[Federal Register Volume 85, Number 10 (Wednesday, January 15, 2020)]
[Proposed Rules]
[Pages 2522-2571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28407]
[[Page 2521]]
Vol. 85
Wednesday,
No. 10
January 15, 2020
Part III
Securities and Exchange Commission
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17 CFR Parts 240 and 249b
Disclosure of Payments by Resource Extraction Issuers; Proposed Rule
Federal Register / Vol. 85 , No. 10 / Wednesday, January 15, 2020 /
Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34-87783; File No. S7-24-19]
RIN 3235-AM06
Disclosure of Payments by Resource Extraction Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing Rule 13q-1 and an amendment to Form SD to
implement Section 1504 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act'') relating to disclosure
of payments by resource extraction issuers. Section 1504 of the Dodd-
Frank Act added Section 13(q) to the Securities Exchange Act of 1934.
Section 13(q) directs the Commission to issue rules requiring resource
extraction issuers to include in an annual report information relating
to payments made 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 these issuers to provide information
about the type and total amount of payments made for each of their
projects 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: Comments should be received by March 16, 2020.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment forms (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-24-19 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-24-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. We will post all comments on our internet website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for
website viewing and printing in our Public Reference Room, 100 F Street
NE, Washington, DC 20549, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
We or the staff may add studies, memoranda or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Special Counsel,
Office of Rulemaking, Division of Corporation Finance, at (202) 551-
3430, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission initially adopted Rule 13q-1
and amendments to Form SD on August 22, 2012. Those rules were vacated
by the U.S. District Court for the District of Columbia on July 2,
2013. On June 27, 2016, the Commission adopted a revised version of
Rule 13q-1 and amendments to Form SD. On February 14, 2017, the revised
rules were disapproved by a joint resolution of Congress pursuant to
the Congressional Review Act. Although the joint resolution vacated the
2016 Rules, the statutory mandate under Section 13(q) of the Exchange
Act remains in effect. As a result, we are proposing 17 CFR 240.13q-1
(``Rule 13q-1'') and an amendment to Form SD \1\ under the Securities
Exchange Act of 1934 (``Exchange Act'').\2\
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\1\ 17 CFR 249b.400.
\2\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Background
A. Section 13(q) of the Exchange Act
B. International Transparency Promotion Efforts
C. The 2016 Rulemaking and Congress's Actions Under the CRA
1. Key Aspects of the 2016 Rules
2. Congressional Disapproval Under the CRA
3. Proposed Rules in Response to the CRA Disapproval
II. Proposed Rules Under Section 13(q)
A. Definition of ``Resource Extraction Issuer''
B. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
1. ``Extraction'' and ``Processing''
2. ``Export''
3. ``Minerals''
C. Definition of ``Payment''
1. Taxes
2. Royalties, Fees, and Bonuses
3. Dividend Payments
4. Infrastructure Payments
5. Community and Social Responsibility Payments
6. In-Kind Payments
7. Other Payment Types
8. Accounting Considerations
9. The ``Not De Minimis'' Threshold
D. Anti-Invasion
E. Definition of ``Subsidiary'' and ``Control''
F. Definition of ``Project''
1. Considerations for Modified ``Project'' Definition
2. Discussion of the Modified ``Project'' Definition
G. Definition of ``Foreign Government'' and ``Federal
Government''
H. Annual Report Requirement
I. Public Reporting
1. Public Disclosure of the Issuer's Payment Information,
Including the Company Name
2. Public Compilation
J. Exemptions From Compliance
1. Exemption for Conflicts of Law
2. Exemption for Conflicts With Pre-Existing Contracts
3. Exemption for Smaller Reporting Companies and Emerging Growth
Companies
4. Targeted Exemption for Payments Related to Exploratory
Activities
5. Transitional Relief for Recently Acquired Companies
6. Transitional Relief for Initial Public Offerings
7. Case-by-Case Exemption
K. Exhibits and Interactive Data Format Requirements
L. Alternative Reporting
M. Treatment for Purposes of the Exchange Act and Securities Act
N. Compliance Date
O. General Request for Comment
III. Economic Analysis
A. Introduction and Baseline
B. Potential Benefits Resulting From the Payment Reporting
Requirement
C. Potential Costs Resulting From the Payment Reporting
Requirement
D. Discussion of Discretionary Choices
1. Definition of ``Project''
2. Exemptions From Disclosure
3. Annual Report Requirement
4. Public Availability of Data
5. Alternative Reporting
6. Definition of ``Control''
7. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
8. Types of Payments
9. Definition of ``Not De Minimis''
10. Exhibit and Interactive Data Requirement
11. Quantitative Estimates of Costs Resulting From the Proposed
Rulemaking
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IV. Paperwork Reduction Act
A. Background
B. Estimate of Issuers
C. Estimate of Issuer Burdens
D. Request for Comment
V. Small Business Regulatory Enforcement Fairness Act
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of Proposed Rule and Form
Amendments
I. Background
A. Section 13(q) of the Exchange Act
Section 13(q) was added to the Exchange Act in 2010 by Section 1504
of the Dodd-Frank Act.\3\ 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 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. The
information must include: (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.\4\
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\3\ Public Law 111-203 (July 21, 2010).
\4\ 15 U.S.C. 78m(q)(2)(A). As discussed further below, Section
13(q) also specifies that the Commission's rules must require
certain information to be provided in an interactive data format.
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On August 22, 2012, the Commission adopted Rule 13q-1 and
amendments to Form SD (the ``2012 Rules'') as mandated by Section 13(q)
of the Exchange Act.\5\ The 2012 Rules were vacated by the U.S.
District Court for the District of Columbia on July 2, 2013.\6\ On June
27, 2016, the Commission adopted a revised version of Rule 13q-1 and
amendments to Form SD (the ``2016 Rules'') that addressed the concerns
raised in the prior litigation.\7\ On February 14, 2017, the 2016 Rules
were disapproved by a joint resolution \8\ of Congress pursuant to the
Congressional Review Act (the ``CRA'').\9\ We are proposing a new Rule
13q-1 and amendments to Form SD to implement Section 13(q).\10\
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\5\ See Release No. 34-67717 (Aug. 22, 2012) [77 FR 56365 (Sept.
12, 2012)] (the ``2012 Rules Adopting Release'') available at http://www.sec.gov/rules/final/2012/34-67717.pdf. See also Release No. 34-
63549 (Dec. 15, 2010) [75 FR 80978 (Dec. 23, 2010)] (the ``2012
Rules Proposing Release'') available at http://www.sec.gov/rules/proposed/2010/34-63549.pdf.
\6\ See API v. SEC, 953 F. Supp. 2d 5 (D.D.C. July 2, 2013). The
District 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. See 953 F. Supp.
2d at 17-19 and 21-23.
\7\ See Release No. 34-78167 (June 27, 2016) [81 FR 49359 (July
27, 2016)] available at https://www.sec.gov/rules/final/2016/34-78167.pdf (the ``2016 Rules Adopting Release''). See also 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 (the ``2016
Rules Proposing Release''). Unless otherwise indicated, comment
letters referenced in this release were submitted in connection with
the 2016 Rules.
\8\ See H.R.J. Res. 41, 115th Cong. (2017) (enacted).
\9\ 5 U.S.C. 801 et seq.
\10\ Although the joint resolution vacated the 2016 Rules, the
statutory mandate under Section 13(q) remains in effect. We discuss
the CRA's requirements for subsequent rulemaking in connection with
disapproved rules in Section I.C.2. below.
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Section 13(q) defines several key terms:
``Resource extraction issuer'' means 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; \11\
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\11\ 15 U.S.C. 78m(q)(1)(D).
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``Commercial development of oil, natural gas, or
minerals'' includes exploration, extraction, processing, export, and
other significant actions relating to oil, natural gas, or minerals, or
the acquisition of a license for any such activity, as determined by
the Commission; \12\
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\12\ 15 U.S.C. 78m(q)(1)(A).
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``Foreign government'' means a foreign government, a
department, agency or instrumentality of a foreign government, or a
company owned by a foreign government, as determined by the Commission;
\13\ and
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\13\ 15 U.S.C. 78m(q)(1)(B).
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``Payment'' means a payment that:
[cir] Is made to further the commercial development of oil, natural
gas, or minerals;
[cir] Is not de minimis; and
[cir] Includes taxes, royalties, fees (including license fees),
production entitlements, bonuses, and other material benefits, that the
Commission, consistent with the guidelines of the Extractive Industries
Transparency Initiative (the ``EITI'') \14\ (to the extent
practicable), determines are part of the commonly recognized revenue
stream for the commercial development of oil, natural gas, or
minerals.\15\
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\14\ The EITI is a voluntary coalition of oil, natural gas, and
mining companies, foreign governments, investor groups, and other
international organizations committed to establishing a global
standard (the ``EITI Standard'') for the good governance of oil,
gas, and mineral resources. The coalition was formed with industry
participation and describes itself as being dedicated to fostering
and improving transparency and accountability in resource-rich
countries through the publication and verification of company
payments and government revenues from oil, natural gas, and mining.
See Implementing EITI for Impact--A Handbook for Policymakers and
Stakeholders (2012) (``EITI Handbook''), at xii. After volunteering
to become an EITI candidate, a country must implement a series of
requirements set forth in the EITI Standard and complete an EITI
validation process to become a compliant member. Although the United
States became an EITI candidate country in March 2014, it withdrew
its EITI candidacy in November 2017. See infra Section II.B.
\15\ 15 U.S.C. 78m(q)(1)(C).
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Section 13(q) specifies 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.'' \16\ Although the
statutory definition of ``payment'' explicitly refers to the EITI, the
provision in Section 13(q) about supporting the Federal Government's
commitment to international transparency promotion efforts does not
mention the EITI.\17\
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\16\ 15 U.S.C. 78m(q)(2)(E).
\17\ See id.
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Pursuant to Section 13(q), the rules must require a resource
extraction issuer to submit the payment information included in an
annual report in an interactive data format \18\ using an interactive
data standard established by the Commission.\19\ Section 13(q) defines
``interactive data format'' to mean an electronic data format in which
pieces of information are identified using an interactive data
standard.\20\ It also defines ``interactive data standard'' as a
standardized list of electronic tags that mark information included in
the annual report of a resource extraction issuer.\21\ Section 13(q)
also requires that the rules include electronic tags that identify, for
any payments made by a resource extraction issuer to a foreign
government or the Federal Government:
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\18\ 15 U.S.C. 78m(q)(2)(C).
\19\ 15 U.S.C. 78m(q)(2)(D).
\20\ 15 U.S.C. 78m(q)(1)(E).
\21\ 15 U.S.C. 78m(q)(1)(F).
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The total amounts of the payments, by category;
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.\22\
Section 13(q) further authorizes the Commission to require
additional
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electronic tags that it determines are necessary or appropriate in the
public interest or for the protection of investors.\23\
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\22\ 15 U.S.C. 78m(q)(2)(D)(ii).
\23\ Id.
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In addition, Section 13(q) 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 rules.\24\ The statute does not define the term compilation.
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\24\ 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 . . .'' \25\
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\25\ 15 U.S.C. 78m(q)(2)(F).
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Congress enacted Section 1504 of the Dodd-Frank Act 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. According to Senator Richard Lugar, who
co-sponsored the amendment that was the basis for this statutory
provision, a goal of requiring transparency was to provide more
information to the global commodity markets and ``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.'' \26\
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\26\ See 156 Cong. Rec. S3816 (daily ed. May 17, 2010).
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B. International Transparency Promotion Efforts
In 2013, the European Parliament and Council of the European Union
(``EU'') adopted two directives that include payment disclosure
rules.\27\ The EU Accounting Directive and the EU Transparency
Directive (the ``EU Directives'') are very similar in content. Both
determine the applicability and scope of the disclosure requirements
and set the baseline in each EU member state and European Economic Area
(``EEA'') \28\ country for annual disclosure requirements for oil, gas,
mining, and logging companies concerning the payments made to
governments on a per country and per project basis.\29\ All EU member
states have implemented both of the EU Directives.\30\ Norway has also
adopted regulations similar to the EU Directives.\31\
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\27\ 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 of the European
Parliament and of the Council on the harmonization of 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 Directive 2007/14/EC on the
implementation of certain provisions of Directive 2004/109/EC (``EU
Transparency Directive'').
\28\ See European Commission Memo (June 12, 2013) (``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''). The
EEA is composed of the EU member states plus Iceland, Liechtenstein,
and Norway.
\29\ The EU Accounting Directive regulates disclosure of
financial information by all ``large'' companies incorporated under
the laws of an EU member state or those of an EEA country, even if
the company is privately held, and requires covered oil, gas,
mining, and logging companies to disclose specified payments to
governments. See Article 3(4) of the EU Accounting Directive, which
defines ``large undertakings'' (i.e., large companies) 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; (b)
net turnover of [euro]40 million; and (c) average number of
employees of 250. The EU Transparency Directive applies these
disclosure requirements to all companies listed on EU-regulated
markets even if they are not registered in the EEA or are
incorporated in other countries. See EU Transparency Directive, Art.
2(1)(d) and Art. 6.
\30\ Resource extraction issuers commenced filing reports under
the EU Directives for 2015 and have since annually filed such
reports. According to the National Resource Governance Institute
(``NRGI''), approximately 90 U.K.-reporting companies have entered
their fourth annual round of public payments to governments
disclosures in 2019. See NRGI, U.K. Financial Regulator Confirms
Extractive Companies Must Name Government Entities to Which They
Make Payments (April 25, 2019), available at https://resourcegovernance.org/blog/uk-financial-regulator-confirms-extractive-companies-must-name-govts-they-pay; see also BHP
Billiton's Economic Contribution Report 2018, available at https://www.bhp.com/investor-centre/-/media/documents/investors/annual-reports/2018/bhpeconomiccontributionreport2018.pdf; BP p.l.c.'s
Report on Payments to Governments for the year ended December 31,
2018, available at https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/group-reports/bp-report-on-payments-to-governments-2018.pdf; and Royal Dutch Shell's Payments
to Governments Report for the Year 2017, available at https://www.shell.com/sustainability/transparency/payments-to-governments/_jcr_content/par/textimage.stream/1554163266774/0354390d1d06f4fe154700810bc50102817feb82/royal-dutch-shell-the-payments-to-governments-report-for-the-year-2018.pdf.
\31\ See PWYP-Norway, Norwegian Regulations concerning country-
by-country reporting (Feb. 24, 2014), available at http://www.publishwhatyoupay.no/en/node/16414, which provides an English
translation of the Norwegian source document, Forskrift om land-for-
land rapportering (Dec. 20, 2013), available at https://www.regjeringen.no/no/dokumenter/forskrift-om-land-for-land-rapportering/id748525/.
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Canada adopted a Federal resource extraction disclosure law, the
Extractive Sector Transparency Measures Act (``ESTMA''), which went
into effect on June 1, 2015.\32\ In March 2016, Canada finalized its
ESTMA Guidance \33\ and the ESTMA Technical Reporting Specifications
(``ESTMA Specifications''), which provide guidelines for complying with
the ESTMA disclosure regime.\34\ 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.\35\ Public reporting under ESTMA was required for fiscal
years beginning after June 1, 2015.\36\
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\32\ See ESTMA, 2014 S.C., ch. 39, s. 376 (Can.).
\33\ ESTMA Guidance available at https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials/PDF/ESTMA%E2%80%93Guidance.pdf.
\34\ ESTMA Specifications available at https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials/PDF/ESTMA%E2%80%93TRS.pdf.
\35\ 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, (ii) it has generated
at least[thinsp]$40 million (CAD) in revenue, (iii) it employs an
average of at least 250 employees; and (c) any other prescribed
entity. ESTMA, Section 8.
\36\ Links to reports made under ESTMA can be found on Natural
Resources Canada's website at https://www.nrcan.gc.ca/mining-materials/estma/18198.
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On March 19, 2014, the United States became an EITI candidate
country,\37\ following which the United States Extractive Industries
Transparency Initiative (the ``USEITI'') submitted reports for 2015 and
2016. On November 2, 2017, the United States withdrew as an EITI
implementing country.\38\ It has, however, maintained
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its status as a supporting country of the EITI.\39\
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\37\ 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. See the EITI's website at http://eiti.org.
\38\ See letter from Gregory Gould, Director of the Office of
Natural Resources Revenue, U.S. Department of the Interior, to
Fredrik Reinfeldt, Chair of the EITI (Nov. 2, 2017) (noting ``the
fact that the U.S. laws prevent us from meeting specific provisions
of the EITI Standard''). This letter is available at https://www.doi.gov/sites/doi.gov/files/uploads/eiti_withdraw.pdf.
\39\ See id. The United States is currently one of 15 supporting
countries of the EITI. Supporting governments are committed to
promote good governance in the extractive industries across the
world. Although the only formal requirement of a supporting country
is to make a clear public endorsement, a country can also support
the EITI through financial, technical, and political support at the
international level and in implementing and other resource-rich
countries. See https://eiti.org/supporters/countries.
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C. The 2016 Rulemaking and Congress's Actions Under the CRA
1. Key Aspects of the 2016 Rules
The 2016 Rules provided for issuer-specific, public disclosure of
payment information broadly in line with the standards adopted under
other international transparency promotion regimes, including the EU
Directives, ESTMA and the EITI. The 2016 Rules differed from the 2012
Rules in certain key aspects. These aspects included:
Defining project to mean ``operational activities governed
by a single contract, license, lease, concession, or similar legal
agreement, which forms the basis for payment liabilities with a
government;'' \40\
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\40\ See Item 2.01(d)(9) of the 2016 Form SD; see also the 2016
Adopting Release, Section II.E.3. This definition also provided that
``[a]greements that are both operationally and geographically
interconnected may be treated by the resource extraction issuer as a
single project.'' The 2012 Rules did not define the term ``project''
but provided guidance on the meaning of the term. See the 2012
Adopting Release, Section II.D.3.c.
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Adopting a targeted exemption to permit issuers to delay
reporting payment information in connection with certain exploratory
activities for one year; \41\
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\41\ See the 2016 Form SD, Item 2.01(b)(1); see also the 2016
Rules Adopting Release, Section II.I.3. The 2012 Rules did not
provide for any exemptions, targeted or otherwise.
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Revising the definition of ``control'' under the 2012
Rules, which had relied on the definition of control under Exchange Act
Rule 12b-2,\42\ by basing the definition instead on applicable
accounting principles; \43\
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\42\ See the 2012 Rules Adopting Release, Section II.D.4.c.
\43\ See the 2016 Form SD, Item 2.01(d)(3); see also 2016 Rules
Adopting Release, Section II.D.3.
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Adopting an alternative reporting mechanism whereby
issuers would be able to meet the requirements of the 2016 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; \44\
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\44\ See the 2016 Form SD, Item 2.01(c); see also the 2016 Rules
Adopting Release, Section II.J.3.
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Adopting transitional relief for issuers that had recently
acquired companies, where such companies had not previously been
subject to the Section 13(q) rules or another ``substantially similar''
jurisdiction's requirements in its last full fiscal year; \45\
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\45\ See the 2016 Form SD, Item 2.01(b)(2); see also the 2016
Rules Adopting Release, Section II.G.3.
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Expressly permitting the submission of requests for
exemptive relief on a case-by-case basis; \46\ and
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\46\ See the 2016 Rules Adopting Release, Section II.I.3.
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Including a provision requiring the Commission's staff, to
the extent practicable, to periodically make available online a public
compilation of the payment information required to be filed by issuers
on Form SD.\47\
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\47\ See the 2016 Release, Section II.H.3. In the 2012
rulemaking, the Commission did not affirmatively adopt such a
provision after noting that, by providing an issuer's Form SD
filings to the public through the searchable, online EDGAR system,
users of the information would be able to produce their own up-to-
date compilations in real time. In the 2016 rulemaking, however,
after reasserting this position, the Commission acknowledged that,
as some commenters maintained, the statute could be read to require
the Commission to periodically provide a public compilation separate
from the individual compilations.
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In other respects, the 2016 Rules were the same or similar to the
2012 Rules. For example, under both sets of rules:
There was no broad, rule-based exemption for situations
where a foreign law or contract term prohibited the payment disclosure;
A resource extraction issuer had to provide the payment
information, including the issuer's identity, publicly on Form SD; \48\
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\48\ See the 2016 Rules Adopting Release, Section II.H.3. and
the 2012 Rules Adopting Release, Section II.F.1.c. Mindful of the
2013 District Court decision, the Commission acknowledged that
Section 13(q) provides the Commission with the discretion to require
public disclosure of payments by resource extraction issuers or to
permit confidential filings. The Commission, however, explained its
continued belief that requiring public disclosure of each issuer's
specific filings (including all the payment information) would best
accomplish the purpose of the statute.
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Form SD was to be filed with, and not furnished to, the
Commission, thereby making the payment disclosure subject to liability
under Section 18 of the Exchange Act; \49\
---------------------------------------------------------------------------
\49\ See the 2016 Rules Adopting Release, Section II.L.3. and
the 2012 Rules Adopting Release, Section II.F.3.c.
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The definitions for ``foreign government'' and ``federal
government'' were the same under both sets of rules; \50\
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\50\ See the 2016 Adopting Release, Section II.F.3. and the 2012
Adopting Release, Section II.E.3.
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The definitions for ``payment'' \51\ and ``commercial
development of oil, natural gas, or minerals'' \52\ were similar under
both sets of rules; and
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\51\ The 2012 Rules' definition of payments added payments for
infrastructure improvements to the list of statutorily mandated
payment types required to be disclosed. See the 2012 Rules Adopting
Release, Section II.D.1.c. The 2016 Rules added to the 2012 Rules'
list of required payment types community and social responsibility
payments that are required by law or contract. The 2016 Rules also
added an instruction clarifying the types of royalty payments
required to be disclosed. See the 2016 Rules Adopting Release,
Section II.C.3.
\52\ In the 2012 rulemaking, the Commission defined ``commercial
development of oil, natural gas, or minerals'' to include certain
statutorily mandated activities. It then provided guidance that the
term ``commercial development'' applied only to activities directly
related to the commercial development of oil, natural gas, or
minerals, and was not intended to capture ancillary or preparatory
activities. See 2012 Rules Adopting Release, Section II.C.3. In the
2016 rulemaking, the Commission adopted the same definition of
``commercial development of oil, natural gas, or minerals'' as in
the earlier rulemaking while expanding upon and codifying the
guidance regarding activities pertaining to ``processing'' and
``export.'' See the 2016 Rules Adopting Release, Section II.B.3.
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Issuers had to electronically tag the payment information
using the eXtensible Business Reporting Language (``XBRL'') electronic
format.\53\
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\53\ See the 2016 Rules Adopting Release, Section II.K.3. and
the 2012 Rules Adopting Release, Section II.F.2.c.
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2. Congressional Disapproval Under the CRA
On February 14, 2017, the President signed a joint resolution of
Congress disapproving the 2016 Rules pursuant to the CRA. Members of
the House and the Senate who supported the joint resolution expressed a
number of concerns with the 2016 Rules. The principal concerns focused
on the potential adverse economic effects of the rules. Specifically,
members expressed the view that the 2016 Rules would impose undue
compliance costs on companies,\54\ undermine job growth and burden the
economy,\55\ and impose competitive harm to U.S. companies relative to
foreign competition.\56\
[[Page 2526]]
Members also expressed concern that the rule extended beyond the SEC's
core mission.\57\
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\54\ See, e.g., 163 Cong. Rec. H.848 (February 1, 2017)
(Statement of Rep. Hensarling) (``The SEC has estimated that ongoing
compliance costs for his rule could reach as high as $591 million
annually . . . Furthermore, this rule still goes far beyond the
statute passed by Congress and mandates public specialized
disclosures that cost more and more, and is more burdensome than the
law requires.'').
\55\ See id. (Statement of Rep. Hensarling) (``That is $591
million every year that could better be used to hire thousands more
Americans in an industry where the average pay is 50 percent higher
than the U.S. average. Literally we could be talking about 10,000
jobs on the line for this ill-advised rule.'').
\56\ See id. (Statement of Rep. Hensarling) (``The economic
opportunities of . . . millions of Americans . . . are not helped by
top-down, politically driven regulations that give many foreign
companies an advantage over American public companies. That is
exactly what this Securities and Exchange Commission regulation that
we are talking about today does. It forces American public companies
to disclose [expensive] proprietary information that can actually be
obtained by their foreign competitors, including state-owned
companies in China and Russia. This is just one regulation out of
thousands and thousands that are burdening our companies, our job
creators, and are costing our households by one estimate, over
$14,000 a year . . .''); see also 163 Cong. Rec. H.851 (February 1,
2017) (Statement of Rep. Wagner) (``This particular SEC regulation .
. . regarding resource extraction disclosures will make it more
expensive for our public companies that are involved with energy
production to be competitive overseas with foreign state-owned
companies.'').
\57\ See, e.g., 163 Cong. Rec. H.850 (February 1, 2017)
(Statement of Rep. Huizenga) (observing that the Congressional goals
underlying Section 13(q) are outside of the SEC's ``core mission''
of ``protect[ing] investors,'' ``maintain[ing] fair, orderly and
efficient markets,'' and ``facilitat[ing] capital formation'').
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Some members who voted in favor of the disapproval nonetheless
reiterated the rule's transparency and anti-corruption objectives. For
instance, a group of senators who voted for the joint resolution
expressed their ``strong support'' for anticorruption policies and
stated that they were ``committed to efforts to encourage corporate
transparency on these matters consistent with the international
standards already adopted by European and other governments.'' \58\
They also indicated, however, that they voted in favor of disapproving
the 2016 Rules in part due to their concern that those rules would
place U.S. and other SEC-registered companies at a significant
competitive disadvantage.\59\
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\58\ See Letter from Senator Bob Corker, Senator Susan Collins,
Senator Marco Rubio, Senator Johnny Isakson, Senator Lindsey Graham,
Senator Todd Young (Feb. 2, 2017), available at https://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml.
\59\ See id.
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Although the joint resolution vacated the 2016 Rules, the statutory
mandate under Section 13(q) of the Exchange Act remains in effect. As a
result, the Commission is statutorily obligated to issue a new
rule.\60\ Under the CRA, however, the Commission may not reissue the
same rule in ``substantially the same form'' or issue a new rule that
is ``substantially the same'' as the disapproved rule.\61\ The CRA does
not define the phrase ``substantially the same,'' but the legislative
history \62\ urges Congress to provide direction to agencies regarding
the possibility of issuing a new rule when debating the resolution of
disapproval.\63\ Given this legislative history, and the absence of
further general guidance from the CRA or any specific legislative
guidance from Congress addressing the form of a new rulemaking, we
looked to the concerns raised by members of Congress during the floor
debates on the joint resolution to assist us in developing a rule that
is not ``substantially the same'' \64\ as the 2016 Rules.\65\
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\60\ A number of members who supported the joint resolution
noted that the Commission would be obligated to issue a new rule
fulfilling the statutory mandate. See, e.g., 163 Cong. Rec. H.848,
849 (February 1, 2017) (Statement of Rep. Hensarling) (``Let's also
remember that this joint resolution does not repeal section 1504 of
Dodd-Frank. I wish it did, but it doesn't . . . It simply tells the
SEC to go back to the drawing board, comply with the Dodd-Frank Act,
and come up with a better rule . . .''); 163 Cong. Rec. S.635 (Feb.
2, 2017) (Statement of Sen. Crapo) (``What this resolution does is
to cause the current SEC rule to not take effect. As it was
characterized yesterday on the House floor and will be characterized
further today on the Senate floor, what the SEC will need to do is
to go back to the drawing board and come up with a better rule that
complies with the law of the land.'').
\61\ See 5 U.S.C. 801(b)(2).
\62\ The principal sponsors of the CRA submitted identical joint
explanatory statements that were ``intended to provide guidance to
the agencies, the courts, and other interested parties when
interpreting the act's terms.'' See Joint Explanatory Statement of
House and Senate Sponsors (Senators Nickles, Reid, and Stevens), 142
Cong. Rec. S.3683 (April 18, 1996).
\63\ 142 Cong. Rec. S.3686 (``The authors intend the debate on
any resolution of disapproval to focus on the law that authorized
the rule and make the congressional intent clear regarding the
agency's options or lack thereof after enactment of a joint
resolution of disapproval. It will be the agency's responsibility in
the first instance when promulgating the rule to determine the range
of discretion afforded under the original law and whether the law
authorizes the agency to issue a substantially different rule. Then,
the agency must give effect to the resolution of disapproval.'').
\64\ See 5 U.S.C. 801(b)(2).
\65\ See supra n. 54-57. In this regard, we note that many of
the concerns raised by members of Congress were raised by commenters
in the previous rulemakings. See, e.g., Letters from the American
Petroleum Institute (``API'') (Feb. 16, 2016); ExxonMobil
Corporation (``ExxonMobil'') (Feb. 16, 2016); and Chevron
Corporation (``Chevron'') (Feb. 16, 2016).
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Request for Comment
We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed amendments. When
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation.
1. Are there any data since the 2016 Rules concerning actual costs
of compliance with mandatory disclosure regimes that relate to or
otherwise address the Congressional concerns about the potential
adverse economic effects of the rules, and specifically, that the 2016
Rules would impose undue compliance costs on companies? Should we
consider, and if so how, the compliance cost data in the UK
Government's Department for Business, Energy and Industrial Strategy
post-implementation review of the UK regulations,\66\ in determining
how to address the stated Congressional concerns?
---------------------------------------------------------------------------
\66\ See Department for Business, Energy and Industrial Strategy
(BEIS), Reports on Payments to Governments Regulations: Final
Report, BEIS Research Paper, Jan. 2018, available at http://www.legislation.gov.uk/uksi/2014/3209/pdfs/uksiod_20143209_en_001.pdf. See infra Section III.D.11. for a
related discussion of the UK report.
---------------------------------------------------------------------------
2. Have there been any developments or changes in industry
practices since the 2016 Rules related to how companies track and
record payment information or how they capture the cost of compliance
with mandatory disclosure regimes that could impact or otherwise
address the stated Congressional concerns?
[[Page 2527]]
3. Proposed Rules in Response to the CRA Disapproval
Similar to the prior rules, the proposed rules, which are described
in more detail in Part II below, would require resource extraction
issuers to submit on an annual basis a Form SD that includes
information about payments related to the commercial development of
oil, natural gas, or minerals that are made to governments. Given the
requirements of Section 13(q), certain elements of the proposed rules
are also in the 2016 Rules.\67\ Nevertheless, we believe that the
proposed rules, considered as a whole, are not in substantially the
same form as the 2016 Rules and therefore in compliance with the CRA's
restriction on subsequent rulemaking.\68\
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\67\ For example, we are proposing the same targeted exemption
for exploratory activities, the same transitional relief for
recently acquired companies, and a similar alternative reporting
mechanism, all of which were adopted in 2016 primarily to limit
compliance costs. See supra Section I.C.1. We also are proposing the
same definitions as adopted in 2016 for ``resource extraction
issuer,'' ``commercial development of oil, natural gas, or
minerals,'' ``payment,'' and ``foreign government.'' As further
discussed below, most commenters who addressed those definitions in
the 2016 rulemaking generally supported them.
\68\ The CRA instructs that the ``new rule'' cannot be
``substantially the same'' or in ``substantially the same form'' as
the disapproved rule. See 5 U.S.C. 801(b)(1). We believe that this
language clearly reflects Congress' intent that, in issuing a new
rule, an agency must do more than substantially revise the
rationales supporting the prior rule or the economic analysis
underlying the prior rule. Rather, the CRA instructs that the ``new
rule'' itself must be substantially different. As such, we do not
believe that readopting the 2016 Rules with modifications only to
the rationales or economic analysis in the release would satisfy the
substantially different requirement mandated by the plain language
of the CRA. Instead, we concur with the views of two scholars that
the CRA requires changes to the rule itself. See Adam M. Finkel and
Jason W. Sullivan, 63 Administrative Law Review 707, 757-58 (2011)
(asserting that the view that ``anything goes so long as the agency
merely asserts that external conditions have changed . . . would
contravene all the plain language and explanatory material in the
CRA. Even if the agency believes it now has better explanations for
an identical reissued rule, the appearance of asking the same
question until you get a different answer is offensive enough to
bedrock good government principles that the regulation should be
required to have different costs and benefits after a veto, not just
new rhetoric about them.'').
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In this regard, the proposed new rules include several significant
changes to the core provisions of the 2016 Rules. Specifically, the
proposed rules would: (1) Revise the definition of the term ``project''
to require disclosure at the national and major subnational political
jurisdiction, as opposed to the contract, level; \69\ (2) revise the
definition of ``not de minimis'' to include both a project threshold
and an individual payment threshold; \70\ (3) add two new conditional
exemptions for situations in which a foreign law or a pre-existing
contract prohibits the required disclosure; \71\ (4) add an exemption
for smaller reporting companies and emerging growth companies; \72\ (5)
revise the definition of ``control'' to exclude entities or operations
in which an issuer has a proportionate interest; \73\ (6) limit the
liability for the required disclosure by deeming the payment
information to be furnished to, but not filed with, the Commission;
\74\ (7) add an instruction in Form SD that would permit an issuer to
aggregate payments by payment type made at a level below the major
subnational government level; \75\ (8) add relief for issuers that have
recently completed their U.S. initial public offerings; \76\ and (9)
extend the deadline for furnishing the payment disclosures.\77\ These
changes, which directly impact the amount, granularity, timing, scope
of, and liability for, the required disclosures, form the basis for our
belief that, when considered as a whole, the proposed rules are not in
substantially the same form as the 2016 Rules.
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\69\ See infra Section II.F.
\70\ See infra Section II.C.9.
\71\ See infra Sections II.J.1. and II.J.2.
\72\ See infra Sections II.J.3.
\73\ See infra Section II.E.
\74\ See infra Section II.M.
\75\ See infra Section II.G.
\76\ See infra Section II.J.5.
\77\ See infra Section II.H.
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The following chart summarizes the primary changes in the proposed
rules compared to the 2016 Rules:
----------------------------------------------------------------------------------------------------------------
Issue 2016 Rules (disapproved) Proposed rules
----------------------------------------------------------------------------------------------------------------
Definition of ``project''............ Defined as operational activities Defined using three
governed by a single contract, license, factors:
lease, concession, or similar legal (1) Type of resource;
agreement, which forms the basis for (2) type of operation; and
payment liabilities with a government. (3) major subnational
jurisdiction.
Aggregation of payments.............. No aggregation of payments beyond Aggregation of
contract level, except that payments payments permitted at major
related to operational activities subnational jurisdiction
governed by multiple legal agreements level, which must be
could be aggregated together as long as identified;
the multiple agreements were Aggregation of
operationally and geographically related. payments permitted at levels
below major subnational
level, which may be
described generically (e.g.,
as county or municipality).
Definition of ``not de minimis'' Defined as a payment that equals Defined as any
payment. or exceeds $100,000. payment that equals or
exceeds $150,000 made in
connection with a project
that equals or exceeds
$750,000 in total payments.
Exemptions from compliance based on No exemptions for conflicts with Conditional
conflicts with foreign laws or foreign laws or contract terms. exemptions for foreign law
contract terms. Case-by-case exemptive process conflicts and pre-existing
established. (pre-adoption) contract
terms that prohibit
disclosure.
Exemption for smaller reporting No exemption for smaller Exemption for
companies or emerging growth reporting companies or emerging growth smaller reporting companies
companies. companies. and emerging growth
companies.
Definition of ``control''............ Based on established financial Similar to approach
reporting principles: Issuer has control under 2016 Rules, except
over an entity when it is required under that an issuer is not
GAAP or IFRS to consolidate or required to disclose
proportionately consolidate the financial payments made by entities
results of that entity. that it only proportionately
consolidates.
Filed vs. Furnished--Application of Reports required to be filed; Reports are
Exchange Act Section 18 liability. Potential Section 18 liability. furnished;
No Section 18
liability.
[[Page 2528]]
Relief for Initial Public Offerings No relief for IPOs. Transitional relief
(IPOs). for IPOs;
Issuer would not
have to comply with the
Section 13(q) rules until
the first fiscal year
following the fiscal year in
which it completed its
initial public offering.
Deadline for Furnishing Payment For all issuers, no later than For issuers with
Disclosures. 150 days after the end of the issuer's fiscal years ending on or
most recent fiscal year. before June 30, no later
than March 31 in the
following calendar year;
For issuers with
fiscal years ending after
June 30, no later than March
31 in the second calendar
year following their most
recent fiscal year.
----------------------------------------------------------------------------------------------------------------
In proposing these provisions and other aspects of this rulemaking,
we have striven to achieve an appropriate balance between implementing
the statute as required by Congress and addressing the concerns
expressed by commenters and members of Congress.\78\ Specifically, we
expect that the proposal would meaningfully reduce the compliance
burden for issuers compared to the compliance burden estimated for the
2016 Rules, for example, by permitting greater aggregation of payments
at the major subnational level and at lower government levels. We also
believe that, for the same reason, the proposal would address the
concerns about potential competitive harm that the 2016 Rules would
have caused as a result of the public disclosure of contract level
payment information.
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\78\ As noted above, the estimated cost of compliance of the
2016 Rules and the potential for competitive harm were specifically
noted by the members of Congress who voted to disapprove the rules.
See, e.g., 163 Cong. Rec. H.848 (daily ed. Feb. 1, 2017) (statement
of Rep. Hensarling); 163 Cong. Rec. at H.852 (statement of Rep.
Barr).
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On the other hand, we have not provided for the confidential
submission of payment information, as suggested by some commenters.\79\
In addition, we have not provided for the release of information only
through an anonymized, aggregated compilation produced by the
Commission, as suggested by some commenters.\80\ As explained below, we
believe that public disclosure of company-specific, project-level
payment information provides an appropriate balance between the stated
concerns with the 2016 Rules and the mandate of Section 13(q) to
increase transparency of payments to governments in resource-rich
nations.\81\ However, we are requesting comment on an alternative
approach that would allow for confidential filing and would release
information only through an anonymized, aggregated compilation.\82\
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\79\ See, e.g., Letters from API (Nov. 7, 2013) (submitted prior
to the 2016 Proposing Release) and (Feb. 16, 2016); Letter from
Chevron (Feb. 16, 2016); and Letter from Royal Dutch Shell plc
(``RDS'') (Feb. 5, 2016).
\80\ See id.
\81\ See infra Sections II.F. and II.I.
\82\ See infra Section II.I.
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II. Proposed Rules Under Section 13(q)
A. Definition of ``Resource Extraction Issuer''
Section 13(q) defines a resource extraction issuer in part as an
issuer that is ``required to file an annual report with the
Commission.'' We believe this language could reasonably be read to
include or to exclude issuers that file annual reports on forms other
than Forms 10-K, 20-F, or 40-F. We are therefore using our discretion
and proposing to cover only issuers filing annual reports on Forms 10-
K, 20-F, or 40-F. Specifically, the proposed rules would define the
term ``resource extraction issuer'' to mean an issuer that is required
to file with the Commission an annual report on one of those forms
pursuant to Section 13 or 15(d) of the Exchange Act and that engages in
the commercial development of oil, natural gas, or minerals.\83\ As
with the 2016 Rules, we believe that covering issuers that provide
disclosure outside of the Exchange Act reporting framework would do
little to further the transparency objectives of Section 13(q) but
would add costs and burdens to the existing disclosure regime governing
those categories of issuers. The proposed definition would therefore
exclude issuers subject to Tier 2 reporting obligations under
Regulation A and issuers filing annual reports pursuant to Regulation
Crowdfunding.\84\ In addition, investment companies registered under
the Investment Company Act of 1940 (``Investment Company Act'') would
not be subject to the proposed rules.\85\
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\83\ See proposed Rule 13q-1(a) and proposed Item 2.01(d)(11) of
Form SD. We interpret ``engages'' as used in Section 13(q) and
proposed Rule 13q-1 to include indirectly engaging in the specified
commercial development activities through an entity under a
company's control. See infra Section II.E. for our discussion of
``control.''
\84\ In prior releases, the Commission noted that, in the
staff's experience, resource extraction issuers rarely use
Regulation A. This continues to be the case. Between June 2015
through September 2017, only one of the Regulation A issuers with a
qualified offering statement appears to have been a resource
extraction issuer at the time of filing based on a review of
assigned Standard Industrial Classification (SIC) codes. Similarly,
between May 2016 and December 2016, only one of the Regulation
Crowdfunding issuers appears to have been a resource extraction
issuer.
\85\ It seems unlikely that an entity that fits within the
definition of ``investment company'' would be one that is
``engag[ing] in the commercial development of oil, natural gas, or
minerals.'' See Section 3(a)(1) of the Investment Company Act (15
U.S.C. 80a-3(a)(1)).
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Almost all of the commenters on the 2016 Rules Proposing Release
supported a definition similar to the one we are proposing today \86\
Consistent with the 2016 Rules, we are not proposing exemptions to our
definition of ``resource extraction issuer'' based on foreign private
issuer status \87\ or the extent of business operations constituting
commercial development of oil, natural gas, or minerals.
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\86\ See 2016 Rules Adopting Release, Section II.A.2.
\87\ See the definition of ``foreign private issuer'' in
Securities Act Rule 405 [17 CFR 230.405] and Exchange Act Rule 3b-4
[17 CFR 240.3b-4]. We are, however, proposing to exclude from the
proposed rules foreign private issuers that are exempt from Exchange
Act registration and reporting obligations pursuant to Exchange Act
Rule 12g3-2(b) (17 CFR 240.12g3-2(b). As discussed in prior
releases, we believe that expanding the statutory definition of
``resource extraction issuer'' to include foreign private issuers
that are relying on Rule 12g3-2(b) would discourage reliance on the
exemption and would be inconsistent with the effect and purpose of
that rule. See the 2016 Rules Adopting Release, Section II.A.3; and
the 2016 Rules Proposing Release, Section II.A.
---------------------------------------------------------------------------
We are, however, proposing to exempt smaller reporting companies
\88\ and emerging growth companies \89\ from the
[[Page 2529]]
scope of Rule 13q-1. As explained below,\90\ we believe that this
proposed change from the 2016 Rules would reduce the overall cost of
the proposed rules \91\ and address the related Congressional
concerns.\92\
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\88\ See the definition of smaller reporting company in
Securities Act Rule 405 (17 CFR 230.405) and Exchange Act Rule 12b-2
(17 CFR 240.12b-2).
\89\ See the definition of emerging growth company in Securities
Act Rule 405 and Exchange Act Rule 12b-2; see also Securities Act
Section 2(a)(19) (15 U.S.C. 77b(a)(19)) and Exchange Act Section
3(a)(80) (15 U.S.C. 78c(a)(80)).
\90\ See infra Section II.J.3.
\91\ We solicit comment on our proposed exemption for smaller
reporting companies and emerging growth companies in Section II.J.3.
below.
\92\ See supra n. 54 and accompanying text.
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Request for Comment
3. Should we define ``resource extraction issuer'' to mean an
issuer that is required to file with the Commission an annual report on
Form 10-K, Form 20-F, or Form 40-F pursuant to Section 13 or 15(d) of
the Exchange Act and that engages in the commercial development of oil,
natural gas, or minerals, as proposed? Should we alter our approach to
the definition of ``resource extraction issuer'' based on any
developments since the adoption of the 2016 Rules or in light of our
other proposals in this release?
4. Should we exclude other categories of issuers, such as foreign
private issuers, from the definition of ``resource extraction issuer''?
B. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
Consistent with the statutory definition, the proposed rules would
define ``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.\93\
Although we have discretionary authority to include other significant
activities relating to oil, natural gas, or minerals,\94\ we are not
proposing to expand the list of covered activities beyond the explicit
terms of Section 13(q). We adopted the same approach when defining
``commercial development of oil, natural gas, or minerals'' in the 2016
rulemaking, and most commenters that addressed this aspect of the prior
rules supported this approach.\95\ As was the case with the 2016 Rules,
we have not sought to impose disclosure obligations that extend beyond
Congress' required disclosures in Section 13(q) and the disclosure
standards developed in connection with international transparency
promotion efforts relating to the commercial development of oil,
natural gas, or minerals. This approach should limit the compliance
costs of the Section 13(q) rules.
---------------------------------------------------------------------------
\93\ See 15 U.S.C. 78m(q)(1)(A).
\94\ See id.
\95\ See the 2016 Rules Adopting Release, Section II.B.2.a.
---------------------------------------------------------------------------
The proposed definition of ``commercial development'' would capture
only those 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. Accordingly, a
company that is only providing products or services that support the
exploration, extraction, processing, or export of such resources would
not be a ``resource extraction issuer'' under the proposed rules.\96\
For example, a company that manufactures drill bits or provides
hardware to help companies explore and extract would not be considered
a resource extraction issuer. Similarly, a company engaged by an
operator to provide hydraulic fracturing or drilling services, to
enable the operator to extract resources, would not be a resource
extraction issuer.\97\ We believe this approach is consistent with
Section 13(q) and the approach adopted in the 2016 rulemaking, which
most commenters who addressed the issue supported.\98\
---------------------------------------------------------------------------
\96\ 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 Rules
Adopting Release at n.146 and Section II.D. for a related discussion
of payments for security support.
\97\ A resource extraction issuer would be required, under the
proposed rules, to disclose payments when such a service provider
makes a payment to a government on its behalf that meets the
definition of ``payment.'' See proposed Instruction 7 to Item 2.01
of Form SD. We discuss the definition of ``payment'' in Section II.C
below.
\98\ See the 2016 Rules Adopting Release, Section II.B.2.a.
---------------------------------------------------------------------------
In the past, commenters have requested clarification of the
activities covered by the definition of ``commercial development.''
\99\ We discuss our proposals to define or provide guidance on several
terms contained within the definition in the subsections that follow.
---------------------------------------------------------------------------
\99\ See 2016 Rules Adopting Release, Section II.B.2; 2012 Rules
Adopting Release, Section II.C.2.
---------------------------------------------------------------------------
Request for Comment
5. Should we define ``commercial development of oil, natural gas,
or minerals'' using the list of activities described in the statute, as
proposed? Should we alter our approach based on any developments since
the adoption of the 2016 Rules or in light of our other proposals in
this release?
1. ``Extraction'' and ``Processing''
As proposed, and consistent with the definitions adopted in the
2016 rulemaking,\100\ ``extraction'' would be defined as the production
of oil and natural gas as well as the extraction of minerals.\101\
``Processing'' would include, but would not be limited to, midstream
activities such as removing liquid hydrocarbons from gas, removing
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. ``Processing'' would
also include the crushing or preparing of raw ore prior to the smelting
or refining phase.\102\ ``Processing'' would not include downstream
activities, such as refining or smelting. As noted above,\103\ the
focus of 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.\104\ Accordingly, we do not believe that, for purposes of the
proposed rules, the term ``processing'' should cover downstream
activities. We also note that including refining or smelting within the
rules
[[Page 2530]]
under Section 13(q) would go beyond what is contemplated by the
statute.
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\100\ Several commenters specifically supported the definitions
of ``extraction'' and ``processing'' proposed in the 2016 rulemaking
while other commenters sought additional guidance regarding the
types of activities covered by the term ``processing.'' See 2016
Rules Adopting Release, Section II.B.3.
\101\ See proposed Item 2.01(d)(5) of Form SD.
\102\ See proposed Instruction 8 to Item 2.01 of Form SD.
Although substantively the same as the instruction found in the 2016
Rules, we are proposing revisions for additional clarity.
\103\ See supra Section I.A.
\104\ We also note 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 Public Law 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 the 2012 Rules Adopting Release, n.108.
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Request for Comment
6. Should we define ``extraction'' as the production of oil and
natural gas as well as the extraction of minerals, as proposed?
7. Are the types of activities covered by the term ``processing''
appropriate?
8. Should we alter our approach to the definition of ``extraction''
or the instruction on ``processing'' based on any developments since
the adoption of the 2016 Rules or in light of our other proposals in
this release?
2. ``Export''
The proposed definition of ``commercial development of oil, natural
gas, or minerals'' would not cover transportation made for a purpose
other than export. Instead, ``export'' would be defined 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.\105\ This definition would reflect
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 across an international
border by a service provider with no ownership interest in the
resource.\106\ 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.
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\105\ See proposed Item 2.01(d)(4) of Form SD.
\106\ 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.
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Accordingly, the proposed definition of ``export'' would 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.\107\ The definition would cover,
however, the purchase of such government-owned resources by a company
otherwise engaged in resource extraction due to the stronger nexus
between the movement of the resource across an international border and
the upstream development activities. This nexus would be particularly
strong in instances where the company is repurchasing government
production entitlements that were originally extracted by that
issuer.\108\
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\107\ See proposed Item 2.01(d)(4) of Form SD.
\108\ See infra Section II.C.6 (discussing when and how payments
must be reported in instances where an issuer is repurchasing
government production entitlements that were originally extracted by
that issuer).
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The proposed definition of export is consistent with the approach
regarding ``export'' adopted by the Commission in the 2016 rulemaking.
The Commission articulated this approach in specific response to one
commenter who sought additional guidance on the scope of the term
``export'' under the Section 13(q) rules.\109\
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\109\ See Letter from Pietro Poretti (Feb. 15, 2016). Except for
this commenter, the Commission's proposed definition of ``export''
was largely unaddressed by commenters in the 2016 rulemaking.
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Request for Comment
9. Should we adopt the definition of ``export,'' as proposed? If we
should provide a different definition, what should it be? Should we
alter our approach based on any developments since the adoption of the
2016 Rules or in light of our other proposals in this release?
3. ``Minerals''
The proposed rules would include an instruction on the meaning of
the term ``minerals'' but would not provide a defined term. We believe
that the term is commonly understood and includes, at a minimum, any
material for which an issuer with mining operations would provide
disclosure under the Commission's existing disclosure requirements for
mining properties.\110\ In support of this approach, which is
consistent with the Commission's approach in the 2016 rulemaking, we
note that no industry commenter suggested that we define the term in
connection with the 2016 Rules.\111\ We also believe that a flexible
approach to this term would preserve consistency between the term's use
under Rule 13q-1 and its use in our other disclosure requirements and
policies.\112\
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\110\ The Commission recently revised its disclosure
requirements for mining properties to provide investors with a more
comprehensive understanding of a registrant's mining properties and
to align those disclosure requirements and policies more closely
with current industry and global regulatory practices and standards.
See Release No. 33-10570 (October 31, 2018) [83 FR 66344 (December
26, 2018)]. The new mining property disclosure rules, which are
codified in subpart 1300 of Regulation S-K (17 CFR 229.1300), will
replace the mining property disclosure guidance in Industry Guide 7
[17 CFR 229.801(g) and 802(g)] and requirements in Item 102 of
Regulation S-K (17 CFR 229.102). Registrants engaged in mining
operations must comply with the new rules for the first fiscal year
beginning on or after January 1, 2021. Industry Guide 7 will remain
effective until all registrants are required to comply with the
final rules, at which time Industry Guide 7 will be rescinded. See
Release No. 33-10570, Section I.
\111\ See 2016 Rules Adopting Release, n.149 and accompanying
text.
\112\ For example, new subpart 1300 of Regulation S-K defines
``mineral resource'' to mean a concentration or occurrence of
material of economic interest in or on the Earth's crust in such
form, grade or quality, and quantity that there are reasonable
prospects for economic extraction. ``Material of economic interest''
is then defined to include ``mineralization, including dumps and
tailings, mineral brines, and other resources extracted on or within
the earth's crust'' while excluding oil and gas resources resulting
from oil and gas producing activities, gases (e.g., helium and
carbon dioxide), geothermal fields, and water. See 17 CFR 229.1300.
Industry Guide 7 similarly does not explicitly define the term
``minerals,'' but does provide a definition of, and guidance
regarding the disclosure of, ``reserves,'' which includes references
to ``minerals'' and ``mineralization.''
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The proposed instruction to Form SD would refer issuers to the use
of the term ``minerals'' in our other disclosure rules.\113\ As such,
the guidance would encompass any changes to that term that may be
reflected in our disclosure requirements for mining registrants.
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\113\ See proposed Instruction 13 to Item 2.01 of Form SD. 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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Request for Comment
10. Should we adopt the instruction on the meaning of the term
``mineral,'' as proposed? Is the proposed instruction sufficiently
clear for issuers to identify when they are engaged in the commercial
development of a mineral?
11. Have there been developments since the 2016 Rules that should
lead us to provide a defined term for ``mineral'' or different
guidance? If so, what should be the definition or guidance?
C. Definition of ``Payment''
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
[[Page 2531]]
development of oil, natural gas, or minerals.\114\
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\114\ 15 U.S.C. 78m(q)(1)(C).
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As with the 2016 Rules, the proposed rules would define payments to
include the specific types of payments identified in the statute, as
well as community and social responsibility (``CSR'') payments that are
required by law or contract, payments of certain dividends, and
payments for infrastructure. The proposed rules would also provide
additional guidance on the statutory payment categories of royalties,
fees, and bonuses. Finally, the proposed rules would address in-kind
payments.
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.'' \115\ According to Section 13(q), these ``other material
benefits'' must be consistent with the EITI's guidelines ``to the
extent practicable.'' \116\ Some commenters on the 2012 Rules Proposing
Release suggested that we include a broad, non-exhaustive list of
payment types or category of ``other material benefits.'' \117\
Commenters on the 2016 Rules Proposing Release, however, did not make a
similar suggestion. 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.
Accordingly, the other material benefits specified in the proposed
rules would be limited to CSR payments required by law or contract,
dividends, and infrastructure payments. As was the case with the 2016
Rules, and as discussed in more detail below, we have determined that
these payment types represent material benefits that are part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas, and minerals and that otherwise meet the definition
of payment.
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\115\ 15 U.S.C. 78m(q)(1)(C)(ii).
\116\ Id.
\117\ See 2012 Rules Adopting Release, n.175 and accompanying
text.
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1. Taxes
Consistent with Section 13(q), the proposed rules would require a
resource extraction issuer to disclose tax payments. The proposed rules
also include an instruction to clarify 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.\118\ In
response to earlier concerns expressed by commenters about the
difficulty of allocating payments that are made for obligations levied
at the entity level, such as corporate taxes, to the project
level,\119\ the proposed rules would provide that issuers may disclose
those payments at the entity level rather than the project level.\120\
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\118\ See proposed Instruction 9 to Item 2.01 of Form SD.
\119\ See 2012 Rules Adopting Release, n.155 and accompanying
text.
\120\ See proposed Instruction 4 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
Request for Comment
12. Is the proposed approach to disclosure of tax payments
appropriate? Should we alter our approach based on any developments
since the adoption of the 2016 Rules or in light of our other proposals
in this release? Would allowing disclosure of tax payments at the
entity level improperly inflate reported payments?
13. Should we provide 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 may be earned from other business activities in the same
jurisdiction as well? If so, what guidance should we provide?
2. Royalties, Fees, and Bonuses
The definition of ``payment'' in Section 13(q) includes royalties,
fees, and bonuses. The statute provides ``license fees'' as an example
of the types of fees covered by that term but does not provide examples
of royalties and bonuses.\121\ As under the 2016 Rules, the proposed
rules would provide further clarification of these terms by including
an instruction setting forth a non-exclusive list of fees (rental fees,
entry fees, and concession fees), bonuses (signature, discovery, and
production bonuses), and royalties (unit-based, value-based, and
profit-based royalties) that would be considered payments under the
proposed rules. The types of fees and bonuses we are proposing to
include are specifically mentioned in the EITI's guidance as payments
that should be disclosed by EITI participants,\122\ which supports our
view that they are part of the commonly recognized revenue stream. The
types of royalties we are proposing to include are not mentioned in the
EITI's guidance but, based on the experience of the Commission staff's
mining engineers, we believe they are also part of the commonly
recognized revenue stream and that including them would provide
additional clarity for issuers.\123\ These examples would be provided
as guidance, and resource extraction issuers could be required to
disclose other types of fees, bonuses, and royalties depending on the
facts and circumstances.
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\121\ 15 U.S.C. 78m(q)(1)(C)(ii).
\122\ See EITI Standard, at 23.
\123\ See proposed Instruction 10 to Item 2.01 of Form SD. For a
discussion of these types of royalties, see World Bank, Mining
Royalties: Their Impact on Investors, Government and Civil Society
(2006), pp. 50-54 available at http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/09/11/000090341_20060911105823/Rendered/PDF/372580Mining0r101OFFICIAL0USE0ONLY1.pdf.
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Request for Comment
14. Should we adopt an instruction providing examples of fees,
bonuses, and royalties that would be considered ``payments,'' as
proposed? Is our interpretation of royalties overly broad? Should we
alter our approach based on any developments since the adoption of the
2016 Rules or in light of our other proposals in this release?
3. Dividend Payments
As under the 2016 Rules, the proposed rules would include dividends
in the list of payment types required to be disclosed. None of the
commenters on the 2016 Rules Proposing Release objected to the
inclusion of dividend payments.
The proposed rules would clarify in an instruction that a resource
extraction 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.\124\ The issuer would, however, be required to
disclose any dividends paid to a government in lieu of production
entitlements or royalties. Under this approach, ordinary dividend
payments would not be part of the commonly recognized revenue stream
because they are not made to further the commercial development of oil,
natural gas, or minerals. This approach is consistent with the approach
taken towards dividend payments in both the 2012 Rules and 2016 Rules.
Most of the commenters who discussed the definition of payments in the
earlier rulemakings either supported or did not
[[Page 2532]]
object to this approach towards dividends.\125\
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\124\ See proposed Instruction 11 to Item 2.01 of Form SD.
\125\ See 2012 Adopting Release, Section II.D.1.b. and 2016
Adopting Release, Section II.C.2.a.
---------------------------------------------------------------------------
Request for Comment
15. Should we require disclosure of dividend payments, as proposed?
Should we alter our approach based on any developments since the
adoption of the 2016 Rules or in light of our other proposals in this
release?
4. Infrastructure Payments
The proposed rules would require the disclosure of payments for
infrastructure, such as building a road or railway to further the
development of oil, natural gas, or minerals.\126\ We believe such
payments are ``other material benefits'' that are part of the commonly
recognized revenue stream for the commercial development of oil,
natural gas, or minerals.\127\ Like dividend payments, none of the
commenters on the 2016 Rules Proposing Release objected to the
inclusion of infrastructure payments.
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\126\ We note that payments for infrastructure often are in-kind
payments rather than direct monetary payments. For additional
discussion of our proposed approach to in-kind payments, see infra
Section II.C.6.
\127\ See Letters from AngloGold Ashanti (Jan. 31, 2011)
(``AngloGold''); Barrick Gold Corporation (Feb. 28, 2011) (``Barrick
Gold''); EarthRights International (Jan. 26, 2011) (``ERI 1'');
Earthworks (Mar. 2, 2011) (``Earthworks''); Global Witness (Feb. 25,
2011); ONE (Mar. 2, 2011) (``ONE''); and Publish What You Pay U.S.
(Feb. 25, 2011). Disclosure of payments for infrastructure
improvements is also required under the EITI. See, e.g., EITI
Standard at 24.
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Request for Comment
16. Should we require the disclosure of infrastructure payments, as
proposed? Should we alter our approach based on any developments since
the adoption of the 2016 Rules or in light of our other proposals in
this release?
5. Community and Social Responsibility Payments
The proposed rules would require disclosure of CSR payments that
are required by law or contract.\128\ For the reasons discussed below,
we believe that such CSR payments are part of the commonly recognized
revenue stream for the commercial development of oil, natural gas, or
minerals.
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\128\ CSR payments could include, for example, funds to build or
operate a training facility for oil and gas workers, funds to build
housing, payments for tuition or other educational purposes, and in
general payments to support the social or economic well-being of
communities within the country where the expenditures are made.
---------------------------------------------------------------------------
Most commenters on the 2016 Rules Proposing Release that addressed
the issue supported the inclusion of CSR payments.\129\ We find the
evidence cited by those commenters to be persuasive. For example, one
commenter noted prevalent discussion of CSR payments in industry
conferences, studies, guidance, and compliance manuals.\130\ This view
was supported by a broad range of commenters and 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.\131\
---------------------------------------------------------------------------
\129\ See 2016 Rules Adopting Release, Section II.C.2.a. The one
commenter that opposed including CSR payments stated that those
payments were not part of the commonly recognized revenue stream due
to their philanthropic or voluntary nature. See Letter from Encana
Corporation (Jan. 25, 2016) (``Encana'').
\130\ See Letter from Prof. Harry G. Broadman and Bruce H.
Searby (Jan. 25, 2016).
\131\ See Letter from ExxonMobil (Feb. 16, 2016).
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In addition to the views of commenters, there is other evidence
supporting the significant role that CSR payments have in the
extractive industries. For example, several issuers already report
their required or voluntary CSR payments.\132\ Furthermore, disclosure
of CSR payments that are required by law or contract has been required
under the EITI since 2013.\133\ Accordingly, we find that the evidence
on balance supports the conclusion that such payments are part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas, or minerals.
---------------------------------------------------------------------------
\132\ See, e.g., Statoil ASA, 2017 Sustainability Report, p. 36
(disclosing that in 2017 Statoil made $4.6 million in social
investments); Newmont Goldcorp, Beyond the Mine: 2017 Sustainability
Report, p. 87 (reporting a total of over $13.9 million in community
investments); and BHP Billiton Ltd., 2018 Sustainability Report, pp.
7 and 37 (reporting that BHP's voluntary community investment
totaled $77.1 million in 2018).
\133\ 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. See EITI Standard, at 28.
---------------------------------------------------------------------------
Request for Comment
17. Should we require disclosure of CSR payments, as proposed?
Should we alter our approach based on any developments since the
adoption of the 2016 Rules or in light of our other proposals in this
release? For example, is there evidence to suggest that CSR payments
are not part of the commonly recognized revenue stream for the
commercial development of oil, natural gas, or minerals?
18. If we exclude CSR payments from the list of covered payment
types, should we provide additional guidance concerning how an issuer
would distinguish CSR payments from infrastructure payments?
6. In-Kind Payments
The proposed rules would require disclosure of payments that fall
within the specified payment types that are made in-kind rather than
through a monetary payment to the host country government.\134\
Examples include production entitlement payments and infrastructure
payments. None of the commenters on the 2016 Rules Proposing Release
objected to the inclusion of in-kind payments in the 2016 Rules.
---------------------------------------------------------------------------
\134\ See proposed Instruction 12 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
Section 13(q) specifies that the rules require the disclosure of
the type and total amount of payments made for each project and to each
government. Accordingly, issuers would need to determine the monetary
value of in-kind payments.\135\ Similar to the 2016 Rules, the proposed
rules specify that issuers must report in-kind payments at historical
cost, or if historical costs are not reasonably determinable, fair
market value, and provide a brief description of how the monetary value
was calculated.\136\ We continue to believe that the required
disclosure would be more consistent and comparable if issuers are
required to report in-kind payments at cost and only permitted to
report using fair market value if historical costs are not reasonably
available or determinable.\137\
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\135\ In addition, in light of the requirement in Section 13(q)
to tag the information to identify the currency in which the
payments were made, the proposed rules would instruct issuers
providing a monetary value for in-kind payments to tag the
information as ``in-kind'' for purposes of the currency tag. See
proposed Instruction 12 to Item 2.01 of Form SD.
\136\ See id.
\137\ This approach is consistent with the recommendation of
some commenters in the 2012 rulemaking. See 2012 Adopting Release,
Section II.D.1.c.
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As under the 2016 Rules, the proposed rules would also include an
instruction clarifying 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.\138\
An issuer's purchase of production entitlements affects the ultimate
cost of such entitlements. Accordingly, if the issuer would be required
to report an in-kind production entitlement payment under the rules and
then repurchases the resources associated with the
[[Page 2533]]
production entitlement within the same fiscal year, the issuer would be
required to use the purchase price (rather than using the valuation
methods described above) when reporting the in-kind value of the
production entitlement.
---------------------------------------------------------------------------
\138\ See proposed Instruction 12 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
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 would be required to 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 would be required.
We also considered whether to require issuers to report the volume
of in-kind payments. Commenters on the 2016 Rules Proposing Release
were divided on whether to require the reporting of volume.\139\ We
generally agree with the commenter that stated such information was
unnecessary.\140\ In this regard, we note that issuers would be
required to provide a brief description of how the monetary value was
calculated, which will provide additional context for assessing the
reasonableness of the disclosure. Based on these considerations, we are
not proposing disclosure related to volume.
---------------------------------------------------------------------------
\139\ See 2016 Rules Adopting Release, Section II.C.2.a.
\140\ See Letter from ExxonMobil (Mar. 8, 2016).
---------------------------------------------------------------------------
Request for Comment
19. Should we require an issuer to report in-kind payments at cost,
or if cost is not reasonably available or determinable, at fair market
value, and provide a brief description of how the monetary value was
calculated, as proposed? Should we alter our approach based on any
developments since the adoption of the 2016 Rules, in light of our
other proposals in this release or for any other reason? Specifically,
should we require an issuer to report in-kind payments at fair market
value, or at cost only if fair market value is not reasonably available
or determinable? Should we instead permit resource extraction issuers
to choose whether to report in-kind payments at cost or fair market
value?
20. Should we include an instruction regarding how to calculate the
in-kind value of a production entitlement, as proposed? Is the proposed
instruction sufficiently clear for resource extraction issuers to
determine how to calculate the in-kind value?
7. Other Payment Types
Some commenters on the 2016 Rules Proposing Release suggested that
we add other payment types such as commodity trading related payments,
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.\141\ We are
not proposing to require disclosure for such payment types because we
do not believe that they represent material benefits that are part of
the commonly recognized revenue stream for the commercial development
of oil, natural gas, or minerals.
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\141\ See 2016 Rules Adopting Release, Section II.C.2.a.
---------------------------------------------------------------------------
With respect to commodity trading-related payments, we believe that
the proposed definition of ``export'' and the categories of payments in
the proposed 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 or similar companies
to purchase natural resources. 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 warrant being
covered by the proposed rules, particularly when the proposed rules
already would require disclosure of in-kind payments of production
entitlements. As discussed above, the proposed rules would, however,
address how such production entitlement payments must be valued when
initially made by an issuer in-kind but the associated resources are
subsequently purchased by the same issuer from the recipient
government.
We are also not specifically proposing requirements to disclose
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 would be covered by the proposed
anti-evasion provision discussed below.\142\
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\142\ See infra Section II.D. See also 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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In addition, the proposed rules would not require issuers to
disclose payments for fines and penalties. We do not believe that such
payments relate sufficiently to the commercial development of natural
resources to warrant inclusion.
Request for Comment
21. In light of developments since the 2016 Rules or other aspects
of the proposed rules, should we add other payment types or eliminate
certain payment types from the proposed list of covered payment types?
If so, please explain which payment types should or should not be
considered part of the commonly recognized revenue stream for the
commercial development of oil, natural gas, or minerals. If you
recommend adding other payment types, please also explain how they are
consistent with the EITI's guidelines and how their inclusion would
support the commitment of the Federal Government to international
transparency promotion efforts relating to the commercial development
of oil, natural gas or minerals.
8. Accounting Considerations
Under the proposed rules, Form SD would expressly state that the
payment disclosure must be made on a cash basis instead of an accrual
basis and need not be audited.\143\ We believe that requiring reporting
to be made on a cash basis is the best approach because: (1) These
payment disclosures are largely cash-based, so reporting them on a cash
basis would limit the associated compliance burden, and (2) requiring a
consistent approach to reporting would improve comparability and
therefore result in greater transparency. This is consistent with the
approach that the Commission proposed and adopted in the 2016
rulemaking.\144\
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\143\ See proposed Item 2.01(a)(2) of Form SD.
\144\ See the 2016 Adopting Release, Section II.C.3.
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With respect to whether to require the payment information to be
audited, we note that the EITI approach is different from Section
13(q). Under the EITI, companies and the host country's government
generally each submit payment information confidentially to an
independent administrator selected by the country's multi-stakeholder
group, frequently an independent auditor, who reconciles the
information
[[Page 2534]]
provided by the companies and the government and then produces a
report.\145\ In contrast, Section 13(q) does not contemplate that an
administrator would audit and reconcile the information or produce a
report as a result of the audit and reconciliation. Moreover, while
Section 13(q) refers to ``payments,'' it does not require the
information to be included in the financial statements. In addition, we
recognize the concerns raised by some previous commenters that an
auditing requirement for the payment information would significantly
increase implementation and ongoing reporting costs.\146\
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\145\ See EITI Standard, at 15, 25-26.
\146\ See, e.g., Letters from Anadarko Petroleum Corporation
(Mar. 2, 2011), AngloGold, API (Jan. 28, 2011), British Petroleum
p.l.c. (Feb. 11, 2011), Chevron Corporation (Jan. 28, 2011), Ernst &
Young (Jan. 31, 2011), New York State Bar Association, Securities
Regulation Committee (Mar. 1, 2011), Petroleo Brasileiro S.A. (Feb.
21, 2011), and PricewaterhouseCoopers LLP (Mar. 2, 2011).
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Request for Comment
22. Should we require issuers to disclose payment information on a
cash basis rather than an accrual basis, as proposed? Should we alter
our approach based on any developments since the adoption of the 2016
Rules or in light of our other proposals in this release?
9. The ``Not De Minimis'' Threshold
The 2016 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.\147\ In light of the previously expressed concerns that the
threshold was unreasonably low and costly to calculate \148\ and the
likely impact of the revised definition of project that we are
proposing,\149\ we no longer believe that the $100,000 threshold is the
best method for determining whether a payment is ``not de minimis''
under Section 13(q).\150\ Rather, we believe that an appropriate
threshold for determining what is a ``not de minimis payment'' must
consider the value of individual payments as well as the value of the
total company payments per project.\151\
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\147\ See 2016 Adopting Release, Section II.C.3.c. The 2012
Rules also defined a ``not de minimis'' payment using the $100,000
threshold. See 2012 Adopting Release, Section II.D.2.c.
\148\ See, e.g., letter from Nouveau Inc. (Feb. 16, 2016)
(stating that the $100,000 reporting threshold would be unreasonably
low for companies working on massive scale projects and would
require parties to engage in the costly collection, compilation, and
standardization of potentially thousands of different data points);
see also 2012 Adopting Release, Section II.D.2.b (discussing a
variety of approaches suggested by commenters to the ``not de
minimis'' payment requirement).
\149\ See infra Section II.F.2.
\150\ Section 13(q) does not define ``not de minimis.''
Consistent with the 2012 and 2016 rules, and for the reasons stated
therein, we continue to believe that it is appropriate to adopt a
definition of ``not de minimis'' to provide clear guidance regarding
when a resource extraction issuer must disclose a payment.
\151\ See proposed Item 2.01(d)(8) of Form SD.
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Under the proposed rules, an issuer would not be required to
provide disclosure if the aggregate project payments for all types of
payments for an individual project are below $750,000. Where the
aggregate payments for an individual project equal or exceed $750,000,
only payments made to each foreign government in a host country or the
Federal Government that equal or exceed $150,000, or its equivalent in
the issuer's reporting currency, whether made as a single payment or a
series of related payments, will need to be reported.\152\ Thus, if no
single payment or series of related payments of the same type equals or
exceeds $150,000 for an individual project, even if the aggregate
payments for that project are equal to or greater than $750,000, no
payments disclosure would be required for that project.
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\152\ See id.
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We believe that this change is necessary to take into account the
proposed definition of project, which aggregates payments at a higher
level, which would likely increase the value of the individual types of
payments. As such, we believe that using the 2016 threshold of $100,000
would likely require more payment disclosure, thus increasing rather
than decreasing the cost and disclosure burden on issuers, contrary to
the guidance provided by Congress in its disapproval of the 2016 Rules.
We further believe that, in light of the larger aggregations permitted
under the revised definition of project, a quantitative standard based
upon project level and individual payment information establishes a
more appropriate threshold for determining ``not de minimis.'' In
addition, we believe that $750,000 in total payments is the appropriate
project threshold and $150,000 is the appropriate threshold for
individual payments because we are proposing to exempt smaller
reporting companies and emerging growth companies from the Section
13(q) disclosure requirements,\153\ thereby resulting in larger
companies, with larger projects and larger individual payments, being
primarily affected by the proposed rules. We also believe that this
``not de minimis'' threshold would further the statutory objectives of
Section 13(q) by requiring disclosure of those payments that are of a
significant enough size such that they would likely benefit the host
country and its local communities.
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\153\ See supra Section II.J.3.
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When adopting the 2016 Rules, we observed that Section 13(q) uses a
``not de minimis'' standard instead of a materiality standard, which is
used elsewhere in the Federal securities laws and in the EITI. This
suggests that Congress did not intend ``not de minimis'' to equate to a
materiality standard.\154\ We continue to believe that this is the
better approach to take when defining ``not de minimis.''
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\154\ See 2012 Rules Adopting Release, Section II.D.2.c. Some
commenters suggested that we adopt a materiality-based definition of
``not de minimis'' in the 2012 rulemaking. See id., n. 224 and
accompanying text.
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An instruction to the 2016 Rules allowed an issuer to choose
several methods to calculate currency conversions for payments not made
in U.S. dollars or the issuer's reporting currency. That instruction
also provided that the same methods are available to issuers when
calculating whether a payment not made in U.S. dollars exceeds the de
minimis threshold.\155\ We are proposing the same instruction \156\ as
we continue to believe that providing alternative methods for
calculating currency conversions would help limit compliance costs
under Section 13(q). Like the 2016 Rules, an issuer would be required
to use a consistent method for its payment currency conversions,
including when determining if a payment is not de minimis, and would be
required to disclose which method it used.\157\
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\155\ See Instruction 2 to Item 2.01 of Form SD under the 2016
Rules.
\156\ See proposed Instruction 2 to Item 2.01 of Form SD, which
states: ``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 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.''
\157\ See id. (stating that ``[i]n 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 submission'').
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[[Page 2535]]
Request for Comment
23. The definition of ``not de minimis'' requires issuers to
disclose payments for an individual project if the payments in the
aggregate equal or exceed $750,000, unless no individual payments per
that project equal or exceed $150,000. Is this approach appropriate in
light of our proposed definition of ``project,'' which would allow for
greater aggregation of payments? Should we instead continue to use the
same quantitative threshold of $100,000 that we used in the 2016 and
2012 Rules without regard to the proposed definition of project? If it
is appropriate to take into account the proposed definition of project,
are there any data or have there been any developments since the 2016
Rules that suggest a quantitative threshold lower or higher than
$750,000 is the more appropriate project threshold, or that an
individual payment threshold lower or higher than $150,000 is the more
appropriate threshold?
24. The statute does not define ``not de minimis'' or explain how
that term should be applied. Should we base the ``not de minimis''
threshold on an amount that is not de minimis relative to (i) a
particular resource extraction issuer, (ii) a particular country, or
(iii) a particular project?
25. Should the focal point for determining whether a payment is
``not de minimis'' be the relationship between individual and total
company payments per payment type? If not, what should the focal point
be? Should we consider the relation of the payment to the government
recipient and/or the local community when adopting the ``not de
minimis'' payment threshold?
26. As an alternative to setting a bright line threshold based on
dollar amount of payment, should we not define ``not de minimis'' and
allow resource extraction issuers to make the determination of what
qualifies as a payment that is not de minimis, based on the particular
facts and circumstances?
27. If we should adopt an absolute quantitative threshold, should
we include a mechanism to adjust periodically the de minimis threshold
to reflect the effects of inflation? If so, what is an appropriate
interval for such adjustments? What should the basis be for making any
such adjustments if the appropriate focal point for determining whether
a payment is ``not de minimis'' is in relation to the host country
recipient?
28. Should we adopt a definition of ``not de minimis'' using a
standard based on the materiality of the payment to the issuer? If so,
would this be consistent with the language of the statute, which uses
the term ``not de minimis'' rather than ``material''?
D. Anti-Evasion
As under the 2016 Rules, the proposed rules would 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).\158\
This provision is designed to emphasize substance over the form or
characterization of payments. We believe that it covers most of the
situations that have concerned commenters in past releases. For
example, the provision would cover payments that were substituted for
otherwise reportable payments in an attempt to evade the disclosure
rules,\159\ as well as activities and payments that were structured,
split, or aggregated in an attempt to avoid application of the
rules.\160\ Similarly, 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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\158\ See proposed Rule 13q-1(b). Several commenters supported
this provision in the 2016 rulemaking although a few commenters
recommended revising the provision to address specific concerns. See
2016 Adopting Release, Section II.C.2.c.
\159\ See, e.g., Letter from Elise J. Bean (Feb. 16, 2016). See
also Section II.F below (discussing application of the anti-evasion
provision in the context of the definition of ``project'' under the
proposed rules).
\160\ See, e.g., Letter from PWYP-US (Feb. 16, 2016).
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Request for Comment
29. Should we adopt an anti-evasion provision, as proposed? Should
we provide additional guidance about when the anti-evasion provision
would apply?
30. Have there been any developments since the 2016 Rules that
suggest that a different approach to the anti-evasion provision would
be appropriate?
E. Definition of ``Subsidiary'' and ``Control''
Section 13(q) requires a resource extraction issuer to disclose
payments by a subsidiary or an entity under the control of the issuer.
Similar to the 2016 Rules, the proposed rules would define the terms
``subsidiary'' and ``control'' based on accounting principles rather
than using the definitions of those terms provided in Rule 12b-2,\161\
which was the case under the 2012 Rules.\162\ All of the commenters on
the 2016 Rules Proposing Release that addressed this aspect of the
proposed rules generally supported using accounting principles to
define ``control.'' \163\
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\161\ 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 ``subsidiary'' of a specified person to mean
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.
\162\ See 2012 Adopting Release, Section II.D.4.c.
\163\ See, e.g., Letters from the API (Feb. 16, 2016); British
Petroleum p.l.c. (Feb. 16, 2016); Chevron Corporation (Feb. 16,
2016); Encana; ExxonMobil (Feb. 16, 2016); Global Witness (Mar. 8,
2016); and PWYP-US (Feb. 16, 2016).
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Under the proposed approach, a resource extraction issuer would
have ``control'' of another entity when the issuer consolidates that
entity under the accounting principles applicable to its financial
statements included in the periodic reports filed pursuant to Section
13(a) or 15(d) of the Exchange Act. Thus, for purposes of determining
control, 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 (``IFRS'') as issued by the International
Accounting Standards Board, as applicable.\164\
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\164\ See Accounting Standards Codification (``ASC'') 810,
Consolidation; and IFRS 10, Consolidated Financial Statements. 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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We believe that the proposed definition, compared to the use of the
definition of ``control'' in Rule 12b-2, would better balance
transparency for users of the payment disclosure and the burden on
issuers. 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,
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.
[[Page 2536]]
Further, this approach could 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.\165\ 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 proposed rules would be 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.\166\
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\165\ 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].
\166\ 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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The proposed rules would not require disclosure of the
proportionate amount of the payments made by a resource extraction
issuer's proportionately consolidated entities or operations.\167\
After reconsidering the comments raising concern about the definition
of control and the potential compliance costs associated with using a
broader definition of control, the definition we are proposing would
exclude entities or operations in which an issuer has only a
proportionate interest.\168\ Compared to an issuer that consolidates an
entity, an issuer with a proportionate interest in an entity or
operations may not have the same level of ability to direct the entity
or operations making the payments. For example, as commenters have
noted, an issuer that holds a proportionate interest in a joint venture
typically does not have ready access to detailed payment information
when it is not the operator of that venture.\169\ Requiring such a non-
operator issuer to provide the payment disclosure based on its
proportionate interest in the venture could compel that issuer to
renegotiate its joint venture agreement or make other arrangements to
obtain sufficiently detailed payment information to comply with the
Section 13(q) rules, which could significantly increase its compliance
burden. Excluding proportionate interest entities or operations from
the proposed definition of control would result in less payment
information about joint ventures becoming public,\170\ as compared to
the 2016 Rules; however, we believe that this potential reduction in
transparency is an appropriate tradeoff to help reduce the compliance
burden of the proposed rules.
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\167\ Proportionately consolidated entities or operations
include those entities or operations that are proportionately
consolidated in accordance with ASC 810-10-45-14 and ``joint
operations'' as defined in IFRS 11, Joint Arrangements.
\168\ See, e.g., Letters from API (Feb. 16, 2016); BP (Feb. 16,
2016); Chevron (Feb. 16, 2016); ExxonMobil (Feb. 16, 2016); Petro1eo
Brasileiro S.A-Petrobras (``Petrobras'') (Feb. 16, 2016); and RDS
(Feb. 5, 2016).
\169\ See, e.g., Letters from API (Feb. 16, 2016); and
ExxonMobil (Feb. 16, 2016).
\170\ See, e.g., Letters from PWYP-US (Feb. 16, 2016); and
Global Witness (Mar. 8, 2016).
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We also reconsidered the recommendation of commenters on the 2016
Rules Proposing Release to include a ``significant influence'' test for
determining control in addition to the accounting consolidation
principles we are proposing.\171\ We do not believe, however, that we
should define control such that significant influence by itself would
constitute control.\172\ 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.
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\171\ See, e.g., Letter from PWYP-US (Feb. 16, 2016).
\172\ 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.
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Request for Comment
31. Should we define the term ``control'' based on applicable
accounting principles, as proposed? Should we alter our approach based
on any developments since the adoption of the 2016 Rules or in light of
our other proposals in this release?
32. Should we exclude from the definition of control entities or
operations in which an issuer has only a proportionate interest, as
proposed? Should we instead require an issuer to disclose its
proportionate share of the payments made by a joint venture based on
its proportionate interest in the venture even when it is not the
operator of the venture? Should we require such a non-operator joint
venture participant to disclose its proportionate share of the joint
venture payments if it knows or is able to obtain the information
necessary to comply with the proposed rules without undue difficulty or
expense?
33. Are there alternatives to the proposed definition of control
that would better balance transparency for users of the payment
information and the compliance burden on issuers? For example, should
we require only the operator of a joint venture to disclose all of the
payments it makes to governments, including those made on behalf of
non-operator joint venture participants? Should we require the operator
of a joint venture to disclose its proportionate share of the payments
made? When the operator is not an Exchange Act reporting company, and
therefore not subject to the Section 13(q) rules, should each non-
operator participant that is subject to the Section 13(q) rules be
required to disclose the payments made by itself and entities or
operations that it fully or proportionately consolidates or accounts
for as a joint operation? In the event that none of the joint venture
participants is a consolidated entity, should we require a registrant
that owns a proportionate interest in the operator of the venture to
disclose the payments made either on behalf of all the participants or
based on the registrant's proportionate share of the venture? In these
circumstances, should we require a registrant that owns a proportionate
interest in a non-operator venture participant to disclose its
proportionate share of the payments if it is able to obtain the
necessary payment information without undue burden or expense?
34. Alternatively, should we adopt a definition of control that
includes more than just consolidated entities (e.g., entities over
which an issuer has significant influence)?
F. Definition of ``Project''
Consistent with Section 13(q), the proposed rules would require 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 amount per project. The proposed rules would define
``project'' using the following three criteria: (1) The type of
resource being commercially developed; (2) the method of extraction;
and (3) the major subnational political jurisdiction where the
commercial development of
[[Page 2537]]
the resource is taking place.\173\ The proposed definition (``Modified
Project Definition'') differs from the definition included in the 2016
Rules, which defined ``project'' as the operational activities governed
by a single contract, license, lease, concession, or similar agreement,
which form the basis for payment liabilities with a government
(``Contract-Level Project Definition'').\174\
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\173\ This proposed definition is similar to the definition of
``project'' suggested by one industry commenter. See Letters from
the API (Nov. 7, 2013) and (Feb. 16, 2016). The term ``project'' as
used in this release would only apply to disclosure provided
pursuant to Rule 13q-1 and not, for example, the disclosure required
by Article 4-10 of Regulation S-X (17 CFR 210.4-10) or subpart 1200
of Regulation S-K (17 CFR 229.1200).
\174\ 2016 Rules Adopting Release, Section II.E.3.
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1. Considerations for Modified ``Project'' Definition
In adopting the 2016 Rules, the Commission expressly considered the
Modified Project Definition as an alternative to the Contract-Level
Project Definition that it ultimately adopted. In considering the
Modified Project Definition, the Commission acknowledged that such a
definition ``could lower the potential for competitive harm when
compared to [the Contract-Level Project Definition].'' \175\ However,
the Commission stated that, in its view, the Contract-Level Project
Definition was ``on balance, necessary and appropriate notwithstanding
the potential competitive concerns that may result in some instances.''
\176\ In doing so, the Commission acknowledged that both approaches
would provide the public with information concerning ``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.'' \177\
Nevertheless, the Commission determined that the more granular
transparency provided by the Contract-Level Project Definition could
potentially go further in combating corruption. Specifically, the
Commission found that the Contract-Level Project Definition, by
providing transparency about the revenues generated from each contract,
license, and concession, could serve to reduce the potential for
corruption in connection with the negotiation and implementation of a
resource-extraction contract.\178\ In this way, the Contract-Level
Project Definition could minimize instances of corruption that may
occur before resource-extraction revenue is paid to the government.
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\175\ Id.
\176\ Id.
\177\ Id.
\178\ Among other things, the Commission found that the
Contract-Level Project Definition had the advantage that, in some
instances, it could combat corruption by: (1) ``help[ing] assist
citizens, civil society groups, and others to monitor individual
companies' contributions to the public finances and ensur[ing] firms
are meeting their payment obligations,'' at least ``[t]o the extent
that a company's contractual or legal obligations are known''; (2)
deterring ``companies from either entering into agreements that
contain suspect payment provisions or following government
officials' suspect payment instructions''; (3) ``help[ing] local
communities and civil society groups to weigh the costs and benefits
of an individual project''; and (4) ``allow[ing] for comparisons of
revenue flow among different projects . . . to identify payment
discrepancies[.]'' Id.
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In advancing a contract-level definition of ``project,'' the
Commission acknowledged that such an approach increases the potential
that resource-extraction issuers might be required to disclose
sensitive competitive information about the underlying contracts,
licenses, or concessions.\179\ The Commission nevertheless concluded
that the additional benefits of this more granular disclosure justified
any attendant competitive effects.\180\
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\179\ See 2016 Rules Adopting Release, Section II.E.3.
\180\ See id.
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In light of the concerns expressed by prior commenters and members
of Congress that the 2016 Rules imposed undue competitive harm, we have
reconsidered the balance that the Commission previously struck. In
proposing the Modified Project Definition, we acknowledge that we may
be narrowing the scope of the transparency benefits that the
disclosures under Section 13(q) were intended to produce. Although we
believe that the proposed definition would continue to provide
substantial transparency about the overall revenue flows to foreign
governments and the U.S. Federal Government, under the Modified Project
Definition, these disclosures would no longer provide the additional
transparency benefits associated with contract-level information. For
the reasons discussed below, we believe that forgoing these additional
transparency benefits is an appropriate trade-off to address
commenters' and Congress's concerns about the potentially adverse
impacts on resource extraction issuers arising from the 2016 Rules.
The proposed change to the definition of ``project'' directly
addresses the primary concerns expressed about the 2016 Rules. Those
concerns included the costs, burdens, and risks of competitive harm
related to tracking, recording, and disclosing the payment information
on a per contract basis using the contract-based definition of
``project'' in the 2016 Rules.\181\ The Modified Project Definition
should alleviate those concerns by reducing the likelihood of
competitively harmful information being released. As one industry
commenter noted in connection with the 2016 Rules Proposing Release,
disclosure that is less detailed and not as closely linked to
individual contracts would assuage concerns that competitors could
reverse-engineer proprietary commercial information.\182\
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\181\ See supra n. 54 through 56. In addition, one congressman
noted that extractive companies ``are already publicly disclosing
the work they do in foreign countries and will continue to do so''
but ``at a level that does not cause competitive harms.'' 163 Cong.
Rec. at H854 (statement of Rep. Williams). See also Letters from API
(Nov. 7, 2013) and (Feb. 16, 2016); Letter from ExxonMobil (Feb. 16,
2016); and Letter from Chevron (Feb. 16, 2016).
\182\ See letter from ExxonMobil (Feb. 16, 2016).
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A broader project definition should also reduce the compliance
burden of the proposed rules compared to the 2016 Rules. Because the
Modified Project Definition would allow an issuer to make the payment
disclosure at a greater level of aggregation than under the Contract-
Level Project Definition, there would be fewer individual data points
that have to be electronically tagged and reported, which should make
it easier to disclose the payment information on an ongoing basis. An
issuer's costs could be further reduced to the extent that it has
already aggregated the payment information for its own internal
accounting or financial reporting purposes. In that event, it may be
less costly for an issuer to modify its internal accounting/financial
reporting system to collect the required payment information than it
would be to build from scratch a system to collect the payment
information on a contract-by-contract basis.\183\
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\183\ See infra Section III.C.2.
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Moreover, we believe that this change is consistent with the CRA's
instruction that an agency may not reissue ``a new rule that is
substantially the same as'' the rule that Congress disapproved.\184\ As
is evident from the discussions in
[[Page 2538]]
the Commission's previous releases and the comments received in
response, the definition of ``project'' is a critical element of the
disclosure regime contemplated by Section 13(q).\185\ We therefore
believe that the Modified Project Definition would help to satisfy the
CRA's requirement that the new rule that we are proposing not be
substantially the same as the 2016 Rules.\186\
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\184\ 5 U.S.C. 801(b)(1). The CRA instructs that the ``new
rule'' cannot be ``substantially the same'' or in ``substantially
the same form'' as the disapproved rule. Id. (emphasis added). We
believe that this language clearly reflects Congress' intent that,
in issuing a new rule, an agency must do more than substantially
revise the rationales supporting the prior rule or the economic
analysis underlying the prior rule. Rather, the CRA instructs that
the ``new rule'' itself must be substantially different. As such, we
do not believe that readopting the 2016 rule with modifications only
to the rationales or economic analysis in the release will satisfy
the substantially different requirement mandated by the plain
language of the CRA.
\185\ See 2012 Rules Adopting Release, Section III.D.3; 2016
Rules Adopting Release, Section III.E.3.
\186\ In the 2016 Rules Adopting Release, the Commission
expressed the view that the Contract-Level Project Definition
embodied a more natural understanding of what constitutes a
``project.'' See 2016 Rules Adopting Release, Section III.E.3.
However, the Commission did not foreclose the Modified Project
Definition as a plausible alternative. In light of Congress's
disapproval of the 2016 Rules, we believe that it is appropriate to
utilize the Modified Project Definition.
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Finally, we note that some prior commenters maintained that a
Contract-Level Project Definition would provide material benefits to
investors by, for example, assisting in the assessment of financial,
political, social, and market risks regarding a particular issuer's
projects,\187\ or helping to mitigate systemic financial market risk
generally in the extractive industries sector.\188\ However, we believe
that Commission rules requiring disclosure of the most significant
risks affecting a company or the securities being offered \189\ and
disclosure of known trends or uncertainties that have had or are
reasonably likely to have a material impact on the registrant's
liquidity, capital resources, or results of operations,\190\ should
elicit all appropriate risk-related disclosure.
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\187\ See, e.g., Letter from Calvert Investments and Social
Investment Forum (Nov. 15, 2010); Letter from Calvert Investments
(Feb. 16, 2016); and Columbia Center on Sustainable Investment (Oct.
30, 2015).
\188\ See, e.g., Letter from ACTIAM NV et al. (Mar. 8, 2016);
Allianz Global Investors et al. (April 28, 2014); and the First
Swedish National Pension Fund et al. (May 9, 2014).
\189\ See Item 503(c) of Regulation S-K (17 CFR 229.503(c)).
\190\ See Item 303 of Regulation S-K (17 CFR 229.303).
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2. Discussion of the Modified ``Project'' Definition
In the following three subsections, we discuss the disclosure
required by each of the three prongs of the proposed Modified Project
Definition in greater detail. In each instance, we have striven to
achieve an appropriate balance between the policy goal of promoting
transparency about a resource extraction issuer's payments to
governments and the concerns expressed by commenters and members of
Congress about the compliance costs and burdens of the proposed rules,
including the risk of competitive harm by requiring the disclosure of
proprietary commercial information.
a. Type of Resource
Under the Modified Project Definition, the first prong for
determining the parameters of a project is the type of resource that is
being commercially developed. As proposed, a resource extraction issuer
would have to disclose whether the project relates to the commercial
development of oil, natural gas, or a specified type of mineral. Thus,
an issuer would not be required to describe the specific type or
quality of oil or natural gas or distinguish between subcategories of
the same mineral type. For example, an issuer disclosing payments
relating to an oil project would not be required to describe whether it
is extracting light or heavy crude oil. Similarly, an issuer disclosing
payments relating to a mining project would be required to disclose
whether the mineral is gold, copper, coal, sand, gravel, or some other
generic mineral class, but not whether it is, for example, bituminous
coal or anthracite coal. For clarity and consistency, a proposed
instruction to Form SD would require synthetic oil or gas obtained
through processing of coal to be classified as ``coal.'' \191\
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\191\ See proposed Instruction 5 to Item 2.01 of Form SD.
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We believe that a requirement to provide greater detail regarding
the type of resource that is the subject of extractive activities,
although perhaps useful in some instances for tracking specific
payments, is not necessary for citizens of resource rich countries to
determine whether those activities have given rise to government
revenues in which they may have an interest. On the other hand, such a
requirement could unnecessarily increase an issuer's compliance costs
and burdens, including the risk that such additional detail may reveal
proprietary information that could cause competitive harm.
b. Method of Extraction
The second prong for determining the parameters of a project is the
method of extraction. This prong would require a resource extraction
issuer to identify whether the resource is being extracted through the
use of a well, an open pit, or underground mining. Additional detail
about the method of extraction would not be required. For example, a
resource extraction issuer would not be required to disclose whether it
is using horizontal or vertical drilling, hydraulic fracturing, or
strip, sublevel stope, or block cave mining. Similar to the type of
resource prong, we preliminarily believe that such a level of
specificity regarding the particular method of extraction is not
necessary for citizens of resource rich countries to determine
generally if extractive activities in their region have given rise to
government revenues in which they may have an interest. Thus, a
requirement to provide more specificity regarding the particular method
of extraction could unnecessarily increase an issuer's regulatory costs
and burdens, including the risk of having to disclose proprietary
information that could potentially result in competitive harm.
c. Major Subnational Political Jurisdiction
The third prong for determining the parameters of a project is the
major subnational political jurisdiction where the commercial
development of the resource is taking place. This prong would require
an issuer to disclose only two levels of jurisdiction: (1) The country;
and (2) the state, province, territory or other major subnational
jurisdiction in which the resource extraction activities are
occurring.\192\ For example, extractive activities in the city of
Timika in the province of Papua, Indonesia could be disclosed as
occurring in Papua, Indonesia without identifying Timika. In addition,
an issuer could treat its activities in the counties of Elko, Nevada
and White Pine, Nevada, as part one project because Nevada would be the
major subnational political jurisdiction. If the extractive activity is
offshore, the proposed rules would require an issuer to disclose that
it is offshore and the nearest major subnational political
jurisdiction.
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\192\ As proposed, an issuer would have to provide an electronic
tag for both the country and the major subnational political
jurisdiction in which the extractive activities are occurring that
is consistent with the International Organization for
Standardization (``ISO'') code pertaining to countries and their
major subdivisions. See infra Section II.K.
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We believe that defining project with regard to the major
subnational jurisdiction in which a project is located would alleviate
one of the most significant concerns (and related harms) expressed by
commenters in the 2016 rulemaking about the Contract-Level Project
Definition, including that contract-level disclosure would:
Allow competitors to derive important information about
new areas under exploration for potential resource development, the
value the company
[[Page 2539]]
places on such resources, and the costs associated with acquiring the
right to develop these new resources;
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; and
Allow competitors to reverse-engineer 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.\193\
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\193\ See, e.g., Letters from the API (Feb. 16, 2016) and
ExxonMobil (Feb. 16, 2016). In particular, we understand that
exploratory activities, particularly in a subnational jurisdiction
that is small, may pose a significant risk of competitive harm to a
resource extraction issuer. We discuss that risk and our proposed
targeted exemption to mitigate that risk in Section II.J.4 below.
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We also note that the proposed use of ISO codes \194\ to identify
subnational jurisdictions would provide a standardized data format that
may be more easily analyzed than the data produced under the Contract-
Level Project Definition.
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\194\ The International Organization for Standardization (ISO)
created and maintains codes for the representation of names of
countries and their subdivisions. See infra Section II.L (discussing
the proposed requirement to use ISO codes to describe the country in
which the project is located and the subnational geographic location
of a project).
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d. Special Situations
The proposed definition of project would include commercial
development activities using multiple resource types or extraction
methods if such activities are located in the same major subnational
political jurisdiction. The issuer would be required to describe each
type of resource that is being commercially developed and each method
of extraction used for that project. For example, an open pit and
underground zinc mining project in Erongo, Namibia would be described
as ``NA-ER/Zinc/Open Pit/Underground'' and a drilling project off the
shore of Nigeria that produced oil and natural gas would be described
as ``NG-BY/Offshore/Oil/Natural Gas/Well.''
We recognize that such an approach could result in broad
aggregation of projects within a major subnational political
jurisdiction, which could make it more difficult for end-users of the
disclosure to identify the specific commercial development activities
associated with the disclosed payments. Nevertheless, we believe this
approach to be appropriate because issuers often develop more than one
type of resource at a particular location and use more than one method
of extraction. Limiting the definition of project to only commercial
development activities comprising the same type of resource, method of
extraction, and major subnational political jurisdiction may result in
artificial distinctions. For example, an issuer would be required to
treat oil and natural gas extraction from the same well as separate
projects, and similarly, open pit and underground mining in the same
location as separate projects. Requiring that these types of related
activities be treated as separate projects could also lead to confusion
about how reportable payments should be allocated between such
projects. In addition, we note that greater aggregation could result in
additional payments being disclosed on a per project basis because it
would be less likely that such a payment would be de minimis than if
project was defined more granularly.
In some situations the site where a resource is being commercially
developed could cross the borders between multiple major subnational
political jurisdictions. In such a case, the proposed rules would
require the issuer to treat the activities in each major subnational
political jurisdiction as separate projects. This approach reflects the
fact that, although the cross-border extractive activities are related,
they likely would give rise to a separate set of payments to different
subnational payees in each jurisdiction.
Request for Comment
35. Should we define ``project'' by the type of resource being
commercially developed, the method of extraction, and the major
subnational political jurisdiction where the commercial development of
the resource is taking place, as proposed?
36. Would the Modified Project Definition achieve an appropriate
balance between promoting transparency regarding a resource extraction
issuer's payments to governments and reducing regulatory costs and
burdens, including the risk of harming the issuer's competitive
position by requiring disclosure of proprietary commercial information?
Are there any specific changes that we could make to the Modified
Project Definition that would improve transparency and/or help limit
compliance costs and burdens consistent with the Section 13(q) mandate
and the CRA's restrictions on subsequent rulemaking?
37. Have companies experienced compliance problems or burdens with
reporting contract-based payments under the EU Directives and Canada's
ESTMA? Does that experience confirm that our proposed approach to the
definition of ``project'' is appropriate, or does it suggest that we
should adopt a different approach? If the latter, describe that
approach and whether it would also help limit compliance costs and
burdens for resource extraction issuers.
38. Is there an alternative to using either the Modified Project
Definition or the Contract-level Project Definition that would support
the commitment of the Federal Government to promote international
transparency promotion efforts relating to the commercial development
of oil, natural gas or minerals while limiting compliance costs and
mitigating competitive concerns for resource extraction issuers? To
what extent is comparability among Section 13(q) disclosures important
for transparency purposes? To the extent it is important, would
requiring more or less granular project information impact
comparability?
39. Are the proposed requirements for describing the type of
resource appropriate? If not, please explain how the type of resource
should be described and why.
40. Should we require issuers to provide greater detail on the type
of resource than proposed? If so, what level of detail should we
require? What benefits would such additional detail provide to end-
users? What costs would an issuer incur to provide such additional
detail?
41. Are the proposed requirements for describing the method of
extraction appropriate? If not, please explain how the method of
extraction should be described and why.
42. Should we require issuers to provide greater detail on the
method of extraction being used? If so, what level of detail should we
require? What benefits would such additional detail provide to end-
users? What costs would an issuer incur to provide such additional
detail?
43. Does the proposed requirement to describe the major subnational
political jurisdiction where the commercial development of the resource
is taking place provide the appropriate balance between promoting
payment transparency and limiting an issuer's compliance costs and
burdens? If not, how should we alter the requirement and why? Does the
reference to ``the state, province, territory or other major
subnational jurisdiction'' provide adequate guidance concerning how to
identify the political jurisdiction where the commercial development of
the resource is taking place?
44. The proposed rules would permit an issuer to combine separate
resources
[[Page 2540]]
and different extraction methods into one project if they occur in the
same major subnational political jurisdiction. Would this result in too
much aggregation even if, as proposed, issuers would be required to
describe each resource and each method of extraction?
45. If we do not allow for multiple resource types or methods of
extraction to be aggregated, would it result in confusion for issuers
or end-users? Would requiring issuers to treat each resource type or
method of extraction as a separate project result in more payments
being considered de minimis and thus reduce the overall amount of
disclosure?
46. Is our proposed approach to disclosing activities that cross
the borders of major subnational political jurisdictions appropriate?
Are there specific cross-border situations that we should address?
Should we instead allow issuers to include all the major subnational
political jurisdictions in the description of the project in such a
cross-border situation? Would such an approach make it more difficult
to identify the location of the project?
G. Definition of ``Foreign Government'' and ``Federal Government''
As with the 2016 Rules, we are proposing definitions of ``foreign
government'' and ``Federal Government'' that are consistent with
Section 13(q).\195\ Under the proposed rules, a ``foreign government''
would be 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. The term ``foreign government'' 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.\196\ ``Federal Government'' would be defined as the Federal
Government of the United States and would not include subnational
governments within the United States.
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\195\ See 2016 Adopting Release, Section II.F.3. We also adopted
the same definitions in the 2012 rulemaking. See 2012 Adopting
Release, Section II.E.3.
\196\ 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
proposed rules.
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For purposes of identifying the foreign governments that received
payments at a level below the major subnational government level, the
proposed rules would permit an issuer to aggregate all of its payments
of a particular payment type without having to identify the particular
subnational government payee. The issuer would only be required to
identify the type of administrative or political level of subnational
government that received the payments. For example, an issuer could
aggregate payments by payment type made to multiple counties and
municipalities (the level below major subnational government level) and
disclose the aggregate amount without having to identify the particular
subnational government payee. The issuer would instead generically
identify the subnational government payee (e.g., as ``county,''
``municipality'' or some combination of subnational governments).\197\
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\197\ See proposed Instruction (14) to Item 2.01 of Form SD.
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In contrast, for payments made at the major subnational government
level, the issuer would have to disclose the particular major
subnational payee. Under the proposed Modified Project Definition,
however, the issuer could aggregate payments of a particular payment
type made to that particular payee.\198\ For example, an issuer with
extractive operations in the three oil sands regions of Alberta, Canada
\199\ would be able to aggregate all of its fees paid for environmental
and other permits to the Regional Municipality of Wood Buffalo,
Northern Sunrise County and the Municipality of Cold Lake, but would
not have to identify any of those subnational governments. Instead,
when disclosing the aggregate amount, the issuer would identify the
payment type as ``fees'' and the government as ``county and
municipality.''
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\198\ See supra Section II.F.
\199\ The three major oil sands regions in Alberta are the
Athabasca, Peace River, and Cold Lake regions. See, e.g., Regional
Aquatics Monitoring Program, ``The Oil Sands Described,'' available
at http://www.ramp-alberta.org/resources/development/distribution.aspx.
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For royalties paid to the Alberta Department of Energy, at the
major subnational government level, however, the issuer would have to
identify the payee as ``Alberta Department of Energy.'' It could
aggregate all of the royalties arising from its operations in the three
oil sands areas, when disclosing the aggregate amount and identifying
the payment type as ``royalties.''
We are proposing this option for aggregated disclosure of
subnational government payments to reduce the potential for competitive
harm that could result from implementation of the Section 13(q) rules.
Some prior commenters stated that overly granular disclosure
requirements could permit the reverse-engineering of an issuer's
proprietary commercial information or otherwise cause the issuer
competitive harm.\200\ Moreover, in disapproving the 2016 Rules,
members of Congress were particularly concerned about the rules'
potential for causing competitive harm.\201\ In light of these
concerns, we are proposing to permit an issuer to aggregate payments
made to entities below the major subnational level without having to
identify the particular subnational government payee to mitigate the
risk that an issuer could be exposed to potential competitive harm from
the disclosure.
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\200\ See, e.g., Letter from ExxonMobil (Feb. 16, 2016); and
Letter from API (Feb. 16, 2016).
\201\ See supra Section I.C.2.
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Separately, under the proposed rules, a company owned by a foreign
government would be defined as a company that is at least majority-
owned by a foreign government.\202\ Although we acknowledge the
concerns of the commenters on the 2016 Rules Proposing Release that
argued for a more expansive definition,\203\ 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.
Moreover, the ``control'' concept is explicitly included in Section
13(q) in other contexts.\204\
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\202\ See proposed Item 2.01(d)(7) of Form SD.
\203\ See, e.g., Letters from Global Witness (Mar. 8, 2016) and
PWYP-US (Feb. 16, 2016).
\204\ Compare Section 13(q)(1)(B) with Section 13(q)(2(A).
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With respect to the definition of ``Federal Government,'' we
believe that Section 13(q) is clear in only requiring disclosure of
payments made to the Federal Government in the United States and not to
state and local governments. In this regard, we believe that typically
the term ``Federal Government'' refers only to the U.S. national
government and not the states or other subnational governments in the
United States.
Request for Comment
47. Should the definition of ``foreign government'' include a
foreign government, a department, agency, or instrumentality of a
foreign government, or a company owned by a foreign government, as
proposed?
48. Should we permit an issuer to aggregate payments made to
subnational governments below the major subnational level without
having to identify any particular subnational government payee, as
proposed? If we should instead require the disclosure of
[[Page 2541]]
each subnational government payee, please explain why that approach
would be more appropriate and address whether such a requirement could
increase the potential for competitive harm.
49. Should we include an instruction in the rules clarifying that a
company owned by a foreign government is a company that is at least
majority-owned by a foreign government, as proposed? Should we instead
provide that a company owned by a foreign government is a company in
which the foreign government is the controlling shareholder?
50. Should the definition of ``foreign government'' include
federally recognized American Indian or Alaska Native tribal entities?
51. Should we alter our approach to the terms ``foreign
government'' or ``Federal Government'' based on any developments since
the adoption of the 2016 Rules or in light of our other proposals in
this release?
H. Annual Report Requirement
Section 13(q) mandates that a resource extraction issuer provide
the payment disclosure required by that section in an annual report but
otherwise does not specify the location of the disclosure, either in
terms of a specific form or in terms of location within a form. We
believe that resource extraction issuers should provide the required
disclosure about payments on Form SD.
Form SD is already used for specialized disclosure not included
within an issuer's periodic or current reports, specifically, the
disclosure required by the rule implementing Section 1502 of the
Act.\205\ As such, we believe that using Form SD would facilitate
interested parties' ability to locate the disclosure. We also believe
that using Form SD would address issuers' concerns about providing the
disclosure in their Exchange Act annual reports on Forms 10-K, 20-F or
40-F.\206\ For example, it should alleviate the concern that the
disclosure will be subject to the officer certifications required by
Exchange Act Rules 13a-14 and 15d-14. It would also allow the
Commission, as discussed below, to adjust the timing of the submission
without directly affecting the broader Exchange Act disclosure
framework.\207\ As proposed, Form SD would require an issuer to include
a brief statement in the body of the form in an item entitled,
``Disclosure of Payments by Resource Extraction Issuers,'' directing
readers to the detailed payment information provided in the exhibits to
the form.\208\
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\205\ 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'').
\206\ See 2012 Rules Adopting Release, n.366-370 and
accompanying text. Under the rules proposed in the 2012 Rules
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. One commenter continued to
support this approach after the 2012 Rules Adopting Release. See
Letter from Susan Rose-Ackerman (Mar. 28, 2014) (``[t]here is no
need for the cost of a separate report.'').
\207\ In this regard, we considered permitting the resource
extraction payment disclosure to be submitted as an amendment to
Form 10-K, 20-F, or 40-F, as applicable, but we are concerned that
this might give the false impression that a correction had been made
to a previous filing. See also 2012 Rules Adopting Release, n.379
and accompanying text.
\208\ See proposed Item 2.01(a)(3).
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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 believe fiscal year
reporting would limit 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).
The 2016 Rules required resource extraction issuers to submit Form
SD on EDGAR no later than 150 days after the end of the issuer's most
recent fiscal year. We based this deadline in part on the need to avoid
a conflict with the deadline for an issuer's annual report on Form 10-
K, 20-F, or 40-F under the Exchange Act.\209\ While we continue to
believe that it is reasonable to provide a deadline that would be later
than an issuer's Exchange Act annual report deadline, in light of the
concerns about excessive compliance costs and burdens and potential
competitive harm under the 2016 Rules,\210\ we are proposing a
submission deadline for Form SD that is longer than the 150 day
deadline. The proposed rules would require an issuer with a fiscal year
ending on or before June 30 to submit Form SD no later than March 31 in
the calendar year following its most recent fiscal year. For an issuer
with a fiscal year ending after June 30, the Form SD submission
deadline would be no later than March 31 in the second calendar year
following its most recent fiscal year.\211\
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\209\ See 2016 Adopting Release, Section II.G.3.
\210\ See, e.g., supra note 54 and accompanying text.
\211\ See proposed General Instruction B.2. of Form SD.
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We believe that the proposed submission deadlines would be
sufficient to enable all resource extraction issuers to prepare timely
disclosure regarding payments to governments made in their most recent
fiscal year, no matter when their fiscal year-end may be, and therefore
mitigate the compliance burdens under Section 13(q). We also believe
that the lengthened submission deadlines would also address the
concerns that the public disclosure of the payment information could
cause competitive harm.
We also considered the possibility that certain resource extraction
issuers may be required to submit two reports on Form SD every year if
we use a reporting period based on the fiscal year and they are subject
to the May 31st conflict minerals disclosure deadline.\212\
Nevertheless, we continue to believe that the fiscal year is the more
appropriate reporting period for the payment disclosure. We believe it
would reduce resource extraction issuers' compliance costs when
compared to a fixed, annual reporting requirement 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). In
addition, although minimizing the number of Forms SD an issuer would
need to submit if it was also subject to the conflict minerals
disclosure rules could have benefits, we do not believe that those
benefits outweigh those arising from a reporting regime tailored to a
resource extraction issuer's fiscal year.\213\
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\212\ General Instruction B.1 of Form SD. See also Exchange Act
Rule 13p-1.
\213\ Of the 236 companies that we estimate would be subject to
the proposed rules, only 39 filed a Form SD pursuant to Rule 13p-1
in 2018. In addition, we note that the conflict minerals reporting
regime adopted a uniform reporting period, in part, because such a
period allows component suppliers that are part of a manufacturer's
supply chain to provide reports to their upstream purchasers only
once a year. See Conflict Minerals Release, n.352 and accompanying
text. The same reasoning does not apply to the issuer-driven
disclosure under the proposed rules.
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Request for Comment
52. Should we require resource extraction issuers to provide the
payment disclosure mandated under Section 13(q) on Form SD, as
proposed? Should we alter our approach based on any developments since
the adoption of the 2016 Rules or in light of our other proposals in
this release? Would extending the submission deadline in this way help
to mitigate potential competitive harm from the payment disclosures?
53. What would be a suitable submission deadline? Should we base
the furnishing deadline on an issuer's
[[Page 2542]]
calendar year-end rather than fiscal year-end?
I. Public Reporting
1. Public Disclosure of the Issuer's Payment Information, Including the
Company Name
Section 13(q) provides the Commission with the discretion to
require public disclosure of payments by resource extraction issuers,
including their names, or to permit nonpublic filings.\214\ For the
reasons set forth below, we preliminarily believe that exercising our
discretion to require public disclosure, including the issuer's name,
might better accomplish the objectives of Section 13(q). We are
therefore proposing that resource extraction issuers provide the
required payment disclosure publicly through the searchable, online
EDGAR system.
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\214\ See API v. SEC, 953 F. Supp. 2d at 11 (finding that the
Commission ``misread the statute to mandate public disclosure of the
reports'').
---------------------------------------------------------------------------
Section 13(q) requires us to adopt rules that, to the extent
practicable, support the commitment of the Federal Government to
international transparency promotion efforts relating to the commercial
development of oil, natural gas or minerals.\215\ We understand that
existing transparency regimes require public disclosure of each
reporting company's annual report, including the identity of the
company.\216\ A public disclosure requirement of the payment
information under Section 13(q), including the resource extraction
issuer's name, would further the statutory directive to support the
commitment of the Federal Government to international transparency
promotion efforts relating to the commercial development of oil,
natural gas or minerals by increasing the total number of companies
that provide public, project-level disclosure. In addition, companies
that could be subject to the proposed rules may already be publicly
reporting under the Canadian or EU regimes, using a more granular
contract-level definition of project. For these companies, there would
likely be only minimal burden or harm due to public reporting under the
proposed rules.
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\215\ Section 13(q)(2)(E).
\216\ 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). We are not aware of any existing transparency regimes that
do not require public disclosure.
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We recognize that some previous commenters suggested that we permit
issuers to submit their annual reports to the Commission non-publicly
and have the Commission use those nonpublic submissions to produce an
aggregated, anonymized compilation that would be made available to the
public.\217\ Rather than follow this approach, the proposed rules seek
to preserve the public disclosure of payment information while
incorporating other changes that we believe would significantly
alleviate, and in some cases eliminate, the concerns of commenters and
certain members of Congress about the rules' potential adverse
competitive effects. These changes from the 2016 Rules include (1) the
Modified Project Definition--which would permit aggregation of project
data at the major subnational level,\218\ (2) the proposal to permit
aggregation of subnational government payments,\219\ (3) the proposed
exemptions for conflicts with foreign law and pre-existing
contracts,\220\ (4) the proposed targeted exemption allowing delayed
reporting for exploratory activities,\221\ and (5) the extended filing
deadline.\222\
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\217\ See, e.g., Letters from API (Feb. 16, 2016) and (Jan. 28,
2011); BP (Feb. 16, 2016); Chevron (Feb. 16, 2016); and Royal Dutch
Shell (Feb. 5, 2016); see also 2016 Rules Proposing Release, Section
II.G.2 and 2016 Adopting Release, n.345.
\218\ See supra Section II.F. Disclosure that is less granular
and not as closely linked to individual contracts should also
assuage concerns that competitors could reverse-engineer proprietary
commercial information.
\219\ See supra Section II.G. In this regard, one industry
commenter on the 2016 Rules Proposing Release stated that its
concerns about company-specific public disclosure causing
competitive harm would be ``substantially mitigated'' if the
Commission adopted a definition of ``project'' similar to the one we
have proposed. See Letter from ExxonMobil (Feb. 16, 2016).
\220\ See infra Sections II.J.1. and 2.
\221\ See infra Section II.J.4.
\222\ See infra Section II.H.
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While we preliminarily believe that the proposed rules strike an
appropriate balance, we are also considering the alternative approach
of permitting resource extraction issuers to submit their annual
reports on Form SD to the Commission non-publicly and the Commission
using those nonpublic submissions to produce an aggregated, anonymized
public compilation. In this regard, we note that some commenters have
indicated that public disclosure of each issuer's specific payments
would increase the risk of competitive harm and that such public
disclosure would force issuers to reveal highly confidential,
commercially-sensitive information, which could also endanger the
safety of an issuer's employees.\223\ Similarly, as discussed above,
several members of Congress who voted to disapprove the 2016 Rules
expressed anti-competitive concerns.\224\ We also note the view
expressed by commenters that the disclosure of issuer-specific
information is not necessary to achieve the statutory goal of
transparency.\225\ These commenters have expressed the view that the
information that is necessary to achieve the statute's purposes is the
type and amount of payments to governments, which would be provided in
an anonymized compilation. We acknowledge our statutory duty in a
public rulemaking to consider whether a proposed action would promote
competition in addition to protect investors.\226\
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\223\ One of these commenters 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. See Letter from API
(Feb. 16, 2016).
\224\ See supra n.56.
\225\ See, e.g., Letter from API (Feb. 16, 2016).
\226\ See Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)],
which requires that, whenever the Commission is engaged in
rulemaking under the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the
public interest, the Commission shall also consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition and capital formation.
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We are interested in commenters' views on whether the rules, as
proposed, would sufficiently alleviate concerns about adverse
competitive effects or whether we should go further and permit
nonpublic submission of the required payment information. If commenters
feel that nonpublic submission is necessary or appropriate, it would be
helpful if commenters could provide specific explanations for why
nonpublic submission is warranted (i.e., what incremental benefits
would it provide as compared to the proposed rules) and how aggregated,
anonymized payment information would impact the statute's transparency
goals. We welcome feedback from all interested parties on these points.
2. Public Compilation
Consistent with Section 13(q), the proposed rules would provide
that the Commission's staff will periodically make a separate public
compilation of the payment information submitted on Forms SD available
online, to the extent practicable.\227\ The staff may determine the
form, manner, and timing of each
[[Page 2543]]
compilation.\228\ As proposed, the staff would not anonymize or change
the information included in the compilation.\229\
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\227\ See proposed Rule 13q-1(e).
\228\ See id. We do not anticipate that the staff would produce
such a compilation more frequently than once a year.
\229\ As noted above, we also are considering an alternative
approach whereby resource extraction issuers would submit their
annual reports on Form SD to the Commission non-publicly. Under this
alternative approach, the Commission would use those nonpublic
submissions to produce an aggregated, anonymized public compilation
of the required payment information.
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However, as discussed above, the Commission is also considering the
alternative of making available a public aggregated, anonymized
compilation instead of making public individual Forms SD. If we choose
this alternative, we are considering including information relating to
the aggregate payments that flowed to a particular jurisdiction by
resource and extraction method.
Request for Comment
54. Should the rules require public disclosure of payment
information, as proposed? Would the proposed definition of ``project''
together with the proposed exemptions (discussed in Section II.J.
below) and other provisions of the proposed rules sufficiently mitigate
the risk of competitive harm that may arise from public disclosure?
55. Should we instead permit issuers to submit the required payment
information non-publicly and then provide an anonymized compilation?
What are the incremental benefits and costs of permitting non-public
submission and providing an anonymized compilation as compared to the
proposed rules? Please be as specific as possible in your response.
56. If we permit non-public submission of Form SD information and
provide an anonymized compilation, what information should we include
in the compilation? Should it include all information other than the
identity of the issuer and identify payments by specific project, or
should other information be omitted? Would the disclosure of the
project raise similar competitive concerns as providing the issuer's
identity? When and how often should the compilation be provided? Please
be as specific as possible in your response.
J. Exemptions From Compliance
The proposed rules include two new exemptions from reporting under
Section 13(q) where disclosure is prohibited by foreign law or pre-
existing contracts. As the 2013 District Court opinion found, the
Commission has the authority to grant exemptions with respect to
Section 13(q).\230\ Several industry commenters specifically
recommended these two exemptions in connection with prior rulemakings
in order to reduce the risk of competitive harm that could result from
the required Section 13(q) payment disclosure.\231\ According to these
commenters, without these exemptions, a resource extraction issuer that
faced a legal or contractual conflict would have to choose between
complying with Section 13(q) or the host country law or contract.
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\230\ See API v. SEC, 953 F. Supp. 2d at 21-23.
\231\ See, e.g., Letters from the API (Feb. 16, 2016) and (Nov.
7, 2013); Letter from Chevron (Feb. 16, 2016); and Letter from
ExxonMobil (Feb. 16, 2016); see also Letter from Nouveau (Feb. 16,
2016).
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For example, if an issuer chose to provide the payment disclosure
in violation of the host country law, the issuer could face the shut
down and, in the extreme case, expropriation of its facilities in the
host country, the imposition of fines or the withholding of
permits.\232\ Similarly, an issuer whose contract prohibits the
disclosure of payment information without the host government's
permission, and who fails to obtain such permission, could also face
adverse financial consequences. For example, the issuer would have to
incur costs associated with having to renegotiate its contract with the
host government in order to provide the payment disclosure required
under Section 13(q).\233\
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\232\ See, e.g., Letter from API (Feb. 16, 2016).
\233\ See id. (stating that ``many companies' contracts with
host governments contain clauses requiring the government's
permission before a company publicly reveals payment information''
and noting that ``[a]lthough some of these contracts allow an issuer
to disclose payment information to comply with securities laws, many
do not, particularly older contracts.'').
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These two new exemptions would be in addition to the targeted
exemption for exploratory activities and transitional relief for
recently acquired companies that were included in the 2016 Rules \234\
and that are being retained in the proposed rules.\235\ We are also
proposing similar transitional relief for a resource extraction issuer
that has recently conducted its initial public offering.\236\ Together,
we believe that these provisions, as well as our continued willingness
to consider additional exemptive relief on a case-by-case basis, would
significantly mitigate the concerns of commenters and members of
Congress about the burdens of Section 13(q) disclosure and the
potential for competitive harm. As a result, we believe these
provisions, when considered together with the other proposed changes to
the 2016 Rules discussed in this release, should serve to satisfy the
CRA's restriction on adopting rules that are in substantially the same
form as the disapproved rules. We discuss each of these provisions in
more detail below.
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\234\ See 2016 Adopting Release, Section II.G.3. Some commenters
on the 2016 rulemaking also sought an exemption for disclosure that
could jeopardize the safety of an issuer's personnel. See the 2016
Adopting Release, Section II.I.3. The Commission decided not to
adopt such an exemption primarily because of its belief that issues
involving safety concerns are inherently fact specific and require
an analysis of the underlying facts and circumstances. Accordingly,
the Commission reasoned that, rather than adopting an exemption
regarding safety concerns that issuers might apply in an overly
broad way, the better approach would be to permit issuers to raise
such concerns by applying for exemptive relief on a case-by-case
basis. See id. We continue to believe that a case-by-case exemptive
process, which would be available under the proposed rules, is the
more appropriate approach for addressing issuers' safety concerns.
See proposed Rule 13q-1(d)(4). We also believe that other proposed
provisions, such as the proposed exemptions for conflicts with
foreign law or pre-existing contracts as well as the proposed
definition of project, should help to alleviate concerns about
employee safety that could potentially result from the proposed
payment disclosure.
\235\ See infra Sections II.J.3. and II.J.4.
\236\ See infra Section II.J.5.
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1. Exemption for Conflicts of Law
We are proposing an exemption for when an issuer is unable to
provide the required disclosure without violating the laws of the
jurisdiction where the project is located.\237\ Unlike the exemption
provided in the 2016 Rules, the proposed exemption would not require
issuers to apply to the Commission for exemptive relief. Although the
Commission stated in the 2016 rulemaking that a case-by-case exemptive
approach for handling situations involving conflicts of law or contract
prohibitions was preferable, after reconsidering the comments and with
a view to limiting compliance costs and burdens, we are proposing to
permit issuers to avail themselves of the exemptions without seeking
individual relief on a case-by-case basis.
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\237\ See proposed Rule 13q-1(d)(1).
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We believe that the proposed approach would facilitate an issuer's
timely submission of Form SD and the timely resolution of any conflict
of laws situations with the host government. It also would alleviate
some of the uncertainties of handling conflict of laws situations and
the potential competitive harm that could result. In this respect, we
note that one commenter in the 2016 rulemaking stated that, with a
case-by-case approach, ``there would be substantial practical and
administrative difficulties associated with obtaining timely exemptive
relief'' from the Section 13(q)
[[Page 2544]]
rules.\238\ Another commenter expressed concern about a case-by-case
approach for handling conflicts of law situations for a company
threatened with the potential total loss of its operations in the host
country.\239\ We anticipate that the proposed rule-based exemption for
foreign law conflicts would substantially address these administrative
difficulties and concerns about potential losses.
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\238\ See Letter from API (Feb. 16, 2016).
\239\ See Letter from ExxonMobil (Feb. 16, 2016).(stating that
``we do not believe the mere possibility of an exemption--which may
or may not be granted and even if granted could be revoked or
challenged at any time--provides adequate comfort to companies and
investors against the potential for being forced to halt operations
in a country because of a conflict of laws situation, especially
given that any such action by a company would likely represent a
breach of the company's contractual obligation to the country and
force the company potentially to suffer a total loss of its local
operations--operations which could be worth tens of billions of
dollars as previously indicated . . .'')
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Further, to the extent that the requirement to obtain a case-by-
case exemption (and the attendant uncertainties surrounding whether
such relief might be granted) could inhibit companies from bidding on
or initiating resource extraction projects in particular countries or
otherwise impair the ability of companies to compete effectively for
such projects, we anticipate that our revised approach would
substantially eliminate these potential barriers.
Although issuers could avail themselves of the exemption without
further Commission action, an issuer seeking to rely on the exemption
would be required to take certain steps to qualify for the exemption,
including providing specified disclosures about its eligibility for
relief. We believe that these proposed conditions would help ensure
that issuers forgo disclosure only when there is a legitimate conflict
of law, so that the exemption does not unreasonably frustrate the
statutory goal of increasing transparency regarding resource extraction
payments. Moreover, as is the case with all filings, the issuer's
disclosure and reliance on this exemption would be subject to
Commission staff review, which should discourage potentially
inappropriate uses of the exemption.
As proposed, the issuer would first have to take reasonable steps
to seek and use exemptions or other relief under the applicable law of
the foreign jurisdiction. After taking such steps and failing to obtain
an exemption or other relief, the issuer would have to disclose the
foreign jurisdiction for which it has excluded disclosure, the law
preventing disclosure, its efforts to seek and use exemptions or other
relief under such law, and the results of those efforts. This
disclosure would be required in the body of Form SD. The issuer would
also be required to furnish as an exhibit to Form SD a legal opinion
from counsel that opines on the inability of the issuer to provide the
required disclosure without violating the foreign jurisdiction's law.
The proposed exemption would not be limited to pre-existing foreign
laws. We acknowledge that this may provide an incentive for foreign
jurisdictions to enact such laws. Although not eliminating this
incentive, the absence of a similar exemption under the EU Directives
or ESTMA, which generally require disclosure at a more granular level,
should serve to limit the likelihood that jurisdictions will pass such
laws. In this regard, one previous commenter observed that no country
has adopted a rule or law prohibiting payment disclosures since the
initial adoption of Section 13(q) in July 2010.\240\
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\240\ Letter from API (Nov. 7, 2013) (``Despite their broad
potential application, these exemptions are only invoked in limited
cases and have not led to a notable spread of non-disclosure laws''
[referring to other Commission provisions that similarly permit a
registrant to limit its disclosure, and in particular, mentioning
Rule 1202 of Regulation S-K, which allows registrants to omit
disclosure of proved reserves if that country's government prohibits
such disclosure, and General Instruction E to Form 10-K, which
allows registrants to omit any item or other requirement of Form 10-
K with respect to any foreign subsidiary to the extent that the
required disclosure would be detrimental to the registrant.] See
also Letter from API (Feb. 16, 2016) (noting that currently ``two
countries--Qatar and China--continue to prohibit the required
disclosures.'').
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Request for Comment
57. Should we provide an exemption from disclosing payments when an
issuer is unable to provide such disclosure without violating the laws
of the jurisdiction where the project is located, as proposed? If we
should adopt such an exemption, should issuers be permitted to rely on
it without first seeking relief from the Commission, as proposed?
58. Should we include qualifying conditions to the exemption, as
proposed? Would these proposed conditions provide adequate protection
against potentially inappropriate uses of the exemption? Are the
proposed required disclosures appropriate? For example, should we
require an issuer to disclose the steps taken to seek and use
exemptions or other relief under foreign law as a condition to claiming
the conflicts of law exemption? Would requiring such disclosure
exacerbate any conflict the issuer may have with foreign law? Should we
include additional or different disclosures?
59. Should we require a legal opinion to be furnished in support of
the exemption, as proposed? If so, are the requirements for the legal
opinion appropriate?
60. An issuer would be required to take reasonable steps to seek
and use exemptions or other relief under the applicable law of the
foreign jurisdiction in which there is a conflict in order to qualify
for the proposed exemption. Should we provide guidance about what would
constitute reasonable steps to satisfy this condition of the exemption?
If so, what should we include in the guidance?
61. Are there other conditions to the proposed exemption that we
should adopt instead of, or in addition to, the proposed conditions?
For example, should we limit the exemption to foreign laws that pre-
date the effective date of the new rules or some earlier date, such as
the date of this release? Should we limit the exemption to situations
involving a conflict with a foreign national law and preclude its
availability when the conflict arises with the law of a foreign
subnational jurisdiction, such as a province? If so, please explain why
any additional limitation would be appropriate.
2. Exemption for Conflicts With Pre-Existing Contracts
We are proposing an exemption from disclosing payments when the
terms of an existing contract prohibit disclosure.\241\ The exemption
would only apply to contracts in which such terms are expressly
included in writing prior to the effective date of the Section 13(q)
rules. Similar to the exemption for conflicts of law, and for the same
reasons, issuers would not need to seek the exemption on an individual,
case-by-case basis. The issuer would, however, have to meet certain
conditions to qualify for relief, and its disclosure and reliance on
the exemption would be subject to staff review, which should help to
discourage potentially inappropriate uses of the exemption.
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\241\ See proposed Rule 13q-1(d)(2).
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As proposed, an issuer would first have to take reasonable steps to
seek and use any contractual exceptions or other contractual relief
(e.g., attempting to obtain the consent of the relevant contractual
parties) to disclose the payment information. This obligation to take
reasonable steps would not include an obligation to renegotiate an
existing contract or to compensate the other contractual parties in
exchange for their
[[Page 2545]]
consent to disclose the payments. If the issuer fails to obtain
consent, the issuer would have to disclose the jurisdiction where it
has excluded such disclosure, the particular contract terms preventing
the issuer from providing disclosure, its efforts to seek consent or
other contractual relief, and the results of those efforts. This
disclosure would be required in the body of Form SD. The issuer would
also be required to furnish as an exhibit to Form SD a legal opinion
from counsel that opines on the inability of the issuer to provide the
required disclosure without violating the applicable contractual terms.
This exemption would differ from the conflicts of law exemption in
that it would only apply to written terms of contracts that were
entered into prior to the date the Section 13(q) rules take effect. We
believe that this limitation is justified because issuers have control
over the terms of their contracts and would be in a position to modify
future contract terms accordingly. By contrast, issuers would not have
similar control over the laws of the jurisdiction where they are
engaged in the commercial development of natural resources.
Request for Comment
62. Should we provide an exemption from disclosing payments when
the written terms of a pre-existing contract restrict such disclosure,
as proposed?
63. Should we include qualifying conditions to the exemption, as
proposed? Would these proposed conditions provide adequate protection
against potentially inappropriate uses of the exemption? In particular,
should we require an issuer to disclose the reasonable steps taken to
seek and use any contractual exceptions or other contractual relief to
disclose the payment information? Would requiring such disclosure
exacerbate any conflict the issuer may have with a pre-existing
contract term?
64. Should we require a legal opinion to be furnished in support of
the exemption, as proposed? If so, are the proposed requirements for
the legal opinion appropriate?
65. As proposed, the exemption would apply only to contracts that
were entered into prior to the effective date of the Section 13(q)
rules. Should it instead apply to contracts entered into by an earlier
or later date? If so, please identify the different date and explain
why it would be more appropriate.
66. Should we provide further guidance on the scope of the proposed
exemption for pre-existing contracts? For example, how should we treat
amendments or extensions of pre-existing contracts that occur after the
effective date of the Section 13(q) rules? Should the proposed
exemption apply to such amendments or extensions?
3. Exemption for Smaller Reporting Companies and Emerging Growth
Companies
We propose to exempt smaller reporting companies \242\ and emerging
growth companies \243\ from the scope of Rule 13q-1.\244\ As proposed,
neither a smaller reporting company nor an emerging growth company
would be required to provide any of the payment disclosure mandated by
Section 13(q) and proposed Rule 13q-1. Given the potentially
significant fixed cost component of the proposed rules,\245\ we believe
that this proposed change from the 2016 Rules, eliminating the
compliance burden for those companies that are less able to afford it,
would reduce the overall cost of the proposed rules and address the
related Congressional concerns.\246\
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\242\ The Commission recently amended the definition of
``smaller reporting company'' to expand the number of registrants
that qualify as smaller reporting companies, and to reduce
compliance costs for these registrants and promote capital
formation, while maintaining appropriate investor protections. The
amended definition of ``smaller reporting company'' includes
registrants with a public float of less than $250 million (compared
to $75 million in the earlier rule), as well as registrants with
annual revenues of less than $100 million for the previous year and
either no public float or a public float of less than $700 million.
See Release No. 33-10513 (Jun. 28, 2018) [83 FR 31992 (Jul. 10,
2018)].
\243\ The term ``emerging growth company'' means an issuer that
had total annual gross revenues of less than $1,070,000,000 during
its most recently completed fiscal year. See the definition of
emerging growth company in Securities Act Rule 405 and Exchange Act
Rule 12b-2.
\244\ See proposed Rule 13q-1(d)(3).
\245\ See infra Section III.C.
\246\ See supra n. 54 and accompanying text. This change would
also help to fulfill Congress' mandate that the proposed rules are
not substantially the same as the 2016 Rules.
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This proposed exemption is consistent with our statutory duty in a
public rulemaking to consider, in addition to investor protection
concerns, whether an action will promote efficiency, competition, and
capital formation.\247\ It also is consistent with our treatment of
smaller reporting companies and emerging growth companies in other
rulemakings \248\ undertaken since the enactment of the Jumpstart Our
Business Startups Act (``JOBS Act'').\249\
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\247\ See supra n. 226.
\248\ See, e.g., Pay Ratio Disclosure, Release No. 33-9877 (Aug.
5, 2015) [80 FR 50103 (Aug. 18, 2015)] (exempting smaller reporting
companies and emerging growth companies, among others, from the
scope of the required pay ratio disclosure).
\249\ Public Law 112-106, 126 Stat. 306 (2012).
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Request for Comment
67. Should we exempt smaller reporting companies or emerging growth
companies from the scope of Rule 13q-1, as proposed?
68. Should we instead provide a longer transition period for
smaller reporting companies or emerging growth companies to comply with
Rule 13q-1? If so, what should be the compliance date for those
companies?
69. Should we instead adopt scaled disclosure requirements for
smaller reporting companies or emerging growth companies under Rule
13q-1? If so, what should those scaled disclosure requirements entail?
4. Targeted Exemption for Payments Related to Exploratory Activities
We are proposing a targeted exemption for payments related to
exploratory activities. We adopted such an exemption in the 2016 Rules
after considering the concerns raised by industry commenters that the
disclosure of payment information regarding exploratory activities
could result in competitive harm to a resource extraction issuer.\250\
We have considered whether such an exemption would continue to be
necessary in light of the proposed Modified Project Definition, which
would provide the geographic location of a project at the national and
major subnational political jurisdiction--rather than contract--level.
We believe the exemption is necessary, given the inherently
commercially sensitive nature of exploratory activities. We also have
considered whether this targeted exemption is necessary in light of the
proposed extended deadline for furnishing the payment information.
Again, we believe it is, because of the difficulty of determining the
precise point at which exploratory activities cease being commercially
sensitive.
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\250\ See 2016 Adopting Release, Section II.I.3. (citing Letter
from API (Feb. 16, 2016), which explained the competitive harm that
could result from the disclosure of bonus and other payments to the
host government regarding high-potential exploratory territory and
stating that a case-by-case exemptive approach would be insufficient
to protect against competitive harm in those situations). See also
Letter from ExxonMobil (Feb. 16, 2016) (discussing the competitive
harm from the forced disclosure of payments that may allow
competitors to identify new areas of potential resource development
an issuer has identified, and to determine the value the issuer
places on such resources).
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Although the Modified Project Definition should help alleviate
competitive harm, we remain concerned that such harm could still occur.
For example, harm could occur if the major subnational political
jurisdiction is
[[Page 2546]]
small or if other indicators, such as disclosure of a particular
payment type that is associated with the commencement of exploratory
activities, would provide enough information to reveal an issuer's
exploratory activities. Thus, we continue to believe that a targeted
exemption for disclosure of payments related to exploratory activities
would mitigate the potential competitive harm that issuers might
experience in these circumstances. Importantly, we do not believe it
would substantially reduce the overall benefits of the disclosure to
its users.\251\
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\251\ See 2016 Rules Adopting Release, Section II.I.3.
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Under this proposed targeted exemption, issuers would not be
required to report payments related to exploratory activities in the
Form SD for the fiscal year in which payments are made. Instead, an
issuer could delay reporting such payments until it submits a Form SD
for the fiscal year following the fiscal year in which the payments
were made.\252\ We are proposing a limited, delayed approach because we
believe that the likelihood of competitive harm from the disclosure of
payment information related to exploratory activities diminishes over
time.
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\252\ In the Form SD for the fiscal year following the fiscal
year in which the exploratory payments were made, the issuer would
be required to report those exploratory payments as well as all
applicable non-exploratory payments, if any, made during the fiscal
year following the fiscal year in which the issuer made the
exploratory payments.
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For purposes of this proposed exemption, we would 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, exploratory activities would be limited to activities conducted
prior to the commercial development (other than exploration) of the
oil, natural gas, or minerals that are the subject of the exploratory
activities.\253\
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\253\ See proposed Item 2.01(b)(1) of Form SD.
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In proposing this exemption, we 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 that any diminished transparency as a result of the one-year
delay in reporting of such payments is justified by the potential
competitive harms that we anticipate may be avoided as a result of this
exemptive relief. Nevertheless, we are proposing to limit the exemption
to one year because we believe that the likelihood of competitive harm
from disclosing the payment information diminishes over time once
exploratory activities have begun.\254\
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\254\ 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 proposing
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 the proposed delay in reporting exploratory
payments, although we solicit comment below on other potential
timeframes for relief. We further note that an issuer would be able
to apply for an exemption on a case-by-case basis, as discussed
below in Section II.J.6., if it believes that its individual
circumstances warranted a longer exemptive period than the proposed
one-year exemption.
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Request for Comment
70. Should we provide a targeted exemption for payments related to
exploratory activities, as proposed? If so, should it be for longer or
shorter than the proposed one-year delay in reporting? For example,
should an issuer be permitted to wait until the second fiscal year
following the fiscal year in which the exploratory activities occurred
before having to provide the Section 13(q) disclosure?
71. Should we alter our approach based on any developments since
the adoption of the 2016 Rules or in light of our other proposals in
this release? For example, does the proposed definition of project,
which is non-contract based, mitigate the need for, or support a
modification to, the targeted exemption regarding exploratory
activities?
5. Transitional Relief for Recently Acquired Companies
We are proposing transitional relief with respect to recently
acquired companies where such companies were not previously subject to
Section 13(q) or an alternative reporting regime deemed by the
Commission to satisfy the transparency objectives of Section
13(q).\255\ The Commission provided this relief under the 2016 Rules
based on the recommendations of commenters who asserted that such
relief was necessary to reduce the compliance costs associated with
recently acquired companies that may experience difficulty timely
complying with the payment disclosure requirements.\256\ As noted by
those commenters, the Commission adopted a similar provision under Rule
13p-1,\257\ which also requires disclosure on Form SD.\258\
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\255\ See proposed Item 2.01(b)(2) of Form SD. For purposes of
this provision, an issuer that has recently acquired a company that
has not been subject to an alternative reporting regime pursuant to
proposed Item 2.01(c) of Form SD would be eligible for the
transitional relief. Under that provision, 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 require disclosure that satisfies the
transparency objectives of Section 13(q) may satisfy its Section
13(q) disclosure obligations by including, as an exhibit to the Form
SD, a report complying with the reporting requirements of the
alternative jurisdiction. See infra Section K.
\256\ See 2016 Adopting Release, Section II.G.3. (citing Letter
from Cleary, Gottlieb, Steen and Hamilton (``Cleary'') (Feb. 17,
2016) and Letter from Ropes & Gray (Feb. 16, 2016)).
\257\ 17 CFR 240.13p-1.
\258\ See Instruction (3) to Item 1.01 of Form SD. The proposed
rules differ, however, from what is provided for under Rule 13p-1
because disclosure under Rule 13p-1 occurs on a calendar year basis
rather than a fiscal year basis.
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Under proposed Rule 13q-1 and Form SD, an issuer would be required
to disclose resource extraction payment information for every entity it
controls. Therefore, absent an exemption, an issuer would be required
to include the acquired company's resource extraction payment
information in its first annual submission after obtaining control. We
are concerned that implementing the appropriate reporting mechanisms in
a timely manner for a company that was not previously subject to
reporting under Section 13(q) or an alternative reporting regime might
remain a significant undertaking, notwithstanding our belief that the
Modified Project Definition would reduce compliance costs and burdens
compared to the 2016 Rules. As such, we are providing transitional
relief with respect to such companies.\259\
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\259\ As explained in the 2016 rulemaking, the proposed
transitional relief would not apply to companies that have been
subject to Section 13(q)'s disclosure requirements or to those of an
alternative reporting regime prior to their acquisition because such
companies should already be generally familiar with the Section
13(q) requirements or have sufficient notice of them to establish
reporting systems and prepare the appropriate disclosure during the
fiscal year of their acquisition. See 2016 Adopting Release, Section
II.G.3.
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Under the proposed rules, issuers would not need to report payment
information for a company that it
[[Page 2547]]
acquired or over which it otherwise obtained control, if the acquired
company, in its last full fiscal year, was not obligated to disclose
resource extraction payment information pursuant to Rule 13q-1 or an
alternative reporting regime's requirements deemed by the Commission to
satisfy Section 13(q)'s transparency objectives. In these
circumstances, the resource extraction issuer would begin reporting
payment information for the acquired company starting with the Form SD
submission for the first full fiscal year immediately following the
effective date of the acquisition. As under the 2016 Rules, and in
contrast to the targeted exemption for exploratory activities, an
issuer would not be required to provide the (excluded) payment
disclosure for the year in which it acquired the company in a future
Form SD.\260\
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\260\ See id.
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Request for Comment
72. Should we provide transitional relief for an issuer that has
acquired or obtained control over a company whose resource extraction
payments are required to be disclosed and was not previously obligated
to provide such disclosure, as proposed? Should we alter our approach
based on any developments since the adoption of the 2016 Rules or in
light of our other proposals in this release?
73. Should the transitional relief be for a longer or shorter
period than as proposed? For example, should an issuer that has
acquired a recently acquired company, which is eligible for the
proposed transitional relief, be permitted to wait until its second
fiscal year following the fiscal year in which the acquisition occurred
before having to comply with the Section 13(q) rules?
6. Transitional Relief for Initial Public Offerings
We are proposing similar transitional relief for a resource
extraction issuer that has completed its initial public offering in the
United States in its last full fiscal year. Such an issuer would not
have to comply with the Section 13(q) rules until the first fiscal year
following the fiscal year in which it completed its initial public
offering.\261\
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\261\ See proposed Item 2.01(b)(3) of Form SD.
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This proposed transitional relief for companies that have recently
completed their U.S. initial public offerings is a change from the 2016
Rules. At that time, the Commission stated its belief that such
companies would have sufficient notice of the payment reporting
requirements to establish reporting systems and prepare the appropriate
disclosure prior to undertaking the initial public offering.\262\
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\262\ See 2016 Adopting Release, Section II.G.
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An issuer that is preparing to conduct its U.S. initial public
offering would have notice of the Section 13(q) rules. Thus, such an
issuer would likely need to incur costs to establish a payment
reporting system to comply with the Section 13(q) rules in advance of
the public offering despite not knowing whether it will successfully
conduct that initial public offering. The company would then incur
these costs unnecessarily if it chose not to move forward with a
planned initial public offering. We believe that the proposed
transitional relief would prevent the situation where an issuer
contemplating a U.S. initial public offering would need to postpone or,
in the extreme case, refrain from conducting its U.S. initial public
offering to avoid the Section 13(q) compliance costs. These outcomes
would be contrary to the stated goals of Section 13(q) as they would
delay or reduce the disclosure provided under that section.
Request for Comment
74. Should we provide transitional relief for an issuer that has
completed its U.S. initial public offering in its last full fiscal
year, as proposed?
75. Should we limit the transitional relief only to those issuers
that, prior to completion of their initial public offering, have not
been subject to an alternative reporting regime deemed by the
Commission to require disclosure that satisfies the transparency
objectives of Section 13(q)?
76. Should the transitional relief be for a longer or shorter
period than as proposed? For example, should an issuer that has
recently completed its U.S. initial public offering be permitted to
wait until its second fiscal year following the fiscal year in which
the initial public offering occurred before having to comply with the
Section 13(q) rules?
7. Case-by-Case Exemption
To address any other potential bases for exemptive relief, beyond
the rule-based exemptions and transitional relief described above, the
proposed rules would provide that issuers may apply for exemptions on a
case-by-case basis using the procedures set forth in 17 CFR 240.0-12
(Rule 0-12 of the Exchange Act).\263\ Issuers seeking an exemption
would be required to submit a written request for exemptive relief to
the Commission. The request should describe the particular payment
disclosures it seeks to omit (e.g., signature bonuses in Country X or
production entitlement payments in Country Y) and the specific facts
and circumstances that warrant an exemption, including the particular
costs and burdens it faces if it discloses the information. The
Commission would be able to consider all appropriate factors in making
a determination whether to grant requests, including whether the
disclosure is already publicly available and whether (and how
frequently) similar information has been disclosed by other companies,
under the same or similar circumstances. If the proposed rules are
adopted, we would anticipate relying on Section 36(a) of the Exchange
Act to provide exemptive relief under this framework. In situations
where exigent circumstances exist, the Commission staff, acting
pursuant to delegated authority from the Commission, could rely on
Exchange Act Section 12(h) \264\ for the limited purpose of providing
interim relief while the Commission considered the Section 36(a)
exemptive application.\265\
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\263\ See proposed Rule 13q-1(d)(4).
\264\ 15 U.S.C. 78l(h).
\265\ See Section 36(a) of the Exchange Act [15 U.S.C. 78mm(a)]
(providing the Commission with broad authority to provide exemptions
when it is necessary or appropriate in the public interest, and it
is consistent with the protection of investors).
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This approach would 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. For example, an issuer could apply for an exemption in
situations where disclosure would have a substantial likelihood of
jeopardizing the safety of an issuer's personnel, or in other
situations posing a significant threat of commercial harm that fall
outside the scope of the proposed rule-based exemptions and
transitional relief described above. 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.
Request for Comment
77. In light of the other proposed exemptions and transitional
relief, should the Section 13(q) rules provide that issuers may apply
for exemptions on a case-by-case basis using the procedures set forth
in Rule 0-12 of the Exchange Act, as proposed?
[[Page 2548]]
K. Exhibits and Interactive Data Format Requirements
As required by Section 13(q), the proposed rules would require a
resource extraction issuer to submit the required disclosure on EDGAR
in an XBRL exhibit to Form SD.\266\ Providing the required disclosure
elements in a machine readable (electronically tagged) format would
enable users easily to extract, aggregate, and analyze the information
in a manner that is most useful to them. For example, it would allow
the information received from the issuers to be converted by EDGAR and
other commonly used software and services into an easily readable
tabular format.
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\266\ 15 U.S.C. 78m(q)(2)(C) and 15 U.S.C. 78m(q)(2)(D)(ii). The
Commission has defined an ``interactive data file'' to be the
interactive data submitted in a machine-readable format. See 17 CFR
232.11; Release No. 33-9002 (Jan. 14, 2009) [74 FR 6776 (Feb. 10,
2009)], 6778, n.50.
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In proposing to require the use of XBRL as the interactive data
format, we note that most commenters on the 2016 Rules Proposing
Release who addressed the issue supported the use of XBRL.\267\
Commenters, however, did not similarly support the use of Inline XBRL,
which is a particular form of XBRL that allows filers to embed XBRL
data directly into an HTML document, eliminating the need to tag a copy
of the information in a separate XBRL exhibit.
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\267\ See 2016 Rules Adopting Release, Section II.K.3.
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The Commission recently proposed to require the use of the Inline
XBRL format for the submission of operating company financial statement
information and mutual fund risk/return summaries.\268\ We are not
proposing to require a resource extraction issuer to use Inline XBRL
when submitting the Section 13(q) payment information. Given the nature
of the disclosure required by the proposed 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.
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\268\ See Release No. 33-10323 (Mar. 1, 2017) [82 FR 13928 (Mar.
15, 2017)].
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Under the proposed rules, and consistent with the statute, a
resource extraction issuer would be required to submit the payment
information in XBRL 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; \269\
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\269\ For example, categories of payments could be royalties,
bonuses, taxes, fees, or production entitlements.
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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.\270\
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\270\ See proposed Item 2.01(a)(5) of Form SD.
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In addition to the electronic tags specifically required by the
statute, a resource extraction issuer would also be required to provide
and tag the type and total amount of payments, by payment type, made
for each project and the type and total amount of payments, by payment
type, for all projects made to each government.\271\ These additional
tags relate to information that is specifically required to be included
in the resource extraction issuer's annual report by Section
13(q).\272\
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\271\ See proposed Item 2.01(a)(5)(i) through (ii).
\272\ See Section 13(q)(2)(A)(i) through (ii).
---------------------------------------------------------------------------
The proposed rules would also require resource extraction issuers
to tag the particular resource that is the subject of commercial
development, the method of extraction, and the country and major
subnational political jurisdiction of the project. While these three
items of information also would be included in the project description,
we believe that having separate tags for these items would further
enhance the usefulness of the data with an insignificant corresponding
increase in compliance costs.
For the country in which the government and project is located and
the major subnational geographic location of a project, we are
proposing that the issuer use a tag that is consistent with the
appropriate ISO code.\273\ As some previous commenters pointed out,
such use would standardize references to those geographic locations and
thereby help to reduce confusion caused by a particular project
description.\274\
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\273\ ISO 3166-1 pertains to countries whereas ISO 3166-2
pertains to major subdivisions in the listed countries.
\274\ See 2016 Rules Adopting Release, Section II.K.3.
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Consistent with the statute, the proposed rules would require a
resource extraction issuer to include an electronic tag that identifies
the currency used to make the payments. The statute also requires a
resource extraction issuer to present the type and total amount of
payments made for each project and to each government, but does not
specify how the issuer should report the total amounts. We believe that
the statutory requirement to provide a tag identifying the currency
used to make the payment, coupled with the requirement to disclose the
total amount of payments by payment type for each project and to each
government, requires issuers to perform currency conversions when
payments are made in multiple currencies.
We are proposing an instruction to Form SD clarifying that issuers
would have 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.\275\ We understand that issuers may have concerns
regarding the compliance costs related to making payments in multiple
currencies and being required to report the information in another
currency.\276\ As we did in the 2016 Rules,\277\ in order to address
those concerns, we are proposing that a resource extraction issuer
would be able to choose to calculate the currency conversion between
the currency in which the payment was made and U.S. dollars or the
issuer's reporting currency, as applicable, in one of three ways:
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\275\ See proposed Instruction 2 to Item 2.01 of Form SD.
Foreign private issuers may currently 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].
\276\ See 2012 Rules Adopting Release, n.485 and accompanying
text.
\277\ See 2016 Adopting Release, Section II.K.1. Only one
commenter addressed the Commission's currency conversion approach in
the 2016 rulemaking. That commenter stated that ``the three proposed
methods for calculating the currency conversion when payments are
made in multiple currencies provide issuers with sufficient options
to address any possible concerns about compliance costs and
comparability of the disclosure among issuers.'' Letter from
Petrobras (Feb. 16, 2016).
---------------------------------------------------------------------------
By translating the expenses at the exchange rate existing
at the time the payment is made;
By using a weighted average of the exchange rates during
the period; or
Based on the exchange rate as of the issuer's fiscal year
end.\278\
---------------------------------------------------------------------------
\278\ See proposed Instruction 2 to Item 2.01 of Form SD.
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Under the proposed rules, a resource extraction issuer would have
to disclose the method used to calculate the currency conversion. In
addition, in order to avoid confusion, we are proposing to require that
an issuer choose a consistent method for all such currency conversions
within a particular Form SD.\279\
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\279\ See id.
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Consistent with the statute, the proposed rules would require a
resource extraction issuer to include an
[[Page 2549]]
electronic tag that identifies the business segment of the resource
extraction issuer that made the payments. We are proposing to define
``business segment'' as a business segment consistent with the
reportable segments used by the resource extraction issuer for purposes
of financial reporting.\280\ Defining ``business segment'' in this way
would enable issuers to report the information according to how they
currently report their business operations, which should help to limit
compliance costs.
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\280\ See proposed Item 2.01(d)(1) of Form SD. The term
``reportable segment'' is defined in FASB ASC Topic 280, Segment
Reporting, and IFRS 8, Operating Segments.
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Finally, to the extent that 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. Issuers
would, however, have to provide all other electronic tags, including
the tag identifying the recipient government.\281\
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\281\ See proposed Instruction 4 to Item 2.01 of Form SD.
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Request for Comment
78. Should we require the resource extraction payment disclosure to
be electronically formatted in XBRL and provided in a new exhibit, as
proposed? We are mindful of concerns about mandating technology that
may one day become outdated. Is there anything we can do to address
this problem in these rules?
79. Should we alter our approach to the exhibit and interactive
data format requirements described above based on any developments
since the adoption of the 2016 Rules or in light of our other proposals
in this release?
80. In addition to the statutorily required tags, should we require
electronic tagging to identify the type of resource, the method of
extraction and the country and major subnational jurisdiction in which
the project is located, as proposed? Would separate tags for these
items be useful even if the information is required to be disclosed in
the project description tag?
L. Alternative Reporting
As noted above, several countries have implemented resource
extraction payment disclosure laws.\282\ In light of these
developments, and with a view towards limiting compliance costs, we are
proposing a provision that would allow issuers to meet the requirements
of the proposed rules, in certain circumstances, by providing
disclosures that comply with a foreign jurisdiction's reporting regime.
Specifically, this provision would apply if the Commission has
determined that the alternate reporting regime requires disclosure that
satisfies the transparency objectives of Section 13(q).\283\ The
Commission proposed a similar approach to alternative reporting in
connection with the 2016 Rules and all of the commenters who addressed
the issue supported this approach.\284\
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\282\ See supra Section I.B.
\283\ See Proposed Item 2.01(c) of Form SD.
\284\ See, e.g., Letter from Africa Centre for Energy Policy
(Feb. 16, 2016); Letter from API (Feb. 16, 2016); Letter from BHP
Billiton (Jan. 25, 2016); Letter from BP (Feb. 16, 2016); Letter
from Calvert Investments (Feb. 16, 2016); Letter from Cleary (Feb.
17, 2016); Letter from Encana Corporation (Jan. 25, 2016); Letter
from Global Witness (Feb. 16, 2016); Letter from PWYP-US (Feb. 16,
2016); Letter from RDS (Feb. 5, 2016); Letter from Ropes & Gray
(Feb. 16, 2017); and Letter from Total (Jan. 13, 2016).
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The proposed provision would allow an issuer subject to resource
extraction payment disclosure requirements in a foreign jurisdiction to
submit the report it prepared under those foreign requirements in lieu
of the report that would otherwise be required by our disclosure rules,
subject to certain conditions. The proposed rules would permit
compliance under this framework only after the Commission has
determined that the foreign reporting regime requires disclosure that
satisfies the transparency objectives of Section 13(q). This framework
for alternative reporting would, at least in part, allow a resource
extraction issuer to avoid the costs of having to prepare a separate
report meeting the requirements of our proposed disclosure rules when
it already submits a report pursuant to another jurisdiction's
requirements deemed by the Commission to satisfy Section 13(q)'s
transparency objectives.
An issuer would only be permitted to use an alternative report for
an approved foreign jurisdiction or regime if the issuer was subject to
the resource extraction payment disclosure requirements of that
jurisdiction or regime and had made the report prepared in accordance
with that jurisdiction's requirements publicly available prior to
submitting it to the Commission.\285\ 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.\286\ The
issuer also would be required to state in the body of its Form SD that
it is relying on this accommodation and identify the alternative
reporting regime for which the report was prepared.\287\
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\285\ See proposed Item 2.01(c)(1) through (2) of Form SD.
\286\ See proposed Item 2.01(c)(2) of Form SD. The format of the
report could differ to the extent necessary to comply with 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.
\287\ See proposed Item 2.01(c)(3) of Form SD.
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In addition, under the proposed rules, the alternative reports must
be tagged using XBRL.\288\ We believe that requiring a consistent data
format for all reports submitted to the Commission would enhance the
ability of users to access the data and create their own compilations
in a manner most useful to them. We also believe that requiring a
consistent data format would better enable the Commission's staff to
provide any additional compilations of Section 13(q) information.\289\
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\288\ See proposed Item 2.01(c)(4) of Form SD.
\289\ We believe that these considerations justify not following
the recommendation of a commenter on the 2016 Rules Proposing
Release that we not require issuers to convert data into a different
interactive data format to qualify for alternative reporting. See
letter from BHP Billiton (Jan. 25, 2016).
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An issuer relying on the proposed alternative reporting
accommodation must also provide a fair and accurate English translation
of the entire report if prepared in a foreign language.\290\ Given the
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.\291\
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\290\ See proposed Item 2.01(c)(5) of Form SD.
\291\ 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 could be provided in lieu of an
English translation.
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Other than the XBRL and English translation requirements, an issuer
that elects to use the alternative reporting option would not be
required to meet a requirement under the proposed rules to the extent
that the alternative reporting regime imposes a different requirement.
Similar to the 2016 Rules, a resource extraction issuer would be
able to follow the submission deadline of an approved alternative
jurisdiction if it
[[Page 2550]]
submits a notice on or before the due date of its Form SD indicating
its intent to submit the alternative report using the alternative
jurisdiction's deadline.\292\ If a resource extraction issuer fails to
submit such notice on a timely basis, or submits such a notice but
fails to submit the alternative report within four business days of the
alternative jurisdiction's deadline, as proposed, it would not be able
to rely on the alternative reporting accommodation for the following
fiscal year.\293\
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\292\ See proposed Item 2.01(c)(6) of Form SD.
\293\ See id.
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We anticipate making determinations about whether a foreign
jurisdiction's disclosure requirements satisfy Section 13(q)'s
transparency objectives either on our own initiative or pursuant to an
application submitted by an issuer or a jurisdiction. We would then
publish the determinations in the form of a Commission order.\294\
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\294\ Concurrently with the 2016 Rules Adopting Release, the
Commission issued an order stating that a resource extraction issuer
that files a report complying with the reporting requirements of the
EU Directives, ESTMA, and the USEITI would satisfy its disclosure
obligations under Rule 13q-1. See Release No. 34-78169 (Jun. 16,
2016) [81 FR 49163] (July 27, 2016) (placing certain additional
conditions on the use of USEITI reports because they are limited to
disclosure of payments to the Federal Government and follow a
different reporting schedule). See also 2016 Rules Adopting Release,
Section II.J.3.b.
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We anticipate considering, among others, the following criteria in
determining whether a foreign jurisdiction's reporting regime requires
disclosure that satisfies Section 13(q)'s transparency objectives: (1)
The types of activities that trigger disclosure; (2) the types of
payments that are required to be disclosed; and (3) whether project-
level disclosure is required and how ``project'' is defined. We also
anticipate considering other factors as appropriate or necessary under
the circumstances.
Applications could be submitted by issuers, governments, industry
groups, and trade associations.\295\ Applicants would follow the
procedures set forth in Rule 0-13 of the Exchange Act to request
recognition of other jurisdictions' reporting regimes as satisfying
Section 13(q)'s transparency objectives.\296\ Under the proposed rules,
the application would have to include supporting documents, and it
would be referred to the Commission's staff for review.\297\ The
Commission would publish a notice in the Federal Register that a
complete application has been submitted and allow for public comment.
The Commission could also, in its sole discretion, schedule a hearing
before the Commission on the matter addressed by the application.
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\295\ See proposed Rule 13q-1(c).
\296\ Rule 0-13 (17 CFR 240.0-13) permits an application to be
filed with the Commission to request a ``substituted compliance
order'' under the Exchange Act.
\297\ Id.
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Request for Comment
81. Should we include a provision in the rules that would allow for
issuers subject to reporting requirements in certain foreign
jurisdictions to submit those reports in satisfaction of our
requirements, as proposed? Are the conditions we have proposed for the
use of the alternative reports, such as providing a fair and accurate
English translation and requiring the information to be tagged using
XBRL, appropriate? For example, should a resource extraction issuer be
precluded from relying on the alternative reporting accommodation for
the following fiscal year if it fails to submit notice on a timely
basis that it intends to submit an alternative report using the
alternative jurisdiction's deadline, as proposed? Should it be
precluded from relying on the alternative reporting accommodation for
the following fiscal year if it submits such notice but fails to submit
the alternative report within four business days of the alternative
jurisdiction's deadline, as proposed? Should we provide more than four
days after the submission deadline of the approved alternative
jurisdiction for a resource extraction issuer to submit the alternative
report? If so, what should that time period be? Should we alter our
approach based on any developments since the adoption of the 2016 Rules
or in light of our other proposals in this release?
82. Are the criteria that we have proposed to determine whether
another foreign jurisdiction's reporting regime requires disclosure
that satisfies the transparency objectives of Section 13(q)
appropriate? Are there certain criteria that we should eliminate or
substitute for any of the criteria discussed in this proposing release?
If so, which criteria and why?
83. Given the development of resource extraction payment disclosure
rules in various jurisdictions, is there any reason why, when a final
rule is adopted, we should not make a determination regarding whether
certain foreign reporting regimes satisfy Section 13(q)'s transparency
objectives? If we should decide to make such a determination, which
jurisdictions should we consider? Would the proposed, broader
definition of ``project'' allow for jurisdictions other than the
European Union and Canada to be deemed alternative reporting regimes
that satisfy the transparency objectives of Section 13(q)?
M. Treatment for Purposes of the Exchange Act and Securities Act
The proposed rules would consider the disclosure provided pursuant
to Section 13q-1 on Form SD as furnished to, but not filed with, with
the Commission.\298\ The Commission originally proposed a similar
approach in the 2012 Rules Proposing Release, but chose to require the
disclosure to be filed in both of the subsequent adopting
releases.\299\ In previously determining that the information should be
``filed,'' the Commission noted that the statute defines ``resource
extraction issuer'' in part to mean an issuer that is required to file
an annual report with the Commission.\300\ This could suggest that the
annual report that includes the required payment information should be
filed.\301\ On the other hand, and as the Commission noted in the 2012
Rules Proposing Release, Section 13(q) does not specifically state how
the information should be submitted, nor does it state that the
disclosure be included in the annual reports that are customarily filed
with the Commission, such as Form 10-K, Form 20-F, or Form 40-F.\302\
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\298\ The proposed rules would use the term ``furnished'' when
referring to the requirement to submit Form SD to provide Section
13(q) payment information to the Commission. See also proposed
General Instruction B.3 to Form SD (stating that, for purposes of
Rule 13q-1, the information and documents furnished on Form SD shall
not be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, unless a registrant
specifically incorporates it by reference into such filing).
\299\ See 2012 Rules Proposing Release, Section II.F.3; 2012
Rules Adopting Release, Section II.F.3; and 2016 Rules Adopting
Release, Section II.L.3.
\300\ 15 U.S.C. 78m(q)(1)(D)(i).
\301\ See Letters from Global Witness (Feb. 25, 2011); Publish
What You Pay U.S. (Feb. 25, 2011); and Senator Benjamin Cardin,
Senator John Kerry, Senator Patrick Leahy, Senator Charles Schumer,
and Representative Barney Frank (Mar. 1, 2011).
\302\ See 2012 Proposing Release, Section II.F.3.
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In previous releases the Commission also looked at the nature of
the disclosure and its likely materiality to investors to determine
whether it should be filed. In the 2012 Rules Proposing Release, the
Commission explained its proposal that the information be deemed
furnished by noting that the nature and purpose of the disclosure
required by Section 13(q) is qualitatively different from the nature
and purpose of existing disclosure that has historically been required
under Section 13 of the Exchange Act. In subsequent releases, however,
the Commission stated that because materiality is a fact specific
inquiry, it
[[Page 2551]]
was not persuaded that the nature of this disclosure should be
determinative that the information should not be deemed filed.\303\
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\303\ See, e.g., 2016 Rules Adopting Release, Section II.L.
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We recognize that compelling arguments can be made on both sides of
this policy choice.\304\ Given the concerns expressed by commenters and
members of Congress regarding the burdens and costs of the required
disclosure, and the CRA's restriction on issuing rules in substantially
the same form as the 2016 Rules, we are proposing to treat the
disclosure provided on Form SD pursuant to Rule 13q-1 as furnished to,
but not filed with, the Commission. This approach would eliminate the
possibility of Section 18 liability for the disclosure. It would also
eliminate the possibility that the disclosure would be incorporated by
reference into a filing under the Securities Act of 1933 (the
``Securities Act'') and be potentially subject to strict liability
under Section 11 of the Securities Act, unless the issuer expressly
incorporated such information.\305\
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\304\ For example, commenters who believed that the Section
13(q) information should be deemed ``filed'' maintained that
investors would benefit from the payment information being subject
to Exchange Act Section 18 liability. Other commenters asserted that
allowing the information to be furnished would diminish the
importance of the information while requiring it to be filed would
enhance the quality of the disclosure and ensure that it could be
used reliably for investment analysis and other purposes. Commenters
who favored treating the Section 13(q) disclosure as ``furnished''
emphasized that, in contrast to disclosure that is typically
required to be filed under Section 13, the nature and purpose of the
Section 13(q) disclosure requirements are not primarily for the
protection of investors but, rather, to increase the accountability
of governments for the proceeds they receive from their natural
resources and to support international transparency promotion
efforts relating to the commercial development of oil, natural gas,
or minerals, and that users of the payment information did not need
the level of protection associated with Section 18 liability. See
2012 Adopting Release, Section II.F.3.b.; and 2016 Adopting Release,
Section II.L.2.
\305\ For example, Form S-3 requires reports ``filed'' pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to
the termination of the offering to be incorporated by reference into
the prospectus. Although Form SD would be the form used for
disclosures under Section 13(q), Section 15(d) of the Exchange Act
refers generally to periodic information, documents, and reports
required by Section 13 reports with respect to securities registered
under Section 12, not simply Section 13(a) reports. Thus, if Form SD
were deemed ``filed,'' it could raise concerns that the payment
disclosure would be incorporated by reference into a Securities Act
filing.
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Accordingly, we believe that deeming payment information provided
on Form SD as not ``filed,'' along with the other proposed changes to
the 2016 Rules, would serve to address the concerns expressed by
commenters and members of Congress about the costs and burdens of
disclosure under the disapproved rules. At the same time, we believe
that this change would not significantly undermine the transparency
objectives of Section 13(q), as it would limit the liability associated
with the required disclosures but not the content of those disclosures.
Moreover, we note that, under the proposed rules, Section 13(q)
disclosures would continue to be subject to the Exchange Act's general
antifraud provisions.\306\
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\306\ See, e.g., Section 10(b) of the Exchange Act and Rule 10b-
5 thereunder.
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Request for Comment
84. Should we deem the resource extraction payment disclosure as
furnished to, but not filed with, the Commission, as proposed?
N. Compliance Date
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).\307\ The proposed rules
would 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 final rules.
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\307\ 15 U.S.C. 78m(q)(2)(F).
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The proposed two-year transition period is the same as the
transition period in the 2016 Rules. While we believe that the proposed
rules would meaningfully reduce the compliance costs and burdens for
issuers compared to the 2016 Rules, issuers that have not previously
been subject to an alternative reporting regime would likely have to
modify their internal systems to track, record and report the required
payment information. The proposed two-year transition period should
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. It
also should afford issuers an opportunity to make any other necessary
arrangements to comply with Section 13(q) and the proposed rules, such
as consulting with counsel on conflicts with foreign law or contractual
terms, or seeking exemptive relief in other situations.
We are also proposing to select a specific compliance date that
corresponds to the end of the nearest calendar quarter following the
effective date. For example, if the rules were adopted on December 18,
2019, the compliance date for an issuer with a December 31, 2019,
fiscal year end would be Tuesday, May 31, 2022 (i.e., 150 days after
its fiscal year end of December 31, 2021, which falls on Monday, May
30, 2022, and taking account of the Memorial Day holiday).
Request for Comment
85. Is the proposed transition period and compliance date
appropriate? Should we instead adopt a shorter or longer transition
period? If so, what should that transition period be and why?
86. Should the rules provide for a longer transition period for
certain categories of resource extraction issuers, such as foreign
private issuers, so as to provide them additional time to prepare for
the disclosure requirements and the benefit of observing how other
companies comply?
O. General Request for Comment
We request and encourage any interested person to submit comments
regarding:
The proposed rules and amendments that are the subject of
this release;
Potential additions or changes to these proposals; or
Other matters that may have an effect on the proposals,
particularly any developments since Congress disapproved the 2016 Rules
pursuant to the CRA.
We request comment from the points of view of all interested
parties. With regard to any comments, we note that such comments are of
great assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.
III. Economic Analysis
A. Introduction and Baseline
As discussed above, Section 13(q) mandates a new disclosure
provision under the Exchange Act that requires resource extraction
issuers to identify and report payments they make to foreign
governments or the U.S. Federal Government relating to the commercial
development of oil, natural gas, or minerals. It does so to help
promote accountability and combat corruption within resource-rich
countries.
We are sensitive to the costs and benefits of the rules we are
proposing, and Exchange Act Section 23(a)(2) requires us to consider
the impact that any new rule would have on
[[Page 2552]]
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.
We have considered the costs and benefits that would result from
the proposed rules, as well as the potential effects on efficiency,
competition, and capital formation. Many of the potential economic
effects of the proposed rules would stem from the statutory mandate,
while others would stem from the discretion we are exercising in
implementing the statutory mandate. As noted above, our discretionary
choices have been informed, in part, by the disapproval of the 2016
Rules under the CRA, and in particular, the concerns expressed by
members of Congress about the compliance costs and burdens of the 2016
Rules and the CRA's restriction on promulgating a substantially similar
rule.\308\ The discussion below addresses the costs and benefits that
might result from both the statute and our discretionary choices, as
well as the comments the Commission received about these matters in the
2016 rulemaking.\309\
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\308\ Members of Congress who supported the resolution of
disapproval expressed the view that the 2016 Rules would impose
undue compliance costs on companies, undermine job growth and burden
the economy, and impose competitive harm to U.S. companies relative
to foreign competition. See supra Section I.C.
\309\ Because our discretionary choices are informed by the
statutory mandate, our discussion of the benefits and costs of those
choices necessarily involves the benefits and costs of the
underlying statute.
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The baseline the Commission uses to analyze the potential effects
of the proposed rules is the current set of legal requirements and
market practices.\310\ To the extent not already encompassed by
existing regulations and current market practices, the proposed rules
likely would have a significant impact on the disclosure practices of,
and compliance costs faced by, resource extraction issuers. The overall
magnitude of the potential costs of the proposed disclosure
requirements will depend on the number of affected issuers and
individual issuers' costs of compliance. In addition, the proposed
rules could impose burdens on competition, although as discussed
elsewhere in this release, the changes we are making from the 2016
Rules are intended to mitigate those burdens. We expect that the
proposed rules would affect both U.S. issuers and foreign issuers that
meet the definition of ``resource extraction issuer'' in much the same
way, except for those issuers already subject to requirements adopted
in the EEA member countries or Canada, as discussed above in Section
I.B. The discussion below describes the Commission's understanding of
the markets and issuers that would be affected by the proposed
rules.\311\
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\310\ See supra Sections I.A. through C. for a discussion of the
current legal requirements and significant international
transparency promotion regimes that affect market practices.
\311\ In addition to our analysis against the baseline, we have
noted where the proposed rules differ in their economic effects from
the 2016 Rules to illustrate why we think those choices address the
concerns expressed by members of Congress about the 2016 Rules'
costs and potential competitive harm. To be clear, however, our
assessment of the proposed rules' economic effects is measured
against the current state of the world in which issuers are not
required by U.S. law to disclose resource extraction payments.
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To estimate the number of potentially affected issuers, we use data
from Exchange Act annual reports for the period January 1, 2018,
through September 30, 2019. We consider all Forms 10-K, 20-F, and 40-F
filed during this period by issuers with oil, natural gas, and mining
Standard Industrial Classification (``SIC'') codes \312\ and thus are
most likely to be resource extraction issuers. We also consider filings
by issuers that do not have the above-mentioned oil, natural gas, and
mining SIC codes and add them to the list of potentially affected
issuers if we determine that they might be affected by the proposed
rules.\313\ In addition, we attempt 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 exclude 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 proposed rules.
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\312\ 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.
\313\ 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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From these filings, we estimate that the number of potentially
affected issuers is 677. We note that this number does not reflect the
number of issuers that actually made resource extraction payments to
governments in the period under consideration but rather represents the
estimated number of issuers that might make such payments. It is
possible that some potentially affected issuers, as a response to the
Section 13(q) rules, may decide it is necessary to delist from an
exchange in the United States, deregister, and cease reporting with the
Commission to avoid the potential compliance costs. We believe,
however, that such a scenario is unlikely given the higher cost of
capital and potentially limited access to capital in the future that
issuers who deregister would incur.
In determining which issuers are likely to bear the full costs of
compliance with the proposed rules, we make three adjustments to the
list of affected issuers. First, we exclude issuers that are smaller
reporting companies and emerging growth companies since the proposed
rules provide an exemption for those issuers. Second, we exclude
issuers that are subject to disclosure requirements in foreign
jurisdictions that generally require more granular disclosure than the
proposed rules and therefore likely already are bearing compliance
costs for such disclosure. Third, we exclude small issuers that likely
could not have made any payment above the de minimis amount of $750,000
to any government entity in the period January 1, 2018 through
September 30, 2019.
First, among the 677 issuers that we estimate would be affected by
the proposed rules, 211 reported being smaller reporting companies
(SRCs) and 191 reported being emerging growth companies (EGCs) in the
period January 1, 2018, through September 30, 2019. There are 84
issuers that reported both SRC and EGC status during this period.
Subtracting the SRCs and EGCs (total of 318) from the sample of 677
potentially affected issuers results in 359 issuers that would be
subject to the requirements of the proposed rules.
To address the second consideration, we searched the filed annual
forms for issuers that have a business address, are incorporated, or
are listed on markets in the EEA or Canada.\314\ For purposes of our
analysis, we assume that issuers in these jurisdictions already are
providing more granular resource extraction payment disclosure than the
disclosure that would be required by the proposed rules and thus that
the additional costs to comply with the proposed rules would be much
lower than costs for
[[Page 2553]]
other issuers.\315\ We identified 109 such issuers.
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\314\ We assume that an issuer is 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 criterion is a proxy for multipronged eligibility
criteria underlying both EEA and Canadian rules that include issuer
assets, revenues, and the number of employees.
\315\ We are proposing an alternative reporting option for
resource extraction issuers that are subject to foreign disclosure
requirements that the Commission determines satisfy the transparency
objectives of Section 13(q). See infra Section III.C.4. for a
discussion concerning how this alternative reporting option could
potentially reduce compliance costs to a negligible amount for
eligible issuers.
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Third, among the remaining 250 issuers (i.e., 359 minus 109) 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 $750,000.
Under these 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 proposed
reporting requirements. We identified 14 such issuers.
Taking these estimates of the number of excluded issuers together,
we estimate that approximately 236 issuers (i.e., 677 minus 318 minus
109 minus 14) would bear the full costs of compliance with the proposed
rules.\316\
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\316\ 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
under the proposed 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 proposed rules.
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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 proposed rules.\317\ We
analyze these potential economic effects through a qualitative
discussion of the potential costs and benefits that might result from
the payment reporting requirement (Sections III. B and III.C) and our
specific implementation choices (Section III.D), respectively.
---------------------------------------------------------------------------
\317\ 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.
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Although aspects of the proposed rules are similar to the 2016
Rules, we have proposed several changes that we believe would have a
significant effect on the resulting compliance costs and burden. These
proposed changes include: (1) The Modified Project Definition, which
requires disclosure at the national and major subnational political
jurisdiction, as opposed to the contract, level; (2) the addition of
two new conditional exemptions for situations in which a foreign law or
a pre-existing contract prohibits the required disclosure; (3)
revisions to the definition of ``control'' to exclude entities or
operations in which an issuer has a proportionate interest; (4)
limitations on liability for the required disclosure by deeming the
payment information to be furnished to, but not filed with, the
Commission; (5) the addition of an instruction in Form SD that would
permit an issuer to aggregate payments by payment type made at a level
below the major subnational government level; (6) revisions to the
filing deadline; and (7) the addition of transitional relief for
issuers that have recently completed their U.S. initial public
offerings. As explained below, we preliminarily believe that these
proposed changes would meaningfully reduce the compliance costs and
burden for issuers compared to the compliance costs and burden
estimated for the 2016 Rules.\318\
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\318\ We also are proposing two additional changes to the 2016
Rules, which should further help to reduce the proposed rules'
compliance costs or their potential for competitive harm. One change
would provide transitional relief for issuers that have recently
completed their U.S. initial public offerings. The other change
would define ``not de minimis'' to mean any payment made to each
foreign government in a host country or the Federal Government that
equals or exceeds $150,000, subject to the condition that payment
disclosure for a project is only required if the total project
payments equal or exceed $750,000.
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B. Potential Benefits Resulting From the Payment Reporting Requirement
Section 13(q) seeks to combat global corruption by improving
transparency about the payments that companies in the extractive
industries make to foreign governments and the Federal Government.
While these statutory goals and intended benefits are of potential
global significance, the potential positive economic effects that may
result cannot be readily quantified with any precision. The current
empirical evidence on the direct causal effect of increased
transparency in the resource extraction sector on societal outcomes is
inconclusive,\319\ and several academic papers have noted the inherent
difficulty in empirically validating a causal link between transparency
interventions and governance improvements.\320\ Additionally, some
countries may change their behavior as a result of the adoption of the
proposed rules in a way that diminishes the potential benefits of the
rules. For example, some foreign jurisdictions may prefer to deal with
companies that are not subject to the Section 13(q) disclosure
requirements, or take steps to prohibit such disclosure.
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\319\ 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 in the 2016
rulemaking attaching an updated version of the study; see Letter
from Caitlin C. Corrigan (Feb. 16, 2016))); 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, 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 inflow to GDP by two percentage
points); Paul F. Villar and Elissaios Papyrakis, ``Evaluating the
Impact of the Extractive Industries Transparency Initiative (EITI)
on Corruption in Zambia. The Extractive Industries and Society,
(2017), forthcoming (finding that EITI implementation reduced
corruption in Zambia); Elissaios Papyrakis, Matthias Rieger, and
Emma Gilberthorpe, ``Corruption and the Extractive Industries
Transparency Initiative,'' Journal of Development Studies, 53
(2017), 295-309 (finding that EITI reduces corruption). For negative
findings, 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); Benjamin J.
Sovacool, Goetz Walter, Thijs Van De Graaf, and Nathan Andrews,
``Energy Governance, Transnational Rules, and the Resource Curse:
Exploring the Effectiveness of the Extractive Industries
Transparency Initiative (EITI),'' World Development, 83 (2017), 179-
192 (finding that the first 16 countries that attained EITI
compliance do not perform better than other countries or their own
past performance in terms of accountability, political stability,
government effectiveness, regulatory quality, rule of law,
corruption, foreign direct investment, and GDP growth); Kerem Oge,
``Which transparency matters? Compliance with anti-corruption
efforts in extractive industries,'' Resources Policy, 49 (2016), 41-
50 (finding that EITI disclosure had no significant effect on
corruption in EITI countries).
\320\ 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; 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.
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In response to the 2016 Rules Proposing Release, we received
several comments on quantifying the potential
[[Page 2554]]
economic benefits of the rules that we discuss in detail below.\321\
Although these comments presented studies that attempt to quantify
those benefits, as discussed below, all have certain limitations that
we believe prevent us from relying on them to quantify the proposed
rules' potential to improve accountability and governance in resource-
rich countries. Furthermore, no other commenters included reliable data
that would allow us to quantify the potential economic benefits of the
proposed rules or suggested a source of data or a methodology that we
could readily look to in doing so.
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\321\ See Letter from Profs. Anthony Cannizzaro & Robert Weiner
(Feb. 11, 2016) (``Cannizzaro & Weiner''). See also Letter from API
(Feb. 16, 2016) and Letter from Publish What You Pay--US (third of
three letters on Mar. 8, 2016) (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 important to note, however, that Congress has directed us to
promulgate a rule requiring disclosure of resource extraction payments.
Thus, in assessing the potential benefits resulting from the rule, we
believe it reasonable to rely on Congress' determination that such a
rule will produce the foreign policy and other benefits discussed above
that Congress sought in imposing this mandate.\322\ In that regard, we
note that Congress did not repeal the mandate under Section 13(q), and
in fact, some members of Congress who supported the joint resolution to
disapprove the 2016 Rules also expressed their ``strong support'' for
the transparency and anti-corruption objectives of the rules.
---------------------------------------------------------------------------
\322\ We note that these intended benefits differ from the
investor protection benefits that our disclosure rules typically
strive to achieve.
---------------------------------------------------------------------------
We further note that none of the industry commenters in the 2016
rulemaking expressed the view that the disclosures required by Section
13(q) would fail to help produce anti-corruption and accountability
benefits. Indeed, several commenters expressly acknowledged that
transparency produces such benefits (notwithstanding the inability to
quantify those benefits reliably). 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.'' \323\ 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.'' \324\ 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.'' \325\
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\323\ See Letter from BHP Billiton (Jan. 25, 2016).
\324\ See Letter from Chevron (Feb. 16, 2016).
\325\ See Letter from Eni SpA (Jan. 31, 2016).
---------------------------------------------------------------------------
To the extent that the Section 13(q) disclosures increase
transparency and reduce corruption, they could increase efficiency and
capital formation either directly abroad or indirectly in the United
States. 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
proposed 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 do 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.\326\ 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.\327\
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\326\ See, e.g., reviews by P. Bardhan, ``Corruption and
Development: A Review of Issues,'' Journal of Economic Literature,
35, no. 3, 1320-1346 (1997); J. Svensson, ``Eight Questions about
Corruption,'' Journal of Economic Perspectives, 19, no. 3, 19-42
(2005) (``Svensson Study'').
\327\ 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); 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).
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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.\328\ Other
studies find that corruption reduces economic growth both directly and
indirectly, through lower investments.\329\ 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.\330\ A commenter on the 2016 Rules cited
its own study suggesting that high levels of corruption (measured by
bribery) correspond to lower levels of economic development.\331\ The
study
[[Page 2555]]
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 even small improvements in a country's governance resulted in
higher income and lower infant mortality rates in the long run.\332\
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\328\ 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).
\329\ 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); Pierre-
Guillaume M[eacute]on and Khalid Sekkat, ``Does corruption grease or
sand the wheels of growth?'' Public Choice 122, 69-97 (2005).
\330\ 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); 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).
\331\ See Letter from Transparency International-USA (Feb. 16,
2016).
\332\ See id., referring to Daniel Kaufmann, ``Governance
Matters 2010: Worldwide Governance Indicators Highlight Governance
Successes, Reversals and Failures,'' available at http://www.brookings.edu/research/opinions/2010/09/24-wgi-kaufmann.
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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.\333\
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\333\ 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); 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 prior 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 under 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.\334\ 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, however, do
discuss corruption in general and its effect on economic growth. In
fact, some specifically discuss the type of corruption addressed by the
statute and proposed rules.\335\ Furthermore, to the extent that
Section 13(q) disclosures are successful in reducing corruption in the
form of misuse of funds, they could also reduce quid pro quo
corruption. For example, if Section 13(q) and the related rules enable
citizens and society to monitor the government and issuers more
strictly, they may become less likely 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 later, after the payment
is made.
---------------------------------------------------------------------------
\334\ See Letter from API (Feb. 16, 2016).
\335\ See, e.g., Svensson Study at n.326 above, which defines
corruption as misuse of public office for private gain. This study
cites examples of corruption that are similar to the types of
corruption the proposed rules seek to address.
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We also note that global transparency efforts such as the EITI and
others 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. Many studies suggest a possible link between improvements in
transparency, which they measure as a resource-rich country joining the
EITI, and increases in GDP and net foreign direct investments,
reduction in conflict and unrest, and effects on economic
development.\336\ The causal mechanisms involved, however, are complex
(impacted by myriad factors) and it may take several decades before
those mechanisms yield empirically verifiable social gains. While some
of these studies provide useful insight into the potential benefits to
be derived from resource payment transparency regimes, 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.
Additionally, other factors could affect both corruption and economic
development (e.g., a country's institutions), making it difficult to
detect a causal relationship between the former and the latter.
---------------------------------------------------------------------------
\336\ See Letter from C. Corrigan (Feb. 16, 2016) (referring to
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); Letter from PWYP-US (Feb. 16, 2016) (referring to
Fernando Londo[ntilde]o, ``Does Joining the Extractive Industries
Transparency Initiative Have an Impact on Extractive and Non-
Extractive FDI Inflows?'' (2014), available at http://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 http://archiv.ub.uni-heidelberg.de/volltextserver/14368/1/Schmaljohann_2013_dp538.pdf (``Schmaljohann
Study'')); Letter from ONE Campaign (Mar. 16, 2016).
---------------------------------------------------------------------------
Notwithstanding the foregoing views, we believe the direct
incremental benefit to investors from the Section 13(q) disclosures may
be limited. Most impacted issuers, other than smaller reporting
companies, are already required to disclose their most significant
operational and financial risks \337\ as well as certain financial
information related to the geographic areas in which they operate, in
their Exchange Act annual reports.\338\
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\337\ See Items 305 and 503 of Regulation S-K, (17 CFR 229.305
and 229.503).
\338\ See Item 101(d) of Regulation S-K (17 CFR 229.101(d)).
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C. Potential Costs Resulting From the Payment Reporting Requirement
The disclosures required by Section 13(q) could result in direct
and indirect compliance costs and competitive effects for affected
issuers. The direct compliance costs would stem from the anticipated
need to modify issuers' core enterprise resource planning systems and
financial reporting systems to capture and report payment data at the
project level, for each type of payment, government payee, and currency
of payment, to the extent that such payments are not currently tracked
by the issuers' reporting systems. Examples of modifications that may
be necessary include establishing additional granularity in 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 different types
of payment (e.g., royalties, taxes, or bonuses), and developing a
systematic approach to handle ``in-kind'' payments.
In addition, we anticipate that the statutory reporting
requirements could result in indirect costs and competitive 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 payment reporting requirements under
the U.S. Federal securities laws or analogous foreign disclosure
regimes. 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. Governments of host countries could try to
avoid Section 13(q) payment disclosure by either prohibiting it
outright, or by changing their preferences in favor of dealing with
private and foreign companies that do not have such reporting
obligations. We are unable to estimate how many governments of
[[Page 2556]]
resource-rich host countries would try to avoid Section 13(q) payment
disclosure, and by what means.
Commenters in the 2016 rulemaking were split in their opinion on
the competitive effect of payment information disclosure. Some
commenters argued that confidential production and reserve data could
be derived by competitors or other interested persons with industry
knowledge by extrapolating from the payment information required to be
disclosed.\339\ 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.\340\
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\339\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
\340\ See Letters from PWYP-US (Feb. 16, 2016) and Oxfam America
(Feb. 16, 2016).
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Whatever the effect, any competitive impact arising from Section
13(q)'s mandated disclosures should be substantially reduced to the
extent that companies are required to disclose payment information in
other jurisdictions, such as the European Union and Canada, which have
adopted laws that require more granular disclosure than that required
by Section 13(q) and the proposed rules.\341\ In that regard, the
proposed rules may provide competitive advantages to U.S. issuers that
are subject to the proposed rules but not subject to the European Union
and Canadian regimes. This is because companies are required to
disclose more granular payment information under the European Union and
Canadian disclosure regimes and those regimes cover a wider pool of
affected issuers (i.e., both registered issuers and large private
issuers are subject to payment disclosure in these regimes). We note,
however, that if industry commenters are accurate in their assessment
of the competitive effects arising from such disclosure requirements,
U.S. issuers that are subject to the proposed rules but not subject to
the EU Directives or other international disclosure regimes might lose
some of the competitive advantage they might enjoy but for the proposed
rules.
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\341\ 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).
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Some commenters on the 2016 Rules suggested that we permit issuers
to submit payment data confidentially to the Commission and make public
only an aggregated compilation of the information.\342\ These
commenters stated that such an approach would address many of their
concerns about the disclosure of commercially sensitive information or
information that companies were legally or contractually prohibited
from disclosing and would significantly mitigate the costs of the
mandatory disclosure under Section 13(q). Although we are not proposing
this approach, we consider the costs and benefits of this alternative
means of implementation in Section III.D.4 below.
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\342\ See, e.g., Letter from API (Feb. 16, 2016); Chevron
(February 16, 2016); Exxon (February 16, 2018).
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The proposed rules differ from the 2016 Rules in that they include
a definition of project that is not contract-based and that would allow
for greater aggregation of payment information than under the 2016
Rules. The proposed rules also include two new exemptions for conflicts
with foreign law and contract prohibitions, in addition to the targeted
exemption for payments made in connection with exploratory activities
that was included in the 2016 Rules.\343\ Furthermore, the proposed
rules would permit an issuer to aggregate payments by payment type made
at a level below the major subnational level (e.g., at the county or
municipality level) and disclose such payments without having to
identify the particular subnational government payee. Together, we
believe that these provisions would significantly alleviate, and in
some cases could eliminate, the potential for competitive harm under
the Section 13(q) rules. We also note that in situations involving more
than one payment, the information would be aggregated by payment type,
government, and/or project, which may further limit the ability of a
company's competitors to use the publicly disclosed information to
their advantage.
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\343\ As discussed below, the proposed rules also include
transitional relief for newly acquired companies and newly public
companies that should further limit the compliance burdens
associated with the rules.
---------------------------------------------------------------------------
We discuss below the significant choices we have made to implement
the statutory requirements that are the main drivers of the direct and
indirect compliance costs and of the proposed rules' competitive
effects. We then discuss the associated benefits and costs of those
choices. In that regard, 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. We are asking commenters to provide us with empirical
evidence that will allow us to evaluate these various choices.
D. Discussion of Discretionary Choices
1. 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 proposed rules define
``project'' using a three-pronged definition: (1) The type of resource
being commercially developed; (2) the method of extraction; and (3) the
major subnational political jurisdiction where the commercial
development of the resource is taking place.
[[Page 2557]]
The definition of ``project'' appears to be a major determinant of
issuers' costs resulting from the Section 13(q) rules. First, the
definition can affect the extent of direct compliance costs imposed on
affected issuers. The extent of this effect depends on the degree to
which issuers' financial and reporting systems use a different
definition of project (or no definition at all) compared to the one
included in the proposed rules. A number of commenters pointed out that
the more granular contract-based definition of ``project'' that was
proposed in the 2016 Rules would require modifications to issuers' core
enterprise resource planning systems and financial reporting systems to
capture and report payment data for each type of payment, government
payee, and currency of payment.\344\ We also note that some commenters
on the 2016 rulemaking questioned the assertion that the definition of
``project'' would increase compliance costs. They argued that most
issuers already have internal systems in place for recording payments
that would be required to be disclosed under Section 13(q), or that any
adjustments to issuers existing reporting systems needed because of
Section 13(q) could be done in a timely and cost-effective manner.\345\
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\344\ See 2016 Rules Adopting Release, Section III.B.2., citing
Letters from API (Jan. 28, 2011); ExxonMobil (Jan. 31, 2011); and
RDS (Jan. 28, 2011).
\345\ See id., citing Letters from EarthRights International
(Sept. 20, 2011); Global Witness (Feb. 25, 2011); and Publish What
You Pay U.S. (Feb. 25, 2011).
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Second, the definition of ``project'' could potentially create
indirect costs in the form of competitive harm for affected issuers.
Such competitive harm could occur if the definition of ``project''
reveals sensitive and proprietary commercial information to
competitors. For example, several commenters in the 2016 rulemaking
suggested that a contract-based definition of ``project'' would result
in the loss of trade secrets and intellectual property more
generally.\346\ One commenter stated that trade secrets and
intellectual property were especially valuable in the resource
extraction industry because of the large sunk costs investments and
uncertain, long-term payoffs.\347\ According to some industry
commenters, a 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. Commenters on the 2016 rulemaking
also stated that a contract-based definition of ``project'' would allow
competitors to reverse-engineer 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.\348\ In contrast with these views, we note that several
commenters in the 2016 rulemaking disputed the assertion that the
contract-based definition of ``project'' would create any competitive
disadvantages to affected issuers.\349\
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\346\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
\347\ See Letter from API (Feb. 16, 2016).
\348\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
\349\ See, e.g., letters from PWYP-US (Feb. 16, 2016) (stating
that the required payment information would not disclose
competitively sensitive information because such information would
not include contractual relationships with downstream processors,
the contribution of the project to the overall profitability of the
reporting issuer, trade secrets, and techniques related to
intellectual property; and denying both that payment transparency is
a decisive factor in competitive bidding processes with host states
to access resources, and that project payment disclosure can be used
by competitors to reverse-engineer commercial terms and succeed in
future bids); see also Global Witness (Mar. 8, 2016). See also
letter from Global Witness (Mar. 8, 2016) (asserting that ``there is
no merit to the claim that US companies would lose out to unlisted
state companies as a result of this rule. In fact, most of the
largest state-owned companies are listed on US and/or European stock
exchanges and would therefore be subject to the same rules as other
US and European issuers.'')
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The Modified Project Definition represents a major change from the
definition adopted by the 2016 Rules. We believe that it should
significantly alleviate direct and indirect compliance costs, including
potential competitive harm, for affected issuers. With respect to
direct compliance costs, the proposed definition of ``project'' would
allow an issuer to make the payment disclosure at a higher level of
aggregation than under the 2016 Rules' contract-based definition.
Instead of tracking, recording, and disclosing payment information at
the single contract, license, or lease level, under the proposed
definition, affected issuers would have to report this information at
the resource type, extraction method, and the major subnational
political jurisdiction level. This higher level of information
aggregation should lower the cost of providing the required payment
disclosure because there would be fewer individual data points to be
electronically tagged and reported.\350\ It should also make it easier
for the issuer to report the payment information.
---------------------------------------------------------------------------
\350\ See the letter from API (Nov. 7, 2013) (noting that ``an
additional benefit of API's project recommendation is clarity and
ease of use for all stakeholders,'' including ``for reporting
companies in submitting data'').
---------------------------------------------------------------------------
In addition, because as proposed the required payment information
is at a higher level of aggregation than under the 2016 Rules, it is
likely that an issuer already aggregates some of the required payment
information for its own internal accounting or financial reporting
purposes. In that event, requiring payment information at a higher
level of aggregation may be less costly because the issuer may be able
to modify its existing internal accounting systems to collect the
required payment information rather than having to build a new system
to collect the payment information on a contract-by-contract basis.
Additionally, the proposed definition of ``project'' lacks the
granularity of a contract-based definition, making it less likely that
competitors would be able to reverse-engineer contract terms or glean
sensitive contract information from the disclosure. In this regard, we
note that many of the concerns expressed in the 2016 rulemaking about
revealing sensitive and proprietary commercial information to
competitors derived from the fact that the required disclosure was at
the contract, license or lease level. Thus, the proposed definition of
``project'' should also alleviate potential competitive harm concerns
that affected issuers might have regarding the latter.
At the same time, the proposed definition of ``project'' would
continue to provide a level of transparency that people could use to
assess revenue flows from projects in their local communities. As we
discuss above in Section III.B, this should have a number of potential
benefits for information users seeking to prevent corruption and
promote accountability.
We note that, even with the proposed modifications to the
definition of ``project,'' affected issuers would incur significant
compliance costs. 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 and thus would likely
need to modify their systems to some degree to collect data on each
payment. In addition, they would be required to electronically tag a
significant amount of information about each payment. Additional
compliance
[[Page 2558]]
costs could result from training local personnel on tracking and
reporting, and developing guidance to ensure consistency across
reporting units.
Finally, we acknowledge that the proposed definition of ``project''
may narrow the scope of the transparency benefits compared to the
previous definition proposed in 2016. We believe, however, that the
revised definition, because it considers the type of resource, the
method of extraction, and the location, will provide substantial
transparency about the overall revenue flows to national and
subnational governments.
2. Exemptions From Disclosure
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. Such costs could arise if issuers are forced to cease operations
in certain countries or otherwise violate local law. In addition, the
country's laws could have the effect of preventing them from
participating in future projects. Alternatively, the host country may
prefer to engage in deals with companies that are not required to
provide disclosure required under Section 13(q). If an issuer violates
local law, it could suffer expropriation of its facilities in the host
country, the imposition of fines or the withholding of permits. In
connection with the 2016 Rules, some commenters asserted that at least
two countries--Qatar and China--prohibit the required disclosures.\351\
---------------------------------------------------------------------------
\351\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
---------------------------------------------------------------------------
To the extent that such prohibitions exist and are enforced without
any type of waiver, affected issuers 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.
Thus, 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 could not easily redeploy the assets in question or if it had
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 were redeployed to projects with inferior rates of return. In the
2016 Rules, we estimated that such losses could amount to billions of
dollars.\352\
---------------------------------------------------------------------------
\352\ See 2016 Rules Adopting Release, Section III.C.
---------------------------------------------------------------------------
These potentially large indirect costs should be generally
eliminated under the proposed rules. We are proposing an exemption for
situations in which an issuer is unable to provide the required
disclosure without violating the laws of the jurisdiction where the
project is located. The exemption would apply not only to pre-existing
but also to future prohibitions on disclosure, in recognition of the
fact that issuers do not have control over the laws of the jurisdiction
where they are engaged in the commercial development of natural
resources.
Some commenters in the 2016 rulemaking also suggested that issuers
with existing contracts that prohibit the disclosure required under
Section 13(q) may find themselves in breach of contract if they make
the required disclosure. This, in turn, could result in termination of
ongoing contracts and inability to participate in future projects.\353\
While we do not have data on how often existing contracts contain such
prohibitions, to address the concerns raised by commenters, we are
proposing an exemption for situations in which a pre-existing contract
prohibits the required disclosure. This exemption would differ from the
conflict of law exemption in that, if adopted as proposed, it would
only apply to written terms of contracts that were entered into prior
to the date the Section 13(q) rules are effective. As explained above,
we believe that this limitation is justified because issuers have
control over the terms of their contracts and would be in a position to
modify future contract terms accordingly.\354\
---------------------------------------------------------------------------
\353\ See Letters from API (Feb. 16, 2016) and Chevron (Feb. 16,
2016).
\354\ See supra Section II.J.2.
---------------------------------------------------------------------------
Neither of these proposed exemptions would require an issuer to
apply to the Commission for exemptive relief. This approach should
significantly decrease compliance and indirect costs for issuers that
qualify for either exemption, potentially saving affected issuers
millions of dollars. Compared to the approach taken in the 2016 Rules,
in which affected issuers were required to seek individual relief on a
case-by-case basis, the proposed exemptions would give such issuers
more certainty about the availability of the exemptions. In addition,
the corresponding relief would be available in a timelier manner.
We note, however, that in addition to reducing costs, the
exemptions might have the unintended consequence of diminishing some of
the benefits of enhanced transparency. For example, 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 jurisdictions that
have failed to do so voluntarily. As mentioned above, we believe that
the likelihood that jurisdictions will pass such laws is limited by the
absence of a similar exemption under the EU Directives or Canada's
ESTMA, which generally require disclosure at a more granular level, and
by the growing global influence of the EITI.\355\
---------------------------------------------------------------------------
\355\ See discussion in Section II.J.1.
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In addition to the exemptions for conflicts with foreign law and
pre-existing contracts, similar to the 2016 Rules, the proposed rules
would allow for delayed reporting for explorative activities and
transitional relief for recently acquired companies not previously
obliged to disclose resource extraction payment information. In a
change from the 2016 Rules, the proposed rules would also provide
transitional relief for companies that have completed their U.S.
initial public offering in the last full fiscal year. These additional
forms of exemptive relief should alleviate compliance costs for
affected issuers. Finally, as in the 2016 Rules, the proposed rules
would allow issuers to apply for exemptive relief on a case-by-case
basis using the procedures set forth in Rule 0-12 of the Exchange Act
for situations posing a significant threat of commercial harm that fall
outside the scope of the other proposed exemptions. We cannot reliably
estimate how frequently potential issuers would apply for exemptive
relief on a case-by-case basis.
We believe that the exemptions provided under the proposed rules,
subject to issuers meeting specified conditions, would substantially
decrease any indirect costs and competitive effects that may result
from conflicts with foreign law and pre-existing contracts, or from
other situations where the required payment disclosure would pose a
significant threat of commercial harm. However, we acknowledge that, if
issuers cannot meet the conditions for the proposed exemptions, issuers
could potentially incur costs associated with the conflict between the
proposed requirements and those foreign law or pre-existing contract
prohibitions. Similarly, issuers could potentially incur costs in
situations where the Commission denies an issuer's claim for exemptive
relief on a case-by-case basis. Due to lack of data, we cannot reliably
estimate the number of affected issuers that may be unable to
[[Page 2559]]
meet the conditions for the proposed exemptions.
We are also proposing to provide an exemption from the disclosure
requirements for smaller reporting companies and/or emerging growth
companies, or to provide for different disclosure requirements for
these entities. Because the proposed rules could result in significant
fixed compliance costs for resource extraction issuers, smaller
entities that are required to provide the payment disclosure mandated
by Section 13(q) may face particular difficulties meeting those costs.
As noted above, 211 issuers reported being SRCs, 191 issuers reported
being EGCs and 84 issuers reported being both SRCs and EGCs in the
period January 1, 2018, through September 30, 2019. This results in 318
issuers that would not bear compliance costs under the proposed rules
because they reported being SRCs and/or EGCs. The proposed exemption
for smaller reporting companies and emerging growth companies would
avoid adding to the costs of being a public reporting company for these
companies.
3. Annual Report Requirement
Section 13(q) provides that the resource extraction payment
disclosure must be ``include[d] in an annual report.'' In a change from
the 2016 Rules, the proposed rules require an issuer to furnish the
payment disclosure in an annual report on Form SD instead of filing it.
Requiring covered issuers to furnish, rather than file, the payment
information in Form SD may limit the incremental risk of liability
under Section 18 of the Exchange Act. This limit to the incremental
risk of liability could decrease the quality of payment information
reported to the extent that issuers are less attentive to collecting
and submitting the information. We note, however, that Section 18 does
not create strict liability for ``filed'' information.\356\ In
addition, issuers would still be subject to antifraud liability under
the U.S. Federal securities laws for material misstatements, which
should mitigate the risk of decreased quality of the reported payment
information.
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\356\ 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.
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As under the 2016 Rules, the required payment information would be
reported under the cover of Form SD. The Form SD would be due no later
than March 31 in the calendar year following its most recent fiscal
year for issuers with a fiscal year ending on or before June 30 and no
later than March 31 in the second calendar year following its most
recent fiscal year for issuers with a fiscal year ending after June 30.
This should lessen the burden of compliance with Section 13(q) and the
related rules because issuers generally would 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 Act annual reports.\357\ An additional benefit is that this
requirement would provide payment 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 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. Finally, we also believe that the lengthened
submission deadlines would also address the concerns that the public
disclosure of the payment information could cause competitive harm.
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\357\ 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.
---------------------------------------------------------------------------
Resource extraction issuers would incur costs associated with
preparing and furnishing the required information on Form SD. We do not
believe, however, that the costs associated with furnishing the
information on Form SD instead of providing it in an existing Exchange
Act form would be significant given that the existing form would have
to be modified to accommodate the requirements of Section 13(q)
disclosure.
4. Public Availability of Data
The proposed rules would require a resource extraction issuer to
provide the required payment disclosure publicly, including the name of
the issuer. As an alternative to requiring payment disclosure by
individual issuers, we could have proposed implementing Section 13(q)
by permitting resource extraction issuers to provide the information
non-publicly and having the Commission publish, an aggregated and
anonymized compilation of company-provided resource extraction payment
information. Such an approach would mitigate concerns regarding the
disclosure of potentially sensitive information that could create
competitive harm. Additionally, such an alternative would still result
in the disclosure of the type and amount of payments to governments,
albeit on an aggregated basis. According to a commenter in the 2016
rulemaking, such an approach would yield the benefits intended by
Congress and at the same time reduce potential competitive harm.\358\
---------------------------------------------------------------------------
\358\ See Letter from API (Feb. 16, 2016).
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Such anonymized public compilation, however, may not further
transparency efforts to the same degree as company-specific disclosure.
Public individual issuer information may help people monitor individual
issuer's contributions to the public finances and ensure that firms are
meeting their payment obligations and that governments are properly
collecting and accounting for payments. Additionally, the public
disclosure of company-specific, project-level data may help to reduce
corruption to the extent that resource extraction issuers are unwilling
to participate in deals where they believe the revenues may be
corruptly diverted from the government coffers. Requiring issuers to
disclose their payment information publicly would also provide users
with more current and immediately available information than a separate
compilation produced by the Commission. In contrast, under an approach
that depends upon the Commission publishing a separate public
compilation of previously submitted non-public information, users of
the information would have to wait to access the information in an
issuer's Form SD until the Commission publishes its periodic
compilation. We do not believe that the proposed requirement for
issuers to disclose the payment information publicly would increase an
issuer's compliance burden compared to the alternative of issuers
submitting the payment information non-publicly (and the Commission
using the nonpublic submissions to produce a publicly available
compilation). The compliance costs would be similar under each
alternative because the issuer would have to provide the same payment
information to the Commission. Regarding the potential increase in the
risk of competitive harm that may result from public disclosure, we
believe that such increase would be marginal because of the Modified
Project Definition, which, as mentioned above, should significantly
alleviate the likelihood of competitive harm from the disclosure, and
because of the extended filing deadline.
[[Page 2560]]
We are considering, however, the alternative of publishing only an
aggregated, anonymous compilation based on confidentially furnished
Forms SD. This approach would both ensure the public availability of
information about payments made in particular jurisdictions--which may
be sufficient to meet the statute's objectives--without potentially
subjecting affected issuers to competitive harm.
5. Alternative Reporting
The proposed rules would allow resource extraction issuers subject
to a foreign jurisdiction's resource extraction payment disclosure
requirements to meet their reporting obligations by submitting the
report required by that foreign jurisdiction with the Commission
subject to the condition that the Commission has determined that the
foreign jurisdiction's reporting obligations satisfy the transparency
objectives of Section 13(q). Concurrently with the 2016 Rules Adopting
Release, the Commission issued an order designating the EU Directives
and ESTMA as eligible substitute reporting regimes for purposes of the
alternative reporting provision in those rules. To the extent that the
Commission makes a similar determination upon or following adoption of
the proposed rules, this approach would significantly decrease
compliance costs for issuers that are cross-listed or incorporated in
these jurisdictions. As noted above, we estimated that approximately
109 issuers are subject to other regulatory regimes that may allow them
to utilize this provision.\359\ For these issuers, the costs associated
with preparing and furnishing a Form SD should be negligible, although
they would be required to format the data in interactive (XBRL) format
and potentially translate it into English before submitting it with the
Commission.
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\359\ These are issuers that have a business address, are
incorporated, or are listed on exchanges in the EEA or Canada.
---------------------------------------------------------------------------
As an alternative, we could have proposed not to include such a
provision. Such an alternative may increase the compliance costs for
issuers that are subject to foreign disclosure requirements that
satisfy the transparency objectives of Section 13(q). 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 significant given the potential overlap that may exist between
these reporting regimes and the proposed rules.
6. 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.E above, we are proposing rules that
define the term ``control'' based on accounting principles.
Alternatively, we could have proposed a definition based on Exchange
Act Rule 12b-2, as in the 2012 Rules.\360\ We believe that the approach
we are proposing would be less costly for issuers to comply with than
such an alternative because issuers are currently required to apply the
accounting concept of ``control'' on at least an annual basis for
financial reporting purposes.
---------------------------------------------------------------------------
\360\ See 2012 Rules Proposing Release, Section II.D.4.
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Using a definition based on Rule 12b-2 would require issuers to
undertake additional steps beyond those currently required for
financial reporting purposes. 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 require 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
increase the compliance costs for issuers compared to the approach we
are proposing.
In addition, there are several other advantages of using a
definition based on accounting principles. There will be audited
financial statement disclosure of an issuer's significant consolidation
of accounting policies in the footnotes to its audited financial
statements contained in its Exchange Act annual reports. Also, an
issuer's determination of control under the proposed rules would 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.\361\
All of these advantages may lead to more accurate, reliable, and
consistent reporting of subsidiary payments, thereby enhancing the
quality of the reported data.
---------------------------------------------------------------------------
\361\ See supra Section II.E.
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In a change from the 2016 Rules, the proposed rules do not require
disclosure of the proportionate amount of the payments made by a
resource extraction issuer's proportionately consolidated entities or
operations. Excluding proportionate interest entities or operations
from the proposed definition of control would ameliorate 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, thereby limiting
compliance costs for affected issuers. At the same time, this approach
would exclude some joint ventures from the scope of the proposed rules,
thereby limiting the transparency benefits of the Section 13(q)
disclosures. It also could potentially provide an incentive for
affected parties to structure their resource extraction operations in a
manner to avoid disclosure. We note, however, that many other factors,
other than Section 13(q) disclosure, likely would influence how parties
structure their operations and agreements, and some of these factors
may outweigh the disclosure consideration.
As an alternative, we could have proposed to require disclosure of
payments made by a resource extraction issuer's proportionately
consolidated entities or operations. This alternative would result in
disclosure of payments made by some joint ventures that would not be
covered by the scope of the proposed rules, which would increase the
transparency benefits of the Section 13(q) disclosures compared to the
proposed approach. However, it also would increase compliance costs for
issuers by potentially compelling them to renegotiate their joint
venture agreements or make other arrangements to obtain sufficiently
detailed payment information to comply with the Section 13(q) rules. In
this regard, we note that several commenters in the 2016 rulemaking
expressed concern 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.\362\ Similar
considerations would apply with respect to a definition of control that
includes a ``significant influence'' test.
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\362\ See Letters from API (Feb. 16, 2016); BP (Feb. 16, 2016);
Chevron (Feb. 16, 2016) ; Encana (Jan. 25, 2016); ExxonMobil (Feb.
16, 2016); Petrobras (Feb. 16, 2016); and Royal Dutch Shell (Feb. 5,
2016).
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7. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
The proposed 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 proposed rules generally track the
[[Page 2561]]
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, provided that issuers
subject to other disclosure regimes are exempt from the proposed rules
under the alternative reporting provision. 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.
8. Types of Payments
As under the 2016 Rules, the proposed rules include 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. We propose to include payments of
certain dividends and payments for infrastructure because, based on
comments received in prior rulemakings, we believe they are part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas and minerals. For example, payments for infrastructure
improvements have been required under the EITI since 2011.
Additionally, the EU Directives and ESTMA require these payment types
to be disclosed. Thus, including dividends and payments for
infrastructure improvements (e.g., building a road) in the list of
payment types required to be disclosed under the proposed rules would
further the statutory objective of supporting the commitment of the
Federal Government to international transparency promotion efforts.
As under the 2016 Rules, the proposed rules would include CSR
payments that are required by law or contract in the list of covered
payment types. Some commenters in the 2016 rulemaking argued that these
payments are of material benefit in resource-dependent countries to
both governments and local communities.\363\ 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.\364\ We also note that the EITI requires the
disclosure of CSR payments if required by law or contract.\365\ 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 and would further the statutory objective of supporting the
commitment of the Federal Government to international transparency
promotion efforts relating to the commercial development of oil,
natural gas or minerals. Additionally, to the extent that it is
difficult for certain resource extraction issuers to distinguish
between CSR payments and infrastructure payments, requiring both types
of payments when required by law or contract may lead to lower
compliance costs for those issuers.\366\
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\363\ See Letters from Africa Centre for Energy Policy (Feb. 16,
2016); Prof. Harry G. Broadman and Bruce H. Searby (Jan. 25, 2016);
ExxonMobil (Feb. 16, 2016); Eugen Falik (Mar. 7, 2016); and PWYP-US
(Feb. 16, 2016).
\364\ See Letter from PWYP-US (Feb. 16, 2016).
\365\ See supra Section II.C.5.
\366\ See Letter from ExxonMobil (Feb. 16, 2016).
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As discussed earlier, under the proposed rules, resource extraction
issuers would incur costs to provide the payment disclosure for the
required payment types. For example, there would be costs to modify the
issuers' core enterprise resource planning systems and financial
reporting systems so that they can track and report payment data at the
project level, for each type of payment, government payee, and currency
of payment. Since some of the payments would be required to be
disclosed only if they are required by law or contract (e.g., CSR
payments), resource extraction issuers presumably already 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 proposed rules. For example,
issuers may need to add these types of payments to their tracking and
reporting systems. We understand that these types of payments are more
typical for mineral extraction issuers than for oil issuers,\367\ and
therefore only a subset of the issuers subject to the proposed rules
might be affected.
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\367\ See, e.g., Letters from PWYP-US (Feb. 16, 2016) and Global
Witness (Feb. 16, 2016). 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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To address previously expressed concerns about the difficulty of
allocating payments that are made for obligations levied at the entity
level, such as corporate income taxes, to the project level, the
proposed rules would permit issuers to disclose those payments at the
entity level rather than the project level. This accommodation also
should help limit compliance costs for issuers without significantly
interfering with the goal of achieving increased payment transparency.
Under the proposed 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 relating to the commercial development of oil, natural gas or
minerals 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 proposed 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
help limit the overall compliance costs associated with our proposal to
require the disclosure of in-kind payments.
9. Definition of ``Not De Minimis''
Section 13(q) requires the disclosure of payments that are ``not de
minimis,'' leaving that term undefined. Under the proposed rule's
definition of ``not de minimis,'' resource extraction issuers would be
required to disclose payments made to each foreign government in a host
country or the Federal Government that equal or exceed $150,000, or its
equivalent in the issuer's reporting currency, whether made as a single
payment or series of related payments, when the total of the individual
payments related to that project equal or exceed $750,000. Thus, no
payment disclosure is required for projects where the total of the
individual payments related to that project is less than $750,000.\368\
Even if the aggregate payments for a project are equal to or greater
than $750,000, if no single payment or series of related payments of
the same type exceeds $150,000, no
[[Page 2562]]
payments disclosure would be required for that project.
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\368\ In crafting this proposal, we also have relied on the
Commission's general definitional and exemptive authority. See
Exchange Act Sections 3(b) and 36.
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We considered proposing a definition of ``not de minimis'' based on
a qualitative standard or a relative quantitative standard rather than
an absolute quantitative standard. We are proposing an absolute
quantitative approach because an absolute quantitative approach would
be easier for issuers to apply than a definition based on either a
qualitative standard or relative quantitative standard. Thus, using an
absolute dollar amount threshold for disclosure purposes should help
limit compliance costs by reducing the work necessary to determine what
payments must be disclosed.
We believe that this higher ``not de minimis'' threshold is
necessary to take into account the proposed definition of project,
which aggregates payments at a higher level, which would likely
increase the value of the individual types of payments. As such, we
believe that using the 2016 threshold of $100,000 would likely require
more payment disclosure, thus increasing rather than decreasing the
cost and disclosure burden on issuers, contrary to the guidance
provided by Congress in its disapproval of the 2016 Rules. We further
believe that, in light of the larger aggregations permitted under the
revised definition of project, a quantitative standard based upon
project level and individual payment information establishes a more
appropriate threshold for determining ``not de minimis.'' In addition,
we believe that $750,000 in total payments is the appropriate project
threshold and $150,000 is the appropriate individual payment threshold
because we are proposing to exempt smaller reporting companies and
emerging growth companies from the Section 13(q) disclosure
requirements,\369\ thereby resulting in larger companies, with larger
projects and larger individual payments, being primarily affected by
the proposed rules.
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\369\ See supra Section II.J.3.
---------------------------------------------------------------------------
We believe that this approach, presents a more accurate definition
of ``not de minimis'' from both an issuer's and the host country's
perspective. Although commenters in the previous rulemakings suggested
various thresholds, no commenter provided data to assist us in
determining an appropriate threshold amount.\370\ One commenter
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.\371\ For issuers (or their
subsidiaries) that are already providing payment information under
other resource extraction disclosure regimes, our definition of ``not
de minimis'' would likely help minimize compliance costs associated
with determining which payments should be reported because these
issuers could report under the proposed rule using the payment
thresholds under their respective jurisdiction and be in compliance.
---------------------------------------------------------------------------
\370\ See, e.g., 2012 Rules Adopting Release, n.235 and n.243
and accompanying text.
\371\ See Letter from Nouveau (Feb. 16, 2016).
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We also considered defining ``not de minimis'' either in terms of a
materiality standard or by using a larger dollar threshold for
individual payment disclosure, such as $1,000,000. Both of these
alternatives might result in lower compliance costs and might lessen
competitive concerns relative to the proposal. They also would result
in less payment transparency, thereby reducing the intended benefits of
the Section 13(q) disclosures.
10. Exhibit and Interactive Data Requirement
Section 13(q) requires the payment disclosure to be electronically
formatted using an interactive data format. The proposed rules would
require a resource extraction issuer to provide the required payment
disclosure in an XBRL exhibit to Form SD that includes all of the
electronic tags required by Section 13(q) and the proposed rules.\372\
We believe that requiring the specified information to be presented in
XBRL format would offer advantages to 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 machine-readable
(electronically tagged) format would 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. The proposed rules also require issuers to tag
the subnational geographic location of a project using ISO codes. Using
ISO codes would standardize references to those subnational geographic
locations and would benefit the users of this information by making it
easier for them to sort and compare the data. It also would increase
compliance costs for issuers to the extent that they do not currently
use such codes in their reporting systems.
---------------------------------------------------------------------------
\372\ Users of this information should be able to render the
information by using software available on the Commission's website
at no cost.
---------------------------------------------------------------------------
Specifying XBRL as the required interactive data format may
increase compliance costs for some issuers. The electronic formatting
costs would vary depending upon a variety of factors, including the
amount of payment data disclosed and an issuer's prior experience with
XBRL. We expect that most issuers are already familiar with XBRL as
they use it to tag financial information in their annual and quarterly
reports filed with the Commission. Thus, we do not expect most affected
issuers to incur start-up costs associated with the format.
Additionally, we do not believe that the ongoing costs associated with
this formatting requirement would be significantly greater than filing
the data in XML.\373\
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\373\ See 2016 Rules Adopting Release, Section II.C.9.
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Consistent with the statute, the proposed rules require a resource
extraction issuer to include an electronic tag that identifies the
currency used to make the payments. Under the proposed rules, if
multiple currencies are used to make 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.\374\ 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.\375\ The proposed rules provide flexibility to issuers in
how to perform the currency conversion, which may help to limit
compliance costs by allowing issuers to choose the option that works
best for them.
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\374\ See Instruction 2 to Item 2.01 of Form SD.
\375\ See supra Section II.K.
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11. Quantitative Estimates of Costs Resulting From the Proposed
Rulemaking
In the 2016 Rules Adopting Release, the Commission quantified the
direct compliance costs of the 2016 Rules based on information provided
by commenters. The Commission estimated initial compliance costs to be
in the
[[Page 2563]]
range of $54.7 to $574.4 million assuming no fixed costs and in the
range of $238.8 to $700.2 million assuming the rule requirements would
generate fixed costs for affected issuers. The Commission estimated the
ongoing compliance costs to be in the range of $21.9 to $547.3 million
assuming no fixed costs and in the range of $95.5 to $590.7 million
assuming fixed costs.
In the 2016 Rules Adopting Release, the Commission also attempted
to quantify some of the indirect costs resulting from the rule and
specifically quantified the costs arising from a foreign law
prohibition against Section 13(q) disclosure. For eight potentially
affected issuers domiciled in the United States that had assets in
China or Qatar, the estimated total loss range was 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 was 2.7 percent. We
note that these estimates applied only to issuers that had assets in
one of the host countries. The Commission also estimated the fire sale
prices at which affected issuers could dispose of their assets in
countries with laws prohibiting disclosure, should such need arise. The
analysis suggested that a discount of 69 percent was warranted. For
U.S.-based issuers, applying the highest discount of 69 percent to the
market value of the issuers' assets in these host countries suggested a
range of losses between $1.2 million and $2.1 billion, with a median
loss of $201.1 million.
Given the substantial changes introduced into the proposed rules
compared to the 2016 Rules, we believe that the estimates from the 2016
Rules are no longer accurate. At present, we do not have data that will
allow us to quantify reliably the costs (either direct compliance costs
or indirect competitive harm) resulting from the proposed rules. For
example, we lack data on the main components of initial and ongoing
compliance costs, the fraction of compliance costs that are fixed, and
how the various statutory and similar foreign law requirements affect
compliance costs. Since issuers currently are not required to disclose
such costs in their SEC filings, and since such costs generally are not
otherwise made publicly available, we do not have information about
them.
A 2018 study by the UK Department for Business, Energy & Industrial
Strategy (the ``UK study'') is another source of potential cost
estimates.\376\ We reviewed that data but found it is of limited use
for the following reasons. First, we are unable to use the data to
determine the cost estimates for the rules we are proposing in this
release because the Modified Project Definition in the proposed rules
is different from the definition in the UK rules. Specifically, the
payment disclosure would be provided at a greater level of aggregation
under the proposed rules than under the UK contract-level definition.
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\376\ See supra n. 67 and accompanying text.
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Second, the small sample size in the UK study makes it difficult
for us to assess with any confidence the actual costs of the UK's
regime (which, broadly speaking, is very similar to the 2016 Rules that
were rejected by Congress under the Congressional Review Act). The
majority of companies (84%) surveyed in the UK study indicated that
they do not track compliance costs. As such, the study relied on actual
or estimated compliance cost data from 15 companies that may or may not
be representative of the broader population. In any event, the
estimates of total compliance costs (initial and ongoing) in the UK
report are broadly consistent with the range we estimated in the 2016
Rules, which like the UK regime had a contract-level definition of
project. Based on the data provided by the 15 companies that responded,
the total compliance costs under the UK rules ranged from approximately
$24,547 per company for small companies to approximately $2,260,263 per
company for large companies. The range that we estimated in connection
with the 2016 rules was $180,302 per company to $2,937,319 per company.
Request for Comments
We request comment on the potential costs and benefits of the
proposed rules and whether the rules, if adopted, would promote
efficiency, competition, and capital formation or have an impact or
burden on competition. In particular, we request comments on the
potential effect on efficiency, competition, and capital formation
should the Commission not adopt certain exceptions or accommodations.
Commenters are requested to provide empirical data, estimation
methodologies, and other factual support for their views, in
particular, on costs and benefits estimates. Our specific questions
follow.
87. Are there any additional benefits from the proposed rules than
the ones mentioned discussed above? Is there information that could
help us quantify any benefits of the proposed rules?
88. What are the lessons about the benefits from the resource
extraction payment disclosure regimes that already exist in other
jurisdictions? Is there empirical evidence on benefits from the
disclosure regimes that are already in place?
89. We seek information that would help us quantify compliance
costs (both initial and ongoing) more precisely. In particular, we
invite issuers and other commenters that have experience with the costs
associated with reporting under the EU Directives or ESTMA to provide
us with information about those costs. What are the actual compliance
costs for issuers that have started to comply with the disclosure
requirements imposed under the EU Directives or ESTMA?
90. What is the breakdown of various compliance costs, such as
legal fees, direct administrative costs, information technology/
consulting costs, training costs, and travel costs? What are the main
drivers of compliance costs?
91. What is the proportion of fixed costs in the direct compliance
costs structure of potentially affected resource extraction issuers?
Would smaller resource extraction issuers incur proportionally lower
compliance costs than larger resource extraction issuers? Would
affiliated issuers be able to save on fixed costs of developing
compliance systems through sharing such costs? If so, what is the
estimate of such savings?
92. Are there additional costs and benefits from the proposed
definition of ``project''? How do issuers typically define ``project''
in their reporting systems? How costly would it be for issuers to
switch from the definition of ``project'' that they currently use to
the one being proposed in these rules? Would our proposed definition of
project reduce compliance costs for issuers compared to a contract-
based definition of project?
93. Are there any additional effects on efficiency, competition,
and capital formation that we have not considered? Are there any
additional indirect costs or competitive harm that we have not
considered?
94. Is our approach to identify small issuers that likely do not
make any payments above the proposed de minimis amount reasonable? Are
annual revenues and net cash flows from investing activities taken
together an appropriate measure for such purpose?
95. What are the costs of converting a resource extraction payment
report in the format required by the EU Directives or ESTMA (e.g., XLS
or PDF) to the report format required by the proposed rules (i.e.,
XBRL)?
96. What are the costs and benefits arising from confidential
submission of the payment information? What are the costs and benefits
arising from public disclosure of the payment information? How do the
potential costs of public
[[Page 2564]]
disclosure to issuers compare to its potential benefits of the
information?
97. Are there studies on the potential effects of the proposed
rules, the disclosure rules under the EU Directives or ESTMA, or EITI
compliance on efficiency, competition, and capital formation? What are
the potential competitive effects of the proposed rules and how might
they be impacted by regulations promulgated pursuant to the EU
Directives and ESTMA? What fraction of international extractive
companies would be affected by at least one of the U.S., EU, or
Canadian rules?
98. What are the benefits and costs of an alternative reporting
option for issuers that are subject to a foreign jurisdiction's
resource extraction payment disclosure requirements that are determined
to satisfy the transparency objectives of Section 13(q)? How much would
such issuers save in compliance costs if they have the option to
satisfy their filing obligations by filing the report required by that
foreign jurisdiction with the Commission?
IV. Paperwork Reduction Act
A. Background
Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\377\ The Commission is submitting the
proposal to the Office of Management and Budget (``OMB'') for review in
accordance with the PRA.\378\ 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:
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\377\ 44 U.S.C. 3501 et seq.
\378\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
``Form SD'' (OMB Control No. 3235-0697).\379\
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\379\ As discussed above, proposed Rule 13q-1 requires a
resource extraction issuer to submit the payment information
specified in Form SD. The collection of information requirements
associated with the proposed rules would be reflected in the burden
hours estimated for Form SD. Therefore, there is no separate burden
estimate for Rule 13q-1.
---------------------------------------------------------------------------
Form SD is currently used to file Conflict Minerals Reports
pursuant to Rule 13p-1 of the Exchange Act. We are proposing amendments
to Form SD to accommodate disclosures required by proposed Rule 13q-1.
It would require 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 would be submitted to the
Commission on EDGAR.
The proposed rules and amendment to the form would implement
Section 13(q) of the Exchange Act, which was added to the Exchange Act
by Section 1504 of the Dodd-Frank Act. As described in detail
above,\380\ Section 13(q) directs the Commission to issue rules
requiring resource extraction issuers to include in an annual report
certain specified information relating to payments made to a foreign
government or the Federal Government for the purpose of the commercial
development of oil, natural gas, or minerals. In addition, Section
13(q) requires a resource extraction issuer to provide information
about those payments in an interactive data format. We are proposing to
require that the mandated payment information be provided in an XBRL
exhibit to Form SD. The disclosure requirements would apply equally to
U.S. issuers and foreign issuers meeting the definition of ``resource
extraction issuer.''
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\380\ See supra Section I.A.
---------------------------------------------------------------------------
Compliance with the rules by affected issuers would be mandatory.
Responses to the information collections would not be 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 would be required to
file the payment information required in Form SD, as proposed to be
amended, is uncertain, but, as discussed in the economic analysis
above, we estimate that the number of potentially affected issuers is
677.\381\ Of these issuers, we excluded 318 issuers that reported being
either smaller reporting companies, emerging growth companies, or both,
because the proposed rules would exempt both types of issuers from the
Section 13(q) requirements. In addition, we excluded 109 issuers that
are subject to resource extraction payment disclosure rules in other
jurisdictions that require more granular payment disclosure than would
be required by the proposed rules, and 14 issuers with no or only
nominal operations, or that are unlikely to make any payments that
would be subject to the proposed disclosure requirements.\382\ For the
109 issuers subject to those alternative reporting regimes, the
additional costs to comply with the proposed rules would likely be much
lower than costs for other issuers.\383\ For the 14 issuers that are
unlikely to make payments subject to the proposed rules, we believe
there would be no additional costs associated with the proposed
rules.\384\ Accordingly, we estimate that 236 issuers would bear the
full costs of compliance with the proposed rules \385\ and 109 would
bear significantly lower costs.
---------------------------------------------------------------------------
\381\ See supra Section III.A. (explaining how we use data from
Exchange Act annual reports for the period January 1, 2018 through
September 30, 2019 to estimate the number of issuers that might make
payments covered by the proposed rules). As noted in that section,
this number does not reflect the number of issuers that actually
made resource extraction payments to governments.
\382\ See id. (describing how we identify issuers that may be
subject to those alternative reporting regimes and how we use shell
company status and revenues and net cash flows from investing
activities to identify issuers that would be unlikely to make
payments exceeding the proposed ``not de minimis'' threshold).
\383\ Issuers subject to the alternative reporting regimes
described above would already be gathering, or have systems in place
to gather, resource extraction payment data, which should reduce
their compliance burden. In addition, under the proposed rules, a
resource extraction issuer that is subject to the resource
extraction payment disclosure requirements of an alternative
reporting regime, deemed by the Commission to require disclosure
that satisfies Section 13(q)'s transparency objectives, may satisfy
its payment disclosure obligations by including, as an exhibit to
Form SD, a report complying with the reporting requirements of the
alternative jurisdiction. See proposed Item 2.01(c) of Form SD. When
adopting its Section 13(q) rules in 2016, in a concurrent order, the
Commission determined that an issuer could substitute a report
prepared pursuant to the EU Directives or Canada's ESTMA to satisfy
its disclosure obligations under the 2016 Rules. If the Commission
were to make a similar determination in respect of the proposed
rules, the 109 issuers subject to those foreign laws would incur
relatively small compliance burdens and costs associated with the
proposed rules. We have nevertheless included them in our estimate
of affected issuers for PRA purposes because under the proposed
rules they would still have an obligation to furnish a report on
Form SD in XBRL, although with a significantly lower associated
burden.
\384\ See supra Section III.A.
\385\ 677 minus 318 minus 109 minus 14 = 236.
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C. Estimate of Issuer Burdens
We derive our burden estimates by estimating the average number of
hours it would take an issuer to prepare and furnish the required
disclosure. 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 percent of the burden of preparation is carried by the issuer
internally and 25 percent of the burden of preparation is carried by
outside professionals retained
[[Page 2565]]
by the issuer at an average cost of $400 per hour.\386\
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\386\ 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 in the 2016 rulemaking,
one commenter used $150 per hour in its analysis of the costs
associated with the proposed rules. See letter from Claigan
Environmental (Feb. 16, 2016). The Commission disagreed with that
estimate, however, because the rate did not factor in the outside
professional costs associated with preparing a document under
applicable securities laws. We believe a resource extraction issuer
would likely seek the advice of an attorney to help it comply with
the rule and form requirements under U.S. Federal securities laws.
Accordingly, we continue to use the $400 per hour estimate when
considering the applicable costs and burdens of this collection of
information.
---------------------------------------------------------------------------
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. We expect that the proposed
rules' burden would be greatest during the first year of their
effectiveness and diminish in subsequent years. To account for this
expected diminishing burden, we use a three-year average of the
expected implementation burden during the first year and the expected
ongoing compliance burden during the next two years.
We believe that the burden associated with this collection of
information would be greatest during the initial compliance period in
order to account for initial set up costs, including initial
adjustments to an issuer's internal books and records, plus costs
associated with the collection, verification and review of the payment
information for the first year. We believe that ongoing compliance
costs would be less because an issuer would have already made any
necessary modifications to its internal systems to capture and report
the information required by the proposed rules.
When conducting the PRA analysis in connection with the 2016 Rules,
the Commission used an estimate for compliance costs and burden
provided by a commenter on the 2012 Rules Proposing Release.\387\ That
commenter estimated that, for an issuer bearing the full costs and
burden, compliance with those rules would require 500 hours to make
initial changes to the issuer's internal books and records and another
500 hours a year on an ongoing basis to review and verify the payment
information.\388\ Based on the commenter's estimates, the Commission
estimated that the 2016 Rules would result in 217,408.65 total
incremental company burden hours and $71,487,820 total outside
professional costs.\389\
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\387\ See the 2016 Rules Adopting Release, Section IV.C., citing
the letter from Barrick Gold (Feb. 28, 2011). When presenting its
own cost estimates for the 2016 Rules, one commenter stated that
``the Barrick costing model seems to be the most valid and accurate
costing model submitted to SEC and should be attributed more weight
by the SEC when calculating expected industry costs.'' Letter from
Claigan Environmental (Feb. 16, 2016).
\388\ Barrick Gold also estimated that its initial compliance
with the rules would require $100,000 for IT consulting, training
and travel costs. See id.
\389\ These total burden and cost estimates were based on the
Commission's estimates that 425 issuers would bear the full burden
and costs of the 2016 Rules and 192 issuers would bear a
significantly reduced burden and costs because they were already
subject to similar payment disclosure requirements in foreign
jurisdictions. See id.
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The Commission's PRA burden estimates for the 2016 Rules were based
on a version of Section 13(q) rules that would have been more onerous
than the proposed rules.\390\ As discussed more fully in Section III
above, we believe that the proposed changes to the 2016 Rules, in
particular the proposed definition of project and the proposed
exemptions for conflicts with foreign law and pre-existing contracts,
would meaningfully reduce the compliance burden and costs for issuers
compared to the 2016 Rules. Because of these proposed changes, we
believe that it would be appropriate to adjust the 2016 PRA burden
estimates to account for this reduction in burden and costs.
---------------------------------------------------------------------------
\390\ For example, neither the 2012 Rules nor the 2016 Rules
provided for exemptions for conflicts with foreign law or pre-
existing contracts, which we are proposing in this rulemaking. See
supra Section II.J. Moreover, the Commission adopted a contract-
based definition of ``project'' in 2016 and, although the Commission
left ``project'' undefined in 2012, it provided guidance in that
rulemaking suggesting that project was to be determined based on the
underlying contract. See 2012 Rules Adopting Release, Section
II.D.3. In contrast, among other changes, the proposed rules include
a broader definition of project and would permit greater aggregation
of payment information at the major subnational jurisdiction level.
See supra Sections II.F. and II.G.
---------------------------------------------------------------------------
For PRA purposes, we estimate that the incremental burden of the
proposed rules would be at least 25 percent less than the incremental
burden of the 2016 Rules. We believe that this reduction in the burden
estimate is reasonable because of the proposed changes to the
definition of project, which should generally simplify and reduce the
collection and reporting of payment information for a resource
extraction issuer.\391\ We note that this reduction in the burden
estimate does not take into account the two new proposed exemptions for
conflicts with foreign law and pre-existing contracts.\392\ While we
expect these proposed exemptions would result in a reduced PRA burden
compared to the 2016 Rules,\393\ because it is more difficult to
estimate the effects of the proposed exemptions, and to avoid
underestimating the proposed rules' burden and costs, we have not
factored them into the current PRA estimates. We have relied on a prior
commenter's estimates for the limited purpose of this PRA analysis,
and, as indicated above, we request commenters to provide us with more
accurate estimates of the compliance costs and burden of the proposed
rules.\394\
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\391\ See supra Section II.F.2.
\392\ See supra Section III.C.
\393\ For example, issuers may spend fewer internal hours and/or
incur fewer professional costs to prepare case-specific exemptive
relief requests in connection with the required disclosures.
\394\ See discussion of quantitative estimate of costs in
Section III.C.11., above.
---------------------------------------------------------------------------
Thus, for an issuer bearing the full costs and burden of the
proposed rules, we estimate that compliance with the proposed rules
would require 375 hours to make initial changes to the issuer's
internal books and records and another 375 hours a year on an ongoing
basis to review and verify the payment information,\395\ resulting in
750 hours per respondent for the initial incremental PRA burden. 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 PRA burden would be 500 hours per fully affected
respondent (750 + 375 + 375 hours/3 years).
---------------------------------------------------------------------------
\395\ 500 hours x .25 = 125 hours. 500 hours-125 = 375 hours.
---------------------------------------------------------------------------
The following table shows the estimated internal burden hours and
professional and other external costs for the 236 issuers bearing the
full costs and burden of the proposed rules and for the 109 issuers
subject to more granular resource extraction payment disclosure
requirements in foreign jurisdictions when preparing and submitting
Form SD. These total burden hours and total external costs would be in
addition to the existing estimated hour and cost burdens applicable to
Form SD because of compliance with Exchange Act Rule 13p-1.
[[Page 2566]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Additional
Burden Total Internal Professional Professional (external)
Number of hours per burden burden (external) (external) IT costs Total Total
Whether issuer is subject to estimated current hours for hours for hours for costs for \2\ per additional external
similar foreign disclosure regime affected affected current current current current current IT costs costs
responses response affected affected affected affected affected
responses responses responses responses response
(A) (B) (C) (D) (E) (F) (G) (H) (I)
= (A) x (B) = (C) x .75 = (C) x .25 = (E) x $400 = (A) x (G) = (F) + (H)
--------------------------------------------------------------------------------------------------------------------------------------------------------
No............................... 236 500 118,000 88,500 29,500 $11,800,000 $75,000 $17,700,000 $29,772,500
Yes.............................. 109 25 \1\ 2,725 2,044 681.25 272,500 0 0 272,500
----------------------------------------------------------------------------------------------------------------------
Total........................ 345 ........... ........... 90,544 ............ 12,072,500 ........... 17,700,000 30,045,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ As we did in the 2016 rulemaking, we estimate that an issuer that is already subject to a qualifying alternative reporting regime would incur an
internal burden that is five percent of the burden incurred by a fully affected issuer. 500 hours x .05 = 25 hours. 25 hours x 109 = 2,725 hours.
\2\ We estimate that an issuer bearing the full costs of the proposed rules would incur additional initial compliance costs for IT consulting, training
and travel of $75,000. We do not, however, believe that these initial IT costs would apply to the issuers that are already subject to a qualifying
alternative reporting regime since those issuers should already have IT systems in place to comply with the foreign regime. Similar to our estimate of
the incremental PRA burden of the proposed rules, we estimate that the additional initial compliance costs for IT consulting, training and travel
would be at least 25 percent less than the estimate for those costs ($100,000 per respondent) that was factored into the PRA estimate of total
professional costs for the 2016 Rules. $100,000 x .25 = $25,000. $100,000-25,000 = $75,000.
D. Request for Comment
We request comment in order to:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information would have practical utility;
Evaluate the accuracy of our estimate of the burden of the
proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collections of information not previously
identified in this section.\396\
---------------------------------------------------------------------------
\396\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
---------------------------------------------------------------------------
Any member of the public may direct to us any comments about the
accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Vanessa A. Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-24-19.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-24-19, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this release. Consequently, a comment to OMB is best assured of having
its full effect if OMB receives it within 30 days of publication.
V. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\397\ a rule is ``major'' if it has resulted, or is likely
to result in:
---------------------------------------------------------------------------
\397\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major
rule'' for purposes of the Small Business Regulatory Enforcement
Fairness Act. We solicit comment and empirical data on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
VI. Regulatory Flexibility Act Certification
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') \398\ requires the agency to prepare and make
available for public comment an Initial Regulatory Flexibility Analysis
(``IRFA'') that will describe the impact of the proposed rule on small
entities.\399\ Section 605 of the RFA allows an agency to certify a
rule, in lieu of preparing an IRFA, if the proposed rulemaking is not
expected to have a significant economic impact on a substantial number
of small entities.\400\
---------------------------------------------------------------------------
\398\ 5 U.S.C. 601 et seq.
\399\ 5 U.S.C. 603(a).
\400\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The proposed rules would exempt smaller reporting companies and
emerging growth companies from the requirements of Section 13(q) and
proposed Rule 13q-1. Most small entities \401\ would fall within the
scope of this exemption and, therefore, would not be subject to the
proposed rules. Accordingly, the Commission hereby certifies, pursuant
to 5 U.S.C. 605(b), that the proposed rules, including proposed Rule
13q-1 and the amendments to Form SD, if adopted, would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA.
---------------------------------------------------------------------------
\401\ For purposes of the RFA, Exchange Act Rule 0-10(a) [17 CFR
240.0-10(a)] defines an issuer (other than an investment company) to
be a ``small business'' or ``small organization'' if it had total
assets of $5 million or less on the last day of its most recent
fiscal year. Because Exchange Act Rule 12b-2 defines a smaller
reporting company as an issuer (that is not an investment company)
with either a public float of less than $250 million, or annual
revenues of less than $100 million for the previous year and either
no public float or a public float of less than $700 million, most
small entities would likely fall within the definition of smaller
reporting company and, therefore, would be exempt from the proposed
rules.
---------------------------------------------------------------------------
Request for Comment
We request comment on this certification. In particular, we solicit
comment on the following: Do commenters agree with the certification?
If not, please describe the nature of any impact of the proposed
amendments on small entities and provide empirical data to illustrate
the extent of the impact. Such comments will be considered in the
preparation of the
[[Page 2567]]
final rules (and in a Final Regulatory Flexibility Analysis if one is
needed) and, if the proposed rules are adopted, will be placed in the
same public file as comments on the proposed rules themselves.
VII. Statutory Authority and Text of Proposed Rule and Form Amendments
We are proposing 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.
List of Subjects in 17 CFR Parts 240 and 249b
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, we propose to amend title 17,
chapter II of the Code of Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The general authority citation for part 240 continues to read 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, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 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); and Pub. L. 112-106,
secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Section 240.13q-1 is revised to read as follows:
Sec. 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 on Form 10-K (17 CFR
249.310), Form 20-F (17 CFR 249.220f), or Form 40-F (17 CFR 249.240f)
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 furnish 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 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 by the
Commission that an alternative reporting regime requires disclosure
that satisfies the transparency objectives of Section 13(q) (15 U.S.C.
78m(q)), for purposes of alternative reporting pursuant to Item 2.01(c)
of Form SD, must be filed in accordance with the procedures set forth
in Sec. 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) Exemptions--(1) Conflicts of law. A resource extraction issuer
that is prohibited by the law of the jurisdiction where the project is
located from providing the payment information required by Form SD may
exclude such disclosure, subject to the following conditions:
(i) The issuer has taken all reasonable steps to seek and use any
exemptions or other relief under the applicable law of the foreign
jurisdiction, and has been unable to obtain or use such an exemption or
other relief;
(ii) The issuer must disclose on Form SD:
(A) The foreign jurisdiction for which it is omitting the
disclosure pursuant to this paragraph (d)(1);
(B) The particular law of that jurisdiction that prevents the
issuer from providing such disclosure; and
(C) The efforts the issuer has undertaken to seek and use
exemptions or other relief under the applicable law of that
jurisdiction, and the results of those efforts; and
(iii) The issuer must furnish as an exhibit to Form SD a legal
opinion from counsel that opines on the issuer's inability to provide
such disclosure without violating the foreign jurisdiction's law.
(2) Conflicts with pre-existing contracts. A resource extraction
issuer that is unable to provide the payment information required by
Form SD without violating one or more contract terms that were in
effect prior to the effective date of this section may exclude such
disclosure, subject to the following conditions:
(i) The issuer has taken all reasonable steps to obtain the consent
of the relevant contractual parties, or to seek and use another
contractual exception or relief, to disclose the payment information,
and has been unable to obtain such consent or other contractual
exception or relief;
(ii) The issuer must disclose on Form SD:
(A) The jurisdiction for which it is omitting the disclosure
pursuant to this paragraph (d)(2);
(B) The particular contract terms that prohibit the issuer from
providing such disclosure; and
(C) The efforts the issuer has undertaken to obtain the consent of
the contracting parties, or to seek and use another contractual
exception or relief, to disclose the payment information, and the
results of those efforts; and
(iii) The issuer must furnish as an exhibit to Form SD a legal
opinion from counsel that opines on the issuer's inability to provide
such disclosure without violating the contractual terms.
(3) Exemption for emerging growth companies and smaller reporting
companies. An issuer that is an emerging growth company or a smaller
reporting company, each as defined under Sec. 240.12b-2, is exempt
from, and need not comply with, the requirements of this section.
(4) Case-by-case exemption. A resource extraction issuer may file
an application for exemptive relief under this section in accordance
with the procedures set forth in Sec. 240.0-12.
(e) Compilation. To the extent practicable, the staff will
periodically make a compilation of the information required to be
submitted 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 issuers or otherwise).
PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934
0
3. The authority citation for part 249b continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
* * * * *
Section 249b.400 is also issued under secs. 1502 and 1504, Pub.
L. 111-203, 124 Stat. 2213 and 2220.
0
4. Amend Form SD (referenced in Sec. 249b.400) by:
0
a. Adding a check box for Rule 13q-1;
0
b. Revising instruction A. under ``General Instructions'';
0
c. Redesignating instruction B.2. as B.3 and adding new instructions
B.2.
[[Page 2568]]
and B.4. under the ``General Instructions''; and
0
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:
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
FORM SD
Specialized Disclosure Report
----------------------------------------------------------------------------------------------------------------
(Exact name of the registrant as specified in its charter)
----------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
----------------------------------------------------------------------------------------------------------------
(Full mailing address of principal executive offices)
----------------------------------------------------------------------------------------------------------------
(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 submitted, and provide the
period to which the information in this Form applies:
__Rule 13p-1 under the Securities Exchange Act (17 CFR 240.13p-1) for the reporting period from January 1 to
December 31, ____.
__Rule 13q-1 under the Securities Exchange Act (17 CFR 240.13q-1) for the fiscal year ended ____.
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 Furnishing Reports
1. * * *
2. Form furnished under Rule 13q-1. If your fiscal year ends on or
before June 30, furnish the information required by Section 2 of this
form on EDGAR no later than March 31 in the calendar year following
your most recent fiscal year. If your fiscal year ends after June 30,
furnish this required information no later than March 31 in the second
calendar year following your most recent fiscal year.
3. If the deadline for furnishing 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 furnished in this report shall not
be deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, unless a registrant specifically
incorporates it by reference into such filing.
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
* * * * *
Section 2--Resource Extraction Issuer Disclosure
Item 2.01 Resource Extraction Issuer Disclosure and Report
(a) Required Disclosure. (1) A resource extraction issuer must
furnish an annual report on Form SD with the Commission, and include as
an exhibit to this Form SD, the information specified in Item
2.01(a)(5) of this Form, 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.
(2) The resource extraction issuer is not required to have the
information audited. The payment information must be provided on a cash
basis and not an accrual basis.
(3) The resource extraction issuer must provide a statement in the
body of the Form SD, under the caption ``Disclosure of Payments by
Resource Extraction Issuers,'' that the specified payment disclosure
required by this Form is included in an exhibit to the Form SD.
(4) A resource extraction issuer that is claiming an exemption
under Rule 13q-1(d)(1) or (2) (17 CFR 240.13q-1(d)(1) or (2)) must
provide the disclosure required by those rules, as applicable, in the
body of the Form SD. If applicable, a resource extraction issuer must
disclose in the body of Form SD that it has filed an application for
exemptive relief pursuant to Rule 13q-1(d)(4) (17 CFR 240.13q-1(d)(4)).
(5) The resource extraction issuer must include the following
information in the exhibit to Form SD, which must present the
information in the eXtensible Business Reporting Language (XBRL)
electronic format:
(i) The type and total amount of such payments, by payment type
listed in paragraph (d)(9)(iii) of this Item, made for each project of
the resource extraction issuer relating to the commercial development
of oil, natural gas, or minerals;
(ii) The type and total amount of such payments, by payment type
listed in paragraph (d)(9)(iii) of this Item, for all projects made to
each government;
(iii) The total amounts of the payments, by payment type listed in
paragraph (d)(9)(iii) of this Item;
(iv) The currency used to make the payments;
(v) The fiscal year in which the payments were made;
(vi) The business segment of the resource extraction issuer that
made the payments;
[[Page 2569]]
(vii) The governments (including any foreign government or the
Federal Government) that received the payments and the country in which
each such government is located;
(viii) The project of the resource extraction issuer to which the
payments relate;
(ix) The particular resource that is the subject of commercial
development;
(x) The method of extraction used in the project; and
(xi) The major subnational political jurisdiction of the project.
(b) Delayed Reporting. (1) A resource extraction issuer may delay
disclosing payment information related to exploratory activities until
the Form SD submitted 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 the commercial
development (other than exploration) of the oil, natural gas, or
minerals 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 pursuant to another alternative
reporting regime deemed by the Commission to require disclosure that
satisfies the transparency objectives of Section 13(q) (15 U.S.C.
78m(q)), in such entity's last full fiscal year is not required to
commence reporting payment information for such acquired entity until
the Form SD submitted 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 submission.
(3) A resource extraction issuer that has completed its initial
public offering in the United States in its last full fiscal year is
not required to commence reporting payment information pursuant to Rule
13q-1 until the Form SD submitted for the fiscal year immediately
following the fiscal year in which the registration statement for its
U.S. initial public offering became effective.
(c) Alternative Reporting. (1) A resource extraction issuer that is
subject to the resource extraction payment disclosure requirements of
an alternative reporting regime, which has been deemed by the
Commission to require disclosure that satisfies the transparency
objectives of Section 13(q) (15 U.S.C. 78m(q)), 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 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 submitted 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 submitted 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) A resource extraction issuer may follow the submission deadline
of an approved alternative jurisdiction if it submits 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. If a resource extraction issuer fails to submit such notice
on a timely basis, or submits such a notice but fails to submit the
alternative report within four 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 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 Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS)). A foreign private
issuer that prepares financial statements according to a comprehensive
set of accounting principles, other than U.S. GAAP, 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) Federal Government means the Federal Government of the United
States.
(7) 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.
(8) Not de minimis means any Payment made to each Foreign
Government in a host country or the Federal Government that equals or
[[Page 2570]]
exceeds $150,000, or its equivalent in the issuer's reporting currency,
whether made as a single payment or series of related payments, subject
to the condition that single payment (or a series of related payments)
disclosure for a Project is only required if the total Payments for a
Project equal or exceed $750,000. 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.
(9) 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;
(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.
(10) Project is defined by using the following three criteria:
(i) The type of resource being commercially developed;
(ii) The method of extraction; and
(iii) The major subnational political jurisdiction where the
commercial development of the resource is taking place.
(11) Resource extraction issuer means an issuer that:
(i) Is required to file an annual report with the Commission on
Form 10-K (17 CFR 249.310), Form 20-F (18 CFR 249.220f), or Form 40-F
(17 CFR 249.240f) 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.
(12) Subsidiary means an entity controlled directly or indirectly
through one or more intermediaries.
Instructions to Item 2.01
Disclosure by Subsidiaries and Other Controlled Entities
(1) If a resource extraction issuer is controlled by another
resource extraction issuer that has submitted a Form SD disclosing the
information required by Item 2.01 for the controlled entity, then such
controlled entity is not required to provide the disclosure required by
Item 2.01 separately. In such circumstances, the controlled entity must
submit a notice on Form SD indicating that the required disclosure was
submitted on Form SD by the controlling entity, identifying the
controlling entity and the date it submitted the disclosure. The
reporting controlling entity must note that it is submitting the
required disclosure for a controlled entity and must identify the
controlled entity on its Form SD submission.
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 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 submission.
Location Tagging
(3) When identifying the country and major subnational political
jurisdiction where the commercial development of the resource is taking
place, a resource extraction issuer must use the combined country and
subdivision code provided in ISO 3166, if available. When identifying
the country in which a government is located, a resource extraction
issuer must use the two letter country code provided in ISO 3166, if
available.
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.
Project Disclosure
(5)(i) When identifying the type of resource that is being
commercially developed for purposes of identifying a project, the
resource extraction issuer must identify whether the resource is oil,
natural gas, or a type of mineral. A resource extraction issuer should
identify synthetic oil obtained through processing tar sands, bitumen,
or oil shales as ``oil'' and should identify gas obtained from methane
hydrates as ``natural gas.'' Synthetic oil or gas obtained through
processing of coal should be identified as ``coal.'' Minerals must be
identified by type, such as gold, copper, coal, sand, or gravel, but
additional detail is not required. For information on which materials
are covered by the term ``minerals,'' refer to Instruction 13 below.
(ii) When identifying the method of extraction for purposes of
identifying a project, the resource extraction issuer must choose from
the following three parameters: well, open pit, or underground mining.
(iii) When identifying the national and major subnational political
jurisdiction for purposes of identifying a project, refer to
Instruction 3 to Item 2.01. Onshore and offshore development of
resources may not be treated as a single project. A resource extraction
issuer must identify when a project is offshore and identify the
nearest major subnational political jurisdiction pursuant to
Instruction 3 of Item 2.01.
(iv) A resource extraction issuer may treat all the activities
within a major subnational political jurisdiction as a single project,
but must describe each type of resource being commercially developed
and each method of extraction used in the description of the
[[Page 2571]]
project. A resource extraction issuer may not combine as one project
activities that cross the borders of a major subnational political
jurisdiction.
Payment Disclosure
(6) 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.
(7) 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.
(8) ``Processing,'' as used in Item 2.01, includes, but is not
limited to, midstream activities such as removing liquid hydrocarbons
from gas, removing impurities from natural gas prior to its transport
through a pipeline, and upgrading bitumen or 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 or preparing of raw ore prior to the smelting
phase. It would not include the downstream activities of refining or
smelting.
(9) 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.
(10) Royalties include unit-based, value-based, and profit-based
royalties. Fees include license fees, rental fees, entry fees, and
other considerations for licenses or concessions. Bonuses include
signature, discovery, and production bonuses.
(11) 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.
(12) 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 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.
(13) ``Minerals,'' as used in Item 2.01, includes any 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
(see subpart 1300 of Regulation S-K (17 CFR 229.1300). It does not
include oil and gas resources (as defined in 17 CFR 210.4-10(a)(16)(D)
or any successor provision).
(14) For payments made at a level below the major subnational
government level, such as a county, district, or municipality, an
issuer may aggregate all of its payments of a particular payment type
made to such subnational governments and disclose the aggregate amount
without having to identify the particular subnational government payee.
The issuer should instead generically identify the subnational
government payee (e.g., as ``county,'' ``municipality,'' or some
combination of subnational governments).
Section 3--Exhibits
Item 3.01 Exhibits
List below the following exhibits submitted 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.
Exhibit 3.01--Opinion of Counsel as required by Rule 13q-1(d)(1) or
(2) (17 CFR 240.13q-1(d)(1) or (2)).
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.
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(Registrant)
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By (Signature and Title) *
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(Date)
* Print name and title of the registrant's signing executive officer
under his or her signature.
* * * * *
By the Commission.
Dated: December 18, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-28407 Filed 1-14-20; 8:45 am]
BILLING CODE 8011-01-P