sec.gov/spotlight/
regreformcomments.shtml. The public comments
we received on Section 1504 of the Act, which were
submitted prior to the 2010 Proposing Release, are
available on our Web site at https://www.sec.gov/
comments/df-title-xv/specialized-disclosures/
specialized-disclosures.shtml. Many comments
were also received between the issuance of the 2012
Adopting Release and the recent Proposing Release
and are available at https://www.sec.gov/comments/
df-title-xv/resource-extraction-issuers/resourceextraction-issuers.shtml.
23 See API et al. v. SEC, No. 12–1668 (D.D.C. Oct.
10, 2012). Petitioners also filed suit in the U.S.
Court of Appeals for the DC Circuit, which
subsequently dismissed the suit for lack of
jurisdiction. See API v. SEC, 714 F. 3d 1329 (D.C.
Cir. 2013).
24 API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013)
(‘‘API Lawsuit’’).
25 Oxfam America, Inc. v. United States Securities
and Exchange Commission, 126 F. Supp. 3d 168 (D.
Mass. 2015).
26 In response to API’s request, the Commission
extended the initial comment period from January
25, 2016 to February 16, 2016 and the reply
comment period from February 16, 2016 to March
8, 2016. See letter from API (Jan. 7, 2016) and
Exchange Act Release No. 34–76958 (Jan. 21, 2016),
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letters (including one form letter
submitted 308 times and a petition with
116,923 signatures) responding to the
requests for comment in the Proposing
Release.27
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C. International Transparency Efforts
As discussed at length in the
Proposing Release, Section 13(q) reflects
the U.S. foreign policy interest in
supporting global efforts to improve the
transparency of payments made in the
extractive industries in order to help
combat global corruption and promote
accountability.28 We formulated the
proposed rules with the purpose of
furthering these interests, and federal
agencies with specific expertise in this
area submitted comments affirming that
the proposed rules would accomplish
that purpose.29 Notably, the U.S.
Department of State expressed the view
that, if adopted, the proposed rule
would be a ‘‘strong tool to increase
transparency and combat corruption’’
and stated that it would advance ‘‘the
United States’ strong foreign policy
81 FR 4598 (Jan. 27, 2016), available at https://
www.sec.gov/rules/proposed/2016/34-76958.pdf.
27 These letters, including the form letters
designated as Type A and B, are available at https://
www.sec.gov/comments/s7-25-15/s72515.shtml.
28 See Section I.E of the Proposing Release, which
we hereby expressly incorporate by reference. See
also 156 Cong. Rec. S3976 (May 19, 2010) (Sen.
Feingold) (explaining that Section 13(q) is intended
to ‘‘empower[] citizens in resource-rich countries in
their efforts to combat corruption and hold their
governments accountable’’). The importance placed
by the United States and other members of the
international community on reducing global
corruption was recently illustrated through the
international anti-corruption summit that British
Prime Minister David Cameron hosted in London
on May 12, 2016. The summit brought together
world leaders, business, and civil society to agree
to a package of steps to, among other things,
promote transparency measures that expose
corruption. The summit adopted a Global
Declaration Against Corruption that specifically
endorsed the promotion of transparency and
governance in the resource extraction sector. See
Global Declaration Against Corruption (May 12,
2016), available at https://www.gov.uk/government/
publications/global-declaration-against-corruption/
global-declaration-against-corruption (last visited
June 16, 2016). President Obama and the other
leaders of the G7 nations in Japan during their
annual conference similarly emphasized the
importance of combatting global corruption. See G7
Ise-Shima Leaders’ Declaration (May 26, 2016),
available at https://www.mofa.go.jp/files/000160
266.pdf (last visited June 16, 2016) (‘‘[r]ecognizing
the magnitude of the global problem of corruption’’
and ‘‘reiterat[ing] that our collective and individual
action to fight corruption is critical for economic
growth, sustainable development and maintaining
peace and security’’).
29 We note that the legislative history also
indicates that Congress intended for the Section
13(q) disclosures to serve as an informational tool
for investors. See, e.g., 156 Cong. Rec. S3815 (May
17, 2010) (Sen. Cardin) (‘‘Investors need to know
the full extent of a company’s exposure’’); id. at
S3816 (May 17, 2010) (Sen. Lugar) (‘‘[the
disclosures] would empower investors to have a
more complete view of the value of their
holdings’’).
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interests in promoting transparency and
combatting corruption globally.’’ 30 In
addition, the U.S. Agency for
International Development (‘‘USAID’’)
stated that the proposed rule, if adopted,
would be ‘‘a significant step toward
greater energy and mineral industry
transparency and, correspondingly,
strengthened governance and civil
society anti-corruption efforts.’’ 31
According to USAID, ‘‘enforcement of
the proposed rule would contribute
towards U.S. Government foreign policy
goals of supporting stable and
democratic governments, and in
particular towards USAID’s goal of
providing assistance to resource-rich
countries in support of economic
growth, good governance, transparency,
and building civil society.’’ 32
Other commenters, including
individuals and non-governmental
organizations, supported the view that
Section 13(q) was enacted to further the
U.S. Government’s interest in improving
transparency in an effort to help combat
global corruption and promote
accountability.33 For example, one
commenter stated that ‘‘the
governmental interest of reducing
corruption and potentially enhancing
governmental accountability . . .
underpins [Section 13(q)].’’ 34 Another
commenter stated that ‘‘[p]romoting
revenue transparency in the extractives
sector with a robust implementation of
Section 1504 would provide civil
society the necessary tools to prevent
and combat corruption worldwide’’ and
that since ‘‘natural resource extraction
accounts for at least 10% of GDP in 61
countries, the potential benefits of
strong rules under Section 1504 are
significant in terms of healthier and
better educated populations, creating
more productive societies and higher
30 Letter from the United States Department of
State (Jan. 21, 2016) (‘‘State Department’’).
31 Letter from U.S. Agency for International
Development (Feb. 16, 2016) (‘‘USAID’’). According
to its Web site, USAID ‘‘carries out U.S. foreign
policy by promoting broad-scale human progress at
the same time it expands stable, free societies,
creates markets and trade partners for the United
States, and fosters good will abroad.’’ USAID, Who
We Are, available at https://www.usaid.gov/who-we
-are (last visited June 16, 2016). USAID is
particularly committed to transparency, such as the
President’s Open Government Initiative. See
USAID, Our Commitment to Transparency,
available at https://www.usaid.gov/results-anddata/progress-data/transparency (last visited June
16, 2016).
32 Id.
33 See, e.g., letters from American Security Project
(Jan. 21, 2016) (‘‘ASP’’); Elise J. Bean (Feb. 16, 2016)
(‘‘Bean’’); BHP Billiton (Jan. 25, 2016) (‘‘BHP’’);
Pietro Poretti (Feb. 15, 2016) (‘‘Poretti’’); Publish
What You Pay—US (Feb. 16, 2016) (‘‘PWYP–US
1’’); and Transparency International—USA (Feb. 16,
2016) (‘‘TI–USA’’).
34 See letter from Poretti.
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economic growth rates.’’ 35 Comments
we received on the Proposing Release
from former and current members of the
U.S. Congress supported our
interpretation of the transparency and
anti-corruption goals of Section 13(q).36
These current and former U.S. senators
stated that ‘‘transparency is a critical
tool to ensure that citizens in resource
rich countries can monitor the economic
performance of oil, gas and mining
projects and ensure that revenues,
especially if more meager than hoped,
are used responsibly.’’ 37 Significantly,
this view was not limited to
government, civil society, and
individual commenters. Industry
commenters also attested to a link
between Section 13(q)’s promotion of
increased transparency and reducing
corruption.38
To determine how best to achieve the
policy objectives of Section 13(q) and to
meet the statutory directive to ‘‘support
the commitment of the Federal
Government to international
transparency promotion efforts’’ to the
extent practicable, we also have
considered the current state of
international transparency efforts. The
following discussion addresses the
global transparency initiatives that have
developed since the 2012 Adopting
Release was issued, including in the
European Union, Canada, and through
the EITI.39 As discussed below, these
initiatives govern a significant
percentage of the companies that will be
impacted by the final rules.40
35 See
letter from TI–USA.
letter from Senators Cardin, Baldwin,
Brown, Coons, Durbin, Leahy, Markey, Menendez,
Markley, Shaheen, Warren, and Whitehouse (Feb. 5,
2016) (‘‘Sen. Cardin et al.’’) and letter from retired
Senators Lugar, Dodd, and Levin (Feb. 4, 2016)
(‘‘Sen. Lugar et al.’’).
37 Id.
38 See letters from BHP (‘‘Transparency by
governments and companies alike regarding
revenue flows from the extraction of natural
resources in a manner which is meaningful,
practical and easily understood by stakeholders
reduces the opportunity for corruption’’) and Total
S.A. (Jan. 13, 2016) (‘‘Total’’) (‘‘Total considers that
the re-introduction of Rule 13q–1 under the Dodd
Frank Act should both restore a level playing field
among major publicly-listed oil and gas companies
and improve transparency to help combat global
corruption and increase accountability.’’).
39 We look to the EITI because it is a significant
international transparency framework, it was
mentioned in the legislative history of Section
13(q), and the definition of ‘‘payment’’ in Section
13(q)(1)(C)(ii) [15 U.S.C. 78m(q)(1)(C)(ii)]
specifically refers to the EITI. See, e.g., 156 Cong.
Rec. S3816 (daily ed. May 17, 2010) (Statement of
Senator Lugar) (‘‘This domestic action will
complement multilateral transparency efforts such
as the Extractive Industries Transparency
Initiative—the EITI—under which some countries
are beginning to require all extractive companies
operating in their territories to publicly report their
payments.’’).
40 See Section III.B.2.b below for our estimates
regarding the number of resource extraction issuers
36 See
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1. European Economic Area
The European Parliament and Council
of the European Union adopted two
directives that include payment
disclosure rules.41 The EU Accounting
Directive and the EU Transparency
Directive (the ‘‘EU Directives’’) are very
similar to each other in content. They
determine the applicability and scope of
the disclosure requirements and set the
baseline in each EU member state and
European Economic Area (‘‘EEA’’) 42
country for annual disclosure
requirements for oil, gas, mining, and
logging companies concerning the
payments they make to governments on
a per country and per project basis.43
The EU Accounting Directive regulates
the provision of financial information
by all ‘‘large’’ companies 44 incorporated
under the laws of an EU member state
or those of an EEA country, even if the
company is privately held. It requires
covered oil, gas, mining, and logging
companies to disclose specified
payments to governments. The EU
Transparency Directive applies these
disclosure requirements to all
companies listed on EU-regulated
markets 45 even if they are not registered
that are already subject to other disclosure regimes.
We estimate that approximately 25% of resource
extraction issuers are already subject to the EU
Directives or ESTMA, but this percentage does not
include resource extraction issuers subject to the
EITI.
41 Directive 2013/34/EU of the European
Parliament and of the Council of 26 June 2013 on
the annual financial statements, consolidated
financial statements and related reports of certain
types of undertakings (‘‘EU Accounting Directive’’);
and Directive 2013/50/EU of the European
Parliament and of the Council of 22 October 2013
amending Directive 2004/109/EC on transparency
requirements in relation to information about
issuers whose securities are admitted to trading on
a regulated market, Directive 2003/71/EC of the
European Parliament and of the Council on the
prospectus to be published when securities are
offered to the public or admitted to trading and
Commission Directive 2007/14/EC on the
implementation of certain provisions of Directive
2004/109/EC (‘‘EU Transparency Directive’’).
42 See European Commission Memo (June 12,
2013) (‘‘Commissioner Barnier welcomes European
Parliament vote on the Accounting and
Transparency Directives (including country by
country reporting)’’). The EEA is composed of the
EU member states plus Iceland, Liechtenstein, and
Norway.
43 Unlike the proposed rules and the rules we are
adopting today, the EU Directives also apply to
companies active in the logging of primary forests.
44 See Article 3(4) of the EU Accounting Directive,
which defines large companies (i.e., ‘‘large
undertakings’’) to mean those which on their
balance sheet dates exceed at least two of the three
following criteria: (a) Balance sheet totaling Ö20
million (approximately $22.5 million (USD) as of
June 16, 2016); (b) net turnover of Ö40 million
(approximately $44.9 million (USD) as of June 16,
2016); and (c) average number of employees of 250.
45 The term ‘‘regulated market’’ is defined in the
EU’s Markets in Financial Instruments Directive
2004/39/EC (‘‘MiFID’’), as amended by 2010/78/EU.
The list of regulated markets can be found on the
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in the EEA or are incorporated in other
countries.46 The EU Directives also
apply to payments made by entities that
are part of a company’s consolidated
report.47
The EU Directives generally cover the
following activities: ‘‘exploration,
prospection, discovery, development,
and extraction of minerals, oil, natural
gas deposits or other materials.’’ 48 The
types of payments that must be
disclosed when made in connection
with those activities include: (a)
Production entitlements; (b) taxes levied
on the income, production, or profits of
companies, excluding taxes levied on
consumption such as value added taxes,
personal income taxes, or sales taxes; (c)
royalties; (d) dividends; (e) signature,
discovery, and production bonuses; (f)
license fees, rental fees, entry fees, and
other considerations for licenses and/or
concessions; and (g) payments for
infrastructure improvements.49 These
payments are covered whether made ‘‘in
money or in kind.’’ 50
Disclosure of payments is made on a
per project and per government basis.
‘‘Project’’ is defined as ‘‘the operational
activities that are governed by a single
contract, license, lease, concession or
similar legal agreements and form the
basis for payment liabilities with a
government.’’ 51 The definition goes on
to state that ‘‘if multiple such
agreements are substantially
interconnected, this shall be considered
a project.’’ 52 ‘‘Substantially
interconnected’’ under the EU
Directives means ‘‘a set of operationally
and geographically integrated contracts,
licenses, leases or concessions or related
agreements with substantially similar
terms that are signed with a
government, giving rise to payment
liabilities.’’ 53
The EU Directives require public
disclosure of the payment information,
including the issuer’s identity.54
Further, the EU Directives do not
provide any exemptions unique to the
resource extraction payment disclosure
European Securities and Markets Authority’s Web
site at https://registers.esma.europa.eu/publication/
searchRegister?core=esma_registers_mifid_rma (last
visited June 16, 2016).
46 See EU Transparency Directive, Art. 2(1)(d) and
Art. 6.
47 See, e.g., EU Accounting Directive, Art. 44.
48 EU Accounting Directive, Art. 41(1).
49 See, e.g., EU Accounting Directive, Art. 41(5).
50 Id.
51 See, e.g., EU Accounting Directive, Art. 41(4).
52 Id. Contrary to the proposed rules and those we
are adopting today, the EU Directives appear to
require aggregation of ‘‘substantially
interconnected’’ agreements rather than providing
such aggregation as an option.
53 See, e.g., EU Accounting Directive, Recital 45.
54 See, e.g., EU Accounting Directive, Arts. 43, 45.
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requirements. They do, however, allow
issuers to use reports prepared for
foreign regulatory purposes to satisfy
their disclosure obligations under EU
law if those reports are deemed
equivalent pursuant to specified
criteria.55 These criteria include: (i)
Target undertakings; (ii) target
recipients of payments; (iii) payments
captured; (iv) attribution of payments
captured; (v) breakdown of payments
captured; (vi) triggers for reporting on a
consolidated basis; (vii) reporting
medium; (viii) frequency of reporting;
and (ix) anti-evasion measures. No
equivalency determinations have been
made to-date in the EEA.
Member states are granted some
leeway for when the report is due and
what penalties will result from
violations of the regulations.56 Required
public disclosure of payments in an
annual report by companies has begun
in the European Union 57 and will occur
in all European Union and EEA member
countries once the essential provisions
have been transposed into domestic law
in each country.58
55 See,
e.g., EU Accounting Directive, Arts. 46, 47.
e.g., EU Accounting Directive, Art. 45
(‘‘The report . . . on payments to governments shall
be published as laid down by the laws of each
Member State . . . .’’); Id. at Article 51 (‘‘Member
States shall provide for penalties applicable to
infringements of the national provisions adopted in
accordance with this Directive . . . .’’).
57 See, e.g., RDS Report discussed in note 302
below.
58 The requirements of the EU Directives are
implemented through the enacting legislation of
each EEA member country. The deadlines for
implementing the EU Accounting Directive and the
EU Transparency Directive were July 20, 2015 and
November 26, 2015 respectively. It is our
understanding that as of the date of this release, 24
countries have implemented the EU Accounting
Directive and 15 countries have implemented the
EU Transparency Directive. In general, non-EU EEA
countries enact implementing legislation after an
EU Directive is adopted into the EEA by Joint
Committee decision. The EEA Joint Committee
adopted the Accounting Directive on October 30,
2015. As of the date of this release, it is our
understanding that the EEA Joint Committee has
not yet adopted a decision on the Transparency
Directive. As of June 16, 2016, Austria, Belgium,
Croatia, the Czech Republic, Denmark, Estonia,
Finland, France, Germany, Hungary, Italy, Latvia,
Lithuania, Lithuania, Luxembourg, Malta, The
Netherlands, Poland, Portugal, Romania, Slovakia,
Spain, Slovenia, Spain, Sweden, and the United
Kingdom have filed notifications of full
transposition (i.e., implementation) of the
Accounting Directive with the European
Commission. As of June 16, 2016, Austria, Croatia,
Cyprus, Estonia, Finland, France, Germany, Greece,
Hungary, Italy, Lithuania, The Netherlands,
Slovakia, Sweden, and the United Kingdom have
filed notifications of full transposition of the
Transparency Directive with the European
Commission. Norway, a non-EU member of the
EEA, adopted legislation that complies with both
the Accounting and Transparency Directives,
effective for fiscal years beginning on or after
January 1, 2014. Other EU and EEA member
countries are working towards implementation.
56 See,
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2. Canada
Canada also adopted a federal
resource extraction disclosure law, the
Extractive Sector Transparency
Measures Act (‘‘ESTMA’’) after the 2012
Adopting Release was issued.59 Since
the Proposing Release, Canada finalized,
substantially as proposed, its previously
issued ESTMA Guidance 60 and the
ESTMA Technical Reporting
Specifications (‘‘ESTMA
Specifications’’).61 ESTMA covers
entities that are engaged in the
commercial development of oil, gas, or
minerals or that control another entity
that is engaged in those activities,
subject to certain limitations.62 ESTMA
defines ‘‘control’’ as being controlled by
another entity ‘‘directly or indirectly, in
any manner,’’ including those entities in
a chain of control.63 The ESTMA
Guidance also addresses issues related
to how payments are reported in
situations of joint control.64
ESTMA defines ‘‘commercial
development of oil, gas or minerals’’ as
the exploration or extraction of oil, gas,
or minerals; the acquisition of a permit,
Updates about member country progress towards
full transposition can be found at: https://
ec.europa.eu/finance/enforcement/directives/index
_en.htm#accounting. See also letter from Arlene
McCarthy OBE (Mar. 8, 2016) (‘‘McCarthy’’) (stating
that ‘‘most Member States have transposed the EU
Directives’’).
59 See ESTMA, 2014 S.C., ch. 39, s. 376 (Can.),
which came into force on June 1, 2015.
60 ESTMA Guidance, available at https://
www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/
mining-materials//ESTMA-Guidance_e.pdf.
61 ESTMA Specifications, available at https://
www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/
mining-materials//ESTMA-Technical_e.pdf.
62 ESTMA, Section 2. The reporting obligation
applies to (a) an entity that is listed on a stock
exchange in Canada; (b) an entity that has a place
of business in Canada, does business in Canada or
has assets in Canada and that, based on its
consolidated financial statements, meets at least
two of the following conditions for at least one of
its two most recent financial years: (i) It has at
least $20 million (CAD) in assets (approximately
$15.4 million (USD) as of June 16, 2016), (ii) it has
generated at least $40 million (CAD) in revenue
(approximately $30.8 million (USD) as of June 16,
2016), (iii) it employs an average of at least 250
employees; and (c) any other prescribed entity.
ESTMA, Section 8.
63 ESTMA, Section 4(1)–(2). For example, in the
statute’s words an ‘‘entity that controls another
entity is deemed to control any entity that is
controlled, or deemed to be controlled, by the other
entity.’’ ESTMA, Section 4(2).
64 ESTMA Guidance, Section 3.6 clarifies that if
a Reporting Entity makes a payment, it must report
it, whether made as an operator of a joint
arrangement or as a member of a joint arrangement.
Also, if a payment is made by an entity that is not
subject to ESTMA but is controlled by a Reporting
Entity, the Reporting Entity must report it. Payment
attribution rules set out in ESTMA may apply in
situations of joint control. The ESTMA Guidance
goes on to say that Reporting Entities should
consider the facts and circumstances of payments
when determining whether to report and which
payments to report in situations of joint control.
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license, lease, or any other authorization
to carry out the exploration or extraction
of oil, gas, or minerals; or any other
prescribed activities in relation to oil,
gas, or minerals.65 The ESTMA
Guidance clarifies that exploration or
extraction refers to ‘‘the key phases of
commercial activity which occur during
the life cycle of an oil, gas or mineral
project’’ and extend to prospecting,
remediation, and reclamation.66 The
ESTMA Guidance also states that these
terms are not limited to ‘‘active phases
of operations on the ground, but also
captures temporary periods of
inactivity.’’ 67 The definition is not
meant to cover ancillary or preparatory
activities such as manufacturing
equipment or the construction of
extraction sites.68 The definition also
generally does not cover post-extraction
activities, such as refining, smelting,
processing, marketing, distribution,
transportation, or export.69
Nevertheless, certain initial processing
activities that are integrated with
extraction operations may be considered
commercial development of oil, gas, or
minerals.70
Canada’s regulations capture the
following payment types: Taxes (other
than consumption taxes and personal
income taxes); royalties; fees (including
rental fees, entry fees and regulatory
charges, as well as fees or other
consideration for licenses, permits or
concessions); production entitlements;
bonuses (including signature, discovery
and production bonuses); dividends
(other than dividends paid to payees as
ordinary shareholders); and
infrastructure improvement payments.71
The ESTMA Guidance also includes a
provision similar to the anti-evasion
provision included in the Proposing
Release. It states that entities should
look to the substance, rather than the
form, of payments in determining which
category is applicable, and that in
certain circumstances a philanthropic or
voluntary contribution made in lieu of
one of the payment categories would
need to be reported.72
Unlike the EU Directives, which do
not provide for any exemptions unique
to resource extraction payment
65 ESTMA, Section 2. Canada does not appear to
have prescribed any additional activities at this
time. See ESTMA Guidance, Section 1, which only
refers to the first two prongs of ESTMA’s definition
of ‘‘commercial development of oil, gas and
minerals.’’
66 ESTMA Guidance, Section 1.
67 Id.
68 Id.
69 Id.
70 Id.
71 ESTMA Guidance, Section 3.1.
72 ESTMA Guidance, Section 3.5.
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disclosure, ESTMA authorizes the
adoption of regulations respecting,
among other matters, ‘‘the
circumstances in which any provisions
of this Act do not apply to entities,
payments or payees.’’ 73 As of the date
of this release, the Minister of Natural
Resources Canada has not authorized
any regulations pursuant to that
provision that provide for exemptions
under ESTMA. ESTMA did, however,
defer the requirement for issuers to
report payments made to Aboriginal
governments in Canada until June 1,
2017.74
Canada has adopted project-level
reporting, and the definition of
‘‘project’’ used in the ESTMA
Specifications is identical to the
definition of that term in the EU
Directives.75 Reports prepared under
ESTMA must be published on the
internet ‘‘so they are available to the
public’’ and a link to the report must be
provided to the Canadian government.76
Like the EU Directives, ESTMA
allows for the Minister of Natural
Resources Canada to determine that the
requirements of another jurisdiction are
an acceptable substitute for the
domestic requirements.77 As noted in
the Proposing Release, on July 31, 2015
the Minister determined that the
reporting requirements set forth in the
EU Directives were an acceptable
substitute for Canada’s requirements
under ESTMA.78 Canada’s current
substitution policy makes an assessment
based on whether a jurisdiction’s
reporting requirements (1) achieve the
purposes of the reporting requirements
under ESTMA (as stated, to ‘‘deter
corruption through public
transparency’’) and (2) address a similar
scope of the reporting requirements
under ESTMA.79 Canada requires that
an issuer must be subject to the
reporting requirements of the other
jurisdiction and must have provided the
report to the other jurisdiction’s
competent authority. Although it has
adopted a reporting deadline of 150
days after the end of an issuer’s
financial (i.e., fiscal) year, Canada
73 See
ESTMA, Section 23(1).
Guidelines, Section 3.3.
75 See ESTMA Specifications, Section 2.3.2.
76 ESTMA Specifications, Section 2.4.
77 See ESTMA, Section 10(1) (‘‘If, in the
Minister’s opinion, and taking into account any
additional conditions that he or she may impose,
the payment reporting requirements of another
jurisdiction achieve the purposes of the reporting
requirements under this Act, the Minister may
determine that the requirements of the other
jurisdiction are an acceptable substitute . . . .’’).
78 Substitution Process and Determination,
available at https://www.nrcan.gc.ca/miningmaterials/estma/18196 (last visited June 16, 2016).
79 See id.
74 ESTMA
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allows for substituted reports to be filed
according to the other jurisdiction’s
deadline if the Department of Natural
Resources Canada is notified by email
within the 150 day period.80 If the other
jurisdiction’s deadline is shorter than
150 days, the issuer may still follow the
150 day deadline when submitting the
report in Canada.81
3. EITI
The EITI is a voluntary coalition of
oil, natural gas, and mining companies,
foreign governments, investor groups,
and other international organizations.
The coalition was formed to foster and
improve transparency and
accountability in resource-rich countries
through the publication and verification
of company payments and government
revenues from oil, natural gas, and
mining.82 A country volunteers to
become an EITI candidate and must
complete an EITI validation process to
become a compliant member.83
Currently 51 countries are EITI
implementing countries.84 Furthermore,
80 Id.
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81 Id.
82 See Implementing EITI for Impact-A Handbook
for Policymakers and Stakeholders (2011) (‘‘EITI
Handbook’’), at xii.
83 Notably, in enacting Section 13(q)’s mandatory
disclosure requirement, Congress sought to
complement the EITI’s existing voluntary
transparency efforts that too many countries and too
many companies either had not joined or would
not. 156 Cong. Rec. S3815 (May 17, 2010) (Sen.
Lugar). See also id. S3815 (May 17, 2010) (Sen.
Cardin) (stating that ‘‘We currently have a voluntary
international standard for promoting transparency.
A number of countries and companies have joined
[EITI], an excellent initiative that has made
tremendous strides in changing the cultural secrecy
that surrounds extractive industries. But too many
countries and too many companies remain outside
this voluntary system.’’); id. S3818 (May 17, 2010)
(Sen. Dodd) (stating that ‘‘broad new requirements
for greater disclosure by resource extractive
companies operating around the world . . . would
be an important step’’ to complement EITI’s
‘‘voluntary program’’).
84 See https://eiti.org/countries/ (last visited June
16, 2016). Of those, 31 have achieved ‘‘EITI
compliant’’ status, two have had their EITI status
temporarily suspended, and the rest are
implementing the EITI requirements but are not yet
compliant. Id. When becoming an EITI candidate,
a country must establish a multi-stakeholder group,
including representatives of civil society, industry,
and government, to oversee implementation of the
EITI. The stakeholder group for a particular country
agrees to the terms of that country’s EITI plan,
including the requirements for what information
will be provided by the governments and by the
companies operating in that country. Generally,
under the EITI, companies and the host country’s
government submit payment information
confidentially to an independent administrator
selected by the country’s multi-stakeholder group,
which is frequently an independent auditor. The
auditor reconciles the information provided to it by
the government and by the companies and produces
a report. While the information provided in the
reports varies among countries, the reports must
adhere to the EITI requirements provided in the
EITI Standard (2016). See the EITI’s Web site at
https://eiti.org (last visited June 16, 2016).
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several countries not currently a part of
the EITI have indicated their intention
to implement the EITI.85 We analyze the
EITI using the guidance in the EITI
Standard and the EITI Handbook on
what should be included in a country’s
EITI plan, as well as reports made by
EITI member countries.86 The U.S.
Extractive Industries Transparency
Initiative (‘‘USEITI’’) issued its first
report in December 2015.87 The report
covered payments made to the U.S.
Federal Government in 2013, including
$12.6 billion for extraction on federal
lands and $11.8 billion in corporate
income tax receipts from mining and
petroleum and coal products
manufacturing industries.88
At a minimum, the EITI requires the
disclosure of material payment and
revenue information related to the
upstream activities of exploration and
production, but permits each country’s
multi-stakeholder group to broaden the
scope of the EITI report to include
revenue streams (i.e., payments made in
cash or in kind) related to other natural
resource sectors, such as forestry, or to
those related to non-upstream activities,
such as export.89 Revenue streams
85 See https://eiti.org/countries/other (last visited
June 16, 2016).
86 The EITI Standard encompasses several
documents fundamental to the EITI: (1) The ‘‘EITI
Principles,’’ which set forth the general aims and
commitments of EITI participants; (2) the ‘‘EITI
Requirements,’’ which must be followed by
countries implementing the EITI; (3) the
‘‘Validation Guide,’’ which provides guidance on
the EITI validation process; (4) the ‘‘Protocol:
Participation of Civil Society,’’ which provides
guidance regarding the role of civil society in the
EITI; and (5) documents relevant to the governance
and management of the EITI (e.g., the EITI Articles
of Association, the EITI Openness Policy, and the
EITI Code of Conduct). The EITI Handbook
provides guidance on implementing the EITI,
including overcoming common challenges to EITI
implementation. All references to the EITI Standard
are to the 2016 edition.
87 The Executive Summary and other aspects of
the USEITI 2015 Report are available at https://
useiti.doi.gov/about/report/. In December 2012, the
U.S. Government established a multi-stakeholder
group, the USEITI Advisory Committee, headed by
the Department of the Interior (‘‘Department of
Interior’’) and including the Departments of Energy
and Treasury, as well as members of industry and
civil society. See Multi-Stakeholder Group List of
Members, at https://www.doi.gov/eiti/FACA/upload/
List-of-Members_03-16-15.pdf. On March 19, 2014,
the United States completed the process of
becoming an EITI candidate country.
88 Revenues reported to the federal government
were for the fiscal year ended September 30, 2013.
Corporate income taxes and most other payments
were reported as of the calendar year ended
December 31, 2013. See the 2015 USEITI Executive
Summary at 2.
89 See EITI Standard at 22–23 and EITI Handbook
at 31 and 33. As an initial matter, each country’s
multi-stakeholder group is required to establish the
thresholds for materiality and to determine which
payments and revenues are material. While the EITI
Standard requires each implementing country to
provide export data for the fiscal year covered by
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49365
required to be disclosed under the EITI
include production entitlements to the
host government and to its national,
state-owned company; profits taxes;
royalties; dividends; bonuses, such as
signature, discovery and production
bonuses; and license fees, including
rental fees, entry fees and other
considerations for licenses or
concessions.90 The EITI also requires
the disclosure of any other ‘‘significant
payment’’ and ‘‘material benefit’’ to the
host government.91 These include
material infrastructure works,92 as well
as material social expenditures if
mandated by law or contract.93
The EITI has long required the
disclosure of the particular type of
revenue stream and government entity
that received each payment in the EITI
Report.94 Since 2013, the EITI has also
required the public reporting of these
revenue streams by individual
company, rather than as aggregated data,
and by project, provided that such
project level disclosure is consistent
with the European Union and
Commission rules.95
Currently each implementing
country’s multi-stakeholder group
determines which companies should be
included in the EITI Report. Out of
concern that developing countries have
lost significant revenues ‘‘as a result of
corrupt or illegal deals’’ involving
‘‘anonymous companies’’ that have
‘‘hidden behind a structure of complex
and secret company ownership,’’ 96 the
EITI has recently commenced a process
that, by January 2020, will require
individual companies that bid for,
operate or invest in the extractive assets
of an EITI implementing country to
identify their beneficial owners,
disclose the level of ownership, and
describe how ownership or control is
exerted in the EITI Report.97
the EITI Report, including total export volumes and
the value of exports by commodity, the reporting of
export payments by individual companies is not
required and is at the option of the multistakeholder group.
90 See EITI Standard at 23.
91 See EITI Standard at 23.
92 See EITI Standard at 24.
93 See EITI Standard at 28. In addition, if the
multi-stakeholder group determines that revenues
from the transportation of oil, gas and minerals are
material, the EITI expects governments and stateowned enterprises to disclose the revenues
received. See EITI Standard at 24.
94 See, e.g., the EITI Source Book (2005) at 26.
95 See EITI Standard at 25.
96 See EITI Beneficial Ownership Fact Sheet
(2016) available at https://eiti.org/files/eiti_bo_
factsheet_en_final_may_2016.pdf.
97 See EITI Standard at 19–21; see also EITI
Beneficial Ownership Fact Sheet. Currently the EITI
requires that, by January 1, 2017, each multistakeholder group publish a roadmap for disclosing
the beneficial ownership information mandated in
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D. Summary of the Final Rules
The final rules, which are described
in more detail in Part II below, are being
adopted mostly as proposed, with a few
significant changes based on feedback
from commenters and other
developments since the Proposing
Release was issued. The final rules
require resource extraction issuers to
file a Form SD on an annual basis that
includes information about payments
related to the commercial development
of oil, natural gas, or minerals that are
made to governments. The following are
key provisions of the final rules:
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• The term ‘‘resource extraction issuer’’
means all U.S. companies and foreign
companies that are required to file annual
reports pursuant to Section 13 or 15(d) of the
Exchange Act 98 and are engaged in the
commercial development of oil, natural gas,
or minerals.
• The term ‘‘commercial development of
oil, natural gas, or minerals’’ means,
consistent with Section 13(q), exploration,
extraction, processing, and export, or the
acquisition of a license for any such activity.
• The term ‘‘payment’’ means payments
that are made to further the commercial
development of oil, natural gas, or minerals,
are ‘‘not de minimis,’’ and includes taxes,
royalties, fees (including license fees),
production entitlements, and bonuses,
consistent with Section 13(q), as well as
community and social responsibility
payments (‘‘CSR payments’’) that are
required by law or contract, dividends, and
payments for infrastructure improvements.
• ‘‘Not de minimis’’ means any payment,
whether a single payment or a series of
related payments, that equals or exceeds
$100,000 during the most recent fiscal year.
• A resource extraction issuer is required
to disclose payments made by its subsidiaries
and other entities under its control. Under
the final rules, an issuer must disclose the
payments made by entities that are
consolidated, or its proportionate amount of
the payments made by entities or operations
that are proportionately consolidated, in its
consolidated financial statements as
determined by applicable accounting
principles.99
2020. The EITI also recommends that each
implementing country establish a public register of
beneficial ownership to the extent none exists. See
EITI Standard at 19–21. The EITI defines
‘‘beneficial ownership’’ to mean ‘‘the natural
person(s) who directly or indirectly ultimately
owns or controls the corporate entity.’’ EITI
Standard at 20. We note that, in these ways, the
EITI is concerned with more than just the actual
revenue flows that result after a deal is entered, but
is also concerned with providing transparency so
that citizens and civil society can help ensure that
the deals themselves do not involve corrupt or
suspect arrangements. As we discuss below in
Section II.E, we similarly believe that Section 13(q)
is concerned not just with corruption after a deal
is entered, but also with exposing potential
corruption that may surround the underlying deal
and the resulting payment flows.
98 15 U.S.C. 78m and 78o(d).
99 We note that Exchange Act Rule 12b–21
provides that required information need be given
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• The term ‘‘project’’ means operational
activities that are governed by a single
contract, license, lease, concession, or similar
legal agreement, which form the basis for
payment liabilities with a government.
Agreements that are both operationally and
geographically interconnected may be treated
by the resource extraction issuer as a single
project.
• The term ‘‘foreign government’’ means a
foreign government, a department, agency, or
instrumentality of a foreign government, or a
company at least majority owned by a foreign
government. It includes a foreign national
government as well as a foreign subnational
government, such as the government of a
state, province, county, district,
municipality, or territory under a foreign
national government.
• The term ‘‘Federal Government’’ means
the United States Federal Government.
• A resource extraction issuer must file its
payment disclosure on Form SD using the
Commission’s Electronic Data Gathering,
Analysis, and Retrieval System (‘‘EDGAR’’),
no later than 150 days after the end of its
fiscal year. In addition to this EDGAR
compilation of Form SD filings, a separate
public compilation of the payment
information submitted in the Form SD filings
will be made available online by the
Commission’s staff.
• A resource extraction issuer must
disclose the payment information and its
identity publicly.
• The final rules include two exemptions
that provide for transitional relief or delayed
reporting in limited circumstances. These
exemptions provide a longer transition
period for recently acquired companies that
were not previously subject to reporting
under the final rules and a one-year delay in
reporting payments related to exploratory
activities. In addition, resource extraction
issuers may apply for, and the Commission
will consider, exemptive relief for other
situations on a case-by-case basis pursuant to
Rule 0–12 of the Exchange Act.100
• Resource extraction issuers may use
alternative reports to comply with the final
rules if the Commission determines that the
requirements applicable to those reports are
substantially similar to our own.101
• The Commission has determined that the
current reporting requirements of the EU
Directives, Canada’s ESTMA, and the USEITI
are substantially similar to the final rules,
subject to the conditions specified below in
Section II.J. Applications for additional
alternative reporting determinations may be
submitted under Rule 0–13 by issuers,
governments, industry groups, and trade
associations.
• Resource extraction issuers, including
those using alternative reports, must present
the payment disclosure using the eXtensible
Business Reporting Language (‘‘XBRL’’)
electronic format and the electronic tags
identified in Form SD. The tags listed in
Form SD include those specified in Section
As we discuss more fully throughout
the remainder of this release, in
developing the final rules we have
sought to balance the various statutory
interests at issue in this rulemaking: On
the one hand, providing transparency to
help combat corruption and promote
accountability, and on the other hand,
doing so in ways that reflect a
consideration of competition, efficiency,
capital formation, and costs.102 For
example, with regard to the appropriate
definition of project and the public
disclosure of each issuer’s annual
reports—two discretionary decisions
that, in many respects, are central to the
transparency regime being adopted—we
determined that the anti-corruption and
accountability concerns underlying
Section 13(q) will be significantly
advanced by the public disclosure of
each issuer’s contract-based payment
data. In making these discretionary
decisions, we were mindful of the
potential economic consequences that
issuers might experience. As another
example of our consideration of the
various policy interests at stake, given
the potential for competitive harm to
issuers, we are adopting a targeted
exemption to permit issuers to delay
reporting payment information in
connection with certain exploratory
activities for one year. Further, we
intend to consider using our existing
authority under the Exchange Act to
afford resource extraction issuers
exemptive relief when other
circumstances warrant. For example,
issuers may seek exemptive relief when
foreign laws may prohibit the Section
13(q) disclosures. This exemptive
process should help mitigate the final
rules’ potential adverse effects on
issuers while still preserving the
transparency objectives of the statute.
Similarly, we have adopted a revised
definition of control and allowed for
issuers to satisfy the rules’ requirements
by providing reports prepared in
compliance with other jurisdictions’
reporting requirements, which should
only insofar as it is known or reasonably available
to the registrant, subject to certain conditions. 17
CFR 240.12b–21.
100 17 CFR 240.0–12.
101 See Item 2.01(c) of Form SD.
102 See letter from API 1 (Feb. 16, 2016) (‘‘API 1’’)
(asserting that Congress intended that the
Commission consider investor protection, as well as
competition, efficiency, and cost concerns, when
issuing the final rules under Section 13(q)).
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13(q), as well as tags for the type and total
amount of payments made for each project,
the type and total amount of payments made
to each government, the particular resource
that is the subject of commercial
development, and the subnational geographic
location of the project.
• Resource extraction issuers are required
to comply with the rules starting with their
fiscal year ending no earlier than September
30, 2018.
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help lower direct compliance costs for
issuers.
II. Final Rules Under Section 13(q)
A. Definition of ‘‘Resource Extraction
Issuer’’
1. Proposed Rules
Section 13(q) defines a ‘‘resource
extraction issuer’’ as an issuer that is
‘‘required to file an annual report with
the Commission’’ and ‘‘engages in the
commercial development of oil, natural
gas, or minerals.’’ 103 The proposed
definition followed the statute without
providing any exemptions based on
size, ownership, foreign private issuer
status,104 or the extent of business
operations constituting commercial
development of oil, natural gas, or
minerals.
We proposed to cover only issuers
filing annual reports on Forms 10–K,
20–F, or 40–F.105 Specifically, the
proposed rules defined the term
‘‘resource extraction issuer’’ to mean an
issuer that is required to file an annual
report with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act
and that engages in the commercial
development of oil, natural gas, or
minerals. The proposed definition
excluded issuers subject to Tier 2
reporting requirements under
Regulation A or subject to Regulation
Crowdfunding’s reporting requirements.
In addition, we did not subject
investment companies registered under
the Investment Company Act of 1940
(‘‘Investment Company Act’’) to the
proposed rules.
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on whether certain categories
of issuers should be exempt from the
rules, such as smaller reporting
companies, emerging growth
companies, or foreign private issuers.106
In addition to these categories addressed
in existing Commission rules, we asked
whether the Commission should exempt
issuers based on a financial test that
would measure the likelihood of the
issuer making resource extraction
payments above the proposed de
103 Section
13(q)(1)(D).
did not, however, propose to extend the
disclosure requirements to foreign private issuers
that are exempt from Exchange Act registration and
reporting obligations pursuant to Exchange Act
Rule 12g3–2(b).
105 See Section II.A of the Proposing Release.
106 See the definition of ‘‘smaller reporting
company’’ in Exchange Act Rule 12b–2 [17 CFR
240.12b–2], the definition of ‘‘emerging growth
company’’ in Exchange Act Section 3(a)(80) [15
U.S.C. 78c(a)(80)], and the definition of ‘‘foreign
private issuer’’ in Exchange Act Rule 3b–4 [17 CFR
240.3b–4].
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104 We
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minimis threshold. We offered the
example of using annual revenues and
net cash flows from investing activities
to make this measurement. We also
solicited comment on whether, instead
of an exemption, the rules should
provide for different disclosure and
reporting obligations for certain types of
issuers. Finally, we solicited comment
on whether we should provide for a
delayed implementation date for certain
categories or types of issuers in order to
provide them additional time to prepare
for the disclosure requirements and the
benefit of observing how other
companies comply.107
Only one commenter on the
Proposing Release recommended
changing the scope of the definition of
resource extraction issuer to add an
exemption based on the type of
issuer.108 This commenter sought an
exemption for foreign private issuers on
the grounds that issuers should only
bear the compliance burden associated
with their home jurisdiction. Other
commenters on the Proposing Release
that addressed this topic were generally
supportive of the proposed definition of
‘‘resource extraction issuer’’ and
opposed excluding any category of
issuer from the definition.109 No
commenter specifically addressed our
exclusion of investment companies and
companies required to file annual
reports other than pursuant to Section
13 or 15(d) of the Exchange Act.
Of the commenters that expressed
support for the proposed definition,
several indicated that the proposed
rules did not present unique challenges
for particular categories of issuers and
thus no exemptions were necessary.110
One of these commenters stated that
because smaller reporting companies
and foreign private issuers were
exposed to significant political
regulatory risks, excluding them would
undermine the value of the rules to
investors.111 The Department of Interior
107 For a discussion of this request for comment,
see Section II.G below.
108 See letter from BP p.l.c. (Feb. 16, 2016) (‘‘BP’’).
109 See letters from Africa Centre for Energy
Policy (Feb. 16, 2016) (‘‘ACEP’’); Calvert
Investments (Feb. 16, 2016) (‘‘Calvert’’); U.S.
Department of Interior, Office of Natural Resources
Revenue (Feb. 17, 2016) (‘‘Department of Interior’’);
Form Letter A; Form Letter B; Global Witness (Feb.
16, 2016) (‘‘Global Witness 1’’); Oxfam America
(Feb. 16, 2016) (‘‘Oxfam 1’’); Natural Resource
Governance Institute (First of two letters on Feb. 16,
2016) (‘‘NRGI 1’’); Sarah Peck and Sarah Chayes
(Feb. 16, 2016) (‘‘Peck & Chayes’’); PWYP–US 1;
Jacqueline Quinones (Feb. 4, 2016) (‘‘Quinones’’);
Sen. Cardin et al.; Sen. Lugar et al.; TI–USA; and
US SIF: The Forum for Sustainable and Responsible
Investment (Mar. 8, 2016) (‘‘USSIF’’).
110 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
111 See letter from USSIF.
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noted that the USEITI covers all
companies that conduct extractive
activities on public and tribal lands in
the United States, without
exemption.112 It also recommended not
providing an exemption that would
allow an issuer to avoid reporting in a
subsequent year based on financial
metrics due to the ‘‘cyclical nature of
extractive commodity prices.’’
3. Final Rules
We are adopting the proposed
definition of ‘‘resource extraction
issuer.’’ Under the final rules, resource
extraction issuers are issuers that are
required to file an annual report with
the Commission pursuant to Section 13
or 15(d) of the Exchange Act and engage
in the commercial development of oil,
natural gas, or minerals.113
As discussed above, almost all of the
commenters on the Proposing Release
supported the proposed definition or
called for the rules to cover all
companies without exemptions. We
disagree with the commenter that
suggested foreign private issuers should
be excluded from the definition of
‘‘resource extraction issuer.’’ 114 This
commenter stated that an exemption for
all foreign private issuers was justifiable
so that issuers only bear the compliance
burden associated with one set of
transparency rules. We note, however,
that not all foreign private issuers will
be required to report in other
jurisdictions. Further, even if the issuer
is required to file reports in another
jurisdiction, an exemption for all foreign
private issuers leaves open the
possibility that the foreign private
issuer’s reporting could be pursuant to
a jurisdiction’s requirements that are
significantly different than the
Commission’s rules. Instead, we believe
that it is more appropriate to address
concerns over duplicative reporting
through the alternative reporting
provisions we are adopting today.115
No commenters on the Proposing
Release specifically requested that the
Commission extend the disclosure
requirements to foreign private issuers
that are exempt from Exchange Act
registration and reporting obligations
112 Letter
from Department of Interior.
continue to interpret ‘‘engages’’ as used in
Section 13(q) and Rule 13q–1 to include indirectly
engaging in the specified commercial development
activities through an entity under a company’s
control. See Section II.D below for a discussion of
‘‘control’’ as used in the final rules. See also
Proposing Release, n. 101.
114 See letter from BP.
115 See Section II.J below. We note that the
commenter that raised these concerns indicated that
if the Commission did not adopt an exemption for
foreign private issuers, it would support an
alternative reporting provision. See letter from BP.
113 We
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pursuant to Exchange Act Rule 12g3–
2(b). As we discussed in the Proposing
Release,116 we continue to believe that
expanding the statutory definition to
include such issuers is not appropriate
because it would discourage reliance on
Rule 12g3–2(b) and would be
inconsistent with the effect, and we
believe the purpose, of that rule.117
Although, as we stated in the
Proposing Release, we believe that the
statutory language could reasonably be
read either to cover or to exclude issuers
that file annual reports on forms other
than Forms 10–K, 20–F, and 40–F, we
also continue to believe that covering
other issuers would do little to further
the transparency objectives of Section
13(q). It would, however, add costs and
burdens to the existing disclosure
regimes governing those categories of
issuers. For example, and as noted in
the Proposing Release, none of the
Regulation A issuers with qualified
offering statements between 2009 and
2014 appear to have been resource
extraction issuers at the time of those
filings.118 That remains the case for
Regulation A issuers that qualified
offering statements in 2015. We also
continue to believe that it is unlikely
that an entity that fits within the
definition of an ‘‘investment
company’’ 119 would be one that is
‘‘engag[ing] in the commercial
development of oil, natural gas, or
minerals.’’ Accordingly, the final rules
116 See
Section II.A. of Proposing Release.
we discussed in the Proposing Release,
Rule 12g3–2(b) provides relief to foreign private
issuers that are not currently Exchange Act
reporting companies (i.e., they are neither listed nor
have made a registered offering in the United
States) and whose primary trading market is located
outside the United States. In these circumstances,
we do not believe it would be appropriate to require
foreign private issuers whose connections with the
U.S. markets do not otherwise require them to make
reports with the Commission to undertake such an
obligation solely for the purpose of providing the
required payment information. Moreover, imposing
a reporting obligation on such issuers would seem
to go beyond what is contemplated by Section
13(q), which defines a ‘‘resource extraction issuer’’
as an issuer that is ‘‘required to file an annual report
with the Commission.’’
118 Based on a review of their assigned Standard
Industrial Classification (SIC) codes. We recognize
that Tier 2 of Regulation A, with a maximum
offering amount of $50 million, is still relatively
new and that the types of companies previously or
currently using Regulation A may not be
representative of its future use. In addition, since
Regulation A issuers were not required to file
annual reports when Section 13(q) was enacted, it
seems unlikely that Congress contemplated
Regulation A issuers having to comply with Section
13(q). Given the added costs and burdens discussed
in the Proposing Release, we continue to believe
that it is not prudent to extend the rule to
Regulation A issuers at this time. See Proposing
Release, Section II.A.
119 See Section 3(a)(1) of the Investment Company
Act (15 U.S.C. 80a–3(a)(1)).
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we are adopting will not apply to such
issuers.120
B. Definition of ‘‘Commercial
Development of Oil, Natural Gas, or
Minerals’’
1. Proposed Rules
Section 13(q) defines ‘‘commercial
development of oil, natural gas, or
minerals.’’ Consistent with the statute,
we proposed defining ‘‘commercial
development of oil, natural gas, or
minerals’’ as exploration, extraction,
processing, and export of oil, natural
gas, or minerals, or the acquisition of a
license for any such activity. Although
we have discretionary authority to
include other significant activities
relating to oil, natural gas, or
minerals,121 we did not propose
expanding the definition beyond the
explicit terms of Section 13(q).
As discussed in the Proposing
Release, the proposed definition of
‘‘commercial development’’ was
intended to capture only activities that
are directly related to the commercial
development of oil, natural gas, or
minerals, and not activities ancillary or
preparatory to such commercial
development.122 We also proposed
additional guidance on several terms
contained within the definition of
‘‘commercial development of oil,
natural gas, or minerals.’’ 123 For
example, we identified activities that
would be covered by the terms
‘‘extraction’’ and ‘‘export,’’ and we
provided examples of the activities that
would be covered by the term
‘‘processing.’’ 124
2. Comments on the Proposed Rules
a. Scope of the Definition
In the Proposing Release we solicited
comment on how we should define
‘‘commercial development of oil,
natural gas, or minerals.’’ For example,
we asked whether the definition should
include any activities that were not
expressly identified in the statute and
what definition would further the U.S.
Government’s foreign policy objective of
battling corruption through improved
transparency. In light of the
Commission’s general exemptive
authority, we solicited comment on
whether certain activities listed in the
statute should be excluded from the
definition. We also sought input on
whether activities that are ancillary or
120 See Proposing Release, Section II.A for a
discussion of the factors we considered.
121 See Section 13(q)(1)(A).
122 See Proposing Release, at Section II.B.
123 Id.
124 Id. See also Section II.B.1.3 below for a
discussion of this guidance.
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preparatory to resource extraction
should be included in the activities
covered by the rules and whether the
Commission should provide additional
guidance on the types of activities that
would be considered ‘‘directly related’’
to the ‘‘commercial development of oil,
natural gas, or minerals.’’
All but one of the commenters that
addressed this aspect of the Proposing
Release supported the proposed
definition,125 stating that it was
consistent with established
international transparency standards.126
An industry commenter disputed that
view, but otherwise generally supported
the proposed definition.127 The
Department of Interior also supported
the definition despite noting that the
USEITI does not cover revenues from
processing, exporting, or the acquisition
of licenses to engage in those
activities.128
b. Guidance on ‘‘Extraction,’’
‘‘Processing,’’ and ‘‘Export’’
In the Proposing Release we solicited
comment on whether additional
guidance should be provided on the
activities covered by the terms
‘‘extraction,’’ ‘‘processing,’’ or ‘‘export’’
and whether the proposed definitions
and guidance were too narrow or too
broad. For the term ‘‘export,’’ we
specifically asked whether the
definition should be broadened to
include all transportation from one
country to another, regardless of
ownership interest or whether the
resource originated in the country from
which it is being transported.
Several commenters supported the
proposed definition of ‘‘extraction’’ and
the proposed guidance on
‘‘processing.’’ 129 Certain commenters,
however, recommended providing
additional guidance on ‘‘processing.’’ 130
125 See letters from ACEP; Department of Interior;
Exxon Mobil Corp. (Mar. 8, 2016) (‘‘ExxonMobil
2’’); Global Witness 1; Oxfam 1; and PWYP–US 1.
One commenter, Encana Corporation, did not
expressly support or object to our definition of
commercial development of oil, natural gas, or
minerals, but rather requested that the Commission
provide additional guidance ‘‘to clarify the
activities covered by the proposed terms used to
define ‘commercial development of oil, natural gas,
or minerals.’ ’’ See letter from Encana Corporation
(Jan. 25, 2016) (‘‘Encana’’). Specifically, Encana
requested guidance that would ‘‘reflect consistency
with the definition of ‘‘Oil and Gas Producing
Activities’’ in Rule 4–10 of Regulation S–X and
‘‘exclude post-extraction activities such as refining,
smelting, processing, marketing, distribution,
transportation, or export.’’
126 See, e.g., letter from PWYP–US 1.
127 See letter from ExxonMobil 2.
128 See letter from Department of Interior.
129 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
130 See letters from Encana and Petroleo Brasileiro
´
S.A. (Feb. 16, 2016) (‘‘Petrobras’’).
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For example, one commenter requested
clarification that ‘‘processing’’ only
includes ‘‘initial processing activities
that are integrated with extraction
operations’’ and ‘‘does not extend to
ancillary or preparatory activities such
as manufacturing equipment or
construction of extraction sites.’’ 131
Another commenter requested
additional guidance on the scope of
‘‘midstream’’ activities that would be
covered by ‘‘processing.’’ 132
As for the definition of ‘‘export,’’ one
commenter requested clarification on
whether that term covers commodity
trading-related activities and situations
such as when an issuer exports oil,
natural gas, or minerals purchased from
a government or from a state-owned
company.133 Another commenter
requested clarification of the term
‘‘mineral,’’ stating that it could have a
variety of meanings, such as
homogeneous crystalline substances
(which would exclude gravel or noncrystalline rocks) or naturally occurring
inorganic solids (which would exclude
coa1).134
3. Final Rules
We are adopting the proposed
definition of ‘‘commercial development
of oil, natural gas, or minerals’’ but with
additional guidance on its application.
Although commenters pointed out that
both the statutory definition and the
proposed definition are broader than the
activities typically covered by the
EITI 135 and, in some respects, other
comparable disclosure regimes,136 most
commenters supported the proposal.
Despite one commenter’s
recommendation that the final rules
exclude ‘‘processing’’ and ‘‘export,’’
both terms are expressly included in the
statutory definition, and we believe that
these are important aspects of the
commercial development of oil, natural
gas, or minerals.137 Although there are
131 See
letter from Encana.
letter from Petrobras.
133 See letter from Poretti.
134 See letter from Keith Bishop (Jan. 5, 2016)
(‘‘Bishop’’).
135 An EITI plan typically covers the ‘‘upstream
activities’’ of exploration and production but not
‘‘downstream activities,’’ such as processing or
export. The relevant multi-stakeholder group does,
however, have the option of expanding the scope
of its EITI program by including some downstream
activities. See the EITI Handbook, at 35.
136 For example, as discussed in Section I.C.1–2
above, processing, export, and the acquisition of
licenses are not specifically mentioned by the EU
Directives, and ESTMA generally does not include
processing or export.
137 See letter from Encana. In light of the statutory
definition and the purpose of Section 13(q), we are
not narrowing the definition of ‘‘commercial
development’’ to make it consistent with the
definition of ‘‘Oil and Gas Producing Activities’’ in
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differences between the definition we
are adopting today and that used in
other transparency regimes, we believe
our approach enhances international
transparency by covering activities
similar to those covered by the EU
Directives, Canada’s ESTMA, and the
EITI, while remaining consistent with
Section 13(q).138 In this regard, the final
rules focus only on issuers engaged in
the extraction or production of oil,
natural gas, or minerals. Where a service
provider makes a payment to a
government on behalf of a resource
extraction issuer that meets the
definition of ‘‘payment,’’ the resource
extraction issuer will be required to
disclose such payment.
Although we are adopting the general
definition of ‘‘commercial development
of oil, natural gas, or minerals’’ as
proposed, as well as reiterating much of
the related guidance, we are revising
certain key terms found in that
definition in response to commenters’
concerns. We note, however, that
whether an issuer is a resource
extraction issuer ultimately depends on
the specific facts and circumstances. We
are adopting the definition of
‘‘extraction’’ as proposed. Thus,
‘‘extraction’’ means the production of
oil and natural gas as well as the
extraction of minerals.139 Also as
proposed, ‘‘processing’’ includes, but is
not limited to, midstream activities such
as the processing of gas to remove liquid
hydrocarbons, the removal of impurities
from natural gas prior to its transport
through a pipeline, and the upgrading of
bitumen and heavy oil, through the
earlier of the point at which oil, gas, or
gas liquids (natural or synthetic) are
either sold to an unrelated third party or
delivered to a main pipeline, a common
carrier, or a marine terminal. It also
Rule 4–10 of Regulation S–X. The definition of ‘‘Oil
and Gas Producing Activities’’ in Rule 4–10 of
Regulation S–X excludes all natural resources other
than oil and gas. Using that definition would
exclude minerals and be contrary to the plain
language of Section 13(q). Moreover, narrowing the
definition in that manner would limit the level of
transparency provided by the final rules and would
be significantly different from the approach taken
in the EU Directives, ESTMA, and the EITI. In the
2012 Adopting Release we took the same approach
in response to similar suggestions from
commenters. See 2012 Adopting Release, Section
II.C.3
138 The EU Directives cover ‘‘exploration,
prospection, discovery, development, and
extraction of minerals, oil, natural gas deposits or
other materials.’’ See, e.g., EU Accounting Directive,
Art. 41(1). ESTMA defines ‘‘commercial
development of oil, gas or minerals’’ as ‘‘(a) the
exploration or extraction of oil, gas or minerals; (b)
the acquisition or holding of a permit, licence, lease
or any other authorization to carry out any of the
activities referred to in paragraph (a); or (c) any
other prescribed activities in relation to oil, gas or
minerals.’’
139 Proposed Item 2.01(c)(5) of Form SD.
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includes the crushing and processing of
raw ore prior to the smelting phase.140
‘‘Processing’’ does not include
downstream activities, such as refining
or smelting. As we noted in the
Proposing Release, the focus of the
disclosures required by Section 13(q) is
on transparency in connection with the
payments that resource extraction
issuers make to governments. Those
payments are primarily generated by
‘‘upstream’’ activities like exploration
and extraction and not in connection
with refining or smelting.141 Finally, we
note that including refining or smelting
within the rules under Section 13(q)
would go beyond what is contemplated
by the statute, EITI, EU Directives, and
ESTMA.142
The final rules define ‘‘export’’ as the
transportation of a resource from its
country of origin to another country by
an issuer with an ownership interest in
the resource, with certain exceptions
described below.143 This definition of
the term ‘‘export’’ reflects the
significance of the relationship between
upstream activities such as exploration
and extraction and the categories of
payments to governments identified in
the statute. In contrast, we do not
believe that Section 13(q) was intended
to capture payments related to
transportation on a fee-for-service basis
140 See proposed Instruction 7 to Item 2.01 of
Form SD.
141 We also noted in the Proposing Release that
in other contexts Congress has treated midstream
activities like ‘‘processing’’ and downstream
activities like ‘‘refining’’ as separate activities,
which further supports our view that Congress did
not intend to include ‘‘refining’’ and ‘‘smelting’’ as
‘‘processing’’ activities. For example, the Sudan
Accountability and Divestment Act of 2007
(‘‘SADA’’), which also relates to resource extraction
activities, specifically includes ‘‘processing’’ and
‘‘refining’’ as two distinct activities in its list of
‘‘mineral extraction activities’’ and ‘‘oil-related
activities . . .’’ See 110 P.L. No. 174 (2007).
Similarly, the Commission’s oil and gas disclosure
rules exclude refining and processing from the
definition of ‘‘oil and gas producing activities’’
(other than field processing of gas to extract liquid
hydrocarbons by the company and the upgrading of
natural resources extracted by the company other
than oil or gas into synthetic oil or gas). See Rule
4–10(a)(16)(ii) of Regulation S–X [17 CFR 210.4–
10(a)(16)(ii)] and 2012 Adopting Release, n. 108.
142 See, e.g., the EITI Handbook, at 35; EU
Accounting Directive, Art. 41(1) (including
‘‘exploration, prospection, discovery, development,
and extraction’’ in the definition of an ‘‘undertaking
active in the extractive industry,’’ but not including
refining or smelting). See also ESTMA Guidance at
Section 1 (‘‘Commercial development generally
does not include post-extraction activities. Refining,
smelting or processing of oil, gas or minerals, as
well as the marketing, distribution, transportation
or export, is generally not captured as commercial
development for the purposes of the Act. However,
certain initial processing activities are often
integrated with extraction operations and may
comprise commercial development of oil, gas or
minerals.’’)
143 See Item 2.01(d)(4) of Form SD.
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across an international border by a
service provider with no ownership
interest in the resource.144 Nor do we
believe that ‘‘export’’ was intended to
capture activities with little relationship
to upstream or midstream activities,
such as commodity trading-related
activities. Accordingly, the definition of
‘‘export’’ we are adopting does not cover
the movement of a resource across an
international border by a company that
(a) is not engaged in the exploration,
extraction, or processing of oil, natural
gas, or minerals and (b) acquired its
ownership interest in the resource
directly or indirectly from a foreign
government or the Federal
Government.145 The definition does
cover, however, the purchase of such
government-owned resources by a
company otherwise engaged in resource
extraction due to the stronger link
between the movement of the resource
across an international border and the
upstream development activities. This
link would be particularly strong in
instances where the company is
repurchasing government production
entitlements that were originally
extracted by that issuer.146
Contrary to the recommendation of
one commenter, we have not defined
‘‘minerals’’ in the final rules.147
Although ESTMA defines minerals as
‘‘all naturally occurring metallic and
non-metallic minerals, including coal,
salt, quarry and pit material, and all rare
and precious minerals and metals,’’ the
EU Directives do not provide a
definition.148 We believe that this term
is commonly understood in the
industry,149 as are the terms ‘‘oil’’ and
‘‘natural gas,’’ and is not ‘‘indefinite’’ as
claimed by this commenter.150 We also
144 It is noteworthy that Section 13(q) includes
export, but not transportation, in the list of covered
activities. In contrast, SADA specifically includes
‘‘transporting’’ in the definition of ‘‘oil and gas
activities’’ and ‘‘mineral extraction activities.’’ The
inclusion of ‘‘transporting’’ in SADA, in contrast to
the language of Section 13(q), suggests that the term
export means something different than
transportation.
145 See Item 2.01(d)(4) of Form SD. See also letter
from Poretti (seeking clarification of the scope of
‘‘export’’ under the rules).
146 See Section C below for a more detailed
discussion of when and how such payments must
be reported.
147 See letter from Bishop.
148 ESTMA, Section 2.
149 In this regard, we note that none of the
industry commenters, or for that matter any
commenters other than Bishop, indicated a need to
define this term. We believe that this also supports
our view that, as commonly used when referring to
mineral resources, ‘‘mineral’’ refers to the broader,
non-technical meaning, which is any organic or
inorganic natural resource extracted from the earth
for human use.
150 We do note, however, that we consider the
commonly understood meaning of ‘‘mineral’’ to
include, at a minimum, any solid material for
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believe that the commonly understood
meaning of ‘‘mineral’’ is consistent with
the definition of that term in ESTMA
described above.
The definition of ‘‘commercial
development of oil, natural gas, or
minerals’’ in the final rules does not
capture activities that are ancillary or
preparatory to such commercial
development.151 We do not consider an
issuer that is only providing products or
services that support the exploration,
extraction, processing, or export of such
resources to be a ‘‘resource extraction
issuer,’’ such as an issuer that
manufactures drill bits or provides
hardware to help companies explore
and extract.152 Similarly, an issuer
engaged by an operator to provide
hydraulic fracturing or drilling services,
thus enabling the operator to extract
resources, is not a resource extraction
issuer. Nevertheless, a resource
extraction issuer must disclose
payments when a service provider
makes a payment to a government on its
behalf that meets the definition of
‘‘payment’’ in the final rules.153
C. Definition of ‘‘Payment’’
1. Proposed Rules
Section 13(q) defines ‘‘payment’’ to
mean a payment that:
• Is made to further the commercial
development of oil, natural gas, or
minerals;
• is not de minimis; and
• includes taxes, royalties, fees
(including license fees), production
entitlements, bonuses, and other
which an issuer with mining operations would
provide disclosure under the Commission’s existing
disclosure requirements and policies, including
Industry Guide 7, or any successor requirements or
policies. The Commission’s staff has previously
provided similar guidance. See Disclosure of
Payments by Resource Extraction Issuers FAQ 3
(May 30, 2013), available at https://www.sec.gov/
divisions/corpfin/guidance/resourceextractionfaq.htm.
151 This is consistent with Canada’s ESTMA. See
ESTMA Guidance at Section 1 (‘‘Commercial
development is not intended to extend to ancillary
or preparatory activities for the exploration or
extraction of oil, gas or minerals. For example,
activities such as manufacturing equipment or
construction of extraction sites would not be
included.’’)
152 Marketing activities would also not be
included. Section 13(q) does not include marketing
in the list of activities covered by the definition of
‘‘commercial development.’’ In addition, including
marketing activities within the final rules under
Section 13(q) would go beyond what is covered by
the EITI and other international regimes. See, e.g.,
the EITI Handbook, at 35. For similar reasons, the
definition of ‘‘commercial development’’ does not
include activities relating to security support. See
2012 Adopting Release at Section II.D for a related
discussion of payments for security support.
153 As we discuss in Section II.I.3 below, we are
providing for delayed reporting for payments
related to exploratory activities. See Item 2.01(b) of
Form SD.
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material benefits, that the Commission,
consistent with the EITI’s guidelines (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 definition of
‘‘payment’’ included the specific types
of payments identified in the statute, as
well as payments of certain dividends
and infrastructure payments.
Consistent with Section 13(q), the
proposed rules required a resource
extraction issuer to disclose taxes. In
addition, the proposed rules included
an instruction stating that a resource
extraction issuer would be required to
disclose payments for taxes levied on
corporate profits, corporate income, and
production, but would not be required
to disclose payments for taxes levied on
consumption, such as value added
taxes, personal income taxes, or sales
taxes.154 In response to earlier concerns
expressed about the difficulty of
allocating certain payments that are
made for obligations levied at the entity
level, such as corporate taxes, to the
project level,155 the proposed rules
provided that issuers could disclose
those payments at the entity level.156
Also consistent with Section 13(q),
the proposed rules required a resource
extraction issuer to disclose fees,
including license fees, and bonuses paid
to further the commercial development
of oil, natural gas, or minerals. The
proposed rules included an instruction
stating that fees include rental fees,
entry fees, and concession fees, and that
bonuses include signature, discovery,
and production bonuses.157 The fees
and bonuses identified, however, were
not an exclusive list, and under the
proposed rules, the issuer could have
been required to disclose other fees and
bonuses as well.
For payments of dividends, which,
along with infrastructure payments, is
not specified in the statute, an
instruction in the proposed rules stated
that an issuer generally would not need
to disclose dividends paid to a
government as a common or ordinary
shareholder of the issuer as long as the
dividend is paid to the government
under the same terms as other
shareholders.158 Under the proposed
154 See proposed Instruction 8 to Item 2.01 of
Form SD.
155 See 2012 Adopting Release, n.155 and
accompanying text.
156 See proposed Instruction 4 to Item 2.01 of
Form SD.
157 See proposed Instruction 9 to Item 2.01 of
Form SD.
158 See proposed Instruction 10 to Item 2.01 of
Form SD.
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rules, the issuer would, however, have
been required to disclose any dividends
paid to a government in lieu of
production entitlements or royalties.
Under the proposed approach, ordinary
dividend payments were not considered
part of the commonly recognized
revenue stream, because they are not
made to further the commercial
development of oil, natural gas, or
minerals.159 We also proposed requiring
a resource extraction issuer to disclose
in-kind payments.160 The proposed
rules specified that an issuer must
report in-kind payments at cost, or if
cost was not determinable, fair market
value, and required the issuer to provide
a brief description of how the monetary
value was calculated.161
The proposed rules defined a ‘‘not de
minimis’’ payment as one that equals or
exceeds $100,000, or its equivalent in
the issuer’s reporting currency, whether
made as a single payment or series of
related payments.162 Finally, the
proposed rules required disclosure of
activities or payments that, although not
within the categories included in the
proposed rules, are part of a plan or
scheme to evade the disclosure
requirements under Section 13(q).163
2. Comments on the Proposed Rules
a. Types of Payments
In the Proposing Release we solicited
comment on whether we should add
other payment types, such as CSR
payments, or remove certain payment
types from the proposed list. In
particular, we asked whether other
types of payments should be considered
part of the commonly recognized
revenue stream for the commercial
159 See
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160 See
Proposing Release, at Section II.C.1.
proposed Instruction 11 to Item 2.01 of
Form SD.
161 See proposed Instruction 11 to Item 2.01 of
Form SD. See also Section 3(e) of ESTMA (‘‘[T]he
value of a payment in kind is the cost to the
entity—or, if the cost cannot be determined, the fair
market value—of the goods and services that it
provided.’’). The EU Directives do not specify how
in-kind payments should be calculated, but require
‘‘supporting notes . . . to explain how their value
has been determined.’’ See, e.g., Section 43(3) of the
EU Accounting Directive.
162 See proposed Item 2.01(c)(8)(ii) of Form SD.
For example, a resource extraction issuer that paid
a $150,000 signature bonus would be required to
disclose that payment. The proposed definition also
clarified that disclosure would be required for
related periodic payments (e.g., rental fees) when
the aggregate amount of such payments exceeds the
payment threshold. This is similar to other
instructions in our rules requiring disclosure of a
series of payments. See, e.g., Instructions 2 and 3
to Item 404(a) of Regulation S–K (17 CFR
229.404(a)). Therefore, under the proposed rules, a
resource extraction issuer obligated to pay royalties
to a government annually and that paid $10,000 in
royalties on a monthly basis to satisfy its obligation
would be required to disclose $120,000 in royalties.
163 See proposed Rule 13q–1(b).
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development of oil, natural gas, or
minerals. We also asked whether the
Commission should provide additional
guidance on how to interpret the
proposed list of covered payment types,
particularly whether additional
guidance should be provided on the
types of fees or bonuses that would be
covered by the rules and how to
distinguish CSR payments from
infrastructure payments. Finally, we
also included a request for comment on
whether the rules should prescribe a
specific method for determining the fair
market value of in-kind payments.
Several commenters supported the
proposed definition of ‘‘payment,’’ 164
while others recommended adding
additional payment types or changing
our approach to particular payment
types. A number of commenters,
including one industry commenter,
recommended adding CSR payments to
the definition.165 These commenters
stated that CSR payments are common
in the industry and should be
considered part of the commonly
recognized revenue stream for resource
extraction.166 One of these commenters
also questioned the characterization in
the Proposing Release that the European
Union and Canada are consistent in not
requiring CSR payments.167 An industry
commenter was particularly concerned
with distinguishing between CSR
payments and infrastructure payments
and recommended requiring both types
of payments when required by contract
with the host government.168 Another
industry commenter, however, opposed
including CSR payments, stating that
those payments were not part of the
commonly recognized revenue stream
due to their ‘‘philanthropic or voluntary
. . . nature.’’ 169
Several commenters recommended
adding commodity trading-related
payments to the definition of
‘‘payment.’’ 170 These commenters
stated that purchases of resources sold
164 See letters from ACEP; Encana; Department of
Interior; Global Witness 1; Oxfam 1; PWYP–US 1;
and USAID.
165 See letters from ACEP; Prof. Harry G.
Broadman and Bruce H. Searby (Jan. 25, 2016)
(‘‘Broadman & Searby’’); Exxon Mobil Corp. (Feb.
16, 2016) (‘‘ExxonMobil 1’’); Eugen Falik (Mar. 7,
2016) (‘‘Falik’’); Global Witness 1; Oxfam 1; PWYP–
US 1; and USAID.
166 See, e.g., Broadman & Searby and ExxonMobil
1.
167 See Broadman & Searby (stating that ‘‘there is
no consistency after all between Europe’s and
Canada’s regimes to which the Commission should
adhere for the sake of equalizing standards and
reporting burdens.’’). See note 212 below and
accompanying text.
168 See letter from ExxonMobil 1.
169 See letter from Encana.
170 See letters from PWYP–US 1; NRGI 1. See also
letters from ACEP; Global Witness 1; and Oxfam 1.
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49371
by a government or a state-owned
company are prone to corruption and
are part of the commonly recognized
revenue stream for the commercial
development of oil, natural gas, or
minerals. They also stated that in many
countries commodity trading-related
payments constitute the largest revenue
stream to the government. Another
commenter expressed uncertainty as to
whether such payments were covered
by the proposed rules and noted that
confusion may arise for others as well
since the current EITI Standard leaves it
to the discretion of a country’s multistakeholder group whether to require
the reporting of payments to
governments for the purchase of natural
resources by buying companies.171
Other commenters stated that covering
commodity trading-related payments
would inappropriately expand the reach
of the rules beyond payments associated
with in-country extractive development
and would substantially increase the
cost of reporting without apparent
benefit.172 These commenters stated that
such an approach would double-count
government revenues given that the
government’s share of production is
already required to be disclosed under
the rules.
Beyond CSR payments and
commodity trading-related payments,
commenters recommended that the
rules cover other types of payments,
such as when an issuer covers
government expenses, provides jobs to
persons related to government officials,
or invests in companies created by
officials or related persons.173 For
example, one commenter recommended
that guidance be added to either the
discussion of reportable payments or the
proposed anti-evasion provision
indicating that payments in excess of
the de minimis threshold should be
disclosed if: (1) The payments were
subtracted from or substituted for
otherwise reportable payments; (2) the
payments were requested by or
associated with a government official
suspected of corruption; or (3) the
payments raise corruption concerns,
including by creating an appearance of
possible corruption, and those payments
would otherwise be undisclosed to the
public.174 Another commenter
recommended including fines and
171 See letter from Poretti (noting that some EITI
reports (e.g., Iraq’s EITI Reports for the years 2011,
2012, and 2013) contain information about
payments reported by buyers of exported crude oil).
172 See letters from API (Mar. 8, 2016) (‘‘API 2’’)
and ExxonMobil 2.
173 See letters from Bean and USAID.
174 See letter from Bean.
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penalties in the definition.175 This
commenter also stated that the EITI
standard requires ‘‘any other significant
payments and material benefit to
government’’ to be reported and that the
USEITI’s multi-stakeholder group has
interpreted that to include penalties.176
This commenter noted that fines and
penalties represent significant payments
to governments and that Section 13(q)
instructs the Commission to define
payment consistently with the EITI
standard.
Commenters supported the proposed
requirement for issuers to disclose the
method they used to calculate the value
of in-kind payments.177 One commenter
recommend that in-kind payments be
reported at cost or fair market value, as
determined by the issuer, rather than
allowing only the use of fair market
value if cost is not determinable.178 This
commenter also noted that, under
ESTMA, in-kind payments are reported
at the cash value of the production
entitlements that the payee takes
possession of during the relevant
financial period. Several other
commenters supported requiring issuers
to disclose the volume of resources
associated with the in-kind
payments.179 These commenters noted
that the EU Directives require disclosure
of volume and that such a requirement
would enhance government
accountability and understanding of an
issuer’s methodology.180 Another
commenter, however, stated that adding
a requirement for issuers to report the
volume of in-kind payments is
unnecessary and could cause
competitive harm by effectively
disclosing contractual selling prices.181
This commenter stated that reporting
fair market value of in-kind payment
types was sufficient.182 Another
commenter requested that the
Commission provide examples for
determining fair market value for inkind payments.183
A number of commenters also
requested additional guidance on the
175 See
letter from TI–USA.
4.1(b) of EITI Standard.
177 See letters from Encana and PWYP–US 1. See
also letters from ACEP; Global Witness 1; and
Oxfam 1.
178 See letter from Encana.
179 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
180 See EU Accounting Directive, Art. 43(3)
(‘‘Where payments in kind are made to a
government, they shall be reported in value and,
where applicable, in volume.’’)
181 See letter from ExxonMobil 2.
182 Although ExxonMobil only mentions using
fair market value and not cost, from the context it
does not appear to be recommending a change to
our proposed approach that calls for cost reporting,
or if cost is not determinable, fair market value.
183 See letter from Petrobras.
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176 Section
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types of payments covered by the
rules.184 Several commenters supported
including a non-exclusive list of the
types of royalties in a manner similar to
what was proposed for fees and
bonuses.185 The recommended
instruction would further clarify that
the examples of fees, bonuses, and
royalties are non-exclusive and the list
of royalties would include unit based,
value-based, and profit-based royalties.
One commenter requested additional
guidance on how to isolate the corporate
income tax payments made on income
generated from the commercial
development of oil, natural gas, or
minerals given that income earned from
business activities beyond resource
extraction would be taxed as well.186
Another commenter recommended
clarifying in Form SD that payments
may be reported either on a cash basis
or on an accrual basis.187 This
commenter noted the contrast between
the Proposing Release, which seems to
leave open the question as to whether
an issuer may elect to present payments
on either basis, and prior staff guidance,
which indicates that payment
information is required to be presented
on an unaudited, cash basis for the year
in which the payments are made.188
Most commenters supported the
proposed definition of ‘‘not de
minimis.’’ 189 For example, the
Department of Interior noted that it was
the same standard that is used in its
disclosure of revenue data.190 It also
recommended not including an
automatic adjustment mechanism
because a stable threshold would allow
the USEITI and industry to plan better
for making ongoing disclosures. Several
commenters also noted the similarity of
the proposed threshold to those used in
the European Union and Canada.191
Another commenter stated that the
threshold was ‘‘unreasonably low for
companies working on massive scale
projects’’ and would thus be too
costly.192 Finally, one commenter
requested clarification on whether the
de minimis threshold is meant to be
calculated based on the currency
conversion in effect at the time of
payment, or at the end of the period
covered by the report.193
b. The ‘‘Not De Minimis’’ Requirement
A key component of the definition of
‘‘payment’’ is how ‘‘not de minimis’’
should be defined. In the Proposing
Release, we solicited comment on
various aspects of this definition. For
example, we requested comment on
whether a $100,000 threshold is too low
or too high, whether a different
threshold should apply to smaller
reporting companies or other categories
of issuers, and whether we should
provide additional guidance on how
and when an issuer would have to
aggregate a series of related payments. If
commenters thought a different
threshold should apply, we asked for
their input on how that threshold would
interact with the thresholds established
by other countries. We also asked
whether the final rules should include
a mechanism to adjust periodically the
de minimis threshold to reflect the
effects of inflation.
c. Anti-Evasion Provision
In the Proposing Release we also
solicited comment on whether the
proposed anti-evasion provision would
promote compliance with the disclosure
requirements and whether we should
provide additional guidance on when
the anti-evasion provision would apply.
Several commenters supported this
provision.194 As described above, one
commenter recommended that guidance
be added to either the discussion of
reportable payments or the proposed
anti-evasion provision indicating that
payments in excess of the de minimis
threshold should be disclosed if: (1) The
payments were subtracted from or
substituted for otherwise reportable
payments; (2) the payments were
requested by or associated with a
government official suspected of
corruption; or (3) the payments raise
corruption concerns, including by
creating an appearance of possible
corruption, and those payments would
otherwise be undisclosed to the
public.195 Several other commenters
endorsed the proposed anti-evasion
provision, but recommended adding
language stating that ‘‘activities and
payments must not be artificially
184 See letters from Encana; ExxonMobil 1;
Petrobras; and PWYP–US 1. See also letters from
ACEP; Global Witness 1; and Oxfam 1.
185 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
186 See letter from Petrobras.
187 See letter from Cleary.
188 See Dodd-Frank Wall Street Reform and
Consumer Protect Act FAQs: Disclosure of
Payments by Resource Extraction Issuers (May 30,
2013) (‘‘Resource Extraction FAQs’’), FAQ 7,
available at https://www.sec.gov/divisions/corpfin/
guidance/faq.htm.
189 See letters from Department of Interior; Form
Letter A; PWYP–US 1; and Quinones. See also
letters from ACEP; Global Witness 1; and Oxfam 1.
190 See letter from Department of Interior.
191 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
192 See letter from Nouveau (Feb. 16, 2016)
(‘‘Nouveau’’).
193 See letter from Bishop.
194 See letters from Bean; PWYP–US 1; Sen.
Cardin et al.; and Sen. Lugar et al. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
195 See letter from Bean.
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structured, split or aggregated to avoid
application of the rules.’’ 196
3. Final Rules
We are adopting the proposed
definition of ‘‘payment’’ with certain
changes to the rule and related
guidance. The definition we are
adopting includes the specific types of
payments identified in the statute as
well as CSR payments that are required
by law or contract, payments of certain
dividends, and payments for
infrastructure. As we noted in the
Proposing Release, the statute and the
EITI guidelines include most of the
types of payments included in the
definition.197 Most of the components of
our definition of ‘‘payment’’ are also
used in the EU Directives and ESTMA.
Thus, including them is consistent with
the statutory directive for our rules to
support international transparency
promotion efforts.
In addition to the types of payments
expressly included in the definition of
payment in the statute, Section 13(q)
provides that the Commission include
within the definition ‘‘other material
benefits’’ that it determines are ‘‘part of
the commonly recognized revenue
stream for the commercial development
of oil, natural gas, or minerals.’’
According to Section 13(q), these ‘‘other
material benefits’’ must be consistent
with the EITI’s guidelines ‘‘to the extent
practicable.’’ 198 The other material
benefits we have included in the final
rules—CSR payments required by law or
contract, dividends, and infrastructure
payments—are all found in the EITI
guidelines as well.199
Unlike with the 2012 Proposing
Release, none of the commenters on the
Proposing Release suggested a broad,
non-exhaustive list of payment types or
a category of ‘‘other material benefits.’’
In light of this, and because we continue
to believe that Section 13(q) directs us
to make an affirmative determination
that the other ‘‘material benefits’’ are
part of the commonly recognized
revenue stream, we are not adopting
such a non-exclusive list or category.
Accordingly, under the final rules,
resource extraction issuers will be
required to disclose only those
payments that fall within the specified
list of payment types in the rules.
We have determined that the payment
types specified in the rules represent
material benefits that are part of the
196 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
197 See EITI Standard, at 23.
198 15 U.S.C. 78m(q)(1)(C)(ii).
199 See the EITI Standard at Sections 4.1(b)
(dividends), 4.3 (infrastructure payments), and 6.1
(social expenditures).
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commonly recognized revenue stream
and that otherwise meet the definition
of ‘‘payment.’’ In support of this
determination, we note that the EU
Directives and ESTMA also require most
of these payment types to be
disclosed.200 In this regard, we also
looked to the EITI and determined that
it would be appropriate to add some of
the types of payments included under
the EITI that are not explicitly
mentioned under Section 13(q). As
such, the final rules require disclosure
of CSR payments that are required by
law or contract, dividend, and
infrastructure payments. We note that
none of the commenters on the
Proposing Release objected to the
inclusion of dividend and infrastructure
payment, while views were mixed on
CSR payments. We also note that
payments for infrastructure
improvements have been required under
the EITI since at least 2011,201 payments
for dividends since at least 2005,202 and
CSR payments that are required by law
or contract since 2013.203
The proposed rules did not require
the disclosure of CSR payments. We
noted in the Proposing Release that
other recently enacted international
transparency promotion efforts, such as
the EU Directives and ESTMA, do not
include CSR payments as a specified
200 See, e.g., EU Accounting Directive, Art. 41(5)
and Section 2 of ESTMA (both including, as
discussed in Section I.C above, the following
payment types: Production entitlements, taxes,
royalties, dividends, bonuses, fees, and
infrastructure payments).
201 In February 2011, the EITI Board issued
revised EITI rules that require participants to
develop a process to disclose infrastructure
payments under an EITI program. See EITI Rules
2011, available at https://eiti.org/document/rules.
See also EITI Requirement 9(f) in EITI Rules 2011,
at 22 (‘‘Where agreements based on in-kind
payments, infrastructure provision or other bartertype arrangements play a significant role in the oil,
gas or mining sectors, the multi-stakeholder group
is required to agree [to] a mechanism for
incorporating benefit streams under these
agreements in to its EITI reporting process. . . .’’)
and EITI Standard, at 24 (‘‘The multi-stakeholder
group and the independent administrator are
required to consider whether there are any
agreements, or sets of agreements, involving the
provision of goods and services, including loans,
grants and infrastructure works, in full or partial
exchange for oil, gas or mining exploration or
production concessions or physical delivery of such
commodities. . . Where the multistakeholder group
concludes that these agreements are material, the
multistakeholder group and the Independent
Administrator are required to ensure that the EITI
Report addresses these agreements, providing a
level of detail and transparency commensurate with
the disclosure and reconciliation of other payments
and revenues streams.’’).
202 See EITI, Source book, Chapter 2, Section D
(Mar. 2005).
203 As is currently the case under the 2016 EITI
Standard, the 2013 version of the EITI Standard
required social contribution payments to be
disclosed if the company was legally or
contractually required to make those payments.
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49373
covered payment type. Although we
noted that the EITI includes the
disclosure of material ‘‘social
expenditures’’ in an EITI report when
those expenditures are required by law
or contract,204 we stated that disclosure
of CSR payments appeared to be outside
of the scope of the more recent
international efforts in the European
Union and Canada.205 In addition, we
noted that there was no clear consensus
among the commenters on whether the
proposed rules should include CSR
payments as part of identified payments
that are required to be disclosed.206
Nevertheless, we sought public input on
the matter.
Upon further consideration of our
approach in the proposed rules and
taking into account the comments
discussed above, we believe that CSR
payments that are required by law or
contract are part of the commonly
recognized revenue stream for the
commercial development of oil, natural
gas, or minerals.207 As noted above, CSR
payments that are required by law or
contract must be disclosed under the
EITI. Also, as noted by one commenter,
‘‘[p]ublic manifestations of how
common in [the resource extraction]
industry CSR payments have become
include prolific conferences, studies,
guidance, and compliance manuals.’’ 208
204 See EITI Standard, at 28 (‘‘Where material
social expenditures by companies are mandated by
law or the contract with the government that
governs the extractive investment, the EITI Report
must disclose and, where possible, reconcile these
transactions.’’).
205 See EU Accounting Directive, Art. 41(5) and
ESTMA, Section 2, both of which list types of
payments covered by their respective disclosure
regulations without including CSR payments. But
see ESTMA Guidance, Section 3.5 (outlining that
‘‘payments made for corporate social responsibility
purposes’’ may be required to be disclosed if ‘‘made
in lieu of one of the payment categories that would
need to be reported under [ESTMA]’’).
206 See Proposing Release, n.148 and
accompanying text.
207 We note that our decision to require disclosure
of such payments is further supported by the fact
that such payments can be used as a mechanism for
the corrupt or suspicious diversion of payment
revenues to governmental officials for their personal
use. See, e.g., Ken Silverstein, The Secret World of
Oil 79 (2014) (noting that ‘‘money specifically
marked for social programs has been stolen’’ by the
leaders of Equatorial Guinea and quoting a court
filing by the U.S. Department of Justice that states:
‘‘The Inner Circle routinely demands that
companies operating in E.G. contribute money to
what are disguised as public service campaigns [to
build housing and other social programs. However]
the contributions are not used for their alleged
purpose, but instead are largely taken by members
of the Inner Circle . . . for their personal benefit.’’)
(bracketed additions were included in The Secret
World of Oil).
208 See letter from Broadman & Searby (noting
publications such as IPIECA, Creating Successful,
Sustainable Social Investment: Guidance document
for the oil and gas industry (2008); Alison Colwell
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Notably, this view was not limited to
academia or civil society organizations.
One industry commenter also stated that
CSR payments are part of the commonly
recognized revenue stream for the
commercial development of oil, natural
gas, or minerals, at least when required
by law or contract.209 Furthermore,
there is other evidence supporting the
significant role that CSR payments have
in the extractive industries. For
example, several EITI implementing
countries already disclose mandatory or
voluntary social expenditures in their
EITI Reports.210 In addition, several
issuers already report their required or
voluntary CSR payments.211 We
recognize that significant disclosure
regimes such as the EU Directives and
ESTMA do not include CSR payments
as a specified covered payment type.
Nonetheless, we find that the evidence
on balance supports the conclusion that
such payments are now part of the
commonly recognized revenue stream
for the commercial development of oil,
natural gas, or minerals.212
of BSR, Driving Business and Social Benefits
Through Inclusive Community Investment (July
2015); Anglo American Corp., Socio-Economic
Assessment Toolbox, Version 3 (2013); FSG,
‘‘Shared Value In Extractives,’’ prepared materials
for the Next-Gen CSR and Shared Value Forum
(Feb. 2014); FSG, ‘‘Extracting with Purpose:
Creating Shared Value in the Oil and Gas Band
Mining Sectors’ Companies and Communities’’
(Oct. 2014).
209 See letter from ExxonMobil 1.
210 See EITI Guidance, Note 17 (Apr. 24, 2014)
(noting that Kazakhstan, Kyrgyzstan, Liberia,
Mongolia, Mozambique, Peru, Republic of Congo,
Togo, Yemen and Zambia require or reconcile social
expenditures in their EITI reports).
211 See, e.g., Statoil ASA, 2015 Sustainability
Report, p. 29 (disclosing that in 2015 Statoil made
NOK 37 million in social investments, of which
NOK 5 million were contractual obligations);
Newmont Mining Corporation, Beyond the MineOur 2014 Social and Environmental Performance
(reporting that Newmont invested $28 million
globally ‘‘to support a wide range of community
investments’’); Kosmos Energy Ltd., 2014 Corporate
Responsibility Report (reporting that Kosmos
Energy spent $2,936,000 in social investments in
2014); BHP Billiton Ltd., 2015 Sustainability Report
(reporting that BHP’s voluntary community
investment totaled $225 million USD in 2015); and
Tullow Oil plc, 2015 Corporate Responsibility
Report (disclosing that Tullow spent $7,537,000 on
discretionary social projects in 2015).
212 One commenter questioned our conclusion in
the Proposing Release that the European Union and
Canada were consistent in generally not requiring
disclosure of CSR payments, particularly with
respect to Canada. See letter from Broadman &
Searby. Although Canada does not list CSR
payments as a separate payment type, the ESTMA
Guidance states that ‘‘the onus is on the Reporting
Entity to determine whether a voluntary or
philanthropic payment does in fact relate in some
way to its commercial development of oil, gas or
minerals. This may include payments for corporate
social responsibility purposes.’’ In this regard, the
guidance also states that entities ‘‘should look to the
substance, rather than the form, of payments in
determining which [payment] category is
applicable.’’ ESTMA Guidance, Section 3.5. The
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We do not believe it is appropriate to
add the other payment types
recommended by some commenters
because we have not determined that
they are material benefits that are part
of the commonly recognized revenue
stream for the commercial development
of oil, natural gas, or minerals. With
respect to commodity trading-related
payments, we believe that our definition
of ‘‘export’’ and the categories of
payments in the final rules, particularly
in-kind payments, accurately reflect the
commonly recognized revenue stream
for the commercial development of oil,
natural gas, or minerals. We
acknowledge that significant payments
may be made by buying/trading
companies and others to purchase the
commodities covered by the final rules.
Nevertheless, we do not believe that
purchasing or trading oil, natural gas, or
minerals, even at a level above the de
minimis threshold, is on its own
sufficiently related to the ‘‘commercial
development’’ of those resources to be
covered by the rules, particularly when
the rules already require disclosure of
in-kind payments of production
entitlements. We have, however,
addressed below how such production
entitlements must be valued when
initially made in-kind but subsequently
purchased by the same issuer from the
recipient government.
We are also not specifically requiring
disclosure of payments for government
expenses, providing jobs or tuition to
persons related to government officials,
investing in companies created by
officials or related persons, or other
similar payments that could reasonably
raise corruption concerns. We find it
unnecessary to do so because, when
these payments are made to further the
commercial development of oil, natural
gas or minerals (in connection with or
in lieu of the identified payments), they
will already be covered by the antievasion provision we are adopting.213
ESTMA Guidance further states that ‘‘payments
made for corporate social responsibility purposes’’
may be required to be disclosed if ‘‘made to a payee
in lieu of one of the payment categories that would
need to be reported under [ESTMA].’’ Id. Finally,
the ESTMA Guidance provides an example of how
providing a local municipal government with a
payment for a scholarship endowment and to build
a community center should be reported under the
bonus payment category. Id. at Box A.
213 See generally U.S. Senate Permanent
Subcommittee on Investigations, Committee on
Government Affairs, Money Laundering and
Foreign Corruption: Enforcement and Effectiveness
of the Patriot Act, Case Study Involving Riggs Bank
Report, at 98–111 (July 14, 2004) (providing
examples of the roles that resource extraction
companies can play in facilitating the suspect or
corrupt practices of foreign officials seeking to
divert resource extraction payments that belong to
the government).
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With respect to payments for fines
and penalties, we do not believe they
relate sufficiently to the commercial
development of natural resources to
warrant inclusion. Although we
acknowledge that the USEITI multistakeholder group has included
penalties, we also note that the EITI
Standard does not address the reporting
of penalties or fines. In this regard, we
understand that actual practice in
countries applying the EITI Standard
appears to vary depending on the
particular interpretations of a country’s
multi-stakeholder group.214
Furthermore, we note that neither the
EU Directives nor ESTMA include fines
or penalties as an explicit payment
category.
We are adopting the proposed
approach to in-kind payments with one
modification. In the past, many
commenters supported the inclusion of
in-kind payments, particularly in
connection with production
entitlements and none of the
commenters on the Proposing Release
objected to their inclusion in the
rules.215 We also note that the EU
Directives and ESTMA require
disclosure of in-kind payments.216 In
addition to production entitlements, inkind payments could include building a
road or school, refurbishing a
government building, or numerous other
activities that do not involve providing
monetary payments to the host country
government. Although certain
commenters recommended allowing
issuers to choose between reporting inkind payments at cost or fair market
value, we continue to believe that such
disclosure would be more consistent
and comparable if issuers are required
to report in-kind payments at cost, and
are only permitted to report using fair
market value if historical costs are not
reasonably available or determinable.
We are providing guidance, however, on
how to report payments made to a
foreign government or the Federal
Government to purchase the resources
associated with production entitlements
that are reported in-kind.217 If the issuer
must report an in-kind production
entitlement payment under the rules
and then repurchases the resources
associated with the production
214 Based upon our review of EITI reports
published in English on the EITI Web site, many of
the reports do not report payments of fines and
penalties.
215 See 2012 Adopting Release, nn.170, 211 and
accompanying text. In-kind payments include, for
example, making a payment to a government in oil
rather than a monetary payment.
216 Article 41 of the EU Accounting Directive and
Section 2 of ESTMA specifically include ‘‘in kind’’
payments in their definitions of ‘‘payment.’’
217 See Instruction 11 to Item 2.01 of Form SD.
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entitlement within the same fiscal year,
the issuer must use the purchase price
(rather than using the valuation
methods described above) when
reporting the in-kind value of the
production entitlement. If the in-kind
production entitlement payment and the
subsequent purchase are made in
different fiscal years and the purchase
price is greater than the previously
reported value of the in-kind payment,
the issuer must report the difference in
values in the latter fiscal year if that
amount exceeds the de minimis
threshold. In other situations, such as
when the purchase price in a
subsequent fiscal year is less than the
in-kind value already reported, no
disclosure relating to the purchase price
is required. We believe that this
approach more accurately captures the
value of in-kind payments for
production entitlements than the
proposed approach and addresses
commenters concerns without adding
significantly to the burden of resource
extraction issuers.
We have also considered whether to
require issuers to report the volume of
in-kind payments. As discussed above,
commenters were divided on this
suggestion.218 We generally agree with
the commenter that stated such
information was unnecessary.219 Based
on these considerations, we are not
requiring disclosure related to volume.
We note that issuers are required to
provide a brief description of how the
monetary value was calculated, which
will provide some additional context for
assessing the reasonableness of the
disclosure.
We are adopting as proposed an
instruction setting forth a non-exclusive
list of fees (rental fees, entry fees, and
concession fees) and bonuses (signature,
discovery, and production bonuses). As
discussed in the Proposing Release, the
EITI specifically mentions these types of
fees and bonuses as payments that
should be disclosed by EITI
participants.220 This supports our view
that these types of fees and bonuses are
part of the commonly recognized
revenue stream. As recommended by
certain commenters, we are also adding
a non-exclusive list of royalties since we
believe that would provide additional
clarity for issuers.221 Thus, the term
‘‘royalties’’ would include, but not be
limited to, unit-based, value-based, and
profit-based royalties.222 Of course,
218 See
Section II.C.2 above.
letter from ExxonMobil 2.
EITI Standard, at 23.
221 See Instruction 9 to Item 2.01 of Form SD. See
also letter from PWYP–US 1.
222 These types of royalties were recommended by
PWYP–US based on the following publication:
219 See
220 See
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resource extraction issuers may be
required to disclose other types of fees,
bonuses, and royalties depending on the
particular facts and circumstances.
In response to commenters’ concerns
about compliance costs, we noted in the
Proposing Release that issuers would
not be required to have the payment
information audited or reported on an
accrual basis.223 As noted above, one
commenter questioned whether this was
a shift from the position taken in prior
staff guidance, which indicates that
issuers are not permitted to provide the
payment information on an accrual
basis.224 We have revised Form SD to
expressly state that the payment
information need not be audited and
must be made on a cash basis. As we
discussed in the 2012 Adopting Release,
we believe that this is the best approach
because (1) these payment disclosures
are largely cash-based, so reporting
them on a cash basis will not result in
a significant compliance burden, and (2)
requiring a consistent approach will
improve comparability and therefore
result in greater transparency.
We are adopting the proposed
definition of ‘‘not de minimis’’ for the
reasons stated in the Proposing Release.
A ‘‘not de minimis’’ payment is one that
equals or exceeds $100,000, or its
equivalent in the issuer’s reporting
currency,225 whether made as a single
payment or series of related payments.
We continue to believe that this
definition provides a clear standard for
determining which payments a resource
extraction issuer must disclose.
Furthermore, several countries have
established payment thresholds that
approximate the proposed $100,000
standard.226 We believe that the
World Bank, Mining Royalties: Their Impact on
Investors, Government and Civil Society (2006), pp.
50–54, available at https://www-wds.worldbank.org/
external/default/WDSContentServer/WDSP/IB/
2006/09/11/000090341_20060911105823/
Rendered/PDF/
372580Mining0r101OFFICIAL0USE0ONLY1.pdf.
223 See Section II.G.5 of the Proposing Release.
224 Resource Extraction FAQ 7, available at
https://www.sec.gov/divisions/corpfin/guidance/
faq.htm.
225 Instruction 2 to Item 2.01 allows an issuer to
choose several methods to calculate currency
conversions for payments not made in U.S. dollars
or the issuer’s reporting currency. We have clarified
in that instruction that the same methods are
available to issuers when calculating whether a
payment not made in U.S. dollars exceeds the de
minimis threshold. However, an issuer must use a
consistent method for such de minimis payment
currency conversions and must disclose which
method it used.
226 See EU Accounting Directive, Art. 43(1) and
Recital 46 (using Ö100,000, or approximately
$112,280 (USD) as of June 16, 2016); UK Reports
on Payments to Governments Regulations 2014
(2014 Statutory Instrument No. 3209), Part 1, 5.–(3)
(using £86,000, or approximately $122,180 (USD) as
of June 16, 2016); Norwegian Regulations, Section
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49375
establishment of a similar payment
threshold by these countries diminishes
any potential additional compliance
burden and potential competitive harm
that otherwise could be caused by
disclosure rules that include a payment
threshold that varies significantly from
the standard used in other jurisdictions.
As discussed above, only one of the
many commenters that addressed the
definition thought that the reporting
threshold was too low.227 Although we
acknowledge this commenter’s concerns
that the threshold might be considered
low for companies working on
‘‘massive’’ scale projects, we note that
none of the large issuers commenting on
the Proposing Release expressed similar
concerns. For this reason and the
reasons stated above, we are not
increasing the threshold.
Finally, despite the changes
recommended by commenters, we are
adopting the anti-evasion provision as
proposed. Thus, the final rules require
disclosure with respect to an activity (or
payment) that, although not within the
categories included in the proposed
rules, is part of a plan or scheme to
evade the disclosure required under
Section 13(q).228 This provision is
designed and intended to emphasize
substance over form or characterization
and to capture any and all payments
made for the purpose of evasion.
Accordingly, we believe that it covers
most of the situations that appeared to
concern commenters. For example, the
provision would cover payments that
were substituted for otherwise
reportable payments in an attempt to
evade the disclosure rules,229 as well as
activities and payments that were
structured, split, or aggregated in an
attempt to avoid application of the
rules.230 Similarly, as noted in the
Proposing Release, a resource extraction
issuer could not avoid disclosure by recharacterizing an activity as
transportation that would otherwise be
covered under the rules, or by making
a payment to the government via a third
party in order to avoid disclosure under
the proposed rules.
3 (using 800,000 kr, or approximately $95,302
(USD) as of June 16, 2016); and ESTMA, Section
9(2) (using $100,000 (CAD), or approximately
$77,140 (USD) as of June 16, 2016).
227 See letter from Nouveau. Comments received
prior to the Proposing Release were divided on
whether the threshold should be increased or
decreased. See Section II.C.2 of the Proposing
Release for a discussion of those comments.
228 See Rule 13q–1(b).
229 See letter from Bean.
230 See, e.g., letter from PWYP–US 1.
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D. Definition of ‘‘Subsidiary’’ and
‘‘Control’’
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1. Proposed Rules
In addition to requiring an issuer to
disclose its own payments, Section
13(q) also requires a resource extraction
issuer to disclose payments by a
subsidiary or an entity under the control
of the issuer made to a foreign
government or the Federal Government
relating to the commercial development
of oil, natural gas, or minerals. The
proposed rules defined the terms
‘‘subsidiary’’ and ‘‘control’’ using
accounting principles rather than other
alternatives, such as using the
definitions of those terms provided in
Rule 12b–2.231
Within the context of the proposed
rules, a resource extraction issuer would
have ‘‘control’’ of another entity if the
issuer consolidated that entity or
proportionately consolidated an interest
in an entity or operation under the
accounting principles applicable to the
financial statements it includes in
periodic reports filed pursuant to
Section 13(a) or 15(d) of the Exchange
Act. Thus, for determining the eligible
payments, or portions thereof, that must
be disclosed, the resource extraction
issuer would follow the consolidation
requirements under generally accepted
accounting principles in the United
States (‘‘U.S. GAAP’’) or under the
International Financial Reporting
Standards as issued by the International
Accounting Standards Board (‘‘IFRS’’),
as applicable.232 The extent to which
the entity making the eligibility
payment is consolidated would
determine the extent to which payments
made by that entity must be disclosed.
For example, a resource extraction
issuer that proportionately consolidates
an interest in an entity or an operation
would be required to disclose the
231 Under Exchange Act Rule 12b–2 [17 CFR
240.12b–2], ‘‘control’’ (including the terms
‘‘controlling,’’ ‘‘controlled by’’ and ‘‘under common
control with’’) is defined to mean ‘‘the possession,
direct or indirect, of the power to direct or cause
the direction of the management and policies of a
person, whether through the ownership of voting
shares, by contract, or otherwise.’’ Rule 12b–2 also
defines a ‘‘subsidiary’’ of a specified person as ‘‘an
affiliate controlled by such person directly, or
indirectly through one or more intermediaries.’’ See
also the definitions of ‘‘majority-owned
subsidiary,’’ ‘‘significant subsidiary,’’ and ‘‘totallyheld subsidiary’’ in Rule 12b–2.
232 See Accounting Standards Codification
(‘‘ASC’’) 810, Consolidation, IFRS 10, Consolidated
Financial Statements and IFRS 11, Joint
Arrangements for guidance. A foreign private issuer
that prepares financial statements according to a
comprehensive set of accounting principles, other
than U.S. GAAP or IFRS, and files with the
Commission a reconciliation to U.S. GAAP would
be required to determine whether or not an entity
is under its control using U.S. GAAP.
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issuer’s proportionate amount of that
entity’s or operation’s eligible payments
indicating the issuer’s proportionate
interest.
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on how the term ‘‘control’’
should be defined. For example, we
asked whether it was preferable to base
the definition of ‘‘control’’ on applicable
accounting principles, rather than using
Rule 12b–2 of the Exchange Act, and
whether there would be significant
differences between these approaches.
We also asked whether we should allow
resource extraction issuers to report
eligible payments made by
proportionately consolidated entities on
a proportionate basis. Finally, we
solicited comment on whether there
were any aspects of other international
transparency initiatives or differences
between U.S. GAAP and IFRS that we
should address so as to promote the
comparability of this type of disclosure.
All of the commenters addressing this
aspect of the proposal generally
supported using accounting
consolidation principles instead of Rule
12b–2.233 Several of these commenters,
however, stated that using accounting
principles would be acceptable only if
the concept of ‘‘significant influence’’
was used in conjunction with
proportional consolidation.234 These
commenters expressed concern that
proportional consolidation is optional
for oil and gas companies under U.S.
GAAP and is rarely used. They were
also concerned that companies might
structure joint ventures to avoid
disclosure. Other commenters disagreed
with adding a ‘‘significant influence’’
concept to the definition of control.235
For example, one expressed concerns
about the ability to access payment-level
financial information from an entity
over which it only had ‘‘significant
influence.’’ 236 Another commenter
stated that there was no support for the
assertion that joint ventures would be
structured to avoid disclosure and that
any reporting gap is inherent to Section
13(q), which applies only to companies
subject to the Commission’s
jurisdiction.237
Several of the commenters that
otherwise supported the proposed
approach had concerns about using
proportional consolidation to determine
control.238 These commenters were
generally concerned that issuers who
use proportional consolidation might
not have access to the required payment
information from operators of existing
joint ventures. These commenters stated
that issuers have access only to highlevel data regarding revenues and costs
of the proportionally consolidated
entities or operations. One of these
commenters was concerned that the
resulting disclosure could be confusing
or misleading because there will be
situations where an issuer has multiple
operations with different ownership
interests that would be both
operationally and geographically
interconnected and therefore would be
classified as a single project for
reporting purposes.239 Another
recommended addressing this issue by
clarifying that Rule 12b–21 would
permit an issuer to exclude information
with respect to entities where the issuer
does not have access to the information
required to be disclosed.240
Several of the commenters who had
concerns with proportional
consolidation for determining ‘‘control’’
recommended that when the payments
relate to joint ventures the rules should
only require disclosure of payments by
the operator of the joint venture.241
Under this recommendation, the
operator would report all of the eligible
payments it makes, rather than its
proportional share. A number of these
commenters indicated that this
approach would be more consistent
with the requirements under the EITI,
EU Directives, and ESTMA.242 One of
these commenters recommended
specific changes to the rules and
instructions that it stated would
accomplish this purpose and would
clarify that ‘‘control’’ extends down an
organizational chain to entities
controlled by other controlled
entities.243 Other commenters
acknowledged that this recommended
change to the Commission’s proposed
definition of ‘‘control’’ could result in
payments not being reported when the
operator of a joint venture is not subject
to the rules, even if minority partners in
the joint venture are subject to the
rules.244 These commenters stated,
233 See letters from API 1; BP; Chevron
Corporation (Feb. 16, 2016) (‘‘Chevron’’); Encana;
ExxonMobil 1; Petrobras; PWYP–US 1; and Royal
Dutch Shell plc (Feb. 5, 2016) (‘‘RDS’’). See also
letters from ACEP; Global Witness; and Oxfam 1.
234 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
235 See letters from API 2 and ExxonMobil 2.
236 See letter from ExxonMobil 2.
237 See letter from API 2.
238 See letters from API 1; BP; Chevron; Encana;
ExxonMobil 1; Petrobras; and RDS.
239 See letter from ExxonMobil 1.
240 See letter from RDS.
241 See letters from API 1; BP; Chevron; Encana;
ExxonMobil 1; and Petrobras.
242 See letters from API 1; BP; Chevron; Encana;
and ExxonMobil 1.
243 See letter from Encana.
244 See, e.g., letter from API 2.
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however, that a similar gap in coverage
would exist under the proposed
definition when a company subject to
the rule is the operator in a joint venture
but the joint venture partners are not
subject to the reporting requirement. In
that situation, these commenters stated
that the operator would be required to
report only its own proportional share
of the payment made to the host
government.
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3. Final Rules
We are adopting the proposed
definitions of ‘‘subsidiary’’ and
‘‘control.’’ We continue to believe that
using accounting principles to
determine control, rather than Rule
12b–2, is appropriate in light of the
significant international developments
since the 2012 Rules were vacated.
Specifically, this approach, although not
identical, complements two major
international transparency regimes, the
EU Directives and ESTMA, and should
therefore support international
transparency promotion efforts by
fostering consistency and comparability
of disclosed payments.245 Also, as noted
above, all of the commenters that
addressed this aspect of the proposed
rules generally supported using
accounting principles to define
‘‘control.’’
We believe that the definition we are
adopting today better balances
transparency for users of the payment
disclosure and the burden on issuers
than the use of the Rule 12b–2
definition of ‘‘control’’ or alternatives
recommended by commenters. Issuers
already apply the concept of control for
financial reporting purposes, which
should facilitate compliance. Assuming
a reporting issuer consolidates the entity
making the eligible payment,246 this
approach also should have the benefit of
limiting the potential overlap of the
disclosed payments because generally,
under applicable financial reporting
principles, only one party can control,
and therefore consolidate, that entity.
Further, this approach may enhance the
quality of the reported data since each
resource extraction issuer is required to
provide audited financial statement
disclosure of its significant
245 See, e.g., EU Accounting Directive, Art. 44
(providing for the preparation of consolidated
reports, subject to limited exceptions). ESTMA
provides that ‘‘control’’ includes both direct and
indirect control, but Section 2.1.3 of the ESTMA
Guidance states that ‘‘[w]here one business controls
another enterprise under the accounting standards
applicable to it . . . that will generally be sufficient
evidence of control for purposes of the Act.’’
246 See below for a discussion of a resource
extraction issuer’s disclosure obligations
concerning proportionately consolidated entities or
operations.
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consolidation accounting policies in the
notes to the audited financial statements
included in its existing Exchange Act
annual reports.247 The disclosure of
these accounting policies should
provide greater transparency about how
the issuer determined which entities
and payments should be included
within the scope of the required
disclosures. Finally, a resource
extraction issuer’s determination of
control under the final rules is subject
to the audit process as well as to the
internal accounting controls that issuers
are required to have in place with
respect to reporting audited financial
statements filed with the
Commission.248
We considered the recommendation
of some commenters to include a
‘‘significant influence’’ test for
determining control in addition to the
accounting consolidation principles we
proposed. We do not believe, however,
that we should define control such that
significant influence by itself would
constitute control.249 The concept of
significant influence does not reflect the
same level of ability to direct or control
the actions of an entity that is generally
reflected in the concept of
consolidation. As such, we believe that
the consolidation principles are better
aligned with the purposes underlying
Section 13(q) than a significant
influence test. Moreover, unlike a
potential significant influence test, the
consolidation principles used to define
control for the purposes of Section 13(q)
more closely capture the situations
where the resource extraction issuer has
access to the information that is
required to be reported.250 We also note
that the European and Canadian
reporting regimes do not measure
control based on ‘‘significant influence’’
alone. For these reasons, we have
247 See ASC 235–10–50; IFRS 8. See also Rules 1–
01, 3–01, and 4–01 of Regulation S–X [17 CFR
210.1–01, 2–01 and 4–01].
248 See Exchange Act Section 13(b)(2)(B) [15
U.S.C. 78m(b)(2)(B)]. See also Rules 13a–15 [17 CFR
240.13a–15] and 15d 15 [17 CFR 240.15d–15]. We
note, however, that the proposed rules would not
create a new auditing requirement.
249 In this regard, we note that under U.S. GAAP
and IFRS, significant influence alone does not
represent a level of control that would result in
consolidation. See ASC 323–10–15, paragraphs 6
through 11 and IAS 28, paragraph 3.
250 Compared to an issuer that consolidates an
entity, an issuer applying proportionate
consolidation may not have the same level of ability
to direct the entity or operations making the eligible
payments. However, an issuer applying
proportionate consolidation has a direct or
undivided ownership in the assets and liabilities of
the entity or operations, and the issuer’s ability to
apply proportionate consolidation indicates a
higher likelihood that it is able to obtain the
information necessary to satisfy the reporting
requirements.
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chosen not to include a significant
influence test in the final rules.
The final rules also require disclosure
of the proportionate amount of the
eligible payments made by a resource
extraction issuer’s proportionately
consolidated entities or operations. We
believe this approach is consistent with
using accounting principles to
determine control because, when
proportionate consolidation is applied,
an entity has an undivided interest in or
contractual rights and obligations in
specified assets, liabilities and
operations. Under this approach, the
proportionate amount of eligible
payments reported by the issuer reflects
the underlying interest in the economics
associated with the specified assets,
liabilities, and operations. Although we
acknowledge commenters’ concerns
about the ability of an issuer to obtain
sufficiently detailed payment
information from proportionately
consolidated entities or operations
when it is not the operator of that
venture, we note that the delayed
compliance date in the final rules will
provide issuers two years to make
arrangements with joint venture
operators to obtain the required
payment information. If, after
reasonable effort, the issuer is unable to
obtain such information, it would be
able to rely on Exchange Act Rule 12b–
21 to omit the information if the
information is unknown and not
reasonably available.251 We expect,
however, that for future joint ventures,
non-operator issuers can and should
negotiate for access to the appropriate
information.
E. Definition of ‘‘Project’’
1. Proposed Rules
We proposed requiring a resource
extraction issuer to disclose payments
made to governments relating to the
commercial development of oil, natural
gas, or minerals by type and total
251 17 CFR 240.12b–21. Specifically Rule 12b–21
states that information required need be given only
insofar as it is known or reasonably available to the
registrant. If any required information is unknown
and not reasonably available to the registrant, either
because the obtaining thereof would involve
unreasonable effort or expense, or because it rests
peculiarly within the knowledge of another person
not affiliated with the registrant, the information
may be omitted. The rule goes on to provide two
additional conditions. The first is that the registrant
must give such information on the subject that it
possesses or can acquire without unreasonable
effort or expense, together with the sources of that
information. The second is that the registrant must
include a statement either showing that
unreasonable effort or expense would be involved
or indicating the absence of any affiliation with the
person within whose knowledge the information
rests and stating the result of a request made to such
person for the information.
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amount per project.252 The proposed
definition of ‘‘project’’ was modeled on
the definition found in the EU
Directives and the ESTMA
Specifications, albeit modified to
provide resource extraction issuers with
additional flexibility on how to treat
operations involving multiple, related
contracts.
Similar to the EU Directives and the
ESTMA Specifications, we proposed to
define ‘‘project’’ as operational activities
that are governed by a single contract,
license, lease, concession, or similar
legal agreement, which form the basis
for payment liabilities with a
government.253 The proposed definition
was also similar to the EU Directives
and the ESTMA Specifications in
allowing issuers to treat multiple
agreements that are both operationally
and geographically interconnected as a
single project.254 Unlike the EU
Directives and Canadian definitions,
however, our proposed definition of
‘‘project’’ provided additional flexibility
to issuers by excluding a requirement
that the agreements have ‘‘substantially
similar terms.’’
In order to assist resource extraction
issuers in determining whether two or
more agreements may be treated as a
single project, we proposed an
instruction that provided a nonexclusive list of factors to consider
when determining whether agreements
are ‘‘operationally and geographically
interconnected’’ for purposes of the
definition of project. No single factor
was necessarily determinative. Those
factors included: Whether the
agreements related to the same resource
and the same or contiguous part of a
field, mineral district, or other
geographic area; whether they were
performed by shared key personnel or
with shared equipment; and whether
they were part of the same operating
budget.255 Furthermore, we proposed an
instruction stating that issuers were not
required to disaggregate payments that
are made for obligations levied on the
issuer at the entity level rather than the
project level.256
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on many possible approaches
to defining the term ‘‘project,’’ as well
as the broader question of whether we
should define ‘‘project’’ at all. We
sought public comment on how best to
252 See
253 See
Section II.E of the Proposing Release.
proposed Item 2.01(c)(10) of Form SD.
254 Id.
255 See proposed Instruction 12 to Item 2.01 of
Form SD.
256 See proposed Instruction 4 to Item 2.01 of
Form SD.
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craft a definition that advanced the U.S.
governmental interest in combatting
global corruption and promoting public
accountability with respect to extractive
resources. Specifically, we asked about
alternative definitions found in other
jurisdictions, such as the European
Union and Canada, as well as the API’s
proposed definition. We asked
commenters to consider how alternative
definitions might enhance transparency
and the comparability of data. For
example, we asked whether we should
align our definition more closely with
the EU Directives and ESTMA and
whether there was an alternative to a
contract-based definition of ‘‘project’’
that would be preferable. We also asked
commenters about specific aspects of
the proposed rules, such as under what
circumstances should the rules allow for
multiple agreements to be aggregated as
a single project.
Numerous commenters supported the
statute’s directive to require disclosure
at the project level.257 Many other
commenters supported defining
‘‘project’’ in relation to a legal
agreement, such as a contract, lease,
license, or concession, consistent with
the definition in the European Union
and Canada.258 A number of other
commenters specifically supported the
proposed definition.259 One of these
commenters stated that project-level
disclosure by contract was necessary to
evaluate and implement effective oil
and mineral revenue sharing policies in
Ghana.260 USAID stated that the EITI
standard also encourages public
disclosure of the details of contracts and
licenses that provide the terms for the
exploitation of oil, gas, and minerals.261
Of the commenters supporting the
proposed definition of ‘‘project,’’ one
supported the proposed non-exclusive
257 See letters from Peck & Chayes; Quinones;
Sen. Cardin et al.; Sen. Lugar et al.; and Form Letter
A.
258 See Form Letter B.
259 See letters from ACEP; ACTIAM NV, AP1/
¨
Forsta AP-Fonden (First Swedish National Pension
Fund), Andra AP2-Fonden (Second Swedish
National Pension Fund), AP3/Tredje AP-Fonden
(Third Swedish National Pension Fund), AP4/
¨
Fjarde AP-Fonden (Fourth Swedish National
ˆ
Pension Fund), Aviva Investors, Batirente, BMO
Global Asset Management, BNP Paribas Investment
Partners, British Columbia Investment Management
Corporation, California State Teachers’ Retirement
System (CalSTRS), Calvert Investments, Cartica
Capital, Ethos Foundation, Switzerland, Henderson
Global Investors, Hermes Equity Ownership
Services Ltd., Legal & General Investment
Management, NEI Investments, RPMI Railpen
Investments, and Sandglass Capital Management
(Mar. 8, 2016) (‘‘ACTIAM et al.’’); Bean; BHP;
Calvert; Department of Interior; State Department;
Encana; Global Witness 1; McCarthy; NRGI 1;
Oxfam 1; PWYP–US 1; TI–USA; USAID; and USSIF.
260 See letter from ACEP.
261 See letter from USAID.
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list of factors to consider when
determining whether agreements are
‘‘operationally and geographically
interconnected.’’ 262 This commenter
stated that these factors would help
ensure that issuers are in compliance
with the proposed rules. Other
commenters that were supportive of the
‘‘project’’ definition, however,
recommended eliminating the list of
non-exclusive factors and providing
clear instructions on when agreements
could be aggregated.263 Also, several
commenters recommended only
allowing for agreements to be aggregated
if they have substantially similar
terms 264 and are operationally and
geographically ‘‘integrated’’ rather than
‘‘interconnected.’’ 265 These commenters
expressed concern that the proposed
rules might allow issuers to ‘‘artificially
aggregate payments and obfuscate
payment information.’’ 266 These
commenters also questioned whether
the ‘‘cost to issuers of [requiring]
‘substantially similar terms’ outweighs
the gains of equivalency’’ with other
transparency regimes.267 On the other
hand, the Department of Interior noted
that the proposed level of aggregation
correlated to on-the-ground operations
on U.S. federal lands.268
Several other commenters opposed
the proposed definition of ‘‘project.’’ 269
For example, one of these commenters
criticized the definition as too vague
and was concerned that disclosing
payments to foreign and subnational
governments on a per contract or project
basis would severely disadvantage
competition against state-affiliated firms
that are not subject to similar rules.270
Another of these commenters
questioned ‘‘the utility of adopting an
overly expansive EU definition’’ of
‘‘project’’ when it results in companies
using ‘‘different definitions to describe
largely similar activities’’ and provides
‘‘great volumes of data’’ with ‘‘no
framework in place that allows everyday
citizens to have even a fighting chance
of understanding what’s actually being
reported.’’ 271 Most of the commenters
that opposed the Commission’s
proposed definition of project supported
262 See
letter from BHP.
letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
264 See letters from PWYP–US 1 and USAID. See
also letters from ACEP; Global Witness 1; and
Oxfam 1.
265 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
266 See id.
267 See id.
268 See letter from Department of Interior.
269 See letters from API 1; ASP; BP; Chevron;
ExxonMobil 1; Nouveau; and RDS.
270 See letter from Encana.
271 See letter from ASP.
263 See
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the API’s alternative definition (the
‘‘API Proposal’’). These commenters
stated that the API Proposal would have
lower compliance costs, generate more
useful data due to the use of consistent
geographic descriptions and project
descriptions across the data set, and
would cause less competitive harm due
to the higher level of aggregation, while
still achieving the purposes of the
statute. In this regard, two supporters of
the API definition suggested that the use
of International Organization for
Standardization (‘‘ISO’’) codes would
provide consistent subnational
geographic descriptions when using the
API’s project naming system.272 One
industry commenter supporting the API
Proposal also expressed support for the
proposed rules if certain changes were
made to the alternative reporting
provisions and the definition of
‘‘control.’’ 273
Several of the commenters that
supported the proposed definition also
specifically criticized the API Proposal
for not providing a sufficiently granular
level of information to meet the statute’s
transparency goals and for being
inconsistent with international
transparency promotion efforts.274 One
of these commenters specifically argued
that the use of ISO codes to identify
subnational geographic location would
be too broad geographically, and
disputed the contention that the data
generated under the EU Directives
would be difficult to evaluate.275
3. Final Rules
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After considering commenters’
recommendations and international
developments 276 since the Proposing
Release, we are adopting the definition
of ‘‘project’’ as proposed. The final rules
define ‘‘project’’ as operational activities
that are governed by a single contract,
license, lease, concession, or similar
legal agreement, which form the basis
272 See letters from ASP and ExxonMobil 1. ISO
is an independent, non-governmental international
organization with a membership composed of
various national standards bodies. See About ISO,
available at https://www.iso.org/iso/home/about.htm
(last visited June 16, 2016).
273 See letter from RDS (requesting that the
Commission recognize UK implementation of the
EU Directive as an approved alternative reporting
scheme and clarify that Rule 12b–21 would permit
a company to exclude information with regard to
proportionally consolidated non-operated entities
where it does not have access to the required
information needed to be disclosed. See Section
II.J.3, infra, and Section II.D.3, supra, for discussion
of these requests.
274 See, e.g., ACEP and PWYP–US 1.
275 See letter from McCarthy.
276 See Section I.C. above.
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for payment liabilities with a
government.277
Commenters continue to express
strong disagreement over the level of
granularity that should be adopted for
the definition of ‘‘project.’’ After
carefully considering the comments
received, we remain persuaded that the
definition of project that we proposed is
necessary and appropriate to achieve a
level of transparency that will help
advance the important anti-corruption
and accountability objectives
underlying Section 13(q).278 In the
Proposing Release, we explained
specific considerations that supported
this contract-based definition of project:
• Such disaggregated information may
help local communities and various levels of
subnational government combat corruption
by enabling them to verify that they are
receiving the resource extraction revenue
allocations from their national governments
that they may be entitled to under law. In
this way, project-level disclosure could help
reduce instances where government officials
are depriving subnational governments and
local communities of revenue allocations to
which they are entitled.
• Project-level reporting at the contract
level could potentially allow for comparisons
of revenue flow among different projects, and
the potential to engage in cross-project
revenue comparisons may allow citizens,
civil society groups, and others to identify
payment discrepancies that reflect potential
corruption and other inappropriate financial
discounts.
• To the extent that a company’s
contractual or legal obligations to make
resource extraction payments to a foreign
government are known, company-specific,
project-level disclosure may help assist
citizens, civil society groups, and others to
monitor individual companies’ contributions
to the public finances and ensure firms are
meeting their payment obligations.279 Such
data may also help various actors ensure that
277 We expressly incorporate the Proposing
Release’s discussion of the rationales for the
definition of project. See Proposing Release, Section
II.E.
278 One commenter asserted that foreign
governments might use the Section 13(q) disclosure
requirement as ‘‘a pretext for expropriating’’ the
assets of a resource extraction issuer. See letter from
API 1. We note that an issuer facing such a situation
could seek exemptive relief from the Commission
to potentially delay or avoid its Section 13(q)
reporting obligation and, thus, to potentially
forestall the expropriation. See Section II.I below
for our discussion of exemptive relief. We also note
that the commenter stated that the required
disclosures would be a ‘‘pretext’’ for expropriation.
If a country is intent on expropriating a resource
extraction issuer’s assets, it is not clear that there
is any action the Commission could take, either in
this rulemaking or later through exemptive relief,
that could dissuade the action.
279 In this regard, we note that one industry
commenter has observed that, at least for contracts
for projects that are older or well-established, ‘‘the
general terms are likely to be known even if
technically not public.’’ See letter from API 1.
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the government is properly collecting and
accounting for payments.
• Company-specific, project-level data may
also act as a strong deterrent to companies
underpaying royalties or other monies
owed.280 Such data may also discourage
companies from either entering into
agreements that contain suspect payment
provisions or following government officials’
suspect payment instructions.281
• Such disaggregated reporting may help
local communities and civil society groups to
weigh the costs and benefits of an individual
project. Where the net benefits of a project
are small or non-existent, this may be an
indication that the foreign government’s
decision to authorize the project is based on
corruption or other inappropriate
motivations.282
In advancing these potential uses for
the granular transparency that our
280 More broadly, we believe that, in contrast to
the API Proposal of aggregated disclosure at the
major subnational jurisdiction level, contract-level
disclosure will better help deter corruption by all
participants in the resource extraction sector. As we
explained in the Proposing Release, detailed or
granular disclosure makes hidden or opaque
behavior more difficult. See Proposing Release,
Section I.E.1. Specifically, the granular information
makes it easier for the public and others to observe
potential improprieties with respect to the payment
flows and such disclosure makes it more difficult
for actors to hide any impropriety from scrutiny.
See generally 156 Cong. Rec. S3815 (explaining that
Section 13(q) is intended to create ‘‘a historic
transparency standard that will pierce the veil of
secrecy that fosters so much corruption and
instability in resource-rich countries . . . .’’). This,
in turn, has an enhanced deterrent effect that may
discourage improper conduct in the first instance.
281 For examples of the role that resource
extraction companies can play in facilitating the
suspect or corrupt practices of foreign officials
seeking to divert for their own personal use
resource extraction payments that belong to the
government, see U.S. Senate Permanent
Subcommittee on Investigations, Committee on
Government Affairs, Money Laundering and
Foreign Corruption: Enforcement and Effectiveness
of the Patriot Act, Case Study Involving Riggs Bank
Report, at 98–111 (July 14, 2004). Among other
examples, this report discusses instances where,
both at the direction of government officials of
Equatorial Guinea (‘‘E.G.’’) and pursuant to suspect
terms of the underlying contracts with the
government, resource extraction companies
diverted payments that should have been paid to
the government to other accounts and to persons
connected with E.G. government officials. Id. at 98
(finding that ‘‘Oil companies operating in
Equatorial Guinea may have contributed to corrupt
practices in that country by making substantial
payments to, or entering into formal business
ventures with, individual E.G. officials, their family
members, or entities they control, with minimal
public disclosure of their actions’’); see also id. at
99 & 104 (explaining that the E.G. government
instructs oil companies where to send payments
owed to the government and has directed oil
companies to divert payments for potentially
corrupt purposes such as paying the educational
costs of the children and other relatives of E.G.
government officials). By requiring the public
disclosure of the identity of the resource extraction
issuers who are making payments, we believe this
may help to deter their willingness to participate in
any such diversions of government revenues or to
enter into any contracts that have suspect payment
terms.
282 See Proposing Release, Section I.E.2.
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definition of project would yield, we
relied on concrete examples that
commenters from countries across the
globe provided to us.283 Moreover, two
Executive Branch agencies with
significant expertise in promoting the
U.S. Government’s anti-corruption and
accountability foreign policy goals
strongly supported our proposed
approach. Specifically, the U.S.
Department of State stated that the
‘‘level of transparency required by the
proposed rule is key for ensuring that
citizens have the necessary means to
hold their governments accountable. As
written, the rule’s requirements directly
advance the United States’ foreign
policy interests in increasing
transparency and reducing corruption in
the oil, gas, and minerals sectors and
strengthen the United States’ credibility
and ability to fight corruption more
broadly[.]’’ 284 Similarly, USAID
supported the proposed approach to
defining project and explained that
‘‘[o]nly through more granular, projectlevel reporting will disclosure produce
meaningful data for citizens, civil
society, and local groups that seek to
break cycles of corruption that involve
government and corporations.’’ 285
We acknowledge that some
commenters, in particular the API and
certain industry-affiliated commenters,
challenged the appropriateness of the
contract-based definition of project that
we are adopting.286 In particular, one of
the principal criticisms of this
definition was that ‘‘contract-specific
disclosure actually frustrates Section
13(q)’s transparency objective.’’ 287 In
advancing this view, the API contends
that ‘‘Section 13(q)’s goal of
transparency is best served by a
283 See letter from ACEP (public disclosure of
payments made by company and by project are
critical in order to ensure that statutory allocation
of mining royalties to Ghanaian subnational
governments was received.). See also Proposing
Release at n.94 and accompanying text (providing
several additional examples).
284 See letter from State Department.
285 See letter from USAID.
286 The API asserts that the requirement that
resource extraction issuers ‘‘disclose payments at
the contract-level is unmoored from the statute.’’
Letter from API 1. The API, however, fails to
explain why a contract-level focus is an
unreasonable frame of reference for the term
‘‘project.’’ In commercial relations, contracts are
frequently used to define the scope of a project that
one party is undertaking for another. Also, as
discussed above, the EU Directives and the ESTMA
Specifications define project at the contract-level,
further confirming that our definition is (at a
minimum) reasonable. Furthermore, nothing in the
text or legislative history of Section 13(q) forecloses
a contract-level definition. For these reasons, and
for the reasons that we expressed in Section II.E. of
the Proposing Release, we continue to believe that
a contract-based definition of ‘‘project’’ is
reasonable and appropriate.
287 See letter from API 1.
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definition of project that aggregates
payments to a more useful—i.e.,
higher—level of generality, instead of
burying the public in an avalanche of
data that is irrelevant to the law’s
avowed purpose.’’ 288 After carefully
considering the record (including filings
that some companies have already
prepared in accordance with a
definition of project similar to our own),
we do not share the API’s view that the
disclosures we are requiring would be
counterproductive. Many of the
commenters who have demonstrated a
detailed understanding of the various
possible disclosure regimes, particularly
those civil society organizations and
related actors that have experience
using revenue data and that have
expressed the greatest interest in the
data that would be released under the
final rules, disagree and have explained
through specific examples how the
granular data would be important to
help reduce corruption and promote
accountability.289 We are persuaded by
both the arguments they have advanced
and the evidence they have produced
that a more granular approach to the
definition of ‘‘project’’ like the one we
are adopting today is necessary.290
288 See id. (‘‘In addition, overly granular
information could very likely make it more difficult
for the public to make use of the disclosures.’’)
(emphasis in original).
289 See letters from PWYP–US 1 and Oxfam-ERI.
290 See letter from Oxfam-ERI and letters cited
therein. The API asserts that contract-level
reporting would ‘‘give insurgents or terrorists
valuable information about where the government
is most financially vulnerable’’ and ‘‘[i]nsurgents
can use that information to plan attack[s].’’ Letter
from API 1. We acknowledge that such groups can
pose a threat. See, e.g., Saboteurs Hit Nigerian Oil,
The Wall Street Journal, at A1 (June 6, 2016).
However, we note that it appears that substantial
information is already reasonably available to the
public about the major resource extraction projects
and facilities operating in countries around the
world. For example, an internet search reveals the
following non-exhaustive list of items: William
Pentland, World’s Five Largest Offshore Oil Fields,
Forbes (Sept. 7, 2013), available at https://
www.forbes.com/sites/williampentland/2013/09/07/
worlds-five-largest-offshore-oil-fields/
#674f017b4bea); James Burgess, Six of the Largest
Oil Fields in the World Still Waiting To Be
Developed, OilPrice.com (April 1, 2012), available
at https://oilprice.com/Latest-Energy-News/WorldNews/6-of-the-Largest-Oil-Fields-in-the-World-StillWaiting-to-be-Developed.html; Nick Cunningham,
Here Are the World’s Five Most Important Oil
Fields, OilPrice.com (June 5, 2014), available at
https://oilprice.com/Energy/Energy-General/HereAre-The-Worlds-Five-Most-Important-OilFields.html; Fredrik Robelius, Giant Oil Fields of
the World (presentation on May 23, 2005) (listing
25 of the world’s giant oil fields), available at
https://www.peakoil.net/AIMseminar/
UU_AIM_Robelius.pdf; Christopher Helman, In
Depth: The Top 10 Oil Fields of the Future, Forbes
(Jan. 1, 2010), available at https://www.forbes.com/
2010/01/20/biggest-oil-fields-business-energy-oilfields_slide.html; U.S. Energy Information
Administration, Top 100 U.S. Oil and Gas Fields
(March 2015), available at https://www.eia.gov/
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We also believe that, in advancing its
view, the API appears to have an unduly
narrow understanding of Section 13(q)’s
purpose. The API stated that Section
13(q) is limited ‘‘to provid[ing] the
public with information about the
overall revenue that national
governments receive from natural
resources, so that the public can seek to
hold the government accountable for
how much it is receiving and how it
spends that money.’’ 291 We believe that
Section 13(q)’s anti-corruption and
accountability goals are broader and
include, among other things, providing
transparency to members of local
communities so that they can hold their
government officials and others
accountable for the underlying resource
extraction agreements to help ensure
that those agreements themselves are
not corrupt, suspect, or otherwise
inappropriate. To cabin Section 13(q)’s
naturalgas/crudeoilreserves/top100/pdf/top100.pdf.
˜
See also Perry-Castaneda Library Map Collection,
available at https://www.lib.utexas.edu/maps/
map_sites/oil_and_gas_sites.html (last visited June
16, 2016) (providing web links to maps detailing
location of oil fields in Asia, Europe, the Middle
East, Africa, North America, and South America);
Collection of the U.S. Geological Survey’s World
Petroleum Assessment Publications, available at
https://energy.usgs.gov/OilGas/AssessmentsData/
WorldPetroleumAssessment.aspx (last visited June
16, 2016); International Petroleum Encyclopedia for
2015 (includes certain oil field production
statistics); Natural Gas Information 2015 (providing
information on natural gas extraction pipeline
trade); U.K. Oil and Gas: Field Data, available at
https://www.gov.uk/guidance/oil-and-gas-uk-fielddata#oil-and-gas-wells (last visited June 16, 2016)
(data for oil and gas wells in the United Kingdom).
The API’s comment letter does not acknowledge the
information that is already reasonably available nor
does it explain why the payment data that would
be made available under the Commission’s rules
would create an appreciably greater risk to safety
than already may exist. In any event, as we discuss
in Section II.I.3 below, the Commission will
consider requests exemptive relief based on
potential safety and terrorism concerns on a caseby-case basis, and resource extraction issues will
have an opportunity in making such a request to
demonstrate why an exemption is warranted with
respect to a specific project, region, or country.
291 See letter from API 1. The text of Section 13(q)
itself suggests that the API’s understanding of the
statute’s purpose is unduly narrow. Section 13(q)
requires two broad categories of disclosure: ‘‘the
type and total amount of [resource extraction]
payments made to each government’’ (governmentlevel disclosure), see Exchange Act Section
13(q)(2)(ii), and ‘‘the type and total amount of such
payments made for each project’’ (project-level
disclosure), see Exchange Act Section 13(q)(2)(i).
Were the API correct that Section 13(q) is limited
‘‘to provid[ing] the public with information about
the overall revenue that national governments
receive from natural resources, so that the public
can seek to hold the government accountable for
how much it is receiving and how it spends that
money,’’ Congress could have achieved this
objective by simply mandating the governmentlevel disclosure. That Congress did not stop there
but instead also mandated project-level disclosure
suggests to us that the anticorruption and
accountability objectives underlying Section 13(q)
are broader than the API asserts.
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sradovich on DSK3GMQ082PROD with RULES2
goals as the API would do, in our view,
would severely limit the potential
transparency and anti-corruption
benefits that the disclosures might
provide to citizens of resource-rich
countries.292
For the reasons discussed above, and
for the reasons set forth in the Proposing
Release, we believe that the definition of
project that we are adopting will
provide the type of granular
transparency that is necessary to
advance in a meaningful way the
statute’s anti-corruption and
accountability objectives.293 In arriving
at our determination, we carefully
considered the API Proposal.294 Under
292 We note that the API contends that a local
community does not ‘‘need contract-level
disclosure to determine that someone is drilling for
oil nearby or whether the community is receiving
enough money from its national government.’’ See
letter from API 1. However, the API does not
explain how the fact that a local community knows
that a nearby project is ongoing can—absent the
type of granular disclosure that the final rules will
provide—allow that community to assess where it
is receiving the portion of total revenues from the
national government that are associated with the
project.
293 We believe that the project-level publicdisclosure mechanism that we are adopting is a
sensible, carefully tailored policy prescription to
help combat corruption and promote accountability
in connection with resource extraction. We
acknowledge, however, that this new transparency
alone will not likely eliminate corruption in this
area. As we stated in the Proposing Release, the
ultimate impact of the disclosures will largely
depend on the ability of all stakeholders—
particularly civil society, media, parliamentarians,
and governments—to use the available information
to improve the management of their resource
extractive sector. See Proposing Release, n.97 and
accompanying text (quoting Alexandra Gillies &
Antoine Heuty, Does Transparency Work? The
Challenges of Measurement and Effectiveness in
Resource-Rich Countries, 6 Yale J. Int’l Aff. 25
(2011)). We also find it relevant that the U.S.
Government may have few other means beyond the
disclosure mechanism required by Section 13(q) to
directly target the myriad forms of corruption that
can develop in connection with resource extraction
(many of which extend well-beyond the quid-proquo payments that are the target of the Foreign
Corrupt Practices Act), or to promote greater
accountability in the use of extractive resources and
the revenues generated therefrom.
294 Among other arguments, the API stated that
we should adopt the API Proposal in order to avoid
potential constitutional issues under the First
Amendment. See letter from API 1. We have
carefully considered that argument but believe that
the public disclosure of the type of commercial
payment information involved here does not run
afoul of the First Amendment. Section 13(q) and the
rules that we are adopting require the disclosure of
payment information involving resource extraction
activities so that the citizens of each country and
those acting on their behalf can help combat
corruption in connection with the sale of their
nation’s oil, gas, and mineral resources, and can
hold relevant actors accountable. See generally EITI
Progress Report 2016, From Reports to Results,
available at https://progrep.eiti.org/2016/glance/
what-eiti-does (last visited June 16, 2016) (‘‘A
country’s natural resources, such as oil, gas, metals
and minerals, belong to its citizens.’’). We believe
that the foreign policy interests involved here are
compelling and substantial, as the administrative
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that proposal, all of an issuer’s resource
extraction activities within the firstlevel of subnational political
jurisdiction of a country below the
national government would be treated
as a single ‘‘project’’ to the extent that
these activities involve the same
resource (e.g., oil, natural gas, coal) and
to the extent that they are extracted in
a generally similar fashion (e.g., onshore
or offshore extraction, or surface or
underground mining). To illustrate how
its proposed definition would work, the
API explained that all of an issuer’s
extraction activities producing natural
gas in Aceh, Indonesia (which
comprises approximately 22,500 square
miles) would be identified as ‘‘Natural
Gas/Onshore/Indonesia/Aceh.’’
Similarly, the API explained that a
project to develop oil offshore of
Sakhalin Island, Russia (which
comprises approximately 28,000 square
miles) would be identified as ‘‘Oil/
Offshore/Russia/Sakhalin.’’ 295
We continue to believe that the
reasons advanced in the Proposing
Release demonstrating why the API
Proposal’s definition of project is not
appropriate remain valid and
persuasive.296 Those include the
following:
• We do not agree that engaging in similar
extraction activities across the territory
comprising the first-level subnational
political jurisdictions of countries provides
the type of defining feature to justify
aggregating those various activities together
as a solitary project.297 Relatedly, by so
record demonstrates, and the means we have
chosen to help advance those interests (including
the public disclosure of contract-level payment
information) are carefully tailored to do so.
295 The API included a third example, stating that
‘‘[o]nshore development in the Niger River delta
area would be ‘Oil/Onshore/Nigeria/Delta.’’ See
letter from the API (Nov. 7, 2013) (emphasis added).
We relied on that example in the Proposing Release,
but in a recent comment, the API explained that the
data for the ‘‘nine separate states in the Niger River
Delta’’ would not in fact ‘‘be aggregated into one
project’’—‘‘each state would be separate projects.’’
See letter from API 1.
296 The API stated that Congress, by requiring
payment disclosure with respect to ‘‘‘each project’’’
and ‘‘ ‘each government’,’’ ‘‘wanted companies to
provide information about . . . the region in which
the resource is located.’’ Letter from API 1. We
agree with the API on this general point, but, as
discussed above, we disagree that defining the
region by the major subnational political
jurisdiction is required (or even suggested) by the
statute as the appropriate level of transparency. See
also Proposing Release, Section II.E.
297 We also note the API Proposal appears to be
inconsistent with how companies in the resource
extraction sector often refer to their ‘‘projects’’ with
foreign countries. Similar to the definition we are
adopting, it appears that companies use the term
project to refer to their concession-level or fieldlevel operations. See, e.g., Texaco’s Web page
available at https://www.texaco.com/ecuador/en/
history/background.aspx (last visited June 16, 2016)
(describing ‘‘Texaco Petroleum’s involvement with
the [Oreinte] project [that] was governed by a 28-
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49381
heavily focusing on subnational political
jurisdictions as a defining consideration, the
API’s definition appears to disregard the
economic and operational considerations that
we believe would more typically—and more
appropriately—be relevant to determining
whether an issuer’s various extraction
operations should be treated together as one
project.
• Separately, the API Proposal in our view
would not generate the level of transparency
that, as discussed above, we believe would be
necessary or appropriate to help
meaningfully achieve the U.S. Government’s
anti-corruption and accountability goals. By
permitting companies to aggregate their oil,
natural gas, and other extraction activities
over large territories, the API’s definition
would not provide local communities with
payment information at the level of
granularity necessary to enable them to know
what funds are being generated from the
extraction activities in their particular
areas.298 This would deprive them of the
year concession agreement’’); Crescent Petroleum’s
Web page available at https://
www.crescentpetroleum.com/ (last visited June 16,
2016) (listing under the heading ‘‘select projects’’
two concession-level extraction projects—the
‘‘Onshore Sharjah Concession’’ and ‘‘The Mubarek
Field’’); New World Oil and Gas Web page available
at https://www.nwoilgas.com/projects/ (last visited
June 16, 2016) (describing the ‘‘Blue Creek Project’’
as consisting of ‘‘one 315 sq km onshore oil
concession divided into two blocks located in NW
Belize’’); The Dodsal Group Web page available at
https://dodsal.com/mining/projects.shtml (last
visited June 16, 2016) (listing the company’s
various hydrocarbon and mineral projects, each of
which is described at the concession level,
including Itingi, which is a ‘‘concession from the
Ministry of Energy and Minerals, Government of
Tanzania, for mining at a location approximately
1,250 km South-West of Dar es Salaam’’ and ‘‘which
is approximately 101 sq. km’’). See also, e.g.,
Chevron Web page available at https://
www.chevron.com/projects (listing as separate
projects various oil fields around the globe,
including the Kern River Field in California, the
Captain EOR Field in the United Kingdom, and the
Duri Field in Indonesia); British Petroleum’s Web
page available at https://tools.bp.com/investor-tools/
upstream-major-projects-map.aspx (last visited
June 16, 2016) (describing various British Petroleum
projects by reference to field operations, such as the
Amenas ‘‘wet-gas field,’’ the Culzean ‘‘lean gas
condensate field,’’ and the ‘‘Clair Ridge Project’’
that ‘‘develops new resources from the giant Clair
Field which . . . extends over an area of 85 square
miles’’).
298 An additional deficiency with the API
Proposal, which relies on the major subnational
political jurisdiction as the defining characteristic
of ‘‘project,’’ is that it could produce vastly
disparate transparency from one jurisdiction to
another. Residents of subnational jurisdictions that
occupy a relatively small area (e.g., State of Sergipe,
Brazil (approximately 8,400 square miles)) would
receive data that, because of the jurisdictions
limited size, may be more localized; but residents
of subnational jurisdictions that are relatively large
´
in size (e.g., State of Para, Brazil (approximately
481,700 square miles)) would receive disclosures
that provide potentially less localized transparency
given the potentially large number of extractive
activities that might be included within the projectlevel disclosure. By contrast, as we explained in the
Proposing Release (and which no commenter
disputed), oil, gas, and mining contracts not only
typically cover areas that are much smaller than a
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ability, for example, to assess the relative
costs and benefits of the particular license or
lease to help ensure that the national
government or subnational government has
not entered into a corrupt, suspect, or
otherwise inappropriate arrangement.
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Beyond these considerations, our own
experience in implementing the Foreign
Corrupt Practices Act leads us to believe
that the granular disclosures that our
definition will produce will better help
combat corruption than the aggregated
(and anonymized) disclosures that the
API Proposal would yield. We have
found that requiring issuers to maintain
detailed, disaggregated records of
payments to government officials
significantly decreases the potential for
issuers and others to hide improper
payments and as such their willingness
to make such payments. This experience
has led us to believe that, where
corruption is involved, detailed,
disaggregated disclosures of payments
minimizes the potential to engage in
corruption undiscovered. We thus
believe that the more granular the
disclosure in connection with the
transactions between governments and
extractive corporations, the less room
there will be for hidden or opaque
behavior.299
We acknowledge that the API
Proposal’s definition of ‘‘project’’ could
lower the potential for competitive harm
when compared to our proposed
major subnational political jurisdiction, there is
also a relative degree of uniformity in the size of
the covered area. For example, we explained that
the typical contract area for oil and gas exploration
is between approximately 400 to 2,000 square
miles. See Proposing Release, Section II.E.2. Also,
mining concessions typically cover only a single
mine. Id. Thus, we believe that our contract-level
definition of project has the additional advantage of
producing a level of transparency that will be more
consistent across jurisdictions than the API
Proposal.
We also note that the API asserts that the
contract-level approach to project may, ‘‘at times,
cover a broad geographic area.’’ Letter from API 1.
While we acknowledge that this may occur, we
believe (as the discussion above demonstrates) that
the potentially broad geographic areas that our
definition may in some instances apply to are still
much smaller than the geographic areas that the
API’s proposed definition of project would cover.
Moreover, as we explained in the Proposing
Release, all of the alternative approaches to defining
project that were recommended would likely result
in disclosure that is more aggregated (and therefore
less detailed) on a geographical basis and would
thus potentially be less useful for purposes of
realizing the statute’s objectives of increasing
payment transparency to combat global corruption
and promote accountability. See Proposing Release,
Section II.E.2.
299 We also believe that the more granular
disclosures that will result from the final rules
relative to the API Proposal will help provide a
powerful incentive for community-based
involvement in monitoring corruption and holding
officials accountable by making clear to those
communities in a direct and concrete fashion what
revenues are being generated from their local
natural resources.
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approach, which requires public
disclosure of contract-level data.
Nevertheless, we continue to believe
that the potential for competitive harm
resulting from the final rules is
significantly reduced, although not
eliminated, by the adoption of a similar
definition of ‘‘project’’ in the European
Union and Canada.300 In this regard, we
note that the transposition of the EU
Directives has progressed since we
issued the Proposing Release and
Canada has finalized the ESTMA
Guidelines and ESTMA
Specifications,301 and some issuers have
already disclosed (and we expect others
will shortly be disclosing) such project
level information.302 Furthermore,
several commenters have questioned the
API’s assertion that a more granular
definition of ‘‘project’’ would reveal
commercially sensitive information.303
For example, one of these commenters
argued that ‘‘contract terms are
generally known within the
disagree with the API’s assertion that the
implementation of the EU Directives and ESTMA
does not mitigate competitive harm because
‘‘[f]orty-six of the top 100 oil and gas companies are
listed only in the United States.’’ See letter from
API 1. Although these companies may lose the
competitive advantage they previously had in the
absence of rules implementing Section 13(q), an
argument disputed by other commenters, we
believe that any competitive harm caused by the
final rules will be significantly less than what
would occur in the absence of the EU Directives
and ESTMA.
301 See ESTMA Guidance (2016) and ESTMA
Technical Reporting Specifications (2016).
302 For example, see the following reports:
• Royal Dutch Shell plc, Report on Payments to
Governments for the Year 2015, available at https://
www.shell.com/sustainability/transparency/
revenues-for-governments.html (‘‘RDS Report’’);
• Total, 2015 Registration Document (Mar. 15,
2016), available at https://www.total.com/sites/
default/files/atoms/files/
registration_document_2015.pdf (‘‘Total Report’’);
• Tullow Oil plc, 2015 Annual Report &
Accounts (Mar. 15, 2016), available at https://
www.tullowoil.com/Media/docs/default-source/
3_investors/2015-annual-report/tullow-oil-2015annual-report-and-accounts.pdf (‘‘Tullow Report’’)
• BHP Billiton, Economic Contribution and
Payments to Governments Report 2015 (Sept. 23,
2015), available at https://www.bhpbilliton.com/∼/
media/bhp/documents/investors/annual-reports/
2015/bhpbillitoneconomiccontributionand
paymentstogovernments2015.pdf (‘‘BHP Report’’);
• Statoil, 2015 Payments to Governments,
available at https://www.statoil.com/no/Investor
Centre/AnnualReport/AnnualReport2015/
Documents/DownloadCentreFiles/01_Key
Downloads/2015%20Payments%20to%20
governments.pdf (‘‘Statoil Report’’);
• Kosmos Energy, Transparency, available at
https://www.kosmosenergy.com/responsibility/
transparency.php (‘‘Kosmos Report’’).
See also letters from Oxfam America (May 2,
2016) (‘‘Oxfam 2’’) and Publish What You Pay—US
(Apr. 7, 2016) (‘‘PWYP–US 5’’).
303 See letters from Oxfam American and
EarthRights International (Mar. 8, 2016) (‘‘OxfamERI’’) and PWYP–US 1.
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industry.’’ 304 We also believe that,
beyond the potential for reduced
competitive harm, a disclosure
requirement that is in accordance with
the emerging international transparency
regime is consistent with Section 13(q),
including its instruction that, ‘‘[t]o the
extent practicable,’’ the Commission’s
rules ‘‘shall support the commitment of
the Federal Government to international
transparency promotion efforts relating
to the commercial development of oil,
natural gas, or minerals.’’ 305 Thus, we
believe that the definition of project that
we are proposing is, on balance,
necessary and appropriate
notwithstanding the potential
competitive concerns that may result in
some instances.306
We are also adopting the proposed
approach to aggregating multiple
agreements. Despite the concerns of
some commenters that the standards in
the proposed rule for aggregating
multiple projects could result in a
304 See letter from Oxfam-ERI (noting that host
countries and competitors, including state-owned
companies, have the resources to access services
that provide the information that the API and others
have argued is commercially sensitive).
305 See generally The Brussels G7 Summit
Declaration ¶17 (June 5, 2014), available at https://
europa.eu/rapid/press-release_MEMO-14402_en.htm (last visited June 16, 2016) (‘‘We remain
committed to work towards common global
standards that raise extractives transparency, which
ensure disclosure of companies’ payments to all
governments. We welcome the progress made
among G7 members to implement quickly such
standards. These global standards should continue
to move towards project-level reporting.’’). We
acknowledge that Congress’s instruction to
‘‘support the commitment of the Federal
Government to international transparency
promotion efforts’’ is subject to the qualification
‘‘[t]o the extent practicable.’’ See Exchange Act
Section 13(q)(2)(E). We believe that our projectlevel public disclosure regime comports with this
instruction. It is now apparent that the reporting
that we are requiring is practicable—that is, it is
capable of being done or accomplished—because
companies are already making similar disclosures
pursuant to the EU Directives. Moreover, as both
the Department of State and USAID have
confirmed, our disclosure regime furthers the
Federal Government’s foreign policy interests in
promoting international transparency by, among
other things, fostering compatibility with the
existing European Union and Canadian
transparency regimes. We also believe that our,
contract-based, public disclosure regime is
consistent with, and furthers, the EITI, which, as
noted in the comment letter from USAID,
encourages implementing countries ‘‘to publicly
disclose any contracts and licenses that provide the
terms attached to the exploitation of oil, gas and
minerals.’’ EITI Standard at 19. See note 261 above
and accompanying text.
306 In this regard, and as we discuss in Section
II.G.3 below, we will consider using our existing
authority under the Exchange Act to provide
exemptive relief at the request of a resource
extraction issuer, if and when warranted. We
believe that this case-by-case approach to
exemptive relief would permit us to tailor any relief
to the particular facts and circumstances presented,
which could include facts related to potential
competitive harm.
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reduction of meaningful payment
information, we continue to believe that
the additional flexibility afforded by
this approach would benefit issuers and
would have limited impact on the
overall level of transparency provided
by the rules. As noted above, we believe
that there are relatively minor
differences between the approach we
are adopting today and other
international regimes 307 and note that
many commenters supported the
proposed definition.308 As we indicated
in the Proposing Release, we understand
that operations under one agreement
may lead to the parties entering into a
second agreement for operations in a
geographically contiguous area. If a
change in market conditions or other
circumstances compels a government to
insist on different terms for the second
agreement, then under our definition
the use of those different terms by
themselves would not preclude treating
the second agreement as the same
project when, operationally and
geographically, work under the second
agreement is a continuation of work
under the first. In that way, it should
reduce the burdens associated with
disaggregating payments.
F. Definition of ‘‘Foreign Government’’
and ‘‘Federal Government’’
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1. Proposed Rules
In Section 13(q), Congress defined
‘‘foreign government’’ to mean a foreign
government, a department, agency, or
instrumentality of a foreign government,
or a company owned by a foreign
government, while granting the
Commission the authority to determine
the scope of the definition.309
Consistent with the 2012 Rules, we
proposed a definition of ‘‘foreign
government’’ that would include a
foreign national government as well as
a foreign subnational government, such
as the government of a state, province,
county, district, municipality, or
307 The EU Directives and ESTMA Specifications
both state that a ‘‘project’’ means ‘‘the operational
activities that are governed by a single contract,
license, lease, concession or similar legal
agreements and form the basis for payment
liabilities with a government. Nonetheless, if
multiple such agreements are substantially
interconnected, this shall be considered a project.’’
Article 41(4) of the EU Accounting Directive;
ESTMA Specifications, Section 2.3.2 The EU
Directives and ESTMA Specifications go on to
define ‘‘substantially interconnected’’ as ‘‘a set of
operationally and geographically integrated
contracts, licenses, leases or concessions or related
agreements with substantially similar terms that are
signed with the government and give rise to
payment liabilities.’’ Recital 45 of the EU
Accounting Directive; ESTMA Specifications,
Section 2.3.2.
308 See note 259 above and accompany text.
309 15 U.S.C. 78m(q)(1)(B).
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territory under a foreign national
government.310 The proposed definition
is consistent with Section 13(q), which
requires an issuer to identify, for each
disclosed payment, the government that
received the payment and the country in
which the government is located.311 It is
also consistent with the EU Directives,
ESTMA Guidance, and the EITI.312 The
Proposing Release also indicated that
‘‘Federal Government’’ means the
United States Federal Government.
2. Comments on the Proposed Rules
The Proposing Release solicited
comment on the scope of the definitions
of ‘‘foreign government’’ and ‘‘Federal
Government.’’ For example, we asked
whether the definition of ‘‘foreign
government’’ should include a foreign
government, a department, agency, or
instrumentality of a foreign government,
a company owned by a foreign
government, or anything else. We also
asked about the level of ownership that
would be appropriate for a company to
be considered owned by a foreign
government. With respect to ‘‘Federal
Government,’’ we requested comment
on whether we should provide
additional guidance on its meaning.
We received few comments on this
aspect of the proposal. Several
commenters generally supported the
proposed definition of ‘‘foreign
government.’’ 313 These commenters,
however, recommended that the rules
be revised so that ‘‘a company owned by
a foreign government’’ would include a
company where the ‘‘government has a
controlling shareholding, enabling it to
make the major decisions about the
strategy and activities of the company,’’
rather than requiring majority
ownership as proposed. As for the
definition of ‘‘Federal Government,’’
one commenter supported the proposed
approach.314
3. Final Rules
We are adopting the definitions of
‘‘foreign government’’ and ‘‘Federal
Government’’ as proposed. Under the
final rules, a ‘‘foreign government’’ is
defined as a foreign government, a
department, agency, or instrumentality
proposed Item 2.01(c)(7) of Form SD.
15 U.S.C. 78m(q)(2)(D)(ii)(V).
312 See EU Accounting Directive, Art. 41(3)
(‘‘Government means any national, regional or local
authority . . .’’); ESTMA Guidance, Section 3.2
(‘‘[A] Payee is . . . any government . . . at a
national, regional, state/provincial or local/
municipal level . . .’’); EITI Standard, at 25
(requiring the disclosure and reconciliation of
material payments to subnational government
entities in an EITI Report).
313 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
314 See letter from Department of Interior.
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311 See
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49383
of a foreign government, or a company
at least majority owned by a foreign
government. Foreign government
includes a foreign national government
as well as a foreign subnational
government, such as the government of
a state, province, county, district,
municipality, or territory under a
foreign national government.315
‘‘Federal Government’’ means the U.S.
Federal Government and does not
include subnational governments within
the United States.
As we discussed in the Proposing
Release, for purposes of identifying the
foreign governments that received the
payments, an issuer must identify the
administrative or political level of
subnational government that is entitled
to a payment under the relevant contract
or foreign law. Also, if a third party
makes a payment on a resource
extraction issuer’s behalf, disclosure of
that payment is covered under the final
rules. Additionally, as proposed, a
company owned by a foreign
government means a company that is at
least majority-owned by a foreign
government.316 Although we
acknowledge the concerns of the
commenters that argued for a more
expansive definition, we believe it
would be difficult for issuers to
determine when the government has
control over a particular entity outside
of a majority-ownership context. In this
regard, we note that the statute refers to
a company ‘‘owned’’ by a foreign
government, not ‘‘controlled’’ by a
foreign government. The control
concept, of course, is explicitly used in
other contexts in Section 13(q).317
G. Annual Report Requirement
1. Proposed Rules
We proposed requiring issuers to
make their resource extraction payment
disclosure annually on Form SD. The
proposed amendments to Form SD
required issuers to include a brief
statement in the body of the form
directing readers to the detailed
payment information provided in the
exhibits to the form. Consistent with the
approach under ESTMA, the proposed
rules also required resource extraction
issuers to file Form SD on EDGAR no
later than 150 days after the end of the
issuer’s most recent fiscal year.318
315 To the extent that aboriginal, indigenous, or
tribal governments are subnational governments in
foreign countries, payments to those government
entities would be covered by the final rules.
316 See proposed Item 2.01(c)(7) of Form SD.
317 Compare Section 13(q)(1)(B) with Section
13(q)(2(A).
318 See proposed General Instruction B.2 to Form
SD.
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2. Comments on the Proposed Rules
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The Proposing Release solicited
comment on whether issuers should
provide the payment disclosure
mandated under Section 13(q) on Form
SD or whether that information should
be provided on Forms 10–K, 20–F, or
40–F or a different form. We also asked
whether the proposed disclosure should
be subject to the officer certifications
required by Exchange Act Rules 13a–14
and 15d–14 or a similar requirement.319
In addition to requesting comment on
the proposed 150 day filing deadline,
we solicited comment on whether the
rules should require disclosure on a
fiscal year basis or an annual year basis,
whether we should provide a
mechanism for requesting extensions
(such as by amending Exchange Act
Rule 12b–25 320), and whether the rules
should provide an accommodation to
filers that are subject to both Rules 13p–
1 and 13q–1, such as an alternative
filing deadline.
Several commenters specifically
supported using Form SD, and no
commenters suggested an alternative
approach.321 Nevertheless, some of the
commenters conditioned their support
for Form SD on the disclosures being
filed rather than furnished.322 The
commenters addressing the filing
deadline all supported the proposed 150
day requirement,323 although several
commenters recommended providing a
phase-in period for newly public
companies or newly acquired
companies.324 One of these commenters
agreed with our assessment that the
proposed deadline would reduce
compliance costs by allowing issuers to
use their existing processes and
reporting systems to produce the
disclosure.325 Other commenters noted
that the proposal was consistent with
the Canadian and United Kingdom
regimes.326 These commenters also
supported allowing issuers to rely on
319 We solicited comment on a similar question in
Section II.G.6 of the Proposing Release. We address
the responses to that request for comment in this
section as well.
320 17 CFR 240.12b–25.
321 See letters from PWYP–US 1 and USSIF. See
also letters from ACEP; Encana; Global Witness 1;
and Oxfam 1.
322 See letter from PWYP–US 1. See also letters
from ACEP; Encana; Global Witness 1; and Oxfam
1.
323 See letters from Encana and PWYP–US 1. See
also letters from ACEP; Global Witness 1; and
Oxfam 1.
324 See letters from Cleary and Michael R.
Littenberg, Ropes & Gray (Feb. 16, 2016) (‘‘Ropes &
Gray’’).
325 See letter from Encana.
326 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
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Rule 12b–25 to request extensions,
subject to certain conditions.
No commenters suggested requiring
officer certifications. Some commenters
stated that certifications were
unnecessary in light of the possibility
for Exchange Act Section 18 liability.327
One commenter opposed such a
requirement, stating that it would add
significant costs with little benefit.328
Some commenters specifically
supported the proposed approach of
using an issuer’s fiscal year as the
reporting period.329 These commenters,
however, incorrectly assumed that the
data was tagged by quarterly period so
that users could generate their own
calendar year reports if they chose to do
so. It is unclear whether those
commenters would have recommended
a different approach if, as proposed, the
data is not tagged by fiscal quarter.330
The Department of Interior did not make
a specific recommendation regarding
the reporting period, but noted that the
USEITI MSG decided to use calendar
year reporting for the USEITI because it
reduced the burden on reporting
companies, many of which use the
calendar year as their fiscal year.331
3. Final Rules
We are adopting the final rules as
proposed, with two new targeted
exemptions that provide for transitional
relief or delayed reporting in limited
circumstances. These exemptions
provide a longer transition period for
recently acquired companies that were
not previously subject to reporting
under the final rules and a one-year
delay in reporting payments related to
exploratory activities.332
Section 13(q) requires a resource
extraction issuer to provide the required
payment disclosure in an annual report
but otherwise does not specify the
location of the disclosure. We believe
Form SD is an appropriate form since it
is already used for specialized
disclosure not included within an
issuer’s periodic or current reports, such
as the disclosure required by the rule
implementing Section 1502 of the
327 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
328 See letter from Encana.
329 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
330 The proposed rules provided for tagging of the
‘‘financial period in which the payments were
made’’ and defined ‘‘financial period’’ as ‘‘the fiscal
year in which the payment was made.’’ See
proposed Item 2.01(a)(5), (c)(6) of Form SD. The
final rules take the same approach, although we
have clarified the text so as to avoid similar
confusion. See Item 2.01(a)(5).
331 See letter from Department of Interior.
332 See Section II.I.3 below for a discussion of the
latter provision.
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Act.333 We also believe that using Form
SD would facilitate interested parties’
ability to locate the disclosure and
address issuers’ concerns about
providing the disclosure in their
Exchange Act annual reports on Forms
10–K, 20–F, or 40–F.334 For example,
requiring the disclosure in a separate
form, rather than in issuers’ Exchange
Act annual reports, eliminates concerns
about the disclosure being subject to the
officer certifications required by
Exchange Act Rules 13a–14 and 15d–14
and allows the Commission to adjust the
timing of the submission without
directly affecting the broader Exchange
Act disclosure framework.335
While Section 13(q) mandates that a
resource extraction issuer include the
relevant payment disclosure in an
‘‘annual report,’’ it does not specifically
mandate the time period in which a
resource extraction issuer must provide
the disclosure. We continue to believe
that the fiscal year is the more
appropriate reporting period for the
payment disclosure. Despite the
USEITI’s use of calendar year reporting,
we believe fiscal year reporting would
reduce resource extraction issuers’
compliance costs by allowing them to
use their existing tracking and reporting
systems for their public reports to also
track and report payments under
Section 13(q). Finally, we note that
ESTMA and the EU Directives also
require reporting based on the fiscal
year, with ESTMA using the same
deadline contained in the proposed
rules.336 Thus, using a fiscal year
333 Rule 13p–1 [17 CFR 240.13p–1]. See also
Exchange Act Release No. 34–67716 (Aug. 22,
2012), 77 FR 56273 (Sept. 12, 2012) (‘‘Conflict
Minerals Release’’).
334 See also 2012 Adopting Release, nn.366–370
and accompanying text. Under the rules proposed
in the 2010 Proposing Release, a resource extraction
issuer would have been required to furnish the
payment information in its annual report on Form
10–K, Form 20–F, or Form 40–F. Certain
commenters continued to support this approach
prior to the Proposing Release. See letter from
Susan Rose-Ackerman (Mar. 28, 2014) (‘‘[t]here is
no need for the cost of a separate report.’’). No
commenters raised similar concerns after the
Proposing Release.
335 In this regard, we previously considered
permitting the resource extraction payment
disclosure to be filed in an amendment to Form 10–
K, 20–F, or 40–F, as applicable, but were concerned
that this might give the false impression that a
correction had been made to a previous filing. See
2012 Adopting Release, n.379 and accompanying
text.
336 See ESTMA, Section 9(1) (‘‘Every entity must,
not later than 150 days after the end of each of its
financial years, provide the Minister with a report
that discloses, in accordance with this section, the
payments that it has made during that year.’’); EU
Accounting Directive, Art. 43(2) (‘‘The report shall
disclose the following information . . . in respect
of the relevant financial year.’’); EU Transparency
Directive, Art. 6 (‘‘The report shall be made public
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reporting period should promote
consistency and comparability across
payment transparency regimes.
We are also adopting the proposed
150 day deadline. As discussed above,
none of the commenters on the
Proposing Release suggested a different
deadline, and we continue to believe
that it is reasonable to provide a filing
deadline that is later than the deadline
for an issuer’s annual report under the
Exchange Act. Although certain
commenters discussed above supported
allowing issuers to rely on Rule 12b–25
to request an extension to the filing
deadline, we do not believe that is
necessary. In this regard, we note that
none of the potential issuers that
provided comments recommended
including an extension process.
Moreover, we believe 150 days is
sufficient time to prepare timely
disclosure regarding the prior fiscal
year.
Nevertheless, we do believe it is
appropriate to provide transitional relief
for recently acquired companies where
such companies were not previously
subject to the rules, as recommended by
certain commenters.337 As these
commenters noted, we included a
similar provision in Rule 13p–1.338 The
final rules therefore allow issuers that
have acquired or otherwise obtain
control over an issuer whose resource
extraction payments are required to be
disclosed under the final rules, and that
has not previously been obligated to
provide such disclosure pursuant to
Rule 13q–1 or another ‘‘substantially
similar’’ jurisdiction’s requirements in
its last full fiscal year, to not commence
reporting payment information for the
acquired company until the Form SD
filing for the fiscal year immediately
following the effective date of the
acquisition.339 Unlike the targeted
exemption for payments related to
exploratory activities described in
Section II.I.3 below, the excluded
at the latest six months after the end of each
financial year . . . .’’).
337 See letters from Cleary and Ropes & Gray.
338 Instruction (3) to Item 1.01 of Form SD states
that ‘‘[a] registrant that acquires or otherwise
obtains control over a company that manufactures
or contracts to manufacture products with conflict
minerals necessary to the functionality or
production of those products that previously had
not been obligated to provide a specialized
disclosure report with respect to its conflict
minerals will be permitted to delay reporting on the
products manufactured by the acquired company
until the end of the first reporting calendar year that
begins no sooner than eight months after the
effective date of the acquisition.’’ The final rules
differ, however, from what is provided for under
Rule 13p–1 because disclosure under Rule 13p–1
occurs on a calendar year basis, not a fiscal year
basis.
339 See Item 2.01(b) of Form SD.
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payment information is not required to
be disclosed in the Form SD filing
covering the immediately following
fiscal year. We do not believe it is
necessary to provide similar transitional
relief for newly acquired companies that
were already required to report such
payments or companies conducting
initial public offerings. Such companies
should already be familiar with the
reporting requirements or would have
sufficient notice of them to establish
reporting systems and prepare the
appropriate disclosure prior to
undertaking the initial public offering.
H. Public Filing
1. Proposed Rules
Recognizing the purposes of Section
13(q) and the discretion provided by the
statute, and taking into account the
views expressed by various
commenters,340 we proposed requiring
resource extraction issuers to provide
the resource extraction payment
disclosure publicly. We believed that
requiring public disclosure, including
the issuer’s name, would best
accomplish the purpose of the statute.
As explained more fully below, we were
not persuaded by certain commenters’
suggestion that issuers should submit
their annual reports to the Commission
confidentially and that the Commission
should use those confidential
submissions to produce an aggregated,
anonymized compilation that would be
made available to the public.341
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on whether issuers should be
permitted to submit the required
payment disclosure on a confidential
basis. We also asked whether issuers
should be required to file certain
aggregate information publicly if we
allow them to file certain disaggregated
information with us confidentially.
Numerous commenters supported, as
a general policy matter, the concept of
publicly disclosing payment
information.342 A number of other
commenters supported public filing in
the specific manner we proposed.343
These commenters generally stated that
allowing for confidential submission
would undermine the transparency
goals of Section 13(q) and compromise
340 See Proposing Release, n.241 and
accompanying text.
341 See Proposing Release, Section II.G.2. See also
id. at n.301.
342 See Form Letter A and Form Letter B.
343 See letters from ACEP; Bean; Department of
Interior; State Department; Global Witness 1; Peck
& Chayes; Oxfam 1; PWYP–US 1; Quinones; Sen.
Cardin et al.; Sen. Lugar et al.; TI–USA; USAID; and
USSIF.
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the usefulness of the disclosure. For
example, the Department of Interior
stated that permitting confidential
disclosure would contravene the
transparency objectives of the statute
and that continued successful USEITI
implementation requires the public
disclosure of payments for all revenue
streams and by project.344
On the other hand, several
commenters recommended allowing for
confidential submission of the detailed
payment information, which would
then be aggregated in an anonymized
format by the Commission before being
publicly released.345 These commenters
stated that their recommended approach
would reduce the burden and
competitive harm caused by public
disclosure of each issuer’s specific
filings. These commenters said that
such public disclosure forces issuers to
reveal highly confidential,
commercially-sensitive information and
could endanger the safety of an issuer’s
employees. They also stated that these
harms would not be mitigated by the
European Union or Canadian disclosure
regimes because 46 of the top 100 oil
and gas companies are listed only in the
United States, with many having no
reportable operations in Europe or
Canada, or only limited operations in
those jurisdictions conducted through
subsidiaries.
3. Final Rules
Section 13(q) provides the
Commission with the discretion to
require public disclosure of payments
by resource extraction issuers or to
permit confidential filings.346 In
addition, the statute directs the
Commission to provide, to the extent
practicable, a public compilation of this
disclosure. Consistent with the
proposed rules, we continue to believe
that requiring public disclosure of each
issuer’s specific filings (including all the
payment information) would best
accomplish the purpose of the statute.
Therefore, taking into account
commenters’ views, we are exercising
the discretion to adopt final rules that
require issuers to disclose the full
payment information publicly,
including the identity of the issuer.
As discussed in the Proposing
Release, several factors continue to
influence our approach.347 First, the
statute requires us to adopt rules that
further the interests of international
344 See
345 See
letter from Department of Interior.
letters from API 1; Chevron; ExxonMobil
1.
346 See API v. SEC, 953 F. Supp. 2d 5 (D.D.C.,
2013).
347 We incorporate the discussion from Section
II.G.2 of the Proposing Release.
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transparency promotion efforts, to the
extent practicable.348 In this regard, we
find it significant that several existing
transparency regimes now require
public disclosure of each reporting
company’s annual report, including the
identity of the company, without
exception.349 A public disclosure
requirement under Section 13(q) would
further the statutory directive to support
international transparency promotion
efforts by enhancing comparability
among companies, as it would increase
the total number of companies that
provide public, project-level disclosure.
It would also be consistent with the
objective of ensuring that the United
States is a global ‘‘leader in creating a
new standard for revenue transparency
in the extractive industries.’’ 350
Second, the United States is currently
a candidate country under the EITI,
which requires it to provide a
framework for public, company-bycompany disclosure in the EITI report.
At least with respect to reporting of
payments to the Federal Government,
requiring issuers to provide their annual
reports publicly on Form SD is
consistent with the U.S. Government’s
policy commitments under the USEITI.
As noted above, the Department of
Interior has stated that permitting
confidential disclosure would
contravene USEITI implementation.
Third, we continue to believe that
exercising our discretion to require
public disclosure of the information
required to be submitted under the
statute is supported by the text,
structure, and legislative history of
Section 13(q).351 In our view, our
348 Section
13(q)(2)(E).
e.g., ESTMA Specifications, Section 2.4
(‘‘Reporting Entities are required to publish their
reports on the Internet so they are available to the
public’’); EITI Standard (2013) at 6 (requiring all
EITI reports to show payments by individual
company rather than aggregated data) and EITI
Standard (2016) at Section 2.5(c) (in addition to
individual company disclosure, requiring
disclosure of the company’s beneficial owners in
EITI reports by 2020); and EU Accounting Directive
Arts. 42(1) and 45(1) (requiring disclosure of
payments to governments in a report made public
on an annual basis and published pursuant to the
laws of each member state.)
350 156 Cong. Rec. S5873 (July 15, 2010)
(Statement of Senator Cardin); id. at S3815 (May 17,
2010) (Statement of Senator Cardin) (describing
Congress’s intention to create ‘‘a historic
transparency standard that will pierce the veil of
secrecy that fosters so much corruption and
instability in resource-rich countries’’).
351 We acknowledge that the statutory
interpretation arguments we identify do not
demonstrate an unambiguous Congressional intent
to require public disclosure. Nevertheless, these
arguments, and the related ambiguity, do lead us to
reject the API’s contrary contention that ‘‘the plain
language of the statute confirms that the
Commission should require companies to disclose
payment information to the Commission
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exercise of discretion in this manner is
consistent with the statute’s use of the
term ‘‘annual report,’’ which is typically
a publicly filed document,352 and
Congress’s inclusion of the statute in the
Exchange Act, which generally operates
through a mechanism of public
disclosure.353 Furthermore, we observe
that Section 13(q) requires issuers to
disclose detailed information in a
number of categories, without
specifying any particular role for the
Commission in using that information.
For example, Section 13(q) requires
disclosure of ‘‘the business segment of
the resource extraction issuer that made
the payments’’ and ‘‘the currency used
to make the payments.’’ We generally do
not believe that these data points would
be useful to the Commission for
preparing an aggregated, anonymized
compilation as the data points would
not be necessary to present aggregated
payment information and otherwise
would not be reflected in such a
compilation. We believe that this is a
further indication that Congress
intended for the information to be made
publicly available. We believe that this
is a further indication that Congress
intended for the information to be made
publicly available. Finally, neither the
statute’s text nor legislative history
includes any suggestion that the
required payment disclosure should be
confidential. In fact, the legislative
history supports our view that the
information submitted under the statute
should be publicly disclosed.354
confidentially[.]’’ Letter from API 1 (emphasis
added). We believe that, at a minimum, Congress
provided the Commission with discretionary
authority. As such, based on our assessment of the
record evidence and our weighing of the various
policy considerations, we have determined to
exercise that discretion by requiring public
disclosure of each issuer’s annual report on Form
SD. Moreover, we believe that the statutory
interpretation considerations discussed in this
Section II.H demonstrate that our approach is a
permissible under the statute.
352 See e.g., Form 10–K, Form 20–F, Form 10–Q,
Form 8–K, etc.
353 The Exchange Act is fundamentally a public
disclosure statute. See generally Schreiber v.
Burlington Northern, Inc., 472 U.S. 1, 12 (1985)
(‘‘the core mechanism’’ is ‘‘sweeping disclosure
requirements’’ that allow ‘‘shareholder choice’’);
Longman v. Food Lion, Inc., 197 F.3d 675, 682 (4th
Cir. 1999) (embodies a ‘‘philosophy of public
disclosure’’); Franklin v. Kaypro Corp., 884 F.2d
1222, 1227 (9th Cir. 1987) (‘‘forc[es] public
disclosure of facts’’). Accordingly, the reports that
public companies are required to submit under the
Exchange Act—such as the annual report on Form
10–K giving a comprehensive description of a
public company’s performance—have always been
made public. Adding a new disclosure requirement
to the Exchange Act, and doing so for the clear
purpose of fostering increased transparency and
public accountability, is a strong indication that
Congress intended for the disclosed information to
be made public.
354 See, e.g., 156 Cong. Rec. S3976 (May 19, 2010)
(Statement of Senator Feingold) (‘‘This amendment
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More fundamentally, we believe that
the public release of issuers’ annual
reports is necessary to achieve the U.S.
interest in providing a level of payment
transparency that will help combat
corruption and promote accountability
in resource-rich countries, as Section
13(q) was intended to do. The
comments that we have received, as
well as our own consideration of the
record and the views that we have
received from other U.S. and foreign
governmental agencies with expertise in
this area, persuade us of this.355
We have carefully considered the
API’s assertion that the ‘‘purpose of
enabling people to hold their
governments accountable for the
revenues generated from resource
development is achieved as long as
citizens know the amount of money the
government receives, not the companies
that make each individual payment.’’ 356
We have also carefully considered the
API’s related assertion that the
Commission has failed ‘‘to connect
[Section 13(q)’s] objectives to the
specific approach in the proposed
rule—mandatory public disclosure by
issuers in their annual reports, as
would require companies listed on U.S. stock
exchanges to disclose in their SEC filings extractive
payments made to foreign governments for oil, gas,
and mining. This information would then be made
public, empowering citizens in resource-rich
countries in their efforts to combat corruption and
hold their governments accountable.’’); id. at S5872
(July 15, 2010) (Sen. Cardin) (‘‘This [amendment]
will require public disclosure of those payments.’’);
see also id. at S3649 (May 12, 2010) (proposed
‘‘sense of Congress’’ accompanying amendment that
became Section 13(q)) (encouraging the President to
‘‘work with foreign governments’’ to establish their
own ‘‘domestic requirements that companies under
[their jurisdiction] publicly disclose any payments
made to a government’’ for resource extraction)
(emphasis added); id. at H5199 (June 29, 2010)
(Joint Explanatory Statement of the Committee of
Conference) (the amendment ‘‘requires public
disclosure to the SEC of any payment relating to the
commercial development of oil, natural gas, and
minerals’’) (emphasis added).
355 The API asserted that publication of each
issuer’s annual report could cause competitive
harm, but that keeping the disclosures confidential
with the public release of only an aggregated,
anonymized compilation will ‘‘minimize . . . the
competitive harm to issuers by omitting the most
sensitive data.’’ See letter from API 1. We believe
the targeted exemption we are providing in
connection with payments relating to exploratory
activities should help to mitigate such competitive
harms. See Section II.I.3 below. In addition, as we
discuss in the economic analysis, see Section
III.B.2.c below, we believe that the other claimed
competitive harms may be overstated. Moreover,
the data that the API would exclude from public
disclosure is, as we discuss above, necessary to
provide the type of granular and localized
transparency that will, in our view, help to combat
corruption and promote accountability. We thus
believe that, on balance, the potential competitive
harms that might result from the public disclosure
of each issuer’s annual report is necessary and
appropriate in furtherance of Section 13(q)’s
objectives.
356 See letter from API 1.
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opposed to confidential disclosure by
issuers followed by a public
compilation produced by the
Commission.’’ 357 For the reasons
discussed below, we do not agree with
either of these assertions.
We believe that disclosing an issuer’s
identity is important to help achieve the
objectives of Section 13(q). In this
regard, we note that one of the
proponents of the API’s approach stated
that ‘‘[f]or the API model to work,’’ each
payer’s identity must be revealed.358 We
further note that, after a decade of
experience, the EITI (to which the API
and many of its members are active
participants) has now determined that
company-specific, project-level
disclosure is necessary to further the
EITI’s goals.359
Furthermore, as we explained in the
Proposing Release, the record supports
a number of specific ways in which
company-specific public disclosures can
facilitate the twin goals of helping to
reduce corruption in the extractives
sector and promoting governmental
accountability. For example, public
disclosure of company-specific, projectlevel payment information may help
assist citizens, civil society groups, and
others to monitor individual issuer’s
contributions to the public finances and
ensure firms are meeting their payment
obligations. We explained that such data
may also help various actors ensure that
the government is properly collecting
and accounting for payments.360 We
also explained that, relatedly, an
important additional benefit of
company-specific and project-level
transparency is that it would act as a
strong deterrent to issuers underpaying
royalties’ or other monies owed. We
believe the record also supports the
potential that the public disclosure of
company-specific, project-level data
may reduce the willingness of resource
extraction issuers to participate in deals
where they believe the revenues may be
corruptly diverted from the government
coffers.361 With our decision to include
357 See
id.
letter from ASP.
359 See Proposing Release, Section II.E.1, n.194,
and Section II.G.2.
360 See Proposing Release, Section I.E.2.
361 See letter from Publish What You Pay—US
(second of three letters on Mar. 8, 2016) (‘‘PWYP–
US 3’’) (explaining that a resource extraction issuer
took part in a transaction in Nigeria knowing that
the revenues were going to be diverted from the
Nigerian government to a Nigerian oil minister, and
explaining that aggregation and anonymization of
such payments would have made it more difficult
for the public and civil society ‘‘to trace where the
payment ended up or even find out that it had been
made’’). See generally U.S. Senate Permanent
Subcommittee on Investigations, Committee on
Government Affairs, Money Laundering and
Foreign Corruption: Enforcement and Effectiveness
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358 See
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contractually required social and
community payments among the
required disclosures, we now perceive
an additional potential benefit of
company-specific, project-level public
disclosure.362 Local communities may
be able to ensure that they are in fact
receiving the promised payments and
that those payments are being used by
the governments receiving the funds for
the benefit of the community. We
believe much the same is true with
respect to contractual obligations
regarding in-kind infrastructure
development.363
We note that the API asserts that
‘‘Section 13(q) was passed to increase
the accountability of governments, not
to force public companies to pay more
to develop natural resources, or to
expose them to activism by special
interest groups.’’ 364 While we recognize
the API’s point, we nonetheless believe
that its view of the anti-corruption and
accountability objectives underlying
Section 13(q) is unduly narrow. In our
view, the U.S. foreign policy interest in
helping citizens to hold their
governments accountable for the
management of the public’s natural
resources (and preventing corruption in
connection with the extraction of those
resources) 365 includes, among other
things, providing transparency to help
ensure that the transactions that the
government enters are producing a
return that the citizens believe is
of the Patriot Act, Case Study Involving Riggs Bank
Report, at 98–111 (July 14, 2004) (providing
examples of the roles that resource extraction
companies can play in facilitating the suspect or
corrupt practices of foreign officials seeking to
divert resource extraction payments that belong to
the government).
362 See Section II.C above.
363 See, e.g., letter from PWYP–US 1 (explaining
that in Equatorial Guinea, ‘‘the government has
used social payments as cover under which to
approach U.S.-listed oil and gas companies about
financing projects that appear to have been
motivated by the whims of individual government
officials and had little to do with social
development. . . . This raises concerns that social
payments, if allowed to remain opaque, could be
misused to channel corrupt payments, special
favors, and kickbacks, creating a gray zone of illicit
payments that may not be easily monitored or
policed by the [Foreign Corrupt Practices Act].’’).
See also letter from ASP (‘‘Even with an explicit
legal prohibition on bribery, however, it is not
always clear what constitutes corruption, as
contracts can be written that favor individuals or
companies. . . ’’).
364 See letter from API 1.
365 See 156 Cong. Rec. S3816 (May 17, 2010) (Sen.
Lugar) (explaining that Section 13(q) is intended to
‘‘help empower citizens to hold their governments
to account for the decisions made by their
governments in the management of valuable oil,
gas, and mineral resources and revenues’’). See also
id. at S5873 (July 15, 2010) (Sen. Cardin)
(explaining that Section 13(q) will help citizens
‘‘ensure that their country’s natural resource wealth
is used wisely for the benefit of the entire nation
and for future generations’’).
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49387
appropriate, and providing transparency
to citizens and members of civil society
to help ensure that the transactions do
not involve suspect or corrupt payment
arrangements. We thus agree with the
position advanced by USAID that ‘‘[i]t is
through disaggregated data, which
includes the identity of the payer and
the location and type of the project, that
transparency will be promoted.’’ 366 As
USAID explained in its comment:
[T]ransparency about corporate payments
to governments is a prerequisite to the
effective engagement of citizens to ensure
that such revenues are managed responsibly
and for the benefit of a country’s citizens.
Such engagement is only possible if the
citizens know which company is paying
what kind of payment to which government
entity relating to which project in which
location. Aggregate data about multiple
resources, projects, or geographic locations
does not allow citizens of a particular[ ]
region to speak up and insist that the
revenues associated with the project
impacting them be used for their benefit,
rather than to personally benefit potentially
corrupt government officials.367
In addition, we believe that providing
an issuer’s Form SD filings to the public
through the searchable, online EDGAR
system, which will enable users of the
information to produce their own up-todate compilations in real time, is both
consistent with the goals of the statute
and the Commission’s obligation, to the
extent practicable, to ‘‘make available
online, to the public, a compilation of
the information required to be
submitted’’ by issuers.368 Under this
366 See letter from USAID. See also letter from
BHP (‘‘Transparency by governments and
companies alike regarding revenue flows from the
extraction of natural resources in a manner which
is meaningful, practical, and easily understood by
stakeholders reduces the opportunity for
corruption.’’)
367 See letter from USAID. See also id.
(‘‘Aggregated information that contains numerous
companies’ payment histories does not allow for
citizens to understand or engage with extraction
companies operating in their geographical area.’’);
letter from State Department (expressing ‘‘approval’’
of the proposed rule’s ‘‘company-specific, projectlevel public disclosure’’ provisions and explaining
that ‘‘[t]his level of transparency required by the
proposed rule is key for ensuring that citizens have
the necessary means to hold their governments
accountable. . . . [T]he rule’s requirements directly
advance the United States’ foreign policy interests
in increasing transparency and reducing corruption
in the oil, gas, and minerals sectors and strengthen
the United States’ credibility and ability to fight
corruption more broadly. . . .).
368 The legislative history surrounding the
adoption of Section 13(q) indicates that Congress
likely did not intend for the public compilation
requirement to serve as a substitute for the public
disclosure of an issuer’s annual reports. Rather, the
public compilation requirement, added to an earlier
version of the legislation that became Section 13(q),
was intended for the convenience of the users of
that data—many of whom were not seeking the
information for purposes of investment activity and
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approach, all the filings will be
separately searchable on EDGAR and
the information provided can be
extracted and viewed on an individual
basis or as a compilation. Indeed, this
approach provides users of the
disclosure with more current and
immediately available information than
the API’s proposed compilation, which
would provide only one annual
update.369 That said, we appreciate that
some commenters have asserted that the
statutory language could be read to
require that the Commission
periodically make available its own
compilation of the information that
issuers provide in their annual reports
thus would potentially be unfamiliar with locating
information in the extensive annual reports that
issuers file. In the earlier versions of the draft
legislation, the resource extraction payment
disclosures were required to be made in the annual
report that each issuer was already required to file
under the securities laws. See, e.g., Extractive
Industries Transparency Disclosure Bill (H.R. 6066)
(May 2008) (‘‘requir[ing] that each issuer required
[to] file an annual report with the Commission shall
disclose in such report’’ the resource extraction
payments that the issuer makes) (emphasis added).
For the convenience of non-investor users of the
data, the provision included a separate section
entitled ‘‘Public Availability of Information’’ that
provided in pertinent part: ‘‘The Securities and
Exchange Commission shall, by rule or regulation,
provide that the information filed by all issuers . . .
be compiled so that it is accessible by the public
directly, and in a compiled format, from the Web
site of the Commission without separately accessing
. . . the annual reports of each issuer filing such
information.’’ Id. (emphasis added). As the
proposed legislative language was later being
incorporated into the Exchange Act, the
Commission’s staff gave technical advice that led to
the modification of the legislative text to provide
the Commission with additional flexibility to
permit the disclosures in an annual report other
than ‘‘the annual report’’ that issuers already file so
as to avoid unnecessarily burdening issuers. See
156 Cong. Rec. S3815 (May 17, 2010) (Statement of
Senator Cardin) (‘‘We have been working with a lot
of groups on perfecting this amendment, and we
have made some changes that will give the SEC the
utmost flexibility in defining how these reports will
be made so that we get the transparency we need
without burdening the companies.’’). Our decision
to utilize Form SD rather than to require the
disclosures in an issuer’s annual report, when
coupled with the functionality that the EDGAR
system provides, in our view sufficiently addresses
the Congressional concern that originally led to the
separate requirement of a publicly available
compilation.
369 Our recommended approach would provide
investors with information that would be
immediately available to all users upon filing. In
contrast, under the API Proposal, users of the
information could have to wait to access the
information for months after an issuer files its Form
SD (when the Commission publishes its next
periodic compilation). For example, assume that the
Commission issues a compilation annually on
December 1st of each year. If an issuer files its
annual Form SD on January 1st, the information in
that report would not be publicly available for
another eleven months if the Forms SD were held
confidentially. Under the approach being adopted,
however, the information will be made publicly
available as soon as the Form SD is filed on EDGAR.
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on Form SD.370 Accordingly, we are
including a provision in the final rules
providing that the Commission’s staff
will periodically make a separate public
compilation of the payment information
submitted in issuers’ Forms SD
available online. Under the final rules,
the staff may determine the form,
manner, and timing of each
compilation, except that no information
included therein may be
anonymized.371
In sum, we believe that public
disclosure of each issuer’s Form SD is
important to further Section 13(q)’s
foreign policy objectives of helping to
reduce corruption and enhance the
ability of citizens to hold their
governments accountable for the
management of the natural resources in
their country and the use of the
revenues generated by those
resources.372 We therefore have
exercised our discretion under Section
13(q) to require issuers to disclose
publicly their Forms SD.
I. Exemption From Compliance
1. Proposed Rules
In the Proposing Release, we noted
that many commenters previously had
requested exemption from Section
13(q)’s disclosure requirements, in
particular in cases where the required
payment disclosure is prohibited under
the host country’s laws. We noted that
some commenters had identified
specific countries that they claimed
prohibit disclosure while other
commenters challenged those
statements. Given commenters’
conflicting positions and
representations, and consistent with the
EU Directives and ESTMA, we did not
propose any blanket or per se
370 See letter from API 1 (discussing the
compilation requirements in Section 13(q)(3)).
371 See Rule 13q–1(e). We do not anticipate that
the staff will produce such a compilation more
frequently than once a year.
372 The API contends that, ‘‘[b]y requiring
disaggregated, contract-level public disclosures,’’
our rule ‘‘will make it more difficult for parties
seeking information about how much governments
are ultimately receiving to obtain that information.’’
Letter from API 1. The API claims that, by contrast,
a ‘‘public compilation that aggregates the total
amount of money paid to governments for oil, gas,
and minerals’’ would be ‘‘more informative.’’ Id. We
note that, in advancing this contention, the API
appears to assume that the Section 13(q) disclosures
are designed only to provide information about how
much governments are ultimately receiving.
Nevertheless, as we have described above, we
believe that the transparency provided by the
disaggregated, project-level disclosures significantly
advances broader anti-corruption and
accountability goals. Even so, we note that to the
extent a particular user is focused on learning about
how much money governments are ultimately
receiving, EDGAR’s functionality will allow them to
generate this information from the filed annual
reports.
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exemptions. Instead, we indicated that
we would consider using our existing
authority under the Exchange Act to
provide exemptive relief at the request
of issuers, if and when warranted.373 We
stated our belief that a case-by-case
approach to exemptive relief using our
existing authority was preferable to
either adopting a blanket exemption or
providing no exemptions. We also
stated that, among other things, such an
approach would permit us to tailor the
exemptive relief to the particular facts
and circumstances presented, such as by
permitting some alternative form of
disclosure that might comply with the
foreign country’s law or by phasing out
the exemption over an appropriate
period of time.374
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on whether a case-by-case
exemptive process was a better
alternative than providing a rule-based
blanket exemption for specific countries
or other circumstances, or providing no
exemptions. We also asked whether any
foreign laws prohibit the disclosure that
would be required by the proposed
rules, or if there was any information
that had not been previously provided
by commenters that supports an
assertion that such prohibitions exist
and are not limited in application. We
also asked whether the EU Directives’
and ESTMA’s lack of an exemption for
situations when disclosure is prohibited
under host country law had presented
any problems for resource extraction
issuers subject to those reporting
regimes.
A number of commenters supported
the proposed approach.375 One of these
commenters, while ‘‘strongly
support[ing]’’ our approach, urged the
Commission to consider existing
commercial relationships when
responding to requests for exemptive
relief.376 This commenter noted that
contractual confidentiality clauses
usually allow the contractual parties to
provide confidential information
requested by court order or regulatory
373 See Section 36(a) of the Exchange Act (15
U.S.C. 78mm(a)).
374 For example, if a resource extraction issuer
were operating in a country that enacted a law that
prohibited the detailed public disclosures required
under our proposal, the Commission could
potentially issue a limited exemptive order (in
substance and/or duration). The order could be
tailored to either require some form of disclosure
that would not conflict with the host country’s law
and/or provide the issuer with time to address the
factors resulting in non-compliance.
375 See letters from ACTIAM et al. (Calvert
separately commenting that it preferred no
exemption despite being a signatory to this letter);
Bean; Cleary; and Petrobras.
376 See letter from Petrobras.
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bodies, but condition such disclosure on
the maintenance of confidentiality by
the receiving entity.
Many other commenters supported
the proposed approach, but preferred
not providing any exemptions.377 A
number of these commenters
recommended granting an exemption
only if the request relates to a foreign
law prohibition pre-dating the passage
of Section 1504.378 Commenters also
disputed claims that foreign law
prohibitions exist or that they would
have competitive harm.379
Numerous commenters recommended
not providing any exemptions.380 For
example, the Department of Interior
noted that federal leases for natural
resource development on federal lands
and waters are public and do not
contain confidentiality provisions. This
commenter stated that, consistent with
the contract transparency provisions
under the EITI Standard, USEITI
reporting includes disclosure of these
leases and that providing an exemption
would contravene the transparency
objectives of Section 13(q) and the
Federal Government.
Several commenters supported
blanket exemptions instead of the
377 See letters from ACEP; Calvert; Global Witness
1; Oxfam 1; PWYP–US 1; Sen. Cardin et al.; Sen.
Lugar et al.; TI–USA; and USSIF.
378 See letters from Sen. Cardin et al.; Sen. Lugar
et al.
379 See letters from Global Witness (Mar. 8, 2016)
(‘‘Global Witness 2’’) (‘‘Nor is there any persuasive
evidence of the existence of secrecy laws that are
in conflict with Section 13(q), as the Commission
itself determined in 2012, and as we and others
have argued.’’); Natural Resource Governance
Institute (Second of two letters on Feb. 16, 2016)
(‘‘NRGI 2’’) (‘‘In practice, there is therefore no
blanket exclusion of covered companies from
awards in [Angola, Cameroon, China, and Qatar].
Our findings further show that the covered
companies have not been significantly affected in
their ability to secure contracts in [those] countries
after the adoption of Section 1504.’’); McCarthy
(stating that Angola’s Production Sharing
Agreements provide a standard exception from
confidentiality to comply with any applicable laws
or regulations and disputing any competitive harm
to companies required to report payments to host
governments in Angola, Cameroon, China, or
Qatar); Oxfam 2 (noting the disclosure of payments
to governments in China and Qatar in the RDS
Report and providing additional evidence of a lack
of foreign law prohibition on payment disclosure
under Qatari law); Oxfam-ERI (‘‘No country
prohibits disclosure, and the Commission should
not grant any categorical exemptions.’’); PWYP–US
1 (‘‘There are no foreign laws prohibiting disclosure
of the information required under Section 13(q).’’);
TI–USA (‘‘[W]hile it has been alleged that Angolan
law prohibits the disclosure of resource extraction
payments . . . Statoil publicly reports such
payments to the Angolan government.’’); PWYP–US
5 (noting the disclosure of payments to
governments in China and Qatar in the Total Report
and Tullow Report).
380 See Form Letter A; Form Letter B and letters
from Department of Interior; Peck & Chayes;
Quinones; and NRGI 1.
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proposed case-by-case approach.381
These commenters sought exemptions
for disclosure that would violate a host
country’s laws, conflict with the terms
of existing contracts, or reveal
commercially sensitive information.
These commenters also sought an
exemption for disclosure that would
jeopardize the safety of an issuer’s
personnel.382 They were concerned that
the cost of not receiving an exemption,
particularly when a foreign law
prohibition was in place, could be very
high if the issuer was required to cease
operations in the host country as a
result of the prohibition and liquidate
its fixed assets at a steep discount. They
also noted the volatility of the regions
in which they operate, the potential for
terrorist attacks, and the existence of
confidentiality provisions in older
resource extraction agreements.
The API and certain other industry
commenters sought various blanket
exemptions.383 With respect to an
exemption for foreign law prohibitions
on disclosure, these commenters
asserted that both Qatar and China
prohibit the required disclosure.384
They were also concerned that it would
be difficult to obtain timely exemptive
relief on a case-by-case basis if
exemptions would have to be granted by
the full Commission. To address these
concerns, they recommended the
following three alternatives to the
proposed approach, in order of
preference: (1) Exempting issuers from
reporting payments in any country
whose laws prohibit the disclosure; (2)
exempting issuers from reporting
payments in any country whose laws
prohibited the disclosures, so long as
those laws existed before the
Commission adopted its rules; and (3)
exempting issuers from reporting
payments in specific countries where
the risk to issuers is particularly acute.
As for disclosure that would reveal
commercially sensitive information,
these commenters recommended
allowing issuers to redact payment
information temporarily until a later
time when the disclosure would be less
harmful (e.g., after news of a new
381 See letters from API 1; Chevron; ExxonMobil
1; and Nouveau.
382 See 2012 Adopting Release, n.69 and
accompanying text. See also letters from API 1 and
Chevron. Other commenters opposed such an
exemption and stated that increased transparency
would instead increase safety for employees. See
2012 Adopting Release, n.70 and accompanying
text. See also letter from Oxfam-ERI.
383 See letters from API 1; Chevron; and
ExxonMobil 1.
384 We note in this regard that the API did not
reiterate its previous assertions that Angola and
Cameroon have laws prohibiting the disclosure of
payment information.
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49389
discovery is public knowledge). The API
explained that such an exemption
would be particularly appropriate for
exploratory activities and new finds, but
acknowledged that the commercial
terms of older projects are generally
publicly known (even if the contracts
are not technically publicly disclosed),
thus suggesting that an exemption
would generally not be necessary to
protect commercially sensitive
information for older projects. They also
recommended exempting disclosure in
situations where revealing payment
information would breach contractual
obligations that existed before Congress
passed Section 13(q) or when it might
jeopardize the safety of an issuer’s
employees (including physical harm or
criminal prosecution) or the national
security of a host nation.
In addition to these broader
recommendations about the types of
exemptions that should be included in
the rules, commenters also made
recommendations with respect to the
process for granting exemptions. A few
commenters were concerned that the
exemption requests would be
considered in a public forum, which
could result in disclosure of
competitively sensitive information or
violate host country law.385 One of these
commenters requested, at a minimum,
that the rules follow an exemptive
approach where any claimed exemption
would require issuers to make
reasonable efforts to obtain permission
for disclosure, file legal opinions
supporting any non-disclosure, and be
subject to review by the Commission,
but would otherwise be selfexecuting.386 Another commenter
recommended using a no-action letter
process with delegated authority to the
Division of Corporation Finance, which
it believed would be both flexible and
practical.387
Numerous commenters recommended
a public process for exemption
applications.388 Many of these
commenters specifically called for a
process that involved notice and
comment.389 Some of them specifically
recommended requiring issuers to apply
for exemptions using Exchange Act Rule
0–12.390 Some of these commenters
385 See
letters from Cleary and ExxonMobil 1.
letter from ExxonMobil 1.
387 See letter from Cleary.
388 See letters from ACEP; ACTIAM et al.; Bean;
Calvert; Global Witness 1; Oxfam 1; PWYP–US 1;
Sen. Cardin et al.; Sen. Lugar et al.; TI–USA; and
USSIF.
389 See letters from ACEP; Bean; Calvert; Global
Witness 1; Oxfam 1; PWYP–US 1; Sen. Cardin et al.;
Sen. Lugar et al.; TI–USA; and USSIF.
390 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
386 See
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recommended that the rules provide
clear guidance on the criteria that would
be used to evaluate applications for
exemptions.391 One of them also
recommended an instruction clarifying
that exemptions will be granted rarely
and only for extremely compelling
reasons.392
A number of commenters made
specific recommendations for the types
of supporting documentation the rules
should require from those seeking an
exemption due to a foreign law
prohibition on disclosure.393 These
commenters recommended requiring the
text of the relevant law, a legal opinion
identifying the conflicts with the
disclosure rules, and a description of
the steps taken by the issuer to obtain
permission from the host country to
disclose, such as waivers, exceptions, or
exemptions. Some of these commenters
also recommended requiring a
description of the penalties or sanctions
for violating the foreign legal provision,
including information about whether
the prohibition has been enforced in the
past.394 One of them also recommended
requiring that the issuer provide the text
of the foreign law and the legal opinion
in English and also provide the date of
enactment or promulgation of the
foreign law or rule.395
3. Final Rules
While we continue to believe, for the
reasons discussed below, that a case-bycase approach to providing exemptions
under our existing authority is generally
preferable in this context, we are also
including a targeted exemption for
payments related to exploratory
activities.396 We believe this exemption,
as described and discussed below,
should help mitigate any potential
competitive harm that issuers might
experience while not materially
reducing the overall benefits of the
disclosure to its users. To address any
other potential bases for exemptive
relief, beyond the exemptions for
payments related to exploratory
activities and recently acquired
companies, issuers may apply for
exemptions on a case-by-case basis
using, as recommended by certain
391 See
letters from Bean and USSIF.
letter from Bean.
393 See letters from ACEP; Bean; Global Witness
1; Oxfam 1; PWYP–US 1; Sen. Cardin et al. and Sen.
Lugar et al.
394 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
395 See letter from Bean.
396 See Item 2.01(b) of Form SD. As discussed
above in Section II.G.3, the final rules also include
transitional relief for certain recently acquired
companies.
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392 See
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commenters,397 the procedures set forth
in Rule 0–12 of the Exchange Act.398
This approach will allow the
Commission to determine if and when
exemptive relief may be warranted and
how broadly it should apply, based on
the specific facts and circumstances
presented in the application.399
With respect to the request for a
blanket exemption in countries where
the law may prohibit the disclosure,
however, we believe that there
continues to be sufficient uncertainty in
the record such that this approach is not
necessary or appropriate at this time.
For example, while the API initially
identified four countries whose laws
would prohibit Section 13(q)
disclosures, its most recent comment
letter listed only two of those countries
as currently prohibiting such
disclosures.400 In addition, with respect
to those two remaining countries, we
note that several large resource
extraction issuers have recently made
payment disclosures related to those
jurisdictions.401 We think this state of
uncertainty, which at a minimum raises
questions about the existence and scope
of disclosure prohibitions in these
foreign jurisdictions, counsels against
adoption of any blanket exemptions for
foreign law conflicts at this time.
Moreover, as more companies begin to
report under the EU Directives and
ESTMA, the existence of alleged
conflicts between those disclosure
regimes and foreign laws may be
clarified prior to any reports being due
under the rules we are adopting
today.402 This, along with the fact that
397 See letters from ACEP; Global Witness 1;
Oxfam; and PWYP–US 1. See also note 388 and
accompanying text.
398 17 CFR 240.0–12.
399 For example, an issuer claiming that a foreign
law prohibits the required payment disclosure
under Section 13(q) will be able to make the case
that it would suffer substantial commercial or
financial harm if relief is not granted. An issuer
could also apply for an exemption in situations
where disclosure would conflict with the terms of
a material preexisting contract, reveal commercially
sensitive information not otherwise available to the
public, or have a substantial likelihood of
jeopardizing the safety of an issuer’s personnel,
among other possible bases for an exemption. The
Commission could then determine the best
approach to take based on the facts and
circumstances, including denying an exemption,
providing an individual exemption, providing a
broader exemption for all issuers operating in a
particular country, or providing some other
appropriately tailored exemption. See letters from
ACEP; ACTIAM et. al.; Bean; Calvert; Cleary; Oxfam
1; Oxfam-ERI; Petrobras; PWYP–US 1; Sen. Cardin
et al.; Sen. Lugar et al.; TI–USA and USSIF (each
supporting a case-by-case exemptive approach,
although some expressed a preference for not
providing any exemptions).
400 See letter from API 1.
401 See note 299 above.
402 For example, reports under the United
Kingdom’s implementation of the EU Directives
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issuers will have a two-year period
before any reports are due under our
rules in which to submit an exemptive
application (along with appropriate
supporting materials), further supports
the conclusion that a case-by-case
exemptive approach is preferable.
Separately, we also believe that the
case-by-case exemptive approach is
significantly less likely than a blanket
approach to encourage foreign
governments to enact laws prohibiting
the Section 13(q) disclosures. A blanket
exemption could lead a foreign
government contemplating such a law to
conclude that enactment of the law
would have its intended effect of
preventing the disclosures. With a caseby-case exemptive approach, however,
that foreign government would not be
able to reach that conclusion, as it
would face a number of uncertainties
concerning the potential results of
enacting such a law. Specifically, the
foreign government would not have any
basis to assume that the Commission
would grant exemptive relief, and, even
if it did so, whether such relief would
apply on a permanent basis or in a more
limited fashion (such as a
grandfathering provision or a time-limit
to allow issuers to divest their interests
in the country in an orderly manner).
This uncertainty about whether the law
would have its intended effect, in our
view, should help to discourage foreign
governments from adopting such a law.
Relatedly, we note that one
commentator opposed the case-by-case
exemptive approach because of the
uncertainty that it may cause issuers.403
While we appreciate this concern, we
believe that it is on balance outweighed
by the countervailing considerations
discussed above, and elsewhere in this
release and the Proposing Release,
which counsel against our adopting
most of the blanket exemptions that
commenters proposed.
With respect to the request for an
exemption to prevent the disclosure of
will be due by November 2016 at the latest (with
certain reports due by June 2016) covering
payments made in fiscal 2015; and reports under
Canada’s ESTMA will be due for many issuers (i.e.,
for those issuers with fiscal years ending December
31, 2016) in May 2017 covering payments made in
2016. Significantly, we note that several reports that
already have been filed pursuant to the EU
Directives have disclosed payments made to the
governments of Angola, China, and Qatar, which
commenters previously indicated prohibited such
disclosure. See BHP Report (China); Shell Report
(China and Qatar), Statoil Report (Angola); and
Total Report (Angola, China, Qatar). See also note
302 above. As additional reports are filed, we
expect to gain further insight into the permissibility
and feasibility of disclosure in these and other
jurisdictions.
403 See letter from API 1 (‘‘issuers need the
certainty of knowing how the rule will affect them
now’’).
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commercially sensitive information, we
are persuaded that a targeted exemption
for payments made in connection with
exploratory activities, in line with
commenters’ suggestions, is
appropriate.404 Specifically, issuers will
not be required to report payments
related to exploratory activities in the
Form SD for the fiscal year in which
payments are made but can instead
delay reporting such payments in the
Form SD until the fiscal year following
the fiscal year in which the payments
were made. In this regard, we believe
that the likelihood of competitive harm
(in regards to a new discovery) from the
disclosure of payment information
related to exploratory activities
diminishes over time starting from
when the exploratory activities on the
property or any adjacent property have
begun.405
For purposes of this exemption, we
consider payments to be related to
exploratory activities if they are made as
part of the process of identifying areas
that may warrant examination or
examining specific areas that are
considered to have prospects of
containing oil and gas reserves, or as
part of a mineral exploration program.
In all cases, however, exploratory
activities are limited to activities
conducted prior to the development or
extraction of the oil and gas or minerals
that are the subject of the exploratory
activities. Furthermore, this targeted
exemption is not permitted for
payments related to exploratory
activities on the property or any
adjacent property once the issuer has
commenced development or extraction
activities anywhere on the property, on
any adjacent property, or on any
property that is part of the same project.
In providing this exemption, we also
considered the fact that the total
payment streams from the first year of
exploration that would be covered by
the exemption should often be relatively
small compared to, for example, the
annual payment streams that would
likely occur once an issuer commences
development and production. Given this
likelihood, we believe, on balance, that
any diminished transparency as a result
of the one-year delay in reporting of
such payments that we are permitting is
justified by the potential competitive
harms that we anticipate may be
avoided as a result of this exemptive
relief. Nevertheless, we have limited the
404 See letter from API 1 (asserting as an example
of competitive harm payments to local governments
in connection with ‘‘high-potential exploratory
territory’’ and maintaining that case-by-case
exemptions would be insufficient to protect against
competitive harm in such situations).
405 See note 406 below.
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exemption to one year because we
believe that the likelihood of
competitive harm related to a new
discovery from disclosing the payment
information diminishes over time once
exploratory activities on the property or
any adjacent property have begun.406
Beyond these accommodations for
exploratory activities and certain
recently acquired companies, we are not
persuaded that we should adopt
exemptions for other purposes in the
final rules. As a threshold matter, we
note that many commenters advanced
credible arguments challenging the
claims raised by industry commenters
for broad exemptive relief in these
areas.407 Further, we are mindful that
global resource extraction payment
transparency touches on a host of issues
that are constantly changing and
evolving and as such do not lend
themselves to static exemptive regimes.
In this regard, we note the enactment of
significant transparency laws in major
economic markets, the expanding
implementation of the EITI, the
increasing prevalence of voluntary
payment disclosure, evolution in the
terms typically included in agreements
with host governments, and the
constantly changing geopolitical
security landscape.408 As such, we
believe that crafting exemptions that
balance the transparency goals of
Section 13(q) with the myriad concerns
that could arise is best done through a
flexible facts-and-circumstances based
approach. Furthermore, although we
have included only two targeted
exemptions in the final rules, nothing
prevents the Commission from using its
existing exemptive authority to provide
broader relief if the facts and
406 We appreciate that the exploratory phase may
vary from project to project, and that this variance
can depend on such considerations as the
geographic area in which the exploration is being
undertaken and the type of resource being sought.
In determining to provide a one-year reporting
delay, we looked to considerations in the oil and
gas industry in particular as oil and gas industry
commenters asserted a specific need for the
exemptive relief. We understand that the
exploratory period for oil and gas generally involves
a seismic survey/analysis phase followed by an
exploratory drilling phase. We further understand
that, while the time periods for those activities can
vary considerably, conducting seismic surveys and
analyzing the data can take six months or more,
while (at least for conventional onshore
hydrocarbons) exploratory drilling and site
clearance can potentially take a similar length of
time. These considerations lead us to believe that
one year is an appropriate period for a delay in
reporting exploratory payments.
407 See Section II.I.2 above.
408 We note in this regard that, in contrast to the
2012 Rules, commenters have not reiterated
previous assertions that Cameroon and Angola
prohibit the disclosure of resource extraction
payments.
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49391
circumstances should warrant such
action in the future.409
A separate but related consideration is
that developing objective criteria for
exemptive relief for potential
competitive harm (beyond the
exploratory phase) or safety that could
be uniformly applied would be difficult.
In our view, issues related to such
competitive and safety concerns are
inherently case-specific, requiring an
analysis of the underlying facts and
circumstances. We are therefore
concerned that adopting a broad
exemption with respect to competitive
concerns (beyond the exploratory phase)
or safety concerns could result in
issuers applying the exemption in an
overly broad way. Specifically, the
effective and appropriate utilization of
broad exemptions in these areas would
be dependent on the independent
assessment and good faith
implementation by issuers, potentially
producing inconsistent application, if
not overuse.410 With a case-by-case
exemptive approach, however, the
Commission can ensure that exemptions
are afforded only where the facts and
circumstances warrant.
Finally, we are not persuaded that
there is a need for an exemption in the
final rules for contracts that may
prohibit the disclosure. We note that
various commenters opposing such an
exemption provided evidence indicating
that many contracts allow for disclosure
of payment information where it is
required by law.411 Moreover, we
409 See Section 36(a) of the Exchange Act (15
U.S.C. 78mm(a)). We contemplate relying on
Section 36(a) and the application process set forth
in Rule 0–12 as the principal means of considering
exemptive relief from the requirements of the final
rules, except that, where exigent circumstances
warrant, the staff, acting pursuant to delegated
authority from the Commission, may rely on
Section 12(h) of the Exchange Act (15 U.S.C. 78l(h)
for the limited purpose of providing interim relief
while the Commission is considering a Section
36(a) exemptive application.
410 Cf. generally letter from API 1 (noting
potential difficulties when rule text is ‘‘susceptible
to varying interpretations’’ among issuers).
411 Several commenters provided persuasive
evidence demonstrating that exceptions to
confidentiality for laws or stock exchange
requirements that require disclosure are frequently
a standard component of oil, gas and mining
contracts. See letter from PWYP–US 3. For instance,
we understand that the Association of International
Petroleum Negotiators (AIPN) has included this
type of exception to confidentiality in its model
contract used by its members for the last two
decades. See letter from Oxfam America (Mar. 20,
2012) (‘‘Oxfam 2 (pre-proposal)’’) (noting that the
AIPN Model Form Confidentiality Agreement
authorizes the disclosure of otherwise confidential
information that is required ‘‘under applicable law,
including by stock exchange regulations or by a
governmental order, decree, regulation or rule.’’).
Another commenter provided a database of over
800 contracts from 73 countries and reported that
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believe that the two-year period that we
are providing issuers before the
reporting obligation takes effect should
allow most issuers a sufficient
opportunity to obtain the necessary
modifications to existing contracts so
that they can make the required
disclosures. With respect to any future
contracts that issuers may enter, we
anticipate that issuers can and should
include express provisions permitting
them to make the disclosures required
under Section 13(q).
Commenters were also divided about
whether the exemptive application
process should be public (with notice
and comment) or confidential. We agree
that public input can be beneficial in
understanding the complexities of the
resource extraction industry.
Accordingly, Rule 0–12 allows the
Commission to provide notice in the
Federal Register and to receive public
comment on applications for
exemptions when it deems such an
approach appropriate. Notwithstanding
our appreciation for public input, we
also do not believe it is appropriate to
require an issuer to reveal the very
information it seeks to protect in order
to apply for an exemption. In this
regard, we note that although an
applicant would need to describe the
particular payment disclosure it seeks to
omit and the specific facts and
circumstances that warrant an
exemption, it need not include specific
payment amounts to support its
application. We believe that in most
cases the application could present
sufficient information to describe the
circumstances warranting an exemption
and the corresponding harm without
revealing the precise information that
the issuer seeks to keep confidential. We
also note that Rule 0–12 does allow
applicants to request temporary
confidential treatment to the extent
provided under Rule 81,412 which may
further alleviate concerns by delaying
public access to the exemptive
application for up to 120 days from the
time of the Commission’s response.
Further, issuers will be permitted to
withdraw their application if it appears
to the staff that the request for
confidential treatment should be
denied, in which case the application
would remain in the Commission’s files
but would not be made public.413
over half of the contracts in the database explicitly
allow for disclosure when required by law. See
letter from OpenOil UG (Oct. 26, 2015) (‘‘OpenOil
(pre-proposal)’’).
412 17 CFR 200.81.
413 17 CFR 200.81(b). The information could be
subject to a request made pursuant to the Freedom
Of Information Act (FOIA). In this regard, however,
we note that FOIA provides an exemption from
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Finally, we note that Rule 0–12
requires an application to be made in
writing, including ‘‘any supporting
documents necessary to make the
application complete.’’ Commenters
were divided on whether the
Commission should require certain
specified documentation as part of the
application or whether we should
follow a more flexible, non-prescriptive
approach, where the registrant would
initially determine what supporting
information is appropriate. We believe a
non-prescriptive, flexible process is
more appropriate given that we are
adopting a case-by-case approach to
exemptions that is driven by particular
facts and circumstances. We do note,
however, that the Commission, through
the Division of Corporation Finance,
may request, as appropriate, supporting
documentation such as a legal opinion,
the text of applicable foreign laws
(translated as necessary),
representations as to the public
availability of the information in
question, or a description of the steps
taken by the issuer to obtain permission
to disclose.414 Failure to provide such
information upon request could cause
the application to be deemed
incomplete or denied. We note that, as
with any exemptive application, the
burden is on the applicant to
demonstrate that such relief is necessary
and appropriate in the public interest.
J. Alternative Reporting
1. Proposed Rules
As noted in the Proposing Release,
several jurisdictions have implemented
resource extraction payment disclosure
laws since the 2012 Rules.415 Around
the time of the Proposing Release, the
USEITI also published its first report.416
In light of these developments and with
a view towards reducing compliance
costs, we proposed a provision that
would allow issuers to meet the
requirements of the proposed rules by
providing disclosure that complies with
a foreign jurisdiction’s rules or that
meets the USEITI’s reporting
requirements, if the Commission has
determined that those rules or
requirements are substantially similar to
the rules adopted under Section
13(q).417 The Proposing Release
contemplated that the Commission
would be able to make a determination
about the similarity of a foreign
public release for ‘‘trade secrets and commercial or
financial information obtained from a person and
privileged or confidential.’’ See 5 U.S.C. 552(b)(4).
414 See Rule 0–12(a), (f) [17 CFR 240.0–12(a), (f)].
415 See Section I.C above.
416 See note 87 above.
417 Proposed Item 2.01(b) of Form SD.
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jurisdiction’s or the USEITI’s disclosure
requirements either unilaterally or
pursuant to an application submitted by
an issuer, jurisdiction, or other party.418
We proposed requiring resource
extraction issuers to file the
substantially similar report as an exhibit
to Form SD with a statement in the body
of its filing that it was relying on the
accommodation and identifying the
alternative reporting regime for which
the report was prepared (e.g., a foreign
jurisdiction or the USEITI).
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on whether we should include
an alternative reporting process that
would allow for an issuer that is subject
to the reporting requirements of a
foreign jurisdiction or the USEITI to
submit those reports in satisfaction of
our requirements. In addition, we
solicited comment on whether a
‘‘substantially similar’’ standard was
appropriate and which criteria should
apply when evaluating the similarity of
another jurisdiction’s reporting
requirements. We also solicited
comment on various aspects of the
procedures surrounding an alternative
reporting process, such as whether the
Commission should unilaterally make
the determination, what types of parties
should be allowed to submit an
application for alternative reporting,
what supporting evidence should be
required, and what application
procedures should be implemented. For
example, we requested comment on
whether Exchange Act Rule 0–13 would
provide appropriate procedures for
requesting alternative reporting. We also
solicited comment on whether the
Commission should recognize certain
foreign reporting requirements or the
USEITI reporting framework as
substantially similar when the final rule
is adopted.
All of the commenters that addressed
this aspect of the Proposing Release
supported the concept of alternative
reporting in some form.419 Despite
general support, several commenters
recommended using a standard different
from ‘‘substantially similar,’’ such as
‘‘equivalent,’’ 420 ‘‘substantially
equivalent,’’ 421 ‘‘broadly similar,’’ 422 or
418 See
Proposing Release, Section II.G.4.
letters from ACEP; ACTIAM et al.; API 1;
Bean; BHP; BP; Calvert; Chevron; Cleary;
Department of Interior; Encana; ExxonMobil 1;
Global Witness 1; Oxfam 1; PWYP–US 1; RDS;
Ropes & Gray; Sen. Cardin et al.; Sen. Lugar et al.;
and Total.
420 See letter from Cleary.
421 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
422 See letter from BP.
419 See
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‘‘broadly comparable.’’ 423 Several
commenters also recommended criteria
that the Commission should focus on
when assessing the similarity of other
regimes. For example, one commenter
recommended using the two criteria set
forth in Canada’s substitution policy.424
A variety of other recommendations
were made by other commenters, such
as comparing (1) the types of payments
that are required to be disclosed; (2) the
types of payment recipients (including
subnational governments and entities
controlled by the government); (3)
whether project-level disclosure is
required and, if so, the definition of
‘‘project;’’ (4) whether the disclosure
must be publicly filed and whether it
includes the identity of the issuer; (5)
whether subsidiaries under the control
of and consolidated by the issuer are
reported; (6) the threshold for de
minimis payments; (7) whether the
disclosure must be provided using an
interactive data format that includes
electronic tags; (8) the availability of
exemptions from reporting; (9)
frequency of reporting; (10) anti-evasion
measures; and (11) the availability of
liability or penalties for violations of the
disclosure requirements.425
One commenter recommended that
the Commission not require issuers to
convert data into a different interactive
data format as a condition to alternative
reporting.426 Another commenter
recommended that the EU Directives
and ESTMA be deemed substantially
similar requirements despite not
requiring inclusion of a tag for the
particular resource subject to
commercial development.427
Other commenters made specific
recommendations on the procedures
that the Commission should follow
when making an alternative reporting
determination. For example, several
commenters supported using the
procedures set forth in Exchange Act
Rule 0–13,428 while other commenters
supported a less prescriptive
approach.429 A few commenters also
recommended allowing issuers, foreign
jurisdictions, and industry groups to
submit applications supporting the
423 Id.
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424 See
letter from Cleary. For a discussion of
Canada’s substitution policy, see Section I.C.2
above.
425 No one commenter recommended all of these
factors. See, e.g., letters from PWYP–US 1 and
Encana.
426 See letter from BHP.
427 See letter from Encana.
428 See letters from Calvert and PWYP–US 1. See
also letters from ACEP; Global Witness 1; and
Oxfam 1.
429 See letters from Cleary and Ropes & Gray.
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substantial similarity of other
jurisdictions’ requirements.430
A number of commenters called for
the Commission to recognize
substantially similar alternative
reporting regimes in the adopting
release.431 Most of those commenters
recommended recognizing the EU
Directives 432 and/or Canada.433
Commenters also recommended the UK
specifically 434 or Norway.435 The
Department of Interior recommended
allowing for alternative reporting under
the USEITI, with several other
commenters supporting that
recommendation.436
3. Final Rules
a. Requirements for Alternative Reports
We are adopting an alternative
reporting mechanism similar to what we
proposed whereby issuers will be able
to meet the requirements of the final
rules by providing disclosure that
complies with a foreign jurisdiction’s or
the USEITI’s resource extraction
payment disclosure requirements if they
are deemed ‘‘substantially similar’’ by
the Commission.437 As noted above,
commenters broadly supported the
concept of alternative reporting despite
differing opinions on how it should be
applied. The framework for alternative
reporting in the final rules allows a
resource extraction issuer that has
already prepared a report pursuant to
‘‘substantially similar’’ requirements to
avoid costs associated with having to
prepare a separate report meeting the
requirements of our disclosure rules.438
We are adopting the proposed
‘‘substantially similar’’ standard because
we are not persuaded that the
alternative standards recommended by
commenters would allow the
Commission to evaluate better whether
a regime requires sufficient disclosure to
serve the underlying goals of Section
letters from Cleary and Ropes & Gray.
letters from ACEP; BHP; BP; Cleary;
Encana; Global Witness 1; Oxfam 1; PWYP–US 1;
RDS; Ropes & Gray; and Total.
432 See letters from ACEP; BHP (recommending
recognizing the EU’s reporting system for a finite
period of five years); BP; Cleary; Encana; Global
Witness 1; Oxfam 1; PWYP–US 1; and Total.
433 See letters from Cleary; Encana; and PWYP–
US 1. See also letters from ACEP; Global Witness
1; and Oxfam 1.
434 See letters from BP; Cleary; and RDS. The
letters from BP and Cleary also recommended the
European Union more generally.
435 See letters from Cleary and PWYP–US 1. See
also letters from ACEP; Global Witness 1; and
Oxfam 1.
436 See letters from BP; Calvert; and PWYP–US 1.
437 See Item 2.01(c) of Form SD.
438 See Section III.C.2 below for a discussion of
these costs.
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431 See
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49393
13(q) while also avoiding unnecessary
costs.439
We note that the alternative reporting
provision is generally consistent with
the approach taken in the EU Directives
and ESTMA and should promote
international transparency efforts by
incentivizing foreign countries that are
considering adoption of resource
extraction payment disclosure laws to
provide a level of disclosure that is
consistent with our rules and the other
major international transparency
regimes. Under the final rules, an issuer
may only use an alternative report for an
approved foreign jurisdiction or regime
if the issuer is subject to the resource
extraction payment disclosure
requirements of that jurisdiction or
regime and has made the report
prepared in accordance with that
jurisdiction’s requirements publicly
available prior to filing it with the
Commission.440 An issuer choosing to
avail itself of this accommodation must
submit as an exhibit to Form SD the
same report that it previously made
publicly available in accordance with
the approved alternative jurisdiction’s
requirements.441 The issuer must
include a statement in the body of Form
SD that it is relying on this
accommodation and identifying the
alternative reporting regime for which
the report was prepared.442
In addition, the alternative reports
must be tagged using XBRL.443
Although a commenter recommended
not requiring issuers to convert data into
a different interactive data format to
qualify for alternative reporting,444 we
believe that requiring a consistent data
format for all reports filed with the
Commission will improve the
usefulness of the compilations created
by the Commission and will enhance
the ability of users to create their own
up-to-date compilations in real time. We
also do not believe that this requirement
will add significantly to the costs of
alternative reporting given that most of
these costs are associated with
collecting the required information, not
the particular data format.
An issuer relying on the alternative
reporting accommodation must also
provide a fair and accurate English
439 See
notes 420–423 above and accompanying
text.
440 See
Item 2.01(c)(1)–(2) of Form SD.
Item 2.01(c)(2). The format of the report
may differ to the extent necessary due to the
conditions placed by the Commission on the
alternative reporting accommodation. See id. For
example, the report may not have been originally
submitted in the home jurisdiction in XBRL or may
not have been in English.
442 See Item 2.01(c)(3) of Form SD.
443 See Item 2.01(c)(4) of Form SD.
444 See letter from BHP.
441 See
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translation of the entire report if
prepared in a foreign language.445
Project names may be presented in their
original language in addition to the
English translation of the project name
if the issuer believes such an approach
would facilitate identification of the
project by users of the disclosure.446
As noted in the Proposing Release, the
‘‘substantially similar’’ standard would
not require the alternative reporting
regime to be equivalent or identical.
Under the final rules, the Commission
could consider the following criteria,
among others, to make its determination
that another reporting regime is
substantially similar: (1) The types of
activities that trigger disclosure; (2) the
types of payments that are required to
be disclosed; (3) whether project-level
disclosure is required and, if so, the
definition of ‘‘project;’’ (4) whether the
disclosure must be publicly filed and
whether it includes the identity of the
issuer; and (5) whether the disclosure
must be provided using an interactive
data format that includes electronic tags.
When considering whether to allow
alternative reporting based on a foreign
jurisdiction’s reporting requirements,
the Commission will likely also
consider whether disclosure of
payments to subnational governments is
required and whether there are any
exemptions allowed and, if so, whether
there are any conditions that would
limit the grant or scope of the
exemptions. This non-exclusive list of
factors does not preclude the
Commission from considering other
factors, such as those recommended in
the comments described above.447
As discussed above in Section I.C.2,
Canada allows for substituted reports to
445 See Item 2.01(c)(5) of Form SD. Rule 306 of
Regulation S–T (17 CFR 232.306) requires that all
electronic filings and submissions be in the English
language. If a filing or submission requires the
inclusion of a foreign language document, Rule 306
requires that the document be translated into
English in accordance with Securities Act Rule
403(c) (17 CFR 230.403(c)) or Exchange Act Rule
12b–12(d) (17 CFR 240.12b–12(d)). Both of these
rules require the submission of a fair and accurate
English translation of an entire foreign language
document that is being submitted as an exhibit or
attachment if the document consists of certain
specified material. If the foreign language document
does not consist of such material, and the form
permits it, a fair and accurate English language
summary may be provided in lieu of an English
translation. Given the level of specificity of the
disclosure and the electronic tagging required under
Rule 13q–1 and Form SD, we do not believe it
would be appropriate to permit an English
summary of a foreign language document that is
being provided as an alternative report. We have
therefore added a requirement to Form SD requiring
a registrant to provide a fair and accurate English
translation of the entire foreign language document
being submitted as an exhibit to Form SD pursuant
to the alternative reporting provision.
446 See Item 2.01(c)(5) of Form SD.
447 See Section II.J.2 above.
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be filed according to the approved
substitute jurisdiction’s deadline if the
Department of Natural Resources
Canada is notified by email prior to the
expiration of ESTMA’s 150 day
deadline.448 In light of the requirement
in the final rules that the alternative
report be publicly available in the
alternative jurisdiction prior to the
submission of the alternative report to
the Commission, we believe that an
approach similar to Canada’s will
increase the usefulness of the alternative
reporting accommodation.449 Therefore,
an issuer filing an alternative report
prepared pursuant to foreign reporting
regimes recognized by the Commission
as substantially similar may follow the
reporting deadline in the alternative
jurisdiction.450 To do so, however, it
must submit a notice on Form SD–N on
or before the due date of its Form SD
indicating its intent to submit the
alternative report using the alternative
jurisdiction’s deadline.451 To deter
abuse of this accommodation, the final
rules provide that if an issuer fails to
submit such notice on a timely basis, or
submits such a notice but fails to submit
the alternative report within two
business days of the alternative
jurisdiction’s deadline, it will become
ineligible for the alternative reporting
accommodation for the following fiscal
year.452
b. Recognition of EU Directives,
Canada’s ESTMA, and the USEITI as
Alternative Reporting Regimes
In conjunction with our adoption of
the final rules, we are issuing an order
recognizing the EU Directives, Canada’s
ESTMA, and the USEITI in their current
forms as substantially similar disclosure
regimes for purposes of alternative
reporting under the final rules, subject
to certain conditions. We have
determined that these three disclosure
regimes are substantially similar to the
final rules.453 For example, all three
regimes require annual, public
disclosure, including the identity of the
filer; do not provide for any blanket
exemptions; include the same or similar
activities when defining commercial
development of oil, natural gas, or
minerals; require project-level reporting
at the contract level (or in the case of the
USEITI, calls for project-level reporting
note 80–81 above and accompanying text.
Canada uses the same 150 day
deadline as the final rules, the EU Directives leave
the annual deadline to the discretion of the member
states. See note 56 above and accompanying text.
450 See Item 2.01(c)(6) of Form SD.
451 See Item 2.01(c) of Form SD.
452 Id.
453 For a lengthier discussion of significant
aspects of these regimes, see Section I.C above.
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449 Although
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consistent with the European Union and
Commission definitions of ‘‘project’’);
cover similar payment types; cover
similar controlled entities and
subsidiaries; and require foreign
subnational payee reporting. Although
we acknowledge differences between
these regimes and the final rules, we do
not believe that such differences, as
identified and discussed above,454
support reaching a different conclusion,
particularly in light of the requirements
we are imposing on alternative
reporting.455 We note that, among those
commenters who addressed the issue,
there was agreement that the
Commission should allow alternative
reporting under the EU Directives,
Canada’s ESTMA, and the USEITI.456
This further persuades us that it is
appropriate at this time to grant these
three regimes alterative reporting status
in their current form.
Although we are recognizing the
USEITI’s requirements as substantially
similar, we are mindful of the more
limited scope of those requirements. For
example, the USEITI does not cover
payments to foreign governments and
currently uses calendar year reporting
instead of fiscal year reporting.457 Due
to these limitations, as set forth in the
accompanying order, USEITI reports
will only satisfy the disclosure
requirements in Rule 13q–1 for
payments made by an issuer to the
454 See Section II.C.3 above (discussing variations
in the treatment of CSR payments under the final
rules, the EU Directives, and ESTMA) and Section
II.E.3 above (discussing when multiple agreements
may be aggregated as a single project under the final
rules and how that differs from the approach used
by the EU Directives and the ESTMA
Specifications). We recognize that our decision to
include CSR payments within the list of payment
types specifically covered by the final rules reflects
a difference from how CSR payments are treated
under the European Union and Canadian disclosure
regimes. On balance, considering the benefits to
users and issuers from permitting alternative
reporting and the fact that the recent trend has been
toward inclusion of such payments (the EITI
revised its standard to include CSR payments after
the EU and Canadian disclosure standards were
developed), we do not feel this difference should
prevent us from recognizing the EU Directives and
ESTMA as ‘‘substantially similar’’ reporting regimes
at this time. In weighing whether to recognize these
reporting regimes as substantially similar, we also
have considered that several companies reporting
under these regimes may provide disclosure about
CSR payments. See Section II.C.3 above.
Furthermore, the ESTMA Guidance indicates that
CSR payments disclosure may be required in
Canada in certain circumstances, despite not being
specifically listed as a covered payment type. See
note 212 and accompanying text.
455 For example, the final rules require alternative
reports to be submitted in XBRL format. See Section
II.J.3.a above.
456 See letters from ACEP; BHP (recommending
recognizing the EU’s reporting system for a finite
period of five years); BP; Calvert; Cleary; Encana;
Global Witness 1; Oxfam 1; PWYP–US 1; and Total.
457 See Section I.C.3 above.
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Federal Government, not to foreign
governments. An issuer will have to
supplement its USEITI report by
disclosing in its Form SD all payment
information to foreign governments
required by the final rules. In addition,
the issuer may need to supplement its
USEITI report so that the required
payment information is provided on a
fiscal year basis.458 We note that the
requirement to provide fiscal year
reporting will have limited impact on
issuers with a December 31 fiscal year
end. In this regard, the Department of
Interior has stated that ‘‘many’’ U.S.
EITI reporting companies use the
calendar year as their fiscal year.459
c. Application Procedures
With respect to applications to
request recognition of other
jurisdictions’ payment transparency
rules as substantially similar, applicants
should follow the procedures set forth
in Rule 0–13 of the Exchange Act,
which permits an application to be filed
with the Commission to request a
‘‘substituted compliance order’’ under
the Exchange Act. Although applicants
should follow the procedures set forth
in Rule 0–13(b) through (i), applications
may be submitted by issuers,
governments, industry groups, and trade
associations.460 The application must
include supporting documents and will
be referred to the Commission’s staff for
review. The Commission must publish a
notice in the Federal Register that a
complete application has been
submitted and allow for public
comment. The Commission may also, in
its sole discretion, schedule a hearing
before the Commission on the matter
addressed by the application.
K. Exhibits and Interactive Data Format
Requirements
1. Proposed Rules
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The proposed rules required a
resource extraction issuer to file the
required disclosure on EDGAR in an
XBRL exhibit to Form SD. Consistent
with Section 13(q), the proposed rules
required issuers to submit the payment
information using electronic tags—a
taxonomy of defined reporting
elements—that identify, for any
payment required to be disclosed:
458 For example, in addition to covering any gaps
between the calendar year and fiscal year, the issuer
will need to disclose any series of payments that
exceeded the de minimis threshold on a fiscal year
basis rather than on a calendar year basis. See
Section II.C above for a discussion of the de
minimis threshold.
459 See letter from Department of Interior.
460 See Rule 13q–1(c).
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• The total amounts of the payments,
by category; 461
• the currency used to make the
payments;
• the financial period in which the
payments were made;
• the 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.462
In addition to the electronic tags
specifically required by the statute, we
proposed requiring issuers to provide
and tag:
• The type and total amount of payments
made for each project,
• the type and total amount of payments
for all projects made to each government;
• the particular resource that is the subject
of commercial development, and
• the subnational geographic location of
the project.
For purposes of identifying the
subnational geographic location of the
project, we proposed an instruction
specifying that issuers must provide
information regarding the location of the
project that is sufficiently detailed to
permit a reasonable user of the
information to identify the project’s
specific, subnational location.463 We
stated that, depending on the facts and
circumstances, this could include the
name of the subnational governmental
jurisdiction(s) (e.g., state, province,
county, district, municipality, territory,
etc.) or the commonly recognized
subnational geographic or geologic
location (e.g., oil field, basin, canyon,
delta, desert, mountain, etc.) where the
project is located, or both. We
anticipated that more than one
descriptive term would likely be
necessary when there are multiple
projects in close proximity to each other
or when a project does not reasonably
fit within a commonly recognized,
subnational geographic location. We
also stated that when considering the
appropriate level of detail, issuers may
need to consider how the relevant
contract identifies the location of the
project.464
We also proposed an instruction to
Form SD that would have required
issuers to report the amount of
payments made for each payment type
461 For example, categories of payments could be
bonuses, taxes, or fees.
462 See proposed Item 2.01(a) of Form SD.
463 See proposed Instruction 3 to Item 2.01 of
Form SD.
464 See id.
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49395
and the total amount of payments made
for each project and to each government
in U.S. dollars or in the issuer’s
reporting currency if not U.S. dollars.465
The proposed rules allowed a resource
extraction issuer to calculate the
currency conversion in one of three
ways: (1) By translating the expenses at
the exchange rate existing at the time
the payment is made; (2) by using a
weighted average of the exchange rates
during the period; or (3) based on the
exchange rate as of the issuer’s fiscal
year end.466 A resource extraction issuer
was also required to disclose the
method used to calculate the currency
conversion.467
Consistent with the statute, the
proposed rules required a resource
extraction issuer to include an
electronic tag that identified the
business segment of the resource
extraction issuer that made the
payments. We proposed defining
‘‘business segment’’ as the reportable
segments used by the resource
extraction issuer for purposes of
financial reporting.468
We also proposed that to the extent
payments, such as corporate income
taxes and dividends, are made for
obligations levied at the entity level,
issuers could omit certain tags that may
be inapplicable (e.g., project tag,
business segment tag) for those payment
types as long as they provide all other
electronic tags, including the tag
identifying the recipient government.469
Finally, we noted that Section 13(q)(3)
directs the Commission, to the extent
practicable, to provide a compilation of
the disclosure made by resource
extraction issuers. To satisfy this
requirement, the proposed rules
required the disclosures to be filed on
EDGAR in an XBRL exhibit, which
would allow the data to be searched and
extracted by users.
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on a variety of matters related
to the format of the disclosure, the
proposed tags, and the related
465 See proposed Instruction 2 to Item 2.01 of
Form SD. Currently, foreign private issuers may
present their financial statements in a currency
other than U.S. dollars for purposes of Securities
Act registration and Exchange Act registration and
reporting. See Rule 3–20 of Regulation S–X [17 CFR
210.3–20].
466 See proposed Instruction 2 to Item 2.01 of
Form SD.
467 See id.
468 See proposed Item 2.01(c)(1) of Form SD. The
term ‘‘reportable segment’’ is defined in FASB ASC
Topic 280, Segment Reporting, and IFRS 8,
Operating Segments.
469 See 2012 Adopting Release, n.432 and
accompanying text.
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instructions. For example, we asked
how the total amount of payments
should be reported when payments are
made in multiple currencies and
whether the three proposed methods for
calculating the currency conversion
described above provide issuers with
sufficient options to address any
possible concerns about compliance
costs, the comparability of the
disclosure among issuers, or other
factors. We also asked whether XBRL is
the most suitable interactive data
standard, whether ‘‘business segment’’
should be defined differently, and
whether the non-statutory tags we
proposed were appropriate. In addition,
we requested comment on whether the
proposed ‘‘reasonable user’’ approach to
describing the geographic location of the
project provided sufficient detail to
users of the disclosure when combined
with the other tagged information.
Finally, we solicited comment on
whether the proposed approach to
making a compilation available was
consistent with Section 13(q)(3) or
whether a different compilation would
be necessary.
All of the commenters that addressed
the proposed interactive data format
supported using XBRL.470 One of them
generally recommended that the rules
provide issuers with the flexibility to
present information in either the body
of the Form SD or on an exhibit, as well
as the flexibility to decide whether to
summarize or include selected
information contained in the exhibit in
the base Form SD.471
One commenter specifically
supported the proposed approach to
describing the geographic location of
projects.472 Another commenter
recommended that, rather than relying
on the concept of ‘‘a reasonable user,’’
the rules require geographic locations to
be disclosed as specified in the
agreement or multiple agreements
which have been used to establish the
project for reporting purposes.473 By
contrast, the commenters that supported
the API Proposal disagreed with tagging
the geographic location of the project at
a level below the largest subnational
political jurisdiction.474 As described
above, those commenters recommended
using ISO codes to standardize
geographic location tagging down to the
first subnational geographic level.475
470 See letters from AICPA; PWYP–US 1; and
XBRL US.
471 See letter from Ropes & Gray.
472 See letter from Department of Interior.
473 See letter from PWYP–US 1.
474 See Section III.E. above.
475 Id.
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Several commenters requested
changes or clarifications to the data
tagging requirements.476 One of them
recommended defining ‘‘business
segment’’ to mean the subsidiary or
other entity under the control of the
issuer that makes payments to a
government because that entity often
has a different name from the parent
issuer that is reporting to the
Commission.477 This commenter stated
that providing the name of the entity
making the payment would aid
accountability and provide users with
the means to follow up locally when
compared to the Commission’s
proposed approach of defining
‘‘business segment’’ as a reportable
segment used for purposes of financial
reporting. Other commenters disagreed
with this suggestion believing that it
was outside the scope of the statute.478
Another commenter, noting our
guidance on entity-level disclosure,
requested clarification of whether it
could omit the project tag with respect
to its export activities, which it stated
were not project-specific.479 Another
commenter was unclear on whether the
tag for the ‘‘particular resource that is
the subject of commercial development’’
should be assigned to each project or
whether it should be assigned to each
government payee.480 This commenter
recommended that, if the particular
resource must be disclosed, the tag
should be associated with a project
rather than a government payee. This
commenter also noted that the proposed
rules did not specify the level of
granularity at which the ‘‘particular
resource’’ must be disclosed.481 This
commenter also had concerns that
reporting payments at a particular
resource level would pose challenges for
some issuers as development projects
often target more than one resource as
the subject of development and not all
payments to a government payee are
determined or dependent on a particular
resource (i.e., property taxes).
Another commenter recommended
adopting the AICPA Audit Data
Standards within the new XBRL
taxonomy. This commenter stated that
using these standards would enable
476 See letters from AICPA; Encana; Petrobras;
PWYP–US 1; and XBRL US.
477 See letter from PWYP–US 1.
478 See letters from ExxonMobil 2 and Petrobras.
479 See letter from Petrobras.
480 See letter from Encana.
481 For example, this commenter sought
clarification of whether the ‘‘particular resource’’
disclosure should be the primary resource targeted,
such as oil, natural gas, or natural gas liquids, or
if it should be the resource product types, such as
coal bed methane, natural gas liquids, bitumen,
heavy oil, light crude oil, and natural gas excluding
natural gas liquids.
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issuers and their auditors to share
‘‘business operational, business and
accounting data,’’ creating potential cost
savings by reducing duplicative data
standards used by issuers and thereby
leveraging the cost of complying with
the rule for a range of purposes
including internal and external use in
the audit function.482
Another commenter recommended
incorporating in EDGAR robust
validation of the data submitted in the
XBRL exhibits for both technical
structure as well as content. 483 This
commenter stated that doing so would
ensure that the information provided to
users is accurate and reliable. This
commenter also recommended
publishing the data as a set of CSV files
to simplify automated analysis for some
users, similar to what the Commission
does for XBRL financial data. Generally
this commenter thought that the
Commission should seek input on the
draft taxonomy through a public review
and comment process prior to
implementing the reporting
requirements. Noting our statement in
the Proposing Release that Inline
XBRL 484 was another possible
alternative for providing the information
in interactive data format, the
commenter questioned whether Inline
XBRL would improve the usability of
the data, or whether it merely adds an
additional burden on filers to convert
their data to HTML as well as XBRL.
One commenter stated that the three
proposed methods for calculating the
currency conversion when payments are
made in multiple currencies provides
issuers with sufficient options to
address any possible concerns about
compliance costs and comparability of
the disclosure among issuers.485
Finally, several commenters
specifically supported the proposed
approach as meeting the statutory
requirements to provide a
compilation.486 Other commenters
stated that the proposed approach
abandons the Commission’s statutory
obligation to create a compilation.487
We discuss our approach to providing a
compilation in Section II.H.3 above.
3. Final Rules
We are adopting the proposed
requirements regarding interactive data
482 See
letter from AICPA.
letter from XBRL US.
484 Inline XBRL would allow registrants to file the
required information and data tags in one document
rather than requiring a separate exhibit for the
interactive data.
485 See letter from Petrobras.
486 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
487 See letters from API 1; Chevron; ExxonMobil
1.
483 See
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exhibits and tagging with limited
modifications. The approach we are
adopting today provides the disclosure
elements in a machine readable
(electronically-tagged) XBRL format that
should enable users to search, extract,
aggregate, and analyze the information
in a manner that is most useful to them.
As we discussed in the Proposing
Release, this approach will allow the
information received from issuers to be
converted by EDGAR and other
commonly used software and services
into an easily-readable tabular
format.488 The final rules do not require
Inline XBRL. Given the nature of the
disclosure required by the final rules,
which is primarily an exhibit with
tabular data, we do not believe that
Inline XBRL would improve the
usefulness or presentation of the
required disclosure. As noted above,
commenters supported using XBRL as
the interactive data format but did not
similarly support Inline XBRL, with one
commenter specifically questioning its
usefulness in this context. Unlike the
comments we received on the 2010
Proposing Release, none of commenters
on the Proposing Release recommended
that the Commission allow issuers to
use an interactive data format of their
preference.489
Commenters were divided on how
issuers should tag the subnational
geographic location of the project.490 On
the one hand, those supporting the API
Proposal favored using the first order
subnational geographic location. Some
of those commenters recommended
using ISO codes to standardize
references to those subnational
geographic locations. These commenters
were generally concerned that the
proposed method for describing the
location of a project would cause
confusion and could potentially reduce
transparency. On the other hand, many
other commenters, including those
expressing the greatest interest in using
the disclosure to further the
transparency goals of the statute,
488 The use of XBRL will allow the Commission
to improve the quality and usefulness of the data
compilation on EDGAR by including data
validation measures to improve data quality. Given
the disbursement ledger nature of the Resource
Extraction data, using existing disbursement
taxonomies would be relevant both for minimizing
implementation costs and also potentially
enhancing the reusability by different consumers
(e.g., management, internal auditors, external
auditors, regulators). The AICPA Audit Data
Standards include disbursement ledger taxonomies
and thereby may be useful in this effort.
489 See Section II.G.5 of the Proposing Release.
490 Commenters were also divided on how to
name the project for the ‘‘project of the resource
extraction issuer to which the payments relate’’ tag.
We address issues relating to the definition of
‘‘project’’ in Section II.E. above.
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disagreed with an approach that would
only disclose the geographic location of
a project at the highest level of political
organization below the national level.
For the reasons discussed in Section
II.E.3 above, we agree with the latter
commenters that additional granularity
is needed to accomplish the goals
underlying Section 13(q). Nevertheless,
we are sympathetic to the concern that
differing descriptions of a project’s
location might make it more difficult to
sort the data compiled in EDGAR. For
this reason, we believe it is appropriate
to add an additional tag for the
subnational geographic location that
uses the ISO codes suggested by
commenters.491 In this way, users of the
disclosure would be able to sort the data
in the more generalized fashion that
industry commenters, such as the API,
said would be more useful while also
having access to the more specific data
that many civil society organizations
have supported. With respect to the
suggestion of one commenter to use the
geographic locations disclosed in the
agreement(s) associated with a project,
we believe the proposed approach
accomplishes the same purpose while
providing the issuer additional
flexibility.492
With respect to the requirement to
provide and tag the type and total
amount of payments made for each
project and to each government, we are
adopting the three currency conversion
methods as proposed.493 As discussed
above, the one commenter that
addressed these methods thought that
the options that were provided were
sufficient to address concerns about
compliance costs and comparability of
disclosure.494 Nevertheless, to avoid
confusion, we are requiring that an
issuer must choose a consistent method
for all such currency conversions within
a particular Form SD filing.495
With respect to the required business
segment tag, despite the concerns of one
commenter, we are adopting the
proposed definition of ‘‘business
segment.’’ 496 We believe defining
business segment in a manner
491 Similarly, to enhance comparability, we are
requiring issuers to use the ISO 3166 code, if
available, to identify the country in which a payee
government is located. See Instruction 3 to Item
2.01 of Form SD.
492 See letter from PWYP–US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
493 See Instruction 2 to Item 2.01 of Form SD.
494 See letter from Petrobras.
495 See Instruction 2 to Item 2.01 of Form SD.
496 See letter from PWYP–US 1 (recommending
defining ‘‘business segment’’ as the subsidiary or
entity under the control of the issuer that makes
payments to a government because that would aid
accountability and facilitate local follow-up by data
users). See also proposed Item 2.01(c)(1) of Form
SD.
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consistent with the reportable segments
used by resource extraction issuers for
purposes of financial reporting provides
sufficient granularity when combined
with the detailed geographic and
project-level information required to be
disclosed by the final rules. In addition,
the proposed approach would have cost
advantages by aligning the disclosure
requirements with the issuer’s existing
financial reporting systems and
procedures.
L. Treatment for Purposes of Securities
Act and Exchange Act
1. Proposed Rules
The statutory language of Section
13(q) does not specify that the
information about resource extraction
payments must be ‘‘filed.’’ Rather, it
states that the information must be
‘‘include[d] in an annual report[.]’’ 497
The proposed rules required resource
extraction issuers to file, rather than
furnish, the payment information on
Form SD.
2. Comments on the Proposed Rules
In the Proposing Release we solicited
comment on whether the payment
disclosure should be filed or furnished.
We also asked whether certain officers,
such as the resource extraction issuer’s
principal executive officer, principal
financial officer, or principal accounting
officer, should certify the Form SD
filing’s compliance with the
requirements of Section 13(q) of the
Exchange Act or that the filing fairly
presents the information required to be
disclosed under Rule 13q–1.498
Commenters were divided on whether
the disclosure should be filed as
proposed, thus incurring Section 18
liability, or whether it should be
furnished.499 The commenters
supporting the proposed approach
stated that requiring the disclosure to be
filed would ensure that it could be used
reliably for investment analysis and for
other purposes.500 The commenters that
recommended allowing the disclosure
to be furnished stated that the rules
were not material to the ‘‘vast majority
of investors’’ and that users of the data
did not need the level of protection
associated with Section 18 liability.501
These commenters expressed concern
497 15
U.S.C. 78m(q)(2)(A).
address responses to this request for
comment and a similar one in Section II.G. above.
499 For those in favor of filing, see letters from
Bean; PWYP–US 1; TI–USA; and USSIF. For those
in favor of furnishing, see letters from API 1;
Chevron; Encana; and ExxonMobil 1.
500 See, e.g., letter from PWYP–US 1.
501 See, e.g., letter from API 1.
498 We
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about the costs issuers might incur from
Section 18 liability.
One commenter recommended
allowing foreign private issuers to
furnish Form SD,502 while another
commenter made a similar
recommendation for foreign private
issuers that are providing alternative
reports.503 The latter commenter
pointed to other instances where foreign
private issuers have been permitted to
furnish reports and noted that the
antifraud provisions of the Exchange
Act would still apply. This commenter
also stated that the courts in home
jurisdictions would be better suited to
interpret the laws governing the
alternate report.
Another commenter recommended
that to the extent an issuer wishes to
include additional, voluntary
disclosures in its Form SD, it should be
permitted to furnish rather than file that
information.504 This commenter noted
that many issuers avoid making elective
disclosures in Commission filings due
to liability concerns and that issuers
could indicate what disclosure is being
furnished under a separate heading or
using other explanatory text.
3. Final Rules
The rules we are adopting today
require the disclosure to be filed on
Form SD. Section 13(q) does not state
how the information should be
submitted and instead leaves that
question to the Commission to
determine. We believe that the Form SD
disclosure, including any voluntary
disclosure, will benefit from potential
Section 18 liability by providing issuers
with further incentive to submit
complete and accurate information.
Although several commenters argued
that the information is not material to
investors and should therefore be
furnished, we note that other
commenters, including a number of
large institutional investors who have
expressed an intention to use the
Section 13(q) disclosures, continue to
argue that the information is material or
important to investors.505 Given this
disagreement, and that materiality is a
fact specific inquiry, we are not
persuaded that this is a reason to permit
the information to be furnished. While
we are mindful of the costs associated
with Section 18 liability, as we noted in
the Proposing Release, Section 18 does
not create strict liability for filed
502 See
letter from BP.
letter from RDS.
504 See letter from Ropes & Gray.
505 See letters from ACTIAM et al.; Bean; Calvert;
International Transport Workers’ Federation (Mar.
7, 2016) (‘‘ITWF’’); Oxfam 1; PWYP–US; Sen.
Cardin et al.; Sen. Lugar et al.; TI–USA; and USSIF.
503 See
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information.506 Rather, it states that a
person shall not be liable for misleading
statements in a filed document if such
person can establish that he or she acted
in good faith and had no knowledge that
the statement was false or
misleading.507
Although a commenter stated that in
certain other contexts issuers may
furnish, rather than file, disclosure
prepared in accordance with a foreign
jurisdiction’s requirements, we note that
the disclosure furnished on Form 6–K,
such as quarterly reports, is not required
by the Commission’s reporting
requirements.508 Instead, such reports
need only be furnished when they are
made or required to be made public in
such issuer’s home jurisdiction. Foreign
private issuers must file, and are not
permitted to furnish, reports required by
the Commission’s rules, such as annual
reports on Form 20–F and Form 40–F,
and Form 6–K reports that have been
specifically incorporated by reference
into a Securities Act registration
statement.
M. Compliance Date
1. Proposed Rules
Section 13(q) provides that, with
respect to each resource extraction
Proposing Release, Section II.G.6.
Act Section 18(a) provides: ‘‘Any
person who shall make or cause to be made any
statement in any application, report, or document
filed pursuant to this title or any rule or regulation
thereunder or any undertaking contained in a
registration statement as provided in subsection (d)
of section 15 of this title, which statement was at
the time and in the light of the circumstances under
which it was made false or misleading with respect
to any material fact, shall be liable to any person
(not knowing that such statement was false or
misleading) who, in reliance upon such statement
shall have purchased or sold a security at a price
which was affected by such statement, for damages
caused by such reliance, unless the person sued
shall prove that he acted in good faith and had no
knowledge that such statement was false or
misleading. A person seeking to enforce such
liability may sue at law or in equity in any court
of competent jurisdiction. In any such suit the court
may, in its discretion, require an undertaking for
the payment of the costs of such suit, and assess
reasonable costs, including reasonable attorneys’
fees, against either party litigant.’’ A plaintiff
asserting a claim under Section 18 would need to
meet the elements of the statute to establish a claim,
including reliance and damages.
508 See letter from RDS. A foreign private issuer
is required to submit under cover of a Form 6–K
(17 CFR 249.306) information that the issuer: Makes
or is required to make public pursuant to the law
of the jurisdiction of its domicile or in which it is
incorporated or organized; files or is required to file
with a stock exchange on which its securities are
traded and which was made public by that
exchange; or distributes or is required to distribute
to its security holders. The Form 6–K report is
deemed furnished, and not filed for purposes of
Section 18, unless it has been specifically
incorporated by reference into a previously filed
Securities Act or Exchange Act registration
statement or Exchange Act report, which is itself
subject to Section 18.
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506 See
507 Exchange
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issuer, the final rules issued under that
section shall take effect on the date on
which the resource extraction issuer is
required to submit an annual report
relating to the issuer’s fiscal year that
ends not earlier than one year after the
date on which the Commission issues
the final rules under Section 13(q).509
We proposed requiring resource
extraction issuers to comply with Rule
13q–1 and Form SD for fiscal years
ending no earlier than one year after the
effective date of the adopted rules.510
We also proposed selecting a specific
compliance date that corresponds to the
end of the nearest calendar quarter
following the effective date, such as
March 31, June 30, September 30, or
December 31.511
2. Comments on the Proposed Rules
In the Proposing Release we asked
whether we should provide a
compliance date linked to the end of the
nearest commonly used quarterly period
following the effective date or whether
we should adopt a shorter or longer
transition period. We also solicited
comment on whether the rules should
provide for a longer transition period for
certain categories of resource extraction
issuers, such as smaller reporting
companies or emerging growth
companies.
Several commenters opposed a longer
transition period for any category of
issuer, including smaller reporting
companies.512 These commenters stated
that issuers are generally on notice of
the impending requirements and that
companies track the required payment
types in the normal course of doing
business. They also noted that
compliance costs for smaller companies
are likely to be significantly lower than
for large issuers since they usually have
fewer payments to disclose. The
Department of Interior noted that the
USEITI does not make distinctions
between issuers.
Some commenters recommended
delaying the effective date for all
issuers.513 One of these commenters
recommended an effective date
beginning with a fiscal year ending no
earlier than December 31, 2017,514
while another deferred to industry
comments.515 Other commenters
509 15
U.S.C. 78m(q)(2)(F).
rules typically go into effect 60 days
after they are published in the Federal Register.
511 See 2012 Adopting Release at 2 [77 FR 56365].
512 See letters from Department of Interior and
PWYP–US 1. See also letters from ACEP; Global
Witness 1; and Oxfam 1.
513 See letters from Encana and Ropes & Gray.
514 See letter from Encana.
515 See letter from Ropes & Gray.
510 Adopted
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recommended delaying the effective
date for specific categories of issuers.516
3. Final Rules
The final rules require a resource
extraction issuer to comply with Rule
13q–1 and Form SD for fiscal years
ending no earlier than two years after
the effective date of the adopted rules.
We believe that this phase-in period is
appropriate to provide all issuers with
sufficient time to establish the necessary
systems and procedures to capture and
track all the required payment
information before the fiscal year
covered by their first Form SD filing
starts. It also should afford issuers an
appropriate opportunity to make any
other necessary arrangements (such as
obtaining modifications to existing
contracts or seeking exemptive relief
where warranted) to comply with
Section 13(q) and these rules. This
compliance date should also provide
issuers with more time to consider the
experience of companies reporting
under similar payment transparency
regimes, such as the EU Directives and
ESTMA, which should reduce
compliance costs.
As proposed, we are also selecting a
specific compliance date that
corresponds to the end of the nearest
calendar quarter following the effective
date. Thus, under the final rules, the
initial Form SD filing for resource
extraction issuers would cover the first
fiscal year ending on or after September
30, 2018 and would not be due until 150
days later. Since most issuers use a
December 31 fiscal year end, the filing
deadline would not be until May 30,
2019 for most issuers. Given the length
of time between the adoption of these
rules and the start of the first fiscal year
that must be reported, we do not believe
any additional accommodations are
necessary for smaller reporting
companies, emerging growth
companies, or other categories of
issuers. We note that not providing
longer phase-in periods for specific
categories of issuers is consistent with
the EITI and, for public companies, with
the EU Directives and ESTMA.
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III. Economic Analysis
A. Introduction and Baseline
We are adopting Rule 13q–1 and an
amendment to Form SD to implement
Section 13(q), which was added to the
Exchange Act by Section 1504 of the
Act. Section 13(q) directs the
Commission to issue rules that require
a resource extraction issuer to disclose
in an annual report filed with the
516 See letters from Cleary and Ropes & Gray. We
address these comments in Section II.G above.
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Commission certain information relating
to payments made by the issuer
(including a subsidiary of the issuer or
an entity under the issuer’s control) to
a foreign government or the U.S. Federal
Government for the purpose of the
commercial development of oil, natural
gas, or minerals.
As discussed above, Congress
intended that the rules issued pursuant
to Section 13(q) would help advance the
important U.S. foreign policy objectives
of combatting global corruption and
helping to promote accountability,
thereby potentially improving
governance in resource-rich countries
around the world.517 The statute seeks
to achieve this objective by mandating
a new disclosure provision under the
Exchange Act that requires resource
extraction issuers to identify and report
payments they make to governments
relating to the commercial development
of oil, natural gas, or minerals. While
these objectives and benefits differ from
the investor protection benefits that our
rules typically strive to achieve,
investors and other market participants,
as well as civil society in countries that
are resource-rich, may benefit from any
increased economic and political
stability and improved investment
climate that such transparency
promotes.518 In addition, some
commenters stated that the information
disclosed pursuant to Section 13(q)
would benefit investors by, among other
things, helping them model project cash
flows and assess political risk,
acquisition costs, and management
effectiveness.519
We are sensitive to the costs and
benefits of the rules we adopt, and
Exchange Act Section 23(a)(2) requires
us, when adopting rules, to consider the
impact that any new rule would have on
competition. In addition, Section 3(f) of
Section I.E of the Proposing Release.
also 156 Cong. Rec. S5873 (May 17, 2010)
(Statement from Senator Cardin) (‘‘Transparency
helps create more stable governments, which in
turn allows U.S. companies to operate more freely—
and on a level playing field—in markets that are
otherwise too risky or unstable.’’); and 156 Cong.
Rec. S3816 (May 17, 2010) (Statement of Senator
Lugar) (‘‘Transparency empowers citizens,
investors, regulators, and other watchdogs and is a
necessary ingredient of good governance for
countries and companies alike. . . . Transparency
also will benefit Americans at home. Improved
governance of extractive industries will improve
investment climates for our companies abroad, it
will increase the reliability of commodity supplies
upon which businesses and people in the United
States rely, and it will promote greater energy
security.’’)
519 See, e.g., letters from Calvert Investments
(Mar. 1, 2011) (‘‘Calvert 1 (pre-proposal)’’);
California Public Employees Retirement System
(Feb. 28, 2011) (‘‘CalPERS (pre-proposal)’’); and
George Soros (Feb. 21, 2012) (‘‘Soros (preproposal)’’).
PO 00000
517 See
518 See
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49399
the Exchange Act directs us, when
engaging in rulemaking that requires us
to consider or determine whether an
action is necessary or appropriate in the
public interest, to consider, in addition
to the protection of investors, whether
the action will promote efficiency,
competition, and capital formation.520
We have considered the costs and
benefits that would result from the final
rules, as well as the potential effects on
efficiency, competition, and capital
formation. Many of the potential
economic effects of the final rules
would stem from the statutory mandate,
while others would stem from the
discretion we are exercising in
implementing the statutory mandate.
The discussion below addresses the
costs and benefits that might result from
both the statute and our discretionary
choices, as well as the comments we
received about these matters.521 In
addition, as discussed elsewhere in this
release, we recognize that the final rules
could impose a burden on competition,
but we believe that any such burden
that might result would be necessary
and appropriate in furtherance of the
purposes of Exchange Act Section 13(q).
As part of our analysis, we have
quantified the potential economic
effects of the final rules wherever
possible. Given both the nature of the
statute’s intended benefits and the lack
of data regarding the benefits and the
costs, in some cases we have been
unable to provide a quantified estimate.
Nevertheless, as described more fully
below, we provide both a qualitative
assessment of the potential effects and
a quantified estimate of the potential
aggregate initial and aggregate ongoing
compliance costs. We reach our
estimates by carefully considering
comments we received on potential
costs and taking into account additional
data and information, including recent
global developments in connection with
resource extraction payment
transparency. We rely particularly on
those comment letters that provided
quantified estimates and were
transparent about their methodologies.
As discussed in more detail below, after
considering the comment letters, we
520 Some commenters incorrectly asserted that we
are required by statute to minimize costs. See, e.g.,
letter from API 1 at 15. Although we do not agree
with this assertion, in crafting the final rules, we
have sought to minimize costs to the extent
possible, and we have attempted to ensure that any
costs we are imposing are either necessary or
appropriate in light of the foreign policy interests
underlying Section 13(q).
521 As discussed above, our discretionary choices
are informed by the statutory mandate, and thus,
discussion of the benefits and costs of those choices
will necessarily involve the benefits and costs of the
underlying statute.
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determined that it was appropriate to
modify and/or expand upon some of the
submitted estimates and methodologies
to reflect data and information
submitted by other commenters, as well
as our own judgment and experience.
The baseline the Commission uses to
analyze the potential effects of the final
rules is the current set of legal
requirements and market practices.522
To the extent not already encompassed
by existing regulations and current
market practices, the final rules likely
will have a substantial impact on the
disclosure practices of, and costs faced
by, resource extraction issuers. The
overall magnitude of the potential costs
of the final disclosure requirements will
depend on the number of affected
issuers and individual issuers’ costs of
compliance. We expect that the final
rules will affect both U.S. issuers and
foreign issuers that meet the definition
of ‘‘resource extraction issuer’’ in
substantially the same way, except for
those issuers already subject to similar
requirements adopted in the EEA
member countries or Canada as
discussed below in Section III.C.1. The
discussion below describes the
Commission’s understanding of the
markets that are affected by the final
rules. We estimate the number of
affected issuers in this section and
quantify their costs in Section III.B.2
below.
To estimate the number of potentially
affected issuers, we use data from
Exchange Act annual reports for 2015,
the latest full calendar year. We
consider all Forms 10–K, 20–F, and
40–F filed in 2015 by issuers with oil,
natural gas, and mining Standard
Industrial Classification (‘‘SIC’’)
codes 523 and, thus, are most likely to be
resource extraction issuers. We also
considered filings by issuers that do not
have the above mentioned oil, natural
gas, and mining SIC codes and added
them to the list of potentially affected
issuers if we determined that they might
be affected by the final rules.524 In
addition, we have attempted to remove
issuers that use oil, natural gas, and
mining SIC codes but appear to be more
accurately classified under other SIC
codes based on the disclosed nature of
522 See Section I above for a discussion of the
current legal requirements and significant
international transparency regimes that affect
market practices.
523 Specifically, the oil, natural gas, and mining
SIC codes considered are 1000, 1011, 1021, 1031,
1040, 1041, 1044, 1061, 1081, 1090, 1094, 1099,
1220, 1221, 1222, 1231, 1311, 1321, 1381, 1382,
1389, 1400, 2911, 3330, 3331, 3334, and 3339.
524 These are issuers whose primary business is
not necessarily resource extraction but which have
some resource extraction operations, such as
ownership of mines.
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their business. Finally, we have
excluded royalty trusts from our
analysis because we believe it is
uncommon for such companies to make
the types of payments that would be
covered by the final rules. From these
filings, we estimate that the number of
potentially affected issuers is 755.525 We
note that this number does not reflect
the number of issuers that actually made
resource extraction payments to
governments in 2015, but rather
represents the estimated number of
issuers that might make such payments.
In the following economic analysis,
we discuss the potential benefits and
costs and likely effects on efficiency,
competition, and capital formation that
might result from both the new
reporting requirement mandated by
Congress and from the specific
implementation choices that we have
made in formulating the final rules.526
We analyze these potential economic
effects in Sections III.B and III.C and
provide qualitative and, wherever
possible, quantitative discussions of the
potential costs and benefits that might
result from the payment reporting
requirement and specific
implementation choices, respectively.
B. Potential Effects Resulting From the
Payment Reporting Requirement
1. Benefits
As noted above, we understand that
Section 13(q) and the rules required
thereunder are intended to advance the
important U.S. foreign policy objective
of combatting global corruption and
helping to promote accountability,
thereby potentially improving
governance in resource-rich countries
around the world.527 The statute seeks
to realize these goals by improving
transparency about the payments that
companies in the extractive industries
make to national and subnational
governments, including local
governmental entities.528 While these
statutory goals and intended benefits are
of global significance, the potential
positive economic effects that may
result cannot be readily quantified with
any precision.529 The current empirical
525 In the Proposing Release, using calendar year
2014 data, we estimated that the number of affected
issuers would be 877.
526 Our consideration of potential benefits and
costs and likely effects on efficiency, competition,
and capital formation also is reflected throughout
the discussion in Section II above.
527 See Proposing Release, Section I.E.
528 See id.
529 Further, we note that the Commission is not
statutorily required to quantify the benefits here.
See Lindeen et al. v. SEC, 2016 WL 3254610, *9
(Nos. 15–1149, 15–1150) (D.C. Cir. June 14, 2016)
(explaining that the Commission is not required to
‘‘conduct a rigorous, quantitative economic
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evidence on the direct causal effect of
increased transparency in the resource
extraction sector on societal outcomes is
inconclusive,530 and several academic
papers have noted the inherent
difficulty in empirically validating a
causal link between transparency
interventions and governance
improvements.531
We received several comments on
quantifying the potential economic
benefits of the final rules that are
discussed in detail below.532 Although
these comments presented studies that
attempt to quantify those benefits, as
discussed below, they each have certain
analysis’’ nor ‘‘to measure the immeasurable’’)
(internal quotation marks omitted); see also id.
(‘‘find[ing] that the SEC’s discussion of
unquantifiable benefits fulfills its statutory
obligation to consider and evaluate’’ the potential
economic effects of a Commission rule).
530 For positive findings, see Caitlin C. Corrigan,
‘‘Breaking the resource curse: Transparency in the
natural resource sector and the extractive industries
transparency initiative’’, Resources Policy, 40
(2014), 17–30 (finding that the negative effect of
resource abundance on GDP per capita, the capacity
of the government to formulate and implement
sound policies and the level of rule of law is
mitigated in EITI countries but noting that the EITI
has little effect on the level of democracy, political
stability and corruption (the author also submitted
a comment letter attaching an updated version of
the study; see letter from Caitlin C. Corrigan (Feb.
16, 2016) (‘‘Corrigan’’))); Liz David-Barrett and Ken
Okamura, ‘‘The Transparency Paradox: Why Do
Corrupt Countries Join EITI?’’, Working Paper No.
38, European Research Centre for Anti-Corruption
and State-Building (Nov. 2013) (finding that EITI
compliant countries gain access to increased aid the
further they progress through the EITI
implementation process and that EITI achieves
results in terms of reducing corruption), available
at https://eiti.org/document/transparency-paradoxwhy-do-corrupt-countries-join-eiti, and Maya
Schmaljohann, ‘‘Enhancing Foreign Direct
Investment via Transparency? Evaluating the Effects
of the EITI on FDI’’, University of Heidelberg
Discussion Paper Series No. 538 (Jan. 2013) (finding
that joining the EITI increases the ratio of the net
foreign direct investment (‘‘FDI’’) inflow to GDP by
2 percentage points). For negative empirical
¨
evidence, see Olcer, Dilan (2009): Extracting the
Maximum from the EITI (Development Centre
Working Papers No. 276): Organisation for
Economic Cooperation and Development (finding
that the EITI has not been able to significantly lower
corruption levels). However, all these papers
discuss the earlier version of the EITI, which did
not require project-level disclosure and rely on data
generated prior to the implementation of the 2013
EITI Standard.
531 See Andres Mejıa Acosta, ‘‘The Impact and
´
´
Effectiveness of Accountability and Transparency
Initiatives: The Governance of Natural Resources’’,
Development Policy Review, 31–S1 (2013), s89–
s105; and Alexandra Gillies and Antoine Heuty,
‘‘Does Transparency Work? The Challenges of
Measurement and Effectiveness in Resource-Rich
Countries’’, Yale Journal of International Affairs,
Spring/Summer 2011, 25–42.
532 See letter from Profs. Anthony Cannizzaro &
Robert Weiner (Feb. 11, 2016) (‘‘Cannizzaro &
Weiner’’). See also letters from API 1 (Appendix B)
and Publish What You Pay—US (third of three
letters on Mar. 8, 2016) (‘‘PWYP–US 4’’) (both
referring to a study by P. Healy and G. Serafeim).
These letters and studies primarily focus on
benefits to issuers and investors.
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limitations that we believe prevent us
from relying on them to quantify the
final rules’ potential benefits in
improving accountability and
governance in resource-rich countries
around the world. Furthermore, no
other commenters included reliable data
that would allow us to quantify the
potential economic benefits of the final
rules or suggested a source of data or a
methodology that we could readily look
to in doing so.
It is also important to note, however,
that Congress has directed us to
promulgate this disclosure rule. Thus,
we believe it reasonable to rely on
Congress’s determination that the rule
will produce the foreign policy and
other benefits that Congress sought in
imposing this mandate. Because of the
important foreign policy interests at
stake, we believe that Congress’
determination that the potential benefits
of disclosure justify such a rule is a
decision that is owed considerable
deference, and we do not believe that
Congress intended that we second-guess
its determination.
Moreover, as noted above, we concur
with Congress’ judgment that resource
extraction payment disclosures could
help to achieve a critical foreign policy
objective of the U.S. Government. In
reaching this conclusion, we are
particularly mindful that a broad
international consensus has developed
on the potential benefits of revenue
transparency.533 Not only have the
Canadian government 534 and the
European Union 535 acknowledged the
533 We also credit the views of the State
Department and USAID that the disclosures we are
requiring will help reduce corruption and promote
accountability in resource-rich countries. Both
agencies have a high degree of expertise and
experience in these matters. Relatedly, we note that
USAID has advanced a persuasive explanation for
ways that the disclosures may help complement the
agency’s own efforts to combat corruption and
enhance governance globally. See letter from
USAID.
534 See, e.g., ESTMA, Section 6 (‘‘The purpose of
this Act is to implement Canada’s international
commitments to participate in the fight against
corruption through the implementation of measures
applicable to the extractive sector, including
measures that enhance transparency and measures
that impose reporting obligations with respect to
payments made by entities.’’). See also ESTMA
Guidance, at 2 (‘‘Canadians will benefit from
increased efforts to strengthen transparency in the
extractive sector, both at home and abroad.
Alongside Canada, the United States and European
Union countries have put in place similar public
disclosure requirements for their respective
extractive industries. Together these reporting
systems will contribute to raising global
transparency standards in the extractive sector.’’).
535 See, e.g., European Commission Memo, ‘‘New
disclosure requirements for the extractive industry
and loggers of primary forests in the Accounting
(and Transparency) Directives (Country by Country
Reporting)—frequently asked questions’’ (June 12,
2013) (‘‘The new disclosure requirement will
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potential benefits by adopting
disclosure requirements similar to what
we are adopting, but even members of
industry through their participation as
stakeholders in EITI have acknowledged
the benefits that revenue transparency
can produce.536 Perhaps most
significantly, industry stakeholders in
the EITI process (which notably
includes a number of industry
organizations) 537 have expressly
adopted the position that the EITI
disclosures (which now include
identification of the issuers responsible
for the payments and project-level
reporting) produce ‘‘[b]enefits for
implementing countries’’ by
‘‘strengthening accountability and good
governance, as well as promoting greater
economic and political stability.’’ 538
Industry stakeholders in EITI have
similarly accepted the view that
‘‘[b]enefits to civil society come from
increasing the amount of information in
the public domain about those revenues
that governments manage on behalf of
improve the transparency of payments made to
governments all over the world by the extractive
and logging industries. Such disclosure will
provide civil society in resource-rich countries with
the information needed to hold governments to
account for any income made through the
exploitation of natural resources, and also to
promote the adoption of the Extractive Industries
Transparency Initiative (EITI) in these same
countries. . . . The reporting of payments to
government by the extractive and logging industries
will provide civil society with significantly more
information on what specifically is paid by EU
companies to host governments in exchange for the
right to extract the relevant countries’ natural
resources. By requiring disclosure of payments at a
project level, where those payments had been
attributed to a specific project and were material,
local communities will have insight into what
governments were being paid by EU multinationals
for exploiting local oil/gas fields, mineral deposits
and forests. This will also allow these communities
to better demand that government accounts for how
the money had been spent locally. Civil society will
be in a position to question whether the contracts
entered into between the government and extractive
and logging companies had delivered adequate
value to society and government.’’).
536 For example, in describing its involvement
with EITI, ExxonMobil states that these ‘‘efforts to
promote revenue transparency have helped fight
corruption, improve government accountability and
promote greater economic stability around the
world.’’ See https://corporate.exxonmobil.com/en/
current-issues/accountability/transparency/
overview. Similarly, when discussing its role in
EITI, Chevron has acknowledged that revenue
transparency is ‘‘an important pathway to improved
governance.’’ See https://www.chevron.com/Stories/
Progress-Partnerships-and-Transparency. Royal
Dutch Shell has also expressed the position that
‘‘[r]evenue transparency provides citizens with an
important tool to hold their government
representatives accountable and to advance good
governance.’’ See https://www.shell.com/
sustainability/transparency/revenues-forgovernments.html.
537 See Stakeholders, available at https://eiti.org/
supporters/partnerorganizations (last visited June
16, 2016).
538 https://eiti.org/eiti/benefits.
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49401
citizens, thereby making governments
more accountable.’’ 539
Notably, none of the industry
commenters expressed the view that the
disclosures required by Section 13(q)
would fail to help produce these anticorruption and accountability benefits.
Indeed, several commenters expressly
acknowledged that transparency
produces such benefits
(notwithstanding the inability to
reliably quantify those benefits). For
example, one industry commenter
stated that ‘‘[t]ransparency by
governments and companies alike
regarding revenue flows from the
extraction of natural resources in a
manner which is meaningful, practical
and easily understood by stakeholders
reduces the opportunity for
corruption.’’ 540 Another industry
commenter expressed its view ‘‘that the
disclosure of revenues received by
governments and payments made by the
extractive-industry companies to
governments could lead to improved
governance in resource-rich
countries.’’ 541 Yet another industry
commenter stated that resource-revenue
transparency efforts ‘‘are fundamental
building blocks of good resource
governance and are key to fostering
better decision-making over public
revenues.’’ 542
While there is no conclusive
empirical evidence that would confirm
whether the project-level, public
disclosure that we are adopting will in
fact reduce corruption, in forming our
conclusion that payment transparency
will further the identified U.S. foreign
policy goals, we find persuasive the
arguments and evidence advanced by
several commenters throughout this
rulemaking that have emphasized the
potential benefits to civil society of such
public disclosure.543 We note that many
of these commenters provided reasons
why the benefits to civil society of
contract-based, project-level reporting
would help to reduce corruption and
promote accountability more effectively
than more aggregated reporting, such as
country-level reporting.544
To support their claims, these
commenters provided numerous
examples of ways in which
disaggregated payment information can
be effective in helping to reduce
corruption and promote accountability,
and no commenters disputed these
539 Id.
540 See
letter from BHP.
letter from Chevron.
542 See letter from Eni SpA (Jan. 31, 2016) (‘‘Eni’’).
543 See, e.g., letters from Global Witness 1, The
ONE Campaign (Mar. 16, 2016) (‘‘ONE Campaign’’),
Oxfam, PWYP–US 3, TI–USA, and USAID.
544 See letter from Oxfam, PWYP–US 1, TI–USA.
541 See
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examples.545 For example, these
commenters stated that public
availability of project-level data would
enable civil society groups, citizens, and
local communities to know how much
their governments earn from the
resources that are removed from their
respective territories when the
governments deny them such
information. In addition, according to
some commenters, the disclosure of
project-level data will help citizens to
monitor public expenditures for
efficiency and effectiveness, allow
citizens and governments to ensure that
revenues are being redistributed by the
central government to localities
properly (according to benefit-sharing
agreements), and provide a basis for
communities to advocate with the
government for public services.546 One
commenter suggested that project-level
disclosure will empower citizens and
civil society organizations to ensure that
extractive revenues are used to generate
public benefits for all and not just to
enrich the elite, assist citizens to assess
the development impact of extraction
locally, and promote economic and
social development, especially in
communities that host natural resource
extraction operations.547 These
commenters also stated that this
information would help empower civil
society organizations to advocate for a
fairer share of revenues, double-check
government-published budget data, and
better calibrate their expectations from
the extractive issuers. Commenters on
the 2010 Proposing Release provided
similar arguments.548
a. Currently Available Empirical
Analyses on Potential Social Gains
From Transparency
As a threshold matter, we think it is
important to observe that the EITI and
other global transparency efforts are
relatively new, which makes it difficult
at this time to draw any firm empirical
conclusions about the potential long545 See
Section I of the Proposing Release.
letter from ACEP, Publish What You Pay—
US (Apr. 15, 2014) (‘‘PWYP 7 (pre-proposal)’’), and
TI–USA.
547 See letter from PWYP 7 (pre-proposal).
548 See, e.g., letters from Global Witness (Feb. 25,
2011) (‘‘Global Witness 1 (pre-proposal)’’); National
Advocacy Coalition on Extractives (Feb. 10, 2015)
(‘‘NACE (pre-proposal)’’); Oxfam America (Feb. 21,
2011) (‘‘Oxfam 1 (pre-proposal)’’); Publish What
You Pay U.S. (Feb. 25, 2011) (‘‘PWYP 1 (preproposal)’’); Publish What You Pay Cameroon (June
8, 2015)(‘‘PWYP–CAM (pre-proposal)’’); Publish
What You Pay—Indonesia (Mar. 11, 2015)(‘‘PWYP–
IND (pre-proposal)’’); Publish What You Pay—
Zimbabwe (Feb. 20, 2015) (‘‘PWYP–ZIM (preproposal)’’); Revenue Watch Institute (Feb. 17,
2011) (‘‘RWI 1 (pre-proposal)’’); and Syena Capital
Management LLC (Feb. 17, 2011) (‘‘Syena (preproposal)’’).
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546 See
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term benefits that such transparency
regimes may produce for resource-rich
countries. The causal mechanisms
involved are complex (impacted by
myriad factors) and it may take several
decades before those mechanisms yield
empirically verifiable social gains.549
A few commenters on the Proposing
Release argued that the rules
implementing Section 13(q) would
generate societal benefits and cited
studies that attempt to measure those
benefits for countries that join the
EITI.550 While these studies provide
useful insight into the potential benefits
to be derived from resource payment
transparency regimes, as discussed more
fully below, we believe that there are
limitations associated with each of these
studies that make it difficult for us to
draw firm conclusions based on their
findings.
One commenter presented a study
that found a significant increase in GDP
when a resource-rich country joins the
EITI.551 The study also found that the
increase in GDP appears to be larger the
more dependent a country’s economy is
on natural resource sectors. While the
study is informative, we have not relied
on it to form any quantitative
conclusions. The study does not take
into account other factors that could be
driving the increase in GDP and that
could be correlated with a country’s
participation in the EITI. While the
study controls for time-invariant (or
country-specific) factors in the
empirical model, it does not control for
time-varying factors that could be
driving the results, such as the change
in the quality of the institutions in a
country. It is possible that non-EITI
driven institutional improvements over
the period of time used in the study
contributed to the increase in GDP. It is
also possible that the improvement in
institutions had an impact on the
country’s decision to join the EITI.
Another commenter cited two studies
that examined the effect of a country
joining the EITI on net foreign direct
investment (‘‘FDI’’).552 One of the
e.g., studies cited in the note 531 above.
letters from PWYP–US 1 and Corrigan.
551 See letter from Corrigan (citing her earlier
study: Corrigan, C. C. (2014). Breaking the Resource
Curse: Transparency in the Natural Resource Sector
and the Extractive Industries Transparency
Initiative. Resources Policy, 41(1), 17–30).
552 See letter from PWYP–US 1 (citing Fernando
˜
Londono, ‘‘Does Joining the Extractive Industries
Transparency Initiative Have an Impact on
Extractive and Non-Extractive FDI Inflows?’’ (2014),
available at https://gppreview.com/wp-content/
˜
uploads/2014/02/Londono-F.pdf) (‘‘Londono
Study’’) and Maya Schmaljohann, ‘‘Enhancing
Foreign Direct Investment via Transparency?
Evaluating the Effects of the EITI on FDI’’ (Jan.
2013), available at https://archiv.ub.uni-
PO 00000
549 See,
550 See
Frm 00044
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studies found that joining the EITI
increased net FDI inflow by 50 percent,
although the statistical significance of
the results is marginal.553 The other
study also found that joining the EITI
increased the net FDI as a fraction of
GDP by two percent.554 This second
study, however, did not fully control for
other factors that could jointly drive the
increase in net FDI and affect the
country’s decision to join EITI, such as
improvements in the quality of the
country’s institutions and overall
improvement in the country’s
transparency. Thus, both of these
studies have limitations that lessen our
confidence in their results and hence
our willingness to rely on them to
quantify benefits from resource
extraction payment transparency.
Another commenter presented two
single country-based case studies of
conflict and unrest, which the
commenter attributed to corruption and
lack of transparency. The studies
measured the economic impact of such
conflict and unrest on U.S. oil
companies and used the avoidance of
such economic costs as a means of
quantifying the societal benefits of
transparency.555 In the first case study,
the costs are estimated as the difference
in revenues in years with conflict and
unrest and a base year without such
conflicts and unrest. The combined cost
estimates from that study are
approximately $17.4 billion over the
period 2011–2014. In the second case
study, the costs are estimated as
unrealized revenues due to shut-in
production events that are caused by
conflict and unrest. The combined cost
estimates from that study are
approximately $14.7 billion over the
period 2003–2016. In these case studies,
however, it is difficult to distinguish the
role that corruption and the lack of
transparency played in stirring a
country’s conflict and unrest from the
role that other factors such as ethnic
conflicts, religious conflicts, and
political repression may have played.
One commenter cited its own study
suggesting that high levels of corruption
(measured by bribery) correspond to
lower levels of economic
development.556 The study found that
higher levels of bribery were associated
with higher maternal mortality, lower
youth literacy rate, and lower access to
basic sanitation. The same commenter
cited another study that suggested that
heidelberg.de/volltextserver/14368/1/Schmaljohann
_2013_dp538.pdf (‘‘Schmaljohann Study’’)).
553 See Londono Study.
˜
554 See Schmaljohann Study.
555 See letter from ONE Campaign.
556 See letter from TI–USA.
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even small improvements in a country’s
governance resulted in higher income
and lower infant mortality rates in the
long run.557 These findings seem
broadly consistent with findings from
other studies on the relationship
between corruption and economic
development.558
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b. Potential Benefits to Issuers and
Investors From Transparency
To the extent that the final rules
increase transparency and thus reduce
corruption, they would increase
efficiency and capital formation. While
the objectives of Section 13(q) may not
appear to be ones that would necessarily
generate measurable, direct economic
benefits to investors or issuers, investors
and issuers might benefit from the final
rules’ indirect effects. In the following
paragraphs, we discuss existing
theoretical arguments and empirical
evidence that reduced corruption and
better governance could have longer
term positive impacts on economic
growth and investment in certain
countries where the affected issuers
operate, which could in turn benefit
issuers and their shareholders.
Although the research and data
available at this time does not allow us
to draw any firm conclusions, we have
considered several theoretical causal
explanations for why reductions in
corruption may increase economic
growth and political stability, which in
turn may reduce investor risk.559 High
levels of corruption could introduce
inefficiencies in market prices as a
result of increased political risks and
the potential awarding of projects to
companies for reasons other than the
merit of their bids. This, in turn, could
prop up inefficient companies and limit
investment opportunities for others.
These potential distortions could have a
negative impact on the economies of
countries with high corruption,
particularly to the extent that potential
revenue streams are diminished or
diverted. Additionally, the cost of
corrupt expenditures, direct or indirect,
impacts profitability, and, if the cost is
sufficiently high, some potentially
economically efficient or productive
investments may not be made. Thus,
reducing corruption could increase the
557 See Daniel Kaufmann, Governance Matters
2010: Worldwide Governance Indicators Highlight
Governance Successes, Reversals and Failures,
available at https://www.brookings.edu/research/
opinions/2010/09/24-wgi-kaufmann.
558 See Section I.E of the Proposing Release.
559 See, e.g., reviews by P. Bardhan, ‘‘Corruption
and Development: A Review of Issues,’’ Journal of
Economic Literature, 35, no. 3, 1320–1346 (1997)
and J. Svensson, ‘‘Eight Questions about
Corruption,’’ Journal of Economic Perspectives, 19,
no. 3, 19–42 (2005).
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number of productive investments and
the level of profitability of each
investment and could lead to improved
efficiency in the allocation of talent,
technology, and capital. Insofar as these
effects are realized, each of them could
benefit issuers operating in countries
with reduced corruption levels. These
and other considerations form a basis
for several dynamic general equilibrium
models predicting a negative
relationship between corruption and
economic development.560
A number of empirical studies have
also shown that reducing corruption
might result in an increase in the level
of GDP and a higher rate of economic
growth through more private
investments, better deployment of
human capital, and political stability.561
Other studies find that corruption
reduces economic growth both directly
and indirectly, through lower
investments.562 To the extent that
increased transparency could lead to a
reduction in corruption and, in turn,
improved political stability and
investment climate, some investors may
consider such factors in their
investment decisions, including when
pricing resource extraction assets of
affected issuers operating in these
countries.563 We note that some
commenters on the Proposing Release
supported this view.564
560 See, e.g., I. Ehrlich and F. Lui ‘‘Bureaucratic
Corruption and Endogenous Economic Growth,’’
Journal of Political Economy, 107 (6), 270–293
(1999); K. Blackburn, N. Bose, and E.M. Haque,
‘‘The Incidence and Persistence of Corruption in
Economic Development,’’ Journal of Economic
Dynamics and Control 30, 2447–2467 (2006); and
C. Leite and J. Weidmann, ‘‘Does Mother Nature
Corrupt? Natural Resources, Corruption, and
Economic Growth,’’ International Monetary Fund
Working Paper No. 99/85 (July 1999).
561 See, e.g., P. Mauro, ‘‘The effects of corruption
on growth, investment and government
expenditure: A cross country analysis,’’ in K.A.
Elliot (ed.) Corruption and the Global Economy,
Washington DC: Institute for International
Economics, 83–107 (1997); H. Poirson, ‘‘Economic
Security, Private Investment, and Growth in
Developing Countries,’’ International Monetary
Fund Working Paper No. 98/4 (Jan. 1998); Institute
for Economics and Peace, Peace and Corruption
Report (2015).
562 See Pak Hung Mo, ‘‘Corruption and Economic
Growth,’’ Journal of Comparative Economics 29,
66–79 (2001); K. Gyimah-Brempong, ‘‘Corruption,
economic growth, and income inequality in Africa,’’
Economics of Governance 3, 183–209 (2002); and
´
Pierre-Guillaume Meon and Khalid Sekkat, ‘‘Does
corruption grease or sand the wheels of growth?’’
Public Choice 122, 69–97 (2005).
563 Several studies present evidence that
reduction in corruption increases foreign direct
investments. See, e.g., S.-J. Wei, ‘‘How Taxing is
Corruption on International Investors?’’ NBER
Working Paper 6030 (1997) and G. Abed and H.
Davoodi, ‘‘Corruption, Structural Reforms, and
Economic Performance in the Transition
Economies,’’ International Monetary Fund Working
Paper No. 00/132 (July 2000).
564 See letter from ACTIAM et al., Calvert, and
PWYP–US 1.
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49403
There also could be positive
externalities from increased investor
confidence to the extent that improved
economic growth and investment
climate could benefit other issuers
working in those countries. Although
we believe the evidence is presently too
inconclusive to allow us to predict the
likelihood that such a result would
occur, we note that there is some
empirical evidence suggesting that
lower levels of corruption might reduce
the cost of capital and improve
valuations for some issuers.565
One commenter asserted that the
studies cited above discuss primarily a
single form of corruption—bribery—that
in the commenter’s view is not subject
to the disclosures required by Section
13(q) and hence the commenter
contended that these studies do not
support our view that the required
disclosures might achieve economic
benefits resulting from reduced
corruption.566 We acknowledge that the
specific studies that the commenter
mentions do focus on bribery as a form
of corruption. All the other studies that
we cite, which are not specifically
mentioned by the commenter, do
discuss corruption in general and its
effect on economic growth. In fact, some
specifically discuss the type of
corruption addressed by the final
rules.567 Furthermore, to the extent that
Section 13(q) is successful in reducing
the corruption in the form of misuse of
funds, it could also reduce quid-pro-quo
corruption as well. For example, if the
government and issuers are more strictly
565 See D. Kaufmann and S. J. Wei ‘‘Does ‘Grease
Money’ Speed Up the Wheels of Commerce?’’ NBER
Working Paper 7093 (1999) (finding, based on
survey evidence, that firms that pay fewer bribes
have lower, not higher, cost of capital); and C. Lee
and D. Ng, ‘‘Corruption and International Valuation:
Does Virtue Pay?’’ Journal of Investing, 18, no. 4,
23–41 (2009) (finding that firms from more corrupt
countries trade at significantly lower market
multiples).
566 See letter from API 1. As we explained above,
we believe that this commenter has an unduly
narrow view of the anti-corruption objectives of
Section 13(q) and, thus, we disagree with the claim
that Section 13(q) is unconcerned with helping to
reduce bribery. See Section II.E.3.
567 See, e.g., the study by J. Svensson at note 559
above, which defines corruption as misuse of public
office for private gain. That study cites examples of
corruption that are similar to the types of
corruption the final rules are trying to address. For
example, the study discusses the diversion of funds
allocated to school districts in Uganda and road
building projects in Indonesia by government
officials in these countries. In Uganda, according to
the study, only 13 percent of the funds allocated to
the school districts actually reached them; the bulk
of the grants was captured by local government
officials and politicians. As this evidence became
known and the central government began to publish
newspaper accounts of monthly transfers to
districts, so that school staff and parents could
monitor local officials, schools received an average
of 80 percent of their annual entitlements.
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monitored by citizens and society as a
result of the final rules, they may
become more reluctant to engage in
quid-pro-quo corruption. It is also
possible that some of the payments that
are reportable under Section 13(q) are
an implicit form of bribery: For
example, government officials could
agree, instead of a bribe, to receive
another type of payment from an issuer
that could be expropriated by these
officials later, after the payment is
made. If the disclosure under Section
13(q) is successful in decreasing the
misuse of funds, this type of implicit
quid-pro-quo corruption could be
reduced as well.
We also note that some commenters
on the Proposing Release 568 stated that
the disclosures required by Section
13(q) could provide useful information
to investors in making investment
decisions. Although we do not believe
this is the primary purpose of the
required disclosures, we acknowledge
the possibility that the disclosures could
provide potentially useful information
to certain investors. Some commenters,
for example, stated that the new
disclosures could help investors better
assess the risks faced by resource
extraction issuers operating in resourcerich countries.569
One of these commenters identified
several benefits that project-level
reporting would generate for
investors.570 First, according to the
commenter, such reporting would help
investors assess the effectiveness of the
diversification of risks within a portfolio
by enabling them to understand better
the risk profiles of individual projects
within a given country and the
contribution of each project to the
overall returns and variation in returns
of the portfolio of projects that an issuer
has in that country. Another commenter
expressed a similar view.571 We note,
however, that additional information,
beyond the disclosure required by
Section 13(q), is needed to estimate
returns and variation of returns of a
project or portfolio of projects in a given
country. For example, investors and
568 See letters from Bean, Calvert, ITWF, Peck &
Chayes, Sen. Cardin et al., Sen. Lugar et al., TI–
USA, and USSIF.
569 See letters from Calvert, Columbia Center on
Sustainable Investment (Oct. 30, 2015) (‘‘Columbia
Center (pre-proposal)’’), and ACTIAM et al. Some
commenters on the 2010 Proposing Release had
similar views. See, e.g., letters from EarthRights
International (Sept. 20, 2011) (‘‘ERI 2 (preproposal)’’); Global Witness 1 (pre-proposal); PGGM
Investments (Mar. 1, 2011) (‘‘PGGM (preproposal)’’); and Oxfam 1 (pre-proposal).
570 See letter from Columbia Center (preproposal).
571 See letter from Robert F. Conrad, Ph.D. (July
17, 2015) (‘‘Conrad (pre-proposal)’’).
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analysts will need cash flow
information (revenues and total costs,
not only those paid to the local
government) and cost of capital per
project, which may not be readily
available. Thus, the extent to which the
disclosure required by Section 13(q)
may generate this particular benefit is
unclear.
A second benefit for investors,
according to the commenter, is that
project-level reporting would help
adjust assumptions on a major cost to
the project: the effective tax rate of the
host government, the total taxes and
other payments to governments. The
commenter provided a hypothetical
example in which information on the
effective tax rate paid increases the
estimate of the value of the company by
three percent. While the benefit of
having accurate tax information when
valuing a project or a company is
indisputable, it is unlikely, as we
indicated above, that an investor or
analyst will have accurate information
for other components (e.g., revenues,
total costs, and cost of capital) necessary
to value a project. If those components
must be estimated, as is typically the
case, the detailed tax information may
not have a first order effect on project/
company value, or at least may not yield
a substantial advantage over simply
using the marginal tax rate of the host
country.
A third benefit for investors,
according to the commenter, is that the
project-level disclosure would help
investors assess the issuer’s exposure to
commodity price downturns by
analyzing industry cost curves to
forecast commodity prices. As noted
above, such benefit assumes that all
other relevant costs (e.g., production
costs and capital expenditures), besides
the one reported under Section 13(q),
are known to investors, which may not
be the case.
A fourth benefit for investors,
according to the commenter, is that
project-level disclosure would result in
lower cost of capital because it makes
firms more transparent and thus creates
trust with investors. The commenter
cites two studies that find a positive
link between transparency and cost of
capital. The studies, however, do not
provide evidence that resource
extraction transparency in particular
leads to lower cost of capital; rather, the
studies conclude more generally that
earnings transparency and the strength
of the country’s securities regulations
can have a major impact on cost of
capital. Transparency regarding key
company financial and accounting
information will likely have a stronger
effect on cost of capital than
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transparency regarding the company’s
resource payments.572
A fifth benefit for investors, according
to the commenter, is that increased
transparency may lead to lower political
risk. Such a benefit, however, depends
not only on resource extraction payment
disclosure, but also on other types of
disclosure and the quality of the
governance of the host country.
Disclosure under Section 13(q) by itself
may not result in lower political risk.
While we acknowledge all these
comments, we believe that the direct
incremental benefit to investors from
this information may be limited given
that most impacted issuers, other than
smaller reporting companies,573 are
already required to disclose their most
significant operational and financial
risks as well as certain financial
information related to the geographic
areas in which they operate in their
Exchange Act annual reports.574
In response to the Proposing Release,
one commenter suggested an additional
approach to quantify the rule’s benefits
to investors.575 A few other commenters
572 Finance theory implies that a firm’s cost of
capital depends primarily on the covariance
between its future free cash flows and the cash
flows from other available investments in the
market. See, e.g., R. Lambert, C. Leuz, and R.
Verrecchia, ‘‘Accounting information, disclosure,
and the cost of capital,’’ Journal of Accounting
Research, 45, 385–420 (2007). The relevant free
cash flows apply to the entire firm, as reflected in
its overall disclosures and top line financial
measures. Because resource payments are already
incorporated within a firm’s reported cash flows,
improved transparency about resource payments is
unlikely to have a large impact on a firm’s cost of
capital.
573 About 43 percent of affected issuers are
smaller reporting companies that are not obligated
to disclose in their Exchange Act annual reports
significant risk factors they face. For such
companies, the resource extraction payments
disclosure could provide incremental information
that might benefit some investors, to the extent that
they would not otherwise have a requirement to
disclose the political or economic risks related to
operating in resource-rich countries. We do not,
however, have data on whether such companies
have material operations in politically volatile
regions and whether they have exposure to risks
described by commenters.
574 See Item 1A and Item 10(d)(3) of Form 10–K
and Item 3.D of Form 20–F. See also Item 1 of Form
10–K which requires disclosure of revenues from
external customers attributed to any individual
foreign country, if material, and long lived assets
located in any individual foreign country, if
material and Item B.2 of Form 20–F which requires
disclosure of the principal markets in which the
company competes, including a breakdown of total
revenues by category of activity and geographic
market for each of the last three financial years. In
addition, pursuant to Item 7 of Form 10–K and Item
5D Form 20–F, registrants other than smaller
reporting companies are required to provide a
discussion of any known trends or uncertainties
that the registrant reasonably expects will have a
material favorable or unfavorable impact on net
sales or revenues or income from continuing
operations or the registrant’s liquidity.
575 See letter from Cannizzaro and Weiner.
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referenced another study using a similar
methodology.576 Both of these studies
use issuers’ stock price reaction to
various events associated with the
rulemaking process to measure
investors’ view on the effect of the rule
on the value of their investments.577
The studies posit that aggregating stock
market gains or losses (adjusted for
other factors) for resource extraction
issuers around the relevant events
enables the quantification of the
aggregate monetary gains or losses that
investors attribute to the rule. We note
that even though these two studies use
similar approaches (i.e., an event study)
to quantify the potential benefits to
investors, they arrive at somewhat
different conclusions with respect to the
rule’s perceived benefits.578
We carefully considered each of these
studies, but note that there are a number
of potential limitations in the analysis:
certain of the events used in these
studies may be confounded by other
events; 579 neither of the studies
considers alternative measures of
expected market return; 580 and neither
576 See letters from API 1 (Appendix B) and
PWYP–US 4 that both refer to the study by P. Healy
and G. Serafeim, ‘‘Voluntary, Self-Regulatory and
Mandatory Disclosure of Oil and Gas Company
Payments to Foreign Governments’’, Working Paper
(2015), available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1961404.
577 Cannizzaro and Weiner consider four events:
the adoption of the rule by the Commission on
August 22, 2012, the API lawsuit filing on October
10, 2012, the vacation of the rule by the court on
July 2, 2013, and the December 11, 2015, reproposal
of the rule. Healy and Serafeim consider seven
events: the House-Senate Conference Committee
meeting on the Dodd-Frank Act on June 24, 2010,
the passage of the Dodd-Frank Act on June 26, 2010,
the signing of the Dodd-Frank Act on July 21, 2010,
the adoption of the rule by the Commission on
August 22, 2012, the API lawsuit filing on October
10, 2012, the vacation of the rule by the court on
July 2, 2013, and the API comment letter
submission on November 7, 2013.
578 The studies use different events, sample
selection criteria, and measures of expected return.
Healy and Serafeim found that investors negatively
reacted to relevant events: they find that the average
cumulative abnormal return for 26 stocks in their
sample for the 3-day window around the days of
studied events is ¥1.90% for events that increase
probability that the rules would be implemented
and +1.06% for events that decrease the probability
that the rules would be implemented. Cannizzaro
and Weiner generally found that investors
positively reacted to relevant events. They find that
the median cumulative abnormal returns for
indexes or exchange traded funds that focus on
extractive industries for the 3-day (7-day) window
around the days of studied events are +0.28%
(+0.26%) and +0.66% (+1.83%) for events that
increase probability that the rules would be
implemented and +0.35% (¥0.31%) and –2.77%
(¥4.83%) for events that decrease the probability
that the rules would be implemented.
579 For example, the Dodd-Frank Act is a
multipart law, of which Section 13(q) is just one
part. Therefore, it is not clear whether the reported
results describe the market reaction to the entire
Dodd-Frank Act or to Section 13(q) only.
580 For example, the Healy and Serafeim study
does not adjust expected stock return for the change
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of the studies reports the statistical
significance of their findings.
Consequently, we are unable to rely on
these studies to draw unambiguous
conclusions about investors’ attitudes
towards the overall effect of the costs
and benefits of the rule as expressed in
their valuation of resource extraction
issuers on certain event dates.
2. Costs
We received a number of comments
on the compliance costs that would be
imposed by the proposed rules. We first
summarize these comments in the
subsection immediately below and then,
in the following subsections, we assess
these comments as part of our
discussion of the final rules’ potential
direct and indirect compliance costs
and their potential effects on
competition.
a. Commenters’ Views of Compliance
Costs
Many commenters stated that the
reporting regime mandated by Section
13(q) would impose significant
compliance costs on issuers. During the
comment period after the 2010
Proposing Release, several commenters
specifically addressed the cost estimates
presented in the Paperwork Reduction
Act (‘‘PRA’’) section of that release.581
Other commenters discussed the costs
and burdens to issuers generally as well
as costs that could have an effect on the
PRA analysis.582 In the Proposing
Release, in response to comments
previously received, we revised our
estimates of both initial and ongoing
compliance costs. In addition, also in
response to comments, we made several
changes to our PRA estimates that were
designed to better reflect the burdens
in oil, natural gas, or other commodities prices, and
the Cannizzaro and Weiner study does not consider
alternative models of market return (e.g., the FamaFrench three-factor model).
581 See the following pre-proposal letters from
American Petroleum Institute (Jan. 28, 2011) (‘‘API
1 (pre-proposal)’’); American Petroleum Institute
(Aug. 11, 2011) (‘‘API 2 (pre-proposal)’’); Barrick
Gold Corporation (Feb. 28, 2011) (‘‘Barrick Gold
(pre-proposal)’’); ERI 2 (pre-proposal); Exxon Mobil
(Jan. 31, 2011) (‘‘ExxonMobil 1 (pre-proposal)’’);
ExxonMobil (Oct. 25, 2011) (‘‘ExxonMobil 3 (preproposal)’’); National Mining Association (Mar. 2,
2011) (‘‘NMA 2 (pre-proposal)’’); Rio Tinto plc
(Mar. 2, 2011) (‘‘Rio Tinto (pre-proposal)’’); Royal
Dutch Shell plc (Jan. 28, 2011) (‘‘RDS 2 (preproposal)’’); and Royal Dutch Shell (Aug. 1, 2011)
(‘‘RDS 4 (pre-proposal)’’).
582 See, e.g., letters from British Petroleum p.l.c.
(Feb. 11, 2011) (‘‘BP 1 (pre-proposal)’’); Chamber of
Commerce Institute for 21st Century Energy (Mar.
2, 2011) (‘‘Chamber Energy Institute (preproposal)’’); Chevron Corporation (Jan. 28, 2011)
(‘‘Chevron (pre-proposal)’’); Cleary Gottlieb Steen &
Hamilton (Mar. 2, 2011) (‘‘Cleary (pre-proposal)’’);
Hermes Equity Ownership Services Ltd. (Mar. 2,
2011) (‘‘Hermes (pre-proposal)’’); and PWYP 1 (preproposal).
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49405
associated with the new disclosure
requirements. In response to the
Proposing Release, a number of
commenters submitted letters reiterating
and emphasizing the potential of the
proposed rules to impose substantial
costs.583 Only one commenter suggested
an alternative quantitative estimate of
the direct compliance costs.584 We
discuss this estimate below, after a brief
discussion of the comments on the cost
estimates that were provided on the
2010 Proposing Release.
Some commenters on the 2010
Proposing Release disagreed with our
industry-wide estimate of the total
annual increase in the collection of
information burden and argued that it
underestimated the actual costs that
would be associated with the rules.585
These and other commenters stated that,
depending upon the final rules adopted,
the compliance burdens and costs
arising from implementation and
ongoing compliance with the rules
would be significantly higher than those
estimated by the Commission.586
However, these commenters generally
did not provide quantitative analysis to
support their estimates.587
Commenters on the 2010 Proposing
Release also stated that modifications to
issuers’ core enterprise resource
planning systems and financial
reporting systems would be necessary to
capture and report payment data at the
project level, for each type of payment,
government payee, and currency of
payment.588 These commenters
estimated that the resulting initial
implementation costs would be in the
tens of millions of dollars for large
issuers and millions of dollars for many
small issuers.589 Two of these
commenters provided examples of the
583 See,
e.g., letters from API 1 and ExxonMobil
1.
584 See letter from Claigan Environmental (Feb.
16, 2016) (‘‘Claigan’’).
585 See letters from API 1 (pre-proposal),
ExxonMobil 1 (pre-proposal).
586 See letters from API 1 (pre-proposal); API 2
(pre-proposal); American Petroleum Institute (Jan.
19, 2012) (‘‘API 3 (pre-proposal)’’); Barrick Gold
(pre-proposal); ExxonMobil 1 (pre-proposal); NMA
2 (pre-proposal); Rio Tinto (pre-proposal); and RDS
2 (pre-proposal).
587 See letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal). ExxonMobil 1 (preproposal) did provide estimated implementation
costs of $50 million if the definition of ‘‘project’’ is
narrow and the level of disaggregation is high
across other reporting parameters. This estimate is
used in our analysis below of the expected
implementation costs.
588 See letters from API 1 (pre-proposal);
ExxonMobil 1 (pre-proposal); and RDS 2 (preproposal).
589 See letters from API 1 (pre-proposal);
ExxonMobil 1 (pre-proposal); and RDS 2 (preproposal). These commenters did not describe how
they defined small and large issuers.
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modifications that would be necessary,
including establishing additional
granularity to existing coding structures
(e.g., splitting accounts that contain
both government and non-government
payment amounts), developing a
mechanism to appropriately capture
data by ‘‘project,’’ building new
collection tools within financial
reporting systems, establishing a trading
partner structure to identify and provide
granularity around government entities,
establishing transaction types to
accommodate types of payment (e.g.,
royalties, taxes, or bonuses), and
developing a systematic approach to
handle ‘‘in-kind’’ payments.590 These
two commenters estimated that total
industry costs for initial implementation
of the final rules could amount to
hundreds of millions of dollars.591
These commenters added that these
estimated costs could be significantly
greater depending on the scope of the
final rules.592 They suggested, for
example, that costs could increase
depending on how the final rules define
‘‘project’’ and whether the final rules
require reporting of non-consolidated
entities, require ‘‘net’’ and accrual
reporting, or require an audit.593
Another commenter estimated that the
initial set up time and costs associated
with the rules implementing Section
13(q) would require 500 hours for the
issuer to change its internal books and
records and $100,000 in information
technology consulting, training, and
travel costs.594 One commenter
representing the mining industry
estimated that start-up costs, including
the burden of establishing new reporting
and accounting systems, training local
personnel on tracking and reporting,
and developing guidance to ensure
consistency across reporting units,
would be at least 500 hours for a midto-large sized multinational issuer.595
Two commenters stated that arriving
at a reliable estimate for the ongoing
annual costs of complying with the
rules would be difficult because the
rules were not yet fully defined but
sradovich on DSK3GMQ082PROD with RULES2
590 See
letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal).
591 See letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal).
592 See letters from API 1 (pre-proposal);
ExxonMobil 1 (pre-proposal); and RDS 2 (preproposal).
593 See letters from API 1 (pre-proposal);
ExxonMobil 1 (pre-proposal); and RDS 2 (preproposal). As previously discussed, the final rules
do not require the payment information to be
audited or reported on an accrual basis; therefore,
commenters’ concerns about possible costs
associated with these items should be alleviated.
See Section II.G.5 of the Proposing Release.
594 See letter from Barrick Gold (pre-proposal).
595 See letter from NMA 2 (pre-proposal).
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suggested that a ‘‘more realistic’’
estimate than the estimate included in
the 2010 Proposing Release is hundreds
of hours per year for each large issuer
that has many foreign locations.596
Commenters also indicated that costs
related to external professional services
would be significantly higher than the
Commission’s estimate, resulting
primarily from XBRL tagging and higher
printing costs, although these
commenters noted that it is not possible
to estimate these costs until the specific
requirements of the final rules are
determined.597
One commenter on the 2010
Proposing Release estimated that
ongoing compliance with the rules
implementing Section 13(q) would
require 100–200 hours of work at the
head office, an additional 100–200
hours of work providing support to its
business units, and 40–80 hours of work
each year by each of its 120 business
units, resulting in an approximate
yearly total of 4,800–9,600 hours and
$2,000,000–$4,000,000.598 One large
multinational issuer estimated an
additional 500 hours each year,
including time spent to review each
payment to determine if it is covered by
the reporting requirements and ensure it
is coded to the appropriate ledger
accounts.599 Another commenter
representing the mining industry
estimated that, for an issuer with a
hundred projects or reporting units, the
annual burden could be nearly 10 times
the estimated PRA burden set out in the
2010 Proposing Release.600 This
commenter stated that its estimate takes
into account the task of collecting,
cross-checking, and analyzing extensive
and detailed data from multiple
jurisdictions around the world, as well
as the potential for protracted time
investments to comply with several
aspects of the rules proposed in 2010
that are not included in the current final
rules.601 This commenter also stated
596 See letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal) (each noting that
estimates would increase if the final rules contain
an audit requirement or if the final rules are such
that issuers are not able to automate material parts
of the collection and reporting process).
597 See letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal).
598 See letter from Rio Tinto (pre-proposal). These
estimates exclude initial set-up time required to
design and implement the reporting process and
develop policies to ensure consistency among
business units. They also assume that an audit is
not required.
599 See letter from Barrick Gold (pre-proposal).
600 See letter from NMA 2 (pre-proposal).
601 See id. Most of the time investments outlined
by this commenter would not apply to the final
rules, such as the cost of seeking information from
non-consolidated ‘‘controlled’’ entities, obtaining
compliance advice on the application of undefined
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that the estimate in the 2010 Proposing
Release did not adequately capture the
burden to an international company
with multiple operations where a wide
range of personnel would need to be
involved in capturing and reviewing the
data for the required disclosures as well
as for electronically tagging the
information in XBRL format.602
In response to the Proposing Release,
only one commenter suggested an
alternative quantitative estimate of the
direct compliance costs.603 The
commenter’s suggested approach is
different from other approaches
suggested by commenters and from the
approach presented in the Proposing
Release in that it considers aggregate
industry costs directly rather than on a
per issuer basis. Starting from an
estimate of the total number of fields or
mines in the world, the commenter first
derived an estimate of the number of
projects per field or mine that might be
reportable under the final rules. The
commenter then multiplied the number
of reportable projects by the estimated
cost for an issuer to report its activities
for an individual field or mine to
calculate total compliance costs to be
incurred by all issuers. The quantitative
estimates derived from this approach
are within our range of estimates (see
the numerical comparison in Section
III.B.2.b. below). However, we note that
some of the commenter’s assumptions
are not fully explained (e.g., the number
of internal and external hours per issuer
per field or mine that issuers would
spend on compliance with the rules).
Although commenters on the
Proposing Release did not address
whether compliance costs have been
overstated, commenters on the 2010
Proposing Release expressed that
view.604 One commenter stated that
most issuers already have internal
systems in place for recording payments
that would be required to be disclosed
under Section 13(q) and that many
issuers currently are subject to reporting
requirements at a project level.605
terms such as ‘‘project,’’ and reviews of the
disclosure in connection with periodic
certifications under the Sarbanes Oxley Act. Certain
potential costs outlined by the commenter,
however, would apply to the final rules, such as
those associated with implementing new systems
based on our final definition of ‘‘project’’ and other
definitions and costs associated with attempting to
secure an exemption from the Commission when
foreign law prohibitions on disclosure apply.
602 See letter from NMA 2 (pre-proposal).
603 See letter from Claigan.
604 See letters from ERI 2 (pre-proposal); Oxfam
1 (pre-proposal); PWYP 1 (pre-proposal); and RWI
1 (pre-proposal).
605 See letter from RWI 1 (pre-proposal) (noting
that Indonesia requires reporting at the production
sharing agreement level and that companies
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Another commenter anticipated that,
while the rules would likely result in
additional costs to resource extraction
issuers, such costs would be marginal in
scale because, in the commenter’s
experience, many issuers already have
extensive systems in place to handle
their current reporting requirements and
any adjustments needed as a result of
Section 13(q) could be done in a timely
and cost-effective manner.606 Another
commenter believed that issuers could
adapt their current systems in a costeffective manner because they should be
able to adapt a practice undertaken in
one operating environment to those in
other countries without substantial
changes to the existing systems and
processes of an efficiently-run
enterprise.607
Another commenter stated that, in
addition to issuers already collecting the
majority of information required to be
made public under Section 13(q) for
internal record-keeping and audits, U.S.
issuers already report such information
to tax authorities at the lease and license
level.608 This commenter added that
efficiently-run issuers should not have
to make extensive changes to their
existing systems and processes to export
practices undertaken in one operating
environment to another.609 However,
another commenter disagreed that
issuers already report the payment
information required by Section 13(q)
for tax purposes.610 This commenter
also noted that tax reporting and
payment periods may differ.
One commenter, while not providing
competing estimates, questioned the
accuracy of the assertions relating to
costs from industry participants,611
noting that: (i) Some issuers already
report project-level payments in certain
countries in one form or another and
under a variety of regimes; (ii) some
EITI countries are already moving
toward project-level disclosure; and (iii)
it is unclear whether issuers can save
much time or money by reporting
government payments at the material
project or country level.612
operating on U.S. federal lands report royalties paid
by lease).
606 See letter from Hermes (pre-proposal).
607 See letter from RWI 1 (pre-proposal).
608 See letter from PWYP 1 (pre-proposal).
609 See id. (citing statement made by Calvert
Investments at a June 2010 IASB-sponsored
roundtable).
610 See letter from Rio Tinto (pre-proposal)
(‘‘[t]his is a simplistic view, and the problem is that
tax payments for a specific year are not necessarily
based on the actual accounting results for that
year.’’).
611 See letter from ERI 2 (pre-proposal).
612 This commenter also explained that any costs
would be limited because, among other things,
issuers are already required to keep records of their
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b. Quantitative Estimates of Compliance
Costs
In the Proposing Release, we
presented a quantitative estimate of the
compliance costs associated with the
proposed rules. No commenters
specifically addressed this quantitative
estimate or provided additional data
that we could use to update or refine
this estimate. Because we have not
received quantitative estimates using
the same or similar approaches that take
into account the differences between the
rules proposed in 2010 and those
proposed in the Proposing Release, we
use the approach presented in the
Proposing Release and the quantitative
information supplied by commenters in
response to the 2010 Proposing Release
to assess the initial and ongoing
compliance costs of the final rules.613
We supplement and compare this
analysis with the cost estimate supplied
by one commenter that used a different
approach.614 Our general approach is to
estimate the upper and lower bounds of
the compliance costs for each
potentially affected issuer and then to
sum up these estimates to estimate the
aggregate compliance costs.615 As
discussed in Section III.A above, we
estimate that, as of the end of 2015, 755
issuers would be potentially affected by
the final rules.616 However, in
determining which issuers are likely to
bear the full costs of compliance with
the final rules, we make two
adjustments to the list of affected
subsidiaries’ payments to governments under the
Foreign Corrupt Practices Act. Id.
613 See letters from Barrick Gold (pre-proposal),
ExxonMobil 1 (pre-proposal), and Rio Tinto (preproposal) discussed above in Section III.B.2.a. One
commenter also provided estimates of initial
compliance hours that are similar to Barrick Gold.
See letter from NMA 2 (pre-proposal). We are
unaware of reliable data that would allow us to
estimate the impact of changed provisions, (e.g., the
change in the definition of the term ‘‘control’’).
614 See letter from Claigan discussed above. This
commenter’s cost estimates are largely consistent
with our estimates.
615 There may be some uncertainty surrounding
who will ultimately bear the compliance costs.
Depending on market conditions and the degree of
competition, issuers may attempt to pass some or
all of their costs on to other market participants.
This consideration, however, does not change our
estimates.
616 We acknowledge that, as one commenter
suggested, some of these issuers are affiliated and
thus are likely to share compliance systems and
fixed costs of creating such systems. See letter from
Publish What You Pay United States (Nov. 12,
2015) (‘‘PWYP–US 2 (pre-proposal)’’). Due to
difficulties in determining affiliation status,
however, we have not attempted to eliminate these
issuers from our estimates, and therefore our
estimates may overstate the potential costs.
Nevertheless, this potential overstatement of costs
would not apply in one of the cases we consider
below, the case of no fixed costs, because the costs
would depend only on the total assets of affected
issuers, not on the number of them.
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49407
issuers. First, we exclude those issuers
that will be subject to disclosure
requirements in foreign jurisdictions
that are substantially similar to the final
rules and therefore will likely already be
bearing compliance costs for such
disclosure. Second, we exclude small
issuers that likely could not have made
any payment above the de minimis
amount of $100,000 to any government
entity in 2015.
To address the first consideration, we
searched the filed annual forms and
forms’ metadata for issuers that have a
business address, are incorporated, or
are listed on markets in the EEA or
Canada. For purposes of our analysis,
we assume that those issuers will
already be subject to similar resource
extraction payment disclosure rules in
those jurisdictions by the time the final
rules become effective and, thus, that
the additional costs to comply with the
final rules will be much lower than
costs for other issuers.617 We identified
192 such issuers.618
Second, among the remaining 563
issuers (i.e., 755 minus 192) we
searched for issuers that, in the most
recent fiscal year as of the date of their
Exchange Act annual report filing,
reported that they are shell companies,
and, thus, have no or only nominal
operations, or have both revenues and
absolute value net cash flows from
investing activities of less than the de
minimis payment threshold of $100,000.
Under those financial constraints, such
issuers are unlikely to have made any
non-de minimis and otherwise
reportable payments to governments
and therefore are unlikely to be subject
to the adopted reporting requirements.
We identified 138 such issuers.
Taking these estimates of the number
of excluded issuers together, we
estimate that approximately 425 issuers
(i.e., 755 minus 192 minus 138) would
bear the full costs of compliance with
the final rules.619
617 We assume that an issuer will be subject to the
EEA or Canadian rules if it is listed on a stock
exchange located in one of these jurisdictions or if
it has a business address or is incorporated in the
EEA or Canada and its total assets are greater than
$50 million. The latter criteria is a proxy for
multipronged eligibility criteria underlying both
EEA and Canadian rules that include issuer assets,
revenues, and the number of employees.
618 We are adopting an alternative reporting
option as part of the final rules and recognizing the
disclosure requirements of these jurisdictions to be
substantially similar to our rules. Thus, for these
issuers, the additional cost will be negligible
compared to the compliance costs we consider in
this section. See also Section III.C.2 below.
619 Because it may be uncertain at the beginning
of a financial period as to whether payments from
an issuer will exceed the de minimis threshold by
the end of such period, an excluded issuer may
incur costs to collect the information to be reported
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To establish an upper and lower
bound for the initial compliance costs
estimates, we use the initial compliance
cost estimates from Barrick Gold and
ExxonMobil referenced above. We note,
however, that these cost estimates were
provided by the commenters during the
comment period after the 2010
Proposing Release and were based on
policy choices made in that proposal
and reflected the other international
regulatory regimes in place at that
time.620 Since then we have changed
our approach (e.g., the final rules define
the term ‘‘control’’ based on accounting
principles, which we believe will be
easier and less costly for issuers to
apply) 621 and international reporting
regimes have undergone considerable
development.622 These developments
are likely to significantly lower the
compliance costs associated with the
final rules. However, as noted above, we
have not received comment letters with
reliable quantitative assessments of the
extent to which these changes would
reduce commenters’ cost estimates and,
thus, we use the original commenters’
estimates without adjustment.
Our methodology to estimate initial
compliance costs applies the specific
issuer cost estimates from Barrick Gold
and ExxonMobil, $500,000 and
$50,000,000, respectively,623 to the
average issuer and then multiplies the
costs by the number of affected issuers.
However, because Barrick Gold and
ExxonMobil are very large issuers and
their compliance costs may not be
representative of significantly smaller
issuers, we apply these costs to all
potentially affected issuers as a
percentage of total assets. This allows
for the compliance cost estimate for
each potentially affected issuer to vary
by their size, consistent with our
expectation that larger issuers will face
higher compliance costs. For example,
we expect larger, multinational issuers
to need more complex payment tracking
systems compared to smaller, single
country based issuers. This approach is
consistent with the method used in the
2012 Adopting Release, where we
estimated the initial compliance costs to
be between 0.002% and 0.021% of total
assets.624
We calculate the average total assets
of the 425 potentially affected issuers to
be approximately $6.4 billion.625
Applying the ratio of initial compliance
costs to total assets (0.002%) from
Barrick Gold, we estimate the lower
bound of total initial compliance costs
for all issuers to be $54.73 million
(0.002% * $6,439,369,000 * 425).
Applying the ratio of initial compliance
costs to total assets (0.021%) from
ExxonMobil, we estimate the upper
bound of total initial compliance costs
for all issuers to be $574.7 million
(0.021% * $6,439,369,000 * 425). The
table below summarizes the upper and
lower bound of total initial compliance
costs under the assumption that
compliance costs vary according to the
issuer’s size.
Average issuer initial compliance costs assuming no fixed costs
Average 2015 total assets of all affected issuers .............................................................................
Average initial compliance costs per issuer using Barrick Gold percentage of total assets (lower
bound) ............................................................................................................................................
Total initial compliance costs using Barrick Gold (lower bound) ......................................................
Average initial compliance costs per issuer using ExxonMobil’s percentage of total assets (upper
bound) ............................................................................................................................................
Total initial compliance costs using ExxonMobil (upper bound) .......................................................
Calculation
$6,439,369,000
........................................
128,787
54,734,640
$6,439,369,000*0.002%
128,787*425
1,352,268
574,713,700
6,439,369,000*0.021%
1,352,268*425
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We also recognize that it is possible
that some compliance costs may not
scale by issuer size and as a result
smaller issuers may be subject to certain
fixed costs that do not vary with the size
of the issuers’ operations. While
commenters did not provide any
information on what fraction of the
initial compliance costs would be fixed
versus variable, we assume that fixed
costs are equal to $500,000—the lower
of the two compliance cost estimates
provided by commenters.626 To find the
under the final rules even if that issuer is not
subsequently required to file an annual report on
Form SD. To the extent that excluded issuers incur
such costs, our estimate may understate the
aggregate compliance costs associated with the final
rules.
620 We note, in particular, that Barrick Gold is
incorporated in Canada and listed on the Toronto
Stock Exchange and thus is subject to substantially
similar foreign disclosure requirements under
existing international transparency regimes.
621 See Section II.D of the Proposing Release.
622 In this regard, we note that some affected
issuers, even if they are not subject to foreign
disclosure requirements, might have subsidiaries or
other entities under their control that are subject to
such requirements. These issuers will thus face
lower compliance costs because they will already
have incurred some of these costs through such
subsidiaries and other controlled entities.
623 Barrick Gold estimated that it would require
500 hours for initial changes to internal books and
records and processes and 500 hours for ongoing
compliance costs. At an hourly rate of $400, this
amounts to $400,000 (1,000 hours * $400) for
hourly compliance costs. Barrick Gold also
estimated that it would cost $100,000 for initial IT/
consulting and travel costs, for a total initial
compliance cost of $500,000. A similar analysis by
ExxonMobil estimated their initial compliance costs
to be $50 million. See 2012 Adopting Release,
Section III.D for details.
624 See 2012 Adopting Release at Section III.D for
details (the approach we use here is referred to as
Method 1 in that release). In the 2012 Adopting
Release, we also used another method (referred to
as Method 2) to estimate compliance costs. With
Method 2, we first estimated the compliance costs
for small and large issuers (as determined by market
capitalization) using the same assumptions as in
Method 1 that compliance costs are a constant
fraction of issuer’s total assets (i.e., that all costs are
variable and there is no fixed component to the
costs) and then aggregated the compliance costs for
all issuers. Although this approach was intended to
provide limited insight into any differential cost
impacts on small versus large issuers, it did not
separate fixed and variable cost components of the
total compliance costs. Therefore, it did not allow
us to apply a differential cost structure to small and
large issuers. In addition, because of poor data
availability and data quality on market
capitalization for small and foreign issuers, the
Method 2 approach may yield less accurate
estimates than the approach we use in this release
(on the other hand, Method 1 could be properly
applied because we collected total assets data for
all affected issuers). As a consequence, we now
believe that the disaggregation and subsequent
aggregation of small and large issuer cost estimates
does not provide additional insights into the
difference in cost structure for small versus large
issuers and any effects of this difference on the
aggregate costs. Consequently, we have used only
one estimation approach in this analysis. As
discussed below, however, we do believe that there
is a fixed component to the compliance costs which
could potentially have a differential impact on
small issuers, and we have expanded the Method
1 approach to allow for a fixed costs component in
the cost structure. We requested comments about
the breakdown of the compliance costs into the
fixed and variable components to enable us to
estimate such impact better, but we have not
received any comments quantifying such
breakdown.
625 For the 425 potentially affected issuers, we
collected their total assets for the fiscal year that
corresponds to their Exchange Act annual reports
for 2015 from XBRL exhibits that accompany
issuers’ annual reports on EDGAR and from
Compustat. If these two data sources varied on an
issuer’s total assets, we used the higher of the two
values. For the remaining issuers that do not have
total assets data from either of these two data
sources, we manually collected the data on total
assets from their filings. We then calculated the
average of those total assets across all issuers that
have the data.
626 Assuming that both estimates are accurate, the
fixed costs cannot be higher than the lower of the
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lower and upper bound estimates of
compliance costs in this case, we
assume that each issuer’s costs are the
maximum between the fixed costs of
$500,000 and, respectively, the lower
bound (0.002% of total assets) or the
upper bound (0.021% of total assets) of
the variable costs. Applying these lower
and upper bounds to each issuer and
summing across all issuers, we find that
the lower bound estimate is $239
million (or, on average, $0.56 million
per issuer) and the upper bound
estimate is $700 million (or, on average,
$1.65 million per issuer).
The table below summarizes the
upper and lower bound of total initial
compliance costs under two fixed costs
assumptions.627 We note that our upper
bound estimates are consistent with two
commenters’ qualitative estimates of
initial implementation costs 628 and the
initial costs estimate from another
commenter 629 is within our range for
the no-fixed costs case. We also note
that, if the actual fixed costs component
is between $0 and $500,000, the lower
and upper bounds of compliance costs
estimates would be between our
estimates for the two opposite cases.
Initial compliance costs
assuming no fixed costs
Costs for an
average issuer
Lower bound ....................................................................................................
Upper bound ....................................................................................................
$128,787
1,352,268
49409
Total costs
$54,734,640
74,713,700
Initial compliance costs
assuming fixed costs of
$500,000
Costs for an
average issuer
$561,932
1,547,437
Total costs
$238,820,900
700,160,800
sradovich on DSK3GMQ082PROD with RULES2
We acknowledge significant
limitations on our analysis that may
result in the actual costs being
significantly lower. First, the analysis is
limited to two large issuers’ estimates
from two different industries, mining
and oil and gas, and the estimates may
not accurately reflect the initial
compliance costs of all affected issuers.
Second, the commenters’ estimates were
generated based on our initial proposal
and they do not reflect the final rules or
the international transparency regimes
that subsequently have been adopted by
other jurisdictions.630
We also acknowledge certain
limitations on our analysis that could
potentially cause the cost to be higher
than our estimates. First, we assume
that the variable part of the compliance
costs is a constant fraction of total
assets, but the dependence of costs on
issuer size might not be linear (e.g.,
costs could grow disproportionally
faster than issuer assets). Second,
commenters mentioned other potential
compliance costs not necessarily
captured in this discussion of
compliance costs.631
In spite of these limitations, we
consider our quantitative approach to
estimate compliance costs to be
appropriate and supported by the
limited data we have. During the
comment period after the Proposing
Release, no commenters specifically
critiqued this method or the derived
quantitative estimates or provided
additional data that we could use to
update or refine these estimates. Only
one commenter supplied an alternative
approach and its point estimates are
within the range of our estimates for
both initial and ongoing direct
compliance costs.632
We estimate ongoing compliance
costs using the same method under the
assumptions of no fixed costs and fixed
costs of $200,000 per year (as explained
below). In response to the 2010
Proposing Release, we received
quantitative information from three
commenters—Rio Tinto, National
Mining Association, and Barrick Gold—
that we used in the analysis.633 As in
the 2012 Adopting Release, we use these
three comments to estimate the ongoing
compliance costs as a percentage of total
assets to be 0.003%, 0.02%, and
0.0008%, respectively, and the average
ongoing compliance costs to be 0.0079%
of total assets.634 For the no fixed costs
two estimates. We have chosen to use the highest
possible value of fixed costs satisfying this
restriction to encompass the widest range of cost
estimates. We have not received any comment
letters with estimates of the fixed cost component
of the initial compliance costs or addressing the
estimates presented in the Proposing Release.
627 The total estimated compliance cost for PRA
purposes is $79,302,480. See Section IV below. The
compliance costs for PRA purposes are
encompassed in the total estimated compliance
costs for issuers. As discussed in detail below, our
PRA estimate includes costs related to tracking and
collecting information about different types of
payments across projects, governments, countries,
subsidiaries, and other controlled entities. The
estimated costs for PRA purposes are calculated by
treating compliance costs as fixed costs and by only
monetizing costs associated with outside
professional services. Therefore, despite using
similar inputs for calculating these costs, the PRA
estimate differs from the lower and upper bounds
calculated above.
628 See letters from API 1 (pre-proposal) (‘‘Total
industry costs just for the initial implementation
could amount to hundreds of millions of dollars
even assuming a favorable final decision on audit
requirements and reasonable application of
accepted materiality concepts.’’) and ExxonMobil 1
(pre-proposal).
629 See letter from Claigan (estimating of the total
initial compliance costs as $181,347,000).
630 See, e.g., Section II.D and note 622 and
accompanying text.
631 Those could include, for example, costs
associated with the termination of existing
agreements in countries with laws that prohibit the
type of disclosure mandated by the final rules, costs
of decreased ability to bid for projects in such
countries in the future, or costs of decreased
competitiveness with respect to non-reporting
entities. Commenters generally did not provide
estimates of such costs. As discussed further below,
we have attempted to estimate the costs associated
with potential foreign law prohibitions on
providing the required disclosure.
632 See letter from Claigan and notes 629 above
and 636 below. This commenter’s approach was not
critiqued or refined by other commenters during the
extended comment rebuttal period.
633 See letters from Barrick Gold (pre-proposal);
Rio Tinto (pre-proposal); and NMA 2 (preproposal). We apply the same caveat as in the initial
compliance cost estimates above, namely, that these
cost estimates were provided by the commenters
during the comment period after the 2010
Proposing Release and were based on policy
choices made in that proposal. Discretionary
choices reflected in the final rules and recent
international developments could significantly
lower the cost estimates. We also note that both
Barrick Gold (incorporated in Canada and listed on
the Toronto Stock Exchange) and Rio Tinto
(incorporated in the United Kingdom and listed on
the London Stock Exchange) are subject to
substantially similar disclosure requirements under
existing international transparency regimes.
634 We estimate the cost percentages as follows:
Rio Tinto estimated that it would take between
5,000 and 10,000 hours per year to comply with the
requirements, for a total ongoing compliance cost of
between $2 million (5,000*$400) and $4 million
(10,000*$400). We use the midpoint of their
estimate, $3 million, as their expected ongoing
compliance cost. The National Mining Association
(NMA), which represents the mining industry,
estimated that ongoing compliance costs would be
10 times our initial estimate from the 2010
Proposing Release, although it did not state
specifically the number to which it referred. We
believe NMA was referring to our proposed estimate
of $30,000. Although this is the dollar figure for
total costs, NMA referred to it when providing an
estimate of ongoing costs, so we do the same here,
which would result in $300,000 (10*$30,000).
Finally, Barrick Gold estimated that it would take
500 hours per year to comply with the
requirements, or $200,000 (500*$400) per year. As
with the initial compliance costs, we calculate the
ongoing compliance cost as a percentage of total
assets. Rio Tinto’s total assets as of the end of fiscal
year 2009 were approximately $97 billion and their
estimated ongoing compliance costs as a percentage
of assets is 0.003% ($3,000,000/$97,236,000,000).
Continued
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Rules and Regulations
case, we take the average total assets for
all affected issuers, $6,439,369,000, and
multiply it by a constant fraction (either
the lower bound of 0.0008%, the
average of 0.0079%, or the upper bound
of 0.02%) of total assets and the number
of affected companies (425) to get the
total lower bound, the average, and the
upper bound of the annual ongoing
compliance costs estimates.
Similar to our estimates of the initial
costs, we then consider fixed costs equal
to the lowest of three estimates given by
the commenters, the Barrick Gold
estimate of $200,000 per year.635 To find
the lower and upper bound estimates,
we assume that each issuer’s costs are
the maximum between the fixed costs of
$200,000 and either the lower bound
(0.0008% of total assets) or the upper
bound (0.02% of total assets) of the
variable costs, respectively. Applying
these lower and upper bounds to each
issuer and summing across all issuers,
we find that the lower bound estimate
is $96 million per year (or, on average,
$0.22 million per issuer per year) and
the upper bound estimate is $591
million per year (or, on average, $1.39
million per issuer per year). Our
estimates are summarized in the
following table. We note that the
ongoing costs estimate from one
commenter 636 is within our range of the
no-fixed costs case. We also note that,
if the actual fixed costs component is
between $0 and $200,000, the lower and
upper bounds of compliance costs
estimates would be between our lower
and upper bounds estimates for the two
opposite fixed costs cases.
Annual ongoing compliance
costs under the assumption of
no fixed costs
Costs for an
average issuer
Lower bound ....................................................................................................
Average ............................................................................................................
Upper bound ....................................................................................................
$51,515
508,710
1,287,874
sradovich on DSK3GMQ082PROD with RULES2
As noted above, we expect that the
initial and ongoing compliance costs
associated with the final rules are likely
to be greater for larger, multinational
issuers as compared to smaller, single
country based issuers, as larger issuers
would likely need more complex
systems to track and report the required
information. However, to the extent
there is a significant fixed component to
the final rules’ overall compliance costs,
such costs could be disproportionately
burdensome for smaller reporting
companies. In this case, the final rules
could give rise to competitive
disadvantages for these smaller issuers
and could provide incentive for these
issuers to consider exiting public capital
markets to avoid reporting requirements
(possibly incurring a higher cost of
capital and potentially limited access to
capital in the future). We estimate that
approximately 43% of affected issuers
are smaller reporting companies.637
Nevertheless, given the fact that smaller
issuers constitute a significant portion
of the public reporting companies
making resource extraction payments,
exempting these issuers from the final
rules could significantly diminish the
expected benefits of the required
disclosure.
We calculated the average total assets of the mining
industry to be $1.5 billion, and using NMA’s
estimated ongoing compliance costs, we estimate
ongoing compliance costs as a percentage of assets
to be 0.02% ($300,000/$1,515,000,000). Barrick
Gold’s total assets as of the end of fiscal year 2009
were approximately $25 billion and their estimated
ongoing compliance costs as a percentage of assets
is 0.0008% ($200,000/$25,075,000,000). See 2012
Adopting Release at Section III.D for details.
635 Similarly to the initial compliance costs,
assuming that both estimates are accurate, the fixed
costs cannot be higher than the lowest of the
estimates. We have chosen to use the highest
possible value of fixed costs satisfying this
restriction to encompass the widest range of cost
estimates. We have not received any comment
letters with estimates of the fixed cost component
of the ongoing compliance costs or addressing the
estimates presented in the Proposing Release.
636 See letter from Claigan (estimating the total
ongoing compliance costs as $73,747,875).
637 As discussed in this section above, our
estimate of the number of affected issuers already
excludes 138 issuers that are shell companies or
whose reported revenues and net cash flows from
investing activities suggest that they are unlikely to
make payments above the de minimis threshold. If
we apply a significantly higher threshold ($250,000,
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c. Indirect Costs and Competitive Effects
In addition to direct compliance costs,
we anticipate that the statutory
reporting requirements could result in
significant indirect effects. Issuers that
have a reporting obligation under
Section 13(q) could be at a competitive
disadvantage compared to private
companies and foreign companies that
are not subject to the reporting
requirements of the U.S. federal
securities laws and therefore do not
have such an obligation. For example,
such competitive disadvantage could
result from, among other things, any
preference by the government of the
host country to avoid disclosure of
covered payment information, or any
ability of market participants to use the
information disclosed by reporting
issuers to derive contract terms, reserve
data, or other confidential information.
The Commission lacks sufficient data or
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Total costs
$21,893,860
216,201,800
547,346,400
Annual ongoing compliance
costs under the assumption of
fixed costs of $200,000
Costs for an
average issuer
$224,773
628,380
1,389,882
Total costs
$95,528,370
267,061,300
590,699,900
a sufficiently reliable methodology to
compare quantitatively total benefits
against total costs, and no commenter
has provided us with data regarding
competitive effects or suggested a
methodology that would allow us to
engage in an empirical evaluation.
Industry commenters on the 2010
Proposing Release stated that
confidential production and reserve
data can be derived by competitors or
other interested persons with industry
knowledge by extrapolating from the
payment information required to be
disclosed.638 Other commenters
asserted, however, that such
extrapolation is not possible or that
such information is readily available
from certain commercial databases.
These commenters stated that
information of the type required to be
disclosed by Section 13(q) therefore
would not confer a competitive
advantage on industry participants not
subject to such disclosure
requirements.639 Another commenter
$500,000, $750,000, or $1,000,000) to revenues and
cash flows from investing to estimate the number
of such issuers, we would exclude a slightly higher
number of issuers from our cost estimates (162, 176,
191, or 203, respectively). Nonetheless, for the
reasons described above, we believe that we have
set the de minimis threshold at an appropriate
level. See also Section II.C above and Section II.C.2
of the Proposing Release.
638 See letters from API 1 (pre-proposal);
ExxonMobil 1 (pre-proposal); and RDS 2 (preproposal).
639 See letters from PWYP 1 (pre-proposal) and
Oxfam 1 (pre-proposal).
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prior to the Proposing Release expressed
the view that project level reporting will
not disclose confidential information of
affected issuers or result in competitive
disadvantage for such issuers relative to
either owners of natural resources or to
competitive resource producers,
including state enterprises, who would
be otherwise unencumbered by such
reporting requirements.640 Commenters
on the Proposing Release were also split
in their opinion on the competitive
effect of payment information
disclosure, asserting views similar to
those described above.641 Whatever the
effect, any competitive impact arising
from Section 13(q)’s mandated
disclosures should be minimal in those
jurisdictions in which payment
information of the types covered by
Section 13(q) is already publicly
available.642 In addition, any
competitive impact should be
substantially reduced to the extent that
other jurisdictions, such as the
European Union and Canada, have
adopted laws that require disclosure
similar to the disclosure required by
Section 13(q) and the final rules.643 We
note, however, that if commenters are
accurate in their assessment of the
competitive effects arising from such
disclosure requirements, some U.S.
issuers that are not subject to the EU
Directives or other international
disclosure regimes might lose some of
the competitive advantage they
otherwise would enjoy from not being
obligated to disclose their resource
extraction payments.
To the extent that the requirement to
disclose payment information does
impose a competitive disadvantage on
an issuer, the issuer could be motivated
to sell assets affected by such
competitive disadvantage at a price that
does not fully reflect the value of such
assets absent such competitive
impact.644 One commenter on the 2010
640 See
letter from Conrad (pre-proposal).
letters from API 1, ExxonMobil 1, PWYP–
US 1, Oxfam 1.
642 In this regard, we note that one commenter
provided several examples of countries in which
payments are publicly disclosed on a lease or
concession level. See letter from PWYP 3.
643 One commenter suggested that if both the
United States and European Union implement
disclosure requirements regarding payments to
governments ‘‘around 90% of the world’s extractive
companies will be covered by the rules.’’ See letter
from Arlene McCarthy (Aug. 10, 2012) (Ms.
McCarthy is a member of the European Parliament
and the parliamentary draftsperson on the EU
transparency rules for the extractive sector).
644 For example, a study on divestitures of assets
find that issuers that undertake voluntary
divestitures have positive stock price reactions, but
also finds that issuers forced to divest assets due to
action undertaken by the antitrust authorities suffer
a decrease in shareholder value. See Kenneth J.
Boudreaux, ‘‘Divestiture and Share Price.’’ Journal
sradovich on DSK3GMQ082PROD with RULES2
641 See
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Proposing Release stated that tens of
billions of dollars of capital investments
could potentially be put at risk if issuers
were required to disclose, pursuant to
the final rules, information prohibited
by a host country’s laws or
regulations.645 Additionally, according
to commenters, resource extraction
issuers operating in countries that
prohibit, or could in the future prohibit,
the disclosure required under the
proposed rules could bear substantial
costs.646 As discussed below,
commenters have presented conflicting
positions and representations
concerning the prevalence and scope of
such foreign law prohibitions, with
some commenters on the Proposing
Release observing that issuers filing in
certain foreign jurisdictions are
providing payment disclosure in respect
of countries that allegedly prohibit
disclosure.647 In the event that such
foreign law prohibitions exist, or are
adopted in the future, pursuant to our
existing Exchange Act authority, we will
consider requests for exemptive relief
on a case-by-case basis and may grant
such relief, if and when warranted. The
economic implications of providing or
not providing such relief are discussed
below in Section III.C.1.
Addressing other potential costs, one
commenter on the 2010 Proposing
Release referred to a potential economic
loss borne by shareholders, without
quantifying such loss, which the
commenter believed could result from
highly disaggregated public disclosure
of competitively sensitive information
causing competitive harm.648 The
commenter also noted resource
extraction issuers could suffer
competitive harm because they could be
excluded from many future projects
altogether. The same commenter also
noted that because energy underlies
every aspect of the economy, these
negative impacts could potentially have
repercussions well beyond resource
extraction issuers.649
Some commenters on the 2010
Proposing Release suggested that we
permit issuers to submit payment data
confidentially to the Commission and
make public only an aggregated
of Financial and Quantitative Analysis 10 (Sept.
1975), 619–26. See also, G. Hite and J. Owers.
‘‘Security Price Reactions around Corporate SpinOff Announcements.’’ Journal of Financial
Economics 12 (Dec. 1983), 409–36 (finding that
issuers spinning off assets because of legal/
regulatory difficulties experience negative stock
returns).
645 See letter from RDS 4 (pre-proposal).
646 See Section II.I.2 above.
647 See notes 379 and 402 above.
648 See letter from API 1 (pre-proposal).
649 See id.
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49411
compilation of the information.650 The
commenters suggesting that the
Commission make public only a
compilation of information stated that
such an approach would address many
of their concerns about the disclosure of
commercially sensitive or legally
prohibited information and would
significantly mitigate the costs of the
mandatory disclosure under Section
13(q). One commenter on the Proposing
Release made a similar suggestion.651 As
noted above, we did not permit
confidential submissions in the 2012
Rules, and the current final rules are
generally consistent with that approach.
As a result, the final rules require public
disclosure of the payment information.
We note that in situations involving
more than one payment, the information
would be aggregated by payment type,
government, and/or project, which may
limit the ability of competitors to use
the publicly disclosed information to
their advantage. Also, a company can
combine more than one contract into a
project, which may further limit the
ability of competitors to use the
information. Further, we are providing a
limited exemption for payments in
connection with exploratory activities,
which should further reduce the
potential competitive effects that might
result from disclosure of payment
information.652 For other situations of
potential substantial competitive harm,
we will consider applications for
exemptive relief from the proposed
disclosure requirements on a case-bycase basis and may grant such relief, if
and when warranted (similar to our
approach with potential foreign law
prohibitions).653 In opting to provide a
categorical exemption for new
exploratory operations but to rely on
case-by-case exemptive relief for
potential competitive harms associated
with ongoing projects, we credit the
position advanced by the API that the
payment terms of older contracts are
generally publicly known (even if not
technically disclosed).654 Consequently,
the disclosure of payment information
relating to these projects is less likely to
produce competitive harm than
payments relating to, for example,
exploratory activities.
650 See
Section II.G.2 of the Proposing Release.
letter from API 1.
652 This exemption would not significantly
frustrate the transparency goals of the final rules.
An issuer that would rely on the exemption for its
payments made in connection with exploratory
activities would have to disclose such payment
information in its Form SD filing for the fiscal year
following the fiscal year in which the payment was
made. See Section II.I.3 for details.
653 See Section II.I above.
654 See API 1.
651 See
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As noted above, the cost of
compliance with this provision would
be primarily borne by the issuer thus
potentially diverting capital away from
other productive opportunities and
resulting in a loss of allocative
efficiency.655 Such effects may be
partially offset over time if increased
transparency of resource extraction
payments reduces corrupt practices by
governments of resource-rich countries
and in turn helps promote improved
economic development and higher
economic growth in those countries. In
this regard, as discussed above in
Section III.B.1, a number of economic
studies have shown that reducing
corruption can help promote higher
economic growth through more private
investments, better deployment of
human capital, and political stability.656
C. Potential Effects Resulting From
Specific Implementation Choices
As discussed in detail in Section II,
the Proposing Release specifically
addressed matters identified in the U.S.
District Court for the District of
Columbia’s decision in the API Lawsuit.
In developing the final rules, in addition
to those matters, we have also
considered relevant international
developments, input from staff
consultations with other U.S.
Government agencies, and the public
comments that we have received. We
discuss below the significant choices
that we are making to implement the
statute and the associated benefits and
costs of those choices. We are unable to
quantify the impact of each of the
choices discussed below with precision
because reliable, empirical evidence
about the effects is not readily available
to the Commission and commenters
have not provided us with empirical
evidence relating to these various
choices.
sradovich on DSK3GMQ082PROD with RULES2
1. Exemption from Compliance
Absent potential exemptive relief,
resource extraction issuers operating in
countries that prohibit, or may in the
future prohibit, the disclosure required
under Section 13(q) could bear
substantial costs.657 Such costs could
arise if issuers have to choose between
ceasing operations in certain countries
or violating local law, or if the country’s
laws have the effect of preventing them
655 See letter from Chevron. See also letter from
Chairman Bachus and Chairman Miller. As
discussed above in note 615, there is some
uncertainty regarding who would bear the ultimate
costs of compliance. Regardless of who bears the
majority of the compliance costs, we believe that
the effects on allocative efficiency and capital flows
would likely be similar.
656 See note 561 above and accompanying text.
657 See Section II.I.2 above.
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from participating in future projects.
Some commenters on the 2010
Proposing Release asserted that four
countries have such laws.658 Other
commenters disputed the assertion that
there are foreign laws that specifically
prohibit disclosure of payment
information.659 After reviewing the
comment letters on the Proposing
Release, we note that some commenters
continue to assert that at least two
countries—Qatar and China—prohibit
the required disclosures whereas
commenters no longer assert that two
other countries mentioned in earlier
comment letters—Angola and
Cameroon—prohibit the disclosure.660
Although we are not making any final
determinations at this stage, as
discussed above, we anticipate
obtaining more information about
companies’ experiences with the
disclosures under the EU Directives and
ESTMA in the near term, which should
assist the Commission in deciding
whether any type of case-by-case
exemptive relief is appropriate before
the first reports are due under the final
rules in two years.
To the extent that such prohibitions
exist and are enforced without any type
of waiver, affected issuers could suffer
substantial losses if they have to
terminate their operations and redeploy
or dispose of their assets in the
particular foreign jurisdiction. These
losses would be magnified if an issuer
cannot redeploy the assets in question
easily, or if it has to sell them at a steep
discount (a fire sale). Even if the assets
could be easily redeployed, an issuer
could suffer opportunity costs if they
are redeployed to projects with inferior
rates of return. In the 2012 Adopting
Release we estimated that such losses
could amount to billions of dollars. One
commenter on the Proposing Release
also asserted that such losses could be
in the tens of billions of dollars.661
In addition to the costs described
above, a foreign private issuer with
operations in a country that prohibits
disclosure of covered payments, or a
foreign issuer that is domiciled in such
country, might face different types of
costs. For example, in these
circumstances, an issuer might decide it
is necessary to delist from an exchange
in the United States, deregister, and
658 See letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal) (mentioning Angola,
Cameroon, China, and Qatar). See also letter from
RDS 2 (pre-proposal) (mentioning Cameroon, China,
and Qatar).
659 See notes 379 and 402 above.
660 See letter from API 1.
661 See letters from ExxonMobil 1 and
ExxonMobil 2.
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cease reporting with the Commission,662
thus incurring a higher cost of capital
and potentially limited access to capital
in the future. Based on our experience
with issuers and the securities markets,
we believe this is highly unlikely given
that, at least for larger resource
extraction issuers, they generally seek
access to capital through publiclytraded securities markets and many of
the major foreign securities exchanges
on which a resource extraction issuer
might seek to trade its securities are
now subject to laws that are
substantially similar to the final rules.
Nonetheless, we acknowledge that
should this occur, shareholders,
including U.S. shareholders, might
suffer an economic and informational
loss if an issuer decides it is necessary
to deregister and cease reporting under
the Exchange Act in the United States
as a result of the final rules.
We believe that there are a number of
factors that may serve to diminish the
likelihood that, to the extent that there
are or will be foreign laws that prohibit
the required disclosures, such laws
would be retained or adopted or, if
retained or adopted, may serve to
mitigate the costs and competitive
burdens arising from their impact. For
example, the widening global influence
of the EITI and the recent trend of other
jurisdictions to promote transparency,
including listing requirements adopted
by the Hong Kong Stock Exchange 663
and the requirements adopted pursuant
to the EU Directives and ESTMA, may
discourage governments in resource-rich
countries from retaining or adopting
prohibitions on payment disclosure.
Resource extraction issuers concerned
that disclosure required by Section 13(q)
may be prohibited in a given host
country may also be able to seek
authorization from the host country to
disclose such information.664
Commenters did not provide estimates
of the cost that might be incurred to
seek such an authorization, and we are
unaware of any probative data.
662 See letters from Branden Carl Berns (Dec. 7,
2011) (‘‘Berns (pre-proposal)’’) and API 1.
663 See Proposing Release, n.70.
664 See letter from Oxfam-ERI (stating that ‘‘Qatar
government’s Model Production Sharing Agreement
(PSA) contains a carveout clause allowing a party
to disclose any information that might otherwise be
deemed confidential, when required by applicable
laws and regulations. In the absence of express
prohibitions on disclosure, the terms of this
contract control confidentiality of information
related to each project’’). The legal opinions
submitted by Royal Dutch Shell with its preproposal comment letter also indicate that
disclosure of otherwise restricted information may
be authorized by government authorities in
Cameroon and China, respectively. See letter from
RDS 2 (pre-proposal).
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Rules and Regulations
In addition, these potential costs
could be substantially mitigated under
the final rules. We intend to consider
using our existing authority under the
Exchange Act to provide exemptive
relief on a case-by-case basis, if and
when warranted, upon the request of a
resource extraction issuer.665 As
mentioned above, we believe that a
case-by-case approach to exemptive
relief is preferable to either including
within the final rules a blanket
exemption where foreign law prohibits
disclosure (or for any other reason) or
providing no exemptions and no avenue
for exemptive relief under this or other
circumstances. This is particularly so
given the increasing uncertainty about
the existence and scope of such laws
and the likelihood that the Commission
will have a more informed basis to
assess the need for exemptive relief as
more companies begin to report under
the EU Directives and ESTMA. The final
approach should significantly decrease
compliance and economic costs to the
extent that issuers are able to
demonstrate that an exemption where
host country laws prohibit disclosure is
warranted. Indeed, assuming such laws
exist and that the Commission
determines to grant an exemption from
the final rules, this approach could
potentially save affected issuers billions
of dollars in compliance and economic
costs.666
An alternative to using our exemptive
authority on a case-by-case basis would
be to provide an exemption where
specific countries have a law
prohibiting the required disclosure.
Although a blanket exemption could
reduce potential economic costs (e.g.,
costs of relocating assets) and
compliance costs (e.g., costs associated
with applying for the exemption) for
issuers if they are subject to foreign law
prohibitions on disclosure, it could
create a stronger incentive for host
countries that want to prevent
transparency to pass laws that prohibit
such disclosure, potentially
undermining the purpose of Section
13(q) to compel disclosure in foreign
countries that have failed to voluntarily
do so.667 It also would remove any
665 See
discussion in Section II.I above.
note, however, that in addition to reducing
costs, granting an exemption might diminish some
of the benefits of enhanced transparency as well.
667 See, e.g., 156 Cong. Rec. S3815 (May 17, 2010)
(Statement of Senator Cardin) (‘‘We currently have
a voluntary international standard for promoting
transparency. . . . But too many countries and too
many companies remain outside this voluntary
system.’’). A blanket exemption would incentivize
host countries that want to prevent transparency to
enact laws prohibiting the disclosure without
suffering the cost of decreasing the number of
potential bidders on—and competition for—projects
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666 We
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incentive for issuers to diligently
negotiate with host countries for
permission to make the required
disclosures. Furthermore, it would make
it more difficult to address any material
changes over time in the laws of the
relevant foreign countries, thereby
resulting in an outdated blanket
exemption. By contrast, the tailored
case-by-case consideration of
exemptions we intend to pursue will
provide a more flexible and targeted
mechanism for the Commission to
address potential cost concerns while
minimizing incentives for host countries
to enact laws prohibiting disclosure.668
As discussed above, host country laws
that prohibit the type of disclosure
required under the final rules could lead
to significant additional economic costs
that are not captured by the compliance
cost estimates in Section III.B.2.b. We
believe that considering exemptive
relief from the disclosure requirements
on a case-by-case basis, as
circumstances warrant, may
substantially mitigate such costs.
However, we acknowledge that, if this
relief is not provided, issuers could
potentially incur costs associated with
the conflict between our requirements
and those foreign law prohibitions.
Below, we have attempted, to the extent
possible, to assess the magnitude of the
potential costs if such laws exist and if
exemptive relief is not granted.
Although we discuss the potential costs
below for completeness, it is not clear
that these costs, in fact, will be incurred
within their jurisdictions, and thus without the cost
of decreasing the potential value realized to the host
country from awarding a contract. We note that one
commenter on the Proposing Release stated that we
had failed to explain why a case-by-case exemptive
approach would not create the very same
incentives. See letter from API 1. We think this is
unlikely, and the incentives to adopt such laws
would be mitigated for the following reasons: a host
country government would realize that there is
greater uncertainty in exemption application
approval; any exemptive relief granted under a
case-by-case approach may be time limited or
otherwise tailored, unlike a blanket exemption; and
countries may realize that by adopting such a law,
they are reducing the pool of potential competitors
for in-country projects, as issuers may be reluctant
to bid for contracts in countries that prohibit
disclosure, if they do not know upfront that they
will be granted an exemption. Thus, enacting laws
prohibiting disclosure could reduce the number of
potential bidders on resource extraction projects
within host countries jurisdictions and, due to
possible costs and uncertainty of the exemption
application, the bids on such projects would be
lower.
668 Although not providing a blanket exemption
could potentially discourage some companies from
listing on U.S. exchanges, the advantage to these
companies from being outside of the final rules may
be limited by the lack of exemptions under the EU
Directives and ESTMA and the possibility that
other jurisdictions in the future will adopt similar
initiatives as the global focus on reducing
corruption associated with resource extraction
activities continues.
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49413
by issuers in light of the present
uncertainty regarding the existence and
scope of such foreign laws and the fact
that we intend to consider the use of our
exemptive authority where investor
interests would be jeopardized with
little accompanying benefit from the
specific disclosure.669 Accordingly, the
magnitude of the potential costs
outlined below should not be viewed as
necessarily indicative of the likely or
expected costs of this aspect of the final
rules.
We base our analysis on the two
countries that some commenters
continue to assert have versions of such
laws.670 We searched (through a text
search in the EDGAR system) the Forms
10–K, 40–F, and 20–F of affected issuers
for calendar year 2015 for any mention
of China or Qatar. We found that, out of
425 potentially affected issuers, 150
mentioned one of these two countries.
However, only 53 of them described any
activity in one of these two countries
and 97 mentioned these countries for
other, unrelated reasons. An
examination of these 53 filings indicates
that most filings did not provide
detailed information on the extent of
issuers’ operations in these countries.671
Thus, we are unable to determine the
total amount of capital that could be lost
in these countries if the information
required to be disclosed under the final
rules is, in fact, prohibited by laws or
regulations and exemptive relief is not
provided.
We can, however, assess if the costs
of withdrawing from these two
countries are in line with some
commenters’ estimates of tens of
billions of dollars provided on the
Proposing Release.672 To do this, we
first estimate the market value of assets
that an issuer currently owns in a
669 No commenters provided us with data or
analysis to assist in assessing the potential costs
that could arise from foreign law prohibitions on
disclosure. We note that we anticipate considering
the specific potential costs that an issuer would
experience if a foreign law prohibition exists when
we consider the issuer’s exemptive application,
provided the issuer produces documentation to
credibly support those potential costs.
670 See notes 658, 659, and 660 at the beginning
of this section.
671 We note that some resource extraction issuers
do not operate in these two countries and thus
would not have any such information to disclose.
Other issuers may have determined that they were
not required to provide detailed information in
their filings regarding their operations in these
countries.
672 See letters from ExxonMobil 1, ExxonMobil 2,
and RDS 4 (pre-proposal). We note, however, that
the Royal Dutch Shell estimate was submitted in
response to the 2010 Proposing Release. In addition,
Royal Dutch Shell is incorporated in the United
Kingdom and listed on the London Stock Exchange
and Euronext Amsterdam and thus is subject to
substantially similar disclosure requirements under
existing international transparency regimes.
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Federal Register / Vol. 81, No. 144 / Wednesday, July 27, 2016 / Rules and Regulations
country with such laws. We then
discuss how the presence of various
opportunities for the use of those assets
by the issuer or another entity would
affect the size of the issuer’s potential
losses. We also discuss how these losses
would be affected if an issuer cannot
redeploy the assets in question easily, or
if it has to sell them at a steep discount
(a fire sale). In order to estimate the
market value of assets located in one of
these countries, we use Compustat
geographic segments data extracted from
Exchange Act annual reports to find the
fraction of book value of such assets in
the issuer’s total assets and assume that
the market value of such assets is the
Issuer
Domicile
(business
address)
Host country
Foreign ...............
Foreign ...............
Foreign ...............
Foreign ...............
Foreign ...............
Foreign ...............
Foreign ...............
Foreign ...............
U.S. ....................
U.S. ....................
U.S. ....................
U.S. ....................
U.S. ....................
U.S. ....................
U.S. ....................
U.S. ....................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
China ................
Qatar .................
Form type
1 .........................
2 .........................
3 .........................
4 .........................
5 .........................
6 .........................
7 .........................
8 .........................
9 .........................
10 .......................
11 .......................
12 .......................
13 .......................
14 .......................
15 .......................
16 .......................
10–K
10–K
10–K
10–K
20–F
20–F
20–F
20–F
10–K
10–K
10–K
10–K
10–K
10–K
10–K
10–K
same fraction of the issuer’s total market
value.673
One commenter suggested that our
valuation analysis is flawed because it
is based on a book value metric instead
of a market value metric.674 The
commenter, however, erroneously states
that we use book values to measure the
value of an issuer’s assets in these two
countries. As stated above, we use book
values only to determine what fraction
an issuer’s assets in China or Qatar are
of that issuer’s total assets. We then
apply this fraction to an issuer’s market
value to determine the market value of
such assets.
As we discuss above, we were able to
identify a total of 53 issuers that
Country assets
($ mil)
23.4
193.6
22.1
9.6
12.9
8,967.0
280,177.4
19,225.9
389.0
311.0
728.0
1,913.0
0.1
13.3
49.9
2,605.0
indicated they are active in these
countries (some operate in more than
one country). The table below provides
information from the 16 issuers, out of
the 53 described above, that provide
geographic segment data at the country
level and that specifically identify the
value of assets in one of these two
countries.675 We expect that the actions
taken in response to any foreign law
prohibition and the nature of costs that
issuers might face would be different for
issuers domiciled in the United States
and in foreign jurisdictions; therefore,
we consider these two types of filers
separately.
Total assets
($ mil)
23.4
193.6
22.1
9.6
12.9
21,451.5
387,691.9
31,046.6
37,399.0
3,075.0
9,598.0
116,539.0
2.0
829.4
2,576.0
56,259.0
Country assets
fraction in total
assets
Market value
estimate of
country assets
($ mil)
100.0%
100.0%
100.0%
100.0%
100.0%
41.8%
72.3%
61.9%
1.0%
10.1%
7.6%
1.6%
6.0%
1.6%
1.9%
4.6%
2.6
86.4
8.1
7.2
58.8
........................
........................
........................
288.5
294.3
389.3
1,518.9
1.7
21.8
33.7
3,053.3
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The magnitude of potential total loss
of assets in the host countries is
represented in the last column of the
table, the estimated market value of
country assets. For the eight issuers
domiciled in the United States that have
assets in one of these two host
countries, the estimated total loss range
is between $1.7 million and $3.1 billion,
with a median loss of $291.4 million.
The aggregate fraction of total assets that
might be affected is 2.7%.676 We note
that these estimates apply only to
issuers that have assets in one of the
host countries.
As shown in the table above, eight
issuers have a foreign address associated
with their Form 10–K or 20–F filing. As
we discussed above, issuers that are
domiciled in foreign countries might
face different types of costs than U.S.based issuers. For example, they are
more likely to decide it is necessary to
delist from an exchange in the United
States, deregister, and cease reporting
with the Commission, thus incurring a
higher cost of capital and potentially
limited access to capital in the future,
rather than to sell their assets abroad.
Due to limited data availability, we
cannot reliably quantify these costs.
Even though our analysis was limited
to less than half of issuers that are active
in these two countries, these estimates
suggest that commenters’ concerns
about such host country laws
potentially imposing billions of dollars
of costs on affected issuers could be
warranted, if such prohibitions exist, are
not waived by the host country, and no
exemptive relief from our rules is
provided. Additional costs at that scale
could have a significant impact on
resource extraction issuers’ profitability
and competitive position. The analysis
above assumes that a total loss of assets
located in the host countries would
occur. In a similar vein, one commenter
suggested that any action by an issuer to
obtain an exemption would likely
673 This approach assumes that valuation of assets
of a firm is the same regardless of where these assets
are geographically located. Not all of the assets
located in these host countries might be related to
resource extraction payments, which disclosure can
trigger their sale or loss; however, we choose the
conservative approach and err on the side of
overestimating the losses.
674 See letter from API 1 (Attachment B).
675 As noted above, we identified 53 issuers that
discussed their activities in at least one of the two
countries, but only 16 of the issuers provided
country-level geographic segment information for
those countries that was specific enough to use in
our analysis (some issuers may have determined
that they were not required to provide detailed
information in their filings and others might not
have any assets in these countries). In the table,
Country Assets are defined as either Long-lived
Assets, Identifiable Total Assets, or Property, Plant
& Equipment, whichever was disclosed; Country
Assets Fraction in Total Assets is Country Assets/
Total Assets; and Market Value Estimate of Country
Assets is Country Assets Fraction in Total Assets *
Company Market Value, where Company Market
Value is calculated as Consolidated Company-Level
Market Value of Common Equity + Total Debt +
Preferred Stock Liquidating Value—Deferred Taxes
and Investment Tax Credits if all these values were
available. We were not able to identify the
company-level market values for some issuers, and,
thus, we were not able to determine their Market
Value Estimate of Country Assets. All Compustat
data is the latest annual data disclosed on or before
the date of the issuer’s 2015 Form 10–K or 20–F
filing.
676 Total assets of all U.S.-based firms located in
these host countries divided by total worldwide
assets of the same firms.
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represent a breach of the issuer’s
contractual obligation to the country
and force the issuer potentially to suffer
a total loss of its local operations.677 In
a more likely scenario, however, these
issuers would be forced to sell their
assets in the above-mentioned host
countries at fire sale prices.
Additionally, an issuer could redeploy
these assets to other projects that would
generate cash flows.
While we do not have data on fire sale
prices for the industries of the affected
issuers, economic studies on fire sales of
real assets in other industries provide
some estimates that may allow us to
quantify the potential costs to affected
issuers from having to sell assets at fire
sale prices. For example, a study on the
airline industry finds that planes sold
by financially distressed airlines bring
10 to 20 percent lower prices than those
sold by undistressed airlines.678
Another study on aerospace plant
closings finds that all groups of
equipment sold for significant discounts
relative to estimated replacement
cost.679 The discounts on machine tools,
instruments, and miscellaneous
equipment were estimated to be
between 63 and 69 percent. The analysis
also suggests that the most specialized
equipment appears to have suffered
substantially higher discounts than the
least specialized equipment, which may
be relevant to the extractive industry to
the extent that a project would not have
many potential alternative suitors
should it need to be disposed of due to
a conflict between the final rules and
host country laws. Other studies
provide estimates of fire sale discounts
for forced house sales (about 3–7
percent for forced sales due to death or
bankruptcy and about 27 percent for
foreclosures) 680 and sales of stand-alone
private firms and subsidiaries (15–30
percent relative to comparable public
acquisition targets).681 These estimates
suggest a possible range for the fire sale
discount from 3 to 69 percent.
Commenters did not provide any
numerical estimates of the fire sale
discounts that resource extraction
issuers could potentially face. One
677 See
letter from ExxonMobil 1.
Todd Pulvino 1998. ‘‘Do Fire-Sales Exist?
An Empirical Study of Commercial Aircraft
Transactions.’’ Journal of Finance, 53(3): 939–78.
679 See Ramey, V.A., Shapiro, M.D. 2001.
‘‘Displaced Capital: A Study of Aerospace Plant
Closings.’’ Journal of Political Economy, 109: 958–
92.
680 See Campbell, John Y., Stefano Giglio, and
Parag Pathak 2011. ‘‘Forced Sales and House
Prices.’’ American Economic Review, 101: 2108–31.
681 See Officer, M.S. 2007. ‘‘The Price of
Corporate Liquidity: Acquisition Discounts for
Unlisted Targets.’’ Journal of Financial Economics,
83: 571–98.
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678 See
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commenter asserted that the range of
fire sale discounts that the Commission
presented in the Proposing Release was
incorrect because it was based on
industries that were very different from
the resource extraction industry.682
According to the commenter, the
appropriate fire sale discount should be
100 percent because of the significant
sunk-cost investments in the resource
extraction industry that the commenter
asserted are relationship-specific and
transaction-specific and thus have little
to no value outside such relationships
or transactions. While we agree with the
commenter that our numerical examples
are based on industries that are different
from the resource extraction industry, as
we acknowledged in the Proposing
Release, we do provide an estimate of a
100 percent fire sale discount as well, as
reflected in the total loss estimate from
above. Additionally, our understanding
is that, in most production sharing
contracts, the exploration and
production company receives
reimbursement via the cost recovery
mechanism during the period of the
contract, and ownership of the field
equipment reverts to the host country
upon termination of the contract.683
Thus, even if the contract is terminated
prematurely, an issuer may receive
certain reimbursement for its sunk cost
investments in the field equipment.
Also, equipment installed in the field by
one issuer can usually be reused by
another issuer without removing it from
the field. Given that the resource
extraction industry is a competitive
industry not only in the United States
but also globally, it is likely that if an
issuer has to dispose of its assets in one
of these two countries there may be
local or international buyers that that
are not subject to the rule that find these
assets valuable and are able to use them
for the same purpose (e.g., to extract oil)
and hence are willing to bid up their
price, which will result in fire sale
discounts of less than 100 percent.
Despite the assertion by the same
commenter that in the event of
disclosure the issuers’ assets are likely
to be seized by locally-owned or
government-owned enterprises, we
believe such asset seizures may be
unlikely given the negative effect on the
country’s reputation as a place to do
business that they could generate as
well as the fact that locally-owned or
government-owned enterprises may not
have the expertise and the technological
letter from API 1 (Attachment B).
e.g., Brady, John, Charles Chang, Dennis
R. Jennings, and Rich Shappard. Petroleum
Accounting—Principles, Procedures, & Issues. PDI,
7th Edition, 2011, Chapter 25.
PO 00000
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683 See,
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49415
know-how to efficiently manage these
assets. Another commenter suggested
that some resource extraction issuers
sell whole or partial stakes in their
ventures as a matter of course without
violating a host country law or
contractual provision.684 According to
this commenter, a sale under such
circumstances could lead to a fire sale
discount, but it is highly unlikely to
bring about a total loss. The commenter
also stated that issuers would likely be
protected under bilateral investment
treaties or covered by political risk
insurance that could lower the size of
the loss. Another commenter also stated
that resource extraction issuers may
have public or private insurance, or
treaty-based or commercial arbitration
mechanisms, which would allow them
to recover some or all of their losses in
the case of government interference
with their assets.685
To understand how relevant these
discounts are to the resource extraction
issuers affected by the final rules, we
examine the ease with which real assets
could be disposed of in different
industries. If the forced disposal of real
assets is more easily facilitated in the
resource extraction industries compared
to other industries (i.e., there is a more
liquid market for those assets), then the
lower range of the fire sale discounts
will be more appropriate to estimate
potential losses due to the foreign law
prohibitions. We measure the ease with
which issuers in a given industry could
sell their assets by a liquidity index.686
The index is defined as the ratio of the
value of corporate control
transactions 687 in a given year to the
total book value of assets of firms in the
industry for that year. We believe that
this ratio captures the general liquidity
of assets in an industry because it
measures the volume of the type of
transactions that companies rely on
when divesting real assets.
Additionally, one economic study finds
684 See
letter from Oxfam 1.
letter from PWYP–US 1.
686 See Frederic Schlingemann, Rene Stulz, and
Ralph Walkling 2002. ‘‘Divestitures and the
Liquidity of the Market for Corporate Assets.’’
Journal of Financial Economics, 64: 117–144. The
index value is between 0 and 1. A higher value of
the index for an industry indicates that this is an
industry with a more liquid market for corporate
assets and a firm in that industry would be able to
sell its real assets easier and at smaller loss than a
firm in an industry with a lower liquidity index.
687 As corporate control transactions, we consider
all completed or pending leveraged buyouts, tender
offers, spinoffs, exchange offers, minority stake
purchases, acquisitions of remaining interest,
privatizations, and equity carve-outs of U.S. targets.
We exclude buybacks (e.g., repurchases and selftenders) from the sample. Data on these transactions
comes from Thomson Financial’s Mergers &
Acquisitions and New Issues databases. Data on the
book value of total assets is taken from Compustat.
685 See
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that the liquidity of the market for
corporate assets, as measured by the
liquidity index, plays an important role
in explaining assets disposals by
companies.688
We note, however, that the index, as
constructed, will also reflect the
industry’s typical financial leverage, not
just the liquidity of its assets. To the
extent that different industries have
different leverages, these differences in
leverage could explain some of the
cross-industry variation of the index.
Additionally, the index measures the
ease with which ownership of assets is
changed over the time period under
consideration. Hence, the index is
expected to adjust to intertemporal
changes in the ease with which assets in
a certain industry can be disposed of,
which is important because it is wellestablished that control transactions
tend to be cyclical in nature.689
We construct the index for all
industries, identified by three-digit SIC
codes. For each industry, after
estimating the value of the index in each
year during the period 2010–2014, we
calculate the average over the five-year
period. Several industries have a
liquidity index greater than 1; in those
cases we cap the index level at 1.
The table below presents summary
statistics for the liquidity index for all
industries and the resource extraction
industries during the period 2010–2014.
Index value
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All other industries:
Mean ...........................
Median ........................
Top quartile .................
Bottom quartile ............
Industries with similar financial leverage:
Mean ...........................
Median ........................
Top quartile .................
Bottom quartile ............
Resource extraction
issuers:
Mean ...........................
Median ........................
0.11
0.03
0.09
0.01
0.08
0.02
0.10
0.01
0.02
0.01
The results in the table show that the
liquidity of real assets in the resource
extraction industries is low (an average
liquidity index of 0.02) compared with
the liquidity in other industries (an
average liquidity index of 0.11). That is,
it is harder to dispose of assets in the
extractive industries relative to other
industries. In fact, the liquidity index of
688 See Frederic Schlingemann, Rene Stulz, and
Ralph Walkling 2002. ‘‘Divestitures and the
Liquidity of the Market for Corporate Assets.’’
Journal of Financial Economics, 64: 117–144.
689 Gregor Andrade, and Erik Stafford, 2004.
‘‘Investigating the economic role of mergers.’’
Journal of Corporate Finance 10: 1–36.
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resource extraction industries is in the
lowest quartile of the distribution of the
index for all industries. As mentioned
above, this could reflect the fact that
resource extraction issuers have higher
financial leverage than other industries.
All other things being equal, higher
financial leverage will result in a lower
liquidity index. To control for the
effects of financial leverage, we compare
the liquidity index of resource
extraction industries to that of
industries with similar leverage.690 As
the results of this comparison show,
resource extraction industries have
lower liquidity index values even when
compared to industries with similar
levels of financial leverage: A median of
0.01 for the resource extraction
industries compared to a median of 0.02
for industries with similar financial
leverage.691 This suggests that affected
issuers may still experience difficulty in
disposing of some of their real assets
relative to other industries with similar
leverage levels when a need arises. It
should be noted, however, that the
liquidity index estimates the liquidity of
the real assets at the industry level, not
at the level of a country with laws
prohibiting disclosure. It is possible that
in some of these countries the ability of
an affected issuer to dispose of assets
could be more or less constrained than
that at the industry level.
One commenter criticized our use of
the liquidity index based on the
argument that it is constructed using
U.S. data, with the U.S. being one of the
most liquid markets in the world.692
Our purpose, however, in using the
index is to do a relative comparison:
that is, to get a sense of whether the
resource extraction industry is more or
less liquid than other industries. We do
not use the liquidity index to develop
an absolute measure of liquidity in the
resource extraction industry.
Furthermore, our results from the
analysis using the liquidity index are in
first estimate the median market leverage
of the resource extraction industries during the
period 2010–2014. Market leverage is defined as the
ratio Total debt/(Total debt + Market value of
equity). We then classify as similar those industries
whose median market leverage is within –/+ 10%
of the median market leverage of the resource
industries for the same time period. There are six
industries that are similar to the resource extraction
industries based on this criterion. Data on total debt
and market value of equity comes from Compustat.
691 We note that many factors may drive the
choice of leverage within a given industry, and
some of these factors may also affect the industry’s
liquidity index. Thus, the industries that have
leverage that is similar to that of the resource
extraction industries may be very different in some
other aspects (e.g., growth opportunities or intensity
of competition) and that could explain the
differences in their liquidity indices and the
liquidity index of the resource extraction industries.
692 See letter from API 1 (Attachment B).
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line with the commenter’s suggestions
that this industry is relatively illiquid
compared to other industries.
Because we lack data to construct the
liquidity index at the country level, we
cannot quantify the liquidity of the
single-country market for real assets.
The table below lists the number of
corporate control transactions in each of
the two countries under consideration
from the period 2010–2014, broken
down by type of industry.693 As seen
from the table, China is by far the more
active market for corporate control
transactions among the two countries.
Although the number of relevant
transactions gives some indication of
how liquid the market in each country
is, without knowing the size of the
discounts and the types of companies
involved in these deals (e.g., small or
large), we cannot conclusively say in
which country the cost associated with
fire sale prices would be lower. These
costs would likely depend on countrylevel factors such as a country’s
regulatory framework governing such
transactions (e.g., how quickly a
transaction can get approved), the
degree of competition in the resource
extraction industry, availability of
capital (e.g., availability and cost of debt
and stock market valuations), and
changes in currency exchange rates. For
example, a recent study documents that
companies from countries whose stock
market has increased in value and
whose currency has recently
appreciated are more likely to be
purchasers of corporate assets.694 In a
certain country, a more competitive
resource extraction industry is likely to
be associated with lower fire sale
discounts.
Country
China:
Resource extraction industries ................................
All other industries ............
Qatar:
Resource extraction industries ................................
All other industries ............
Number of
transactions
(% of all
transactions)
885 (6)
14,304 (94)
5 (8)
54 (92)
Given the lower liquidity of the
market for the real assets of resource
extraction issuers, we believe that the
upper limit of the fire sale discount
range would be more appropriate when
693 Corporate control transactions are defined as
in footnote 687. Data on the transactions comes
from Thomson Financial’s Mergers & Acquisitions.
694 See Isil Erel, Rose Liao, and Michael Weisbach
2012. ‘‘Determinants of Cross-Border Mergers and
Acquisitions,’’ Journal of Finance 67: 1045–82.
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estimating the fire sale prices at which
affected issuers could dispose of their
assets in countries with laws prohibiting
disclosure, should such need arise. If we
apply those discount percentages to the
market value of the issuers’ assets in
these host countries, this would reduce
our estimates of their potential losses.
For U.S.-based issuers, if we apply the
highest discount of 69 percent, the range
of losses would be between $1.2 million
and $2.1 billion, with a median loss of
$201.1 million. If the true fire sale
discounts in the countries with
disclosure prohibition laws are lower
than our highest estimate, the losses of
affected issuers would be lower. In
addition to the dollar costs, the process
of disposing of assets could involve
substantial time, which could further
increase the total cost of the
restructuring. We acknowledge,
however, that the fire sale discount
estimates are based on data from other
industries that are very different from
the industries of affected issuers. Thus,
our estimates may not accurately reflect
the true fire sale discounts that affected
issuers could face.
Alternatively, an issuer could
redeploy these assets to other projects
that would generate cash flows. If an
issuer could redeploy these assets
relatively quickly and without a
significant cost to projects that generate
similar rates of returns as those in the
above-mentioned countries, then the
issuer’s loss from the presence of such
host country laws would be minimal.
The more difficult and costly it is for an
issuer to do so, and the more difficult
it is to find other projects with similar
rates of return, the larger the issuer’s
losses would be. However, we do not
have sufficient data to quantify more
precisely the potential losses of issuers
under those various circumstances.
Likewise, if there are multiple potential
buyers (e.g., companies not subject to
the final rules, the EU Directives, or
ESTMA), and if the issuer could sell
those assets to one such buyer, then the
buyer might pay the fair market value
for those assets, resulting in minimal to
no loss for the issuer.
Overall, the results of our analysis are
consistent with commenters’ assertions
that the presence of host country laws
that prohibit the type of disclosure
required under the final rules could be
costly, although, as mentioned in the
preceding paragraph, in some instances
there may be mitigating factors that
could decrease those costs. It is also
possible that under certain
circumstances affected issuers could
lose 100 percent of their assets in a
given country. The size of the potential
loss to issuers would depend on the
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presence of other similar opportunities,
third parties willing to buy the assets at
fair-market values in the abovementioned host countries, and the
ability of issuers to avoid fire sales of
these assets. Finally, as discussed at the
beginning of this section, it is not clear
that these costs, in fact, will be incurred
by issuers in light of the present
uncertainty over the existence and
scope of such foreign law prohibitions
and our intent to consider exemptive
relief on a case-by-case basis.
2. Alternative Reporting
The final rules allow resource
extraction issuers subject to a foreign
jurisdiction’s resource extraction
payment disclosure requirements that
we have determined are substantially
similar to our own requirements to
satisfy their submitting obligations by
filing the report required by that foreign
jurisdiction with the Commission. At
the same time, we are recognizing the
EU Directives, ESTMA, and the USEITI
as ‘‘substantially similar’’ reporting
regimes for purposes of this alternative
reporting provision. This approach will
significantly decrease compliance costs
for issuers that are cross-listed or
incorporated in these foreign
jurisdictions. We estimated above that
approximately 192 issuers will be
subject to other regulatory regimes that
may allow them to utilize this
provision.695 For these issuers, the costs
associated with preparing and filing a
Form SD should be negligible, although
they will be required to format the data
in interactive (XBRL) format before
filing it with the Commission.
As an alternative, we could have
decided not to adopt such a provision.
Such an alternative would have
increased the compliance costs for
issuers that are subject to substantially
similar foreign disclosure requirements.
These issuers would have to comply
with multiple disclosure regimes and
bear compliance costs for each regime,
although it is possible that the marginal
costs for complying with an additional
disclosure regime would not be high
given the potential similarities that may
exist between these reporting regimes
and the final rules.
3. Definition of Control
Section 13(q) requires resource
extraction issuers to disclose payments
made by a subsidiary or entity under the
control of the issuer. As discussed in
Section II.D above, we are adopting
695 These are issuers that have a business address,
are incorporated, or are listed on exchanges in the
EEA or Canada and that have to provide
substantially similar disclosure to the European
Union or Canadian authorities.
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49417
rules that define the term ‘‘control’’
based on accounting principles.
Alternatively, we could have used a
definition based on Exchange Act Rule
12b–2 as in the 2012 Rules.696 We
believe that the approach we are
adopting will be less costly for issuers
to comply with because issuers are
currently required to apply the
definition on at least an annual basis for
financial reporting purposes. While
some commenters were concerned about
the ability of an issuer to obtain
sufficiently detailed payment
information from proportionately
consolidated entities or operations
when it is not the operator of that
venture, we note that the issuer would
be able to rely on Exchange Act Rule
12b–21 to omit the information if, under
existing contracts, the necessary
payment information is unknown and
not reasonably available.697
Using a definition based on Rule 12b–
2 would require issuers to undertake
additional steps beyond those currently
required for financial reporting
purposes.698 Specifically, a resource
extraction 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. Thus, this
alternative would have required issuers
to engage in a separate analysis of which
entities are included within the scope of
the required disclosures (apart from the
consolidation determinations made for
financial reporting purposes) and could
have increased the compliance costs for
issuers compared to the approach we
are adopting.
In addition, there are several other
benefits from using a definition based
on accounting principles. There will be
audited financial statement disclosure
of an issuer’s significant consolidation
accounting policies in the footnotes to
its audited financial statements
contained in its Exchange Act annual
reports, and an issuer’s determination of
control under the final rules will be
subject to the audit process as well as
subject to the internal accounting
controls that issuers are required to have
in place with respect to audited
financial statements filed with the
Commission.699 All of these benefits
may lead to more accurate, reliable, and
consistent reporting of subsidiary
payments, thereby enhancing the
quality of the reported data.
696 See
Section II.D of the Proposing Release.
letters from API 1; BP; Chevron; Encana;
ExxonMobil 1; Petrobras; and RDS.
698 Id.
699 See Section II.D above.
697 See
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4. Definition of ‘‘Commercial
Development of Oil, Natural Gas, or
Minerals’’
As in the Proposing Release, the final
rules define ‘‘commercial development
of oil, natural gas, or minerals’’ to
include exploration, extraction,
processing, and export, or the
acquisition of a license for any such
activity. As described above, the rules
that we are adopting generally track the
language in the statute. We are sensitive
to the fact that a broader definition of
‘‘commercial development of oil,
natural gas, or minerals’’ could increase
issuers’ costs. We are also sensitive to
the fact that expanding the definition in
a way that is broader than other
reporting regimes could potentially lead
to a competitive disadvantage for those
issuers covered only by our rules.
Further, we recognize that limiting the
definition to these specified activities
could adversely affect those using the
payment information if disclosure about
payments made for activities not
included in the list of specified
activities, such as refining, smelting,
marketing, or stand-alone transportation
services (i.e., transportation that is not
otherwise related to export), would be
useful to users of the information.
As noted above, the final rules
include an anti-evasion provision that
requires disclosure with respect to an
activity or payment that, although not in
form or characterization one of the
categories specified under the final
rules, is part of a plan or scheme to
evade the disclosure required under
Section 13(q).700 We recognize that
adding this requirement may increase
the compliance costs for some issuers;
however, we believe this provision is
appropriate in order to minimize
evasion and improve the effectiveness of
the disclosure.
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5. Types of Payments
As in the Proposing Release, the final
rules add two categories of payments to
the list of payment types identified in
the statute that must be disclosed:
Dividends and payments for
infrastructure improvements. We
include these payment types in the final
rules because, based on the comments
we have received, we believe they are
part of the commonly recognized
revenue stream. For example, payments
for infrastructure improvements have
been required under the EITI since
2011. Additionally, we note that the EU
Directives and ESTMA also require
these payment types to be disclosed.
Thus, including dividends and
700 See
proposed Rule 13q–1(b).
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payments for infrastructure
improvements (e.g., building a road) in
the list of payment types required to be
disclosed under the final rules will
promote consistency with the EU
Directives and ESTMA and should
improve the effectiveness of the
disclosure, thereby furthering
international transparency promotion
efforts.
In a change from the Proposing
Release, we are adding CSR payments
that are required by law or contract to
the list of covered payment types. Some
commenters argued that these payments
are of material benefit in resourcedependent countries to both
governments and local communities.701
One commenter suggested that some
resource extraction issuers already
disclose such payments voluntarily and
presented survey data indicating that
such payments could be quite large.702
Thus, the addition of CSR payments to
the list of types of payments that must
be disclosed should improve the quality
of the disclosure required by the statute.
Additionally, to the extent that it is
difficult for certain resource extracting
issuers to distinguish between CSR
payments and infrastructure payments,
requiring both types of payments when
required by contract with the host
government may lead to lower
compliance costs for those issuers.703
As discussed earlier, under the final
rules resource extraction issuers would
incur costs to provide the payment
disclosure for the required payment
types. For example, there will be costs
to modify the issuers’ core enterprise
resource planning systems and financial
reporting systems so that they can
capture and report payment data at the
project level, for each type of payment,
government payee, and currency of
payment.704 Since some of the payments
are required to be disclosed only if they
are required by law or contract (e.g.,
CSR payments), resource extraction
issuers would presumably track such
payments and hence the costs of
disclosing these payments may not be
large. Nevertheless, the addition of
dividends, payments for infrastructure
improvements, and CSR payments to
the list of payment types for which
disclosure is required may marginally
increase some issuers’ costs of
complying with the final rules. For
example, issuers may need to add these
types of payments to their tracking and
701 See letters from ACEP; Broadman & Searby;
ExxonMobil 1; Falik; Global Witness 1; Oxfam 1;
PWYP–US 1; and USAID.
702 See letter from PWYP–US 1.
703 See letter from ExxonMobil 1.
704 See note 588 and accompanying text.
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reporting systems. We understand that
these types of payments are more
typical for mineral extraction issuers
than for oil issuers,705 and therefore
only a subset of the issuers subject to
the final rules might be affected.
Under the final rules, issuers may
disclose payments that are made for
obligations levied at the entity level,
such as corporate income taxes, at the
entity level rather than the project level.
This accommodation also should help
reduce compliance costs for issuers
without significantly interfering with
the goal of achieving increased payment
transparency.
Under the final rules, issuers must
disclose payments made in-kind. The
EU Directives and ESTMA also require
disclosure of in-kind payments, as does
the EITI. Consequently, this requirement
should help further the goal of
supporting international transparency
promotion efforts and enhance the
effectiveness of the payment disclosure.
At the same time, this requirement
could impose costs if issuers have not
previously had to value their in-kind
payments. To minimize the potential
additional costs, the final rules provide
issuers with the flexibility of reporting
in-kind payments at cost, or if cost is
not determinable, at fair market value.
We believe this approach should lower
the overall compliance costs associated
with our decision to include the
disclosure of in-kind payments.
6. Definition of ‘‘Not De Minimis’’
Section 13(q) requires the disclosure
of payments that are ‘‘not de minimis,’’
leaving that term undefined. Consistent
with the proposed rules, the final rules
define ‘‘not de minimis’’ to mean any
payment, whether made as a single
payment or a series of related payments,
that equals or exceeds $100,000, or its
equivalent in the issuer’s reporting
currency.
We considered adopting a definition
of ‘‘not de minimis’’ that was based on
a qualitative principle or a relative
quantitative measure rather than an
absolute quantitative standard. We
chose the absolute quantitative
approach for several reasons. An
absolute quantitative approach should
promote consistency of disclosure and,
in addition, would be easier for issuers
to apply than a definition based on
either a qualitative principle or relative
quantitative measure. Moreover, using
an absolute dollar amount threshold for
705 See, e.g., letters from PWYP–US 1 and Global
Witness 1. See also Chapter 19 ‘‘Advancing the EITI
in the Mining Sector: Implementation Issues’’ by
Sefton Darby and Kristian Lempa, in Advancing the
EITI in the Mining Sector: A Consultation with
Stakeholders (EITI 2009).
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disclosure purposes should reduce
compliance costs by reducing the work
necessary to determine what payments
must be disclosed.
In choosing the $100,000 ‘‘de
minimis’’ threshold, we selected an
amount that we believe strikes an
appropriate balance in light of varied
commenters’ concerns and the purpose
of the statute. Although commenters on
the 2010 Proposing Release suggested
various thresholds, no commenter
provided data to assist us in
determining an appropriate threshold
amount.706 In addition, one commenter
on the Proposing Release criticized the
proposed $100,000 threshold as too low,
although the commenter did not suggest
an alternative amount or provide data to
support why the threshold was too
low.707 Our proposed threshold is very
similar to the payment thresholds of
other resource extraction disclosure
regimes.708 For issuers (or their
subsidiaries) that are already providing
payment information under those
resource extraction disclosure regimes,
our definition of ‘‘not de minimis’’ will
likely decrease compliance costs
(compared to other threshold choices)
associated with determining which
payments should be reported because
these issuers will already have systems
tailored to this threshold. We
considered other absolute amounts but
chose $100,000 as the quantitative
threshold in the definition of ‘‘not de
minimis.’’ We decided not to adopt a
lower threshold because we are
concerned that such an amount could
result in undue compliance burdens and
raise competitive concerns for many
issuers. We also considered defining
‘‘not de minimis’’ either in terms of a
materiality standard or by using a larger
number, such as $1,000,000. Both of
these alternatives might have resulted in
lower compliance costs and might have
lessened competitive concerns. In
determining not to adopt these
thresholds, however, we were mindful
that they could leave important
payment streams undisclosed, reducing
the potential benefits to be derived from
the final rules. In short, we believe the
$100,000 threshold strikes an
appropriate balance between concerns
about the potential compliance burdens
of a lower threshold and the need to
fulfill the statutory directive for
resource extraction issuers to disclose
payments that are ‘‘not de minimis.’’
706 See 2012 Adopting Release, n.235 and n.243
and accompanying text.
707 See letter from Nouveau.
708 See discussion in Section II.C.2 of the
Proposing Release.
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7. Definition of ‘‘Project’’
Section 13(q) requires a resource
extraction issuer to disclose information
about the type and total amount of
payments made to a foreign government
or the Federal Government for each
project relating to the commercial
development of oil, natural gas, or
minerals, but it does not define the term
‘‘project.’’ The final rules define
‘‘project’’ as operational activities
governed by a single contract license,
lease, concession, or similar legal
agreement, which forms the basis for
payment liabilities with a government.
This definition is based on the
definition in the EU Directives and the
ESTMA Specifications, but allows for
greater flexibility when operational
activities governed by multiple legal
agreements may be deemed a project.
The definition of ‘‘project’’ that we are
adopting should have the benefit of
providing a granular transparency that
citizens, civil society groups, and others
can use to assess revenue flows from
projects in their local communities. As
we discuss above in Section II.E, this
should have a number of potential
benefits for information users seeking to
prevent corruption and promote
accountability. The definition of project
may also reduce costs for issuers that
are subject to both the final rules and
either the EU Directives or ESTMA by
not requiring different disaggregation of
project-related costs due to different
definitions of the term. It also likely will
reduce the competitive disadvantage for
issuers that could be required to make
more granular disclosure of information
than their competitors under a narrower
definition. The definition also will
provide more flexibility in, and reduce
the burdens associated with,
disaggregating payments made for
activities that relate to multiple
agreements that are both operationally
and geographically interconnected.
The definition may, however, increase
the compliance costs for issuers that
will be required to implement systems
to track payments at a different level of
granularity than what they currently
track. In a similar vein, it may increase
the risk of sensitive contract information
being released, thus increasing the
likelihood of competitive harm for some
affected issuers. At the same time, this
risk could be mitigated by the ability of
issuers to treat operationally and
geographically interconnected
agreements as a single ‘‘project’’
notwithstanding that they do not have
substantially similar terms.
Several commenters on the Proposing
Release suggested that the contractbased definition of ‘‘project’’ would
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result in the loss of trade secrets and
intellectual property more generally.709
One commenter stated that trade secrets
and intellectual property were
especially valuable in the resource
extraction industry because of its large
sunk costs investments and uncertain,
long-term payoffs. According to this
commenter, the project-level disclosures
required by the rule would amount to
loss of trade secrets.710 The commenter
did not, however, explain how the
project-level disclosure of certain
payments to foreign governments would
result in the revelation of trade secrets
and intellectual property.
Commenters on the Proposing Release
also asserted that the definition of
‘‘project’’ would reveal sensitive and
proprietary commercial information to
competitors, thus resulting in
competitive harm for resource
extraction issuers.711 In considering the
potential competitive consequences that
may result from a contract-based
definition of project, we think it is
useful to break the analysis into three
phases—the exploratory phase, the
actual discovery, the development and
early production period, and the mature
stage of production.712
According to industry commenters,
the contract-based definition of
‘‘project’’ would allow competitors to
derive important information about the
new areas under exploration for
potential resource development, the
value the company places on such
resources, and the costs associated with
acquiring the right to develop these new
resources. This would in turn enable
competitors to evaluate the new
resources more precisely, and as a
result, structure their bids for additional
opportunities in the areas with new
resources more effectively. We are
mindful of these concerns and believe
that the targeted exemption for
payments related to exploratory
activities included in the final rules,
which permits registrants to delay the
disclosure of these payments for an
additional year, should help to mitigate
these potential competitive harms. In
this regard, we view the disclosure of
payment information from the
exploratory period as perhaps the most
likely to reveal competitively sensitive
information regarding a company’s
activities and expectations about the
709 See
letters from API 1 and ExxonMobil 1.
letter from API 1.
711 See letters from API 1 and ExxonMobil 1.
712 See generally OPEN OIL, OIL CONTRACTS:
HOW TO READ AND UNDERSTAND THEM, at 15,
available at https://openoil.net/?wpdmact=process
&did=NS5ob3RsaW5r) (describing the ‘‘key stages
of a [petroleum] project’s life’’ as exploration,
development, production, and decommission).
710 See
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location of resources. Further, because
many larger scale resource extraction
issuers are engaged in a continuous and
competitive quest to locate new finds,
we think a targeted exemption is
appropriate to preserve their respective
competitive advantages.
We do not think the same potential
for competitive harm exists after a
resource find occurs. To the extent that
exploratory activities lead to a new
discovery, we note that industry
commenters have not explained why a
contract-based definition of ‘‘project’’
will lead to the public disclosure of
more information about new areas of
development and their value than
would otherwise be publicly disclosed
by analysts, industry consultants,
media, and the issuers themselves. In
this regard, we note that issuers have an
incentive to disclose new developments
and their value because this can often
have a positive effect on their stock
price. Additionally, the issuer’s
presence in a new area, irrespective of
any other disclosure, will often provide
information to its competitors that the
area may have favorable prospects.
Thus, regardless of any disclosures
made pursuant to these rules, it is likely
that an issuer’s new resource discovery
would eventually be disclosed by any of
several methods, which should attract
potential competitors and over time
erode the first mover’s advantage.
To the extent that the contract-based
definition of ‘‘project’’ provides detailed
information on the costs of newer
projects, it could be advantageous to
potential competitors at the expense of
the affected issuer. We note, however,
that the payments required by the final
rules will be only part of the costs of a
new project. Unless competitors are able
to observe the total costs of a new
project, which we are skeptical they
could do based just on the required
disclosures, they may be unlikely to
gain important competitive advantages.
Additionally, a commenter’s contention
that requiring payment disclosure from
an issuer in one country will help
another country demand more from that
same issuer and thus affect the issuer’s
competitive position does not take into
account the fact that differences in
geology, risk factors, and various other
project characteristics will likely
complicate such a strategy.713
713 See letter from API 1. We also note that the
contracting environment varies from country to
country and therefore variables beyond the specific
contractual provisions relating to revenue for the
government may govern an issuer’s strategic ability
to obtain a license or concession. See generally, Ken
Silverstein, The Secret World of Oil 14–54, 145–166
(2014) (describing the role that intermediaries and
personal contacts can play in obtaining resource
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With respect to those projects that are
older or more established, we think it is
particularly unlikely that our contractbased definition of ‘‘project’’ will result
in the public disclosure of competitively
sensitive information. According to the
API, the general terms of older projects
are typically already available
irrespective of whether the contracts
have technically been made public.714
Thus, for resource extraction issuers
that have a larger fraction of older or
more well-established projects in their
portfolio, the competitive harm
described by the commenters is likely to
be insignificant. Additionally, given that
resource extraction projects are
generally long-term projects, it is likely
that at any point in time older projects
will be prevalent in an issuer’s portfolio,
which again suggests that potential
competitive harm from the payment
disclosures required by the final rules
may not be significant.
Commenters also stated that the
contract-based definition of ‘‘project’’
would allow competitors to reverseengineer proprietary commercial
information: For example, to determine
the commercial and fiscal terms of the
agreements, get a better understanding
of an issuer’s strategic approach to
bidding and contracting, and identify
rate of return criteria.715 Since Section
13(q), like the EU Directives and
ESTMA, requires all reporting issuers to
disclose such payment information, the
playing field among U.S. issuers and
resource extraction companies subject to
the European and Canadian disclosure
regimes should be level since any
reporting company could benefit from
disclosures of all its reporting
competitors.
We note that several commenters on
the Proposing Release disputed the
assertion that the contract-based
definition of ‘‘project’’ would create any
competitive disadvantages to affected
issuers.716 One commenter argued that a
significant number (84) of the world’s
largest 100 oil and gas companies and
a large number (58) of the world’s
largest mining companies would be
required to disclose their payments
under U.S., EU, Canadian, and
Norwegian rules, or are doing so
voluntarily already, thus diminishing
the potential anti-competitive effects of
the contract-based definition of
‘‘project.’’ 717 We note, however, that the
pool of largest oil companies that the
commenter was referring to was
determined based on market
capitalization, which is unavailable for
national oil companies and private oil
and gas companies. If national and other
private oil and gas companies were
included in this pool, then the
percentage of the largest companies
required to disclose their payments
under U.S., EU, Canadian, and
Norwegian rules could be much smaller.
Relatedly, we acknowledge the
potential that our definition of ‘‘project’’
could provide competitive advantages to
state-owned oil companies, which are
not covered by the final rules. We note
that such companies could enjoy an
advantage to the extent that they do
business in countries other than their
own. In this regard, however, it is
important to clarify that state-owned oil
and gas companies across the globe
‘‘differ on a number of very important
variables, including the level of
competition in the market in which they
operate’’ and ‘‘their degree of
commercial orientation and
internationalization.’’ 718 Moreover, the
extent to which state-owned companies
compete in the market place against
issuers covered by our rules varies. We
understand that many state-owned
companies operate primarily as gatekeepers for their home countries
resource reserves, contracting with nonstate-owned companies, such as the
large publicly traded U.S. oil and gas
companies, to extract the country’s
natural resources.719 Other state-owned
companies are primarily engaged in
directly undertaking the extractive
activities themselves for their home
country.720 To the extent a state-owned
oil or gas company is operating
exclusively or predominantly in either
of these two capacities, we anticipate
that the issuers covered by our rules
would not experience a substantial
competitive disadvantage (from these
state-owned companies) as a result of
project-level payment disclosure.
Nevertheless, we acknowledge that
some state-owned companies are
responsible for competing in the global
marketplace to extract oil and gas
abroad for import back to their home
country (an activity their home country
may have them undertake either to
ensure a secure supply of natural
resources or to balance the power of
exporting countries and large non-stateowned oil companies).721 To the extent
extraction contracts in many foreign countries,
particularly those countries that lack fully
democratic regimes).
714 See id.
715 See letters from API 1 and ExxonMobil 1.
716 See letters from PWYP–US 1 and Oxfam 1.
717 See letter from PWYP–US 1.
718 See World Bank, Working Paper No. 218:
National Oil Companies and Value Creation (2011),
available at https://siteresources.worldbank.org/
INTOGMC/Resources/9780821388310.pdf, at xii.
719 Id. at xi.
720 Id.
721 Id. at 23.
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any state-owned company acts in this
way, it could compete with issuers
covered by our rule and might
potentially obtain some competitive
advantage from the disclosure of
sensitive commercial information.722
That said, we note that any potential
competitive harm to U.S. issuers from
the final rules could be limited by the
fact that, as one commenter observed,
national oil companies may already
have access to similar commercial
information from the numerous
business intelligence services that
provide real time, contract-level and
lease-level information.723
One commenter also suggested that
foreign issuers may decide to delist from
U.S. exchanges because of the
competitive advantage they would gain
over reporting issuers.724 We are
skeptical as to whether the gains from
the potential cost savings and
competitive advantages that could result
from delisting from U.S. exchanges will
be large enough to offset the likely large
costs associated with it: Higher cost of
capital, limited access to financing, and
lower liquidity. Given that most of the
major capital markets (e.g., United
States, Europe, and Canada) require
substantially similar disclosures, it is
not obvious to what comparable listing
venues issuers could migrate. Another
option for issuers will be to delist and
become private companies, but this
would only magnify the costs of
delisting described above and, thus, we
think is an unlikely outcome.725
722 We note that some import-based state-owned
companies that potentially compete globally with
U.S. issuers for extraction resources may be subject
to our rules (or the EU Directives or ESTMA) to
some extent and, thus, will be required to disclose
information that could potentially be used by
competitors. See, e.g., Zhang Tao & Wang Xiaocong,
China Big Oil Firms on Edge Over U.S. Disclosure,
Market Watch (April 22, 2012), available at https://
www.marketwatch.com/story/china-big-oil-firms-on
-edge-over-us-disclosure-2012-04-22 (explaining
that ‘‘China’s state-owned, Big Three oil
concerns’’—China National Petroleum Corp.
(CNPC), China Petroleum & Chemical Corp.
(Sinopec) SNP, and China National Offshore Oil
Corp. (CNOOC)—have subsidiaries that ‘‘are listed
on the New York Stock Exchange’’ and thus may
be required to release some revenue resource
extraction payment information under Section
13(q)). See also, id. (explaining that the U.S.-listed
CNOOC subsidiary engages in ‘‘oversees
exploration and development projects in China and
the rest of the world’’ and that ‘‘Sinopec’s listed
company described overseas projects in its 2010
annual report in Canada, Kazakhstan, Brazil and
Angola’’).
723 See letter from Oxfam-ERI.
724 See letter from API 1.
725 The commenter also argued that the potential
delisting may actually decrease transparency,
contrary to Section 13(q)’s intent. According to the
commenter, fewer issuers will be reporting (due to
the potential delistings) and those reporting would
lose market share (due to competitive effects) and
hence would have fewer payments to report. As
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One commenter argued that the direct
compliance costs associated with the
definition of ‘‘project’’ that we are
adopting are not justified because we
have no data to show any benefits of
requiring the disclosure at such a
granular level.726 We note that most of
the compliance costs would remain
even if we adopted the commenter’s
preferred approach of identifying
payments by subnational political
jurisdiction. Even were we to adopt a
less granular disclosure requirement
(such as, for example, the API Proposal)
issuers would still be required to track
each payment that they make to foreign
governments and the Federal
Government in furtherance of resource
extraction activities. Issuers would thus
still need to modify their systems in
substantially similar ways to collect
data on each payment, and this would
include tagging a significant amount of
information about each payment. The
principal difference is that issuers
would be able to aggregate that data in
various ways before submitting it to the
Commission at the end of their fiscal
year, but the underlying collection
systems and tagging would still need to
occur for each payment to ensure
accurate reporting. Thus, complying
with this approach would entail many
of the same costs as the definition of
‘‘project’’ we are adopting: Issuers
would still need to track every resource
extraction payment to foreign
governments and the Federal
Government, including the type of
payment it is and which business unit
paid it. Under the broader project
definition advocated by the commenter,
issuers will themselves have to
aggregate the various payment flows in
their Section 13(q) disclosures, while
under the definition we are adopting
they could not do so and would also
have to include an additional data tag
for each payment specifying the project
in connection with which it was made.
Although we lack sufficient data to
quantify the potential economic losses
that could result from our choice of a
contract-based definition of ‘‘project,’’
based on the qualitative analysis above,
we find that the Section 13(q) disclosure
requirements and the definition of
‘‘project’’ that we are adopting are not
likely to cause significant competitive
harms or result in significant losses.
discussed above, we do not think potential
delistings will be likely. By the same token, our
analysis above suggests that the competition effects
of the final rules may not be large enough to lead
to losses in market share for extraction issuers.
Thus, the commenter’s argument that transparency
will decrease may be based on an overly pessimistic
scenario.
726 See letter from API 1.
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As an alternative, we could have not
defined the term ‘‘project.’’ Taking this
approach could have provided issuers
more flexibility in applying the term to
different business contexts depending
on factors such as the particular
industry or business in which the issuer
operates or the issuer’s size. Under such
an approach, however, resource
extraction issuers could have incurred
costs in determining their ‘‘projects.’’
Moreover, not defining ‘‘project’’ could
result in higher costs for some resource
extraction issuers than others if an
issuer’s determination of what
constitutes a ‘‘project’’ would result in
more granular information being
disclosed than another issuer’s
determination of what constitutes a
‘‘project.’’ In addition, not defining
‘‘project’’ may not be as effective in
achieving the anticorruption objectives
contemplated by the statute because
resource extraction issuers’
determinations of what constitutes a
‘‘project’’ may differ, which could
reduce the comparability of disclosure
across issuers.
Finally, we could have adopted the
API Proposal, which would allow
issuers to combine as one ‘‘project’’ all
of the similar extraction activities
within a major subnational political
jurisdiction. We acknowledge that this
aggregated disclosure could potentially
impose fewer competitive burdens on
resource extraction issuers—particularly
those issuers with many similar
resource extraction activities occurring
within a subnational jurisdiction—as
the API suggested definition would not
require issuers to expend the time and
resources necessary to achieve the type
of granular reporting that our proposed
rules would require. As discussed above
in Section II.E, however, we believe that
such a high-level definition, as opposed
to the definition we are adopting, would
not appropriately serve the
anticorruption objectives that Congress
intended when it enacted Section 13(q).
8. Annual Report Requirement
Section 13(q) provides that the
resource extraction payment disclosure
must be ‘‘include[d] in an annual
report.’’ The final rules require an issuer
to file the payment disclosure in an
annual report on new Form SD. Form
SD will be due no later than 150 days
after the end of the issuer’s most recent
fiscal year. This should lessen the
burden of compliance with Section
13(q) and the related rules because
issuers generally will not have to incur
the burden and cost of providing the
payment disclosure at the same time
that they must fulfill their disclosure
obligations with respect to Exchange
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Act annual reports.727 An additional
benefit is that this requirement will
provide information to users in a
standardized manner for all issuers
rather than in different annual report
forms depending on whether a resource
extraction issuer is a domestic or foreign
filer. Moreover, requiring the disclosure
in new Form SD, rather than in issuers’
Exchange Act annual reports, should
alleviate any concerns and costs
associated with the disclosure being
subject to the officer certifications
required by Exchange Act Rules 13a–14
and 15d–14.
In a change from the proposed rules,
the final rules will allow for a longer
transition period for newly acquired
companies that were not previously
subject to reporting under the final
rules.728 Thus, the final rules will allow
issuers that have acquired or otherwise
obtain control over an issuer whose
resource extraction payments are
required to be disclosed under the final
rules, and that has not previously been
obligated to provide such disclosure
pursuant to Rule 13q–1 or another
‘‘substantially similar’’ jurisdiction’s
requirements, to not commence
reporting payment information for the
acquired company until the second
Form SD filing due after the effective
date of the acquisition. This should
lessen the burden of compliance with
Section 13(q) for such issuers.
Additionally, the longer transition
period should help ensure that the final
rules do not inadvertently discourage
efficient business combinations.
In another change from the proposed
rules, the final rules will require a
resource extraction issuer to comply
with Rule 13q–1 and Form SD for fiscal
years ending no earlier than two years,
rather than one year, after the effective
date of the adopted rules. This longer
phase-in period should provide issuers
with sufficient time to establish the
necessary systems and procedures to
capture and track all the required
payment information before the fiscal
year covered by their first Form SD
filing starts. The extended compliance
date will also provide issuers with
additional time to address potential
legal barriers to making the required
disclosure, such as by amending
existing contracts to permit disclosure
or, when warranted, seeking appropriate
exemptive relief from the Commission.
727 For
example, a resource extraction issuer may
potentially be able to save resources to the extent
that the timing of its obligations with respect to its
Exchange Act annual report and its obligations to
provide payment disclosure allow for it to allocate
its resources, in particular personnel, more
efficiently.
728 See Section II.G.3 above.
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Resource extraction issuers will incur
costs associated with preparing and
filing each Form SD. We do not believe,
however, that the costs associated with
filing each Form SD instead of
providing the disclosure in an existing
form would be significant. We also
acknowledge that requiring covered
issuers to file, rather than furnish, the
payment information in Form SD may
create an incremental risk of liability in
litigation under Section 18 of the
Exchange Act. This incremental risk of
legal liability could be a benefit to users
of the information to the extent that
issuers will be more attentive to the
information they file, thereby increasing
the quality of the reported information.
We note however that Section 18 does
not create strict liability for ‘‘filed’’
information.729
Finally, the final rules do not require
the resource extraction payment
information to be audited or provided
on an accrual basis. Not requiring the
payment information to be audited or
provided on an accrual basis may result
in lower compliance costs than
otherwise would be the case.730 At the
same time, the lack of independent
audit may affect the quality of the
payment information. As an alternative,
we could have chosen to provide, as one
commenter suggested,731 an aggregated
and anonymized compilation of
company-provided resource extraction
payment information. According to the
commenter, such an approach would
yield the benefits intended by Congress
and at the same time reduce issuer
compliance costs. We note that, contrary
to the commenter’s assertion, such an
alternative would likely limit the
benefits of disclosure. As discussed
more fully in Section II.H, requiring
project level disclosure by identified
registrants provides important benefits
in terms of combating corruption and
promoting accountability in resourcerich countries, consistent with the
purpose of Section 13(q).
9. Exhibit and Interactive Data
Requirement
Section 13(q) requires the payment
disclosure to be electronically formatted
using an interactive data format.
Consistent with the proposed rules, the
final rules will require a resource
extraction issuer to provide the required
729 See Exchange Act Section 18 [15 U.S.C. 78r].
A plaintiff asserting a claim under Section 18
would need to meet the elements of the statute to
establish a claim, including purchasing or selling a
security in reliance on the misstatement and
incurring damages caused by that reliance.
730 See note 297 of the Proposing Release and
accompanying text.
731 See letter from API 1.
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payment disclosure in an XBRL exhibit
to Form SD that includes all of the
electronic tags required by Section 13(q)
and the final rules.732 We believe that
requiring the specified information to be
presented in XBRL format will benefit
issuers and users of the information by
promoting consistency and
standardization of the information and
increasing the usability of the payment
disclosure. Providing the required
disclosure elements in a humanreadable and machine-readable
(electronically-tagged) format will allow
users to quickly examine, extract,
aggregate, compare, and analyze the
information in a manner that is most
useful to them. This includes searching
for specific information within a
particular submission as well as
performing large-scale statistical
analysis using the disclosures of
multiple issuers and across date ranges.
In a change from the Proposing Release,
and as suggested by certain commenters,
we are requiring issuers to tag the
subnational geographic location using
ISO codes. Using ISO codes will
standardize references to those
subnational geographic locations and
will benefit the users of this information
by making it easier to sort and compare
the data. It may also increase
compliance costs for issuers that do not
currently use such codes in their
reporting systems.
Our choice of XBRL as the required
interactive data format may increase
compliance costs for some issuers. The
electronic formatting costs will vary
depending upon a variety of factors,
including the amount of payment data
disclosed and an issuer’s prior
experience with XBRL. While most
issuers are already familiar with XBRL
because they use it to tag financial
information in their annual and
quarterly reports filed with the
Commission, issuers that are not already
filing reports using XBRL (i.e., foreign
private issuers that report using
IFRS) 733 would incur some start-up
costs associated with the format. We do
not believe, however, that the ongoing
costs associated with this formatting
requirement will be significantly greater
than filing the data in XML.734
Consistent with the statute, the final
rules require a resource extraction issuer
to include an electronic tag that
identifies the currency used to make the
payments. Under the final rules, if
multiple currencies are used to make
732 Users of this information should be able to
render the information by using software available
on our Web site at no cost.
733 We estimate that 16 of the 425 affected issuers
fall into this category.
734 See Section II.G.5 of the Proposing Release.
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payments for a specific project or to a
government, a resource extraction issuer
may choose to provide the amount of
payments made for each payment type
and the total amount per project or per
government in either U.S. dollars or the
issuer’s reporting currency.735 We
recognize that a resource extraction
issuer could incur costs associated with
converting payments made in multiple
currencies to U.S. dollars or its
reporting currency. Nevertheless, given
the statute’s tagging requirements and
the requirement to disclose total
amounts, we believe reporting in one
currency is necessary.736 The final rules
provide flexibility to issuers in how to
perform the currency conversion, which
may result in lower compliance costs
because it enables issuers to choose the
option that works best for them. To the
extent issuers choose different options
to perform the conversion, it may result
in less comparability of the payment
information and, in turn, could result in
costs to users of the information.
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IV. Paperwork Reduction Act
A. Background
Certain provisions of the final rules
contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’).737 The Commission published
a notice requesting comment on the
collection of information requirements
in the Proposing Release, and submitted
the proposed requirements to the Office
of Management and Budget (‘‘OMB’’) for
review in accordance with the PRA and
its implementing regulations.738 Several
commenters provided qualitative
comments on the possible costs of the
proposed rule and form amendment, but
only one commenter addressed our PRA
analysis.739 This comment is discussed
below. Where appropriate, we have
revised our burden estimates to reflect
differences between the proposed rules
and the rules we are adopting today.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid OMB
control number. The title for the
collection of information is:
• ‘‘Form SD’’ (OMB Control No.
3235–0697).
Form SD is currently used to file
Conflict Minerals Reports pursuant to
Rule 13p–1 of the Exchange Act. We are
adopting amendments to Form SD to
735 See
Instruction 2 to Item 2.01 of Form SD.
736 See discussion in Section II.G.5 of the
Proposing Release.
737 44 U.S.C. 3501 et seq.
738 44 U.S.C. 3507(d) and 5 CFR 1320.11.
739 See letter from Claigan.
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accommodate disclosures required by
Rule 13q–1, which requires resource
extraction issuers to disclose
information about payments made by
the issuer, a subsidiary of the issuer, or
an entity under the control of the issuer
to foreign governments or the U.S.
Federal Government for the purpose of
the commercial development of oil,
natural gas, or minerals. Form SD is
filed on EDGAR with the Commission.
The final rules and amendment to the
form implement Section 13(q) of the
Exchange Act, which was added by
Section 1504 of the Act. Section 13(q)
requires the Commission to ‘‘issue final
rules that require each resource
extraction issuer to include in an annual
report of the resource extraction issuer
information relating to any payment
made by the resource extraction issuer,
a subsidiary of the resource extraction
issuer, or an entity under the control of
the resource extraction issuer to a
foreign government or the Federal
Government for the purpose of the
commercial development of oil, natural
gas, or minerals, including—(i) the type
and total amount of such payments
made for each project of the resource
extraction issuer relating to the
commercial development of oil, natural
gas, or minerals, and (ii) the type and
total amount of such payments made to
each government.’’ 740 Section 13(q) also
mandates the submission of the
payment information in an interactive
data format, and provides the
Commission with the discretion to
determine the applicable interactive
data standard.741 The final rules require
the mandated payment information to
be provided in an XBRL exhibit to Form
SD. The disclosure requirements apply
equally to U.S. issuers and foreign
issuers meeting the definition of
‘‘resource extraction issuer.’’
Compliance with the rules by affected
issuers is mandatory. Responses to the
information collections are generally not
kept confidential and there would be no
mandatory retention period for the
collection of information.
B. Estimate of Issuers
The number, type, and size of the
issuers that are required to file the
payment information required in Form
SD, as amended, is uncertain, but, as
discussed in the economic analysis
above, we estimate that the number of
potentially affected issuers is 755.742 Of
740 15
U.S.C. 78m(q)(2)(A).
U.S.C. 78m(q)(2)(C) and (D).
742 See Section III.A above. As discussed in
Section III.A above, we derived the number of
potentially affected issuers using data from 2015 to
estimate the number of issuers that might make
payments covered by the final rules. This number
741 15
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these issuers, we have identified 192
that may be subject to similar resource
extraction payment disclosure rules in
other jurisdictions by the time the final
rules are adopted and 138 shell
companies and other smaller issuers
that are unlikely to make any payments
that would be subject to the disclosure
requirements.743 For the issuers subject
to similar disclosure rules in other
jurisdictions, the additional costs to
comply with our rules will be much
lower than costs for other issuers.744 For
the smaller issuers that are unlikely to
be subject to the rules, we believe there
would be no additional costs associated
with our rules. Accordingly, we
estimate that 425 issuers will bear the
full costs of compliance with the final
rules, with 192 bearing significantly
lower costs.
C. Estimate of Issuer Burdens
After considering the comments and
international developments,745 we
continue to derive our burden estimates
by estimating the average number of
hours it would take an issuer to prepare
does not reflect the number of issuers that actually
made resource extraction payments to governments.
743 See Section III.B.2 above (describing in more
detail how we identified issuers that may be subject
to foreign reporting requirements and how we used
revenues and net cash flows from investing
activities and shell company status to identify
issuers that would be unlikely to make payments
exceeding the proposed de minimis threshold).
744 Under the final rules, a determination by the
Commission that another jurisdiction’s reporting
requirements are substantially similar to ours
would lower an issuer’s compliance burden. The
Commission has made this determination with
respect to the EU Directives, ESTMA, and the
USEITI. If the issuer is subject to the EU Directives
or ESTMA it would already have gathered, or have
systems in place to gather, resource extraction
payment data by the time it must comply with the
final rules. If the issuer is subject to the USEITI it
would already have gathered, or have systems in
place to gather, resource extraction payment data
with respect to payments made to the U.S. Federal
Government from federal lands or waters. Although
for purposes of our economic analysis the costs to
the 192 issuers that may already be subject to
similar resource extraction payment disclosure
rules would be negligible, we have included them
in our estimate of issuers for PRA purposes because
under the final rules they would continue to have
an obligation to file a report on Form SD in XBRL,
although with a significantly lower associated
burden. See Section II.J above.
745 Although most of the comments we received
with respect to our PRA estimates related to the
2010 Proposing Release, which required the
disclosure in Forms 10–K, 20–F, and 40–F, among
other differences, we have considered these
estimates in arriving at our PRA estimate for Form
SD because, although the disclosures would be
provided pursuant to a new rule and on Form SD,
the disclosure requirements themselves are similar.
We also believe that this is the more conservative
approach given that changes from the 2010
Proposing Release should generally reduce the
burdens that were considered by those commenters.
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and file the required disclosure.746 In
deriving our estimates, we recognize
that the burdens would likely vary
among individual issuers based on a
number of factors, including the size
and complexity of their operations and
whether they are subject to similar
disclosure requirements in other
jurisdictions.
When determining the estimates
described below, we have assumed that
75% of the burden of preparation is
carried by the issuer internally and 25%
of the burden of preparation is carried
by outside professionals retained by the
issuer at an average cost of $400 per
hour.747 One commenter questioned the
basis for using $400 per hour. This
commenter used $150 per hour in its
analysis of the costs associated with the
proposed rules. This commenter stated
that $150 per hour was a ‘‘conservative
estimate’’ based on a rounded multiple
of the hourly mean wage for accountants
and auditors in the field of
Management, Scientific, and Technical
Consulting Services ($37.27 × 3 =
111.81, rounded up to $150).748 We
disagree with this estimate, however,
because that rate does not factor in the
outside professional costs associated
with preparing a document subject to
potential liability under applicable
securities laws. Resource extraction
issuers likely will seek the advice of
attorneys to mitigate the risks associated
with such liability, as well as to help
them comply with the rule and form
requirements. Thus, consistent with our
conservative approach when
considering the applicable costs and
burdens, we continue to use the $400
per hour estimate.
The portion of the burden carried by
outside professionals is reflected as a
cost, while the portion of the burden
carried by the issuer internally is
reflected in hours. In connection with
the 2010 Proposing Release, we received
estimates from some commenters
expressed in burden hours and
estimates from other commenters
expressed in dollar costs.749 We expect
746 As discussed above, Rule 13q–1 requires
resource extraction issuers to file the payment
information required in Form SD. The collection of
information requirements are reflected in the
burden hours estimated for Form SD. Therefore,
Rule 13q–1 does not impose any separate burden.
747 We recognize that the costs of retaining
outside professionals may vary depending on the
nature of the professional services, but for purposes
of this PRA analysis we estimate that such costs
would be an average of $400 per hour. This is the
rate we typically estimate for outside legal services
used in connection with public company reporting.
We note that no commenters provided us with an
alternative rate estimate for these purposes in
connection with the 2010 Proposing Release.
748 See letter from Claigan.
749 See 2012 Adopting Release at Section IV.B.
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that the rules’ effect would be greatest
during the first year of their
effectiveness and diminish in
subsequent years. To account for this
expected diminishing burden, we
believe that a three-year average of the
expected implementation burden during
the first year and the expected ongoing
compliance burden during the next two
years is a reasonable estimate.
In connection with the 2010
Proposing Release, some commenters
estimated implementation costs of tens
of millions of dollars for large filers and
millions of dollars for smaller filers.750
These commenters did not describe how
they defined ‘‘small’’ and ‘‘large’’ filers.
One commenter provided an estimate of
$50 million in implementation costs if
the definition of ‘‘project’’ is narrow and
the level of disaggregation is high across
other reporting parameters, though it
did not provide alternate estimates for
different definitions of ‘‘project’’ or
different levels of disaggregation.751 We
note that the commenter that provided
this estimate was among the largest 20
oil and gas companies in the world,752
and we believe that the estimate it
provided may be representative of the
costs to companies of similar large size
rather than smaller companies.
Generally, we note that some of the
estimates we received may reflect the
burden to a particular commenter, and
may not represent the burden for other
resource extraction issuers.753 Also,
while we received estimates for smaller
companies and an estimate for one of
the largest companies, we did not
receive data on companies of varying
sizes in between the two extremes.754
Finally, commenters’ estimates on the
burdens associated with initial
implementation and ongoing
compliance varied widely.
As discussed above, we estimate that
425 issuers would bear the full costs of
compliance and 192 issuers are subject
to similar resource extraction payment
disclosure rules, such that the
additional costs to comply with our
rules will be much lower than costs for
other issuers. We also estimate that 138
smaller issuers, including shell
750 See letters from API 1 (pre-proposal) and
ExxonMobil 1 (pre-proposal).
751 See letter from ExxonMobil 1 (pre-proposal).
752 See letter from API (Oct. 12, 2010) (ranking the
75 largest oil and gas companies by reserves and
production).
753 For example, one commenter’s letter indicated
that it had approximately 120 operating entities.
See letter from Rio Tinto (pre-proposal).
754 See letter from API 1 (pre-proposal)
(estimating implementation costs in the tens of
millions of dollars for large filers and millions of
dollars for many smaller filers). This commenter
did not explain how it defined small and large
filers.
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companies, will bear no compliance
costs because it is likely that any
payments they make for the purpose of
the commercial development of oil,
natural gas, or minerals will be
considered de minimis under the
proposed rules. We have used the cost
estimates provided by commenters to
estimate the compliance burden for
affected issuers for PRA purposes. To
distinguish between the burden faced by
the two groups of affected issuers
described above, we have assumed that
the issuers who may already be
complying with a similar foreign
disclosure regime would have
compliance costs of approximately five
percent of the issuers that bear the full
costs of compliance.755 For issuers
bearing the full costs, we note that
Barrick Gold estimated an initial
compliance burden of 1,000 hours (500
hours for initial changes to internal
books and records and 500 hours for
initial compliance).756 Although we
believe that initial implementation costs
would increase with the size of the
issuer, as discussed in our economic
analysis above,757 commenters did not
provide estimates on the fraction of
compliance costs that would be fixed
versus variable. Also, since commenters’
cost estimates were based on policy
choices made in the 2010 Proposing
Release, they might not reflect these
commenters’ views on the final rules.
Unfortunately, we are unable to reliably
quantify the reduction in these cost
estimates based on the policy changes
reflected in the final rules. Thus, despite
Barrick Gold being a large accelerated
filer and commenting on proposed rules
that we believe would have been more
onerous than the final rules, we use its
estimate of 1,000 hours as a
conservative estimate.
We believe that the burden associated
with this collection of information will
be greatest during the implementation
period to account for initial set up costs,
but that ongoing compliance costs
would be less because companies would
have already made any necessary
755 We are using the proposed five percent
estimate even though it was developed prior to the
Commission granting alternative reporting status to
the EU Directives and ESTMA. We believe this
approach conservatively estimates the burden
alternative report filers will face (e.g., when
converting the alternative report to XBRL format or
possibly translating the report to English).
756 We use Barrick Gold’s estimate because it is
the only commenter that provided a number of
hours and dollar value estimates for initial and
ongoing compliance costs. Although in the
economic analysis above we used ExxonMobil’s
dollar value estimate to calculate an upper bound
of compliance costs, we are unable to calculate the
number of burden hours for purposes of the PRA
analysis using ExxonMobil’s dollar value inputs.
757 See Section III.B.2 above.
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modifications to their systems to
capture and report the information
required by the final rules. In
connection with the 2010 Proposing
Release, two commenters provided
estimates of ongoing compliance costs:
Rio Tinto provided an estimate of
5,000–10,000 burden hours for ongoing
compliance,758 while Barrick Gold
provided an estimate of 500 burden
hours for ongoing compliance. Based on
total assets, Rio Tinto is one of the
largest resource extraction issuers. We
believe that, because of Rio Tinto’s size,
the estimate it provided may be
representative of the burden for resource
extraction issuers of a similar size, but
may not be a representative estimate for
smaller resource extraction issuers.
Although in terms of total assets Barrick
Gold is among the largest resource
extraction issuers that are Exchange Act
reporting companies, it is closer in size
to the average issuer than is Rio Tinto.
As such, we believe that Barrick Gold’s
estimate is a better estimate of the
ongoing compliance burden hours. We
acknowledge, however, that using
Barrick Gold’s estimate is a conservative
approach. For example, the average total
assets of issuers that we believe would
be bearing the full costs of the rules is
19% of Barrick Gold’s total assets for
2015 ($6.4 billion/$33.9 billion).759
Thus, using the three-year average of
the expected burden during the first
year and the expected ongoing burden
during the next two years, we estimate
that the incremental collection of
information burden associated with the
rules would be 667 burden hours per
fully affected respondent (1000 + 500 +
500)/3 years). We estimate that the rules
would result in an internal burden of
approximately 212,606.25 hours (425
responses × 667 hours/response × .75)
for issuers bearing the full costs and
4,802.4 hours (192 responses × 33.35
hours/response × .75) for issuers that are
subject to similar resource extraction
payment disclosure rules in other
jurisdictions, amounting to a total
incremental company burden of
217,408.65 hours (212,606.25 + 4,802.4).
Outside professional costs would be
$28,347,500 (425 responses × 667 hours/
response × .25 × $400) for issuers
bearing the full costs and $640,320 (192
758 See letter from Rio Tinto (pre-proposal). This
commenter estimated 100–200 hours of work at the
head office, an additional 100–200 hours of work
providing support to its business units, and a total
of 4,800–9,600 hours by its business units. We
arrived at the estimated range of 5,000–10,000
hours by adding the estimates provided by this
commenter (100 + 100 + 4,800 = 5,000 and 200 +
200 + 9,600 = 10,000).
759 The average estimated resource extraction
issuer’s total assets compared to Rio Tinto’s total
assets ($108.0 billion for 2015) is 6%.
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responses × 33.35 hours/response × .25
× $400) for issuers that are subject to
similar resource extraction payment
disclosure rules in other jurisdictions,
amounting to total outside professional
costs of $28,987,820 ($28,347,500 +
$640,320). Barrick Gold also indicated
that its initial compliance costs would
include $100,000 for IT consulting,
training, and travel costs. Again, we
believe this to be a conservative
estimate given the size of Barrick Gold
compared to our estimate of the average
resource extraction issuer’s size. We do
not, however, believe that these initial
IT costs would apply to the issuers that
are already subject to similar resource
extraction payment disclosure rules,
since those issuers should already have
such IT systems in place to comply with
a foreign regime. Thus, we estimate total
IT compliance costs to be $42,500,000
(425 issuers × $100,000). We have added
the estimated IT compliance costs to the
cost estimates for other professional
costs discussed above to derive total
professional costs for PRA purposes of
$71,487,820 ($28,987,820 +
$42,500,000) for all issuers.760 The total
burden hours and total professional
costs discussed above are in addition to
the existing estimated hour and cost
burdens applicable to Form SD as a
result of compliance with Exchange Act
Rule 13p–1.
V. Final Regulatory Flexibility Act
Analysis
This Final Regulatory Flexibility Act
Analysis (‘‘FRFA’’) has been prepared in
accordance with the Regulatory
Flexibility Act.761 It relates to rule and
form amendments that we are adopting
today to implement Section 13(q) of the
Exchange Act, which concerns certain
disclosure obligations of resource
extraction issuers. As defined by
Section 13(q), a resource extraction
issuer is an issuer that is required to file
an annual report with the Commission
and engages in the commercial
development of oil, natural gas, or
minerals. An Initial Regulatory
Flexibility Analysis (IRFA) was
prepared in accordance with the
Regulatory Flexibility Act and included
in the Proposing Release.
note that this PRA cost estimate serves a
different purpose than the economic analysis and,
accordingly, estimates costs differently. See Section
III above. One of these differences is that the
economic analysis estimates average total
compliance costs for affected issuers without
dividing such costs between internal burden hours
and external cost burdens. See Section III.B.2.b
above.
761 5 U.S.C. 603.
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Frm 00067
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49425
A. Need for the Rules
The rule and form amendments are
designed to implement the requirements
of Section 13(q), which was added by
Section 1504 of the Act. Specifically,
the rule and form amendments will
require a resource extraction issuer to
disclose in an annual report certain
information relating to any payment
made by the issuer, a subsidiary of the
issuer, or an entity under the issuer’s
control to a foreign government or the
U.S. Federal Government for the
purpose of the commercial development
of oil, natural gas, or minerals. An issuer
will be required to include that
information in an exhibit to Form SD.
The exhibit must be formatted in XBRL.
B. Significant Issues Raised by Public
Comments
In the Proposing Release, we
requested comment on every aspect of
the IRFA, including the number of small
entities that would be affected by the
proposed rule and form amendments,
the existence or nature of the potential
impact of the proposals on small entities
discussed in the analysis, and how to
quantify the impact of the proposed
rules. We did not receive any comments
specifically addressing the IRFA. We
did, however, receive one comment
recommending that smaller reporting
companies be given more time before
being required to comply with the final
rules.762 This commenter believed that,
in the aggregate, smaller reporting
companies represent a small percentage
of the total payments made to
governments by resource extraction
issuers and therefore a longer transition
period should not impair the
effectiveness of the final rules. As
discussed above, other commenters
disagreed with that approach.763
Although not limited to small entities,
the final rules take into account the
suggestion for a longer transition period
by providing a two-year transition
period for all issuers rather than the
one-year transition period that was
proposed.764
C. Small Entities Subject to the Rules
The final rules will affect small
entities that are required to file an
annual report with the Commission
762 See letter from Ropes & Gray. In connection
with the 2010 Proposing Release we received
comments requesting an exemption for a ‘‘small
entity’’ or ‘‘small business’’ having $5 million or
less in assets on the last day of its more recently
completed fiscal year; however, these comments
were not raised again by those commenters after the
Proposing Release. See 2012 Adopting Release, at
n.662 and accompanying text.
763 See Section II.I above.
764 See Section II.M.3 above for additional details.
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under Section 13(a) or Section 15(d) of
the Exchange Act and are engaged in the
commercial development of oil, natural
gas, or minerals. Exchange Act Rule 0–
10(a) 765 defines an issuer (other than an
investment company) to be a ‘‘small
business’’ or ‘‘small organization’’ for
purposes of the Regulatory Flexibility
Act if it had total assets of $5 million
or less on the last day of its most recent
fiscal year. Based on a review of total
assets for Exchange Act registrants filing
under certain SICs,766 we estimate that
there are approximately 229 companies
that will be considered resource
extraction issuers under the final rules
and that may be considered small
entities.
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D. Reporting, Recordkeeping, and Other
Compliance Requirements
The final rule and form amendments
add to the annual disclosure
requirements of companies meeting the
definition of resource extraction issuer,
including small entities, by requiring
them to provide the payment disclosure
mandated by Section 13(q) in Form SD.
That information must include:
• The type and total amount of
payments made for each project of the
issuer relating to the commercial
development of oil, natural gas, or
minerals; and
• the type and total amount of those
payments made to each government.
A resource extraction issuer must
provide the required disclosure in an
exhibit to Form SD formatted in XBRL.
Consistent with the statute, the final
rules require an issuer to submit the
payment information using electronic
tags that identify, for any not de
minimis payment made by a resource
extraction issuer to a foreign
government or the U.S. Federal
Government:
• The type and total amount of such
payments made for each project of the
resource extraction issuer relating to the
commercial development of oil, natural
gas, or minerals;
• The type and total amount of such
payments for all projects made to each
government;
• The total amounts of the payments,
by payment type;
• The currency used to make the
payments;
• The fiscal year in which the
payments were made;
• The business segment of the
resource extraction issuer that made the
payments;
765 17
CFR 240.0–10(a).
Section III.B above for a discussion of how
we estimated the number of ‘‘resource extraction
issuers’’ under the final rules.
766 See
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• The governments (including any
foreign government or the Federal
Government) that received the payments
and the country in which each such
government is located;
• The project of the resource
extraction issuer to which the payments
relate;
• The particular resource that is the
subject of commercial development; and
• The subnational geographic
location of the project.
The same payment disclosure
requirements will apply to U.S. and
foreign resource extraction issuers.
specific disclosure requirements and no
commenters objected to this approach.
We also believe that the rules would be
more useful to users of the information
if there are specific disclosure
requirements that promote transparent
and consistent disclosure among all
resource extraction issuers. Such
requirements should help further the
statutory goal of supporting
international transparency promotion
efforts. For this reason, we have not
used consolidated or simplified
disclosure requirements for small
entities.
E. Agency Action To Minimize Effect on
Small Entities
The Regulatory Flexibility Act directs
us to consider significant alternatives
that would accomplish the stated
objectives, while minimizing any
significant adverse impact on small
entities. In connection with adopting
the final rule and form amendments, we
considered, as alternatives, establishing
different compliance or reporting
requirements which take into account
the resources available to smaller
entities; exempting smaller entities from
coverage of the disclosure requirements,
or any part thereof; clarifying,
consolidating, or simplifying the
disclosure for small entities; and using
performance standards rather than
design standards.
Section 13(q) is designed to enhance
the transparency of payments by
resource extraction issuers to
governments and providing different
disclosure requirements for small
entities or exempting them from the
coverage of the requirements may
undermine the intended benefits of the
disclosure mandated by Section 13(q).
As discussed above, we estimate that a
significant number (43%) of affected
issuers are smaller reporting companies;
therefore, exempting such issuers from
the final rules could create a significant
gap in the intended transparency.
Furthermore, no commenters supported
an exemption or different reporting
requirements for small entities in
response to the Proposing Release. Only
one commenter specifically called for an
extended transition period for such
entities. In response to that comment
and other concerns, we have provided a
longer transition period prior to the
application of the rules to all resource
extraction issuers, rather than only
small entities.
We have used design rather than
performance standards in connection
with the final rule and form
amendments because the statutory
language, which requires electronic
tagging of specific items, contemplates
VI. Statutory Authority
We are adopting the rule and form
amendments contained in this
document under the authority set forth
in Sections 3(b), 12, 13, 15, 23(a), and
36 of the Exchange Act.
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List of Subjects in 17 CFR Parts 240 and
249b
Reporting and recordkeeping
requirements, Securities.
In accordance with the foregoing, we
are amending title 17, chapter II of the
Code of Federal Regulations as follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
continues to read in part as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll,
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
3, 80b–4, 80b–11, 7201 et seq., and 8302; 7
U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18
U.S.C. 1350; and Pub. L. 111–203, 939A, 124
Stat. 1376 (2010), unless otherwise noted.
*
*
*
*
*
2. Section 240.13q–1 is revised to read
as follows:
■
§ 240.13q–1 Disclosure of payments made
by resource extraction issuers.
(a) Resource extraction issuers. Every
issuer that is required to file an annual
report with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act
(15 U.S.C. 78m or 78o(d)) and engages
in the commercial development of oil,
natural gas, or minerals must file a
report on Form SD (17 CFR 249b.400)
within the period specified in that Form
disclosing the information required by
the applicable items of Form SD as
specified in that Form.
(b) Anti-evasion. Disclosure is
required under this section in
circumstances in which an activity
related to the commercial development
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of oil, natural gas, or minerals, or a
payment or series of payments made by
a resource extraction issuer to a foreign
government or the Federal Government
for the purpose of commercial
development of oil, natural gas, or
minerals is not, in form or
characterization, within one of the
categories of activities or payments
specified in Form SD, but is part of a
plan or scheme to evade the disclosure
required under this section.
(c) Alternative reporting. An
application for recognition of a regime
as substantially similar for purposes of
alternative reporting must be filed in
accordance with the procedures set
forth in Rule 0–13 (§ 240.0–13), except
that, for purposes of this paragraph (c),
applications may be submitted by
resource extraction issuers,
governments, industry groups, or trade
associations.
(d) Exemptive relief. An application
for exemptive relief under this section
may be filed in accordance with the
procedures set forth in Rule 0–12
(§ 240.0–12).
(e) Public compilation. To the extent
practicable, the staff will periodically
make a compilation of the information
required to be filed under this section
publicly available online. The staff may
determine the form, manner and timing
of the compilation, except that no
information included therein may be
anonymized (whether by redacting the
names of the resource extraction issuer
or otherwise).
PART 249b—FURTHER FORMS,
SECURITIES EXCHANGE ACT OF 1934
■ 3. The authority citation for part 249b
is amended by revising the entry for
§ 249b.400 to read in part as follows:
Authority: 15 U.S.C. 78a et seq., unless
otherwise noted.
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*
*
*
*
*
Section 249b.400 is also issued under
secs. 1502 and 1504, Pub. L. 111–203,
124 Stat. 2213 and 2220.
■ 4. Amend Form SD (referenced in
§ 249b.400) by:
■ a. Adding a check box for Rule 13q–
1;
■ b. Revising instruction A. under
‘‘General Instructions’’;
■ c. Redesignating instruction B.2. as
B.3 and adding new instructions B.2.
and B.4. under the ‘‘General
Instructions’’; and
■ d. Redesignating Section 2 as Section
3, adding new Section 2, and revising
newly redesignated Section 3 under the
‘‘Information to be Included in the
Report’’.
The addition and revision read as
follows:
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Note: The text of Form SD does not,
and this amendment will not, appear in
the Code of Federal Regulations.
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
Specialized Disclosure Report
llllllllllllllllll
l
(Exact name of the registrant as
specified in its charter)
llllllllllllllllll
l
(State or other jurisdiction of
incorporation or organization)
llllllllllllllllll
l
(Commission
File Number)
llllllllllllllllll
l
(I.R.S. Employer Identification No.)
llllllllllllllllll
l
(Full mailing address of principal
executive offices)
llllllllllllllllll
l
(Name and telephone number, including
area code, of the person to contact in
connection with this report.)
Check the appropriate box to indicate
the rule pursuant to which this Form is
being filed, and provide the period to
which the information in this Form
applies:
llRule 13p–1 under the Securities
Exchange Act (17 CFR 240.13p–1)
for the reporting period from
January 1 to December 31,lll.
llRule 13q–1 under the Securities
Exchange Act (17 CFR 240.13q–1)
for the fiscal year endedlll.
GENERAL INSTRUCTIONS
A. Rule as to Use of Form SD.
This Form shall be used for a report
pursuant to Rule 13p–1 (17 CFR
240.13p–1) and Rule 13q–1 (17 CFR
240.13q–1) under the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’).
B. Information to be Reported and Time
for Filing of Reports.
1. * * *
2. Form filed under Rule 13q–1. File
the information required by Section 2 of
this form on EDGAR no later than 150
days after the end of the issuer’s most
recent fiscal year.
3. If the deadline for filing this Form
occurs on a Saturday, Sunday or holiday
on which the Commission is not open
for business, then the deadline shall be
the next business day.
4. The information and documents
filed in this report shall not be deemed
to be incorporated by reference into any
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filing under the Securities Act or the
Exchange Act, unless the registrant
specifically incorporates it by reference
into such filing.
*
*
*
*
*
INFORMATION TO BE INCLUDED IN
THE REPORT
*
FORM SD
49427
*
*
*
*
Section 2—Resource Extraction Issuer
Disclosure
Item 2.01 Resource Extraction Issuer
Disclosure and Report
(a) Required Disclosure. A resource
extraction issuer must file an annual
report on Form SD with the
Commission, and include as an exhibit
to this Form SD, information relating to
any payment made during the fiscal
year covered by the annual report by the
resource extraction issuer, a subsidiary
of the resource extraction issuer, or an
entity under the control of the resource
extraction issuer, to a foreign
government or the Federal Government,
for the purpose of the commercial
development of oil, natural gas, or
minerals. The resource extraction issuer
is not required to have the information
audited. The payment information must
be provided on a cash basis. The
resource extraction issuer must provide
a statement in the body of the Form SD
that the specified payment disclosure
required by this Form is included in
such exhibit. The resource extraction
issuer must include the following
information in the exhibit, which must
present the information in the
eXtensible Business Reporting Language
(XBRL) electronic format:
(1) The type and total amount of such
payments, by payment type listed in
paragraph (d)(8)(iii) of this Item, made
for each project of the resource
extraction issuer relating to the
commercial development of oil, natural
gas, or minerals;
(2) The type and total amount of such
payments, by payment type listed in
paragraph (d)(8)(iii) of this Item, for all
projects made to each government;
(3) The total amounts of the
payments, by payment type listed in
paragraph (d)(8)(iii) of this Item;
(4) The currency used to make the
payments;
(5) The fiscal year in which the
payments were made;
(6) The business segment of the
resource extraction issuer that made the
payments;
(7) The governments (including any
foreign government or the Federal
Government) that received the payments
and the country in which each such
government is located;
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(8) The project of the resource
extraction issuer to which the payments
relate;
(9) The particular resource that is the
subject of commercial development; and
(10) The subnational geographic
location of the project.
(b) Delayed Reporting. (1) A resource
extraction issuer may delay disclosing
payment information related to
exploratory activities until the Form SD
filed for the fiscal year immediately
following the fiscal year in which the
payment was made. For purposes of this
paragraph, payment information related
to exploratory activities includes all
payments made as part of the process of
(i) identifying areas that may warrant
examination, (ii) examining specific
areas that are considered to have
prospects of containing oil and gas
reserves, or (iii) as part of a mineral
exploration program, in each case
limited to exploratory activities that
were commenced prior to any
development or extraction activities on
the property, any adjacent property, or
any property that is part of the same
project.
(2) A resource extraction issuer that
has acquired (or otherwise obtains
control over) an entity that has not been
obligated to provide disclosure pursuant
to Rule 13q–1 or another ‘‘substantially
similar’’ jurisdiction’s requirements in
such entity’s last full fiscal year is not
required to commence reporting
payment information for such acquired
entity until the Form SD filed for the
fiscal year immediately following the
effective date of the acquisition. A
resource extraction issuer must disclose
that it is relying on this accommodation
in the body of its Form SD filing.
(c) Alternative Reporting. (1) A resource
extraction issuer that is subject to the
resource extraction payment disclosure
requirements of an alternative reporting
regime that has been deemed by the
Commission to be substantially similar
to the requirements of Rule 13q–1 (17
CFR 240.13q–1) may satisfy its
disclosure obligations under paragraph
(a) of this Item 2.01 by including, as an
exhibit to this Form SD, a report
complying with the reporting
requirements of the alternative
jurisdiction.
(2) The alternative report must be the
same as the one prepared and made
publicly available pursuant to the
requirements of the approved
alternative reporting regime, subject to
changes necessary to comply with any
conditions to alternative reporting set
forth by the Commission.
(3) The resource extraction issuer
must: (i) State in the body of the Form
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SD that it is relying on the alternative
reporting provision; (ii) identify the
alternative reporting regime for which
the report was prepared; (iii) describe
how to access the publicly filed report
in the alternative jurisdiction; and (iv)
specify that the payment disclosure
required by this Form is included in an
exhibit to this Form SD.
(4) The alternative report must be
provided in XBRL format.
(5) A fair and accurate English
translation of the entire report must be
filed if the report is in a foreign
language. Project names may be
presented in their original language, in
addition to the English translation of the
project name, if the resource extraction
issuer believes that such an approach
would facilitate identification of the
project by users of the disclosure.
(6) Unless the Commission provides
otherwise in an exemptive order, a
resource extraction issuer may follow
the submission deadline of an approved
alternative jurisdiction if it files a notice
on Form SD–N on or before the due date
of its Form SD indicating its intent to
file the alternative report using the
alternative jurisdiction’s deadline. If a
resource extraction issuer fails to file
such notice on a timely basis, or files
such a notice but fails to file the
alternative report within two business
days of the alternative jurisdiction’s
deadline, it may not rely on this Item
2.01(c) for the following fiscal year.
(7) Resource extraction issuers must
also comply with any additional
requirements that are provided by the
Commission upon granting an
alternative reporting accommodation, as
well as subsequent changes in such
requirements.
(d) Definitions. For purposes of this
item, the following definitions apply:
(1) Business segment means a
business segment consistent with the
reportable segments used by the
resource extraction issuer for purposes
of financial reporting.
(2) Commercial development of oil,
natural gas, or minerals means
exploration, extraction, processing, and
export of oil, natural gas, or minerals, or
the acquisition of a license for any such
activity.
(3) Control means that the resource
extraction issuer consolidates the entity
or proportionately consolidates an
interest in an entity or operation under
the accounting principles applicable to
the financial statements included in the
resource extraction issuer’s periodic
reports filed pursuant to the Exchange
Act (i.e., under generally accepted
accounting principles in the United
States (U.S. GAAP) or International
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Financial Reporting Standards as issued
by the International Accounting
Standards Board (IFRS), but not both). A
foreign private issuer that prepares
financial statements according to a
comprehensive set of accounting
principles, other than U.S. GAAP or
IFRS, and files with the Commission a
reconciliation to U.S. GAAP must
determine control using U.S. GAAP.
(4) Export means the movement of a
resource across an international border
from the host country to another
country by a company with an
ownership interest in the resource.
Export does not include the movement
of a resource across an international
border by a company that (i) is not
engaged in the exploration, extraction,
or processing of oil, natural gas, or
minerals and (ii) acquired its ownership
interest in the resource directly or
indirectly from a foreign government or
the Federal Government. Export also
does not include cross-border
transportation activities by an entity
that is functioning solely as a service
provider, with no ownership interest in
the resource being transported.
(5) Extraction means the production
of oil and natural gas as well as the
extraction of minerals.
(6) Foreign government means a
foreign government, a department,
agency, or instrumentality of a foreign
government, or a company at least
majority owned by a foreign
government. As used in this Item 2.01,
foreign government includes a foreign
national government as well as a foreign
subnational government, such as the
government of a state, province, county,
district, municipality, or territory under
a foreign national government.
(7) Not de minimis means any
payment, whether made as a single
payment or a series of related payments,
which equals or exceeds $100,000, or its
equivalent in the resource extraction
issuer’s reporting currency, during the
fiscal year covered by this Form SD. In
the case of any arrangement providing
for periodic payments or installments, a
resource extraction issuer must use the
aggregate amount of the related periodic
payments or installments of the related
payments in determining whether the
payment threshold has been met for that
series of payments, and accordingly,
whether disclosure is required.
(8) Payment means an amount paid
that:
(i) Is made to further the commercial
development of oil, natural gas, or
minerals;
(ii) Is not de minimis; and
(iii) Is one or more of the following:
(A) Taxes;
(B) Royalties;
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(C) Fees;
(D) Production entitlements;
(E) Bonuses;
(F) Dividends;
(G) Payments for infrastructure
improvements; and
(H) Community and social
responsibility payments that are
required by law or contract.
(9) Project means operational
activities that are governed by a single
contract, license, lease, concession, or
similar legal agreement, which form the
basis for payment liabilities with a
government. Agreements that are both
operationally and geographically
interconnected may be treated by the
resource extraction issuer as a single
project.
(10) Resource extraction issuer means
an issuer that:
(i) Is required to file an annual report
with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act
(15 U.S.C. 78m or 78o(d)); and
(ii) Engages in the commercial
development of oil, natural gas, or
minerals.
(11) Subsidiary means an entity
controlled directly or indirectly through
one or more intermediaries.
between the currency in which the
payment was made and U.S. dollars or
the resource extraction issuer’s
reporting currency, as applicable, in one
of three ways: (a) By translating the
expenses at the exchange rate existing at
the time the payment is made; (b) using
a weighted average of the exchange rates
during the period; or (c) based on the
exchange rate as of the resource
extraction issuer’s fiscal year end. When
calculating whether the de minimis
threshold has been exceeded, a resource
extraction issuer may be required to
convert the payment to U.S. dollars,
even though it is not required to
disclose those payments in U.S. dollars.
For example, this may occur when the
resource extraction issuer is using a
non-U.S. dollar reporting currency. In
these instances, the resource extraction
issuer may use any of the three methods
described above for calculating the
currency conversion. In all cases a
resource extraction issuer must disclose
the method used to calculate the
currency conversion and must choose a
consistent method for all such currency
conversions within a particular Form
SD filing.
Instructions to Item 2.01
Geographic Location Tagging
Disclosure by Subsidiaries and other
Controlled Entities
(3) When identifying the country in
which a government is located, a
resource extraction issuer must use the
code provided in ISO 3166 if available.
When identifying the ‘‘subnational
geographic location of the project,’’ as
used in Item 2.01(a)(10), a resource
extraction issuer must include the
subdivision code provided in ISO 3166
if available and must also include
sufficiently detailed additional
information to permit a reasonable user
of the information to identify the
project’s specific, subnational,
geographic location. In identifying the
project’s specific location, resource
extraction issuers may use subnational
jurisdiction(s) (e.g., a state, province,
county, district, municipality, territory,
etc.) and/or a commonly recognized,
subnational, geographic or geological
description (e.g., oil field, basin,
canyon, delta, desert, mountain, etc.).
More than one descriptive term may be
necessary when there are multiple
projects in close proximity to each other
or when a project does not reasonably
fit within a commonly recognized,
subnational geographic location. In
considering the appropriate level of
detail, resource extraction issuers may
need to consider how the relevant
contract identifies the location of the
project.
(1) If a resource extraction issuer is
controlled by another resource
extraction issuer that has filed a Form
SD disclosing the information required
by Item 2.01 for the controlled entity,
then such controlled entity is not
required to file the disclosure required
by Item 2.01 separately. In such
circumstances, the controlled entity
must file a notice on Form SD indicating
that the required disclosure was filed on
Form SD by the controlling entity,
identifying the controlling entity and
the date it filed the disclosure. The
reporting controlling entity must note
that it is filing the required disclosure
for a controlled entity and must identify
the controlled entity on its Form SD
filing.
sradovich on DSK3GMQ082PROD with RULES2
Currency Disclosure and Conversion
(2) A resource extraction issuer must
report the amount of payments made for
each payment type, and the total
amount of payments made for each
project and to each government, during
the reporting period in either U.S.
dollars or the resource extraction
issuer’s reporting currency. If a resource
extraction issuer has made payments in
currencies other than U.S. dollars or its
reporting currency, it may choose to
calculate the currency conversion
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49429
Entity Level Disclosure and Tagging
(4) If a government levies a payment
obligation, such as a tax or a
requirement to pay a dividend, at the
entity level rather than on a particular
project, a resource extraction issuer may
disclose that payment at the entity level.
To the extent that payments, such as
corporate income taxes and dividends,
are made for obligations levied at the
entity level, a resource extraction issuer
may omit certain tags that may be
inapplicable (e.g., project tag, business
segment tag) for those payment types as
long as it provides all other electronic
tags, including the tag identifying the
recipient government.
Payment Disclosure
(5) When a resource extraction issuer
proportionately consolidates an entity
or operation under U.S. GAAP or IFRS,
as applicable, the resource extraction
issuer must disclose its proportionate
amount of the payments made by such
entity or operation pursuant to this Item
and must indicate the proportionate
interest.
(6) Although an entity providing only
services to a resource extraction issuer
to assist with exploration, extraction,
processing or export would generally
not be considered a resource extraction
issuer, where such a service provider
makes a payment that falls within the
definition of ‘‘payment’’ to a
government on behalf of a resource
extraction issuer, the resource extraction
issuer must disclose such payment.
(7) ‘‘Processing,’’ as used in Item 2.01,
would include, but is not limited to,
midstream activities such as the
processing of gas to remove liquid
hydrocarbons, the removal of impurities
from natural gas prior to its transport
through a pipeline, and the upgrading of
bitumen and heavy oil, through the
earlier of the point at which oil, gas, or
gas liquids (natural or synthetic) are
either sold to an unrelated third party or
delivered to a main pipeline, a common
carrier, or a marine terminal. It would
also include the crushing and
processing of raw ore prior to the
smelting phase. It would not include the
downstream activities of refining or
smelting.
(8) A resource extraction issuer must
disclose payments made for taxes on
corporate profits, corporate income, and
production. Disclosure of payments
made for taxes levied on consumption,
such as value added taxes, personal
income taxes, or sales taxes, is not
required.
(9) Royalties include unit-based,
value-based, and profit-based royalties.
Fees include license fees, rental fees,
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entry fees, and other considerations for
licenses or concessions. Bonuses
include signature, discovery, and
production bonuses.
(10) Dividends paid to a government
as a common or ordinary shareholder of
the resource extraction issuer that are
paid to the government under the same
terms as other shareholders need not be
disclosed. The resource extraction
issuer, however, must disclose any
dividends paid in lieu of production
entitlements or royalties.
(11) If a resource extraction issuer
makes an in-kind payment of the types
of payments required to be disclosed,
the resource extraction issuer must
disclose the payment. When reporting
an in-kind payment, a resource
extraction issuer must determine the
monetary value of the in-kind payment
and tag the information as ‘‘in-kind’’ for
purposes of the currency. For purposes
of the disclosure, a resource extraction
issuer must report the payment at cost,
or if cost is not determinable, fair
market value and must provide a brief
description of how the monetary value
was calculated. If a resource extraction
issuer makes an in-kind production
entitlement payment under the rules
and then repurchases the resources
associated with the production
entitlement within the same fiscal year,
the resource extraction issuer must
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report the payment using the purchase
price (rather than at cost, or if cost is not
determinable, fair market value). If the
in-kind production entitlement payment
and the subsequent repurchase are made
in different fiscal years and the
purchase price is greater than the
previously reported value of the in-kind
payment, the resource extraction issuer
must report the difference in values in
the latter fiscal year (assuming the
amount of that difference exceeds the de
minimis threshold). In other situations,
such as when the purchase price in a
subsequent fiscal year is less than the
in-kind value already reported, no
disclosure relating to the purchase price
is required.
Interconnected Agreements
(12) The following is a non-exclusive
list of factors to consider when
determining whether agreements are
‘‘operationally and geographically
interconnected’’ for purposes of the
definition of ‘‘project’’: (a) whether the
agreements relate to the same resource
and the same or contiguous part of a
field, mineral district, or other
geographic area; (b) whether the
agreements will be performed by shared
key personnel or with shared
equipment; and (c) whether they are
part of the same operating budget.
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Section 3—Exhibits
Item 3.01
Exhibits
List below the following exhibits filed
as part of this report:
Exhibit 1.01—Conflict Minerals
Report as required by Items 1.01 and
1.02 of this Form.
Exhibit 2.01—Resource Extraction
Payment Report as required by Item 2.01
of this Form.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the
registrant has duly caused this report to
be signed on its behalf by the duly
authorized undersigned.
(Registrant)
llllllllllllllllll
By (Signature and Title)*
llllllllllllllllll
(Date)
*Print name and title of the registrant’s
signing executive officer under his or
her signature.
*
*
*
*
*
By the Commission.
Dated: June 27, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016–15676 Filed 7–26–16; 8:45 am]
BILLING CODE 8011–01–P
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]]>Agencies
[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Rules and Regulations]
[Pages 49359-49430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15676]
[[Page 49359]]
Vol. 81
Wednesday,
No. 144
July 27, 2016
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249b
Disclosure of Payments by Resource Extraction Issuers; Final Rule
Federal Register / Vol. 81 , No. 144 / Wednesday, July 27, 2016 /
Rules and Regulations
[[Page 49360]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34-78167; File No. S7-25-15]
RIN 3235-AL53
Disclosure of Payments by Resource Extraction Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting Rule 13q-1 and an amendment to Form SD to
implement Section 1504 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act relating to the disclosure of payments by
resource extraction issuers. Rule 13q-1 was initially adopted by the
Commission on August 22, 2012, but it was subsequently vacated by the
U.S. District Court for the District of Columbia. Section 1504 of the
Dodd-Frank Act added Section 13(q) to the Securities Exchange Act of
1934, which directs the Commission to issue rules requiring resource
extraction issuers to include in an annual report information relating
to any payment made by the issuer, a subsidiary of the issuer, or an
entity under the control of the issuer, to a foreign government or the
Federal Government for the purpose of the commercial development of
oil, natural gas, or minerals. Section 13(q) requires a resource
extraction issuer to provide information about the type and total
amount of such 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. In addition, Section 13(q)
requires a resource extraction issuer to provide information about
those payments in an interactive data format.
DATES: Effective date: The final rule and form amendment are effective
September 26, 2016.
Compliance date: A resource extraction issuer must comply with the
final rule and form for fiscal years ending on or after September 30,
2018.
FOR FURTHER INFORMATION CONTACT: Shehzad K. Niazi, Special Counsel;
Office of Rulemaking, Division of Corporation Finance, at (202) 551-
3430; or Elliot Staffin, Special Counsel; Office of International
Corporate Finance, Division of Corporation Finance, at (202) 551-3450,
U.S. Securities and Exchange Commission, 100 F Street NE., Washington,
DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting Rule 13q-1 \1\ and an
amendment to Form SD \2\ under the Securities Exchange Act of 1934
(``Exchange Act'').\3\
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\1\ 17 CFR 240.13q-1.
\2\ 17 CFR 249.448.
\3\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Introduction and Background
A. Section 13(q) of the Exchange Act
B. The 2012 Rules and Litigation
C. International Transparency Efforts
1. European Economic Area
2. Canada
3. EITI
D. Summary of the Final Rules
II. Final Rules Under Section 13(q)
A. Definition of ``Resource Extraction Issuer''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
B. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
C. Definition of ``Payment''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
D. Definition of ``Subsidiary'' and ``Control''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
E. Definition of ``Project''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
F. Definition of ``Foreign Government'' and ``Federal
Government''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
G. Annual Report Requirement
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
H. Public Filing
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
I. Exemption From Compliance
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
J. Alternative Reporting
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
K. Exhibits and Interactive Data Format Requirements
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
L. Treatment for Purposes of Securities Act and Exchange Act
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
M. Compliance Date
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
III. Economic Analysis
A. Introduction and Baseline
B. Potential Effects Resulting From the Payment Reporting
Requirement
1. Benefits
2. Costs
C. Potential Effects Resulting From Specific Implementation
Choices
1. Exemption From Compliance
2. Alternative Reporting
3. Definition of Control
4. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
5. Types of Payments
6. Definition of ``Not De Minimis''
7. Definition of ``Project''
8. Annual Report Requirement
9. Exhibit and Interactive Data Requirement
IV. Paperwork Reduction Act
A. Background
B. Estimate of Issuers
C. Estimate of Issuer Burdens
V. Final Regulatory Flexibility Act Analysis
A. Need for the Rules
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority
I. Introduction and Background
On December 11, 2015, we re-proposed a rule and form amendments-\4\
to implement Section 13(q) of the Exchange Act (the ``Proposing
Release''). Rules implementing Section 13(q) were previously adopted by
the Commission on August 22, 2012 (the ``2012 Rules''),\5\ but were
vacated by the U.S. District Court for the District of Columbia by
order dated July 2, 2013.\6\
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\4\ Exchange Act Release No. 34-76620 (Dec. 11, 2015), 80 FR
80057 (Dec. 23, 2015) available at https://www.sec.gov/rules/proposed/2015/34-76620.pdf.
\5\ See Exchange Act Release No. 67717 (Aug. 22, 2012), 77 FR
56365 (Sept. 12, 2012) available at https://www.sec.gov/rules/final/2012/34-67717.pdf (the ``2012 Adopting Release''). See also Exchange
Act Release No. 63549 (Dec. 15, 2010), 75 FR 80978 (Dec. 23, 2010)
available at https://www.sec.gov/rules/proposed/2010/34-63549.pdf
(the ``2010 Proposing Release'').
\6\ API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013) (``API
Lawsuit'').
---------------------------------------------------------------------------
A. Section 13(q) of the Exchange Act
Section 13(q) was added in 2010 by Section 1504 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``the Act'').\7\ It
directs the Commission to ``issue final rules that require each
resource extraction issuer to include in an annual report . . .
information relating to any payment
[[Page 49361]]
made by the resource extraction issuer, a subsidiary of the resource
extraction issuer, or an entity under the control of the resource
extraction issuer to a foreign government or the Federal Government for
the purpose of the commercial development of oil, natural gas, or
minerals, including--(i) the type and total amount of such payments
made for each project of the resource extraction issuer relating to the
commercial development of oil, natural gas, or minerals, and (ii) the
type and total amount of such payments made to each government.'' \8\
---------------------------------------------------------------------------
\7\ Public Law 111-203 (July 21, 2010).
\8\ 15 U.S.C. 78m(q)(2)(A). As discussed below, Section 13(q)
also specifies that the Commission's rules must require certain
information to be provided in interactive data format.
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Based on the statutory text and the legislative history, we
understand that Congress enacted Section 1504 to increase the
transparency of payments made by oil, natural gas, and mining companies
to governments for the purpose of the commercial development of their
oil, natural gas, and minerals. As discussed in more detail below, the
legislation reflects U.S. foreign policy interests in supporting global
efforts to improve transparency in the extractive industries.\9\ The
goal of such transparency is to help combat global corruption and
empower citizens of resource-rich countries to hold their governments
accountable for the wealth generated by those resources.\10\ Section
13(q) also defines several key terms, such as ``resource extraction
issuer,'' \11\ ``commercial development of oil, natural gas, or
minerals,'' \12\ ``foreign government,'' \13\ and ``payment,'' \14\
each of which is addressed in detail below.
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\9\ See Section I.C below.
\10\ See, e.g., 156 Cong. Rec. S3816 (daily ed. May 17, 2010)
(Statement of Senator Lugar, one of the sponsors of Section 1504)
(``Adoption of the Cardin-Lugar amendment would bring a major step
in favor of increased transparency at home and abroad. . . . More
importantly, it would help empower citizens to hold their
governments to account for the decisions made by their governments
in the management of valuable oil, gas, and mineral resources and
revenues. . . . The essential issue at stake is a citizen's right to
hold its government to account. Americans would not tolerate the
Congress denying them access to revenues our Treasury collects. We
cannot force foreign governments to treat their citizens as we would
hope, but this amendment would make it much more difficult to hide
the truth.''); id. at S3817-18 (May 17, 2010) (Statement of Senator
Dodd) (``[C]ountries with huge revenue flows from energy development
also frequently have some of the highest rates of poverty,
corruption and violence. Where is all that money going? [Section
13(q)] is a first step toward addressing that issue by setting a new
international standard for disclosure.'').
\11\ 15 U.S.C. 78m(q)(1)(D).
\12\ 15 U.S.C. 78m(q)(1)(A).
\13\ 15 U.S.C. 78m(q)(1)(B).
\14\ 15 U.S.C. 78m(q)(1)(C).
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Section 13(q) provides that ``[t]o the extent practicable, the
rules . . . shall support the commitment of the Federal Government to
international transparency promotion efforts relating to the commercial
development of oil, natural gas, or minerals.'' \15\ In light of this
directive, we have considered significant international initiatives in
connection with the final rules, such as the Extractive Industries
Transparency Initiative (``EITI'') and the regulations enacted by the
European Union and Canada.\16\
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\15\ 15 U.S.C. 78m(q)(2)(E).
\16\ See Section I.C below for a discussion of these disclosure
regimes, including why they are significant. See also Proposing
Release, nn.13-18 and accompanying text.
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Pursuant to Section 13(q), the rules we adopt must require a
resource extraction issuer to submit the payment information included
in an annual report in an electronic data format in which the
information is identified using a standardized list of electronic
tags.\17\ Section 13(q) lists certain electronic tags that must be
included in the rules to identify specified information \18\ while also
authorizing the Commission to require additional electronic tags for
other information that it determines is necessary or appropriate in the
public interest or for the protection of investors.\19\
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\17\ 15 U.S.C. 78m(q)(1)(E), (1)(F), (2)(C), (2)(D).
\18\ These tags include: (I) the total amounts of the payments,
by category; (II) the currency used to make the payments; (III) the
financial period in which the payments were made; (IV) the business
segment of the resource extraction issuer that made the payments;
(V) the government that received the payments and the country in
which the government is located; (VI) and the project of the
resource extraction issuer to which the payments relate. 15 U.S.C.
78m(q)(2)(D)(ii).
\19\ 15 U.S.C. 78m(q)(2)(D)(ii)(VII).
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Section 13(q) further requires, to the extent practicable, that the
Commission make publicly available online a compilation of the
information required to be submitted by resource extraction issuers
under the new rules.\20\ The statute does not define the term
compilation or describe how it should be generated.
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\20\ 15 U.S.C. 78m(q)(3).
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Finally, Section 13(q) provides that the final rules ``shall take
effect on the date on which the resource extraction issuer is required
to submit an annual report relating to the fiscal year . . . that ends
not earlier than one year after the date on which the Commission issues
final rules . . . .'' \21\
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\21\ 15 U.S.C. 78m(q)(2)(F).
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B. The 2012 Rules and Litigation
We adopted final rules implementing Section 13(q) on August 22,
2012.\22\ Subsequently, in October 2012, the American Petroleum
Institute (``API''), the U.S. Chamber of Commerce, and two other
industry groups challenged the 2012 Rules.\23\ On July 2, 2013, the
U.S. District Court for the District of Columbia vacated the rules.\24\
The court based its decision on two findings: first, that the
Commission misread Section 13(q) to compel the public disclosure of the
issuers' reports; and second, the Commission's explanation for not
granting an exemption for when disclosure is prohibited by foreign
governments was arbitrary and capricious. On September 18, 2014, Oxfam
America, Inc. filed suit in the U.S. District Court for the District of
Massachusetts to compel the Commission to promulgate a final rule
implementing Section 1504. On September 2, 2015, the court issued an
order holding that the Commission unlawfully withheld agency action by
not promulgating a final rule.\25\ The Commission filed an expedited
schedule for promulgating the final rule with the court on October 2,
2015. Consistent with that schedule, the Commission re-proposed rules
and form amendments on December 11, 2015. The comment period for the
re-proposal was divided into an initial comment period and a reply
comment period. These comment periods were subsequently extended in
response to a request by the API.\26\ The Commission received 369
[[Page 49362]]
letters (including one form letter submitted 308 times and a petition
with 116,923 signatures) responding to the requests for comment in the
Proposing Release.\27\
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\22\ We received over 150 unique comment letters on the 2010
Proposing Release, as well as over 149,000 form letters (including a
petition with 143,000 signatures). The letters, including the form
letters designated as Type A, Type B, and Type C, are available at
https://www.sec.gov/comments/s7-42-10/s74210.shtml. In addition, to
facilitate public input on the Act before the comment periods for
specific rulemakings opened, the Commission provided a series of
email links, organized by topic, on its Web site at https://www.sec.gov/spotlight/regreformcomments.shtml. The public comments
we received on Section 1504 of the Act, which were submitted prior
to the 2010 Proposing Release, are available on our Web site at
https://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml. Many comments were also received
between the issuance of the 2012 Adopting Release and the recent
Proposing Release and are available at https://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml.
\23\ See API et al. v. SEC, No. 12-1668 (D.D.C. Oct. 10, 2012).
Petitioners also filed suit in the U.S. Court of Appeals for the DC
Circuit, which subsequently dismissed the suit for lack of
jurisdiction. See API v. SEC, 714 F. 3d 1329 (D.C. Cir. 2013).
\24\ API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013) (``API
Lawsuit'').
\25\ Oxfam America, Inc. v. United States Securities and
Exchange Commission, 126 F. Supp. 3d 168 (D. Mass. 2015).
\26\ In response to API's request, the Commission extended the
initial comment period from January 25, 2016 to February 16, 2016
and the reply comment period from February 16, 2016 to March 8,
2016. See letter from API (Jan. 7, 2016) and Exchange Act Release
No. 34-76958 (Jan. 21, 2016), 81 FR 4598 (Jan. 27, 2016), available
at https://www.sec.gov/rules/proposed/2016/34-76958.pdf.
\27\ These letters, including the form letters designated as
Type A and B, are available at https://www.sec.gov/comments/s7-25-15/s72515.shtml.
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C. International Transparency Efforts
As discussed at length in the Proposing Release, Section 13(q)
reflects the U.S. foreign policy interest in supporting global efforts
to improve the transparency of payments made in the extractive
industries in order to help combat global corruption and promote
accountability.\28\ We formulated the proposed rules with the purpose
of furthering these interests, and federal agencies with specific
expertise in this area submitted comments affirming that the proposed
rules would accomplish that purpose.\29\ Notably, the U.S. Department
of State expressed the view that, if adopted, the proposed rule would
be a ``strong tool to increase transparency and combat corruption'' and
stated that it would advance ``the United States' strong foreign policy
interests in promoting transparency and combatting corruption
globally.'' \30\ In addition, the U.S. Agency for International
Development (``USAID'') stated that the proposed rule, if adopted,
would be ``a significant step toward greater energy and mineral
industry transparency and, correspondingly, strengthened governance and
civil society anti-corruption efforts.'' \31\ According to USAID,
``enforcement of the proposed rule would contribute towards U.S.
Government foreign policy goals of supporting stable and democratic
governments, and in particular towards USAID's goal of providing
assistance to resource-rich countries in support of economic growth,
good governance, transparency, and building civil society.'' \32\
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\28\ See Section I.E of the Proposing Release, which we hereby
expressly incorporate by reference. See also 156 Cong. Rec. S3976
(May 19, 2010) (Sen. Feingold) (explaining that Section 13(q) is
intended to ``empower[] citizens in resource-rich countries in their
efforts to combat corruption and hold their governments
accountable''). The importance placed by the United States and other
members of the international community on reducing global corruption
was recently illustrated through the international anti-corruption
summit that British Prime Minister David Cameron hosted in London on
May 12, 2016. The summit brought together world leaders, business,
and civil society to agree to a package of steps to, among other
things, promote transparency measures that expose corruption. The
summit adopted a Global Declaration Against Corruption that
specifically endorsed the promotion of transparency and governance
in the resource extraction sector. See Global Declaration Against
Corruption (May 12, 2016), available at https://www.gov.uk/government/publications/global-declaration-against-corruption/global-declaration-against-corruption (last visited June 16, 2016).
President Obama and the other leaders of the G7 nations in Japan
during their annual conference similarly emphasized the importance
of combatting global corruption. See G7 Ise-Shima Leaders'
Declaration (May 26, 2016), available at https://www.mofa.go.jp/files/000160266.pdf (last visited June 16, 2016) (``[r]ecognizing
the magnitude of the global problem of corruption'' and
``reiterat[ing] that our collective and individual action to fight
corruption is critical for economic growth, sustainable development
and maintaining peace and security'').
\29\ We note that the legislative history also indicates that
Congress intended for the Section 13(q) disclosures to serve as an
informational tool for investors. See, e.g., 156 Cong. Rec. S3815
(May 17, 2010) (Sen. Cardin) (``Investors need to know the full
extent of a company's exposure''); id. at S3816 (May 17, 2010) (Sen.
Lugar) (``[the disclosures] would empower investors to have a more
complete view of the value of their holdings'').
\30\ Letter from the United States Department of State (Jan. 21,
2016) (``State Department'').
\31\ Letter from U.S. Agency for International Development (Feb.
16, 2016) (``USAID''). According to its Web site, USAID ``carries
out U.S. foreign policy by promoting broad-scale human progress at
the same time it expands stable, free societies, creates markets and
trade partners for the United States, and fosters good will
abroad.'' USAID, Who We Are, available at https://www.usaid.gov/who-we-are (last visited June 16, 2016). USAID is particularly committed
to transparency, such as the President's Open Government Initiative.
See USAID, Our Commitment to Transparency, available at https://www.usaid.gov/results-and-data/progress-data/transparency (last
visited June 16, 2016).
\32\ Id.
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Other commenters, including individuals and non-governmental
organizations, supported the view that Section 13(q) was enacted to
further the U.S. Government's interest in improving transparency in an
effort to help combat global corruption and promote accountability.\33\
For example, one commenter stated that ``the governmental interest of
reducing corruption and potentially enhancing governmental
accountability . . . underpins [Section 13(q)].'' \34\ Another
commenter stated that ``[p]romoting revenue transparency in the
extractives sector with a robust implementation of Section 1504 would
provide civil society the necessary tools to prevent and combat
corruption worldwide'' and that since ``natural resource extraction
accounts for at least 10% of GDP in 61 countries, the potential
benefits of strong rules under Section 1504 are significant in terms of
healthier and better educated populations, creating more productive
societies and higher economic growth rates.'' \35\ Comments we received
on the Proposing Release from former and current members of the U.S.
Congress supported our interpretation of the transparency and anti-
corruption goals of Section 13(q).\36\ These current and former U.S.
senators stated that ``transparency is a critical tool to ensure that
citizens in resource rich countries can monitor the economic
performance of oil, gas and mining projects and ensure that revenues,
especially if more meager than hoped, are used responsibly.'' \37\
Significantly, this view was not limited to government, civil society,
and individual commenters. Industry commenters also attested to a link
between Section 13(q)'s promotion of increased transparency and
reducing corruption.\38\
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\33\ See, e.g., letters from American Security Project (Jan. 21,
2016) (``ASP''); Elise J. Bean (Feb. 16, 2016) (``Bean''); BHP
Billiton (Jan. 25, 2016) (``BHP''); Pietro Poretti (Feb. 15, 2016)
(``Poretti''); Publish What You Pay--US (Feb. 16, 2016) (``PWYP-US
1''); and Transparency International--USA (Feb. 16, 2016) (``TI-
USA'').
\34\ See letter from Poretti.
\35\ See letter from TI-USA.
\36\ See letter from Senators Cardin, Baldwin, Brown, Coons,
Durbin, Leahy, Markey, Menendez, Markley, Shaheen, Warren, and
Whitehouse (Feb. 5, 2016) (``Sen. Cardin et al.'') and letter from
retired Senators Lugar, Dodd, and Levin (Feb. 4, 2016) (``Sen. Lugar
et al.'').
\37\ Id.
\38\ See letters from BHP (``Transparency by governments and
companies alike regarding revenue flows from the extraction of
natural resources in a manner which is meaningful, practical and
easily understood by stakeholders reduces the opportunity for
corruption'') and Total S.A. (Jan. 13, 2016) (``Total'') (``Total
considers that the re-introduction of Rule 13q-1 under the Dodd
Frank Act should both restore a level playing field among major
publicly-listed oil and gas companies and improve transparency to
help combat global corruption and increase accountability.'').
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To determine how best to achieve the policy objectives of Section
13(q) and to meet the statutory directive to ``support the commitment
of the Federal Government to international transparency promotion
efforts'' to the extent practicable, we also have considered the
current state of international transparency efforts. The following
discussion addresses the global transparency initiatives that have
developed since the 2012 Adopting Release was issued, including in the
European Union, Canada, and through the EITI.\39\ As discussed below,
these initiatives govern a significant percentage of the companies that
will be impacted by the final rules.\40\
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\39\ We look to the EITI because it is a significant
international transparency framework, it was mentioned in the
legislative history of Section 13(q), and the definition of
``payment'' in Section 13(q)(1)(C)(ii) [15 U.S.C. 78m(q)(1)(C)(ii)]
specifically refers to the EITI. See, e.g., 156 Cong. Rec. S3816
(daily ed. May 17, 2010) (Statement of Senator Lugar) (``This
domestic action will complement multilateral transparency efforts
such as the Extractive Industries Transparency Initiative--the
EITI--under which some countries are beginning to require all
extractive companies operating in their territories to publicly
report their payments.'').
\40\ See Section III.B.2.b below for our estimates regarding the
number of resource extraction issuers that are already subject to
other disclosure regimes. We estimate that approximately 25% of
resource extraction issuers are already subject to the EU Directives
or ESTMA, but this percentage does not include resource extraction
issuers subject to the EITI.
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[[Page 49363]]
1. European Economic Area
The European Parliament and Council of the European Union adopted
two directives that include payment disclosure rules.\41\ The EU
Accounting Directive and the EU Transparency Directive (the ``EU
Directives'') are very similar to each other in content. They determine
the applicability and scope of the disclosure requirements and set the
baseline in each EU member state and European Economic Area (``EEA'')
\42\ country for annual disclosure requirements for oil, gas, mining,
and logging companies concerning the payments they make to governments
on a per country and per project basis.\43\ The EU Accounting Directive
regulates the provision of financial information by all ``large''
companies \44\ incorporated under the laws of an EU member state or
those of an EEA country, even if the company is privately held. It
requires covered oil, gas, mining, and logging companies to disclose
specified payments to governments. The EU Transparency Directive
applies these disclosure requirements to all companies listed on EU-
regulated markets \45\ even if they are not registered in the EEA or
are incorporated in other countries.\46\ The EU Directives also apply
to payments made by entities that are part of a company's consolidated
report.\47\
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\41\ Directive 2013/34/EU of the European Parliament and of the
Council of 26 June 2013 on the annual financial statements,
consolidated financial statements and related reports of certain
types of undertakings (``EU Accounting Directive''); and Directive
2013/50/EU of the European Parliament and of the Council of 22
October 2013 amending Directive 2004/109/EC on transparency
requirements in relation to information about issuers whose
securities are admitted to trading on a regulated market, Directive
2003/71/EC of the European Parliament and of the Council on the
prospectus to be published when securities are offered to the public
or admitted to trading and Commission Directive 2007/14/EC on the
implementation of certain provisions of Directive 2004/109/EC (``EU
Transparency Directive'').
\42\ See European Commission Memo (June 12, 2013)
(``Commissioner Barnier welcomes European Parliament vote on the
Accounting and Transparency Directives (including country by country
reporting)''). The EEA is composed of the EU member states plus
Iceland, Liechtenstein, and Norway.
\43\ Unlike the proposed rules and the rules we are adopting
today, the EU Directives also apply to companies active in the
logging of primary forests.
\44\ See Article 3(4) of the EU Accounting Directive, which
defines large companies (i.e., ``large undertakings'') to mean those
which on their balance sheet dates exceed at least two of the three
following criteria: (a) Balance sheet totaling [euro]20 million
(approximately $22.5 million (USD) as of June 16, 2016); (b) net
turnover of [euro]40 million (approximately $44.9 million (USD) as
of June 16, 2016); and (c) average number of employees of 250.
\45\ The term ``regulated market'' is defined in the EU's
Markets in Financial Instruments Directive 2004/39/EC (``MiFID''),
as amended by 2010/78/EU. The list of regulated markets can be found
on the European Securities and Markets Authority's Web site at
https://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_mifid_rma (last visited June 16,
2016).
\46\ See EU Transparency Directive, Art. 2(1)(d) and Art. 6.
\47\ See, e.g., EU Accounting Directive, Art. 44.
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The EU Directives generally cover the following activities:
``exploration, prospection, discovery, development, and extraction of
minerals, oil, natural gas deposits or other materials.'' \48\ The
types of payments that must be disclosed when made in connection with
those activities include: (a) Production entitlements; (b) taxes levied
on the income, production, or profits of companies, excluding taxes
levied on consumption such as value added taxes, personal income taxes,
or sales taxes; (c) royalties; (d) dividends; (e) signature, discovery,
and production bonuses; (f) license fees, rental fees, entry fees, and
other considerations for licenses and/or concessions; and (g) payments
for infrastructure improvements.\49\ These payments are covered whether
made ``in money or in kind.'' \50\
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\48\ EU Accounting Directive, Art. 41(1).
\49\ See, e.g., EU Accounting Directive, Art. 41(5).
\50\ Id.
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Disclosure of payments is made on a per project and per government
basis. ``Project'' is defined as ``the operational activities that are
governed by a single contract, license, lease, concession or similar
legal agreements and form the basis for payment liabilities with a
government.'' \51\ The definition goes on to state that ``if multiple
such agreements are substantially interconnected, this shall be
considered a project.'' \52\ ``Substantially interconnected'' under the
EU Directives means ``a set of operationally and geographically
integrated contracts, licenses, leases or concessions or related
agreements with substantially similar terms that are signed with a
government, giving rise to payment liabilities.'' \53\
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\51\ See, e.g., EU Accounting Directive, Art. 41(4).
\52\ Id. Contrary to the proposed rules and those we are
adopting today, the EU Directives appear to require aggregation of
``substantially interconnected'' agreements rather than providing
such aggregation as an option.
\53\ See, e.g., EU Accounting Directive, Recital 45.
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The EU Directives require public disclosure of the payment
information, including the issuer's identity.\54\ Further, the EU
Directives do not provide any exemptions unique to the resource
extraction payment disclosure requirements. They do, however, allow
issuers to use reports prepared for foreign regulatory purposes to
satisfy their disclosure obligations under EU law if those reports are
deemed equivalent pursuant to specified criteria.\55\ These criteria
include: (i) Target undertakings; (ii) target recipients of payments;
(iii) payments captured; (iv) attribution of payments captured; (v)
breakdown of payments captured; (vi) triggers for reporting on a
consolidated basis; (vii) reporting medium; (viii) frequency of
reporting; and (ix) anti-evasion measures. No equivalency
determinations have been made to-date in the EEA.
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\54\ See, e.g., EU Accounting Directive, Arts. 43, 45.
\55\ See, e.g., EU Accounting Directive, Arts. 46, 47.
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Member states are granted some leeway for when the report is due
and what penalties will result from violations of the regulations.\56\
Required public disclosure of payments in an annual report by companies
has begun in the European Union \57\ and will occur in all European
Union and EEA member countries once the essential provisions have been
transposed into domestic law in each country.\58\
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\56\ See, e.g., EU Accounting Directive, Art. 45 (``The report .
. . on payments to governments shall be published as laid down by
the laws of each Member State . . . .''); Id. at Article 51
(``Member States shall provide for penalties applicable to
infringements of the national provisions adopted in accordance with
this Directive . . . .'').
\57\ See, e.g., RDS Report discussed in note 302 below.
\58\ The requirements of the EU Directives are implemented
through the enacting legislation of each EEA member country. The
deadlines for implementing the EU Accounting Directive and the EU
Transparency Directive were July 20, 2015 and November 26, 2015
respectively. It is our understanding that as of the date of this
release, 24 countries have implemented the EU Accounting Directive
and 15 countries have implemented the EU Transparency Directive. In
general, non-EU EEA countries enact implementing legislation after
an EU Directive is adopted into the EEA by Joint Committee decision.
The EEA Joint Committee adopted the Accounting Directive on October
30, 2015. As of the date of this release, it is our understanding
that the EEA Joint Committee has not yet adopted a decision on the
Transparency Directive. As of June 16, 2016, Austria, Belgium,
Croatia, the Czech Republic, Denmark, Estonia, Finland, France,
Germany, Hungary, Italy, Latvia, Lithuania, Lithuania, Luxembourg,
Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Spain,
Slovenia, Spain, Sweden, and the United Kingdom have filed
notifications of full transposition (i.e., implementation) of the
Accounting Directive with the European Commission. As of June 16,
2016, Austria, Croatia, Cyprus, Estonia, Finland, France, Germany,
Greece, Hungary, Italy, Lithuania, The Netherlands, Slovakia,
Sweden, and the United Kingdom have filed notifications of full
transposition of the Transparency Directive with the European
Commission. Norway, a non-EU member of the EEA, adopted legislation
that complies with both the Accounting and Transparency Directives,
effective for fiscal years beginning on or after January 1, 2014.
Other EU and EEA member countries are working towards
implementation. Updates about member country progress towards full
transposition can be found at: https://ec.europa.eu/finance/enforcement/directives/index_en.htm#accounting. See also letter from
Arlene McCarthy OBE (Mar. 8, 2016) (``McCarthy'') (stating that
``most Member States have transposed the EU Directives'').
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[[Page 49364]]
2. Canada
Canada also adopted a federal resource extraction disclosure law,
the Extractive Sector Transparency Measures Act (``ESTMA'') after the
2012 Adopting Release was issued.\59\ Since the Proposing Release,
Canada finalized, substantially as proposed, its previously issued
ESTMA Guidance \60\ and the ESTMA Technical Reporting Specifications
(``ESTMA Specifications'').\61\ ESTMA covers entities that are engaged
in the commercial development of oil, gas, or minerals or that control
another entity that is engaged in those activities, subject to certain
limitations.\62\ ESTMA defines ``control'' as being controlled by
another entity ``directly or indirectly, in any manner,'' including
those entities in a chain of control.\63\ The ESTMA Guidance also
addresses issues related to how payments are reported in situations of
joint control.\64\
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\59\ See ESTMA, 2014 S.C., ch. 39, s. 376 (Can.), which came
into force on June 1, 2015.
\60\ ESTMA Guidance, available at https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials//ESTMA-Guidance_e.pdf.
\61\ ESTMA Specifications, available at https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials//ESTMA-Technical_e.pdf.
\62\ ESTMA, Section 2. The reporting obligation applies to (a)
an entity that is listed on a stock exchange in Canada; (b) an
entity that has a place of business in Canada, does business in
Canada or has assets in Canada and that, based on its consolidated
financial statements, meets at least two of the following conditions
for at least one of its two most recent financial years: (i) It has
at least[thinsp]$20 million (CAD) in assets (approximately $15.4
million (USD) as of June 16, 2016), (ii) it has generated at
least[thinsp]$40 million (CAD) in revenue (approximately $30.8
million (USD) as of June 16, 2016), (iii) it employs an average of
at least 250 employees; and (c) any other prescribed entity. ESTMA,
Section 8.
\63\ ESTMA, Section 4(1)-(2). For example, in the statute's
words an ``entity that controls another entity is deemed to control
any entity that is controlled, or deemed to be controlled, by the
other entity.'' ESTMA, Section 4(2).
\64\ ESTMA Guidance, Section 3.6 clarifies that if a Reporting
Entity makes a payment, it must report it, whether made as an
operator of a joint arrangement or as a member of a joint
arrangement. Also, if a payment is made by an entity that is not
subject to ESTMA but is controlled by a Reporting Entity, the
Reporting Entity must report it. Payment attribution rules set out
in ESTMA may apply in situations of joint control. The ESTMA
Guidance goes on to say that Reporting Entities should consider the
facts and circumstances of payments when determining whether to
report and which payments to report in situations of joint control.
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ESTMA defines ``commercial development of oil, gas or minerals'' as
the exploration or extraction of oil, gas, or minerals; the acquisition
of a permit, license, lease, or any other authorization to carry out
the exploration or extraction of oil, gas, or minerals; or any other
prescribed activities in relation to oil, gas, or minerals.\65\ The
ESTMA Guidance clarifies that exploration or extraction refers to ``the
key phases of commercial activity which occur during the life cycle of
an oil, gas or mineral project'' and extend to prospecting,
remediation, and reclamation.\66\ The ESTMA Guidance also states that
these terms are not limited to ``active phases of operations on the
ground, but also captures temporary periods of inactivity.'' \67\ The
definition is not meant to cover ancillary or preparatory activities
such as manufacturing equipment or the construction of extraction
sites.\68\ The definition also generally does not cover post-extraction
activities, such as refining, smelting, processing, marketing,
distribution, transportation, or export.\69\ Nevertheless, certain
initial processing activities that are integrated with extraction
operations may be considered commercial development of oil, gas, or
minerals.\70\
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\65\ ESTMA, Section 2. Canada does not appear to have prescribed
any additional activities at this time. See ESTMA Guidance, Section
1, which only refers to the first two prongs of ESTMA's definition
of ``commercial development of oil, gas and minerals.''
\66\ ESTMA Guidance, Section 1.
\67\ Id.
\68\ Id.
\69\ Id.
\70\ Id.
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Canada's regulations capture the following payment types: Taxes
(other than consumption taxes and personal income taxes); royalties;
fees (including rental fees, entry fees and regulatory charges, as well
as fees or other consideration for licenses, permits or concessions);
production entitlements; bonuses (including signature, discovery and
production bonuses); dividends (other than dividends paid to payees as
ordinary shareholders); and infrastructure improvement payments.\71\
The ESTMA Guidance also includes a provision similar to the anti-
evasion provision included in the Proposing Release. It states that
entities should look to the substance, rather than the form, of
payments in determining which category is applicable, and that in
certain circumstances a philanthropic or voluntary contribution made in
lieu of one of the payment categories would need to be reported.\72\
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\71\ ESTMA Guidance, Section 3.1.
\72\ ESTMA Guidance, Section 3.5.
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Unlike the EU Directives, which do not provide for any exemptions
unique to resource extraction payment disclosure, ESTMA authorizes the
adoption of regulations respecting, among other matters, ``the
circumstances in which any provisions of this Act do not apply to
entities, payments or payees.'' \73\ As of the date of this release,
the Minister of Natural Resources Canada has not authorized any
regulations pursuant to that provision that provide for exemptions
under ESTMA. ESTMA did, however, defer the requirement for issuers to
report payments made to Aboriginal governments in Canada until June 1,
2017.\74\
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\73\ See ESTMA, Section 23(1).
\74\ ESTMA Guidelines, Section 3.3.
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Canada has adopted project-level reporting, and the definition of
``project'' used in the ESTMA Specifications is identical to the
definition of that term in the EU Directives.\75\ Reports prepared
under ESTMA must be published on the internet ``so they are available
to the public'' and a link to the report must be provided to the
Canadian government.\76\
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\75\ See ESTMA Specifications, Section 2.3.2.
\76\ ESTMA Specifications, Section 2.4.
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Like the EU Directives, ESTMA allows for the Minister of Natural
Resources Canada to determine that the requirements of another
jurisdiction are an acceptable substitute for the domestic
requirements.\77\ As noted in the Proposing Release, on July 31, 2015
the Minister determined that the reporting requirements set forth in
the EU Directives were an acceptable substitute for Canada's
requirements under ESTMA.\78\ Canada's current substitution policy
makes an assessment based on whether a jurisdiction's reporting
requirements (1) achieve the purposes of the reporting requirements
under ESTMA (as stated, to ``deter corruption through public
transparency'') and (2) address a similar scope of the reporting
requirements under ESTMA.\79\ Canada requires that an issuer must be
subject to the reporting requirements of the other jurisdiction and
must have provided the report to the other jurisdiction's competent
authority. Although it has adopted a reporting deadline of 150 days
after the end of an issuer's financial (i.e., fiscal) year, Canada
[[Page 49365]]
allows for substituted reports to be filed according to the other
jurisdiction's deadline if the Department of Natural Resources Canada
is notified by email within the 150 day period.\80\ If the other
jurisdiction's deadline is shorter than 150 days, the issuer may still
follow the 150 day deadline when submitting the report in Canada.\81\
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\77\ See ESTMA, Section 10(1) (``If, in the Minister's opinion,
and taking into account any additional conditions that he or she may
impose, the payment reporting requirements of another jurisdiction
achieve the purposes of the reporting requirements under this Act,
the Minister may determine that the requirements of the other
jurisdiction are an acceptable substitute . . . .'').
\78\ Substitution Process and Determination, available at https://www.nrcan.gc.ca/mining-materials/estma/18196 (last visited June 16,
2016).
\79\ See id.
\80\ Id.
\81\ Id.
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3. EITI
The EITI is a voluntary coalition of oil, natural gas, and mining
companies, foreign governments, investor groups, and other
international organizations. The coalition was formed to foster and
improve transparency and accountability in resource-rich countries
through the publication and verification of company payments and
government revenues from oil, natural gas, and mining.\82\ A country
volunteers to become an EITI candidate and must complete an EITI
validation process to become a compliant member.\83\ Currently 51
countries are EITI implementing countries.\84\ Furthermore, several
countries not currently a part of the EITI have indicated their
intention to implement the EITI.\85\ We analyze the EITI using the
guidance in the EITI Standard and the EITI Handbook on what should be
included in a country's EITI plan, as well as reports made by EITI
member countries.\86\ The U.S. Extractive Industries Transparency
Initiative (``USEITI'') issued its first report in December 2015.\87\
The report covered payments made to the U.S. Federal Government in
2013, including $12.6 billion for extraction on federal lands and $11.8
billion in corporate income tax receipts from mining and petroleum and
coal products manufacturing industries.\88\
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\82\ See Implementing EITI for Impact-A Handbook for
Policymakers and Stakeholders (2011) (``EITI Handbook''), at xii.
\83\ Notably, in enacting Section 13(q)'s mandatory disclosure
requirement, Congress sought to complement the EITI's existing
voluntary transparency efforts that too many countries and too many
companies either had not joined or would not. 156 Cong. Rec. S3815
(May 17, 2010) (Sen. Lugar). See also id. S3815 (May 17, 2010) (Sen.
Cardin) (stating that ``We currently have a voluntary international
standard for promoting transparency. A number of countries and
companies have joined [EITI], an excellent initiative that has made
tremendous strides in changing the cultural secrecy that surrounds
extractive industries. But too many countries and too many companies
remain outside this voluntary system.''); id. S3818 (May 17, 2010)
(Sen. Dodd) (stating that ``broad new requirements for greater
disclosure by resource extractive companies operating around the
world . . . would be an important step'' to complement EITI's
``voluntary program'').
\84\ See https://eiti.org/countries/ (last visited June 16,
2016). Of those, 31 have achieved ``EITI compliant'' status, two
have had their EITI status temporarily suspended, and the rest are
implementing the EITI requirements but are not yet compliant. Id.
When becoming an EITI candidate, a country must establish a multi-
stakeholder group, including representatives of civil society,
industry, and government, to oversee implementation of the EITI. The
stakeholder group for a particular country agrees to the terms of
that country's EITI plan, including the requirements for what
information will be provided by the governments and by the companies
operating in that country. Generally, under the EITI, companies and
the host country's government submit payment information
confidentially to an independent administrator selected by the
country's multi-stakeholder group, which is frequently an
independent auditor. The auditor reconciles the information provided
to it by the government and by the companies and produces a report.
While the information provided in the reports varies among
countries, the reports must adhere to the EITI requirements provided
in the EITI Standard (2016). See the EITI's Web site at https://eiti.org (last visited June 16, 2016).
\85\ See https://eiti.org/countries/other (last visited June 16,
2016).
\86\ The EITI Standard encompasses several documents fundamental
to the EITI: (1) The ``EITI Principles,'' which set forth the
general aims and commitments of EITI participants; (2) the ``EITI
Requirements,'' which must be followed by countries implementing the
EITI; (3) the ``Validation Guide,'' which provides guidance on the
EITI validation process; (4) the ``Protocol: Participation of Civil
Society,'' which provides guidance regarding the role of civil
society in the EITI; and (5) documents relevant to the governance
and management of the EITI (e.g., the EITI Articles of Association,
the EITI Openness Policy, and the EITI Code of Conduct). The EITI
Handbook provides guidance on implementing the EITI, including
overcoming common challenges to EITI implementation. All references
to the EITI Standard are to the 2016 edition.
\87\ The Executive Summary and other aspects of the USEITI 2015
Report are available at https://useiti.doi.gov/about/report/. In
December 2012, the U.S. Government established a multi-stakeholder
group, the USEITI Advisory Committee, headed by the Department of
the Interior (``Department of Interior'') and including the
Departments of Energy and Treasury, as well as members of industry
and civil society. See Multi-Stakeholder Group List of Members, at
https://www.doi.gov/eiti/FACA/upload/List-of-Members_03-16-15.pdf. On
March 19, 2014, the United States completed the process of becoming
an EITI candidate country.
\88\ Revenues reported to the federal government were for the
fiscal year ended September 30, 2013. Corporate income taxes and
most other payments were reported as of the calendar year ended
December 31, 2013. See the 2015 USEITI Executive Summary at 2.
---------------------------------------------------------------------------
At a minimum, the EITI requires the disclosure of material payment
and revenue information related to the upstream activities of
exploration and production, but permits each country's multi-
stakeholder group to broaden the scope of the EITI report to include
revenue streams (i.e., payments made in cash or in kind) related to
other natural resource sectors, such as forestry, or to those related
to non-upstream activities, such as export.\89\ Revenue streams
required to be disclosed under the EITI include production entitlements
to the host government and to its national, state-owned company;
profits taxes; royalties; dividends; bonuses, such as signature,
discovery and production bonuses; and license fees, including rental
fees, entry fees and other considerations for licenses or
concessions.\90\ The EITI also requires the disclosure of any other
``significant payment'' and ``material benefit'' to the host
government.\91\ These include material infrastructure works,\92\ as
well as material social expenditures if mandated by law or
contract.\93\
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\89\ See EITI Standard at 22-23 and EITI Handbook at 31 and 33.
As an initial matter, each country's multi-stakeholder group is
required to establish the thresholds for materiality and to
determine which payments and revenues are material. While the EITI
Standard requires each implementing country to provide export data
for the fiscal year covered by the EITI Report, including total
export volumes and the value of exports by commodity, the reporting
of export payments by individual companies is not required and is at
the option of the multi-stakeholder group.
\90\ See EITI Standard at 23.
\91\ See EITI Standard at 23.
\92\ See EITI Standard at 24.
\93\ See EITI Standard at 28. In addition, if the multi-
stakeholder group determines that revenues from the transportation
of oil, gas and minerals are material, the EITI expects governments
and state-owned enterprises to disclose the revenues received. See
EITI Standard at 24.
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The EITI has long required the disclosure of the particular type of
revenue stream and government entity that received each payment in the
EITI Report.\94\ Since 2013, the EITI has also required the public
reporting of these revenue streams by individual company, rather than
as aggregated data, and by project, provided that such project level
disclosure is consistent with the European Union and Commission
rules.\95\
---------------------------------------------------------------------------
\94\ See, e.g., the EITI Source Book (2005) at 26.
\95\ See EITI Standard at 25.
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Currently each implementing country's multi-stakeholder group
determines which companies should be included in the EITI Report. Out
of concern that developing countries have lost significant revenues
``as a result of corrupt or illegal deals'' involving ``anonymous
companies'' that have ``hidden behind a structure of complex and secret
company ownership,'' \96\ the EITI has recently commenced a process
that, by January 2020, will require individual companies that bid for,
operate or invest in the extractive assets of an EITI implementing
country to identify their beneficial owners, disclose the level of
ownership, and describe how ownership or control is exerted in the EITI
Report.\97\
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\96\ See EITI Beneficial Ownership Fact Sheet (2016) available
at https://eiti.org/files/eiti_bo_factsheet_en_final_may_2016.pdf.
\97\ See EITI Standard at 19-21; see also EITI Beneficial
Ownership Fact Sheet. Currently the EITI requires that, by January
1, 2017, each multi-stakeholder group publish a roadmap for
disclosing the beneficial ownership information mandated in 2020.
The EITI also recommends that each implementing country establish a
public register of beneficial ownership to the extent none exists.
See EITI Standard at 19-21. The EITI defines ``beneficial
ownership'' to mean ``the natural person(s) who directly or
indirectly ultimately owns or controls the corporate entity.'' EITI
Standard at 20. We note that, in these ways, the EITI is concerned
with more than just the actual revenue flows that result after a
deal is entered, but is also concerned with providing transparency
so that citizens and civil society can help ensure that the deals
themselves do not involve corrupt or suspect arrangements. As we
discuss below in Section II.E, we similarly believe that Section
13(q) is concerned not just with corruption after a deal is entered,
but also with exposing potential corruption that may surround the
underlying deal and the resulting payment flows.
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[[Page 49366]]
D. Summary of the Final Rules
The final rules, which are described in more detail in Part II
below, are being adopted mostly as proposed, with a few significant
changes based on feedback from commenters and other developments since
the Proposing Release was issued. The final rules require resource
extraction issuers to file a Form SD on an annual basis that includes
information about payments related to the commercial development of
oil, natural gas, or minerals that are made to governments. The
following are key provisions of the final rules:
The term ``resource extraction issuer'' means all U.S.
companies and foreign companies that are required to file annual
reports pursuant to Section 13 or 15(d) of the Exchange Act \98\ and
are engaged in the commercial development of oil, natural gas, or
minerals.
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\98\ 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------
The term ``commercial development of oil, natural gas,
or minerals'' means, consistent with Section 13(q), exploration,
extraction, processing, and export, or the acquisition of a license
for any such activity.
The term ``payment'' means payments that are made to
further the commercial development of oil, natural gas, or minerals,
are ``not de minimis,'' and includes taxes, royalties, fees
(including license fees), production entitlements, and bonuses,
consistent with Section 13(q), as well as community and social
responsibility payments (``CSR payments'') that are required by law
or contract, dividends, and payments for infrastructure
improvements.
``Not de minimis'' means any payment, whether a single
payment or a series of related payments, that equals or exceeds
$100,000 during the most recent fiscal year.
A resource extraction issuer is required to disclose
payments made by its subsidiaries and other entities under its
control. Under the final rules, an issuer must disclose the payments
made by entities that are consolidated, or its proportionate amount
of the payments made by entities or operations that are
proportionately consolidated, in its consolidated financial
statements as determined by applicable accounting principles.\99\
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\99\ We note that Exchange Act Rule 12b-21 provides that
required information need be given only insofar as it is known or
reasonably available to the registrant, subject to certain
conditions. 17 CFR 240.12b-21.
---------------------------------------------------------------------------
The term ``project'' means operational activities that
are governed by a single contract, license, lease, concession, or
similar legal agreement, which form the basis for payment
liabilities with a government. Agreements that are both
operationally and geographically interconnected may be treated by
the resource extraction issuer as a single project.
The term ``foreign government'' means a foreign
government, a department, agency, or instrumentality of a foreign
government, or a company at least majority owned by a foreign
government. It includes a foreign national government as well as a
foreign subnational government, such as the government of a state,
province, county, district, municipality, or territory under a
foreign national government.
The term ``Federal Government'' means the United States
Federal Government.
A resource extraction issuer must file its payment
disclosure on Form SD using the Commission's Electronic Data
Gathering, Analysis, and Retrieval System (``EDGAR''), no later than
150 days after the end of its fiscal year. In addition to this EDGAR
compilation of Form SD filings, a separate public compilation of the
payment information submitted in the Form SD filings will be made
available online by the Commission's staff.
A resource extraction issuer must disclose the payment
information and its identity publicly.
The final rules include two exemptions that provide for
transitional relief or delayed reporting in limited circumstances.
These exemptions provide a longer transition period for recently
acquired companies that were not previously subject to reporting
under the final rules and a one-year delay in reporting payments
related to exploratory activities. In addition, resource extraction
issuers may apply for, and the Commission will consider, exemptive
relief for other situations on a case-by-case basis pursuant to Rule
0-12 of the Exchange Act.\100\
---------------------------------------------------------------------------
\100\ 17 CFR 240.0-12.
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Resource extraction issuers may use alternative reports
to comply with the final rules if the Commission determines that the
requirements applicable to those reports are substantially similar
to our own.\101\
---------------------------------------------------------------------------
\101\ See Item 2.01(c) of Form SD.
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The Commission has determined that the current
reporting requirements of the EU Directives, Canada's ESTMA, and the
USEITI are substantially similar to the final rules, subject to the
conditions specified below in Section II.J. Applications for
additional alternative reporting determinations may be submitted
under Rule 0-13 by issuers, governments, industry groups, and trade
associations.
Resource extraction issuers, including those using
alternative reports, must present the payment disclosure using the
eXtensible Business Reporting Language (``XBRL'') electronic format
and the electronic tags identified in Form SD. The tags listed in
Form SD include those specified in Section 13(q), as well as tags
for the type and total amount of payments made for each project, the
type and total amount of payments made to each government, the
particular resource that is the subject of commercial development,
and the subnational geographic location of the project.
Resource extraction issuers are required to comply with
the rules starting with their fiscal year ending no earlier than
September 30, 2018.
As we discuss more fully throughout the remainder of this release,
in developing the final rules we have sought to balance the various
statutory interests at issue in this rulemaking: On the one hand,
providing transparency to help combat corruption and promote
accountability, and on the other hand, doing so in ways that reflect a
consideration of competition, efficiency, capital formation, and
costs.\102\ For example, with regard to the appropriate definition of
project and the public disclosure of each issuer's annual reports--two
discretionary decisions that, in many respects, are central to the
transparency regime being adopted--we determined that the anti-
corruption and accountability concerns underlying Section 13(q) will be
significantly advanced by the public disclosure of each issuer's
contract-based payment data. In making these discretionary decisions,
we were mindful of the potential economic consequences that issuers
might experience. As another example of our consideration of the
various policy interests at stake, given the potential for competitive
harm to issuers, we are adopting a targeted exemption to permit issuers
to delay reporting payment information in connection with certain
exploratory activities for one year. Further, we intend to consider
using our existing authority under the Exchange Act to afford resource
extraction issuers exemptive relief when other circumstances warrant.
For example, issuers may seek exemptive relief when foreign laws may
prohibit the Section 13(q) disclosures. This exemptive process should
help mitigate the final rules' potential adverse effects on issuers
while still preserving the transparency objectives of the statute.
Similarly, we have adopted a revised definition of control and allowed
for issuers to satisfy the rules' requirements by providing reports
prepared in compliance with other jurisdictions' reporting
requirements, which should
[[Page 49367]]
help lower direct compliance costs for issuers.
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\102\ See letter from API 1 (Feb. 16, 2016) (``API 1'')
(asserting that Congress intended that the Commission consider
investor protection, as well as competition, efficiency, and cost
concerns, when issuing the final rules under Section 13(q)).
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II. Final Rules Under Section 13(q)
A. Definition of ``Resource Extraction Issuer''
1. Proposed Rules
Section 13(q) defines a ``resource extraction issuer'' as an issuer
that is ``required to file an annual report with the Commission'' and
``engages in the commercial development of oil, natural gas, or
minerals.'' \103\ The proposed definition followed the statute without
providing any exemptions based on size, ownership, foreign private
issuer status,\104\ or the extent of business operations constituting
commercial development of oil, natural gas, or minerals.
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\103\ Section 13(q)(1)(D).
\104\ We did not, however, propose to extend the disclosure
requirements to foreign private issuers that are exempt from
Exchange Act registration and reporting obligations pursuant to
Exchange Act Rule 12g3-2(b).
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We proposed to cover only issuers filing annual reports on Forms
10-K, 20-F, or 40-F.\105\ Specifically, the proposed rules defined the
term ``resource extraction issuer'' to mean an issuer that is required
to file an annual report with the Commission pursuant to Section 13 or
15(d) of the Exchange Act and that engages in the commercial
development of oil, natural gas, or minerals. The proposed definition
excluded issuers subject to Tier 2 reporting requirements under
Regulation A or subject to Regulation Crowdfunding's reporting
requirements. In addition, we did not subject investment companies
registered under the Investment Company Act of 1940 (``Investment
Company Act'') to the proposed rules.
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\105\ See Section II.A of the Proposing Release.
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2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on whether certain
categories of issuers should be exempt from the rules, such as smaller
reporting companies, emerging growth companies, or foreign private
issuers.\106\ In addition to these categories addressed in existing
Commission rules, we asked whether the Commission should exempt issuers
based on a financial test that would measure the likelihood of the
issuer making resource extraction payments above the proposed de
minimis threshold. We offered the example of using annual revenues and
net cash flows from investing activities to make this measurement. We
also solicited comment on whether, instead of an exemption, the rules
should provide for different disclosure and reporting obligations for
certain types of issuers. Finally, we solicited comment on whether we
should provide for a delayed implementation date for certain categories
or types of issuers in order to provide them additional time to prepare
for the disclosure requirements and the benefit of observing how other
companies comply.\107\
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\106\ See the definition of ``smaller reporting company'' in
Exchange Act Rule 12b-2 [17 CFR 240.12b-2], the definition of
``emerging growth company'' in Exchange Act Section 3(a)(80) [15
U.S.C. 78c(a)(80)], and the definition of ``foreign private issuer''
in Exchange Act Rule 3b-4 [17 CFR 240.3b-4].
\107\ For a discussion of this request for comment, see Section
II.G below.
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Only one commenter on the Proposing Release recommended changing
the scope of the definition of resource extraction issuer to add an
exemption based on the type of issuer.\108\ This commenter sought an
exemption for foreign private issuers on the grounds that issuers
should only bear the compliance burden associated with their home
jurisdiction. Other commenters on the Proposing Release that addressed
this topic were generally supportive of the proposed definition of
``resource extraction issuer'' and opposed excluding any category of
issuer from the definition.\109\ No commenter specifically addressed
our exclusion of investment companies and companies required to file
annual reports other than pursuant to Section 13 or 15(d) of the
Exchange Act.
---------------------------------------------------------------------------
\108\ See letter from BP p.l.c. (Feb. 16, 2016) (``BP'').
\109\ See letters from Africa Centre for Energy Policy (Feb. 16,
2016) (``ACEP''); Calvert Investments (Feb. 16, 2016) (``Calvert'');
U.S. Department of Interior, Office of Natural Resources Revenue
(Feb. 17, 2016) (``Department of Interior''); Form Letter A; Form
Letter B; Global Witness (Feb. 16, 2016) (``Global Witness 1'');
Oxfam America (Feb. 16, 2016) (``Oxfam 1''); Natural Resource
Governance Institute (First of two letters on Feb. 16, 2016) (``NRGI
1''); Sarah Peck and Sarah Chayes (Feb. 16, 2016) (``Peck &
Chayes''); PWYP-US 1; Jacqueline Quinones (Feb. 4, 2016)
(``Quinones''); Sen. Cardin et al.; Sen. Lugar et al.; TI-USA; and
US SIF: The Forum for Sustainable and Responsible Investment (Mar.
8, 2016) (``USSIF'').
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Of the commenters that expressed support for the proposed
definition, several indicated that the proposed rules did not present
unique challenges for particular categories of issuers and thus no
exemptions were necessary.\110\ One of these commenters stated that
because smaller reporting companies and foreign private issuers were
exposed to significant political regulatory risks, excluding them would
undermine the value of the rules to investors.\111\ The Department of
Interior noted that the USEITI covers all companies that conduct
extractive activities on public and tribal lands in the United States,
without exemption.\112\ It also recommended not providing an exemption
that would allow an issuer to avoid reporting in a subsequent year
based on financial metrics due to the ``cyclical nature of extractive
commodity prices.''
---------------------------------------------------------------------------
\110\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\111\ See letter from USSIF.
\112\ Letter from Department of Interior.
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3. Final Rules
We are adopting the proposed definition of ``resource extraction
issuer.'' Under the final rules, resource extraction issuers are
issuers that are required to file an annual report with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act and engage in the
commercial development of oil, natural gas, or minerals.\113\
---------------------------------------------------------------------------
\113\ We continue to interpret ``engages'' as used in Section
13(q) and Rule 13q-1 to include indirectly engaging in the specified
commercial development activities through an entity under a
company's control. See Section II.D below for a discussion of
``control'' as used in the final rules. See also Proposing Release,
n. 101.
---------------------------------------------------------------------------
As discussed above, almost all of the commenters on the Proposing
Release supported the proposed definition or called for the rules to
cover all companies without exemptions. We disagree with the commenter
that suggested foreign private issuers should be excluded from the
definition of ``resource extraction issuer.'' \114\ This commenter
stated that an exemption for all foreign private issuers was
justifiable so that issuers only bear the compliance burden associated
with one set of transparency rules. We note, however, that not all
foreign private issuers will be required to report in other
jurisdictions. Further, even if the issuer is required to file reports
in another jurisdiction, an exemption for all foreign private issuers
leaves open the possibility that the foreign private issuer's reporting
could be pursuant to a jurisdiction's requirements that are
significantly different than the Commission's rules. Instead, we
believe that it is more appropriate to address concerns over
duplicative reporting through the alternative reporting provisions we
are adopting today.\115\
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\114\ See letter from BP.
\115\ See Section II.J below. We note that the commenter that
raised these concerns indicated that if the Commission did not adopt
an exemption for foreign private issuers, it would support an
alternative reporting provision. See letter from BP.
---------------------------------------------------------------------------
No commenters on the Proposing Release specifically requested that
the Commission extend the disclosure requirements to foreign private
issuers that are exempt from Exchange Act registration and reporting
obligations
[[Page 49368]]
pursuant to Exchange Act Rule 12g3-2(b). As we discussed in the
Proposing Release,\116\ we continue to believe that expanding the
statutory definition to include such issuers is not appropriate because
it would discourage reliance on Rule 12g3-2(b) and would be
inconsistent with the effect, and we believe the purpose, of that
rule.\117\
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\116\ See Section II.A. of Proposing Release.
\117\ As we discussed in the Proposing Release, Rule 12g3-2(b)
provides relief to foreign private issuers that are not currently
Exchange Act reporting companies (i.e., they are neither listed nor
have made a registered offering in the United States) and whose
primary trading market is located outside the United States. In
these circumstances, we do not believe it would be appropriate to
require foreign private issuers whose connections with the U.S.
markets do not otherwise require them to make reports with the
Commission to undertake such an obligation solely for the purpose of
providing the required payment information. Moreover, imposing a
reporting obligation on such issuers would seem to go beyond what is
contemplated by Section 13(q), which defines a ``resource extraction
issuer'' as an issuer that is ``required to file an annual report
with the Commission.''
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Although, as we stated in the Proposing Release, we believe that
the statutory language could reasonably be read either to cover or to
exclude issuers that file annual reports on forms other than Forms 10-
K, 20-F, and 40-F, we also continue to believe that covering other
issuers would do little to further the transparency objectives of
Section 13(q). It would, however, add costs and burdens to the existing
disclosure regimes governing those categories of issuers. For example,
and as noted in the Proposing Release, none of the Regulation A issuers
with qualified offering statements between 2009 and 2014 appear to have
been resource extraction issuers at the time of those filings.\118\
That remains the case for Regulation A issuers that qualified offering
statements in 2015. We also continue to believe that it is unlikely
that an entity that fits within the definition of an ``investment
company'' \119\ would be one that is ``engag[ing] in the commercial
development of oil, natural gas, or minerals.'' Accordingly, the final
rules we are adopting will not apply to such issuers.\120\
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\118\ Based on a review of their assigned Standard Industrial
Classification (SIC) codes. We recognize that Tier 2 of Regulation
A, with a maximum offering amount of $50 million, is still
relatively new and that the types of companies previously or
currently using Regulation A may not be representative of its future
use. In addition, since Regulation A issuers were not required to
file annual reports when Section 13(q) was enacted, it seems
unlikely that Congress contemplated Regulation A issuers having to
comply with Section 13(q). Given the added costs and burdens
discussed in the Proposing Release, we continue to believe that it
is not prudent to extend the rule to Regulation A issuers at this
time. See Proposing Release, Section II.A.
\119\ See Section 3(a)(1) of the Investment Company Act (15
U.S.C. 80a-3(a)(1)).
\120\ See Proposing Release, Section II.A for a discussion of
the factors we considered.
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B. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
1. Proposed Rules
Section 13(q) defines ``commercial development of oil, natural gas,
or minerals.'' Consistent with the statute, we proposed defining
``commercial development of oil, natural gas, or minerals'' as
exploration, extraction, processing, and export of oil, natural gas, or
minerals, or the acquisition of a license for any such activity.
Although we have discretionary authority to include other significant
activities relating to oil, natural gas, or minerals,\121\ we did not
propose expanding the definition beyond the explicit terms of Section
13(q).
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\121\ See Section 13(q)(1)(A).
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As discussed in the Proposing Release, the proposed definition of
``commercial development'' was intended to capture only activities that
are directly related to the commercial development of oil, natural gas,
or minerals, and not activities ancillary or preparatory to such
commercial development.\122\ We also proposed additional guidance on
several terms contained within the definition of ``commercial
development of oil, natural gas, or minerals.'' \123\ For example, we
identified activities that would be covered by the terms ``extraction''
and ``export,'' and we provided examples of the activities that would
be covered by the term ``processing.'' \124\
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\122\ See Proposing Release, at Section II.B.
\123\ Id.
\124\ Id. See also Section II.B.1.3 below for a discussion of
this guidance.
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2. Comments on the Proposed Rules
a. Scope of the Definition
In the Proposing Release we solicited comment on how we should
define ``commercial development of oil, natural gas, or minerals.'' For
example, we asked whether the definition should include any activities
that were not expressly identified in the statute and what definition
would further the U.S. Government's foreign policy objective of
battling corruption through improved transparency. In light of the
Commission's general exemptive authority, we solicited comment on
whether certain activities listed in the statute should be excluded
from the definition. We also sought input on whether activities that
are ancillary or preparatory to resource extraction should be included
in the activities covered by the rules and whether the Commission
should provide additional guidance on the types of activities that
would be considered ``directly related'' to the ``commercial
development of oil, natural gas, or minerals.''
All but one of the commenters that addressed this aspect of the
Proposing Release supported the proposed definition,\125\ stating that
it was consistent with established international transparency
standards.\126\ An industry commenter disputed that view, but otherwise
generally supported the proposed definition.\127\ The Department of
Interior also supported the definition despite noting that the USEITI
does not cover revenues from processing, exporting, or the acquisition
of licenses to engage in those activities.\128\
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\125\ See letters from ACEP; Department of Interior; Exxon Mobil
Corp. (Mar. 8, 2016) (``ExxonMobil 2''); Global Witness 1; Oxfam 1;
and PWYP-US 1. One commenter, Encana Corporation, did not expressly
support or object to our definition of commercial development of
oil, natural gas, or minerals, but rather requested that the
Commission provide additional guidance ``to clarify the activities
covered by the proposed terms used to define `commercial development
of oil, natural gas, or minerals.' '' See letter from Encana
Corporation (Jan. 25, 2016) (``Encana''). Specifically, Encana
requested guidance that would ``reflect consistency with the
definition of ``Oil and Gas Producing Activities'' in Rule 4-10 of
Regulation S-X and ``exclude post-extraction activities such as
refining, smelting, processing, marketing, distribution,
transportation, or export.''
\126\ See, e.g., letter from PWYP-US 1.
\127\ See letter from ExxonMobil 2.
\128\ See letter from Department of Interior.
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b. Guidance on ``Extraction,'' ``Processing,'' and ``Export''
In the Proposing Release we solicited comment on whether additional
guidance should be provided on the activities covered by the terms
``extraction,'' ``processing,'' or ``export'' and whether the proposed
definitions and guidance were too narrow or too broad. For the term
``export,'' we specifically asked whether the definition should be
broadened to include all transportation from one country to another,
regardless of ownership interest or whether the resource originated in
the country from which it is being transported.
Several commenters supported the proposed definition of
``extraction'' and the proposed guidance on ``processing.'' \129\
Certain commenters, however, recommended providing additional guidance
on ``processing.'' \130\
[[Page 49369]]
For example, one commenter requested clarification that ``processing''
only includes ``initial processing activities that are integrated with
extraction operations'' and ``does not extend to ancillary or
preparatory activities such as manufacturing equipment or construction
of extraction sites.'' \131\ Another commenter requested additional
guidance on the scope of ``midstream'' activities that would be covered
by ``processing.'' \132\
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\129\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\130\ See letters from Encana and Petr[oacute]leo Brasileiro
S.A. (Feb. 16, 2016) (``Petrobras'').
\131\ See letter from Encana.
\132\ See letter from Petrobras.
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As for the definition of ``export,'' one commenter requested
clarification on whether that term covers commodity trading-related
activities and situations such as when an issuer exports oil, natural
gas, or minerals purchased from a government or from a state-owned
company.\133\ Another commenter requested clarification of the term
``mineral,'' stating that it could have a variety of meanings, such as
homogeneous crystalline substances (which would exclude gravel or non-
crystalline rocks) or naturally occurring inorganic solids (which would
exclude coa1).\134\
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\133\ See letter from Poretti.
\134\ See letter from Keith Bishop (Jan. 5, 2016) (``Bishop'').
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3. Final Rules
We are adopting the proposed definition of ``commercial development
of oil, natural gas, or minerals'' but with additional guidance on its
application. Although commenters pointed out that both the statutory
definition and the proposed definition are broader than the activities
typically covered by the EITI \135\ and, in some respects, other
comparable disclosure regimes,\136\ most commenters supported the
proposal.
---------------------------------------------------------------------------
\135\ An EITI plan typically covers the ``upstream activities''
of exploration and production but not ``downstream activities,''
such as processing or export. The relevant multi-stakeholder group
does, however, have the option of expanding the scope of its EITI
program by including some downstream activities. See the EITI
Handbook, at 35.
\136\ For example, as discussed in Section I.C.1-2 above,
processing, export, and the acquisition of licenses are not
specifically mentioned by the EU Directives, and ESTMA generally
does not include processing or export.
---------------------------------------------------------------------------
Despite one commenter's recommendation that the final rules exclude
``processing'' and ``export,'' both terms are expressly included in the
statutory definition, and we believe that these are important aspects
of the commercial development of oil, natural gas, or minerals.\137\
Although there are differences between the definition we are adopting
today and that used in other transparency regimes, we believe our
approach enhances international transparency by covering activities
similar to those covered by the EU Directives, Canada's ESTMA, and the
EITI, while remaining consistent with Section 13(q).\138\ In this
regard, the final rules focus only on issuers engaged in the extraction
or production of oil, natural gas, or minerals. Where a service
provider makes a payment to a government on behalf of a resource
extraction issuer that meets the definition of ``payment,'' the
resource extraction issuer will be required to disclose such payment.
---------------------------------------------------------------------------
\137\ See letter from Encana. In light of the statutory
definition and the purpose of Section 13(q), we are not narrowing
the definition of ``commercial development'' to make it consistent
with the definition of ``Oil and Gas Producing Activities'' in Rule
4-10 of Regulation S-X. The definition of ``Oil and Gas Producing
Activities'' in Rule 4-10 of Regulation S-X excludes all natural
resources other than oil and gas. Using that definition would
exclude minerals and be contrary to the plain language of Section
13(q). Moreover, narrowing the definition in that manner would limit
the level of transparency provided by the final rules and would be
significantly different from the approach taken in the EU
Directives, ESTMA, and the EITI. In the 2012 Adopting Release we
took the same approach in response to similar suggestions from
commenters. See 2012 Adopting Release, Section II.C.3
\138\ The EU Directives cover ``exploration, prospection,
discovery, development, and extraction of minerals, oil, natural gas
deposits or other materials.'' See, e.g., EU Accounting Directive,
Art. 41(1). ESTMA defines ``commercial development of oil, gas or
minerals'' as ``(a) the exploration or extraction of oil, gas or
minerals; (b) the acquisition or holding of a permit, licence, lease
or any other authorization to carry out any of the activities
referred to in paragraph (a); or (c) any other prescribed activities
in relation to oil, gas or minerals.''
---------------------------------------------------------------------------
Although we are adopting the general definition of ``commercial
development of oil, natural gas, or minerals'' as proposed, as well as
reiterating much of the related guidance, we are revising certain key
terms found in that definition in response to commenters' concerns. We
note, however, that whether an issuer is a resource extraction issuer
ultimately depends on the specific facts and circumstances. We are
adopting the definition of ``extraction'' as proposed. Thus,
``extraction'' means the production of oil and natural gas as well as
the extraction of minerals.\139\ Also as proposed, ``processing''
includes, but is not limited to, midstream activities such as the
processing of gas to remove liquid hydrocarbons, the removal of
impurities from natural gas prior to its transport through a pipeline,
and the upgrading of bitumen and heavy oil, through the earlier of the
point at which oil, gas, or gas liquids (natural or synthetic) are
either sold to an unrelated third party or delivered to a main
pipeline, a common carrier, or a marine terminal. It also includes the
crushing and processing of raw ore prior to the smelting phase.\140\
``Processing'' does not include downstream activities, such as refining
or smelting. As we noted in the Proposing Release, the focus of the
disclosures required by Section 13(q) is on transparency in connection
with the payments that resource extraction issuers make to governments.
Those payments are primarily generated by ``upstream'' activities like
exploration and extraction and not in connection with refining or
smelting.\141\ Finally, we note that including refining or smelting
within the rules under Section 13(q) would go beyond what is
contemplated by the statute, EITI, EU Directives, and ESTMA.\142\
---------------------------------------------------------------------------
\139\ Proposed Item 2.01(c)(5) of Form SD.
\140\ See proposed Instruction 7 to Item 2.01 of Form SD.
\141\ We also noted in the Proposing Release that in other
contexts Congress has treated midstream activities like
``processing'' and downstream activities like ``refining'' as
separate activities, which further supports our view that Congress
did not intend to include ``refining'' and ``smelting'' as
``processing'' activities. For example, the Sudan Accountability and
Divestment Act of 2007 (``SADA''), which also relates to resource
extraction activities, specifically includes ``processing'' and
``refining'' as two distinct activities in its list of ``mineral
extraction activities'' and ``oil-related activities . . .'' See 110
P.L. No. 174 (2007). Similarly, the Commission's oil and gas
disclosure rules exclude refining and processing from the definition
of ``oil and gas producing activities'' (other than field processing
of gas to extract liquid hydrocarbons by the company and the
upgrading of natural resources extracted by the company other than
oil or gas into synthetic oil or gas). See Rule 4-10(a)(16)(ii) of
Regulation S-X [17 CFR 210.4-10(a)(16)(ii)] and 2012 Adopting
Release, n. 108.
\142\ See, e.g., the EITI Handbook, at 35; EU Accounting
Directive, Art. 41(1) (including ``exploration, prospection,
discovery, development, and extraction'' in the definition of an
``undertaking active in the extractive industry,'' but not including
refining or smelting). See also ESTMA Guidance at Section 1
(``Commercial development generally does not include post-extraction
activities. Refining, smelting or processing of oil, gas or
minerals, as well as the marketing, distribution, transportation or
export, is generally not captured as commercial development for the
purposes of the Act. However, certain initial processing activities
are often integrated with extraction operations and may comprise
commercial development of oil, gas or minerals.'')
---------------------------------------------------------------------------
The final rules define ``export'' as the transportation of a
resource from its country of origin to another country by an issuer
with an ownership interest in the resource, with certain exceptions
described below.\143\ This definition of the term ``export'' reflects
the significance of the relationship between upstream activities such
as exploration and extraction and the categories of payments to
governments identified in the statute. In contrast, we do not believe
that Section 13(q) was intended to capture payments related to
transportation on a fee-for-service basis
[[Page 49370]]
across an international border by a service provider with no ownership
interest in the resource.\144\ Nor do we believe that ``export'' was
intended to capture activities with little relationship to upstream or
midstream activities, such as commodity trading-related activities.
Accordingly, the definition of ``export'' we are adopting does not
cover the movement of a resource across an international border by a
company that (a) is not engaged in the exploration, extraction, or
processing of oil, natural gas, or minerals and (b) acquired its
ownership interest in the resource directly or indirectly from a
foreign government or the Federal Government.\145\ The definition does
cover, however, the purchase of such government-owned resources by a
company otherwise engaged in resource extraction due to the stronger
link between the movement of the resource across an international
border and the upstream development activities. This link would be
particularly strong in instances where the company is repurchasing
government production entitlements that were originally extracted by
that issuer.\146\
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\143\ See Item 2.01(d)(4) of Form SD.
\144\ It is noteworthy that Section 13(q) includes export, but
not transportation, in the list of covered activities. In contrast,
SADA specifically includes ``transporting'' in the definition of
``oil and gas activities'' and ``mineral extraction activities.''
The inclusion of ``transporting'' in SADA, in contrast to the
language of Section 13(q), suggests that the term export means
something different than transportation.
\145\ See Item 2.01(d)(4) of Form SD. See also letter from
Poretti (seeking clarification of the scope of ``export'' under the
rules).
\146\ See Section C below for a more detailed discussion of when
and how such payments must be reported.
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Contrary to the recommendation of one commenter, we have not
defined ``minerals'' in the final rules.\147\ Although ESTMA defines
minerals as ``all naturally occurring metallic and non-metallic
minerals, including coal, salt, quarry and pit material, and all rare
and precious minerals and metals,'' the EU Directives do not provide a
definition.\148\ We believe that this term is commonly understood in
the industry,\149\ as are the terms ``oil'' and ``natural gas,'' and is
not ``indefinite'' as claimed by this commenter.\150\ We also believe
that the commonly understood meaning of ``mineral'' is consistent with
the definition of that term in ESTMA described above.
---------------------------------------------------------------------------
\147\ See letter from Bishop.
\148\ ESTMA, Section 2.
\149\ In this regard, we note that none of the industry
commenters, or for that matter any commenters other than Bishop,
indicated a need to define this term. We believe that this also
supports our view that, as commonly used when referring to mineral
resources, ``mineral'' refers to the broader, non-technical meaning,
which is any organic or inorganic natural resource extracted from
the earth for human use.
\150\ We do note, however, that we consider the commonly
understood meaning of ``mineral'' to include, at a minimum, any
solid material for which an issuer with mining operations would
provide disclosure under the Commission's existing disclosure
requirements and policies, including Industry Guide 7, or any
successor requirements or policies. The Commission's staff has
previously provided similar guidance. See Disclosure of Payments by
Resource Extraction Issuers FAQ 3 (May 30, 2013), available at
https://www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm.
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The definition of ``commercial development of oil, natural gas, or
minerals'' in the final rules does not capture activities that are
ancillary or preparatory to such commercial development.\151\ We do not
consider an issuer that is only providing products or services that
support the exploration, extraction, processing, or export of such
resources to be a ``resource extraction issuer,'' such as an issuer
that manufactures drill bits or provides hardware to help companies
explore and extract.\152\ Similarly, an issuer engaged by an operator
to provide hydraulic fracturing or drilling services, thus enabling the
operator to extract resources, is not a resource extraction issuer.
Nevertheless, a resource extraction issuer must disclose payments when
a service provider makes a payment to a government on its behalf that
meets the definition of ``payment'' in the final rules.\153\
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\151\ This is consistent with Canada's ESTMA. See ESTMA Guidance
at Section 1 (``Commercial development is not intended to extend to
ancillary or preparatory activities for the exploration or
extraction of oil, gas or minerals. For example, activities such as
manufacturing equipment or construction of extraction sites would
not be included.'')
\152\ Marketing activities would also not be included. Section
13(q) does not include marketing in the list of activities covered
by the definition of ``commercial development.'' In addition,
including marketing activities within the final rules under Section
13(q) would go beyond what is covered by the EITI and other
international regimes. See, e.g., the EITI Handbook, at 35. For
similar reasons, the definition of ``commercial development'' does
not include activities relating to security support. See 2012
Adopting Release at Section II.D for a related discussion of
payments for security support.
\153\ As we discuss in Section II.I.3 below, we are providing
for delayed reporting for payments related to exploratory
activities. See Item 2.01(b) of Form SD.
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C. Definition of ``Payment''
1. Proposed Rules
Section 13(q) defines ``payment'' to mean a payment that:
Is made to further the commercial development of oil,
natural gas, or minerals;
is not de minimis; and
includes taxes, royalties, fees (including license fees),
production entitlements, bonuses, and other material benefits, that the
Commission, consistent with the EITI's guidelines (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 definition of ``payment'' included the specific types
of payments identified in the statute, as well as payments of certain
dividends and infrastructure payments.
Consistent with Section 13(q), the proposed rules required a
resource extraction issuer to disclose taxes. In addition, the proposed
rules included an instruction stating that a resource extraction issuer
would be required to disclose payments for taxes levied on corporate
profits, corporate income, and production, but would not be required to
disclose payments for taxes levied on consumption, such as value added
taxes, personal income taxes, or sales taxes.\154\ In response to
earlier concerns expressed about the difficulty of allocating certain
payments that are made for obligations levied at the entity level, such
as corporate taxes, to the project level,\155\ the proposed rules
provided that issuers could disclose those payments at the entity
level.\156\
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\154\ See proposed Instruction 8 to Item 2.01 of Form SD.
\155\ See 2012 Adopting Release, n.155 and accompanying text.
\156\ See proposed Instruction 4 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
Also consistent with Section 13(q), the proposed rules required a
resource extraction issuer to disclose fees, including license fees,
and bonuses paid to further the commercial development of oil, natural
gas, or minerals. The proposed rules included an instruction stating
that fees include rental fees, entry fees, and concession fees, and
that bonuses include signature, discovery, and production bonuses.\157\
The fees and bonuses identified, however, were not an exclusive list,
and under the proposed rules, the issuer could have been required to
disclose other fees and bonuses as well.
---------------------------------------------------------------------------
\157\ See proposed Instruction 9 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
For payments of dividends, which, along with infrastructure
payments, is not specified in the statute, an instruction in the
proposed rules stated that an issuer generally would not need to
disclose dividends paid to a government as a common or ordinary
shareholder of the issuer as long as the dividend is paid to the
government under the same terms as other shareholders.\158\ Under the
proposed
[[Page 49371]]
rules, the issuer would, however, have been required to disclose any
dividends paid to a government in lieu of production entitlements or
royalties. Under the proposed approach, ordinary dividend payments were
not considered part of the commonly recognized revenue stream, because
they are not made to further the commercial development of oil, natural
gas, or minerals.\159\ We also proposed requiring a resource extraction
issuer to disclose in-kind payments.\160\ The proposed rules specified
that an issuer must report in-kind payments at cost, or if cost was not
determinable, fair market value, and required the issuer to provide a
brief description of how the monetary value was calculated.\161\
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\158\ See proposed Instruction 10 to Item 2.01 of Form SD.
\159\ See Proposing Release, at Section II.C.1.
\160\ See proposed Instruction 11 to Item 2.01 of Form SD.
\161\ See proposed Instruction 11 to Item 2.01 of Form SD. See
also Section 3(e) of ESTMA (``[T]he value of a payment in kind is
the cost to the entity--or, if the cost cannot be determined, the
fair market value--of the goods and services that it provided.'').
The EU Directives do not specify how in-kind payments should be
calculated, but require ``supporting notes . . . to explain how
their value has been determined.'' See, e.g., Section 43(3) of the
EU Accounting Directive.
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The proposed rules defined a ``not de minimis'' payment as one that
equals or exceeds $100,000, or its equivalent in the issuer's reporting
currency, whether made as a single payment or series of related
payments.\162\ Finally, the proposed rules required disclosure of
activities or payments that, although not within the categories
included in the proposed rules, are part of a plan or scheme to evade
the disclosure requirements under Section 13(q).\163\
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\162\ See proposed Item 2.01(c)(8)(ii) of Form SD. For example,
a resource extraction issuer that paid a $150,000 signature bonus
would be required to disclose that payment. The proposed definition
also clarified that disclosure would be required for related
periodic payments (e.g., rental fees) when the aggregate amount of
such payments exceeds the payment threshold. This is similar to
other instructions in our rules requiring disclosure of a series of
payments. See, e.g., Instructions 2 and 3 to Item 404(a) of
Regulation S-K (17 CFR 229.404(a)). Therefore, under the proposed
rules, a resource extraction issuer obligated to pay royalties to a
government annually and that paid $10,000 in royalties on a monthly
basis to satisfy its obligation would be required to disclose
$120,000 in royalties.
\163\ See proposed Rule 13q-1(b).
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2. Comments on the Proposed Rules
a. Types of Payments
In the Proposing Release we solicited comment on whether we should
add other payment types, such as CSR payments, or remove certain
payment types from the proposed list. In particular, we asked whether
other types of payments should be considered part of the commonly
recognized revenue stream for the commercial development of oil,
natural gas, or minerals. We also asked whether the Commission should
provide additional guidance on how to interpret the proposed list of
covered payment types, particularly whether additional guidance should
be provided on the types of fees or bonuses that would be covered by
the rules and how to distinguish CSR payments from infrastructure
payments. Finally, we also included a request for comment on whether
the rules should prescribe a specific method for determining the fair
market value of in-kind payments.
Several commenters supported the proposed definition of
``payment,'' \164\ while others recommended adding additional payment
types or changing our approach to particular payment types. A number of
commenters, including one industry commenter, recommended adding CSR
payments to the definition.\165\ These commenters stated that CSR
payments are common in the industry and should be considered part of
the commonly recognized revenue stream for resource extraction.\166\
One of these commenters also questioned the characterization in the
Proposing Release that the European Union and Canada are consistent in
not requiring CSR payments.\167\ An industry commenter was particularly
concerned with distinguishing between CSR payments and infrastructure
payments and recommended requiring both types of payments when required
by contract with the host government.\168\ Another industry commenter,
however, opposed including CSR payments, stating that those payments
were not part of the commonly recognized revenue stream due to their
``philanthropic or voluntary . . . nature.'' \169\
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\164\ See letters from ACEP; Encana; Department of Interior;
Global Witness 1; Oxfam 1; PWYP-US 1; and USAID.
\165\ See letters from ACEP; Prof. Harry G. Broadman and Bruce
H. Searby (Jan. 25, 2016) (``Broadman & Searby''); Exxon Mobil Corp.
(Feb. 16, 2016) (``ExxonMobil 1''); Eugen Falik (Mar. 7, 2016)
(``Falik''); Global Witness 1; Oxfam 1; PWYP-US 1; and USAID.
\166\ See, e.g., Broadman & Searby and ExxonMobil 1.
\167\ See Broadman & Searby (stating that ``there is no
consistency after all between Europe's and Canada's regimes to which
the Commission should adhere for the sake of equalizing standards
and reporting burdens.''). See note 212 below and accompanying text.
\168\ See letter from ExxonMobil 1.
\169\ See letter from Encana.
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Several commenters recommended adding commodity trading-related
payments to the definition of ``payment.'' \170\ These commenters
stated that purchases of resources sold by a government or a state-
owned company are prone to corruption and are part of the commonly
recognized revenue stream for the commercial development of oil,
natural gas, or minerals. They also stated that in many countries
commodity trading-related payments constitute the largest revenue
stream to the government. Another commenter expressed uncertainty as to
whether such payments were covered by the proposed rules and noted that
confusion may arise for others as well since the current EITI Standard
leaves it to the discretion of a country's multi-stakeholder group
whether to require the reporting of payments to governments for the
purchase of natural resources by buying companies.\171\ Other
commenters stated that covering commodity trading-related payments
would inappropriately expand the reach of the rules beyond payments
associated with in-country extractive development and would
substantially increase the cost of reporting without apparent
benefit.\172\ These commenters stated that such an approach would
double-count government revenues given that the government's share of
production is already required to be disclosed under the rules.
---------------------------------------------------------------------------
\170\ See letters from PWYP-US 1; NRGI 1. See also letters from
ACEP; Global Witness 1; and Oxfam 1.
\171\ See letter from Poretti (noting that some EITI reports
(e.g., Iraq's EITI Reports for the years 2011, 2012, and 2013)
contain information about payments reported by buyers of exported
crude oil).
\172\ See letters from API (Mar. 8, 2016) (``API 2'') and
ExxonMobil 2.
---------------------------------------------------------------------------
Beyond CSR payments and commodity trading-related payments,
commenters recommended that the rules cover other types of payments,
such as when an issuer covers government expenses, provides jobs to
persons related to government officials, or invests in companies
created by officials or related persons.\173\ For example, one
commenter recommended that guidance be added to either the discussion
of reportable payments or the proposed anti-evasion provision
indicating that payments in excess of the de minimis threshold should
be disclosed if: (1) The payments were subtracted from or substituted
for otherwise reportable payments; (2) the payments were requested by
or associated with a government official suspected of corruption; or
(3) the payments raise corruption concerns, including by creating an
appearance of possible corruption, and those payments would otherwise
be undisclosed to the public.\174\ Another commenter recommended
including fines and
[[Page 49372]]
penalties in the definition.\175\ This commenter also stated that the
EITI standard requires ``any other significant payments and material
benefit to government'' to be reported and that the USEITI's multi-
stakeholder group has interpreted that to include penalties.\176\ This
commenter noted that fines and penalties represent significant payments
to governments and that Section 13(q) instructs the Commission to
define payment consistently with the EITI standard.
---------------------------------------------------------------------------
\173\ See letters from Bean and USAID.
\174\ See letter from Bean.
\175\ See letter from TI-USA.
\176\ Section 4.1(b) of EITI Standard.
---------------------------------------------------------------------------
Commenters supported the proposed requirement for issuers to
disclose the method they used to calculate the value of in-kind
payments.\177\ One commenter recommend that in-kind payments be
reported at cost or fair market value, as determined by the issuer,
rather than allowing only the use of fair market value if cost is not
determinable.\178\ This commenter also noted that, under ESTMA, in-kind
payments are reported at the cash value of the production entitlements
that the payee takes possession of during the relevant financial
period. Several other commenters supported requiring issuers to
disclose the volume of resources associated with the in-kind
payments.\179\ These commenters noted that the EU Directives require
disclosure of volume and that such a requirement would enhance
government accountability and understanding of an issuer's
methodology.\180\ Another commenter, however, stated that adding a
requirement for issuers to report the volume of in-kind payments is
unnecessary and could cause competitive harm by effectively disclosing
contractual selling prices.\181\ This commenter stated that reporting
fair market value of in-kind payment types was sufficient.\182\ Another
commenter requested that the Commission provide examples for
determining fair market value for in-kind payments.\183\
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\177\ See letters from Encana and PWYP-US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
\178\ See letter from Encana.
\179\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\180\ See EU Accounting Directive, Art. 43(3) (``Where payments
in kind are made to a government, they shall be reported in value
and, where applicable, in volume.'')
\181\ See letter from ExxonMobil 2.
\182\ Although ExxonMobil only mentions using fair market value
and not cost, from the context it does not appear to be recommending
a change to our proposed approach that calls for cost reporting, or
if cost is not determinable, fair market value.
\183\ See letter from Petrobras.
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A number of commenters also requested additional guidance on the
types of payments covered by the rules.\184\ Several commenters
supported including a non-exclusive list of the types of royalties in a
manner similar to what was proposed for fees and bonuses.\185\ The
recommended instruction would further clarify that the examples of
fees, bonuses, and royalties are non-exclusive and the list of
royalties would include unit based, value-based, and profit-based
royalties. One commenter requested additional guidance on how to
isolate the corporate income tax payments made on income generated from
the commercial development of oil, natural gas, or minerals given that
income earned from business activities beyond resource extraction would
be taxed as well.\186\ Another commenter recommended clarifying in Form
SD that payments may be reported either on a cash basis or on an
accrual basis.\187\ This commenter noted the contrast between the
Proposing Release, which seems to leave open the question as to whether
an issuer may elect to present payments on either basis, and prior
staff guidance, which indicates that payment information is required to
be presented on an unaudited, cash basis for the year in which the
payments are made.\188\
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\184\ See letters from Encana; ExxonMobil 1; Petrobras; and
PWYP-US 1. See also letters from ACEP; Global Witness 1; and Oxfam
1.
\185\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\186\ See letter from Petrobras.
\187\ See letter from Cleary.
\188\ See Dodd-Frank Wall Street Reform and Consumer Protect Act
FAQs: Disclosure of Payments by Resource Extraction Issuers (May 30,
2013) (``Resource Extraction FAQs''), FAQ 7, available at https://www.sec.gov/divisions/corpfin/guidance/faq.htm.
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b. The ``Not De Minimis'' Requirement
A key component of the definition of ``payment'' is how ``not de
minimis'' should be defined. In the Proposing Release, we solicited
comment on various aspects of this definition. For example, we
requested comment on whether a $100,000 threshold is too low or too
high, whether a different threshold should apply to smaller reporting
companies or other categories of issuers, and whether we should provide
additional guidance on how and when an issuer would have to aggregate a
series of related payments. If commenters thought a different threshold
should apply, we asked for their input on how that threshold would
interact with the thresholds established by other countries. We also
asked whether the final rules should include a mechanism to adjust
periodically the de minimis threshold to reflect the effects of
inflation.
Most commenters supported the proposed definition of ``not de
minimis.'' \189\ For example, the Department of Interior noted that it
was the same standard that is used in its disclosure of revenue
data.\190\ It also recommended not including an automatic adjustment
mechanism because a stable threshold would allow the USEITI and
industry to plan better for making ongoing disclosures. Several
commenters also noted the similarity of the proposed threshold to those
used in the European Union and Canada.\191\ Another commenter stated
that the threshold was ``unreasonably low for companies working on
massive scale projects'' and would thus be too costly.\192\ Finally,
one commenter requested clarification on whether the de minimis
threshold is meant to be calculated based on the currency conversion in
effect at the time of payment, or at the end of the period covered by
the report.\193\
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\189\ See letters from Department of Interior; Form Letter A;
PWYP-US 1; and Quinones. See also letters from ACEP; Global Witness
1; and Oxfam 1.
\190\ See letter from Department of Interior.
\191\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\192\ See letter from Nouveau (Feb. 16, 2016) (``Nouveau'').
\193\ See letter from Bishop.
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c. Anti-Evasion Provision
In the Proposing Release we also solicited comment on whether the
proposed anti-evasion provision would promote compliance with the
disclosure requirements and whether we should provide additional
guidance on when the anti-evasion provision would apply. Several
commenters supported this provision.\194\ As described above, one
commenter recommended that guidance be added to either the discussion
of reportable payments or the proposed anti-evasion provision
indicating that payments in excess of the de minimis threshold should
be disclosed if: (1) The payments were subtracted from or substituted
for otherwise reportable payments; (2) the payments were requested by
or associated with a government official suspected of corruption; or
(3) the payments raise corruption concerns, including by creating an
appearance of possible corruption, and those payments would otherwise
be undisclosed to the public.\195\ Several other commenters endorsed
the proposed anti-evasion provision, but recommended adding language
stating that ``activities and payments must not be artificially
[[Page 49373]]
structured, split or aggregated to avoid application of the rules.''
\196\
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\194\ See letters from Bean; PWYP-US 1; Sen. Cardin et al.; and
Sen. Lugar et al. See also letters from ACEP; Global Witness 1; and
Oxfam 1.
\195\ See letter from Bean.
\196\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
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3. Final Rules
We are adopting the proposed definition of ``payment'' with certain
changes to the rule and related guidance. The definition we are
adopting includes the specific types of payments identified in the
statute as well as CSR payments that are required by law or contract,
payments of certain dividends, and payments for infrastructure. As we
noted in the Proposing Release, the statute and the EITI guidelines
include most of the types of payments included in the definition.\197\
Most of the components of our definition of ``payment'' are also used
in the EU Directives and ESTMA. Thus, including them is consistent with
the statutory directive for our rules to support international
transparency promotion efforts.
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\197\ See EITI Standard, at 23.
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In addition to the types of payments expressly included in the
definition of payment in the statute, Section 13(q) provides that the
Commission include within the definition ``other material benefits''
that it determines are ``part of the commonly recognized revenue stream
for the commercial development of oil, natural gas, or minerals.''
According to Section 13(q), these ``other material benefits'' must be
consistent with the EITI's guidelines ``to the extent practicable.''
\198\ The other material benefits we have included in the final rules--
CSR payments required by law or contract, dividends, and infrastructure
payments--are all found in the EITI guidelines as well.\199\
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\198\ 15 U.S.C. 78m(q)(1)(C)(ii).
\199\ See the EITI Standard at Sections 4.1(b) (dividends), 4.3
(infrastructure payments), and 6.1 (social expenditures).
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Unlike with the 2012 Proposing Release, none of the commenters on
the Proposing Release suggested a broad, non-exhaustive list of payment
types or a category of ``other material benefits.'' In light of this,
and because we continue to believe that Section 13(q) directs us to
make an affirmative determination that the other ``material benefits''
are part of the commonly recognized revenue stream, we are not adopting
such a non-exclusive list or category. Accordingly, under the final
rules, resource extraction issuers will be required to disclose only
those payments that fall within the specified list of payment types in
the rules.
We have determined that the payment types specified in the rules
represent material benefits that are part of the commonly recognized
revenue stream and that otherwise meet the definition of ``payment.''
In support of this determination, we note that the EU Directives and
ESTMA also require most of these payment types to be disclosed.\200\ In
this regard, we also looked to the EITI and determined that it would be
appropriate to add some of the types of payments included under the
EITI that are not explicitly mentioned under Section 13(q). As such,
the final rules require disclosure of CSR payments that are required by
law or contract, dividend, and infrastructure payments. We note that
none of the commenters on the Proposing Release objected to the
inclusion of dividend and infrastructure payment, while views were
mixed on CSR payments. We also note that payments for infrastructure
improvements have been required under the EITI since at least
2011,\201\ payments for dividends since at least 2005,\202\ and CSR
payments that are required by law or contract since 2013.\203\
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\200\ See, e.g., EU Accounting Directive, Art. 41(5) and Section
2 of ESTMA (both including, as discussed in Section I.C above, the
following payment types: Production entitlements, taxes, royalties,
dividends, bonuses, fees, and infrastructure payments).
\201\ In February 2011, the EITI Board issued revised EITI rules
that require participants to develop a process to disclose
infrastructure payments under an EITI program. See EITI Rules 2011,
available at https://eiti.org/document/rules. See also EITI
Requirement 9(f) in EITI Rules 2011, at 22 (``Where agreements based
on in-kind payments, infrastructure provision or other barter-type
arrangements play a significant role in the oil, gas or mining
sectors, the multi-stakeholder group is required to agree [to] a
mechanism for incorporating benefit streams under these agreements
in to its EITI reporting process. . . .'') and EITI Standard, at 24
(``The multi-stakeholder group and the independent administrator are
required to consider whether there are any agreements, or sets of
agreements, involving the provision of goods and services, including
loans, grants and infrastructure works, in full or partial exchange
for oil, gas or mining exploration or production concessions or
physical delivery of such commodities. . . Where the
multistakeholder group concludes that these agreements are material,
the multistakeholder group and the Independent Administrator are
required to ensure that the EITI Report addresses these agreements,
providing a level of detail and transparency commensurate with the
disclosure and reconciliation of other payments and revenues
streams.'').
\202\ See EITI, Source book, Chapter 2, Section D (Mar. 2005).
\203\ As is currently the case under the 2016 EITI Standard, the
2013 version of the EITI Standard required social contribution
payments to be disclosed if the company was legally or contractually
required to make those payments.
---------------------------------------------------------------------------
The proposed rules did not require the disclosure of CSR payments.
We noted in the Proposing Release that other recently enacted
international transparency promotion efforts, such as the EU Directives
and ESTMA, do not include CSR payments as a specified covered payment
type. Although we noted that the EITI includes the disclosure of
material ``social expenditures'' in an EITI report when those
expenditures are required by law or contract,\204\ we stated that
disclosure of CSR payments appeared to be outside of the scope of the
more recent international efforts in the European Union and
Canada.\205\ In addition, we noted that there was no clear consensus
among the commenters on whether the proposed rules should include CSR
payments as part of identified payments that are required to be
disclosed.\206\ Nevertheless, we sought public input on the matter.
---------------------------------------------------------------------------
\204\ See EITI Standard, at 28 (``Where material social
expenditures by companies are mandated by law or the contract with
the government that governs the extractive investment, the EITI
Report must disclose and, where possible, reconcile these
transactions.'').
\205\ See EU Accounting Directive, Art. 41(5) and ESTMA, Section
2, both of which list types of payments covered by their respective
disclosure regulations without including CSR payments. But see ESTMA
Guidance, Section 3.5 (outlining that ``payments made for corporate
social responsibility purposes'' may be required to be disclosed if
``made in lieu of one of the payment categories that would need to
be reported under [ESTMA]'').
\206\ See Proposing Release, n.148 and accompanying text.
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Upon further consideration of our approach in the proposed rules
and taking into account the comments discussed above, we believe that
CSR payments that are required by law or contract are part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas, or minerals.\207\ As noted above, CSR payments that
are required by law or contract must be disclosed under the EITI. Also,
as noted by one commenter, ``[p]ublic manifestations of how common in
[the resource extraction] industry CSR payments have become include
prolific conferences, studies, guidance, and compliance manuals.''
\208\
[[Page 49374]]
Notably, this view was not limited to academia or civil society
organizations. One industry commenter also stated that CSR payments are
part of the commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals, at least when required by
law or contract.\209\ Furthermore, there is other evidence supporting
the significant role that CSR payments have in the extractive
industries. For example, several EITI implementing countries already
disclose mandatory or voluntary social expenditures in their EITI
Reports.\210\ In addition, several issuers already report their
required or voluntary CSR payments.\211\ We recognize that significant
disclosure regimes such as the EU Directives and ESTMA do not include
CSR payments as a specified covered payment type. Nonetheless, we find
that the evidence on balance supports the conclusion that such payments
are now part of the commonly recognized revenue stream for the
commercial development of oil, natural gas, or minerals.\212\
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\207\ We note that our decision to require disclosure of such
payments is further supported by the fact that such payments can be
used as a mechanism for the corrupt or suspicious diversion of
payment revenues to governmental officials for their personal use.
See, e.g., Ken Silverstein, The Secret World of Oil 79 (2014)
(noting that ``money specifically marked for social programs has
been stolen'' by the leaders of Equatorial Guinea and quoting a
court filing by the U.S. Department of Justice that states: ``The
Inner Circle routinely demands that companies operating in E.G.
contribute money to what are disguised as public service campaigns
[to build housing and other social programs. However] the
contributions are not used for their alleged purpose, but instead
are largely taken by members of the Inner Circle . . . for their
personal benefit.'') (bracketed additions were included in The
Secret World of Oil).
\208\ See letter from Broadman & Searby (noting publications
such as IPIECA, Creating Successful, Sustainable Social Investment:
Guidance document for the oil and gas industry (2008); Alison
Colwell of BSR, Driving Business and Social Benefits Through
Inclusive Community Investment (July 2015); Anglo American Corp.,
Socio-Economic Assessment Toolbox, Version 3 (2013); FSG, ``Shared
Value In Extractives,'' prepared materials for the Next-Gen CSR and
Shared Value Forum (Feb. 2014); FSG, ``Extracting with Purpose:
Creating Shared Value in the Oil and Gas Band Mining Sectors'
Companies and Communities'' (Oct. 2014).
\209\ See letter from ExxonMobil 1.
\210\ See EITI Guidance, Note 17 (Apr. 24, 2014) (noting that
Kazakhstan, Kyrgyzstan, Liberia, Mongolia, Mozambique, Peru,
Republic of Congo, Togo, Yemen and Zambia require or reconcile
social expenditures in their EITI reports).
\211\ See, e.g., Statoil ASA, 2015 Sustainability Report, p. 29
(disclosing that in 2015 Statoil made NOK 37 million in social
investments, of which NOK 5 million were contractual obligations);
Newmont Mining Corporation, Beyond the Mine-Our 2014 Social and
Environmental Performance (reporting that Newmont invested $28
million globally ``to support a wide range of community
investments''); Kosmos Energy Ltd., 2014 Corporate Responsibility
Report (reporting that Kosmos Energy spent $2,936,000 in social
investments in 2014); BHP Billiton Ltd., 2015 Sustainability Report
(reporting that BHP's voluntary community investment totaled $225
million USD in 2015); and Tullow Oil plc, 2015 Corporate
Responsibility Report (disclosing that Tullow spent $7,537,000 on
discretionary social projects in 2015).
\212\ One commenter questioned our conclusion in the Proposing
Release that the European Union and Canada were consistent in
generally not requiring disclosure of CSR payments, particularly
with respect to Canada. See letter from Broadman & Searby. Although
Canada does not list CSR payments as a separate payment type, the
ESTMA Guidance states that ``the onus is on the Reporting Entity to
determine whether a voluntary or philanthropic payment does in fact
relate in some way to its commercial development of oil, gas or
minerals. This may include payments for corporate social
responsibility purposes.'' In this regard, the guidance also states
that entities ``should look to the substance, rather than the form,
of payments in determining which [payment] category is applicable.''
ESTMA Guidance, Section 3.5. The ESTMA Guidance further states that
``payments made for corporate social responsibility purposes'' may
be required to be disclosed if ``made to a payee in lieu of one of
the payment categories that would need to be reported under
[ESTMA].'' Id. Finally, the ESTMA Guidance provides an example of
how providing a local municipal government with a payment for a
scholarship endowment and to build a community center should be
reported under the bonus payment category. Id. at Box A.
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We do not believe it is appropriate to add the other payment types
recommended by some commenters because we have not determined that they
are material benefits that are part of the commonly recognized revenue
stream for the commercial development of oil, natural gas, or minerals.
With respect to commodity trading-related payments, we believe that our
definition of ``export'' and the categories of payments in the final
rules, particularly in-kind payments, accurately reflect the commonly
recognized revenue stream for the commercial development of oil,
natural gas, or minerals. We acknowledge that significant payments may
be made by buying/trading companies and others to purchase the
commodities covered by the final rules. Nevertheless, we do not believe
that purchasing or trading oil, natural gas, or minerals, even at a
level above the de minimis threshold, is on its own sufficiently
related to the ``commercial development'' of those resources to be
covered by the rules, particularly when the rules already require
disclosure of in-kind payments of production entitlements. We have,
however, addressed below how such production entitlements must be
valued when initially made in-kind but subsequently purchased by the
same issuer from the recipient government.
We are also not specifically requiring disclosure of payments for
government expenses, providing jobs or tuition to persons related to
government officials, investing in companies created by officials or
related persons, or other similar payments that could reasonably raise
corruption concerns. We find it unnecessary to do so because, when
these payments are made to further the commercial development of oil,
natural gas or minerals (in connection with or in lieu of the
identified payments), they will already be covered by the anti-evasion
provision we are adopting.\213\
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\213\ See generally U.S. Senate Permanent Subcommittee on
Investigations, Committee on Government Affairs, Money Laundering
and Foreign Corruption: Enforcement and Effectiveness of the Patriot
Act, Case Study Involving Riggs Bank Report, at 98-111 (July 14,
2004) (providing examples of the roles that resource extraction
companies can play in facilitating the suspect or corrupt practices
of foreign officials seeking to divert resource extraction payments
that belong to the government).
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With respect to payments for fines and penalties, we do not believe
they relate sufficiently to the commercial development of natural
resources to warrant inclusion. Although we acknowledge that the USEITI
multi-stakeholder group has included penalties, we also note that the
EITI Standard does not address the reporting of penalties or fines. In
this regard, we understand that actual practice in countries applying
the EITI Standard appears to vary depending on the particular
interpretations of a country's multi-stakeholder group.\214\
Furthermore, we note that neither the EU Directives nor ESTMA include
fines or penalties as an explicit payment category.
---------------------------------------------------------------------------
\214\ Based upon our review of EITI reports published in English
on the EITI Web site, many of the reports do not report payments of
fines and penalties.
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We are adopting the proposed approach to in-kind payments with one
modification. In the past, many commenters supported the inclusion of
in-kind payments, particularly in connection with production
entitlements and none of the commenters on the Proposing Release
objected to their inclusion in the rules.\215\ We also note that the EU
Directives and ESTMA require disclosure of in-kind payments.\216\ In
addition to production entitlements, in-kind payments could include
building a road or school, refurbishing a government building, or
numerous other activities that do not involve providing monetary
payments to the host country government. Although certain commenters
recommended allowing issuers to choose between reporting in-kind
payments at cost or fair market value, we continue to believe that such
disclosure would be more consistent and comparable if issuers are
required to report in-kind payments at cost, and are only permitted to
report using fair market value if historical costs are not reasonably
available or determinable. We are providing guidance, however, on how
to report payments made to a foreign government or the Federal
Government to purchase the resources associated with production
entitlements that are reported in-kind.\217\ If the issuer must report
an in-kind production entitlement payment under the rules and then
repurchases the resources associated with the production
[[Page 49375]]
entitlement within the same fiscal year, the issuer must use the
purchase price (rather than using the valuation methods described
above) when reporting the in-kind value of the production entitlement.
If the in-kind production entitlement payment and the subsequent
purchase are made in different fiscal years and the purchase price is
greater than the previously reported value of the in-kind payment, the
issuer must report the difference in values in the latter fiscal year
if that amount exceeds the de minimis threshold. In other situations,
such as when the purchase price in a subsequent fiscal year is less
than the in-kind value already reported, no disclosure relating to the
purchase price is required. We believe that this approach more
accurately captures the value of in-kind payments for production
entitlements than the proposed approach and addresses commenters
concerns without adding significantly to the burden of resource
extraction issuers.
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\215\ See 2012 Adopting Release, nn.170, 211 and accompanying
text. In-kind payments include, for example, making a payment to a
government in oil rather than a monetary payment.
\216\ Article 41 of the EU Accounting Directive and Section 2 of
ESTMA specifically include ``in kind'' payments in their definitions
of ``payment.''
\217\ See Instruction 11 to Item 2.01 of Form SD.
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We have also considered whether to require issuers to report the
volume of in-kind payments. As discussed above, commenters were divided
on this suggestion.\218\ We generally agree with the commenter that
stated such information was unnecessary.\219\ Based on these
considerations, we are not requiring disclosure related to volume. We
note that issuers are required to provide a brief description of how
the monetary value was calculated, which will provide some additional
context for assessing the reasonableness of the disclosure.
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\218\ See Section II.C.2 above.
\219\ See letter from ExxonMobil 2.
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We are adopting as proposed an instruction setting forth a non-
exclusive list of fees (rental fees, entry fees, and concession fees)
and bonuses (signature, discovery, and production bonuses). As
discussed in the Proposing Release, the EITI specifically mentions
these types of fees and bonuses as payments that should be disclosed by
EITI participants.\220\ This supports our view that these types of fees
and bonuses are part of the commonly recognized revenue stream. As
recommended by certain commenters, we are also adding a non-exclusive
list of royalties since we believe that would provide additional
clarity for issuers.\221\ Thus, the term ``royalties'' would include,
but not be limited to, unit-based, value-based, and profit-based
royalties.\222\ Of course, resource extraction issuers may be required
to disclose other types of fees, bonuses, and royalties depending on
the particular facts and circumstances.
---------------------------------------------------------------------------
\220\ See EITI Standard, at 23.
\221\ See Instruction 9 to Item 2.01 of Form SD. See also letter
from PWYP-US 1.
\222\ These types of royalties were recommended by PWYP-US based
on the following publication: World Bank, Mining Royalties: Their
Impact on Investors, Government and Civil Society (2006), pp. 50-54,
available at https://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/09/11/000090341_20060911105823/Rendered/PDF/372580Mining0r101OFFICIAL0USE0ONLY1.pdf.
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In response to commenters' concerns about compliance costs, we
noted in the Proposing Release that issuers would not be required to
have the payment information audited or reported on an accrual
basis.\223\ As noted above, one commenter questioned whether this was a
shift from the position taken in prior staff guidance, which indicates
that issuers are not permitted to provide the payment information on an
accrual basis.\224\ We have revised Form SD to expressly state that the
payment information need not be audited and must be made on a cash
basis. As we discussed in the 2012 Adopting Release, we believe that
this is the best approach because (1) these payment disclosures are
largely cash-based, so reporting them on a cash basis will not result
in a significant compliance burden, and (2) requiring a consistent
approach will improve comparability and therefore result in greater
transparency.
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\223\ See Section II.G.5 of the Proposing Release.
\224\ Resource Extraction FAQ 7, available at https://www.sec.gov/divisions/corpfin/guidance/faq.htm.
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We are adopting the proposed definition of ``not de minimis'' for
the reasons stated in the Proposing Release. A ``not de minimis''
payment is one that equals or exceeds $100,000, or its equivalent in
the issuer's reporting currency,\225\ whether made as a single payment
or series of related payments. We continue to believe that this
definition provides a clear standard for determining which payments a
resource extraction issuer must disclose. Furthermore, several
countries have established payment thresholds that approximate the
proposed $100,000 standard.\226\ We believe that the establishment of a
similar payment threshold by these countries diminishes any potential
additional compliance burden and potential competitive harm that
otherwise could be caused by disclosure rules that include a payment
threshold that varies significantly from the standard used in other
jurisdictions. As discussed above, only one of the many commenters that
addressed the definition thought that the reporting threshold was too
low.\227\ Although we acknowledge this commenter's concerns that the
threshold might be considered low for companies working on ``massive''
scale projects, we note that none of the large issuers commenting on
the Proposing Release expressed similar concerns. For this reason and
the reasons stated above, we are not increasing the threshold.
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\225\ Instruction 2 to Item 2.01 allows an issuer to choose
several methods to calculate currency conversions for payments not
made in U.S. dollars or the issuer's reporting currency. We have
clarified in that instruction that the same methods are available to
issuers when calculating whether a payment not made in U.S. dollars
exceeds the de minimis threshold. However, an issuer must use a
consistent method for such de minimis payment currency conversions
and must disclose which method it used.
\226\ See EU Accounting Directive, Art. 43(1) and Recital 46
(using [euro]100,000, or approximately $112,280 (USD) as of June 16,
2016); UK Reports on Payments to Governments Regulations 2014 (2014
Statutory Instrument No. 3209), Part 1, 5.-(3) (using [pound]86,000,
or approximately $122,180 (USD) as of June 16, 2016); Norwegian
Regulations, Section 3 (using 800,000 kr, or approximately $95,302
(USD) as of June 16, 2016); and ESTMA, Section 9(2) (using $100,000
(CAD), or approximately $77,140 (USD) as of June 16, 2016).
\227\ See letter from Nouveau. Comments received prior to the
Proposing Release were divided on whether the threshold should be
increased or decreased. See Section II.C.2 of the Proposing Release
for a discussion of those comments.
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Finally, despite the changes recommended by commenters, we are
adopting the anti-evasion provision as proposed. Thus, the final rules
require disclosure with respect to an activity (or payment) that,
although not within the categories included in the proposed rules, is
part of a plan or scheme to evade the disclosure required under Section
13(q).\228\ This provision is designed and intended to emphasize
substance over form or characterization and to capture any and all
payments made for the purpose of evasion. Accordingly, we believe that
it covers most of the situations that appeared to concern commenters.
For example, the provision would cover payments that were substituted
for otherwise reportable payments in an attempt to evade the disclosure
rules,\229\ as well as activities and payments that were structured,
split, or aggregated in an attempt to avoid application of the
rules.\230\ Similarly, as noted in the Proposing Release, a resource
extraction issuer could not avoid disclosure by re-characterizing an
activity as transportation that would otherwise be covered under the
rules, or by making a payment to the government via a third party in
order to avoid disclosure under the proposed rules.
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\228\ See Rule 13q-1(b).
\229\ See letter from Bean.
\230\ See, e.g., letter from PWYP-US 1.
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[[Page 49376]]
D. Definition of ``Subsidiary'' and ``Control''
1. Proposed Rules
In addition to requiring an issuer to disclose its own payments,
Section 13(q) also requires a resource extraction issuer to disclose
payments by a subsidiary or an entity under the control of the issuer
made to a foreign government or the Federal Government relating to the
commercial development of oil, natural gas, or minerals. The proposed
rules defined the terms ``subsidiary'' and ``control'' using accounting
principles rather than other alternatives, such as using the
definitions of those terms provided in Rule 12b-2.\231\
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\231\ Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2],
``control'' (including the terms ``controlling,'' ``controlled by''
and ``under common control with'') is defined to mean ``the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting shares, by contract, or otherwise.''
Rule 12b-2 also defines a ``subsidiary'' of a specified person as
``an affiliate controlled by such person directly, or indirectly
through one or more intermediaries.'' See also the definitions of
``majority-owned subsidiary,'' ``significant subsidiary,'' and
``totally-held subsidiary'' in Rule 12b-2.
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Within the context of the proposed rules, a resource extraction
issuer would have ``control'' of another entity if the issuer
consolidated that entity or proportionately consolidated an interest in
an entity or operation under the accounting principles applicable to
the financial statements it includes in periodic reports filed pursuant
to Section 13(a) or 15(d) of the Exchange Act. Thus, for determining
the eligible payments, or portions thereof, that must be disclosed, the
resource extraction issuer would follow the consolidation requirements
under generally accepted accounting principles in the United States
(``U.S. GAAP'') or under the International Financial Reporting
Standards as issued by the International Accounting Standards Board
(``IFRS''), as applicable.\232\ The extent to which the entity making
the eligibility payment is consolidated would determine the extent to
which payments made by that entity must be disclosed. For example, a
resource extraction issuer that proportionately consolidates an
interest in an entity or an operation would be required to disclose the
issuer's proportionate amount of that entity's or operation's eligible
payments indicating the issuer's proportionate interest.
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\232\ See Accounting Standards Codification (``ASC'') 810,
Consolidation, IFRS 10, Consolidated Financial Statements and IFRS
11, Joint Arrangements for guidance. A foreign private issuer that
prepares financial statements according to a comprehensive set of
accounting principles, other than U.S. GAAP or IFRS, and files with
the Commission a reconciliation to U.S. GAAP would be required to
determine whether or not an entity is under its control using U.S.
GAAP.
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2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on how the term
``control'' should be defined. For example, we asked whether it was
preferable to base the definition of ``control'' on applicable
accounting principles, rather than using Rule 12b-2 of the Exchange
Act, and whether there would be significant differences between these
approaches. We also asked whether we should allow resource extraction
issuers to report eligible payments made by proportionately
consolidated entities on a proportionate basis. Finally, we solicited
comment on whether there were any aspects of other international
transparency initiatives or differences between U.S. GAAP and IFRS that
we should address so as to promote the comparability of this type of
disclosure.
All of the commenters addressing this aspect of the proposal
generally supported using accounting consolidation principles instead
of Rule 12b-2.\233\ Several of these commenters, however, stated that
using accounting principles would be acceptable only if the concept of
``significant influence'' was used in conjunction with proportional
consolidation.\234\ These commenters expressed concern that
proportional consolidation is optional for oil and gas companies under
U.S. GAAP and is rarely used. They were also concerned that companies
might structure joint ventures to avoid disclosure. Other commenters
disagreed with adding a ``significant influence'' concept to the
definition of control.\235\ For example, one expressed concerns about
the ability to access payment-level financial information from an
entity over which it only had ``significant influence.'' \236\ Another
commenter stated that there was no support for the assertion that joint
ventures would be structured to avoid disclosure and that any reporting
gap is inherent to Section 13(q), which applies only to companies
subject to the Commission's jurisdiction.\237\
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\233\ See letters from API 1; BP; Chevron Corporation (Feb. 16,
2016) (``Chevron''); Encana; ExxonMobil 1; Petrobras; PWYP-US 1; and
Royal Dutch Shell plc (Feb. 5, 2016) (``RDS''). See also letters
from ACEP; Global Witness; and Oxfam 1.
\234\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\235\ See letters from API 2 and ExxonMobil 2.
\236\ See letter from ExxonMobil 2.
\237\ See letter from API 2.
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Several of the commenters that otherwise supported the proposed
approach had concerns about using proportional consolidation to
determine control.\238\ These commenters were generally concerned that
issuers who use proportional consolidation might not have access to the
required payment information from operators of existing joint ventures.
These commenters stated that issuers have access only to high-level
data regarding revenues and costs of the proportionally consolidated
entities or operations. One of these commenters was concerned that the
resulting disclosure could be confusing or misleading because there
will be situations where an issuer has multiple operations with
different ownership interests that would be both operationally and
geographically interconnected and therefore would be classified as a
single project for reporting purposes.\239\ Another recommended
addressing this issue by clarifying that Rule 12b-21 would permit an
issuer to exclude information with respect to entities where the issuer
does not have access to the information required to be disclosed.\240\
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\238\ See letters from API 1; BP; Chevron; Encana; ExxonMobil 1;
Petrobras; and RDS.
\239\ See letter from ExxonMobil 1.
\240\ See letter from RDS.
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Several of the commenters who had concerns with proportional
consolidation for determining ``control'' recommended that when the
payments relate to joint ventures the rules should only require
disclosure of payments by the operator of the joint venture.\241\ Under
this recommendation, the operator would report all of the eligible
payments it makes, rather than its proportional share. A number of
these commenters indicated that this approach would be more consistent
with the requirements under the EITI, EU Directives, and ESTMA.\242\
One of these commenters recommended specific changes to the rules and
instructions that it stated would accomplish this purpose and would
clarify that ``control'' extends down an organizational chain to
entities controlled by other controlled entities.\243\ Other commenters
acknowledged that this recommended change to the Commission's proposed
definition of ``control'' could result in payments not being reported
when the operator of a joint venture is not subject to the rules, even
if minority partners in the joint venture are subject to the
rules.\244\ These commenters stated,
[[Page 49377]]
however, that a similar gap in coverage would exist under the proposed
definition when a company subject to the rule is the operator in a
joint venture but the joint venture partners are not subject to the
reporting requirement. In that situation, these commenters stated that
the operator would be required to report only its own proportional
share of the payment made to the host government.
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\241\ See letters from API 1; BP; Chevron; Encana; ExxonMobil 1;
and Petrobras.
\242\ See letters from API 1; BP; Chevron; Encana; and
ExxonMobil 1.
\243\ See letter from Encana.
\244\ See, e.g., letter from API 2.
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3. Final Rules
We are adopting the proposed definitions of ``subsidiary'' and
``control.'' We continue to believe that using accounting principles to
determine control, rather than Rule 12b-2, is appropriate in light of
the significant international developments since the 2012 Rules were
vacated. Specifically, this approach, although not identical,
complements two major international transparency regimes, the EU
Directives and ESTMA, and should therefore support international
transparency promotion efforts by fostering consistency and
comparability of disclosed payments.\245\ Also, as noted above, all of
the commenters that addressed this aspect of the proposed rules
generally supported using accounting principles to define ``control.''
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\245\ See, e.g., EU Accounting Directive, Art. 44 (providing for
the preparation of consolidated reports, subject to limited
exceptions). ESTMA provides that ``control'' includes both direct
and indirect control, but Section 2.1.3 of the ESTMA Guidance states
that ``[w]here one business controls another enterprise under the
accounting standards applicable to it . . . that will generally be
sufficient evidence of control for purposes of the Act.''
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We believe that the definition we are adopting today better
balances transparency for users of the payment disclosure and the
burden on issuers than the use of the Rule 12b-2 definition of
``control'' or alternatives recommended by commenters. Issuers already
apply the concept of control for financial reporting purposes, which
should facilitate compliance. Assuming a reporting issuer consolidates
the entity making the eligible payment,\246\ this approach also should
have the benefit of limiting the potential overlap of the disclosed
payments because generally, under applicable financial reporting
principles, only one party can control, and therefore consolidate, that
entity. Further, this approach may enhance the quality of the reported
data since each resource extraction issuer is required to provide
audited financial statement disclosure of its significant consolidation
accounting policies in the notes to the audited financial statements
included in its existing Exchange Act annual reports.\247\ The
disclosure of these accounting policies should provide greater
transparency about how the issuer determined which entities and
payments should be included within the scope of the required
disclosures. Finally, a resource extraction issuer's determination of
control under the final rules is subject to the audit process as well
as to the internal accounting controls that issuers are required to
have in place with respect to reporting audited financial statements
filed with the Commission.\248\
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\246\ See below for a discussion of a resource extraction
issuer's disclosure obligations concerning proportionately
consolidated entities or operations.
\247\ See ASC 235-10-50; IFRS 8. See also Rules 1-01, 3-01, and
4-01 of Regulation S-X [17 CFR 210.1-01, 2-01 and 4-01].
\248\ See Exchange Act Section 13(b)(2)(B) [15 U.S.C.
78m(b)(2)(B)]. See also Rules 13a-15 [17 CFR 240.13a-15] and 15d 15
[17 CFR 240.15d-15]. We note, however, that the proposed rules would
not create a new auditing requirement.
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We considered the recommendation of some commenters to include a
``significant influence'' test for determining control in addition to
the accounting consolidation principles we proposed. We do not believe,
however, that we should define control such that significant influence
by itself would constitute control.\249\ The concept of significant
influence does not reflect the same level of ability to direct or
control the actions of an entity that is generally reflected in the
concept of consolidation. As such, we believe that the consolidation
principles are better aligned with the purposes underlying Section
13(q) than a significant influence test. Moreover, unlike a potential
significant influence test, the consolidation principles used to define
control for the purposes of Section 13(q) more closely capture the
situations where the resource extraction issuer has access to the
information that is required to be reported.\250\ We also note that the
European and Canadian reporting regimes do not measure control based on
``significant influence'' alone. For these reasons, we have chosen not
to include a significant influence test in the final rules.
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\249\ In this regard, we note that under U.S. GAAP and IFRS,
significant influence alone does not represent a level of control
that would result in consolidation. See ASC 323-10-15, paragraphs 6
through 11 and IAS 28, paragraph 3.
\250\ Compared to an issuer that consolidates an entity, an
issuer applying proportionate consolidation may not have the same
level of ability to direct the entity or operations making the
eligible payments. However, an issuer applying proportionate
consolidation has a direct or undivided ownership in the assets and
liabilities of the entity or operations, and the issuer's ability to
apply proportionate consolidation indicates a higher likelihood that
it is able to obtain the information necessary to satisfy the
reporting requirements.
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The final rules also require disclosure of the proportionate amount
of the eligible payments made by a resource extraction issuer's
proportionately consolidated entities or operations. We believe this
approach is consistent with using accounting principles to determine
control because, when proportionate consolidation is applied, an entity
has an undivided interest in or contractual rights and obligations in
specified assets, liabilities and operations. Under this approach, the
proportionate amount of eligible payments reported by the issuer
reflects the underlying interest in the economics associated with the
specified assets, liabilities, and operations. Although we acknowledge
commenters' concerns about the ability of an issuer to obtain
sufficiently detailed payment information from proportionately
consolidated entities or operations when it is not the operator of that
venture, we note that the delayed compliance date in the final rules
will provide issuers two years to make arrangements with joint venture
operators to obtain the required payment information. If, after
reasonable effort, the issuer is unable to obtain such information, it
would be able to rely on Exchange Act Rule 12b-21 to omit the
information if the information is unknown and not reasonably
available.\251\ We expect, however, that for future joint ventures,
non-operator issuers can and should negotiate for access to the
appropriate information.
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\251\ 17 CFR 240.12b-21. Specifically Rule 12b-21 states that
information required need be given only insofar as it is known or
reasonably available to the registrant. If any required information
is unknown and not reasonably available to the registrant, either
because the obtaining thereof would involve unreasonable effort or
expense, or because it rests peculiarly within the knowledge of
another person not affiliated with the registrant, the information
may be omitted. The rule goes on to provide two additional
conditions. The first is that the registrant must give such
information on the subject that it possesses or can acquire without
unreasonable effort or expense, together with the sources of that
information. The second is that the registrant must include a
statement either showing that unreasonable effort or expense would
be involved or indicating the absence of any affiliation with the
person within whose knowledge the information rests and stating the
result of a request made to such person for the information.
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E. Definition of ``Project''
1. Proposed Rules
We proposed requiring a resource extraction issuer to disclose
payments made to governments relating to the commercial development of
oil, natural gas, or minerals by type and total
[[Page 49378]]
amount per project.\252\ The proposed definition of ``project'' was
modeled on the definition found in the EU Directives and the ESTMA
Specifications, albeit modified to provide resource extraction issuers
with additional flexibility on how to treat operations involving
multiple, related contracts.
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\252\ See Section II.E of the Proposing Release.
---------------------------------------------------------------------------
Similar to the EU Directives and the ESTMA Specifications, we
proposed to define ``project'' as operational activities that are
governed by a single contract, license, lease, concession, or similar
legal agreement, which form the basis for payment liabilities with a
government.\253\ The proposed definition was also similar to the EU
Directives and the ESTMA Specifications in allowing issuers to treat
multiple agreements that are both operationally and geographically
interconnected as a single project.\254\ Unlike the EU Directives and
Canadian definitions, however, our proposed definition of ``project''
provided additional flexibility to issuers by excluding a requirement
that the agreements have ``substantially similar terms.''
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\253\ See proposed Item 2.01(c)(10) of Form SD.
\254\ Id.
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In order to assist resource extraction issuers in determining
whether two or more agreements may be treated as a single project, we
proposed an instruction that provided a non-exclusive list of factors
to consider when determining whether agreements are ``operationally and
geographically interconnected'' for purposes of the definition of
project. No single factor was necessarily determinative. Those factors
included: Whether the agreements related to the same resource and the
same or contiguous part of a field, mineral district, or other
geographic area; whether they were performed by shared key personnel or
with shared equipment; and whether they were part of the same operating
budget.\255\ Furthermore, we proposed an instruction stating that
issuers were not required to disaggregate payments that are made for
obligations levied on the issuer at the entity level rather than the
project level.\256\
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\255\ See proposed Instruction 12 to Item 2.01 of Form SD.
\256\ See proposed Instruction 4 to Item 2.01 of Form SD.
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2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on many possible
approaches to defining the term ``project,'' as well as the broader
question of whether we should define ``project'' at all. We sought
public comment on how best to craft a definition that advanced the U.S.
governmental interest in combatting global corruption and promoting
public accountability with respect to extractive resources.
Specifically, we asked about alternative definitions found in other
jurisdictions, such as the European Union and Canada, as well as the
API's proposed definition. We asked commenters to consider how
alternative definitions might enhance transparency and the
comparability of data. For example, we asked whether we should align
our definition more closely with the EU Directives and ESTMA and
whether there was an alternative to a contract-based definition of
``project'' that would be preferable. We also asked commenters about
specific aspects of the proposed rules, such as under what
circumstances should the rules allow for multiple agreements to be
aggregated as a single project.
Numerous commenters supported the statute's directive to require
disclosure at the project level.\257\ Many other commenters supported
defining ``project'' in relation to a legal agreement, such as a
contract, lease, license, or concession, consistent with the definition
in the European Union and Canada.\258\ A number of other commenters
specifically supported the proposed definition.\259\ One of these
commenters stated that project-level disclosure by contract was
necessary to evaluate and implement effective oil and mineral revenue
sharing policies in Ghana.\260\ USAID stated that the EITI standard
also encourages public disclosure of the details of contracts and
licenses that provide the terms for the exploitation of oil, gas, and
minerals.\261\
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\257\ See letters from Peck & Chayes; Quinones; Sen. Cardin et
al.; Sen. Lugar et al.; and Form Letter A.
\258\ See Form Letter B.
\259\ See letters from ACEP; ACTIAM NV, AP1/F[ouml]rsta AP-
Fonden (First Swedish National Pension Fund), Andra AP2-Fonden
(Second Swedish National Pension Fund), AP3/Tredje AP-Fonden (Third
Swedish National Pension Fund), AP4/Fj[auml]rde AP-Fonden (Fourth
Swedish National Pension Fund), Aviva Investors, B[acirc]tirente,
BMO Global Asset Management, BNP Paribas Investment Partners,
British Columbia Investment Management Corporation, California State
Teachers' Retirement System (CalSTRS), Calvert Investments, Cartica
Capital, Ethos Foundation, Switzerland, Henderson Global Investors,
Hermes Equity Ownership Services Ltd., Legal & General Investment
Management, NEI Investments, RPMI Railpen Investments, and Sandglass
Capital Management (Mar. 8, 2016) (``ACTIAM et al.''); Bean; BHP;
Calvert; Department of Interior; State Department; Encana; Global
Witness 1; McCarthy; NRGI 1; Oxfam 1; PWYP-US 1; TI-USA; USAID; and
USSIF.
\260\ See letter from ACEP.
\261\ See letter from USAID.
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Of the commenters supporting the proposed definition of
``project,'' one supported the proposed non-exclusive list of factors
to consider when determining whether agreements are ``operationally and
geographically interconnected.'' \262\ This commenter stated that these
factors would help ensure that issuers are in compliance with the
proposed rules. Other commenters that were supportive of the
``project'' definition, however, recommended eliminating the list of
non-exclusive factors and providing clear instructions on when
agreements could be aggregated.\263\ Also, several commenters
recommended only allowing for agreements to be aggregated if they have
substantially similar terms \264\ and are operationally and
geographically ``integrated'' rather than ``interconnected.'' \265\
These commenters expressed concern that the proposed rules might allow
issuers to ``artificially aggregate payments and obfuscate payment
information.'' \266\ These commenters also questioned whether the
``cost to issuers of [requiring] `substantially similar terms'
outweighs the gains of equivalency'' with other transparency
regimes.\267\ On the other hand, the Department of Interior noted that
the proposed level of aggregation correlated to on-the-ground
operations on U.S. federal lands.\268\
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\262\ See letter from BHP.
\263\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\264\ See letters from PWYP-US 1 and USAID. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
\265\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\266\ See id.
\267\ See id.
\268\ See letter from Department of Interior.
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Several other commenters opposed the proposed definition of
``project.'' \269\ For example, one of these commenters criticized the
definition as too vague and was concerned that disclosing payments to
foreign and subnational governments on a per contract or project basis
would severely disadvantage competition against state-affiliated firms
that are not subject to similar rules.\270\ Another of these commenters
questioned ``the utility of adopting an overly expansive EU
definition'' of ``project'' when it results in companies using
``different definitions to describe largely similar activities'' and
provides ``great volumes of data'' with ``no framework in place that
allows everyday citizens to have even a fighting chance of
understanding what's actually being reported.'' \271\ Most of the
commenters that opposed the Commission's proposed definition of project
supported
[[Page 49379]]
the API's alternative definition (the ``API Proposal''). These
commenters stated that the API Proposal would have lower compliance
costs, generate more useful data due to the use of consistent
geographic descriptions and project descriptions across the data set,
and would cause less competitive harm due to the higher level of
aggregation, while still achieving the purposes of the statute. In this
regard, two supporters of the API definition suggested that the use of
International Organization for Standardization (``ISO'') codes would
provide consistent subnational geographic descriptions when using the
API's project naming system.\272\ One industry commenter supporting the
API Proposal also expressed support for the proposed rules if certain
changes were made to the alternative reporting provisions and the
definition of ``control.'' \273\
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\269\ See letters from API 1; ASP; BP; Chevron; ExxonMobil 1;
Nouveau; and RDS.
\270\ See letter from Encana.
\271\ See letter from ASP.
\272\ See letters from ASP and ExxonMobil 1. ISO is an
independent, non-governmental international organization with a
membership composed of various national standards bodies. See About
ISO, available at https://www.iso.org/iso/home/about.htm (last
visited June 16, 2016).
\273\ See letter from RDS (requesting that the Commission
recognize UK implementation of the EU Directive as an approved
alternative reporting scheme and clarify that Rule 12b-21 would
permit a company to exclude information with regard to
proportionally consolidated non-operated entities where it does not
have access to the required information needed to be disclosed. See
Section II.J.3, infra, and Section II.D.3, supra, for discussion of
these requests.
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Several of the commenters that supported the proposed definition
also specifically criticized the API Proposal for not providing a
sufficiently granular level of information to meet the statute's
transparency goals and for being inconsistent with international
transparency promotion efforts.\274\ One of these commenters
specifically argued that the use of ISO codes to identify subnational
geographic location would be too broad geographically, and disputed the
contention that the data generated under the EU Directives would be
difficult to evaluate.\275\
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\274\ See, e.g., ACEP and PWYP-US 1.
\275\ See letter from McCarthy.
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3. Final Rules
After considering commenters' recommendations and international
developments \276\ since the Proposing Release, we are adopting the
definition of ``project'' as proposed. The final rules define
``project'' as operational activities that are governed by a single
contract, license, lease, concession, or similar legal agreement, which
form the basis for payment liabilities with a government.\277\
---------------------------------------------------------------------------
\276\ See Section I.C. above.
\277\ We expressly incorporate the Proposing Release's
discussion of the rationales for the definition of project. See
Proposing Release, Section II.E.
---------------------------------------------------------------------------
Commenters continue to express strong disagreement over the level
of granularity that should be adopted for the definition of
``project.'' After carefully considering the comments received, we
remain persuaded that the definition of project that we proposed is
necessary and appropriate to achieve a level of transparency that will
help advance the important anti-corruption and accountability
objectives underlying Section 13(q).\278\ In the Proposing Release, we
explained specific considerations that supported this contract-based
definition of project:
---------------------------------------------------------------------------
\278\ One commenter asserted that foreign governments might use
the Section 13(q) disclosure requirement as ``a pretext for
expropriating'' the assets of a resource extraction issuer. See
letter from API 1. We note that an issuer facing such a situation
could seek exemptive relief from the Commission to potentially delay
or avoid its Section 13(q) reporting obligation and, thus, to
potentially forestall the expropriation. See Section II.I below for
our discussion of exemptive relief. We also note that the commenter
stated that the required disclosures would be a ``pretext'' for
expropriation. If a country is intent on expropriating a resource
extraction issuer's assets, it is not clear that there is any action
the Commission could take, either in this rulemaking or later
through exemptive relief, that could dissuade the action.
Such disaggregated information may help local
communities and various levels of subnational government combat
corruption by enabling them to verify that they are receiving the
resource extraction revenue allocations from their national
governments that they may be entitled to under law. In this way,
project-level disclosure could help reduce instances where
government officials are depriving subnational governments and local
communities of revenue allocations to which they are entitled.
Project-level reporting at the contract level could
potentially allow for comparisons of revenue flow among different
projects, and the potential to engage in cross-project revenue
comparisons may allow citizens, civil society groups, and others to
identify payment discrepancies that reflect potential corruption and
other inappropriate financial discounts.
To the extent that a company's contractual or legal
obligations to make resource extraction payments to a foreign
government are known, company-specific, project-level disclosure may
help assist citizens, civil society groups, and others to monitor
individual companies' contributions to the public finances and
ensure firms are meeting their payment obligations.\279\ Such data
may also help various actors ensure that the government is properly
collecting and accounting for payments.
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\279\ In this regard, we note that one industry commenter has
observed that, at least for contracts for projects that are older or
well-established, ``the general terms are likely to be known even if
technically not public.'' See letter from API 1.
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Company-specific, project-level data may also act as a
strong deterrent to companies underpaying royalties or other monies
owed.\280\ Such data may also discourage companies from either
entering into agreements that contain suspect payment provisions or
following government officials' suspect payment instructions.\281\
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\280\ More broadly, we believe that, in contrast to the API
Proposal of aggregated disclosure at the major subnational
jurisdiction level, contract-level disclosure will better help deter
corruption by all participants in the resource extraction sector. As
we explained in the Proposing Release, detailed or granular
disclosure makes hidden or opaque behavior more difficult. See
Proposing Release, Section I.E.1. Specifically, the granular
information makes it easier for the public and others to observe
potential improprieties with respect to the payment flows and such
disclosure makes it more difficult for actors to hide any
impropriety from scrutiny. See generally 156 Cong. Rec. S3815
(explaining that Section 13(q) is intended to create ``a historic
transparency standard that will pierce the veil of secrecy that
fosters so much corruption and instability in resource-rich
countries . . . .''). This, in turn, has an enhanced deterrent
effect that may discourage improper conduct in the first instance.
\281\ For examples of the role that resource extraction
companies can play in facilitating the suspect or corrupt practices
of foreign officials seeking to divert for their own personal use
resource extraction payments that belong to the government, see U.S.
Senate Permanent Subcommittee on Investigations, Committee on
Government Affairs, Money Laundering and Foreign Corruption:
Enforcement and Effectiveness of the Patriot Act, Case Study
Involving Riggs Bank Report, at 98-111 (July 14, 2004). Among other
examples, this report discusses instances where, both at the
direction of government officials of Equatorial Guinea (``E.G.'')
and pursuant to suspect terms of the underlying contracts with the
government, resource extraction companies diverted payments that
should have been paid to the government to other accounts and to
persons connected with E.G. government officials. Id. at 98 (finding
that ``Oil companies operating in Equatorial Guinea may have
contributed to corrupt practices in that country by making
substantial payments to, or entering into formal business ventures
with, individual E.G. officials, their family members, or entities
they control, with minimal public disclosure of their actions'');
see also id. at 99 & 104 (explaining that the E.G. government
instructs oil companies where to send payments owed to the
government and has directed oil companies to divert payments for
potentially corrupt purposes such as paying the educational costs of
the children and other relatives of E.G. government officials). By
requiring the public disclosure of the identity of the resource
extraction issuers who are making payments, we believe this may help
to deter their willingness to participate in any such diversions of
government revenues or to enter into any contracts that have suspect
payment terms.
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Such disaggregated reporting may help local communities
and civil society groups to weigh the costs and benefits of an
individual project. Where the net benefits of a project are small or
non-existent, this may be an indication that the foreign
government's decision to authorize the project is based on
corruption or other inappropriate motivations.\282\
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\282\ See Proposing Release, Section I.E.2.
In advancing these potential uses for the granular transparency
that our
[[Page 49380]]
definition of project would yield, we relied on concrete examples that
commenters from countries across the globe provided to us.\283\
Moreover, two Executive Branch agencies with significant expertise in
promoting the U.S. Government's anti-corruption and accountability
foreign policy goals strongly supported our proposed approach.
Specifically, the U.S. Department of State stated that the ``level of
transparency required by the proposed rule is key for ensuring that
citizens have the necessary means to hold their governments
accountable. As written, the rule's requirements directly advance the
United States' foreign policy interests in increasing transparency and
reducing corruption in the oil, gas, and minerals sectors and
strengthen the United States' credibility and ability to fight
corruption more broadly[.]'' \284\ Similarly, USAID supported the
proposed approach to defining project and explained that ``[o]nly
through more granular, project-level reporting will disclosure produce
meaningful data for citizens, civil society, and local groups that seek
to break cycles of corruption that involve government and
corporations.'' \285\
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\283\ See letter from ACEP (public disclosure of payments made
by company and by project are critical in order to ensure that
statutory allocation of mining royalties to Ghanaian subnational
governments was received.). See also Proposing Release at n.94 and
accompanying text (providing several additional examples).
\284\ See letter from State Department.
\285\ See letter from USAID.
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We acknowledge that some commenters, in particular the API and
certain industry-affiliated commenters, challenged the appropriateness
of the contract-based definition of project that we are adopting.\286\
In particular, one of the principal criticisms of this definition was
that ``contract-specific disclosure actually frustrates Section 13(q)'s
transparency objective.'' \287\ In advancing this view, the API
contends that ``Section 13(q)'s goal of transparency is best served by
a definition of project that aggregates payments to a more useful--
i.e., higher--level of generality, instead of burying the public in an
avalanche of data that is irrelevant to the law's avowed purpose.''
\288\ After carefully considering the record (including filings that
some companies have already prepared in accordance with a definition of
project similar to our own), we do not share the API's view that the
disclosures we are requiring would be counterproductive. Many of the
commenters who have demonstrated a detailed understanding of the
various possible disclosure regimes, particularly those civil society
organizations and related actors that have experience using revenue
data and that have expressed the greatest interest in the data that
would be released under the final rules, disagree and have explained
through specific examples how the granular data would be important to
help reduce corruption and promote accountability.\289\ We are
persuaded by both the arguments they have advanced and the evidence
they have produced that a more granular approach to the definition of
``project'' like the one we are adopting today is necessary.\290\
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\286\ The API asserts that the requirement that resource
extraction issuers ``disclose payments at the contract-level is
unmoored from the statute.'' Letter from API 1. The API, however,
fails to explain why a contract-level focus is an unreasonable frame
of reference for the term ``project.'' In commercial relations,
contracts are frequently used to define the scope of a project that
one party is undertaking for another. Also, as discussed above, the
EU Directives and the ESTMA Specifications define project at the
contract-level, further confirming that our definition is (at a
minimum) reasonable. Furthermore, nothing in the text or legislative
history of Section 13(q) forecloses a contract-level definition. For
these reasons, and for the reasons that we expressed in Section
II.E. of the Proposing Release, we continue to believe that a
contract-based definition of ``project'' is reasonable and
appropriate.
\287\ See letter from API 1.
\288\ See id. (``In addition, overly granular information could
very likely make it more difficult for the public to make use of the
disclosures.'') (emphasis in original).
\289\ See letters from PWYP-US 1 and Oxfam-ERI.
\290\ See letter from Oxfam-ERI and letters cited therein. The
API asserts that contract-level reporting would ``give insurgents or
terrorists valuable information about where the government is most
financially vulnerable'' and ``[i]nsurgents can use that information
to plan attack[s].'' Letter from API 1. We acknowledge that such
groups can pose a threat. See, e.g., Saboteurs Hit Nigerian Oil, The
Wall Street Journal, at A1 (June 6, 2016). However, we note that it
appears that substantial information is already reasonably available
to the public about the major resource extraction projects and
facilities operating in countries around the world. For example, an
internet search reveals the following non-exhaustive list of items:
William Pentland, World's Five Largest Offshore Oil Fields, Forbes
(Sept. 7, 2013), available at https://www.forbes.com/sites/williampentland/2013/09/07/worlds-five-largest-offshore-oil-fields/#674f017b4bea); James Burgess, Six of the Largest Oil Fields in the
World Still Waiting To Be Developed, OilPrice.com (April 1, 2012),
available at https://oilprice.com/Latest-Energy-News/World-News/6-of-the-Largest-Oil-Fields-in-the-World-Still-Waiting-to-be-Developed.html; Nick Cunningham, Here Are the World's Five Most
Important Oil Fields, OilPrice.com (June 5, 2014), available at
https://oilprice.com/Energy/Energy-General/Here-Are-The-Worlds-Five-Most-Important-Oil-Fields.html; Fredrik Robelius, Giant Oil Fields
of the World (presentation on May 23, 2005) (listing 25 of the
world's giant oil fields), available at https://www.peakoil.net/AIMseminar/UU_AIM_Robelius.pdf; Christopher Helman, In Depth: The
Top 10 Oil Fields of the Future, Forbes (Jan. 1, 2010), available at
https://www.forbes.com/2010/01/20/biggest-oil-fields-business-energy-oil-fields_slide.html; U.S. Energy Information Administration, Top
100 U.S. Oil and Gas Fields (March 2015), available at https://www.eia.gov/naturalgas/crudeoilreserves/top100/pdf/top100.pdf. See
also Perry-Casta[ntilde]eda Library Map Collection, available at
https://www.lib.utexas.edu/maps/map_sites/oil_and_gas_sites.html
(last visited June 16, 2016) (providing web links to maps detailing
location of oil fields in Asia, Europe, the Middle East, Africa,
North America, and South America); Collection of the U.S. Geological
Survey's World Petroleum Assessment Publications, available at
https://energy.usgs.gov/OilGas/AssessmentsData/WorldPetroleumAssessment.aspx (last visited June 16, 2016);
International Petroleum Encyclopedia for 2015 (includes certain oil
field production statistics); Natural Gas Information 2015
(providing information on natural gas extraction pipeline trade);
U.K. Oil and Gas: Field Data, available at https://www.gov.uk/guidance/oil-and-gas-uk-field-data#oil-and-gas-wells (last visited
June 16, 2016) (data for oil and gas wells in the United Kingdom).
The API's comment letter does not acknowledge the information that
is already reasonably available nor does it explain why the payment
data that would be made available under the Commission's rules would
create an appreciably greater risk to safety than already may exist.
In any event, as we discuss in Section II.I.3 below, the Commission
will consider requests exemptive relief based on potential safety
and terrorism concerns on a case-by-case basis, and resource
extraction issues will have an opportunity in making such a request
to demonstrate why an exemption is warranted with respect to a
specific project, region, or country.
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We also believe that, in advancing its view, the API appears to
have an unduly narrow understanding of Section 13(q)'s purpose. The API
stated that Section 13(q) is limited ``to provid[ing] the public with
information about the overall revenue that national governments receive
from natural resources, so that the public can seek to hold the
government accountable for how much it is receiving and how it spends
that money.'' \291\ We believe that Section 13(q)'s anti-corruption and
accountability goals are broader and include, among other things,
providing transparency to members of local communities so that they can
hold their government officials and others accountable for the
underlying resource extraction agreements to help ensure that those
agreements themselves are not corrupt, suspect, or otherwise
inappropriate. To cabin Section 13(q)'s
[[Page 49381]]
goals as the API would do, in our view, would severely limit the
potential transparency and anti-corruption benefits that the
disclosures might provide to citizens of resource-rich countries.\292\
---------------------------------------------------------------------------
\291\ See letter from API 1. The text of Section 13(q) itself
suggests that the API's understanding of the statute's purpose is
unduly narrow. Section 13(q) requires two broad categories of
disclosure: ``the type and total amount of [resource extraction]
payments made to each government'' (government-level disclosure),
see Exchange Act Section 13(q)(2)(ii), and ``the type and total
amount of such payments made for each project'' (project-level
disclosure), see Exchange Act Section 13(q)(2)(i). Were the API
correct that Section 13(q) is limited ``to provid[ing] the public
with information about the overall revenue that national governments
receive from natural resources, so that the public can seek to hold
the government accountable for how much it is receiving and how it
spends that money,'' Congress could have achieved this objective by
simply mandating the government-level disclosure. That Congress did
not stop there but instead also mandated project-level disclosure
suggests to us that the anticorruption and accountability objectives
underlying Section 13(q) are broader than the API asserts.
\292\ We note that the API contends that a local community does
not ``need contract-level disclosure to determine that someone is
drilling for oil nearby or whether the community is receiving enough
money from its national government.'' See letter from API 1.
However, the API does not explain how the fact that a local
community knows that a nearby project is ongoing can--absent the
type of granular disclosure that the final rules will provide--allow
that community to assess where it is receiving the portion of total
revenues from the national government that are associated with the
project.
---------------------------------------------------------------------------
For the reasons discussed above, and for the reasons set forth in
the Proposing Release, we believe that the definition of project that
we are adopting will provide the type of granular transparency that is
necessary to advance in a meaningful way the statute's anti-corruption
and accountability objectives.\293\ In arriving at our determination,
we carefully considered the API Proposal.\294\ Under that proposal, all
of an issuer's resource extraction activities within the first-level of
subnational political jurisdiction of a country below the national
government would be treated as a single ``project'' to the extent that
these activities involve the same resource (e.g., oil, natural gas,
coal) and to the extent that they are extracted in a generally similar
fashion (e.g., onshore or offshore extraction, or surface or
underground mining). To illustrate how its proposed definition would
work, the API explained that all of an issuer's extraction activities
producing natural gas in Aceh, Indonesia (which comprises approximately
22,500 square miles) would be identified as ``Natural Gas/Onshore/
Indonesia/Aceh.'' Similarly, the API explained that a project to
develop oil offshore of Sakhalin Island, Russia (which comprises
approximately 28,000 square miles) would be identified as ``Oil/
Offshore/Russia/Sakhalin.'' \295\
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\293\ We believe that the project-level public-disclosure
mechanism that we are adopting is a sensible, carefully tailored
policy prescription to help combat corruption and promote
accountability in connection with resource extraction. We
acknowledge, however, that this new transparency alone will not
likely eliminate corruption in this area. As we stated in the
Proposing Release, the ultimate impact of the disclosures will
largely depend on the ability of all stakeholders--particularly
civil society, media, parliamentarians, and governments--to use the
available information to improve the management of their resource
extractive sector. See Proposing Release, n.97 and accompanying text
(quoting Alexandra Gillies & Antoine Heuty, Does Transparency Work?
The Challenges of Measurement and Effectiveness in Resource-Rich
Countries, 6 Yale J. Int'l Aff. 25 (2011)). We also find it relevant
that the U.S. Government may have few other means beyond the
disclosure mechanism required by Section 13(q) to directly target
the myriad forms of corruption that can develop in connection with
resource extraction (many of which extend well-beyond the quid-pro-
quo payments that are the target of the Foreign Corrupt Practices
Act), or to promote greater accountability in the use of extractive
resources and the revenues generated therefrom.
\294\ Among other arguments, the API stated that we should adopt
the API Proposal in order to avoid potential constitutional issues
under the First Amendment. See letter from API 1. We have carefully
considered that argument but believe that the public disclosure of
the type of commercial payment information involved here does not
run afoul of the First Amendment. Section 13(q) and the rules that
we are adopting require the disclosure of payment information
involving resource extraction activities so that the citizens of
each country and those acting on their behalf can help combat
corruption in connection with the sale of their nation's oil, gas,
and mineral resources, and can hold relevant actors accountable. See
generally EITI Progress Report 2016, From Reports to Results,
available at https://progrep.eiti.org/2016/glance/what-eiti-does
(last visited June 16, 2016) (``A country's natural resources, such
as oil, gas, metals and minerals, belong to its citizens.''). We
believe that the foreign policy interests involved here are
compelling and substantial, as the administrative record
demonstrates, and the means we have chosen to help advance those
interests (including the public disclosure of contract-level payment
information) are carefully tailored to do so.
\295\ The API included a third example, stating that ``[o]nshore
development in the Niger River delta area would be `Oil/Onshore/
Nigeria/Delta.'' See letter from the API (Nov. 7, 2013) (emphasis
added). We relied on that example in the Proposing Release, but in a
recent comment, the API explained that the data for the ``nine
separate states in the Niger River Delta'' would not in fact ``be
aggregated into one project''--``each state would be separate
projects.'' See letter from API 1.
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We continue to believe that the reasons advanced in the Proposing
Release demonstrating why the API Proposal's definition of project is
not appropriate remain valid and persuasive.\296\ Those include the
following:
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\296\ The API stated that Congress, by requiring payment
disclosure with respect to ```each project''' and `` `each
government','' ``wanted companies to provide information about . . .
the region in which the resource is located.'' Letter from API 1. We
agree with the API on this general point, but, as discussed above,
we disagree that defining the region by the major subnational
political jurisdiction is required (or even suggested) by the
statute as the appropriate level of transparency. See also Proposing
Release, Section II.E.
We do not agree that engaging in similar extraction
activities across the territory comprising the first-level
subnational political jurisdictions of countries provides the type
of defining feature to justify aggregating those various activities
together as a solitary project.\297\ Relatedly, by so heavily
focusing on subnational political jurisdictions as a defining
consideration, the API's definition appears to disregard the
economic and operational considerations that we believe would more
typically--and more appropriately--be relevant to determining
whether an issuer's various extraction operations should be treated
together as one project.
---------------------------------------------------------------------------
\297\ We also note the API Proposal appears to be inconsistent
with how companies in the resource extraction sector often refer to
their ``projects'' with foreign countries. Similar to the definition
we are adopting, it appears that companies use the term project to
refer to their concession-level or field-level operations. See,
e.g., Texaco's Web page available at https://www.texaco.com/ecuador/en/history/background.aspx (last visited June 16, 2016) (describing
``Texaco Petroleum's involvement with the [Oreinte] project [that]
was governed by a 28-year concession agreement''); Crescent
Petroleum's Web page available at https://www.crescentpetroleum.com/
(last visited June 16, 2016) (listing under the heading ``select
projects'' two concession-level extraction projects--the ``Onshore
Sharjah Concession'' and ``The Mubarek Field''); New World Oil and
Gas Web page available at https://www.nwoilgas.com/projects/ (last
visited June 16, 2016) (describing the ``Blue Creek Project'' as
consisting of ``one 315 sq km onshore oil concession divided into
two blocks located in NW Belize''); The Dodsal Group Web page
available at https://dodsal.com/mining/projects.shtml (last visited
June 16, 2016) (listing the company's various hydrocarbon and
mineral projects, each of which is described at the concession
level, including Itingi, which is a ``concession from the Ministry
of Energy and Minerals, Government of Tanzania, for mining at a
location approximately 1,250 km South-West of Dar es Salaam'' and
``which is approximately 101 sq. km''). See also, e.g., Chevron Web
page available at https://www.chevron.com/projects (listing as
separate projects various oil fields around the globe, including the
Kern River Field in California, the Captain EOR Field in the United
Kingdom, and the Duri Field in Indonesia); British Petroleum's Web
page available at https://tools.bp.com/investor-tools/upstream-major-projects-map.aspx (last visited June 16, 2016) (describing various
British Petroleum projects by reference to field operations, such as
the Amenas ``wet-gas field,'' the Culzean ``lean gas condensate
field,'' and the ``Clair Ridge Project'' that ``develops new
resources from the giant Clair Field which . . . extends over an
area of 85 square miles'').
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Separately, the API Proposal in our view would not
generate the level of transparency that, as discussed above, we
believe would be necessary or appropriate to help meaningfully
achieve the U.S. Government's anti-corruption and accountability
goals. By permitting companies to aggregate their oil, natural gas,
and other extraction activities over large territories, the API's
definition would not provide local communities with payment
information at the level of granularity necessary to enable them to
know what funds are being generated from the extraction activities
in their particular areas.\298\ This would deprive them of the
[[Page 49382]]
ability, for example, to assess the relative costs and benefits of
the particular license or lease to help ensure that the national
government or subnational government has not entered into a corrupt,
suspect, or otherwise inappropriate arrangement.
---------------------------------------------------------------------------
\298\ An additional deficiency with the API Proposal, which
relies on the major subnational political jurisdiction as the
defining characteristic of ``project,'' is that it could produce
vastly disparate transparency from one jurisdiction to another.
Residents of subnational jurisdictions that occupy a relatively
small area (e.g., State of Sergipe, Brazil (approximately 8,400
square miles)) would receive data that, because of the jurisdictions
limited size, may be more localized; but residents of subnational
jurisdictions that are relatively large in size (e.g., State of
Par[aacute], Brazil (approximately 481,700 square miles)) would
receive disclosures that provide potentially less localized
transparency given the potentially large number of extractive
activities that might be included within the project-level
disclosure. By contrast, as we explained in the Proposing Release
(and which no commenter disputed), oil, gas, and mining contracts
not only typically cover areas that are much smaller than a major
subnational political jurisdiction, there is also a relative degree
of uniformity in the size of the covered area. For example, we
explained that the typical contract area for oil and gas exploration
is between approximately 400 to 2,000 square miles. See Proposing
Release, Section II.E.2. Also, mining concessions typically cover
only a single mine. Id. Thus, we believe that our contract-level
definition of project has the additional advantage of producing a
level of transparency that will be more consistent across
jurisdictions than the API Proposal.
We also note that the API asserts that the contract-level
approach to project may, ``at times, cover a broad geographic
area.'' Letter from API 1. While we acknowledge that this may occur,
we believe (as the discussion above demonstrates) that the
potentially broad geographic areas that our definition may in some
instances apply to are still much smaller than the geographic areas
that the API's proposed definition of project would cover. Moreover,
as we explained in the Proposing Release, all of the alternative
approaches to defining project that were recommended would likely
result in disclosure that is more aggregated (and therefore less
detailed) on a geographical basis and would thus potentially be less
useful for purposes of realizing the statute's objectives of
increasing payment transparency to combat global corruption and
promote accountability. See Proposing Release, Section II.E.2.
Beyond these considerations, our own experience in implementing the
Foreign Corrupt Practices Act leads us to believe that the granular
disclosures that our definition will produce will better help combat
corruption than the aggregated (and anonymized) disclosures that the
API Proposal would yield. We have found that requiring issuers to
maintain detailed, disaggregated records of payments to government
officials significantly decreases the potential for issuers and others
to hide improper payments and as such their willingness to make such
payments. This experience has led us to believe that, where corruption
is involved, detailed, disaggregated disclosures of payments minimizes
the potential to engage in corruption undiscovered. We thus believe
that the more granular the disclosure in connection with the
transactions between governments and extractive corporations, the less
room there will be for hidden or opaque behavior.\299\
---------------------------------------------------------------------------
\299\ We also believe that the more granular disclosures that
will result from the final rules relative to the API Proposal will
help provide a powerful incentive for community-based involvement in
monitoring corruption and holding officials accountable by making
clear to those communities in a direct and concrete fashion what
revenues are being generated from their local natural resources.
---------------------------------------------------------------------------
We acknowledge that the API Proposal's definition of ``project''
could lower the potential for competitive harm when compared to our
proposed approach, which requires public disclosure of contract-level
data. Nevertheless, we continue to believe that the potential for
competitive harm resulting from the final rules is significantly
reduced, although not eliminated, by the adoption of a similar
definition of ``project'' in the European Union and Canada.\300\ In
this regard, we note that the transposition of the EU Directives has
progressed since we issued the Proposing Release and Canada has
finalized the ESTMA Guidelines and ESTMA Specifications,\301\ and some
issuers have already disclosed (and we expect others will shortly be
disclosing) such project level information.\302\ Furthermore, several
commenters have questioned the API's assertion that a more granular
definition of ``project'' would reveal commercially sensitive
information.\303\ For example, one of these commenters argued that
``contract terms are generally known within the industry.'' \304\ We
also believe that, beyond the potential for reduced competitive harm, a
disclosure requirement that is in accordance with the emerging
international transparency regime is consistent with Section 13(q),
including its instruction that, ``[t]o the extent practicable,'' the
Commission's rules ``shall support the commitment of the Federal
Government to international transparency promotion efforts relating to
the commercial development of oil, natural gas, or minerals.'' \305\
Thus, we believe that the definition of project that we are proposing
is, on balance, necessary and appropriate notwithstanding the potential
competitive concerns that may result in some instances.\306\
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\300\ We disagree with the API's assertion that the
implementation of the EU Directives and ESTMA does not mitigate
competitive harm because ``[f]orty-six of the top 100 oil and gas
companies are listed only in the United States.'' See letter from
API 1. Although these companies may lose the competitive advantage
they previously had in the absence of rules implementing Section
13(q), an argument disputed by other commenters, we believe that any
competitive harm caused by the final rules will be significantly
less than what would occur in the absence of the EU Directives and
ESTMA.
\301\ See ESTMA Guidance (2016) and ESTMA Technical Reporting
Specifications (2016).
\302\ For example, see the following reports:
Royal Dutch Shell plc, Report on Payments to
Governments for the Year 2015, available at https://www.shell.com/sustainability/transparency/revenues-for-governments.html (``RDS
Report'');
Total, 2015 Registration Document (Mar. 15, 2016),
available at https://www.total.com/sites/default/files/atoms/files/registration_document_2015.pdf (``Total Report'');
Tullow Oil plc, 2015 Annual Report & Accounts (Mar. 15,
2016), available at https://www.tullowoil.com/Media/docs/default-source/3_investors/2015-annual-report/tullow-oil-2015-annual-report-and-accounts.pdf (``Tullow Report'') BHP Billiton, Economic
Contribution and Payments to Governments Report 2015 (Sept. 23,
2015), available at https://www.bhpbilliton.com/~/media/bhp/
documents/investors/annual-reports/2015/
bhpbillitoneconomiccontributionandpaymentstogovernments2015.pdf
(``BHP Report'');
Statoil, 2015 Payments to Governments, available at
https://www.statoil.com/no/InvestorCentre/AnnualReport/AnnualReport2015/Documents/DownloadCentreFiles/01_KeyDownloads/2015%20Payments%20to%20governments.pdf (``Statoil Report'');
Kosmos Energy, Transparency, available at https://www.kosmosenergy.com/responsibility/transparency.php (``Kosmos
Report'').
See also letters from Oxfam America (May 2, 2016) (``Oxfam 2'')
and Publish What You Pay--US (Apr. 7, 2016) (``PWYP-US 5'').
\303\ See letters from Oxfam American and EarthRights
International (Mar. 8, 2016) (``Oxfam-ERI'') and PWYP-US 1.
\304\ See letter from Oxfam-ERI (noting that host countries and
competitors, including state-owned companies, have the resources to
access services that provide the information that the API and others
have argued is commercially sensitive).
\305\ See generally The Brussels G7 Summit Declaration ]17 (June
5, 2014), available at https://europa.eu/rapid/press-release_MEMO-14-402_en.htm (last visited June 16, 2016) (``We remain committed to
work towards common global standards that raise extractives
transparency, which ensure disclosure of companies' payments to all
governments. We welcome the progress made among G7 members to
implement quickly such standards. These global standards should
continue to move towards project-level reporting.''). We acknowledge
that Congress's instruction to ``support the commitment of the
Federal Government to international transparency promotion efforts''
is subject to the qualification ``[t]o the extent practicable.'' See
Exchange Act Section 13(q)(2)(E). We believe that our project-level
public disclosure regime comports with this instruction. It is now
apparent that the reporting that we are requiring is practicable--
that is, it is capable of being done or accomplished--because
companies are already making similar disclosures pursuant to the EU
Directives. Moreover, as both the Department of State and USAID have
confirmed, our disclosure regime furthers the Federal Government's
foreign policy interests in promoting international transparency by,
among other things, fostering compatibility with the existing
European Union and Canadian transparency regimes. We also believe
that our, contract-based, public disclosure regime is consistent
with, and furthers, the EITI, which, as noted in the comment letter
from USAID, encourages implementing countries ``to publicly disclose
any contracts and licenses that provide the terms attached to the
exploitation of oil, gas and minerals.'' EITI Standard at 19. See
note 261 above and accompanying text.
\306\ In this regard, and as we discuss in Section II.G.3 below,
we will consider using our existing authority under the Exchange Act
to provide exemptive relief at the request of a resource extraction
issuer, if and when warranted. We believe that this case-by-case
approach to exemptive relief would permit us to tailor any relief to
the particular facts and circumstances presented, which could
include facts related to potential competitive harm.
---------------------------------------------------------------------------
We are also adopting the proposed approach to aggregating multiple
agreements. Despite the concerns of some commenters that the standards
in the proposed rule for aggregating multiple projects could result in
a
[[Page 49383]]
reduction of meaningful payment information, we continue to believe
that the additional flexibility afforded by this approach would benefit
issuers and would have limited impact on the overall level of
transparency provided by the rules. As noted above, we believe that
there are relatively minor differences between the approach we are
adopting today and other international regimes \307\ and note that many
commenters supported the proposed definition.\308\ As we indicated in
the Proposing Release, we understand that operations under one
agreement may lead to the parties entering into a second agreement for
operations in a geographically contiguous area. If a change in market
conditions or other circumstances compels a government to insist on
different terms for the second agreement, then under our definition the
use of those different terms by themselves would not preclude treating
the second agreement as the same project when, operationally and
geographically, work under the second agreement is a continuation of
work under the first. In that way, it should reduce the burdens
associated with disaggregating payments.
---------------------------------------------------------------------------
\307\ The EU Directives and ESTMA Specifications both state that
a ``project'' means ``the operational activities that are governed
by a single contract, license, lease, concession or similar legal
agreements and form the basis for payment liabilities with a
government. Nonetheless, if multiple such agreements are
substantially interconnected, this shall be considered a project.''
Article 41(4) of the EU Accounting Directive; ESTMA Specifications,
Section 2.3.2 The EU Directives and ESTMA Specifications go on to
define ``substantially interconnected'' as ``a set of operationally
and geographically integrated contracts, licenses, leases or
concessions or related agreements with substantially similar terms
that are signed with the government and give rise to payment
liabilities.'' Recital 45 of the EU Accounting Directive; ESTMA
Specifications, Section 2.3.2.
\308\ See note 259 above and accompany text.
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F. Definition of ``Foreign Government'' and ``Federal Government''
1. Proposed Rules
In Section 13(q), Congress defined ``foreign government'' to mean a
foreign government, a department, agency, or instrumentality of a
foreign government, or a company owned by a foreign government, while
granting the Commission the authority to determine the scope of the
definition.\309\ Consistent with the 2012 Rules, we proposed a
definition of ``foreign government'' that would include a foreign
national government as well as a foreign subnational government, such
as the government of a state, province, county, district, municipality,
or territory under a foreign national government.\310\ The proposed
definition is consistent with Section 13(q), which requires an issuer
to identify, for each disclosed payment, the government that received
the payment and the country in which the government is located.\311\ It
is also consistent with the EU Directives, ESTMA Guidance, and the
EITI.\312\ The Proposing Release also indicated that ``Federal
Government'' means the United States Federal Government.
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\309\ 15 U.S.C. 78m(q)(1)(B).
\310\ See proposed Item 2.01(c)(7) of Form SD.
\311\ See 15 U.S.C. 78m(q)(2)(D)(ii)(V).
\312\ See EU Accounting Directive, Art. 41(3) (``Government
means any national, regional or local authority . . .''); ESTMA
Guidance, Section 3.2 (``[A] Payee is . . . any government . . . at
a national, regional, state/provincial or local/municipal level . .
.''); EITI Standard, at 25 (requiring the disclosure and
reconciliation of material payments to subnational government
entities in an EITI Report).
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2. Comments on the Proposed Rules
The Proposing Release solicited comment on the scope of the
definitions of ``foreign government'' and ``Federal Government.'' For
example, we asked whether the definition of ``foreign government''
should include a foreign government, a department, agency, or
instrumentality of a foreign government, a company owned by a foreign
government, or anything else. We also asked about the level of
ownership that would be appropriate for a company to be considered
owned by a foreign government. With respect to ``Federal Government,''
we requested comment on whether we should provide additional guidance
on its meaning.
We received few comments on this aspect of the proposal. Several
commenters generally supported the proposed definition of ``foreign
government.'' \313\ These commenters, however, recommended that the
rules be revised so that ``a company owned by a foreign government''
would include a company where the ``government has a controlling
shareholding, enabling it to make the major decisions about the
strategy and activities of the company,'' rather than requiring
majority ownership as proposed. As for the definition of ``Federal
Government,'' one commenter supported the proposed approach.\314\
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\313\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\314\ See letter from Department of Interior.
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3. Final Rules
We are adopting the definitions of ``foreign government'' and
``Federal Government'' as proposed. Under the final rules, a ``foreign
government'' is defined as a foreign government, a department, agency,
or instrumentality of a foreign government, or a company at least
majority owned by a foreign government. Foreign government includes a
foreign national government as well as a foreign subnational
government, such as the government of a state, province, county,
district, municipality, or territory under a foreign national
government.\315\ ``Federal Government'' means the U.S. Federal
Government and does not include subnational governments within the
United States.
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\315\ To the extent that aboriginal, indigenous, or tribal
governments are subnational governments in foreign countries,
payments to those government entities would be covered by the final
rules.
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As we discussed in the Proposing Release, for purposes of
identifying the foreign governments that received the payments, an
issuer must identify the administrative or political level of
subnational government that is entitled to a payment under the relevant
contract or foreign law. Also, if a third party makes a payment on a
resource extraction issuer's behalf, disclosure of that payment is
covered under the final rules. Additionally, as proposed, a company
owned by a foreign government means a company that is at least
majority-owned by a foreign government.\316\ Although we acknowledge
the concerns of the commenters that argued for a more expansive
definition, we believe it would be difficult for issuers to determine
when the government has control over a particular entity outside of a
majority-ownership context. In this regard, we note that the statute
refers to a company ``owned'' by a foreign government, not
``controlled'' by a foreign government. The control concept, of course,
is explicitly used in other contexts in Section 13(q).\317\
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\316\ See proposed Item 2.01(c)(7) of Form SD.
\317\ Compare Section 13(q)(1)(B) with Section 13(q)(2(A).
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G. Annual Report Requirement
1. Proposed Rules
We proposed requiring issuers to make their resource extraction
payment disclosure annually on Form SD. The proposed amendments to Form
SD required issuers to include a brief statement in the body of the
form directing readers to the detailed payment information provided in
the exhibits to the form. Consistent with the approach under ESTMA, the
proposed rules also required resource extraction issuers to file Form
SD on EDGAR no later than 150 days after the end of the issuer's most
recent fiscal year.\318\
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\318\ See proposed General Instruction B.2 to Form SD.
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[[Page 49384]]
2. Comments on the Proposed Rules
The Proposing Release solicited comment on whether issuers should
provide the payment disclosure mandated under Section 13(q) on Form SD
or whether that information should be provided on Forms 10-K, 20-F, or
40-F or a different form. We also asked whether the proposed disclosure
should be subject to the officer certifications required by Exchange
Act Rules 13a-14 and 15d-14 or a similar requirement.\319\ In addition
to requesting comment on the proposed 150 day filing deadline, we
solicited comment on whether the rules should require disclosure on a
fiscal year basis or an annual year basis, whether we should provide a
mechanism for requesting extensions (such as by amending Exchange Act
Rule 12b-25 \320\), and whether the rules should provide an
accommodation to filers that are subject to both Rules 13p-1 and 13q-1,
such as an alternative filing deadline.
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\319\ We solicited comment on a similar question in Section
II.G.6 of the Proposing Release. We address the responses to that
request for comment in this section as well.
\320\ 17 CFR 240.12b-25.
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Several commenters specifically supported using Form SD, and no
commenters suggested an alternative approach.\321\ Nevertheless, some
of the commenters conditioned their support for Form SD on the
disclosures being filed rather than furnished.\322\ The commenters
addressing the filing deadline all supported the proposed 150 day
requirement,\323\ although several commenters recommended providing a
phase-in period for newly public companies or newly acquired
companies.\324\ One of these commenters agreed with our assessment that
the proposed deadline would reduce compliance costs by allowing issuers
to use their existing processes and reporting systems to produce the
disclosure.\325\ Other commenters noted that the proposal was
consistent with the Canadian and United Kingdom regimes.\326\ These
commenters also supported allowing issuers to rely on Rule 12b-25 to
request extensions, subject to certain conditions.
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\321\ See letters from PWYP-US 1 and USSIF. See also letters
from ACEP; Encana; Global Witness 1; and Oxfam 1.
\322\ See letter from PWYP-US 1. See also letters from ACEP;
Encana; Global Witness 1; and Oxfam 1.
\323\ See letters from Encana and PWYP-US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
\324\ See letters from Cleary and Michael R. Littenberg, Ropes &
Gray (Feb. 16, 2016) (``Ropes & Gray'').
\325\ See letter from Encana.
\326\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
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No commenters suggested requiring officer certifications. Some
commenters stated that certifications were unnecessary in light of the
possibility for Exchange Act Section 18 liability.\327\ One commenter
opposed such a requirement, stating that it would add significant costs
with little benefit.\328\
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\327\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\328\ See letter from Encana.
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Some commenters specifically supported the proposed approach of
using an issuer's fiscal year as the reporting period.\329\ These
commenters, however, incorrectly assumed that the data was tagged by
quarterly period so that users could generate their own calendar year
reports if they chose to do so. It is unclear whether those commenters
would have recommended a different approach if, as proposed, the data
is not tagged by fiscal quarter.\330\ The Department of Interior did
not make a specific recommendation regarding the reporting period, but
noted that the USEITI MSG decided to use calendar year reporting for
the USEITI because it reduced the burden on reporting companies, many
of which use the calendar year as their fiscal year.\331\
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\329\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\330\ The proposed rules provided for tagging of the ``financial
period in which the payments were made'' and defined ``financial
period'' as ``the fiscal year in which the payment was made.'' See
proposed Item 2.01(a)(5), (c)(6) of Form SD. The final rules take
the same approach, although we have clarified the text so as to
avoid similar confusion. See Item 2.01(a)(5).
\331\ See letter from Department of Interior.
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3. Final Rules
We are adopting the final rules as proposed, with two new targeted
exemptions that provide for transitional relief or delayed reporting in
limited circumstances. These exemptions provide a longer transition
period for recently acquired companies that were not previously subject
to reporting under the final rules and a one-year delay in reporting
payments related to exploratory activities.\332\
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\332\ See Section II.I.3 below for a discussion of the latter
provision.
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Section 13(q) requires a resource extraction issuer to provide the
required payment disclosure in an annual report but otherwise does not
specify the location of the disclosure. We believe Form SD is an
appropriate form since it is already used for specialized disclosure
not included within an issuer's periodic or current reports, such as
the disclosure required by the rule implementing Section 1502 of the
Act.\333\ We also believe that using Form SD would facilitate
interested parties' ability to locate the disclosure and address
issuers' concerns about providing the disclosure in their Exchange Act
annual reports on Forms 10-K, 20-F, or 40-F.\334\ For example,
requiring the disclosure in a separate form, rather than in issuers'
Exchange Act annual reports, eliminates concerns about the disclosure
being subject to the officer certifications required by Exchange Act
Rules 13a-14 and 15d-14 and allows the Commission to adjust the timing
of the submission without directly affecting the broader Exchange Act
disclosure framework.\335\
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\333\ Rule 13p-1 [17 CFR 240.13p-1]. See also Exchange Act
Release No. 34-67716 (Aug. 22, 2012), 77 FR 56273 (Sept. 12, 2012)
(``Conflict Minerals Release'').
\334\ See also 2012 Adopting Release, nn.366-370 and
accompanying text. Under the rules proposed in the 2010 Proposing
Release, a resource extraction issuer would have been required to
furnish the payment information in its annual report on Form 10-K,
Form 20-F, or Form 40-F. Certain commenters continued to support
this approach prior to the Proposing Release. See letter from Susan
Rose-Ackerman (Mar. 28, 2014) (``[t]here is no need for the cost of
a separate report.''). No commenters raised similar concerns after
the Proposing Release.
\335\ In this regard, we previously considered permitting the
resource extraction payment disclosure to be filed in an amendment
to Form 10-K, 20-F, or 40-F, as applicable, but were concerned that
this might give the false impression that a correction had been made
to a previous filing. See 2012 Adopting Release, n.379 and
accompanying text.
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While Section 13(q) mandates that a resource extraction issuer
include the relevant payment disclosure in an ``annual report,'' it
does not specifically mandate the time period in which a resource
extraction issuer must provide the disclosure. We continue to believe
that the fiscal year is the more appropriate reporting period for the
payment disclosure. Despite the USEITI's use of calendar year
reporting, we believe fiscal year reporting would reduce resource
extraction issuers' compliance costs by allowing them to use their
existing tracking and reporting systems for their public reports to
also track and report payments under Section 13(q). Finally, we note
that ESTMA and the EU Directives also require reporting based on the
fiscal year, with ESTMA using the same deadline contained in the
proposed rules.\336\ Thus, using a fiscal year
[[Page 49385]]
reporting period should promote consistency and comparability across
payment transparency regimes.
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\336\ See ESTMA, Section 9(1) (``Every entity must, not later
than 150 days after the end of each of its financial years, provide
the Minister with a report that discloses, in accordance with this
section, the payments that it has made during that year.''); EU
Accounting Directive, Art. 43(2) (``The report shall disclose the
following information . . . in respect of the relevant financial
year.''); EU Transparency Directive, Art. 6 (``The report shall be
made public at the latest six months after the end of each financial
year . . . .'').
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We are also adopting the proposed 150 day deadline. As discussed
above, none of the commenters on the Proposing Release suggested a
different deadline, and we continue to believe that it is reasonable to
provide a filing deadline that is later than the deadline for an
issuer's annual report under the Exchange Act. Although certain
commenters discussed above supported allowing issuers to rely on Rule
12b-25 to request an extension to the filing deadline, we do not
believe that is necessary. In this regard, we note that none of the
potential issuers that provided comments recommended including an
extension process. Moreover, we believe 150 days is sufficient time to
prepare timely disclosure regarding the prior fiscal year.
Nevertheless, we do believe it is appropriate to provide
transitional relief for recently acquired companies where such
companies were not previously subject to the rules, as recommended by
certain commenters.\337\ As these commenters noted, we included a
similar provision in Rule 13p-1.\338\ The final rules therefore allow
issuers that have acquired or otherwise obtain control over an issuer
whose resource extraction payments are required to be disclosed under
the final rules, and that has not previously been obligated to provide
such disclosure pursuant to Rule 13q-1 or another ``substantially
similar'' jurisdiction's requirements in its last full fiscal year, to
not commence reporting payment information for the acquired company
until the Form SD filing for the fiscal year immediately following the
effective date of the acquisition.\339\ Unlike the targeted exemption
for payments related to exploratory activities described in Section
II.I.3 below, the excluded payment information is not required to be
disclosed in the Form SD filing covering the immediately following
fiscal year. We do not believe it is necessary to provide similar
transitional relief for newly acquired companies that were already
required to report such payments or companies conducting initial public
offerings. Such companies should already be familiar with the reporting
requirements or would have sufficient notice of them to establish
reporting systems and prepare the appropriate disclosure prior to
undertaking the initial public offering.
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\337\ See letters from Cleary and Ropes & Gray.
\338\ Instruction (3) to Item 1.01 of Form SD states that ``[a]
registrant that acquires or otherwise obtains control over a company
that manufactures or contracts to manufacture products with conflict
minerals necessary to the functionality or production of those
products that previously had not been obligated to provide a
specialized disclosure report with respect to its conflict minerals
will be permitted to delay reporting on the products manufactured by
the acquired company until the end of the first reporting calendar
year that begins no sooner than eight months after the effective
date of the acquisition.'' The final rules differ, however, from
what is provided for under Rule 13p-1 because disclosure under Rule
13p-1 occurs on a calendar year basis, not a fiscal year basis.
\339\ See Item 2.01(b) of Form SD.
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H. Public Filing
1. Proposed Rules
Recognizing the purposes of Section 13(q) and the discretion
provided by the statute, and taking into account the views expressed by
various commenters,\340\ we proposed requiring resource extraction
issuers to provide the resource extraction payment disclosure publicly.
We believed that requiring public disclosure, including the issuer's
name, would best accomplish the purpose of the statute. As explained
more fully below, we were not persuaded by certain commenters'
suggestion that issuers should submit their annual reports to the
Commission confidentially and that the Commission should use those
confidential submissions to produce an aggregated, anonymized
compilation that would be made available to the public.\341\
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\340\ See Proposing Release, n.241 and accompanying text.
\341\ See Proposing Release, Section II.G.2. See also id. at
n.301.
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2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on whether issuers
should be permitted to submit the required payment disclosure on a
confidential basis. We also asked whether issuers should be required to
file certain aggregate information publicly if we allow them to file
certain disaggregated information with us confidentially.
Numerous commenters supported, as a general policy matter, the
concept of publicly disclosing payment information.\342\ A number of
other commenters supported public filing in the specific manner we
proposed.\343\ These commenters generally stated that allowing for
confidential submission would undermine the transparency goals of
Section 13(q) and compromise the usefulness of the disclosure. For
example, the Department of Interior stated that permitting confidential
disclosure would contravene the transparency objectives of the statute
and that continued successful USEITI implementation requires the public
disclosure of payments for all revenue streams and by project.\344\
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\342\ See Form Letter A and Form Letter B.
\343\ See letters from ACEP; Bean; Department of Interior; State
Department; Global Witness 1; Peck & Chayes; Oxfam 1; PWYP-US 1;
Quinones; Sen. Cardin et al.; Sen. Lugar et al.; TI-USA; USAID; and
USSIF.
\344\ See letter from Department of Interior.
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On the other hand, several commenters recommended allowing for
confidential submission of the detailed payment information, which
would then be aggregated in an anonymized format by the Commission
before being publicly released.\345\ These commenters stated that their
recommended approach would reduce the burden and competitive harm
caused by public disclosure of each issuer's specific filings. These
commenters said that such public disclosure forces issuers to reveal
highly confidential, commercially-sensitive information and could
endanger the safety of an issuer's employees. They also stated that
these harms would not be mitigated by the European Union or Canadian
disclosure regimes because 46 of the top 100 oil and gas companies are
listed only in the United States, with many having no reportable
operations in Europe or Canada, or only limited operations in those
jurisdictions conducted through subsidiaries.
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\345\ See letters from API 1; Chevron; ExxonMobil 1.
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3. Final Rules
Section 13(q) provides the Commission with the discretion to
require public disclosure of payments by resource extraction issuers or
to permit confidential filings.\346\ In addition, the statute directs
the Commission to provide, to the extent practicable, a public
compilation of this disclosure. Consistent with the proposed rules, we
continue to believe that requiring public disclosure of each issuer's
specific filings (including all the payment information) would best
accomplish the purpose of the statute. Therefore, taking into account
commenters' views, we are exercising the discretion to adopt final
rules that require issuers to disclose the full payment information
publicly, including the identity of the issuer.
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\346\ See API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013).
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As discussed in the Proposing Release, several factors continue to
influence our approach.\347\ First, the statute requires us to adopt
rules that further the interests of international
[[Page 49386]]
transparency promotion efforts, to the extent practicable.\348\ In this
regard, we find it significant that several existing transparency
regimes now require public disclosure of each reporting company's
annual report, including the identity of the company, without
exception.\349\ A public disclosure requirement under Section 13(q)
would further the statutory directive to support international
transparency promotion efforts by enhancing comparability among
companies, as it would increase the total number of companies that
provide public, project-level disclosure. It would also be consistent
with the objective of ensuring that the United States is a global
``leader in creating a new standard for revenue transparency in the
extractive industries.'' \350\
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\347\ We incorporate the discussion from Section II.G.2 of the
Proposing Release.
\348\ Section 13(q)(2)(E).
\349\ See, e.g., ESTMA Specifications, Section 2.4 (``Reporting
Entities are required to publish their reports on the Internet so
they are available to the public''); EITI Standard (2013) at 6
(requiring all EITI reports to show payments by individual company
rather than aggregated data) and EITI Standard (2016) at Section
2.5(c) (in addition to individual company disclosure, requiring
disclosure of the company's beneficial owners in EITI reports by
2020); and EU Accounting Directive Arts. 42(1) and 45(1) (requiring
disclosure of payments to governments in a report made public on an
annual basis and published pursuant to the laws of each member
state.)
\350\ 156 Cong. Rec. S5873 (July 15, 2010) (Statement of Senator
Cardin); id. at S3815 (May 17, 2010) (Statement of Senator Cardin)
(describing Congress's intention to create ``a historic transparency
standard that will pierce the veil of secrecy that fosters so much
corruption and instability in resource-rich countries'').
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Second, the United States is currently a candidate country under
the EITI, which requires it to provide a framework for public, company-
by-company disclosure in the EITI report. At least with respect to
reporting of payments to the Federal Government, requiring issuers to
provide their annual reports publicly on Form SD is consistent with the
U.S. Government's policy commitments under the USEITI. As noted above,
the Department of Interior has stated that permitting confidential
disclosure would contravene USEITI implementation.
Third, we continue to believe that exercising our discretion to
require public disclosure of the information required to be submitted
under the statute is supported by the text, structure, and legislative
history of Section 13(q).\351\ In our view, our exercise of discretion
in this manner is consistent with the statute's use of the term
``annual report,'' which is typically a publicly filed document,\352\
and Congress's inclusion of the statute in the Exchange Act, which
generally operates through a mechanism of public disclosure.\353\
Furthermore, we observe that Section 13(q) requires issuers to disclose
detailed information in a number of categories, without specifying any
particular role for the Commission in using that information. For
example, Section 13(q) requires disclosure of ``the business segment of
the resource extraction issuer that made the payments'' and ``the
currency used to make the payments.'' We generally do not believe that
these data points would be useful to the Commission for preparing an
aggregated, anonymized compilation as the data points would not be
necessary to present aggregated payment information and otherwise would
not be reflected in such a compilation. We believe that this is a
further indication that Congress intended for the information to be
made publicly available. We believe that this is a further indication
that Congress intended for the information to be made publicly
available. Finally, neither the statute's text nor legislative history
includes any suggestion that the required payment disclosure should be
confidential. In fact, the legislative history supports our view that
the information submitted under the statute should be publicly
disclosed.\354\
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\351\ We acknowledge that the statutory interpretation arguments
we identify do not demonstrate an unambiguous Congressional intent
to require public disclosure. Nevertheless, these arguments, and the
related ambiguity, do lead us to reject the API's contrary
contention that ``the plain language of the statute confirms that
the Commission should require companies to disclose payment
information to the Commission confidentially[.]'' Letter from API 1
(emphasis added). We believe that, at a minimum, Congress provided
the Commission with discretionary authority. As such, based on our
assessment of the record evidence and our weighing of the various
policy considerations, we have determined to exercise that
discretion by requiring public disclosure of each issuer's annual
report on Form SD. Moreover, we believe that the statutory
interpretation considerations discussed in this Section II.H
demonstrate that our approach is a permissible under the statute.
\352\ See e.g., Form 10-K, Form 20-F, Form 10-Q, Form 8-K, etc.
\353\ The Exchange Act is fundamentally a public disclosure
statute. See generally Schreiber v. Burlington Northern, Inc., 472
U.S. 1, 12 (1985) (``the core mechanism'' is ``sweeping disclosure
requirements'' that allow ``shareholder choice''); Longman v. Food
Lion, Inc., 197 F.3d 675, 682 (4th Cir. 1999) (embodies a
``philosophy of public disclosure''); Franklin v. Kaypro Corp., 884
F.2d 1222, 1227 (9th Cir. 1987) (``forc[es] public disclosure of
facts''). Accordingly, the reports that public companies are
required to submit under the Exchange Act--such as the annual report
on Form 10-K giving a comprehensive description of a public
company's performance--have always been made public. Adding a new
disclosure requirement to the Exchange Act, and doing so for the
clear purpose of fostering increased transparency and public
accountability, is a strong indication that Congress intended for
the disclosed information to be made public.
\354\ See, e.g., 156 Cong. Rec. S3976 (May 19, 2010) (Statement
of Senator Feingold) (``This amendment would require companies
listed on U.S. stock exchanges to disclose in their SEC filings
extractive payments made to foreign governments for oil, gas, and
mining. This information would then be made public, empowering
citizens in resource-rich countries in their efforts to combat
corruption and hold their governments accountable.''); id. at S5872
(July 15, 2010) (Sen. Cardin) (``This [amendment] will require
public disclosure of those payments.''); see also id. at S3649 (May
12, 2010) (proposed ``sense of Congress'' accompanying amendment
that became Section 13(q)) (encouraging the President to ``work with
foreign governments'' to establish their own ``domestic requirements
that companies under [their jurisdiction] publicly disclose any
payments made to a government'' for resource extraction) (emphasis
added); id. at H5199 (June 29, 2010) (Joint Explanatory Statement of
the Committee of Conference) (the amendment ``requires public
disclosure to the SEC of any payment relating to the commercial
development of oil, natural gas, and minerals'') (emphasis added).
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More fundamentally, we believe that the public release of issuers'
annual reports is necessary to achieve the U.S. interest in providing a
level of payment transparency that will help combat corruption and
promote accountability in resource-rich countries, as Section 13(q) was
intended to do. The comments that we have received, as well as our own
consideration of the record and the views that we have received from
other U.S. and foreign governmental agencies with expertise in this
area, persuade us of this.\355\
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\355\ The API asserted that publication of each issuer's annual
report could cause competitive harm, but that keeping the
disclosures confidential with the public release of only an
aggregated, anonymized compilation will ``minimize . . . the
competitive harm to issuers by omitting the most sensitive data.''
See letter from API 1. We believe the targeted exemption we are
providing in connection with payments relating to exploratory
activities should help to mitigate such competitive harms. See
Section II.I.3 below. In addition, as we discuss in the economic
analysis, see Section III.B.2.c below, we believe that the other
claimed competitive harms may be overstated. Moreover, the data that
the API would exclude from public disclosure is, as we discuss
above, necessary to provide the type of granular and localized
transparency that will, in our view, help to combat corruption and
promote accountability. We thus believe that, on balance, the
potential competitive harms that might result from the public
disclosure of each issuer's annual report is necessary and
appropriate in furtherance of Section 13(q)'s objectives.
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We have carefully considered the API's assertion that the ``purpose
of enabling people to hold their governments accountable for the
revenues generated from resource development is achieved as long as
citizens know the amount of money the government receives, not the
companies that make each individual payment.'' \356\ We have also
carefully considered the API's related assertion that the Commission
has failed ``to connect [Section 13(q)'s] objectives to the specific
approach in the proposed rule--mandatory public disclosure by issuers
in their annual reports, as
[[Page 49387]]
opposed to confidential disclosure by issuers followed by a public
compilation produced by the Commission.'' \357\ For the reasons
discussed below, we do not agree with either of these assertions.
---------------------------------------------------------------------------
\356\ See letter from API 1.
\357\ See id.
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We believe that disclosing an issuer's identity is important to
help achieve the objectives of Section 13(q). In this regard, we note
that one of the proponents of the API's approach stated that ``[f]or
the API model to work,'' each payer's identity must be revealed.\358\
We further note that, after a decade of experience, the EITI (to which
the API and many of its members are active participants) has now
determined that company-specific, project-level disclosure is necessary
to further the EITI's goals.\359\
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\358\ See letter from ASP.
\359\ See Proposing Release, Section II.E.1, n.194, and Section
II.G.2.
---------------------------------------------------------------------------
Furthermore, as we explained in the Proposing Release, the record
supports a number of specific ways in which company-specific public
disclosures can facilitate the twin goals of helping to reduce
corruption in the extractives sector and promoting governmental
accountability. For example, public disclosure of company-specific,
project-level payment information may help assist citizens, civil
society groups, and others to monitor individual issuer's contributions
to the public finances and ensure firms are meeting their payment
obligations. We explained that such data may also help various actors
ensure that the government is properly collecting and accounting for
payments.\360\ We also explained that, relatedly, an important
additional benefit of company-specific and project-level transparency
is that it would act as a strong deterrent to issuers underpaying
royalties' or other monies owed. We believe the record also supports
the potential that the public disclosure of company-specific, project-
level data may reduce the willingness of resource extraction issuers to
participate in deals where they believe the revenues may be corruptly
diverted from the government coffers.\361\ With our decision to include
contractually required social and community payments among the required
disclosures, we now perceive an additional potential benefit of
company-specific, project-level public disclosure.\362\ Local
communities may be able to ensure that they are in fact receiving the
promised payments and that those payments are being used by the
governments receiving the funds for the benefit of the community. We
believe much the same is true with respect to contractual obligations
regarding in-kind infrastructure development.\363\
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\360\ See Proposing Release, Section I.E.2.
\361\ See letter from Publish What You Pay--US (second of three
letters on Mar. 8, 2016) (``PWYP-US 3'') (explaining that a resource
extraction issuer took part in a transaction in Nigeria knowing that
the revenues were going to be diverted from the Nigerian government
to a Nigerian oil minister, and explaining that aggregation and
anonymization of such payments would have made it more difficult for
the public and civil society ``to trace where the payment ended up
or even find out that it had been made''). See generally U.S. Senate
Permanent Subcommittee on Investigations, Committee on Government
Affairs, Money Laundering and Foreign Corruption: Enforcement and
Effectiveness of the Patriot Act, Case Study Involving Riggs Bank
Report, at 98-111 (July 14, 2004) (providing examples of the roles
that resource extraction companies can play in facilitating the
suspect or corrupt practices of foreign officials seeking to divert
resource extraction payments that belong to the government).
\362\ See Section II.C above.
\363\ See, e.g., letter from PWYP-US 1 (explaining that in
Equatorial Guinea, ``the government has used social payments as
cover under which to approach U.S.-listed oil and gas companies
about financing projects that appear to have been motivated by the
whims of individual government officials and had little to do with
social development. . . . This raises concerns that social payments,
if allowed to remain opaque, could be misused to channel corrupt
payments, special favors, and kickbacks, creating a gray zone of
illicit payments that may not be easily monitored or policed by the
[Foreign Corrupt Practices Act].''). See also letter from ASP
(``Even with an explicit legal prohibition on bribery, however, it
is not always clear what constitutes corruption, as contracts can be
written that favor individuals or companies. . . '').
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We note that the API asserts that ``Section 13(q) was passed to
increase the accountability of governments, not to force public
companies to pay more to develop natural resources, or to expose them
to activism by special interest groups.'' \364\ While we recognize the
API's point, we nonetheless believe that its view of the anti-
corruption and accountability objectives underlying Section 13(q) is
unduly narrow. In our view, the U.S. foreign policy interest in helping
citizens to hold their governments accountable for the management of
the public's natural resources (and preventing corruption in connection
with the extraction of those resources) \365\ includes, among other
things, providing transparency to help ensure that the transactions
that the government enters are producing a return that the citizens
believe is appropriate, and providing transparency to citizens and
members of civil society to help ensure that the transactions do not
involve suspect or corrupt payment arrangements. We thus agree with the
position advanced by USAID that ``[i]t is through disaggregated data,
which includes the identity of the payer and the location and type of
the project, that transparency will be promoted.'' \366\ As USAID
explained in its comment:
---------------------------------------------------------------------------
\364\ See letter from API 1.
\365\ See 156 Cong. Rec. S3816 (May 17, 2010) (Sen. Lugar)
(explaining that Section 13(q) is intended to ``help empower
citizens to hold their governments to account for the decisions made
by their governments in the management of valuable oil, gas, and
mineral resources and revenues''). See also id. at S5873 (July 15,
2010) (Sen. Cardin) (explaining that Section 13(q) will help
citizens ``ensure that their country's natural resource wealth is
used wisely for the benefit of the entire nation and for future
generations'').
\366\ See letter from USAID. See also letter from BHP
(``Transparency by governments and companies alike regarding revenue
flows from the extraction of natural resources in a manner which is
meaningful, practical, and easily understood by stakeholders reduces
the opportunity for corruption.'')
[T]ransparency about corporate payments to governments is a
prerequisite to the effective engagement of citizens to ensure that
such revenues are managed responsibly and for the benefit of a
country's citizens. Such engagement is only possible if the citizens
know which company is paying what kind of payment to which
government entity relating to which project in which location.
Aggregate data about multiple resources, projects, or geographic
locations does not allow citizens of a particular[ ] region to speak
up and insist that the revenues associated with the project
impacting them be used for their benefit, rather than to personally
benefit potentially corrupt government officials.\367\
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\367\ See letter from USAID. See also id. (``Aggregated
information that contains numerous companies' payment histories does
not allow for citizens to understand or engage with extraction
companies operating in their geographical area.''); letter from
State Department (expressing ``approval'' of the proposed rule's
``company-specific, project-level public disclosure'' provisions and
explaining that ``[t]his level of transparency required by the
proposed rule is key for ensuring that citizens have the necessary
means to hold their governments accountable. . . . [T]he rule's
requirements directly advance the United States' foreign policy
interests in increasing transparency and reducing corruption in the
oil, gas, and minerals sectors and strengthen the United States'
credibility and ability to fight corruption more broadly. . . .).
In addition, we believe that providing an issuer's Form SD filings
to the public through the searchable, online EDGAR system, which will
enable users of the information to produce their own up-to-date
compilations in real time, is both consistent with the goals of the
statute and the Commission's obligation, to the extent practicable, to
``make available online, to the public, a compilation of the
information required to be submitted'' by issuers.\368\ Under this
[[Page 49388]]
approach, all the filings will be separately searchable on EDGAR and
the information provided can be extracted and viewed on an individual
basis or as a compilation. Indeed, this approach provides users of the
disclosure with more current and immediately available information than
the API's proposed compilation, which would provide only one annual
update.\369\ That said, we appreciate that some commenters have
asserted that the statutory language could be read to require that the
Commission periodically make available its own compilation of the
information that issuers provide in their annual reports on Form
SD.\370\ Accordingly, we are including a provision in the final rules
providing that the Commission's staff will periodically make a separate
public compilation of the payment information submitted in issuers'
Forms SD available online. Under the final rules, the staff may
determine the form, manner, and timing of each compilation, except that
no information included therein may be anonymized.\371\
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\368\ The legislative history surrounding the adoption of
Section 13(q) indicates that Congress likely did not intend for the
public compilation requirement to serve as a substitute for the
public disclosure of an issuer's annual reports. Rather, the public
compilation requirement, added to an earlier version of the
legislation that became Section 13(q), was intended for the
convenience of the users of that data--many of whom were not seeking
the information for purposes of investment activity and thus would
potentially be unfamiliar with locating information in the extensive
annual reports that issuers file. In the earlier versions of the
draft legislation, the resource extraction payment disclosures were
required to be made in the annual report that each issuer was
already required to file under the securities laws. See, e.g.,
Extractive Industries Transparency Disclosure Bill (H.R. 6066) (May
2008) (``requir[ing] that each issuer required [to] file an annual
report with the Commission shall disclose in such report'' the
resource extraction payments that the issuer makes) (emphasis
added). For the convenience of non-investor users of the data, the
provision included a separate section entitled ``Public Availability
of Information'' that provided in pertinent part: ``The Securities
and Exchange Commission shall, by rule or regulation, provide that
the information filed by all issuers . . . be compiled so that it is
accessible by the public directly, and in a compiled format, from
the Web site of the Commission without separately accessing . . .
the annual reports of each issuer filing such information.'' Id.
(emphasis added). As the proposed legislative language was later
being incorporated into the Exchange Act, the Commission's staff
gave technical advice that led to the modification of the
legislative text to provide the Commission with additional
flexibility to permit the disclosures in an annual report other than
``the annual report'' that issuers already file so as to avoid
unnecessarily burdening issuers. See 156 Cong. Rec. S3815 (May 17,
2010) (Statement of Senator Cardin) (``We have been working with a
lot of groups on perfecting this amendment, and we have made some
changes that will give the SEC the utmost flexibility in defining
how these reports will be made so that we get the transparency we
need without burdening the companies.''). Our decision to utilize
Form SD rather than to require the disclosures in an issuer's annual
report, when coupled with the functionality that the EDGAR system
provides, in our view sufficiently addresses the Congressional
concern that originally led to the separate requirement of a
publicly available compilation.
\369\ Our recommended approach would provide investors with
information that would be immediately available to all users upon
filing. In contrast, under the API Proposal, users of the
information could have to wait to access the information for months
after an issuer files its Form SD (when the Commission publishes its
next periodic compilation). For example, assume that the Commission
issues a compilation annually on December 1st of each year. If an
issuer files its annual Form SD on January 1st, the information in
that report would not be publicly available for another eleven
months if the Forms SD were held confidentially. Under the approach
being adopted, however, the information will be made publicly
available as soon as the Form SD is filed on EDGAR.
\370\ See letter from API 1 (discussing the compilation
requirements in Section 13(q)(3)).
\371\ See Rule 13q-1(e). We do not anticipate that the staff
will produce such a compilation more frequently than once a year.
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In sum, we believe that public disclosure of each issuer's Form SD
is important to further Section 13(q)'s foreign policy objectives of
helping to reduce corruption and enhance the ability of citizens to
hold their governments accountable for the management of the natural
resources in their country and the use of the revenues generated by
those resources.\372\ We therefore have exercised our discretion under
Section 13(q) to require issuers to disclose publicly their Forms SD.
---------------------------------------------------------------------------
\372\ The API contends that, ``[b]y requiring disaggregated,
contract-level public disclosures,'' our rule ``will make it more
difficult for parties seeking information about how much governments
are ultimately receiving to obtain that information.'' Letter from
API 1. The API claims that, by contrast, a ``public compilation that
aggregates the total amount of money paid to governments for oil,
gas, and minerals'' would be ``more informative.'' Id. We note that,
in advancing this contention, the API appears to assume that the
Section 13(q) disclosures are designed only to provide information
about how much governments are ultimately receiving. Nevertheless,
as we have described above, we believe that the transparency
provided by the disaggregated, project-level disclosures
significantly advances broader anti-corruption and accountability
goals. Even so, we note that to the extent a particular user is
focused on learning about how much money governments are ultimately
receiving, EDGAR's functionality will allow them to generate this
information from the filed annual reports.
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I. Exemption From Compliance
1. Proposed Rules
In the Proposing Release, we noted that many commenters previously
had requested exemption from Section 13(q)'s disclosure requirements,
in particular in cases where the required payment disclosure is
prohibited under the host country's laws. We noted that some commenters
had identified specific countries that they claimed prohibit disclosure
while other commenters challenged those statements. Given commenters'
conflicting positions and representations, and consistent with the EU
Directives and ESTMA, we did not propose any blanket or per se
exemptions. Instead, we indicated that we would consider using our
existing authority under the Exchange Act to provide exemptive relief
at the request of issuers, if and when warranted.\373\ We stated our
belief that a case-by-case approach to exemptive relief using our
existing authority was preferable to either adopting a blanket
exemption or providing no exemptions. We also stated that, among other
things, such an approach would permit us to tailor the exemptive relief
to the particular facts and circumstances presented, such as by
permitting some alternative form of disclosure that might comply with
the foreign country's law or by phasing out the exemption over an
appropriate period of time.\374\
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\373\ See Section 36(a) of the Exchange Act (15 U.S.C. 78mm(a)).
\374\ For example, if a resource extraction issuer were
operating in a country that enacted a law that prohibited the
detailed public disclosures required under our proposal, the
Commission could potentially issue a limited exemptive order (in
substance and/or duration). The order could be tailored to either
require some form of disclosure that would not conflict with the
host country's law and/or provide the issuer with time to address
the factors resulting in non-compliance.
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2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on whether a case-by-
case exemptive process was a better alternative than providing a rule-
based blanket exemption for specific countries or other circumstances,
or providing no exemptions. We also asked whether any foreign laws
prohibit the disclosure that would be required by the proposed rules,
or if there was any information that had not been previously provided
by commenters that supports an assertion that such prohibitions exist
and are not limited in application. We also asked whether the EU
Directives' and ESTMA's lack of an exemption for situations when
disclosure is prohibited under host country law had presented any
problems for resource extraction issuers subject to those reporting
regimes.
A number of commenters supported the proposed approach.\375\ One of
these commenters, while ``strongly support[ing]'' our approach, urged
the Commission to consider existing commercial relationships when
responding to requests for exemptive relief.\376\ This commenter noted
that contractual confidentiality clauses usually allow the contractual
parties to provide confidential information requested by court order or
regulatory
[[Page 49389]]
bodies, but condition such disclosure on the maintenance of
confidentiality by the receiving entity.
---------------------------------------------------------------------------
\375\ See letters from ACTIAM et al. (Calvert separately
commenting that it preferred no exemption despite being a signatory
to this letter); Bean; Cleary; and Petrobras.
\376\ See letter from Petrobras.
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Many other commenters supported the proposed approach, but
preferred not providing any exemptions.\377\ A number of these
commenters recommended granting an exemption only if the request
relates to a foreign law prohibition pre-dating the passage of Section
1504.\378\ Commenters also disputed claims that foreign law
prohibitions exist or that they would have competitive harm.\379\
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\377\ See letters from ACEP; Calvert; Global Witness 1; Oxfam 1;
PWYP-US 1; Sen. Cardin et al.; Sen. Lugar et al.; TI-USA; and USSIF.
\378\ See letters from Sen. Cardin et al.; Sen. Lugar et al.
\379\ See letters from Global Witness (Mar. 8, 2016) (``Global
Witness 2'') (``Nor is there any persuasive evidence of the
existence of secrecy laws that are in conflict with Section 13(q),
as the Commission itself determined in 2012, and as we and others
have argued.''); Natural Resource Governance Institute (Second of
two letters on Feb. 16, 2016) (``NRGI 2'') (``In practice, there is
therefore no blanket exclusion of covered companies from awards in
[Angola, Cameroon, China, and Qatar]. Our findings further show that
the covered companies have not been significantly affected in their
ability to secure contracts in [those] countries after the adoption
of Section 1504.''); McCarthy (stating that Angola's Production
Sharing Agreements provide a standard exception from confidentiality
to comply with any applicable laws or regulations and disputing any
competitive harm to companies required to report payments to host
governments in Angola, Cameroon, China, or Qatar); Oxfam 2 (noting
the disclosure of payments to governments in China and Qatar in the
RDS Report and providing additional evidence of a lack of foreign
law prohibition on payment disclosure under Qatari law); Oxfam-ERI
(``No country prohibits disclosure, and the Commission should not
grant any categorical exemptions.''); PWYP-US 1 (``There are no
foreign laws prohibiting disclosure of the information required
under Section 13(q).''); TI-USA (``[W]hile it has been alleged that
Angolan law prohibits the disclosure of resource extraction payments
. . . Statoil publicly reports such payments to the Angolan
government.''); PWYP-US 5 (noting the disclosure of payments to
governments in China and Qatar in the Total Report and Tullow
Report).
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Numerous commenters recommended not providing any exemptions.\380\
For example, the Department of Interior noted that federal leases for
natural resource development on federal lands and waters are public and
do not contain confidentiality provisions. This commenter stated that,
consistent with the contract transparency provisions under the EITI
Standard, USEITI reporting includes disclosure of these leases and that
providing an exemption would contravene the transparency objectives of
Section 13(q) and the Federal Government.
---------------------------------------------------------------------------
\380\ See Form Letter A; Form Letter B and letters from
Department of Interior; Peck & Chayes; Quinones; and NRGI 1.
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Several commenters supported blanket exemptions instead of the
proposed case-by-case approach.\381\ These commenters sought exemptions
for disclosure that would violate a host country's laws, conflict with
the terms of existing contracts, or reveal commercially sensitive
information. These commenters also sought an exemption for disclosure
that would jeopardize the safety of an issuer's personnel.\382\ They
were concerned that the cost of not receiving an exemption,
particularly when a foreign law prohibition was in place, could be very
high if the issuer was required to cease operations in the host country
as a result of the prohibition and liquidate its fixed assets at a
steep discount. They also noted the volatility of the regions in which
they operate, the potential for terrorist attacks, and the existence of
confidentiality provisions in older resource extraction agreements.
---------------------------------------------------------------------------
\381\ See letters from API 1; Chevron; ExxonMobil 1; and
Nouveau.
\382\ See 2012 Adopting Release, n.69 and accompanying text. See
also letters from API 1 and Chevron. Other commenters opposed such
an exemption and stated that increased transparency would instead
increase safety for employees. See 2012 Adopting Release, n.70 and
accompanying text. See also letter from Oxfam-ERI.
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The API and certain other industry commenters sought various
blanket exemptions.\383\ With respect to an exemption for foreign law
prohibitions on disclosure, these commenters asserted that both Qatar
and China prohibit the required disclosure.\384\ They were also
concerned that it would be difficult to obtain timely exemptive relief
on a case-by-case basis if exemptions would have to be granted by the
full Commission. To address these concerns, they recommended the
following three alternatives to the proposed approach, in order of
preference: (1) Exempting issuers from reporting payments in any
country whose laws prohibit the disclosure; (2) exempting issuers from
reporting payments in any country whose laws prohibited the
disclosures, so long as those laws existed before the Commission
adopted its rules; and (3) exempting issuers from reporting payments in
specific countries where the risk to issuers is particularly acute.
---------------------------------------------------------------------------
\383\ See letters from API 1; Chevron; and ExxonMobil 1.
\384\ We note in this regard that the API did not reiterate its
previous assertions that Angola and Cameroon have laws prohibiting
the disclosure of payment information.
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As for disclosure that would reveal commercially sensitive
information, these commenters recommended allowing issuers to redact
payment information temporarily until a later time when the disclosure
would be less harmful (e.g., after news of a new discovery is public
knowledge). The API explained that such an exemption would be
particularly appropriate for exploratory activities and new finds, but
acknowledged that the commercial terms of older projects are generally
publicly known (even if the contracts are not technically publicly
disclosed), thus suggesting that an exemption would generally not be
necessary to protect commercially sensitive information for older
projects. They also recommended exempting disclosure in situations
where revealing payment information would breach contractual
obligations that existed before Congress passed Section 13(q) or when
it might jeopardize the safety of an issuer's employees (including
physical harm or criminal prosecution) or the national security of a
host nation.
In addition to these broader recommendations about the types of
exemptions that should be included in the rules, commenters also made
recommendations with respect to the process for granting exemptions. A
few commenters were concerned that the exemption requests would be
considered in a public forum, which could result in disclosure of
competitively sensitive information or violate host country law.\385\
One of these commenters requested, at a minimum, that the rules follow
an exemptive approach where any claimed exemption would require issuers
to make reasonable efforts to obtain permission for disclosure, file
legal opinions supporting any non-disclosure, and be subject to review
by the Commission, but would otherwise be self-executing.\386\ Another
commenter recommended using a no-action letter process with delegated
authority to the Division of Corporation Finance, which it believed
would be both flexible and practical.\387\
---------------------------------------------------------------------------
\385\ See letters from Cleary and ExxonMobil 1.
\386\ See letter from ExxonMobil 1.
\387\ See letter from Cleary.
---------------------------------------------------------------------------
Numerous commenters recommended a public process for exemption
applications.\388\ Many of these commenters specifically called for a
process that involved notice and comment.\389\ Some of them
specifically recommended requiring issuers to apply for exemptions
using Exchange Act Rule 0-12.\390\ Some of these commenters
[[Page 49390]]
recommended that the rules provide clear guidance on the criteria that
would be used to evaluate applications for exemptions.\391\ One of them
also recommended an instruction clarifying that exemptions will be
granted rarely and only for extremely compelling reasons.\392\
---------------------------------------------------------------------------
\388\ See letters from ACEP; ACTIAM et al.; Bean; Calvert;
Global Witness 1; Oxfam 1; PWYP-US 1; Sen. Cardin et al.; Sen. Lugar
et al.; TI-USA; and USSIF.
\389\ See letters from ACEP; Bean; Calvert; Global Witness 1;
Oxfam 1; PWYP-US 1; Sen. Cardin et al.; Sen. Lugar et al.; TI-USA;
and USSIF.
\390\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\391\ See letters from Bean and USSIF.
\392\ See letter from Bean.
---------------------------------------------------------------------------
A number of commenters made specific recommendations for the types
of supporting documentation the rules should require from those seeking
an exemption due to a foreign law prohibition on disclosure.\393\ These
commenters recommended requiring the text of the relevant law, a legal
opinion identifying the conflicts with the disclosure rules, and a
description of the steps taken by the issuer to obtain permission from
the host country to disclose, such as waivers, exceptions, or
exemptions. Some of these commenters also recommended requiring a
description of the penalties or sanctions for violating the foreign
legal provision, including information about whether the prohibition
has been enforced in the past.\394\ One of them also recommended
requiring that the issuer provide the text of the foreign law and the
legal opinion in English and also provide the date of enactment or
promulgation of the foreign law or rule.\395\
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\393\ See letters from ACEP; Bean; Global Witness 1; Oxfam 1;
PWYP-US 1; Sen. Cardin et al. and Sen. Lugar et al.
\394\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\395\ See letter from Bean.
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3. Final Rules
While we continue to believe, for the reasons discussed below, that
a case-by-case approach to providing exemptions under our existing
authority is generally preferable in this context, we are also
including a targeted exemption for payments related to exploratory
activities.\396\ We believe this exemption, as described and discussed
below, should help mitigate any potential competitive harm that issuers
might experience while not materially reducing the overall benefits of
the disclosure to its users. To address any other potential bases for
exemptive relief, beyond the exemptions for payments related to
exploratory activities and recently acquired companies, issuers may
apply for exemptions on a case-by-case basis using, as recommended by
certain commenters,\397\ the procedures set forth in Rule 0-12 of the
Exchange Act.\398\ This approach will allow the Commission to determine
if and when exemptive relief may be warranted and how broadly it should
apply, based on the specific facts and circumstances presented in the
application.\399\
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\396\ See Item 2.01(b) of Form SD. As discussed above in Section
II.G.3, the final rules also include transitional relief for certain
recently acquired companies.
\397\ See letters from ACEP; Global Witness 1; Oxfam; and PWYP-
US 1. See also note 388 and accompanying text.
\398\ 17 CFR 240.0-12.
\399\ For example, an issuer claiming that a foreign law
prohibits the required payment disclosure under Section 13(q) will
be able to make the case that it would suffer substantial commercial
or financial harm if relief is not granted. An issuer could also
apply for an exemption in situations where disclosure would conflict
with the terms of a material preexisting contract, reveal
commercially sensitive information not otherwise available to the
public, or have a substantial likelihood of jeopardizing the safety
of an issuer's personnel, among other possible bases for an
exemption. The Commission could then determine the best approach to
take based on the facts and circumstances, including denying an
exemption, providing an individual exemption, providing a broader
exemption for all issuers operating in a particular country, or
providing some other appropriately tailored exemption. See letters
from ACEP; ACTIAM et. al.; Bean; Calvert; Cleary; Oxfam 1; Oxfam-
ERI; Petrobras; PWYP-US 1; Sen. Cardin et al.; Sen. Lugar et al.;
TI-USA and USSIF (each supporting a case-by-case exemptive approach,
although some expressed a preference for not providing any
exemptions).
---------------------------------------------------------------------------
With respect to the request for a blanket exemption in countries
where the law may prohibit the disclosure, however, we believe that
there continues to be sufficient uncertainty in the record such that
this approach is not necessary or appropriate at this time. For
example, while the API initially identified four countries whose laws
would prohibit Section 13(q) disclosures, its most recent comment
letter listed only two of those countries as currently prohibiting such
disclosures.\400\ In addition, with respect to those two remaining
countries, we note that several large resource extraction issuers have
recently made payment disclosures related to those jurisdictions.\401\
We think this state of uncertainty, which at a minimum raises questions
about the existence and scope of disclosure prohibitions in these
foreign jurisdictions, counsels against adoption of any blanket
exemptions for foreign law conflicts at this time. Moreover, as more
companies begin to report under the EU Directives and ESTMA, the
existence of alleged conflicts between those disclosure regimes and
foreign laws may be clarified prior to any reports being due under the
rules we are adopting today.\402\ This, along with the fact that
issuers will have a two-year period before any reports are due under
our rules in which to submit an exemptive application (along with
appropriate supporting materials), further supports the conclusion that
a case-by-case exemptive approach is preferable.
---------------------------------------------------------------------------
\400\ See letter from API 1.
\401\ See note 299 above.
\402\ For example, reports under the United Kingdom's
implementation of the EU Directives will be due by November 2016 at
the latest (with certain reports due by June 2016) covering payments
made in fiscal 2015; and reports under Canada's ESTMA will be due
for many issuers (i.e., for those issuers with fiscal years ending
December 31, 2016) in May 2017 covering payments made in 2016.
Significantly, we note that several reports that already have been
filed pursuant to the EU Directives have disclosed payments made to
the governments of Angola, China, and Qatar, which commenters
previously indicated prohibited such disclosure. See BHP Report
(China); Shell Report (China and Qatar), Statoil Report (Angola);
and Total Report (Angola, China, Qatar). See also note 302 above. As
additional reports are filed, we expect to gain further insight into
the permissibility and feasibility of disclosure in these and other
jurisdictions.
---------------------------------------------------------------------------
Separately, we also believe that the case-by-case exemptive
approach is significantly less likely than a blanket approach to
encourage foreign governments to enact laws prohibiting the Section
13(q) disclosures. A blanket exemption could lead a foreign government
contemplating such a law to conclude that enactment of the law would
have its intended effect of preventing the disclosures. With a case-by-
case exemptive approach, however, that foreign government would not be
able to reach that conclusion, as it would face a number of
uncertainties concerning the potential results of enacting such a law.
Specifically, the foreign government would not have any basis to assume
that the Commission would grant exemptive relief, and, even if it did
so, whether such relief would apply on a permanent basis or in a more
limited fashion (such as a grandfathering provision or a time-limit to
allow issuers to divest their interests in the country in an orderly
manner). This uncertainty about whether the law would have its intended
effect, in our view, should help to discourage foreign governments from
adopting such a law. Relatedly, we note that one commentator opposed
the case-by-case exemptive approach because of the uncertainty that it
may cause issuers.\403\ While we appreciate this concern, we believe
that it is on balance outweighed by the countervailing considerations
discussed above, and elsewhere in this release and the Proposing
Release, which counsel against our adopting most of the blanket
exemptions that commenters proposed.
---------------------------------------------------------------------------
\403\ See letter from API 1 (``issuers need the certainty of
knowing how the rule will affect them now'').
---------------------------------------------------------------------------
With respect to the request for an exemption to prevent the
disclosure of
[[Page 49391]]
commercially sensitive information, we are persuaded that a targeted
exemption for payments made in connection with exploratory activities,
in line with commenters' suggestions, is appropriate.\404\
Specifically, issuers will not be required to report payments related
to exploratory activities in the Form SD for the fiscal year in which
payments are made but can instead delay reporting such payments in the
Form SD until the fiscal year following the fiscal year in which the
payments were made. In this regard, we believe that the likelihood of
competitive harm (in regards to a new discovery) from the disclosure of
payment information related to exploratory activities diminishes over
time starting from when the exploratory activities on the property or
any adjacent property have begun.\405\
---------------------------------------------------------------------------
\404\ See letter from API 1 (asserting as an example of
competitive harm payments to local governments in connection with
``high-potential exploratory territory'' and maintaining that case-
by-case exemptions would be insufficient to protect against
competitive harm in such situations).
\405\ See note 406 below.
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For purposes of this exemption, we consider payments to be related
to exploratory activities if they are made as part of the process of
identifying areas that may warrant examination or examining specific
areas that are considered to have prospects of containing oil and gas
reserves, or as part of a mineral exploration program. In all cases,
however, exploratory activities are limited to activities conducted
prior to the development or extraction of the oil and gas or minerals
that are the subject of the exploratory activities. Furthermore, this
targeted exemption is not permitted for payments related to exploratory
activities on the property or any adjacent property once the issuer has
commenced development or extraction activities anywhere on the
property, on any adjacent property, or on any property that is part of
the same project.
In providing this exemption, we also considered the fact that the
total payment streams from the first year of exploration that would be
covered by the exemption should often be relatively small compared to,
for example, the annual payment streams that would likely occur once an
issuer commences development and production. Given this likelihood, we
believe, on balance, that any diminished transparency as a result of
the one-year delay in reporting of such payments that we are permitting
is justified by the potential competitive harms that we anticipate may
be avoided as a result of this exemptive relief. Nevertheless, we have
limited the exemption to one year because we believe that the
likelihood of competitive harm related to a new discovery from
disclosing the payment information diminishes over time once
exploratory activities on the property or any adjacent property have
begun.\406\
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\406\ We appreciate that the exploratory phase may vary from
project to project, and that this variance can depend on such
considerations as the geographic area in which the exploration is
being undertaken and the type of resource being sought. In
determining to provide a one-year reporting delay, we looked to
considerations in the oil and gas industry in particular as oil and
gas industry commenters asserted a specific need for the exemptive
relief. We understand that the exploratory period for oil and gas
generally involves a seismic survey/analysis phase followed by an
exploratory drilling phase. We further understand that, while the
time periods for those activities can vary considerably, conducting
seismic surveys and analyzing the data can take six months or more,
while (at least for conventional onshore hydrocarbons) exploratory
drilling and site clearance can potentially take a similar length of
time. These considerations lead us to believe that one year is an
appropriate period for a delay in reporting exploratory payments.
---------------------------------------------------------------------------
Beyond these accommodations for exploratory activities and certain
recently acquired companies, we are not persuaded that we should adopt
exemptions for other purposes in the final rules. As a threshold
matter, we note that many commenters advanced credible arguments
challenging the claims raised by industry commenters for broad
exemptive relief in these areas.\407\ Further, we are mindful that
global resource extraction payment transparency touches on a host of
issues that are constantly changing and evolving and as such do not
lend themselves to static exemptive regimes. In this regard, we note
the enactment of significant transparency laws in major economic
markets, the expanding implementation of the EITI, the increasing
prevalence of voluntary payment disclosure, evolution in the terms
typically included in agreements with host governments, and the
constantly changing geopolitical security landscape.\408\ As such, we
believe that crafting exemptions that balance the transparency goals of
Section 13(q) with the myriad concerns that could arise is best done
through a flexible facts-and-circumstances based approach. Furthermore,
although we have included only two targeted exemptions in the final
rules, nothing prevents the Commission from using its existing
exemptive authority to provide broader relief if the facts and
circumstances should warrant such action in the future.\409\
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\407\ See Section II.I.2 above.
\408\ We note in this regard that, in contrast to the 2012
Rules, commenters have not reiterated previous assertions that
Cameroon and Angola prohibit the disclosure of resource extraction
payments.
\409\ See Section 36(a) of the Exchange Act (15 U.S.C. 78mm(a)).
We contemplate relying on Section 36(a) and the application process
set forth in Rule 0-12 as the principal means of considering
exemptive relief from the requirements of the final rules, except
that, where exigent circumstances warrant, the staff, acting
pursuant to delegated authority from the Commission, may rely on
Section 12(h) of the Exchange Act (15 U.S.C. 78l(h) for the limited
purpose of providing interim relief while the Commission is
considering a Section 36(a) exemptive application.
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A separate but related consideration is that developing objective
criteria for exemptive relief for potential competitive harm (beyond
the exploratory phase) or safety that could be uniformly applied would
be difficult. In our view, issues related to such competitive and
safety concerns are inherently case-specific, requiring an analysis of
the underlying facts and circumstances. We are therefore concerned that
adopting a broad exemption with respect to competitive concerns (beyond
the exploratory phase) or safety concerns could result in issuers
applying the exemption in an overly broad way. Specifically, the
effective and appropriate utilization of broad exemptions in these
areas would be dependent on the independent assessment and good faith
implementation by issuers, potentially producing inconsistent
application, if not overuse.\410\ With a case-by-case exemptive
approach, however, the Commission can ensure that exemptions are
afforded only where the facts and circumstances warrant.
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\410\ Cf. generally letter from API 1 (noting potential
difficulties when rule text is ``susceptible to varying
interpretations'' among issuers).
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Finally, we are not persuaded that there is a need for an exemption
in the final rules for contracts that may prohibit the disclosure. We
note that various commenters opposing such an exemption provided
evidence indicating that many contracts allow for disclosure of payment
information where it is required by law.\411\ Moreover, we
[[Page 49392]]
believe that the two-year period that we are providing issuers before
the reporting obligation takes effect should allow most issuers a
sufficient opportunity to obtain the necessary modifications to
existing contracts so that they can make the required disclosures. With
respect to any future contracts that issuers may enter, we anticipate
that issuers can and should include express provisions permitting them
to make the disclosures required under Section 13(q).
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\411\ Several commenters provided persuasive evidence
demonstrating that exceptions to confidentiality for laws or stock
exchange requirements that require disclosure are frequently a
standard component of oil, gas and mining contracts. See letter from
PWYP-US 3. For instance, we understand that the Association of
International Petroleum Negotiators (AIPN) has included this type of
exception to confidentiality in its model contract used by its
members for the last two decades. See letter from Oxfam America
(Mar. 20, 2012) (``Oxfam 2 (pre-proposal)'') (noting that the AIPN
Model Form Confidentiality Agreement authorizes the disclosure of
otherwise confidential information that is required ``under
applicable law, including by stock exchange regulations or by a
governmental order, decree, regulation or rule.''). Another
commenter provided a database of over 800 contracts from 73
countries and reported that over half of the contracts in the
database explicitly allow for disclosure when required by law. See
letter from OpenOil UG (Oct. 26, 2015) (``OpenOil (pre-proposal)'').
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Commenters were also divided about whether the exemptive
application process should be public (with notice and comment) or
confidential. We agree that public input can be beneficial in
understanding the complexities of the resource extraction industry.
Accordingly, Rule 0-12 allows the Commission to provide notice in the
Federal Register and to receive public comment on applications for
exemptions when it deems such an approach appropriate. Notwithstanding
our appreciation for public input, we also do not believe it is
appropriate to require an issuer to reveal the very information it
seeks to protect in order to apply for an exemption. In this regard, we
note that although an applicant would need to describe the particular
payment disclosure it seeks to omit and the specific facts and
circumstances that warrant an exemption, it need not include specific
payment amounts to support its application. We believe that in most
cases the application could present sufficient information to describe
the circumstances warranting an exemption and the corresponding harm
without revealing the precise information that the issuer seeks to keep
confidential. We also note that Rule 0-12 does allow applicants to
request temporary confidential treatment to the extent provided under
Rule 81,\412\ which may further alleviate concerns by delaying public
access to the exemptive application for up to 120 days from the time of
the Commission's response. Further, issuers will be permitted to
withdraw their application if it appears to the staff that the request
for confidential treatment should be denied, in which case the
application would remain in the Commission's files but would not be
made public.\413\
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\412\ 17 CFR 200.81.
\413\ 17 CFR 200.81(b). The information could be subject to a
request made pursuant to the Freedom Of Information Act (FOIA). In
this regard, however, we note that FOIA provides an exemption from
public release for ``trade secrets and commercial or financial
information obtained from a person and privileged or confidential.''
See 5 U.S.C. 552(b)(4).
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Finally, we note that Rule 0-12 requires an application to be made
in writing, including ``any supporting documents necessary to make the
application complete.'' Commenters were divided on whether the
Commission should require certain specified documentation as part of
the application or whether we should follow a more flexible, non-
prescriptive approach, where the registrant would initially determine
what supporting information is appropriate. We believe a non-
prescriptive, flexible process is more appropriate given that we are
adopting a case-by-case approach to exemptions that is driven by
particular facts and circumstances. We do note, however, that the
Commission, through the Division of Corporation Finance, may request,
as appropriate, supporting documentation such as a legal opinion, the
text of applicable foreign laws (translated as necessary),
representations as to the public availability of the information in
question, or a description of the steps taken by the issuer to obtain
permission to disclose.\414\ Failure to provide such information upon
request could cause the application to be deemed incomplete or denied.
We note that, as with any exemptive application, the burden is on the
applicant to demonstrate that such relief is necessary and appropriate
in the public interest.
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\414\ See Rule 0-12(a), (f) [17 CFR 240.0-12(a), (f)].
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J. Alternative Reporting
1. Proposed Rules
As noted in the Proposing Release, several jurisdictions have
implemented resource extraction payment disclosure laws since the 2012
Rules.\415\ Around the time of the Proposing Release, the USEITI also
published its first report.\416\ In light of these developments and
with a view towards reducing compliance costs, we proposed a provision
that would allow issuers to meet the requirements of the proposed rules
by providing disclosure that complies with a foreign jurisdiction's
rules or that meets the USEITI's reporting requirements, if the
Commission has determined that those rules or requirements are
substantially similar to the rules adopted under Section 13(q).\417\
The Proposing Release contemplated that the Commission would be able to
make a determination about the similarity of a foreign jurisdiction's
or the USEITI's disclosure requirements either unilaterally or pursuant
to an application submitted by an issuer, jurisdiction, or other
party.\418\
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\415\ See Section I.C above.
\416\ See note 87 above.
\417\ Proposed Item 2.01(b) of Form SD.
\418\ See Proposing Release, Section II.G.4.
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We proposed requiring resource extraction issuers to file the
substantially similar report as an exhibit to Form SD with a statement
in the body of its filing that it was relying on the accommodation and
identifying the alternative reporting regime for which the report was
prepared (e.g., a foreign jurisdiction or the USEITI).
2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on whether we should
include an alternative reporting process that would allow for an issuer
that is subject to the reporting requirements of a foreign jurisdiction
or the USEITI to submit those reports in satisfaction of our
requirements. In addition, we solicited comment on whether a
``substantially similar'' standard was appropriate and which criteria
should apply when evaluating the similarity of another jurisdiction's
reporting requirements. We also solicited comment on various aspects of
the procedures surrounding an alternative reporting process, such as
whether the Commission should unilaterally make the determination, what
types of parties should be allowed to submit an application for
alternative reporting, what supporting evidence should be required, and
what application procedures should be implemented. For example, we
requested comment on whether Exchange Act Rule 0-13 would provide
appropriate procedures for requesting alternative reporting. We also
solicited comment on whether the Commission should recognize certain
foreign reporting requirements or the USEITI reporting framework as
substantially similar when the final rule is adopted.
All of the commenters that addressed this aspect of the Proposing
Release supported the concept of alternative reporting in some
form.\419\ Despite general support, several commenters recommended
using a standard different from ``substantially similar,'' such as
``equivalent,'' \420\ ``substantially equivalent,'' \421\ ``broadly
similar,'' \422\ or
[[Page 49393]]
``broadly comparable.'' \423\ Several commenters also recommended
criteria that the Commission should focus on when assessing the
similarity of other regimes. For example, one commenter recommended
using the two criteria set forth in Canada's substitution policy.\424\
A variety of other recommendations were made by other commenters, such
as comparing (1) the types of payments that are required to be
disclosed; (2) the types of payment recipients (including subnational
governments and entities controlled by the government); (3) whether
project-level disclosure is required and, if so, the definition of
``project;'' (4) whether the disclosure must be publicly filed and
whether it includes the identity of the issuer; (5) whether
subsidiaries under the control of and consolidated by the issuer are
reported; (6) the threshold for de minimis payments; (7) whether the
disclosure must be provided using an interactive data format that
includes electronic tags; (8) the availability of exemptions from
reporting; (9) frequency of reporting; (10) anti-evasion measures; and
(11) the availability of liability or penalties for violations of the
disclosure requirements.\425\
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\419\ See letters from ACEP; ACTIAM et al.; API 1; Bean; BHP;
BP; Calvert; Chevron; Cleary; Department of Interior; Encana;
ExxonMobil 1; Global Witness 1; Oxfam 1; PWYP-US 1; RDS; Ropes &
Gray; Sen. Cardin et al.; Sen. Lugar et al.; and Total.
\420\ See letter from Cleary.
\421\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\422\ See letter from BP.
\423\ Id.
\424\ See letter from Cleary. For a discussion of Canada's
substitution policy, see Section I.C.2 above.
\425\ No one commenter recommended all of these factors. See,
e.g., letters from PWYP-US 1 and Encana.
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One commenter recommended that the Commission not require issuers
to convert data into a different interactive data format as a condition
to alternative reporting.\426\ Another commenter recommended that the
EU Directives and ESTMA be deemed substantially similar requirements
despite not requiring inclusion of a tag for the particular resource
subject to commercial development.\427\
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\426\ See letter from BHP.
\427\ See letter from Encana.
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Other commenters made specific recommendations on the procedures
that the Commission should follow when making an alternative reporting
determination. For example, several commenters supported using the
procedures set forth in Exchange Act Rule 0-13,\428\ while other
commenters supported a less prescriptive approach.\429\ A few
commenters also recommended allowing issuers, foreign jurisdictions,
and industry groups to submit applications supporting the substantial
similarity of other jurisdictions' requirements.\430\
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\428\ See letters from Calvert and PWYP-US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
\429\ See letters from Cleary and Ropes & Gray.
\430\ See letters from Cleary and Ropes & Gray.
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A number of commenters called for the Commission to recognize
substantially similar alternative reporting regimes in the adopting
release.\431\ Most of those commenters recommended recognizing the EU
Directives \432\ and/or Canada.\433\ Commenters also recommended the UK
specifically \434\ or Norway.\435\ The Department of Interior
recommended allowing for alternative reporting under the USEITI, with
several other commenters supporting that recommendation.\436\
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\431\ See letters from ACEP; BHP; BP; Cleary; Encana; Global
Witness 1; Oxfam 1; PWYP-US 1; RDS; Ropes & Gray; and Total.
\432\ See letters from ACEP; BHP (recommending recognizing the
EU's reporting system for a finite period of five years); BP;
Cleary; Encana; Global Witness 1; Oxfam 1; PWYP-US 1; and Total.
\433\ See letters from Cleary; Encana; and PWYP-US 1. See also
letters from ACEP; Global Witness 1; and Oxfam 1.
\434\ See letters from BP; Cleary; and RDS. The letters from BP
and Cleary also recommended the European Union more generally.
\435\ See letters from Cleary and PWYP-US 1. See also letters
from ACEP; Global Witness 1; and Oxfam 1.
\436\ See letters from BP; Calvert; and PWYP-US 1.
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3. Final Rules
a. Requirements for Alternative Reports
We are adopting an alternative reporting mechanism similar to what
we proposed whereby issuers will be able to meet the requirements of
the final rules by providing disclosure that complies with a foreign
jurisdiction's or the USEITI's resource extraction payment disclosure
requirements if they are deemed ``substantially similar'' by the
Commission.\437\ As noted above, commenters broadly supported the
concept of alternative reporting despite differing opinions on how it
should be applied. The framework for alternative reporting in the final
rules allows a resource extraction issuer that has already prepared a
report pursuant to ``substantially similar'' requirements to avoid
costs associated with having to prepare a separate report meeting the
requirements of our disclosure rules.\438\ We are adopting the proposed
``substantially similar'' standard because we are not persuaded that
the alternative standards recommended by commenters would allow the
Commission to evaluate better whether a regime requires sufficient
disclosure to serve the underlying goals of Section 13(q) while also
avoiding unnecessary costs.\439\
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\437\ See Item 2.01(c) of Form SD.
\438\ See Section III.C.2 below for a discussion of these costs.
\439\ See notes 420-423 above and accompanying text.
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We note that the alternative reporting provision is generally
consistent with the approach taken in the EU Directives and ESTMA and
should promote international transparency efforts by incentivizing
foreign countries that are considering adoption of resource extraction
payment disclosure laws to provide a level of disclosure that is
consistent with our rules and the other major international
transparency regimes. Under the final rules, an issuer may only use an
alternative report for an approved foreign jurisdiction or regime if
the issuer is subject to the resource extraction payment disclosure
requirements of that jurisdiction or regime and has made the report
prepared in accordance with that jurisdiction's requirements publicly
available prior to filing it with the Commission.\440\ An issuer
choosing to avail itself of this accommodation must submit as an
exhibit to Form SD the same report that it previously made publicly
available in accordance with the approved alternative jurisdiction's
requirements.\441\ The issuer must include a statement in the body of
Form SD that it is relying on this accommodation and identifying the
alternative reporting regime for which the report was prepared.\442\
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\440\ See Item 2.01(c)(1)-(2) of Form SD.
\441\ See Item 2.01(c)(2). The format of the report may differ
to the extent necessary due to the conditions placed by the
Commission on the alternative reporting accommodation. See id. For
example, the report may not have been originally submitted in the
home jurisdiction in XBRL or may not have been in English.
\442\ See Item 2.01(c)(3) of Form SD.
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In addition, the alternative reports must be tagged using
XBRL.\443\ Although a commenter recommended not requiring issuers to
convert data into a different interactive data format to qualify for
alternative reporting,\444\ we believe that requiring a consistent data
format for all reports filed with the Commission will improve the
usefulness of the compilations created by the Commission and will
enhance the ability of users to create their own up-to-date
compilations in real time. We also do not believe that this requirement
will add significantly to the costs of alternative reporting given that
most of these costs are associated with collecting the required
information, not the particular data format.
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\443\ See Item 2.01(c)(4) of Form SD.
\444\ See letter from BHP.
---------------------------------------------------------------------------
An issuer relying on the alternative reporting accommodation must
also provide a fair and accurate English
[[Page 49394]]
translation of the entire report if prepared in a foreign
language.\445\ Project names may be presented in their original
language in addition to the English translation of the project name if
the issuer believes such an approach would facilitate identification of
the project by users of the disclosure.\446\
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\445\ See Item 2.01(c)(5) of Form SD. Rule 306 of Regulation S-T
(17 CFR 232.306) requires that all electronic filings and
submissions be in the English language. If a filing or submission
requires the inclusion of a foreign language document, Rule 306
requires that the document be translated into English in accordance
with Securities Act Rule 403(c) (17 CFR 230.403(c)) or Exchange Act
Rule 12b-12(d) (17 CFR 240.12b-12(d)). Both of these rules require
the submission of a fair and accurate English translation of an
entire foreign language document that is being submitted as an
exhibit or attachment if the document consists of certain specified
material. If the foreign language document does not consist of such
material, and the form permits it, a fair and accurate English
language summary may be provided in lieu of an English translation.
Given the level of specificity of the disclosure and the electronic
tagging required under Rule 13q-1 and Form SD, we do not believe it
would be appropriate to permit an English summary of a foreign
language document that is being provided as an alternative report.
We have therefore added a requirement to Form SD requiring a
registrant to provide a fair and accurate English translation of the
entire foreign language document being submitted as an exhibit to
Form SD pursuant to the alternative reporting provision.
\446\ See Item 2.01(c)(5) of Form SD.
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As noted in the Proposing Release, the ``substantially similar''
standard would not require the alternative reporting regime to be
equivalent or identical. Under the final rules, the Commission could
consider the following criteria, among others, to make its
determination that another reporting regime is substantially similar:
(1) The types of activities that trigger disclosure; (2) the types of
payments that are required to be disclosed; (3) whether project-level
disclosure is required and, if so, the definition of ``project;'' (4)
whether the disclosure must be publicly filed and whether it includes
the identity of the issuer; and (5) whether the disclosure must be
provided using an interactive data format that includes electronic
tags. When considering whether to allow alternative reporting based on
a foreign jurisdiction's reporting requirements, the Commission will
likely also consider whether disclosure of payments to subnational
governments is required and whether there are any exemptions allowed
and, if so, whether there are any conditions that would limit the grant
or scope of the exemptions. This non-exclusive list of factors does not
preclude the Commission from considering other factors, such as those
recommended in the comments described above.\447\
---------------------------------------------------------------------------
\447\ See Section II.J.2 above.
---------------------------------------------------------------------------
As discussed above in Section I.C.2, Canada allows for substituted
reports to be filed according to the approved substitute jurisdiction's
deadline if the Department of Natural Resources Canada is notified by
email prior to the expiration of ESTMA's 150 day deadline.\448\ In
light of the requirement in the final rules that the alternative report
be publicly available in the alternative jurisdiction prior to the
submission of the alternative report to the Commission, we believe that
an approach similar to Canada's will increase the usefulness of the
alternative reporting accommodation.\449\ Therefore, an issuer filing
an alternative report prepared pursuant to foreign reporting regimes
recognized by the Commission as substantially similar may follow the
reporting deadline in the alternative jurisdiction.\450\ To do so,
however, it must submit a notice on Form SD-N on or before the due date
of its Form SD indicating its intent to submit the alternative report
using the alternative jurisdiction's deadline.\451\ To deter abuse of
this accommodation, the final rules provide that if an issuer fails to
submit such notice on a timely basis, or submits such a notice but
fails to submit the alternative report within two business days of the
alternative jurisdiction's deadline, it will become ineligible for the
alternative reporting accommodation for the following fiscal year.\452\
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\448\ See note 80-81 above and accompanying text.
\449\ Although Canada uses the same 150 day deadline as the
final rules, the EU Directives leave the annual deadline to the
discretion of the member states. See note 56 above and accompanying
text.
\450\ See Item 2.01(c)(6) of Form SD.
\451\ See Item 2.01(c) of Form SD.
\452\ Id.
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b. Recognition of EU Directives, Canada's ESTMA, and the USEITI as
Alternative Reporting Regimes
In conjunction with our adoption of the final rules, we are issuing
an order recognizing the EU Directives, Canada's ESTMA, and the USEITI
in their current forms as substantially similar disclosure regimes for
purposes of alternative reporting under the final rules, subject to
certain conditions. We have determined that these three disclosure
regimes are substantially similar to the final rules.\453\ For example,
all three regimes require annual, public disclosure, including the
identity of the filer; do not provide for any blanket exemptions;
include the same or similar activities when defining commercial
development of oil, natural gas, or minerals; require project-level
reporting at the contract level (or in the case of the USEITI, calls
for project-level reporting consistent with the European Union and
Commission definitions of ``project''); cover similar payment types;
cover similar controlled entities and subsidiaries; and require foreign
subnational payee reporting. Although we acknowledge differences
between these regimes and the final rules, we do not believe that such
differences, as identified and discussed above,\454\ support reaching a
different conclusion, particularly in light of the requirements we are
imposing on alternative reporting.\455\ We note that, among those
commenters who addressed the issue, there was agreement that the
Commission should allow alternative reporting under the EU Directives,
Canada's ESTMA, and the USEITI.\456\ This further persuades us that it
is appropriate at this time to grant these three regimes alterative
reporting status in their current form.
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\453\ For a lengthier discussion of significant aspects of these
regimes, see Section I.C above.
\454\ See Section II.C.3 above (discussing variations in the
treatment of CSR payments under the final rules, the EU Directives,
and ESTMA) and Section II.E.3 above (discussing when multiple
agreements may be aggregated as a single project under the final
rules and how that differs from the approach used by the EU
Directives and the ESTMA Specifications). We recognize that our
decision to include CSR payments within the list of payment types
specifically covered by the final rules reflects a difference from
how CSR payments are treated under the European Union and Canadian
disclosure regimes. On balance, considering the benefits to users
and issuers from permitting alternative reporting and the fact that
the recent trend has been toward inclusion of such payments (the
EITI revised its standard to include CSR payments after the EU and
Canadian disclosure standards were developed), we do not feel this
difference should prevent us from recognizing the EU Directives and
ESTMA as ``substantially similar'' reporting regimes at this time.
In weighing whether to recognize these reporting regimes as
substantially similar, we also have considered that several
companies reporting under these regimes may provide disclosure about
CSR payments. See Section II.C.3 above. Furthermore, the ESTMA
Guidance indicates that CSR payments disclosure may be required in
Canada in certain circumstances, despite not being specifically
listed as a covered payment type. See note 212 and accompanying
text.
\455\ For example, the final rules require alternative reports
to be submitted in XBRL format. See Section II.J.3.a above.
\456\ See letters from ACEP; BHP (recommending recognizing the
EU's reporting system for a finite period of five years); BP;
Calvert; Cleary; Encana; Global Witness 1; Oxfam 1; PWYP-US 1; and
Total.
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Although we are recognizing the USEITI's requirements as
substantially similar, we are mindful of the more limited scope of
those requirements. For example, the USEITI does not cover payments to
foreign governments and currently uses calendar year reporting instead
of fiscal year reporting.\457\ Due to these limitations, as set forth
in the accompanying order, USEITI reports will only satisfy the
disclosure requirements in Rule 13q-1 for payments made by an issuer to
the
[[Page 49395]]
Federal Government, not to foreign governments. An issuer will have to
supplement its USEITI report by disclosing in its Form SD all payment
information to foreign governments required by the final rules. In
addition, the issuer may need to supplement its USEITI report so that
the required payment information is provided on a fiscal year
basis.\458\ We note that the requirement to provide fiscal year
reporting will have limited impact on issuers with a December 31 fiscal
year end. In this regard, the Department of Interior has stated that
``many'' U.S. EITI reporting companies use the calendar year as their
fiscal year.\459\
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\457\ See Section I.C.3 above.
\458\ For example, in addition to covering any gaps between the
calendar year and fiscal year, the issuer will need to disclose any
series of payments that exceeded the de minimis threshold on a
fiscal year basis rather than on a calendar year basis. See Section
II.C above for a discussion of the de minimis threshold.
\459\ See letter from Department of Interior.
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c. Application Procedures
With respect to applications to request recognition of other
jurisdictions' payment transparency rules as substantially similar,
applicants should follow the procedures set forth in Rule 0-13 of the
Exchange Act, which permits an application to be filed with the
Commission to request a ``substituted compliance order'' under the
Exchange Act. Although applicants should follow the procedures set
forth in Rule 0-13(b) through (i), applications may be submitted by
issuers, governments, industry groups, and trade associations.\460\ The
application must include supporting documents and will be referred to
the Commission's staff for review. The Commission must publish a notice
in the Federal Register that a complete application has been submitted
and allow for public comment. The Commission may also, in its sole
discretion, schedule a hearing before the Commission on the matter
addressed by the application.
---------------------------------------------------------------------------
\460\ See Rule 13q-1(c).
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K. Exhibits and Interactive Data Format Requirements
1. Proposed Rules
The proposed rules required a resource extraction issuer to file
the required disclosure on EDGAR in an XBRL exhibit to Form SD.
Consistent with Section 13(q), the proposed rules required issuers to
submit the payment information using electronic tags--a taxonomy of
defined reporting elements--that identify, for any payment required to
be disclosed:
The total amounts of the payments, by category; \461\
---------------------------------------------------------------------------
\461\ For example, categories of payments could be bonuses,
taxes, or fees.
---------------------------------------------------------------------------
the currency used to make the payments;
the financial period in which the payments were made;
the 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.\462\
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\462\ See proposed Item 2.01(a) of Form SD.
---------------------------------------------------------------------------
In addition to the electronic tags specifically required by the
statute, we proposed requiring issuers to provide and tag:
The type and total amount of payments made for each
project,
the type and total amount of payments for all projects
made to each government;
the particular resource that is the subject of
commercial development, and
the subnational geographic location of the project.
For purposes of identifying the subnational geographic location of
the project, we proposed an instruction specifying that issuers must
provide information regarding the location of the project that is
sufficiently detailed to permit a reasonable user of the information to
identify the project's specific, subnational location.\463\ We stated
that, depending on the facts and circumstances, this could include the
name of the subnational governmental jurisdiction(s) (e.g., state,
province, county, district, municipality, territory, etc.) or the
commonly recognized subnational geographic or geologic location (e.g.,
oil field, basin, canyon, delta, desert, mountain, etc.) where the
project is located, or both. We anticipated that more than one
descriptive term would likely be necessary when there are multiple
projects in close proximity to each other or when a project does not
reasonably fit within a commonly recognized, subnational geographic
location. We also stated that when considering the appropriate level of
detail, issuers may need to consider how the relevant contract
identifies the location of the project.\464\
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\463\ See proposed Instruction 3 to Item 2.01 of Form SD.
\464\ See id.
---------------------------------------------------------------------------
We also proposed an instruction to Form SD that would have required
issuers to report the amount of payments made for each payment type and
the total amount of payments made for each project and to each
government in U.S. dollars or in the issuer's reporting currency if not
U.S. dollars.\465\ The proposed rules allowed a resource extraction
issuer to calculate the currency conversion in one of three ways: (1)
By translating the expenses at the exchange rate existing at the time
the payment is made; (2) by using a weighted average of the exchange
rates during the period; or (3) based on the exchange rate as of the
issuer's fiscal year end.\466\ A resource extraction issuer was also
required to disclose the method used to calculate the currency
conversion.\467\
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\465\ See proposed Instruction 2 to Item 2.01 of Form SD.
Currently, foreign private issuers may present their financial
statements in a currency other than U.S. dollars for purposes of
Securities Act registration and Exchange Act registration and
reporting. See Rule 3-20 of Regulation S-X [17 CFR 210.3-20].
\466\ See proposed Instruction 2 to Item 2.01 of Form SD.
\467\ See id.
---------------------------------------------------------------------------
Consistent with the statute, the proposed rules required a resource
extraction issuer to include an electronic tag that identified the
business segment of the resource extraction issuer that made the
payments. We proposed defining ``business segment'' as the reportable
segments used by the resource extraction issuer for purposes of
financial reporting.\468\
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\468\ See proposed Item 2.01(c)(1) of Form SD. The term
``reportable segment'' is defined in FASB ASC Topic 280, Segment
Reporting, and IFRS 8, Operating Segments.
---------------------------------------------------------------------------
We also proposed that to the extent payments, such as corporate
income taxes and dividends, are made for obligations levied at the
entity level, issuers could omit certain tags that may be inapplicable
(e.g., project tag, business segment tag) for those payment types as
long as they provide all other electronic tags, including the tag
identifying the recipient government.\469\
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\469\ See 2012 Adopting Release, n.432 and accompanying text.
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Finally, we noted that Section 13(q)(3) directs the Commission, to
the extent practicable, to provide a compilation of the disclosure made
by resource extraction issuers. To satisfy this requirement, the
proposed rules required the disclosures to be filed on EDGAR in an XBRL
exhibit, which would allow the data to be searched and extracted by
users.
2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on a variety of
matters related to the format of the disclosure, the proposed tags, and
the related
[[Page 49396]]
instructions. For example, we asked how the total amount of payments
should be reported when payments are made in multiple currencies and
whether the three proposed methods for calculating the currency
conversion described above provide issuers with sufficient options to
address any possible concerns about compliance costs, the comparability
of the disclosure among issuers, or other factors. We also asked
whether XBRL is the most suitable interactive data standard, whether
``business segment'' should be defined differently, and whether the
non-statutory tags we proposed were appropriate. In addition, we
requested comment on whether the proposed ``reasonable user'' approach
to describing the geographic location of the project provided
sufficient detail to users of the disclosure when combined with the
other tagged information. Finally, we solicited comment on whether the
proposed approach to making a compilation available was consistent with
Section 13(q)(3) or whether a different compilation would be necessary.
All of the commenters that addressed the proposed interactive data
format supported using XBRL.\470\ One of them generally recommended
that the rules provide issuers with the flexibility to present
information in either the body of the Form SD or on an exhibit, as well
as the flexibility to decide whether to summarize or include selected
information contained in the exhibit in the base Form SD.\471\
---------------------------------------------------------------------------
\470\ See letters from AICPA; PWYP-US 1; and XBRL US.
\471\ See letter from Ropes & Gray.
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One commenter specifically supported the proposed approach to
describing the geographic location of projects.\472\ Another commenter
recommended that, rather than relying on the concept of ``a reasonable
user,'' the rules require geographic locations to be disclosed as
specified in the agreement or multiple agreements which have been used
to establish the project for reporting purposes.\473\ By contrast, the
commenters that supported the API Proposal disagreed with tagging the
geographic location of the project at a level below the largest
subnational political jurisdiction.\474\ As described above, those
commenters recommended using ISO codes to standardize geographic
location tagging down to the first subnational geographic level.\475\
---------------------------------------------------------------------------
\472\ See letter from Department of Interior.
\473\ See letter from PWYP-US 1.
\474\ See Section III.E. above.
\475\ Id.
---------------------------------------------------------------------------
Several commenters requested changes or clarifications to the data
tagging requirements.\476\ One of them recommended defining ``business
segment'' to mean the subsidiary or other entity under the control of
the issuer that makes payments to a government because that entity
often has a different name from the parent issuer that is reporting to
the Commission.\477\ This commenter stated that providing the name of
the entity making the payment would aid accountability and provide
users with the means to follow up locally when compared to the
Commission's proposed approach of defining ``business segment'' as a
reportable segment used for purposes of financial reporting. Other
commenters disagreed with this suggestion believing that it was outside
the scope of the statute.\478\
---------------------------------------------------------------------------
\476\ See letters from AICPA; Encana; Petrobras; PWYP-US 1; and
XBRL US.
\477\ See letter from PWYP-US 1.
\478\ See letters from ExxonMobil 2 and Petrobras.
---------------------------------------------------------------------------
Another commenter, noting our guidance on entity-level disclosure,
requested clarification of whether it could omit the project tag with
respect to its export activities, which it stated were not project-
specific.\479\ Another commenter was unclear on whether the tag for the
``particular resource that is the subject of commercial development''
should be assigned to each project or whether it should be assigned to
each government payee.\480\ This commenter recommended that, if the
particular resource must be disclosed, the tag should be associated
with a project rather than a government payee. This commenter also
noted that the proposed rules did not specify the level of granularity
at which the ``particular resource'' must be disclosed.\481\ This
commenter also had concerns that reporting payments at a particular
resource level would pose challenges for some issuers as development
projects often target more than one resource as the subject of
development and not all payments to a government payee are determined
or dependent on a particular resource (i.e., property taxes).
---------------------------------------------------------------------------
\479\ See letter from Petrobras.
\480\ See letter from Encana.
\481\ For example, this commenter sought clarification of
whether the ``particular resource'' disclosure should be the primary
resource targeted, such as oil, natural gas, or natural gas liquids,
or if it should be the resource product types, such as coal bed
methane, natural gas liquids, bitumen, heavy oil, light crude oil,
and natural gas excluding natural gas liquids.
---------------------------------------------------------------------------
Another commenter recommended adopting the AICPA Audit Data
Standards within the new XBRL taxonomy. This commenter stated that
using these standards would enable issuers and their auditors to share
``business operational, business and accounting data,'' creating
potential cost savings by reducing duplicative data standards used by
issuers and thereby leveraging the cost of complying with the rule for
a range of purposes including internal and external use in the audit
function.\482\
---------------------------------------------------------------------------
\482\ See letter from AICPA.
---------------------------------------------------------------------------
Another commenter recommended incorporating in EDGAR robust
validation of the data submitted in the XBRL exhibits for both
technical structure as well as content. \483\ This commenter stated
that doing so would ensure that the information provided to users is
accurate and reliable. This commenter also recommended publishing the
data as a set of CSV files to simplify automated analysis for some
users, similar to what the Commission does for XBRL financial data.
Generally this commenter thought that the Commission should seek input
on the draft taxonomy through a public review and comment process prior
to implementing the reporting requirements. Noting our statement in the
Proposing Release that Inline XBRL \484\ was another possible
alternative for providing the information in interactive data format,
the commenter questioned whether Inline XBRL would improve the
usability of the data, or whether it merely adds an additional burden
on filers to convert their data to HTML as well as XBRL.
---------------------------------------------------------------------------
\483\ See letter from XBRL US.
\484\ Inline XBRL would allow registrants to file the required
information and data tags in one document rather than requiring a
separate exhibit for the interactive data.
---------------------------------------------------------------------------
One commenter stated that the three proposed methods for
calculating the currency conversion when payments are made in multiple
currencies provides issuers with sufficient options to address any
possible concerns about compliance costs and comparability of the
disclosure among issuers.\485\
---------------------------------------------------------------------------
\485\ See letter from Petrobras.
---------------------------------------------------------------------------
Finally, several commenters specifically supported the proposed
approach as meeting the statutory requirements to provide a
compilation.\486\ Other commenters stated that the proposed approach
abandons the Commission's statutory obligation to create a
compilation.\487\ We discuss our approach to providing a compilation in
Section II.H.3 above.
---------------------------------------------------------------------------
\486\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
\487\ See letters from API 1; Chevron; ExxonMobil 1.
---------------------------------------------------------------------------
3. Final Rules
We are adopting the proposed requirements regarding interactive
data
[[Page 49397]]
exhibits and tagging with limited modifications. The approach we are
adopting today provides the disclosure elements in a machine readable
(electronically-tagged) XBRL format that should enable users to search,
extract, aggregate, and analyze the information in a manner that is
most useful to them. As we discussed in the Proposing Release, this
approach will allow the information received from issuers to be
converted by EDGAR and other commonly used software and services into
an easily-readable tabular format.\488\ The final rules do not require
Inline XBRL. Given the nature of the disclosure required by the final
rules, which is primarily an exhibit with tabular data, we do not
believe that Inline XBRL would improve the usefulness or presentation
of the required disclosure. As noted above, commenters supported using
XBRL as the interactive data format but did not similarly support
Inline XBRL, with one commenter specifically questioning its usefulness
in this context. Unlike the comments we received on the 2010 Proposing
Release, none of commenters on the Proposing Release recommended that
the Commission allow issuers to use an interactive data format of their
preference.\489\
---------------------------------------------------------------------------
\488\ The use of XBRL will allow the Commission to improve the
quality and usefulness of the data compilation on EDGAR by including
data validation measures to improve data quality. Given the
disbursement ledger nature of the Resource Extraction data, using
existing disbursement taxonomies would be relevant both for
minimizing implementation costs and also potentially enhancing the
reusability by different consumers (e.g., management, internal
auditors, external auditors, regulators). The AICPA Audit Data
Standards include disbursement ledger taxonomies and thereby may be
useful in this effort.
\489\ See Section II.G.5 of the Proposing Release.
---------------------------------------------------------------------------
Commenters were divided on how issuers should tag the subnational
geographic location of the project.\490\ On the one hand, those
supporting the API Proposal favored using the first order subnational
geographic location. Some of those commenters recommended using ISO
codes to standardize references to those subnational geographic
locations. These commenters were generally concerned that the proposed
method for describing the location of a project would cause confusion
and could potentially reduce transparency. On the other hand, many
other commenters, including those expressing the greatest interest in
using the disclosure to further the transparency goals of the statute,
disagreed with an approach that would only disclose the geographic
location of a project at the highest level of political organization
below the national level. For the reasons discussed in Section II.E.3
above, we agree with the latter commenters that additional granularity
is needed to accomplish the goals underlying Section 13(q).
Nevertheless, we are sympathetic to the concern that differing
descriptions of a project's location might make it more difficult to
sort the data compiled in EDGAR. For this reason, we believe it is
appropriate to add an additional tag for the subnational geographic
location that uses the ISO codes suggested by commenters.\491\ In this
way, users of the disclosure would be able to sort the data in the more
generalized fashion that industry commenters, such as the API, said
would be more useful while also having access to the more specific data
that many civil society organizations have supported. With respect to
the suggestion of one commenter to use the geographic locations
disclosed in the agreement(s) associated with a project, we believe the
proposed approach accomplishes the same purpose while providing the
issuer additional flexibility.\492\
---------------------------------------------------------------------------
\490\ Commenters were also divided on how to name the project
for the ``project of the resource extraction issuer to which the
payments relate'' tag. We address issues relating to the definition
of ``project'' in Section II.E. above.
\491\ Similarly, to enhance comparability, we are requiring
issuers to use the ISO 3166 code, if available, to identify the
country in which a payee government is located. See Instruction 3 to
Item 2.01 of Form SD.
\492\ See letter from PWYP-US 1. See also letters from ACEP;
Global Witness 1; and Oxfam 1.
---------------------------------------------------------------------------
With respect to the requirement to provide and tag the type and
total amount of payments made for each project and to each government,
we are adopting the three currency conversion methods as proposed.\493\
As discussed above, the one commenter that addressed these methods
thought that the options that were provided were sufficient to address
concerns about compliance costs and comparability of disclosure.\494\
Nevertheless, to avoid confusion, we are requiring that an issuer must
choose a consistent method for all such currency conversions within a
particular Form SD filing.\495\
---------------------------------------------------------------------------
\493\ See Instruction 2 to Item 2.01 of Form SD.
\494\ See letter from Petrobras.
\495\ See Instruction 2 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
With respect to the required business segment tag, despite the
concerns of one commenter, we are adopting the proposed definition of
``business segment.'' \496\ We believe defining business segment in a
manner consistent with the reportable segments used by resource
extraction issuers for purposes of financial reporting provides
sufficient granularity when combined with the detailed geographic and
project-level information required to be disclosed by the final rules.
In addition, the proposed approach would have cost advantages by
aligning the disclosure requirements with the issuer's existing
financial reporting systems and procedures.
---------------------------------------------------------------------------
\496\ See letter from PWYP-US 1 (recommending defining
``business segment'' as the subsidiary or entity under the control
of the issuer that makes payments to a government because that would
aid accountability and facilitate local follow-up by data users).
See also proposed Item 2.01(c)(1) of Form SD.
---------------------------------------------------------------------------
L. Treatment for Purposes of Securities Act and Exchange Act
1. Proposed Rules
The statutory language of Section 13(q) does not specify that the
information about resource extraction payments must be ``filed.''
Rather, it states that the information must be ``include[d] in an
annual report[.]'' \497\ The proposed rules required resource
extraction issuers to file, rather than furnish, the payment
information on Form SD.
---------------------------------------------------------------------------
\497\ 15 U.S.C. 78m(q)(2)(A).
---------------------------------------------------------------------------
2. Comments on the Proposed Rules
In the Proposing Release we solicited comment on whether the
payment disclosure should be filed or furnished. We also asked whether
certain officers, such as the resource extraction issuer's principal
executive officer, principal financial officer, or principal accounting
officer, should certify the Form SD filing's compliance with the
requirements of Section 13(q) of the Exchange Act or that the filing
fairly presents the information required to be disclosed under Rule
13q-1.\498\
---------------------------------------------------------------------------
\498\ We address responses to this request for comment and a
similar one in Section II.G. above.
---------------------------------------------------------------------------
Commenters were divided on whether the disclosure should be filed
as proposed, thus incurring Section 18 liability, or whether it should
be furnished.\499\ The commenters supporting the proposed approach
stated that requiring the disclosure to be filed would ensure that it
could be used reliably for investment analysis and for other
purposes.\500\ The commenters that recommended allowing the disclosure
to be furnished stated that the rules were not material to the ``vast
majority of investors'' and that users of the data did not need the
level of protection associated with Section 18 liability.\501\ These
commenters expressed concern
[[Page 49398]]
about the costs issuers might incur from Section 18 liability.
---------------------------------------------------------------------------
\499\ For those in favor of filing, see letters from Bean; PWYP-
US 1; TI-USA; and USSIF. For those in favor of furnishing, see
letters from API 1; Chevron; Encana; and ExxonMobil 1.
\500\ See, e.g., letter from PWYP-US 1.
\501\ See, e.g., letter from API 1.
---------------------------------------------------------------------------
One commenter recommended allowing foreign private issuers to
furnish Form SD,\502\ while another commenter made a similar
recommendation for foreign private issuers that are providing
alternative reports.\503\ The latter commenter pointed to other
instances where foreign private issuers have been permitted to furnish
reports and noted that the antifraud provisions of the Exchange Act
would still apply. This commenter also stated that the courts in home
jurisdictions would be better suited to interpret the laws governing
the alternate report.
---------------------------------------------------------------------------
\502\ See letter from BP.
\503\ See letter from RDS.
---------------------------------------------------------------------------
Another commenter recommended that to the extent an issuer wishes
to include additional, voluntary disclosures in its Form SD, it should
be permitted to furnish rather than file that information.\504\ This
commenter noted that many issuers avoid making elective disclosures in
Commission filings due to liability concerns and that issuers could
indicate what disclosure is being furnished under a separate heading or
using other explanatory text.
---------------------------------------------------------------------------
\504\ See letter from Ropes & Gray.
---------------------------------------------------------------------------
3. Final Rules
The rules we are adopting today require the disclosure to be filed
on Form SD. Section 13(q) does not state how the information should be
submitted and instead leaves that question to the Commission to
determine. We believe that the Form SD disclosure, including any
voluntary disclosure, will benefit from potential Section 18 liability
by providing issuers with further incentive to submit complete and
accurate information. Although several commenters argued that the
information is not material to investors and should therefore be
furnished, we note that other commenters, including a number of large
institutional investors who have expressed an intention to use the
Section 13(q) disclosures, continue to argue that the information is
material or important to investors.\505\ Given this disagreement, and
that materiality is a fact specific inquiry, we are not persuaded that
this is a reason to permit the information to be furnished. While we
are mindful of the costs associated with Section 18 liability, as we
noted in the Proposing Release, Section 18 does not create strict
liability for filed information.\506\ Rather, it states that a person
shall not be liable for misleading statements in a filed document if
such person can establish that he or she acted in good faith and had no
knowledge that the statement was false or misleading.\507\
---------------------------------------------------------------------------
\505\ See letters from ACTIAM et al.; Bean; Calvert;
International Transport Workers' Federation (Mar. 7, 2016)
(``ITWF''); Oxfam 1; PWYP-US; Sen. Cardin et al.; Sen. Lugar et al.;
TI-USA; and USSIF.
\506\ See Proposing Release, Section II.G.6.
\507\ Exchange Act Section 18(a) provides: ``Any person who
shall make or cause to be made any statement in any application,
report, or document filed pursuant to this title or any rule or
regulation thereunder or any undertaking contained in a registration
statement as provided in subsection (d) of section 15 of this title,
which statement was at the time and in the light of the
circumstances under which it was made false or misleading with
respect to any material fact, shall be liable to any person (not
knowing that such statement was false or misleading) who, in
reliance upon such statement shall have purchased or sold a security
at a price which was affected by such statement, for damages caused
by such reliance, unless the person sued shall prove that he acted
in good faith and had no knowledge that such statement was false or
misleading. A person seeking to enforce such liability may sue at
law or in equity in any court of competent jurisdiction. In any such
suit the court may, in its discretion, require an undertaking for
the payment of the costs of such suit, and assess reasonable costs,
including reasonable attorneys' fees, against either party
litigant.'' A plaintiff asserting a claim under Section 18 would
need to meet the elements of the statute to establish a claim,
including reliance and damages.
---------------------------------------------------------------------------
Although a commenter stated that in certain other contexts issuers
may furnish, rather than file, disclosure prepared in accordance with a
foreign jurisdiction's requirements, we note that the disclosure
furnished on Form 6-K, such as quarterly reports, is not required by
the Commission's reporting requirements.\508\ Instead, such reports
need only be furnished when they are made or required to be made public
in such issuer's home jurisdiction. Foreign private issuers must file,
and are not permitted to furnish, reports required by the Commission's
rules, such as annual reports on Form 20-F and Form 40-F, and Form 6-K
reports that have been specifically incorporated by reference into a
Securities Act registration statement.
---------------------------------------------------------------------------
\508\ See letter from RDS. A foreign private issuer is required
to submit under cover of a Form 6-K (17 CFR 249.306) information
that the issuer: Makes or is required to make public pursuant to the
law of the jurisdiction of its domicile or in which it is
incorporated or organized; files or is required to file with a stock
exchange on which its securities are traded and which was made
public by that exchange; or distributes or is required to distribute
to its security holders. The Form 6-K report is deemed furnished,
and not filed for purposes of Section 18, unless it has been
specifically incorporated by reference into a previously filed
Securities Act or Exchange Act registration statement or Exchange
Act report, which is itself subject to Section 18.
---------------------------------------------------------------------------
M. Compliance Date
1. Proposed Rules
Section 13(q) provides that, with respect to each resource
extraction issuer, the final rules issued under that section shall take
effect on the date on which the resource extraction issuer is required
to submit an annual report relating to the issuer's fiscal year that
ends not earlier than one year after the date on which the Commission
issues the final rules under Section 13(q).\509\ We proposed requiring
resource extraction issuers to comply with Rule 13q-1 and Form SD for
fiscal years ending no earlier than one year after the effective date
of the adopted rules.\510\ We also proposed selecting a specific
compliance date that corresponds to the end of the nearest calendar
quarter following the effective date, such as March 31, June 30,
September 30, or December 31.\511\
---------------------------------------------------------------------------
\509\ 15 U.S.C. 78m(q)(2)(F).
\510\ Adopted rules typically go into effect 60 days after they
are published in the Federal Register.
\511\ See 2012 Adopting Release at 2 [77 FR 56365].
---------------------------------------------------------------------------
2. Comments on the Proposed Rules
In the Proposing Release we asked whether we should provide a
compliance date linked to the end of the nearest commonly used
quarterly period following the effective date or whether we should
adopt a shorter or longer transition period. We also solicited comment
on whether the rules should provide for a longer transition period for
certain categories of resource extraction issuers, such as smaller
reporting companies or emerging growth companies.
Several commenters opposed a longer transition period for any
category of issuer, including smaller reporting companies.\512\ These
commenters stated that issuers are generally on notice of the impending
requirements and that companies track the required payment types in the
normal course of doing business. They also noted that compliance costs
for smaller companies are likely to be significantly lower than for
large issuers since they usually have fewer payments to disclose. The
Department of Interior noted that the USEITI does not make distinctions
between issuers.
---------------------------------------------------------------------------
\512\ See letters from Department of Interior and PWYP-US 1. See
also letters from ACEP; Global Witness 1; and Oxfam 1.
---------------------------------------------------------------------------
Some commenters recommended delaying the effective date for all
issuers.\513\ One of these commenters recommended an effective date
beginning with a fiscal year ending no earlier than December 31,
2017,\514\ while another deferred to industry comments.\515\ Other
commenters
[[Page 49399]]
recommended delaying the effective date for specific categories of
issuers.\516\
---------------------------------------------------------------------------
\513\ See letters from Encana and Ropes & Gray.
\514\ See letter from Encana.
\515\ See letter from Ropes & Gray.
\516\ See letters from Cleary and Ropes & Gray. We address these
comments in Section II.G above.
---------------------------------------------------------------------------
3. Final Rules
The final rules require a resource extraction issuer to comply with
Rule 13q-1 and Form SD for fiscal years ending no earlier than two
years after the effective date of the adopted rules. We believe that
this phase-in period is appropriate to provide all issuers with
sufficient time to establish the necessary systems and procedures to
capture and track all the required payment information before the
fiscal year covered by their first Form SD filing starts. It also
should afford issuers an appropriate opportunity to make any other
necessary arrangements (such as obtaining modifications to existing
contracts or seeking exemptive relief where warranted) to comply with
Section 13(q) and these rules. This compliance date should also provide
issuers with more time to consider the experience of companies
reporting under similar payment transparency regimes, such as the EU
Directives and ESTMA, which should reduce compliance costs.
As proposed, we are also selecting a specific compliance date that
corresponds to the end of the nearest calendar quarter following the
effective date. Thus, under the final rules, the initial Form SD filing
for resource extraction issuers would cover the first fiscal year
ending on or after September 30, 2018 and would not be due until 150
days later. Since most issuers use a December 31 fiscal year end, the
filing deadline would not be until May 30, 2019 for most issuers. Given
the length of time between the adoption of these rules and the start of
the first fiscal year that must be reported, we do not believe any
additional accommodations are necessary for smaller reporting
companies, emerging growth companies, or other categories of issuers.
We note that not providing longer phase-in periods for specific
categories of issuers is consistent with the EITI and, for public
companies, with the EU Directives and ESTMA.
III. Economic Analysis
A. Introduction and Baseline
We are adopting Rule 13q-1 and an amendment to Form SD to implement
Section 13(q), which was added to the Exchange Act by Section 1504 of
the Act. Section 13(q) directs the Commission to issue rules that
require a resource extraction issuer to disclose in an annual report
filed with the Commission certain information relating to payments made
by the issuer (including a subsidiary of the issuer or an entity under
the issuer's control) to a foreign government or the U.S. Federal
Government for the purpose of the commercial development of oil,
natural gas, or minerals.
As discussed above, Congress intended that the rules issued
pursuant to Section 13(q) would help advance the important U.S. foreign
policy objectives of combatting global corruption and helping to
promote accountability, thereby potentially improving governance in
resource-rich countries around the world.\517\ The statute seeks to
achieve this objective by mandating a new disclosure provision under
the Exchange Act that requires resource extraction issuers to identify
and report payments they make to governments relating to the commercial
development of oil, natural gas, or minerals. While these objectives
and benefits differ from the investor protection benefits that our
rules typically strive to achieve, investors and other market
participants, as well as civil society in countries that are resource-
rich, may benefit from any increased economic and political stability
and improved investment climate that such transparency promotes.\518\
In addition, some commenters stated that the information disclosed
pursuant to Section 13(q) would benefit investors by, among other
things, helping them model project cash flows and assess political
risk, acquisition costs, and management effectiveness.\519\
---------------------------------------------------------------------------
\517\ See Section I.E of the Proposing Release.
\518\ See also 156 Cong. Rec. S5873 (May 17, 2010) (Statement
from Senator Cardin) (``Transparency helps create more stable
governments, which in turn allows U.S. companies to operate more
freely--and on a level playing field--in markets that are otherwise
too risky or unstable.''); and 156 Cong. Rec. S3816 (May 17, 2010)
(Statement of Senator Lugar) (``Transparency empowers citizens,
investors, regulators, and other watchdogs and is a necessary
ingredient of good governance for countries and companies alike. . .
. Transparency also will benefit Americans at home. Improved
governance of extractive industries will improve investment climates
for our companies abroad, it will increase the reliability of
commodity supplies upon which businesses and people in the United
States rely, and it will promote greater energy security.'')
\519\ See, e.g., letters from Calvert Investments (Mar. 1, 2011)
(``Calvert 1 (pre-proposal)''); California Public Employees
Retirement System (Feb. 28, 2011) (``CalPERS (pre-proposal)''); and
George Soros (Feb. 21, 2012) (``Soros (pre-proposal)'').
---------------------------------------------------------------------------
We are sensitive to the costs and benefits of the rules we adopt,
and Exchange Act Section 23(a)(2) requires us, when adopting rules, to
consider the impact that any new rule would have on competition. In
addition, Section 3(f) of the Exchange Act directs us, when engaging in
rulemaking that requires us to consider or determine whether an action
is necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\520\ We have
considered the costs and benefits that would result from the final
rules, as well as the potential effects on efficiency, competition, and
capital formation. Many of the potential economic effects of the final
rules would stem from the statutory mandate, while others would stem
from the discretion we are exercising in implementing the statutory
mandate. The discussion below addresses the costs and benefits that
might result from both the statute and our discretionary choices, as
well as the comments we received about these matters.\521\ In addition,
as discussed elsewhere in this release, we recognize that the final
rules could impose a burden on competition, but we believe that any
such burden that might result would be necessary and appropriate in
furtherance of the purposes of Exchange Act Section 13(q).
---------------------------------------------------------------------------
\520\ Some commenters incorrectly asserted that we are required
by statute to minimize costs. See, e.g., letter from API 1 at 15.
Although we do not agree with this assertion, in crafting the final
rules, we have sought to minimize costs to the extent possible, and
we have attempted to ensure that any costs we are imposing are
either necessary or appropriate in light of the foreign policy
interests underlying Section 13(q).
\521\ As discussed above, our discretionary choices are informed
by the statutory mandate, and thus, discussion of the benefits and
costs of those choices will necessarily involve the benefits and
costs of the underlying statute.
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As part of our analysis, we have quantified the potential economic
effects of the final rules wherever possible. Given both the nature of
the statute's intended benefits and the lack of data regarding the
benefits and the costs, in some cases we have been unable to provide a
quantified estimate. Nevertheless, as described more fully below, we
provide both a qualitative assessment of the potential effects and a
quantified estimate of the potential aggregate initial and aggregate
ongoing compliance costs. We reach our estimates by carefully
considering comments we received on potential costs and taking into
account additional data and information, including recent global
developments in connection with resource extraction payment
transparency. We rely particularly on those comment letters that
provided quantified estimates and were transparent about their
methodologies. As discussed in more detail below, after considering the
comment letters, we
[[Page 49400]]
determined that it was appropriate to modify and/or expand upon some of
the submitted estimates and methodologies to reflect data and
information submitted by other commenters, as well as our own judgment
and experience.
The baseline the Commission uses to analyze the potential effects
of the final rules is the current set of legal requirements and market
practices.\522\ To the extent not already encompassed by existing
regulations and current market practices, the final rules likely will
have a substantial impact on the disclosure practices of, and costs
faced by, resource extraction issuers. The overall magnitude of the
potential costs of the final disclosure requirements will depend on the
number of affected issuers and individual issuers' costs of compliance.
We expect that the final rules will affect both U.S. issuers and
foreign issuers that meet the definition of ``resource extraction
issuer'' in substantially the same way, except for those issuers
already subject to similar requirements adopted in the EEA member
countries or Canada as discussed below in Section III.C.1. The
discussion below describes the Commission's understanding of the
markets that are affected by the final rules. We estimate the number of
affected issuers in this section and quantify their costs in Section
III.B.2 below.
---------------------------------------------------------------------------
\522\ See Section I above for a discussion of the current legal
requirements and significant international transparency regimes that
affect market practices.
---------------------------------------------------------------------------
To estimate the number of potentially affected issuers, we use data
from Exchange Act annual reports for 2015, the latest full calendar
year. We consider all Forms 10-K, 20-F, and 40-F filed in 2015 by
issuers with oil, natural gas, and mining Standard Industrial
Classification (``SIC'') codes \523\ and, thus, are most likely to be
resource extraction issuers. We also considered filings by issuers that
do not have the above mentioned oil, natural gas, and mining SIC codes
and added them to the list of potentially affected issuers if we
determined that they might be affected by the final rules.\524\ In
addition, we have attempted to remove issuers that use oil, natural
gas, and mining SIC codes but appear to be more accurately classified
under other SIC codes based on the disclosed nature of their business.
Finally, we have excluded royalty trusts from our analysis because we
believe it is uncommon for such companies to make the types of payments
that would be covered by the final rules. From these filings, we
estimate that the number of potentially affected issuers is 755.\525\
We note that this number does not reflect the number of issuers that
actually made resource extraction payments to governments in 2015, but
rather represents the estimated number of issuers that might make such
payments.
---------------------------------------------------------------------------
\523\ Specifically, the oil, natural gas, and mining SIC codes
considered are 1000, 1011, 1021, 1031, 1040, 1041, 1044, 1061, 1081,
1090, 1094, 1099, 1220, 1221, 1222, 1231, 1311, 1321, 1381, 1382,
1389, 1400, 2911, 3330, 3331, 3334, and 3339.
\524\ These are issuers whose primary business is not
necessarily resource extraction but which have some resource
extraction operations, such as ownership of mines.
\525\ In the Proposing Release, using calendar year 2014 data,
we estimated that the number of affected issuers would be 877.
---------------------------------------------------------------------------
In the following economic analysis, we discuss the potential
benefits and costs and likely effects on efficiency, competition, and
capital formation that might result from both the new reporting
requirement mandated by Congress and from the specific implementation
choices that we have made in formulating the final rules.\526\ We
analyze these potential economic effects in Sections III.B and III.C
and provide qualitative and, wherever possible, quantitative
discussions of the potential costs and benefits that might result from
the payment reporting requirement and specific implementation choices,
respectively.
---------------------------------------------------------------------------
\526\ Our consideration of potential benefits and costs and
likely effects on efficiency, competition, and capital formation
also is reflected throughout the discussion in Section II above.
---------------------------------------------------------------------------
B. Potential Effects Resulting From the Payment Reporting Requirement
1. Benefits
As noted above, we understand that Section 13(q) and the rules
required thereunder are intended to advance the important U.S. foreign
policy objective of combatting global corruption and helping to promote
accountability, thereby potentially improving governance in resource-
rich countries around the world.\527\ The statute seeks to realize
these goals by improving transparency about the payments that companies
in the extractive industries make to national and subnational
governments, including local governmental entities.\528\ While these
statutory goals and intended benefits are of global significance, the
potential positive economic effects that may result cannot be readily
quantified with any precision.\529\ The current empirical evidence on
the direct causal effect of increased transparency in the resource
extraction sector on societal outcomes is inconclusive,\530\ and
several academic papers have noted the inherent difficulty in
empirically validating a causal link between transparency interventions
and governance improvements.\531\
---------------------------------------------------------------------------
\527\ See Proposing Release, Section I.E.
\528\ See id.
\529\ Further, we note that the Commission is not statutorily
required to quantify the benefits here. See Lindeen et al. v. SEC,
2016 WL 3254610, *9 (Nos. 15-1149, 15-1150) (D.C. Cir. June 14,
2016) (explaining that the Commission is not required to ``conduct a
rigorous, quantitative economic analysis'' nor ``to measure the
immeasurable'') (internal quotation marks omitted); see also id.
(``find[ing] that the SEC's discussion of unquantifiable benefits
fulfills its statutory obligation to consider and evaluate'' the
potential economic effects of a Commission rule).
\530\ For positive findings, see Caitlin C. Corrigan, ``Breaking
the resource curse: Transparency in the natural resource sector and
the extractive industries transparency initiative'', Resources
Policy, 40 (2014), 17-30 (finding that the negative effect of
resource abundance on GDP per capita, the capacity of the government
to formulate and implement sound policies and the level of rule of
law is mitigated in EITI countries but noting that the EITI has
little effect on the level of democracy, political stability and
corruption (the author also submitted a comment letter attaching an
updated version of the study; see letter from Caitlin C. Corrigan
(Feb. 16, 2016) (``Corrigan''))); Liz David-Barrett and Ken Okamura,
``The Transparency Paradox: Why Do Corrupt Countries Join EITI?'',
Working Paper No. 38, European Research Centre for Anti-Corruption
and State-Building (Nov. 2013) (finding that EITI compliant
countries gain access to increased aid the further they progress
through the EITI implementation process and that EITI achieves
results in terms of reducing corruption), available at https://eiti.org/document/transparency-paradox-why-do-corrupt-countries-join-eiti, and Maya Schmaljohann, ``Enhancing Foreign Direct
Investment via Transparency? Evaluating the Effects of the EITI on
FDI'', University of Heidelberg Discussion Paper Series No. 538
(Jan. 2013) (finding that joining the EITI increases the ratio of
the net foreign direct investment (``FDI'') inflow to GDP by 2
percentage points). For negative empirical evidence, see [Ouml]lcer,
Dilan (2009): Extracting the Maximum from the EITI (Development
Centre Working Papers No. 276): Organisation for Economic
Cooperation and Development (finding that the EITI has not been able
to significantly lower corruption levels). However, all these papers
discuss the earlier version of the EITI, which did not require
project-level disclosure and rely on data generated prior to the
implementation of the 2013 EITI Standard.
\531\ See Andr[eacute]s Mej[iacute]a Acosta, ``The Impact and
Effectiveness of Accountability and Transparency Initiatives: The
Governance of Natural Resources'', Development Policy Review, 31-S1
(2013), s89-s105; and Alexandra Gillies and Antoine Heuty, ``Does
Transparency Work? The Challenges of Measurement and Effectiveness
in Resource-Rich Countries'', Yale Journal of International Affairs,
Spring/Summer 2011, 25-42.
---------------------------------------------------------------------------
We received several comments on quantifying the potential economic
benefits of the final rules that are discussed in detail below.\532\
Although these comments presented studies that attempt to quantify
those benefits, as discussed below, they each have certain
[[Page 49401]]
limitations that we believe prevent us from relying on them to quantify
the final rules' potential benefits in improving accountability and
governance in resource-rich countries around the world. Furthermore, no
other commenters included reliable data that would allow us to quantify
the potential economic benefits of the final rules or suggested a
source of data or a methodology that we could readily look to in doing
so.
---------------------------------------------------------------------------
\532\ See letter from Profs. Anthony Cannizzaro & Robert Weiner
(Feb. 11, 2016) (``Cannizzaro & Weiner''). See also letters from API
1 (Appendix B) and Publish What You Pay--US (third of three letters
on Mar. 8, 2016) (``PWYP-US 4'') (both referring to a study by P.
Healy and G. Serafeim). These letters and studies primarily focus on
benefits to issuers and investors.
---------------------------------------------------------------------------
It is also important to note, however, that Congress has directed
us to promulgate this disclosure rule. Thus, we believe it reasonable
to rely on Congress's determination that the rule will produce the
foreign policy and other benefits that Congress sought in imposing this
mandate. Because of the important foreign policy interests at stake, we
believe that Congress' determination that the potential benefits of
disclosure justify such a rule is a decision that is owed considerable
deference, and we do not believe that Congress intended that we second-
guess its determination.
Moreover, as noted above, we concur with Congress' judgment that
resource extraction payment disclosures could help to achieve a
critical foreign policy objective of the U.S. Government. In reaching
this conclusion, we are particularly mindful that a broad international
consensus has developed on the potential benefits of revenue
transparency.\533\ Not only have the Canadian government \534\ and the
European Union \535\ acknowledged the potential benefits by adopting
disclosure requirements similar to what we are adopting, but even
members of industry through their participation as stakeholders in EITI
have acknowledged the benefits that revenue transparency can
produce.\536\ Perhaps most significantly, industry stakeholders in the
EITI process (which notably includes a number of industry
organizations) \537\ have expressly adopted the position that the EITI
disclosures (which now include identification of the issuers
responsible for the payments and project-level reporting) produce
``[b]enefits for implementing countries'' by ``strengthening
accountability and good governance, as well as promoting greater
economic and political stability.'' \538\ Industry stakeholders in EITI
have similarly accepted the view that ``[b]enefits to civil society
come from increasing the amount of information in the public domain
about those revenues that governments manage on behalf of citizens,
thereby making governments more accountable.'' \539\
---------------------------------------------------------------------------
\533\ We also credit the views of the State Department and USAID
that the disclosures we are requiring will help reduce corruption
and promote accountability in resource-rich countries. Both agencies
have a high degree of expertise and experience in these matters.
Relatedly, we note that USAID has advanced a persuasive explanation
for ways that the disclosures may help complement the agency's own
efforts to combat corruption and enhance governance globally. See
letter from USAID.
\534\ See, e.g., ESTMA, Section 6 (``The purpose of this Act is
to implement Canada's international commitments to participate in
the fight against corruption through the implementation of measures
applicable to the extractive sector, including measures that enhance
transparency and measures that impose reporting obligations with
respect to payments made by entities.''). See also ESTMA Guidance,
at 2 (``Canadians will benefit from increased efforts to strengthen
transparency in the extractive sector, both at home and abroad.
Alongside Canada, the United States and European Union countries
have put in place similar public disclosure requirements for their
respective extractive industries. Together these reporting systems
will contribute to raising global transparency standards in the
extractive sector.'').
\535\ See, e.g., European Commission Memo, ``New disclosure
requirements for the extractive industry and loggers of primary
forests in the Accounting (and Transparency) Directives (Country by
Country Reporting)--frequently asked questions'' (June 12, 2013)
(``The new disclosure requirement will improve the transparency of
payments made to governments all over the world by the extractive
and logging industries. Such disclosure will provide civil society
in resource-rich countries with the information needed to hold
governments to account for any income made through the exploitation
of natural resources, and also to promote the adoption of the
Extractive Industries Transparency Initiative (EITI) in these same
countries. . . . The reporting of payments to government by the
extractive and logging industries will provide civil society with
significantly more information on what specifically is paid by EU
companies to host governments in exchange for the right to extract
the relevant countries' natural resources. By requiring disclosure
of payments at a project level, where those payments had been
attributed to a specific project and were material, local
communities will have insight into what governments were being paid
by EU multinationals for exploiting local oil/gas fields, mineral
deposits and forests. This will also allow these communities to
better demand that government accounts for how the money had been
spent locally. Civil society will be in a position to question
whether the contracts entered into between the government and
extractive and logging companies had delivered adequate value to
society and government.'').
\536\ For example, in describing its involvement with EITI,
ExxonMobil states that these ``efforts to promote revenue
transparency have helped fight corruption, improve government
accountability and promote greater economic stability around the
world.'' See https://corporate.exxonmobil.com/en/current-issues/accountability/transparency/overview. Similarly, when discussing its
role in EITI, Chevron has acknowledged that revenue transparency is
``an important pathway to improved governance.'' See https://www.chevron.com/Stories/Progress-Partnerships-and-Transparency.
Royal Dutch Shell has also expressed the position that ``[r]evenue
transparency provides citizens with an important tool to hold their
government representatives accountable and to advance good
governance.'' See https://www.shell.com/sustainability/transparency/revenues-for-governments.html.
\537\ See Stakeholders, available at https://eiti.org/supporters/partnerorganizations (last visited June 16, 2016).
\538\ https://eiti.org/eiti/benefits.
\539\ Id.
---------------------------------------------------------------------------
Notably, none of the industry commenters expressed the view that
the disclosures required by Section 13(q) would fail to help produce
these anti-corruption and accountability benefits. Indeed, several
commenters expressly acknowledged that transparency produces such
benefits (notwithstanding the inability to reliably quantify those
benefits). For example, one industry commenter stated that
``[t]ransparency by governments and companies alike regarding revenue
flows from the extraction of natural resources in a manner which is
meaningful, practical and easily understood by stakeholders reduces the
opportunity for corruption.'' \540\ Another industry commenter
expressed its view ``that the disclosure of revenues received by
governments and payments made by the extractive-industry companies to
governments could lead to improved governance in resource-rich
countries.'' \541\ Yet another industry commenter stated that resource-
revenue transparency efforts ``are fundamental building blocks of good
resource governance and are key to fostering better decision-making
over public revenues.'' \542\
---------------------------------------------------------------------------
\540\ See letter from BHP.
\541\ See letter from Chevron.
\542\ See letter from Eni SpA (Jan. 31, 2016) (``Eni'').
---------------------------------------------------------------------------
While there is no conclusive empirical evidence that would confirm
whether the project-level, public disclosure that we are adopting will
in fact reduce corruption, in forming our conclusion that payment
transparency will further the identified U.S. foreign policy goals, we
find persuasive the arguments and evidence advanced by several
commenters throughout this rulemaking that have emphasized the
potential benefits to civil society of such public disclosure.\543\ We
note that many of these commenters provided reasons why the benefits to
civil society of contract-based, project-level reporting would help to
reduce corruption and promote accountability more effectively than more
aggregated reporting, such as country-level reporting.\544\
---------------------------------------------------------------------------
\543\ See, e.g., letters from Global Witness 1, The ONE Campaign
(Mar. 16, 2016) (``ONE Campaign''), Oxfam, PWYP-US 3, TI-USA, and
USAID.
\544\ See letter from Oxfam, PWYP-US 1, TI-USA.
---------------------------------------------------------------------------
To support their claims, these commenters provided numerous
examples of ways in which disaggregated payment information can be
effective in helping to reduce corruption and promote accountability,
and no commenters disputed these
[[Page 49402]]
examples.\545\ For example, these commenters stated that public
availability of project-level data would enable civil society groups,
citizens, and local communities to know how much their governments earn
from the resources that are removed from their respective territories
when the governments deny them such information. In addition, according
to some commenters, the disclosure of project-level data will help
citizens to monitor public expenditures for efficiency and
effectiveness, allow citizens and governments to ensure that revenues
are being redistributed by the central government to localities
properly (according to benefit-sharing agreements), and provide a basis
for communities to advocate with the government for public
services.\546\ One commenter suggested that project-level disclosure
will empower citizens and civil society organizations to ensure that
extractive revenues are used to generate public benefits for all and
not just to enrich the elite, assist citizens to assess the development
impact of extraction locally, and promote economic and social
development, especially in communities that host natural resource
extraction operations.\547\ These commenters also stated that this
information would help empower civil society organizations to advocate
for a fairer share of revenues, double-check government-published
budget data, and better calibrate their expectations from the
extractive issuers. Commenters on the 2010 Proposing Release provided
similar arguments.\548\
---------------------------------------------------------------------------
\545\ See Section I of the Proposing Release.
\546\ See letter from ACEP, Publish What You Pay--US (Apr. 15,
2014) (``PWYP 7 (pre-proposal)''), and TI-USA.
\547\ See letter from PWYP 7 (pre-proposal).
\548\ See, e.g., letters from Global Witness (Feb. 25, 2011)
(``Global Witness 1 (pre-proposal)''); National Advocacy Coalition
on Extractives (Feb. 10, 2015) (``NACE (pre-proposal)''); Oxfam
America (Feb. 21, 2011) (``Oxfam 1 (pre-proposal)''); Publish What
You Pay U.S. (Feb. 25, 2011) (``PWYP 1 (pre-proposal)''); Publish
What You Pay Cameroon (June 8, 2015)(``PWYP-CAM (pre-proposal)'');
Publish What You Pay--Indonesia (Mar. 11, 2015)(``PWYP-IND (pre-
proposal)''); Publish What You Pay--Zimbabwe (Feb. 20, 2015)
(``PWYP-ZIM (pre-proposal)''); Revenue Watch Institute (Feb. 17,
2011) (``RWI 1 (pre-proposal)''); and Syena Capital Management LLC
(Feb. 17, 2011) (``Syena (pre-proposal)'').
---------------------------------------------------------------------------
a. Currently Available Empirical Analyses on Potential Social Gains
From Transparency
As a threshold matter, we think it is important to observe that the
EITI and other global transparency efforts are relatively new, which
makes it difficult at this time to draw any firm empirical conclusions
about the potential long-term benefits that such transparency regimes
may produce for resource-rich countries. The causal mechanisms involved
are complex (impacted by myriad factors) and it may take several
decades before those mechanisms yield empirically verifiable social
gains.\549\
---------------------------------------------------------------------------
\549\ See, e.g., studies cited in the note 531 above.
---------------------------------------------------------------------------
A few commenters on the Proposing Release argued that the rules
implementing Section 13(q) would generate societal benefits and cited
studies that attempt to measure those benefits for countries that join
the EITI.\550\ While these studies provide useful insight into the
potential benefits to be derived from resource payment transparency
regimes, as discussed more fully below, we believe that there are
limitations associated with each of these studies that make it
difficult for us to draw firm conclusions based on their findings.
---------------------------------------------------------------------------
\550\ See letters from PWYP-US 1 and Corrigan.
---------------------------------------------------------------------------
One commenter presented a study that found a significant increase
in GDP when a resource-rich country joins the EITI.\551\ The study also
found that the increase in GDP appears to be larger the more dependent
a country's economy is on natural resource sectors. While the study is
informative, we have not relied on it to form any quantitative
conclusions. The study does not take into account other factors that
could be driving the increase in GDP and that could be correlated with
a country's participation in the EITI. While the study controls for
time-invariant (or country-specific) factors in the empirical model, it
does not control for time-varying factors that could be driving the
results, such as the change in the quality of the institutions in a
country. It is possible that non-EITI driven institutional improvements
over the period of time used in the study contributed to the increase
in GDP. It is also possible that the improvement in institutions had an
impact on the country's decision to join the EITI.
---------------------------------------------------------------------------
\551\ See letter from Corrigan (citing her earlier study:
Corrigan, C. C. (2014). Breaking the Resource Curse: Transparency in
the Natural Resource Sector and the Extractive Industries
Transparency Initiative. Resources Policy, 41(1), 17-30).
---------------------------------------------------------------------------
Another commenter cited two studies that examined the effect of a
country joining the EITI on net foreign direct investment
(``FDI'').\552\ One of the studies found that joining the EITI
increased net FDI inflow by 50 percent, although the statistical
significance of the results is marginal.\553\ The other study also
found that joining the EITI increased the net FDI as a fraction of GDP
by two percent.\554\ This second study, however, did not fully control
for other factors that could jointly drive the increase in net FDI and
affect the country's decision to join EITI, such as improvements in the
quality of the country's institutions and overall improvement in the
country's transparency. Thus, both of these studies have limitations
that lessen our confidence in their results and hence our willingness
to rely on them to quantify benefits from resource extraction payment
transparency.
---------------------------------------------------------------------------
\552\ See letter from PWYP-US 1 (citing Fernando Londo[ntilde]o,
``Does Joining the Extractive Industries Transparency Initiative
Have an Impact on Extractive and Non-Extractive FDI Inflows?''
(2014), available at https://gppreview.com/wp-content/uploads/2014/02/Londono-F.pdf) (``Londo[ntilde]o Study'') and Maya Schmaljohann,
``Enhancing Foreign Direct Investment via Transparency? Evaluating
the Effects of the EITI on FDI'' (Jan. 2013), available at https://archiv.ub.uni-heidelberg.de/volltextserver/14368/1/Schmaljohann_2013_dp538.pdf (``Schmaljohann Study'')).
\553\ See Londo[ntilde]o Study.
\554\ See Schmaljohann Study.
---------------------------------------------------------------------------
Another commenter presented two single country-based case studies
of conflict and unrest, which the commenter attributed to corruption
and lack of transparency. The studies measured the economic impact of
such conflict and unrest on U.S. oil companies and used the avoidance
of such economic costs as a means of quantifying the societal benefits
of transparency.\555\ In the first case study, the costs are estimated
as the difference in revenues in years with conflict and unrest and a
base year without such conflicts and unrest. The combined cost
estimates from that study are approximately $17.4 billion over the
period 2011-2014. In the second case study, the costs are estimated as
unrealized revenues due to shut-in production events that are caused by
conflict and unrest. The combined cost estimates from that study are
approximately $14.7 billion over the period 2003-2016. In these case
studies, however, it is difficult to distinguish the role that
corruption and the lack of transparency played in stirring a country's
conflict and unrest from the role that other factors such as ethnic
conflicts, religious conflicts, and political repression may have
played.
---------------------------------------------------------------------------
\555\ See letter from ONE Campaign.
---------------------------------------------------------------------------
One commenter cited its own study suggesting that high levels of
corruption (measured by bribery) correspond to lower levels of economic
development.\556\ The study found that higher levels of bribery were
associated with higher maternal mortality, lower youth literacy rate,
and lower access to basic sanitation. The same commenter cited another
study that suggested that
[[Page 49403]]
even small improvements in a country's governance resulted in higher
income and lower infant mortality rates in the long run.\557\ These
findings seem broadly consistent with findings from other studies on
the relationship between corruption and economic development.\558\
---------------------------------------------------------------------------
\556\ See letter from TI-USA.
\557\ See Daniel Kaufmann, Governance Matters 2010: Worldwide
Governance Indicators Highlight Governance Successes, Reversals and
Failures, available at https://www.brookings.edu/research/opinions/2010/09/24-wgi-kaufmann.
\558\ See Section I.E of the Proposing Release.
---------------------------------------------------------------------------
b. Potential Benefits to Issuers and Investors From Transparency
To the extent that the final rules increase transparency and thus
reduce corruption, they would increase efficiency and capital
formation. While the objectives of Section 13(q) may not appear to be
ones that would necessarily generate measurable, direct economic
benefits to investors or issuers, investors and issuers might benefit
from the final rules' indirect effects. In the following paragraphs, we
discuss existing theoretical arguments and empirical evidence that
reduced corruption and better governance could have longer term
positive impacts on economic growth and investment in certain countries
where the affected issuers operate, which could in turn benefit issuers
and their shareholders.
Although the research and data available at this time does not
allow us to draw any firm conclusions, we have considered several
theoretical causal explanations for why reductions in corruption may
increase economic growth and political stability, which in turn may
reduce investor risk.\559\ High levels of corruption could introduce
inefficiencies in market prices as a result of increased political
risks and the potential awarding of projects to companies for reasons
other than the merit of their bids. This, in turn, could prop up
inefficient companies and limit investment opportunities for others.
These potential distortions could have a negative impact on the
economies of countries with high corruption, particularly to the extent
that potential revenue streams are diminished or diverted.
Additionally, the cost of corrupt expenditures, direct or indirect,
impacts profitability, and, if the cost is sufficiently high, some
potentially economically efficient or productive investments may not be
made. Thus, reducing corruption could increase the number of productive
investments and the level of profitability of each investment and could
lead to improved efficiency in the allocation of talent, technology,
and capital. Insofar as these effects are realized, each of them could
benefit issuers operating in countries with reduced corruption levels.
These and other considerations form a basis for several dynamic general
equilibrium models predicting a negative relationship between
corruption and economic development.\560\
---------------------------------------------------------------------------
\559\ See, e.g., reviews by P. Bardhan, ``Corruption and
Development: A Review of Issues,'' Journal of Economic Literature,
35, no. 3, 1320-1346 (1997) and J. Svensson, ``Eight Questions about
Corruption,'' Journal of Economic Perspectives, 19, no. 3, 19-42
(2005).
\560\ See, e.g., I. Ehrlich and F. Lui ``Bureaucratic Corruption
and Endogenous Economic Growth,'' Journal of Political Economy, 107
(6), 270-293 (1999); K. Blackburn, N. Bose, and E.M. Haque, ``The
Incidence and Persistence of Corruption in Economic Development,''
Journal of Economic Dynamics and Control 30, 2447-2467 (2006); and
C. Leite and J. Weidmann, ``Does Mother Nature Corrupt? Natural
Resources, Corruption, and Economic Growth,'' International Monetary
Fund Working Paper No. 99/85 (July 1999).
---------------------------------------------------------------------------
A number of empirical studies have also shown that reducing
corruption might result in an increase in the level of GDP and a higher
rate of economic growth through more private investments, better
deployment of human capital, and political stability.\561\ Other
studies find that corruption reduces economic growth both directly and
indirectly, through lower investments.\562\ To the extent that
increased transparency could lead to a reduction in corruption and, in
turn, improved political stability and investment climate, some
investors may consider such factors in their investment decisions,
including when pricing resource extraction assets of affected issuers
operating in these countries.\563\ We note that some commenters on the
Proposing Release supported this view.\564\
---------------------------------------------------------------------------
\561\ See, e.g., P. Mauro, ``The effects of corruption on
growth, investment and government expenditure: A cross country
analysis,'' in K.A. Elliot (ed.) Corruption and the Global Economy,
Washington DC: Institute for International Economics, 83-107 (1997);
H. Poirson, ``Economic Security, Private Investment, and Growth in
Developing Countries,'' International Monetary Fund Working Paper
No. 98/4 (Jan. 1998); Institute for Economics and Peace, Peace and
Corruption Report (2015).
\562\ See Pak Hung Mo, ``Corruption and Economic Growth,''
Journal of Comparative Economics 29, 66-79 (2001); K. Gyimah-
Brempong, ``Corruption, economic growth, and income inequality in
Africa,'' Economics of Governance 3, 183-209 (2002); and Pierre-
Guillaume M[eacute]on and Khalid Sekkat, ``Does corruption grease or
sand the wheels of growth?'' Public Choice 122, 69-97 (2005).
\563\ Several studies present evidence that reduction in
corruption increases foreign direct investments. See, e.g., S.-J.
Wei, ``How Taxing is Corruption on International Investors?'' NBER
Working Paper 6030 (1997) and G. Abed and H. Davoodi, ``Corruption,
Structural Reforms, and Economic Performance in the Transition
Economies,'' International Monetary Fund Working Paper No. 00/132
(July 2000).
\564\ See letter from ACTIAM et al., Calvert, and PWYP-US 1.
---------------------------------------------------------------------------
There also could be positive externalities from increased investor
confidence to the extent that improved economic growth and investment
climate could benefit other issuers working in those countries.
Although we believe the evidence is presently too inconclusive to allow
us to predict the likelihood that such a result would occur, we note
that there is some empirical evidence suggesting that lower levels of
corruption might reduce the cost of capital and improve valuations for
some issuers.\565\
---------------------------------------------------------------------------
\565\ See D. Kaufmann and S. J. Wei ``Does `Grease Money' Speed
Up the Wheels of Commerce?'' NBER Working Paper 7093 (1999)
(finding, based on survey evidence, that firms that pay fewer bribes
have lower, not higher, cost of capital); and C. Lee and D. Ng,
``Corruption and International Valuation: Does Virtue Pay?'' Journal
of Investing, 18, no. 4, 23-41 (2009) (finding that firms from more
corrupt countries trade at significantly lower market multiples).
---------------------------------------------------------------------------
One commenter asserted that the studies cited above discuss
primarily a single form of corruption--bribery--that in the commenter's
view is not subject to the disclosures required by Section 13(q) and
hence the commenter contended that these studies do not support our
view that the required disclosures might achieve economic benefits
resulting from reduced corruption.\566\ We acknowledge that the
specific studies that the commenter mentions do focus on bribery as a
form of corruption. All the other studies that we cite, which are not
specifically mentioned by the commenter, do discuss corruption in
general and its effect on economic growth. In fact, some specifically
discuss the type of corruption addressed by the final rules.\567\
Furthermore, to the extent that Section 13(q) is successful in reducing
the corruption in the form of misuse of funds, it could also reduce
quid-pro-quo corruption as well. For example, if the government and
issuers are more strictly
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monitored by citizens and society as a result of the final rules, they
may become more reluctant to engage in quid-pro-quo corruption. It is
also possible that some of the payments that are reportable under
Section 13(q) are an implicit form of bribery: For example, government
officials could agree, instead of a bribe, to receive another type of
payment from an issuer that could be expropriated by these officials
later, after the payment is made. If the disclosure under Section 13(q)
is successful in decreasing the misuse of funds, this type of implicit
quid-pro-quo corruption could be reduced as well.
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\566\ See letter from API 1. As we explained above, we believe
that this commenter has an unduly narrow view of the anti-corruption
objectives of Section 13(q) and, thus, we disagree with the claim
that Section 13(q) is unconcerned with helping to reduce bribery.
See Section II.E.3.
\567\ See, e.g., the study by J. Svensson at note 559 above,
which defines corruption as misuse of public office for private
gain. That study cites examples of corruption that are similar to
the types of corruption the final rules are trying to address. For
example, the study discusses the diversion of funds allocated to
school districts in Uganda and road building projects in Indonesia
by government officials in these countries. In Uganda, according to
the study, only 13 percent of the funds allocated to the school
districts actually reached them; the bulk of the grants was captured
by local government officials and politicians. As this evidence
became known and the central government began to publish newspaper
accounts of monthly transfers to districts, so that school staff and
parents could monitor local officials, schools received an average
of 80 percent of their annual entitlements.
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We also note that some commenters on the Proposing Release \568\
stated that the disclosures required by Section 13(q) could provide
useful information to investors in making investment decisions.
Although we do not believe this is the primary purpose of the required
disclosures, we acknowledge the possibility that the disclosures could
provide potentially useful information to certain investors. Some
commenters, for example, stated that the new disclosures could help
investors better assess the risks faced by resource extraction issuers
operating in resource-rich countries.\569\
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\568\ See letters from Bean, Calvert, ITWF, Peck & Chayes, Sen.
Cardin et al., Sen. Lugar et al., TI-USA, and USSIF.
\569\ See letters from Calvert, Columbia Center on Sustainable
Investment (Oct. 30, 2015) (``Columbia Center (pre-proposal)''), and
ACTIAM et al. Some commenters on the 2010 Proposing Release had
similar views. See, e.g., letters from EarthRights International
(Sept. 20, 2011) (``ERI 2 (pre-proposal)''); Global Witness 1 (pre-
proposal); PGGM Investments (Mar. 1, 2011) (``PGGM (pre-
proposal)''); and Oxfam 1 (pre-proposal).
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One of these commenters identified several benefits that project-
level reporting would generate for investors.\570\ First, according to
the commenter, such reporting would help investors assess the
effectiveness of the diversification of risks within a portfolio by
enabling them to understand better the risk profiles of individual
projects within a given country and the contribution of each project to
the overall returns and variation in returns of the portfolio of
projects that an issuer has in that country. Another commenter
expressed a similar view.\571\ We note, however, that additional
information, beyond the disclosure required by Section 13(q), is needed
to estimate returns and variation of returns of a project or portfolio
of projects in a given country. For example, investors and analysts
will need cash flow information (revenues and total costs, not only
those paid to the local government) and cost of capital per project,
which may not be readily available. Thus, the extent to which the
disclosure required by Section 13(q) may generate this particular
benefit is unclear.
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\570\ See letter from Columbia Center (pre-proposal).
\571\ See letter from Robert F. Conrad, Ph.D. (July 17, 2015)
(``Conrad (pre-proposal)'').
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A second benefit for investors, according to the commenter, is that
project-level reporting would help adjust assumptions on a major cost
to the project: the effective tax rate of the host government, the
total taxes and other payments to governments. The commenter provided a
hypothetical example in which information on the effective tax rate
paid increases the estimate of the value of the company by three
percent. While the benefit of having accurate tax information when
valuing a project or a company is indisputable, it is unlikely, as we
indicated above, that an investor or analyst will have accurate
information for other components (e.g., revenues, total costs, and cost
of capital) necessary to value a project. If those components must be
estimated, as is typically the case, the detailed tax information may
not have a first order effect on project/company value, or at least may
not yield a substantial advantage over simply using the marginal tax
rate of the host country.
A third benefit for investors, according to the commenter, is that
the project-level disclosure would help investors assess the issuer's
exposure to commodity price downturns by analyzing industry cost curves
to forecast commodity prices. As noted above, such benefit assumes that
all other relevant costs (e.g., production costs and capital
expenditures), besides the one reported under Section 13(q), are known
to investors, which may not be the case.
A fourth benefit for investors, according to the commenter, is that
project-level disclosure would result in lower cost of capital because
it makes firms more transparent and thus creates trust with investors.
The commenter cites two studies that find a positive link between
transparency and cost of capital. The studies, however, do not provide
evidence that resource extraction transparency in particular leads to
lower cost of capital; rather, the studies conclude more generally that
earnings transparency and the strength of the country's securities
regulations can have a ma 
