[Federal Register Volume 77, Number 177 (Wednesday, September 12, 2012)]
[Rules and Regulations]
[Pages 56365-56419]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21155]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-67717; File No. S7-42-10]
RIN 3235-AK85
Disclosure of Payments by Resource Extraction Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting new rules and an amendment to a new form
pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act relating to disclosure of payments by resource
extraction issuers. Section 1504 added Section 13(q) to the Securities
Exchange Act of 1934, which requires the Commission to issue rules
requiring resource extraction issuers to include in an annual report
information relating to any payment made by the issuer, a subsidiary of
the issuer, or an entity under the control of the issuer, to a foreign
government or the Federal Government for the purpose of the commercial
development of oil, natural gas, or minerals. Section 13(q) requires a
resource extraction issuer to provide information about the type and
total amount of such payments made for each project related to the
commercial development of oil, natural gas, or minerals, and the type
and total amount of payments made to each government. In addition,
Section 13(q) requires a resource extraction issuer to provide
information regarding those payments in an interactive data format.
DATES: Effective date: November 13, 2012.
Compliance date: A resource extraction issuer must comply with the
new rules and form for fiscal years ending after September 30, 2013.
For the first report filed for fiscal years ending after September 30,
2013, a resource extraction issuer may provide a partial year report if
the issuer's fiscal year began before September 30, 2013. The issuer
will be required to provide a report for the period beginning October
1, 2013 through the end of its fiscal year. For any fiscal year
beginning on or after September 30, 2013, a resource extraction issuer
will be required to file a report disclosing payments for the full
fiscal year.
FOR FURTHER INFORMATION CONTACT: Tamara Brightwell, Senior Special
Counsel, Division of Corporation Finance, Elliot Staffin, Special
Counsel, Office of International Corporate Finance, Division of
Corporation Finance, or Eduardo Aleman, Special Counsel, Office of
Rulemaking, Division of Corporation Finance, at (202) 551-3290, U.S.
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-4553.
SUPPLEMENTARY INFORMATION: We are adopting new Rule 13q-1 \1\ and an
amendment to new Form SD \2\ under the Securities Exchange Act of 1934
(``Exchange Act'').\3\
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\1\ 17 CFR 240.13q-1.
\2\ 17 CFR 249.448.
\3\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Background
II. Final Rules Implementing Section 13(q)
A. Summary of the Final Rules
B. Definition of ``Resource Extraction Issuer'' and Application
of the Disclosure Requirements
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
C. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
D. Definition of ``Payment''
1. Types of Payments
2. The ``Not De Minimis'' Requirement
3. The Requirement To Provide Disclosure for ``Each Project''
4. Payments by ``a Subsidiary * * * or an Entity Under the
Control of * * *''
E. Definition of ``foreign government''
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
F. Disclosure Required and Form of Disclosure
1. Annual Report Requirement
2. Exhibits and Interactive Data Format Requirements
3. Treatment for Purposes of Securities Act and Exchange Act
G. Effective Date
1. Proposed Rules
2. Comments on the Proposed Rules
3. Final Rules
III. Economic Analysis
A. Introduction
B. Benefits and Costs Resulting From the Mandatory Reporting
Requirement
1. Benefits
2. Costs
C. Benefits and Costs Resulting From Commission's Exercise of
Discretion
1. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
2. Types of Payments
3. Definition of ``Not De Minimis''
4. Definition of ``Project''
5. Annual Report Requirement
6. Exhibit and Interactive Data Requirement
D. Quantified Assessment of Overall Economic Effects
IV. Paperwork Reduction Act
A. Background
B. Summary of the Comment Letters
C. Revisions to PRA Reporting and Cost Burden Estimates
D. Revised PRA Estimate
V. Final Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Final Rules
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority and Text of Final Rule and Form Amendments
[[Page 56366]]
I. Background
On December 15, 2010, we proposed rule and form amendments \4\
under the Exchange Act to implement Section 13(q) of the Exchange Act,
which was added by Section 1504 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (``the Act'').\5\ Section 13(q) requires
the Commission to ``issue final rules that require each resource
extraction issuer to include in an annual report of the resource
extraction issuer information relating to any payment made by the
resource extraction issuer, a subsidiary of the resource extraction
issuer, or an entity under the control of the resource extraction
issuer to a foreign government or the Federal Government for the
purpose of the commercial development of oil, natural gas, or minerals,
including--(i) the type and total amount of such payments made for each
project of the resource extraction issuer relating to the commercial
development of oil, natural gas, or minerals, and (ii) the type and
total amount of such payments made to each government.'' \6\
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\4\ See Exchange Act Release No. 63549 (December 15, 2010), 75
FR 80978 (December 23, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63549.pdf (``Proposing Release'').
\5\ Public Law 111-203 (July 21, 2010).
\6\ 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 interactive data format.
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Based on the legislative history, we understand that Congress
enacted Section 1504 to increase the transparency of payments made by
oil, natural gas, and mining companies to governments for the purpose
of the commercial development of their oil, natural gas, and minerals.
A primary goal of such transparency is to help empower citizens of
those resource-rich countries to hold their governments accountable for
the wealth generated by those resources.\7\ To accomplish this goal,
Congress created a disclosure regime under the Exchange Act that would
support the commitment of the U.S. Federal Government to international
transparency promotion efforts relating to the commercial development
of oil, natural gas, or minerals.\8\
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\7\ See, e.g., statement by Senator Richard Lugar, one of the
sponsors of Section 1504 (``Adoption of the Cardin-Lugar amendment
would bring a major step in favor of increased transparency at home
and abroad * * *. More importantly, it would help empower citizens
to hold their governments to account for the decisions made by their
governments in the management of valuable oil, gas, and mineral
resources and revenues * * *. The essential issue at stake is a
citizen's right to hold its government to account. Americans would
not tolerate the Congress denying them access to revenues our
Treasury collects. We cannot force foreign governments to treat
their citizens as we would hope, but this amendment would make it
much more difficult to hide the truth.''), 156 Cong. Rec. S3816 (May
17, 2010).
\8\ See 15 U.S.C. 78m(q)(2)(E).
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Section 13(q) provides the following definitions and descriptions
of 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; \9\
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\9\ 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; \10\
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\10\ 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;
\11\ and
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\11\ 15 U.S.C. 78m(q)(1)(B).
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``payment'' means 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 guidelines of the Extractive Industries
Transparency Initiative (to the extent practicable), determines are
part of the commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals.\12\
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\12\ 15 U.S.C. 78m(q)(1)(C).
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Section 13(q) specifies that ``[t]o the extent practicable, the
rules issued under [the section] shall support the commitment of the
Federal Government to international transparency promotion efforts
relating to the commercial development of oil, natural gas, or
minerals.'' \13\ As noted above, the statute explicitly refers to one
international initiative, the Extractive Industries Transparency
Initiative (``EITI''),\14\ in the definition of ``payment.'' Although a
separate provision in Section 13(q) regarding international
transparency
[[Page 56367]]
efforts does not explicitly mention the EITI, the legislative history
indicates that the EITI was considered in connection with the new
statutory provision.\15\ The United States is one of several countries
that supports the EITI.\16\
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\13\ 15 U.S.C. 78m(q)(2)(E).
\14\ The EITI is a voluntary coalition of oil, natural gas, and
mining companies, foreign governments, investor groups, and other
international organizations dedicated to fostering and improving
transparency and accountability in countries rich in oil, natural
gas, and minerals through the publication and verification of
company payments and government revenues from oil, natural gas, and
mining. See Implementing the Extractive Industries Transparency
Initiative (2008) (``Implementing the EITI''), available at http://eiti.org/document/implementingtheeiti. According to the EITI, ``[b]y
encouraging greater transparency and accountability in countries
dependent on the revenues from oil, gas and mining, the potential
negative impacts of mismanaged revenues can be mitigated, and these
revenues can instead become an important engine for long-term
economic growth that contributes to sustainable development and
poverty reduction.'' EITI Source Book (2005), at 4, available at
http://eiti.org/files/document/sourcebookmarch05.pdf. Announced by
former UK Prime Minister Tony Blair at the World Summit on
Sustainable Development in Johannesburg in September 2002, the EITI
received the endorsement of the World Bank Group in 2003. See
History of EITI, http://www.eiti.org/eiti/history (last visited
August 15, 2012).
Currently 14 countries--Azerbaijan, Central African Republic,
Ghana, Kyrgyz Republic, Liberia, Mali, Mauritania, Mongolia, Niger,
Nigeria, Norway, Peru, Timor Leste, and Yemen--have achieved ``EITI
compliant'' status by completing a validation process in which
company payments are matched with government revenues by an
independent auditor. See http://eiti.org/countries/compliant (last
visited August 15, 2012). Some 22 other countries are EITI
candidates in the process of complying with EITI standards, although
one of the countries, Madagascar, recently had its EITI candidate
status suspended. See http://eiti.org/candidatecountries (last
visited August 15, 2012). Several other countries have indicated
their intent to implement the EITI. See http://eiti.org/othercountries. Implementation of the EITI varies across countries--
the EITI provides criteria and a framework for implementation, but
allows countries to make key decisions on the scope of its program
(e.g., degree of aggregation of data, inclusion of subnational or
social or community payments). See Implementing the EITI, at 23-24.
On September 20, 2011, President Obama declared that the United
States will join the global initiative and released a National
Action Plan stating that the Administration is committing to
implement the EITI. See http://www.whitehouse.gov/the-press-office/2011/09/20/opening-remarks-president-obama-open-government-partnership and http://www.whitehouse.gov/sites/default/files/us_national_action_plan_final_2.pdf. The U.S. Department of the
Interior (``DOI'') is responsible for implementing the U.S. EITI.
See ``White House Announces Secretary Ken Salazar as Senior Official
Responsible for Oversight of Implementation of Extractive Industries
Transparency Initiative,'' White House Statements and Releases
(October 25, 2011), available at http://www.whitehouse.gov/the-press-office/2011/10/25/white-house-announces-secretary-ken-salazar-administrations-senior-offic. After soliciting comment on and
evaluating comments regarding the formation of the multi-stakeholder
group for the U.S. EITI, the DOI announced that the assessment phase
of the U.S. EITI implementation was complete, and the next phase of
the U.S. EITI implementation will involve establishing the multi-
stakeholder group. See ``U.S. Department of the Interior Announces
Results of USEITI Implementation Assessment,'' U.S. Department of
the Interior News Release (July 10, 2012), available at http://www.doi.gov/EITI/index.cfm. See also letter from Batirente Inc. and
NEI Investments (February 10, 2012) (``Batirente and NEI
Investments'') (submitting a copy of a statement by 17 Canadian
investment institutions calling on the Canadian government to become
an EITI implementing country). One commentator indicated that the
final rules should be ``aligned and coordinated'' with the process
being developed by the DOI to fulfill the United States' commitment
to implementing the EITI. See letter from NMA 3.
\15\ See, e.g., statement by Senator Lugar (``This domestic
action will complement multilateral transparency efforts such as the
Extractive Industries Transparency Initiative--the EITI--under which
some countries are beginning to require all extractive companies
operating in their territories to publicly report their
payments.''), 111 Cong. Rec. S3816 (daily ed. May 17, 2010). Other
examples of international transparency efforts include the
amendments of the Hong Kong Stock Exchange listing rules for mineral
companies and the London Stock Exchange AIM rules for extractive
companies. See Amendments to the GEM Listing Rules of the Hong Kong
Stock Exchange, Chapter 18A.05(6)(c) (effective June 3, 2010),
available at http://www.hkex.com.hk/eng/rulesreg/listrules/gemrulesup/Documents/gem34_miner.pdf (requiring a mineral company
to include in its listing document, if relevant and material to the
company's business operations, information regarding its compliance
with host country laws, regulations and permits, and payments made
to host country governments in respect of tax, royalties, and other
significant payments on a country by country basis) and Note for
Mining and Oil & Gas Companies--June 2009, available at http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/rules/guidance-note.pdf (requiring disclosure in the initial listing
of ``any payments aggregating over [pound]10,000 made to any
government or regulatory authority or similar body made by the
applicant or on behalf of it, in regards to the acquisition of, or
maintenance of its assets.'').
\16\ See the list of EITI supporting countries, available at
http://eiti.org/supporters/countries (last visited August 15, 2012).
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The Commission's rules under Section 13(q) must require a resource
extraction issuer to submit the payment information included in an
annual report in an interactive data format \17\ using an interactive
data standard established by the Commission.\18\ 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.\19\ The section 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.\20\ The rules
issued pursuant to Section 13(q) \21\ must include electronic tags that
identify:
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\17\ 15 U.S.C. 78m(q)(2)(C).
\18\ 15 U.S.C. 78m(q)(2)(D).
\19\ 15 U.S.C. 78m(q)(1)(E).
\20\ 15 U.S.C. 78m(q)(1)(F).
\21\ 15 U.S.C. 78m(q)(2)(D)(i).
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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 electronic tags for other information that it determines is
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\ 15 U.S.C. 78m(q)(2)(D)(ii).
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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 1 year after the date on which the Commission issues final
rules[.]'' \24\
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\24\ 15 U.S.C. 78m(q)(2)(F).
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Finally, Section 13(q) requires, to the extent practicable, the
Commission to make publicly available online a compilation of the
information required to be submitted by resource extraction issuers
under the new rules.\25\ The statute does not define the term
compilation.
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\25\ 15 U.S.C. 78m(q)(3).
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The Commission received over 150 unique comment letters on the
proposal as well as over 149,000 form letters (including a petition
with 143,000 signatures).\26\ These letters came from corporations in
the resource extraction industries, industry and professional
associations, United States and foreign government officials, non-
governmental organizations, law firms, pension and other investment
funds, academics, investors, a labor union and other employee groups,
and other interested parties. Commentators generally supported
transparency efforts and offered numerous suggestions for revising
certain aspects of the proposal in the final rules.
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\26\ The letters, including the form letters designated as Type
A, Type B, and Type C, are available at http://www.sec.gov/comments/s7-42-10/s74210.shtml. In addition, to facilitate public input on
the Act, the Commission provided a series of email links, organized
by topic, on its Web site at http://www.sec.gov/spotlight/regreformcomments.shtml. The public comments we received on Section
1504 of the Act, which were submitted prior to the Proposing
Release, are available on our Web site at http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml. Many commentators provided comments both prior
to, and in response to, the proposal. Generally, our references to
comment letters refer to the comments submitted in response to the
proposal. When we refer to a comment letter submitted prior to the
proposal, however, we make that clear in the citation.
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We have reviewed and considered all of the comments that we
received and the rules we are adopting reflect changes made in response
to many of the comments. Generally, as adopted, the final rules track
the language in the statute, and except for where the language or
approach of Section 13(q) clearly deviates from the EITI, the final
rules are consistent with the EITI.\27\ In instances where the language
or approach of Section 13(q) clearly deviates from the EITI, the final
rules track the statute rather than the EITI because in those instances
we believe Congress intended the final rules to go beyond what is
required by the EITI. We believe this approach is consistent with
Section 13(q) and furthers the statutory goal to support international
transparency promotion efforts relating to the commercial development
of oil, natural gas, or minerals because the EITI is referenced in
Section 13(q) and is well-recognized for promoting such
transparency.\28\
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\27\ A country volunteers to become an EITI member. To become an
EITI member country, among other things, 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, as we understand it, 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.
The information provided in the reports varies widely among
countries. A country must complete an EITI validation process to
become a compliant member. The EITI Source Book and Implementing the
EITI provide guidance regarding what should be included in a
country's EITI plan, and we have looked to those materials and to
the reports made by EITI member countries for guidance as to EITI
requirements. See the EITI's Web site at http://eiti.org.
\28\ See Exchange Act Sections 13(q)(2)(C)(ii) and 13(q)(2)(E)
[15 U.S.C. 78m(q)(2)(C)(ii) and 78m(q)(2)(E)].
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II. Final Rules Implementing Section 13(q)
A. Summary of the Final Rules
Consistent with the proposal, we are adopting final rules that
define the term ``resource extraction issuer'' as defined in Section
13(q). As proposed, the final rules will apply to all U.S. companies
and foreign companies that are engaged in the commercial development of
oil, natural gas, or minerals, and that are required to file annual
reports with the Commission, regardless of the size of the company or
the extent of business operations constituting commercial development
of oil, natural gas, or minerals. Consistent with the proposal, the
final rules will apply to an issuer, whether government-owned or not,
that
[[Page 56368]]
meets the definition of resource extraction issuer.
Consistent with the proposal and in light of the structure,
language, and purpose of the statute, the final rules do not provide
any exemptions from the disclosure requirements. As such, the final
rules do not include an exemption for certain categories of issuers or
for resource extraction issuers subject to similar reporting
requirements under home country laws, listing rules, or an EITI
program. The final rules also do not provide an exemption for
situations in which foreign law may prohibit the required disclosure.
In addition, the final rules do not provide an exemption for instances
when an issuer has a confidentiality provision in an existing or future
contract or for commercially sensitive information.
Consistent with Section 13(q) and the proposal, the final rules
define ``commercial development of oil, natural gas, or minerals'' to
include the activities of exploration, extraction, processing, and
export, or the acquisition of a license for any such activity.
Consistent with Section 13(q) and the proposal, the final rules
define ``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, and bonuses. After considering the
comments, under the final rules and in accordance with Section
13(q)(1)(C)(ii), we also are including dividends and payments for
infrastructure improvements in the list of payments required to be
disclosed. The final rules include instructions to clarify the types of
taxes, fees, bonuses, and dividends that are covered. In addition,
after considering the comments, we have determined to define the term
``not de minimis.'' Unlike the proposed rules, which left the term
``not de minimis'' undefined, the final rules define ``not de minimis''
to mean any payment, whether a single payment or a series of related
payments, that equals or exceeds $100,000 during the most recent fiscal
year.
Consistent with Section 13(q) and the proposal, after considering
the comments, we have decided to leave the term ``project'' undefined.
Consistent with the proposal, the final rules require a resource
extraction issuer to disclose payments made by the issuer, a subsidiary
of the issuer, or an entity under the control of the issuer to a
foreign government or the U.S. Federal Government for the purpose of
commercial development of oil, natural gas, or minerals. A resource
extraction issuer will be required to disclose payments made directly,
or by any subsidiary, or entity under the control of the resource
extraction issuer. Therefore, a resource extraction issuer must
disclose payments made by a subsidiary or entity under the control of
the resource extraction issuer where the subsidiary or entity is
consolidated in the resource extraction issuer's financial statements
included in its Exchange Act reports, as well as payments by other
entities it controls as determined in accordance with Rule 12b-2. A
resource extraction issuer may be required to provide the disclosure
for entities in which it provides proportionately consolidated
information. A resource extraction issuer will be required to determine
whether it has control of an entity for purposes of the final rules
based on a consideration of all relevant facts and circumstances.\29\
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\29\ See Exchange Act Rule 12b-2 for the definition of
``control.'' See also note 315.
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We are adopting the definition of ``foreign government'' consistent
with the definition in Section 13(q), as proposed. A ``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. As proposed, the final rules clarify that
``Federal Government'' means the United States Federal Government. The
final rules do not require disclosure of payments made to subnational
governments in the United States. Consistent with the proposal, the
final rules clarify that a company owned by a foreign government is a
company that is at least majority-owned by a foreign government.
After considering the comments, the final rules we are adopting
require resource extraction issuers to provide the required disclosure
about payments in a new annual report, rather than in the issuer's
existing Exchange Act annual report as proposed. We are adopting
amendments to new Form SD to require the disclosure.\30\ Similar to the
proposal, the Form SD will require issuers to include a brief statement
in the body of the form in an item entitled, ``Disclosure of Payments
By Resource Extraction Issuers,'' directing users to detailed payment
information provided in an exhibit to the form. As adopted, in response
to comments, the final rules require resource extraction issuers to
file Form SD on EDGAR no later than 150 days after the end of the
issuer's most recent fiscal year. The final rules will require resource
extraction issuers to present the payment information in one exhibit to
new Form SD rather than in two exhibits, as was proposed. The required
exhibit must provide the information using the XBRL interactive data
standard.\31\ Because the XBRL exhibit will be automatically rendered
into a readable form available on EDGAR, we are not requiring a
separate HTML or ASCII exhibit in addition to the XBRL exhibit. Under
the final rules, and as required by the statute, a resource extraction
issuer must submit the payment information using electronic tags that
identify, for any payments made by a resource extraction issuer to a
foreign government or the U.S. Federal Government:
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\30\ In another release we are issuing today, we are adopting
rules to implement the requirements of Section 1502 of the Dodd-
Frank Act and requiring issuers subject to those requirements to
file the disclosure on Form SD. See Conflict Minerals, Release 34-
67716 (August 22, 2012) (``Conflict Minerals Adopting Release'').
Because of the order of our actions, we are adopting Form SD in that
release and we are amending the form in this release, but we intend
for the form to be used equally for these two separate disclosure
requirements and potentially others that would benefit from
placement in a specialized disclosure form.
\31\ As proposed, an issuer would have been required to submit
two exhibits--one in HTML or ASCII and the other in XBRL. As
discussed below, we have decided to require only one exhibit for
technical reasons and to reduce the compliance burden of the final
rules.
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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.\32\
\32\ See Item 2.01(a) of Form SD (17 CFR 249.448).
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In addition, a resource extraction issuer must provide the type and
total amount of payments made for each project and the type and total
amount of payments made to each government in interactive data format.
Unlike the proposal, in response to comments we received, the final
rules require resource extraction issuers to file rather than furnish
the payment information.
Under the final rules, a resource extraction issuer will be
required to comply with the new rules and form for fiscal years ending
after September 30, 2013. For the first report filed for fiscal years
ending after September 30, 2013, a resource extraction issuer may
provide
[[Page 56369]]
a partial year report if the issuer's fiscal year began before
September 30, 2013. The issuer will be required to provide a report for
the period beginning October 1, 2013 through the end of its fiscal
year. For any fiscal year beginning on or after September 30, 2013, a
resource extraction issuer will be required to file a report disclosing
payments for the full fiscal year.
B. Definition of ``Resource Extraction Issuer'' and Application of the
Disclosure Requirements
1. Proposed Rules
In accord with Section 13(q), the proposed rules would have applied
to issuers meeting the definition of ``resource extraction issuer'' and
would have defined the term to mean an issuer that is required to file
an annual report with the Commission and that engages in the commercial
development of oil, natural gas, or minerals. Consistent with Section
13(q), the proposed rules would not have provided any exemptions from
the disclosure requirements for resource extraction issuers. The
Proposing Release further clarified that the proposed rules would apply
to companies that fall within the definition of resource extraction
issuer whether or not they are owned or controlled by governments.
2. Comments on the Proposed Rules
We received a variety of comments regarding the proposed rules and
the application of the disclosure requirements. Numerous commentators
supported the Commission's proposed definition and application of the
disclosure requirements, including that the rules should not provide
any exemptions from the disclosure requirements.\33\ Noting an absence
of statutory language regarding exemptions, several commentators stated
that the legislative intent underlying Section 1504 was to provide the
broadest possible coverage of extractive companies so as to create a
level playing field.\34\
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\33\ See letters from Association of Forest Communities in
Guatemala (March 8, 2012) (``Guatemalan Forest Communities''),
Batirente (February 28, 2011), BC Investment Management Corporation
(March 2, 2011) (``bcIMC''), Bon Secours Health System (March 1,
2011) (``Bon Secours''), California State Teachers' Retirement
System (March 1, 2011) (``CalSTRS''), Calvert Investments (March 1,
2011) (``Calvert''), Catholic Relief Services and Committee on
International Justice and Peace (February 9, 2011) (``CRS''),
Derecho Ambiente y Recursos Naturales DAR (March 23, 2012)
(``Derecho''), EarthRights International (December 2, 2010) (pre-
proposing letter) (``ERI pre-proposal''), EarthRights International
(January 26, 2011), (September 20, 2011), (February 3, 2012),
(February 7, 2012) (respectively, ``ERI 1,'' ``ERI 2,'' ``ERI 3,''
and ``ERI 4''), Earthworks (March 2, 2011), Extractive Industries
Working Group (March 2, 2011) (``EIWG''), Global Financial Integrity
(March 1, 2011) (``Global Financial 2''), Global Witness (February
25, 2011) (``Global Witness 1''), Global Witness (February 24, 2012)
(with attachments) (``Global Witness 2''), Global Witness (February
24, 2012) (``Global Witness 3''), Greenpeace (March 8, 2012), Grupo
FARO (February 13, 2012), Philippe Le Billon (March 2, 2012) (``Le
Billon''), Libyan Transparency Association (February 22, 2012)
(``Libyan Transparency''), National Civil Society Coalition on
Mineral Resource Governance of Senegal (February 14, 2012)
(``National Coalition of Senegal''), Newground Social Investment
(March 1, 2011) (``Newground''), Nigeria Union of Petroleum and
Natural Gas Workers (July 8, 2011) (``NUPENG''), ONE (March 2,
2011), ONE Petition (February 23, 2012), Oxfam America (February 21,
2011) (``Oxfam 1''), Petroleum and Natural Gas Senior Staff
Association of Nigeria (June 27, 2011) (``PENGASSAN''), PGGM
Investments (March 1, 2011) (``PGGM''), PricewaterhouseCoopers LLP
(March 2, 2011) (``PWC''), Publish What You Pay U.S. (November 22,
2010) (pre-proposing letter) (``PWYP pre-proposal''), Publish What
You Pay U.S. (February 25, 2011) (``PWYP 1''), Railpen Investments
(February 25, 2011), Representative Barney Frank, Representative
Jose Serrano, Representative Norman Dicks, Representative Henry
Waxman, Representative Maxine Waters, Representative Donald Payne,
Representative Nita Lowey, Representative Betty McCollum,
Representative Barbara Lee, Representative Jesse Jackson, Jr.,
Representative Alcee Hastings, Representative Gregory Meeks,
Representative Rosa DeLauro, and Representative Marcy Kaptur
(February 15, 2012) (``Rep. Frank et al.''), Revenue Watch Institute
(February 17, 2011) (``RWI 1''), Peter Sanborn (March 12, 2011)
(``Sanborn''), Senator Benjamin Cardin, Senator John Kerry, Senator
Patrick Leahy, Senator Charles Schumer, and Representative Barney
Frank (March 1, 2011) (``Sen. Cardin et al. 1''), Senator Benjamin
Cardin, Senator John Kerry, Senator Patrick Leahy, Senator Carl
Levin, and Senator Charles Schumer (January 31, 2012) (``Sen. Cardin
et al. 2''), Senator Carl Levin (February 1, 2011) (``Sen. Levin
1''), Social Investment Forum (March 2, 2011) (``SIF''), George
Soros (February 23, 2011) and (February 21, 2012) (``Soros 1'' and
``Soros 2'', respectively), Syena Capital Management LLC (February
17, 2011) (``Syena''), Ta'ang Students and Youth Organization
(``TSYO''), TIAA-CREF (March 2, 2011) (``TIAA''), U.S. Agency for
International Development (July 15, 2011) (``USAID''), United
Steelworkers (March 29, 2011) (``USW''), WACAM (February 2, 2012),
and World Resources Institute (March 1, 2011) (``WRI''), and letters
designated as Type A and Type B. Other commentators generally voiced
their support for strong rules under Section 1504. See letters from
Cambodians for Resource Revenue Transparency (February 7, 2012)
(``Cambodians''), Conflict Risk Network (February 7, 2012), Bill and
Melinda Gates Foundation (February 9, 2012) (``Gates Foundation''),
Global Witness 2, Barbara and Richard Hause (February 24, 2012),
Network for the Fight Against Hunger in Cameroon (February 20, 2012)
(``RELUFA 3''), Oxfam America (March 7, 2012) (``Oxfam 3''), Gradye
Parsons (February 15, 2012), Representative Raul M. Grijalva
(November 15, 2011), Reverend Jed Koball (February 10, 2012), and
letters designated as Type C.
\34\ See, e.g., letters from Calvert, Global Witness 1, Oxfam 1,
PWYP 1, Sen. Cardin et al. 1, Sen. Levin 1, and WRI.
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Most commentators that addressed the issue supported including
issuers that are owned or controlled by governments within the
definition of resource extraction issuer, as proposed.\35\ Commentators
favored such inclusion because it would be consistent with the intent
of the statute to hold all resource extraction issuers accountable for
payments to governments,\36\ would adhere to EITI's universality
principle that payment disclosure in a given country should involve all
extractive industry companies operating in that country,\37\ and would
avoid anti-competitive effects because many government-owned companies
are the largest in the industry.\38\ Another commentator stated that,
while it did not believe government-owned entities should be exempt
from the payment disclosure rules, it opposed requiring a government-
owned entity to disclose payments made to the government that controls
it. According to that commentator, such payments are not ``made to
further commercial development,'' but rather are ``distributions to the
entity's controlling shareholder (or to itself), and requiring them to
be disclosed is inappropriate as a matter of comity.'' \39\ Another
commentator sought an exemption for payments made by a foreign
government-owned company to a subsidiary or entity controlled by
it.\40\
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\35\ See letters from American Petroleum Institute (January 28,
2011) (``API 1''), Chevron Corporation (January 28, 2011)
(``Chevron''), Exxon Mobil (January 31, 2011) (``ExxonMobil 1''), Le
Billon, PWYP 1, and Royal Dutch Shell plc (January 28, 2011) (``RDS
1'').
\36\ See letter from PWYP 1.
\37\ See letters from API 1 and ExxonMobil 1.
\38\ See letters from Chevron and RDS 1.
\39\ See letter from Cleary Gottlieb Steen & Hamilton (March 2,
2011) (``Cleary'').
\40\ See letter from Statoil ASA (February 22, 2011)
(``Statoil'').
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Several other commentators supported exemptions for certain
categories of issuers or for certain circumstances.\41\ For example,
while opposing a general exemption for smaller reporting companies,
some commentators supported an exemption for a small entity having $5
million or less in assets on the last day of its most recently
completed fiscal year.\42\ Other commentators opposed an exemption for
smaller companies because of their belief that those companies
generally face greater equity risk from their
[[Page 56370]]
operations in host countries than larger issuers.\43\
---------------------------------------------------------------------------
\41\ See, e.g., letters from API 1, API (August 11, 2011) (``API
2'') and API (May 18, 2012) (``API 5''), ExxonMobil 1, Cleary, New
York State Bar Association, Securities Regulation Committee (March
1, 2011) (``NYSBA Committee''), PetroChina Company Limited (February
28, 2011) (``PetroChina''), Petroleo Brasileiro S.A. (February 21,
2011) (``Petrobras''), Rio Tinto plc (March 2, 2011) (``Rio
Tinto''), RDS 1, and Statoil.
\42\ See letters from API 1 and ExxonMobil 1. Those commentators
otherwise supported the application of the payment disclosure
requirements to all classes of issuers.
\43\ See letters from Global Witness 1, PWYP 1, Sen. Cardin et
al. 1, and Soros 1.
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In addition, some commentators supported an exemption for
circumstances in which issuers were subject to other resource
extraction payment disclosure requirements, such as host country law,
stock exchange listing requirements, or an EITI program.\44\
Commentators believed that issuers should be able to satisfy their
obligations under Section 13(q) and the related rules by providing the
disclosure reported under applicable home country laws, listing rules,
or the EITI.\45\ Commentators asserted that this would minimize an
issuer's burden of having to comply with multiple transparency
standards and avoid potentially confusing duplicative disclosure.\46\
Other commentators, however, opposed providing an exemption for issuers
based on other reporting requirements because such an exemption would
result in an unlevel playing field and loss of comparability.\47\ Some
commentators asserted that because there are not currently any other
national extractive disclosure regulatory regimes equivalent to Section
13(q), providing such an exemption would be premature.\48\ In addition,
several commentators maintained that Section 13(q) was intended to go
beyond the disclosure provided under the EITI.\49\
---------------------------------------------------------------------------
\44\ See, e.g., letters from API 1, British Petroleum p.l.c.
(February 11, 2011 and July 8, 2011) (respectively ``BP 1'' and ``BP
2''), Cleary, ExxonMobil 1, NYSBA Committee, Petrobras, Rio Tinto,
RDS 1, Royal Dutch Shell (July 11, 2011) (``RDS 3''), Statoil, and
Vale S.A. (March 2, 2011) (``Vale''). In addition, two commentators
requested that the Commission align the rules with the reporting
requirements to be adopted by the DOI for the U.S. EITI. See letters
from NMA (June 15, 2012) (``NMA 3'') and Northwest Mining
Association (June 29, 2012) (``NWMA'').
\45\ See, e.g., letters from API 1, ExxonMobil 1, and RDS 1
(suggesting such an approach if home country requirements are at
least as rigorous as Section 13(q)); AngloGold Ashanti (January 31,
2011) (``AngloGold''), BHP Billiton Limited (July 28, 2011) (``BHP
Billiton''), and Vale (suggesting such an approach if disclosure is
made based on EITI principles); BP 2 and RDS 3 (supporting a global
common standard for transparency disclosure and, alternatively,
suggesting such an approach if disclosure is made in a broadly
similar manner based on EITI principles); Cleary, NYSBA Committee,
Petrobras, Rio Tinto, and Statoil (suggesting such an approach if
disclosure is made pursuant to home country requirements regardless
of whether those requirements follow EITI principles); and Cleary,
NYSBA Committee, and Statoil (suggesting alternatively such an
approach if disclosure is made based on EITI principles if the
company is a participant in an EITI program).
\46\ See, e.g., letters from Cleary, Rio Tinto, and Statoil.
\47\ See, e.g., letters from ERI 1, Global Witness 1, PWYP 1,
Rep. Frank et al., Sen. Cardin et al. 1, and Sen. Levin 1.
\48\ See, e.g., letter from PWYP 1. In this regard, after noting
that the European Commission (``EC'') is developing legislative
proposals for extractive industry reporting rules in the European
Union (``EU''), one commentator stated that ``it is critical that
country-by-country and project-by-project disclosure regulations are
adopted across other major markets to ensure a level playing field
and consistent reporting across countries.'' Letter from Publish
What You Pay U.K. (April 28, 2011) (``PWYP U.K.''). The EC
subsequently published proposals for extractive industry payment
disclosure requirements. See discussion in note 82. After the EC
published the proposals, PWYP urged the Commission to take the
initiative and promptly adopt final rules so that the EC can
harmonize its extractive disclosure requirements with the Section
13(q) rules. See letter from Publish What You Pay (December 19,
2011) (``PWYP 2''). The EC proposals are currently pending.
\49\ See letters from Global Witness 1, PWYP 1, and Sen.
Benjamin Cardin (December 1, 2010) (pre-proposal letter) (``Cardin
pre-proposal'').
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Many commentators supported an exemption from the disclosure
requirements when the required payment disclosure is prohibited under
the host country's laws.\50\ Some commentators stated that the laws of
China, Cameroon, Qatar, and Angola would prohibit disclosure required
under Section 13(q) and expressed concern that other countries would
enact similar laws.\51\ Commentators stated that without an appropriate
exemption, Section 13(q) would become a ``business prohibition''
statute that would force issuers to choose between leaving their
operations in certain countries or breaching local law and incurring
penalties in order to comply with the statute's requirements.\52\
Either outcome, according to commentators, would adversely affect
investors, efficiency, competition, and capital formation.\53\ Some
commentators further suggested that failure to adopt such an exemption
could encourage foreign issuers to deregister from the U.S. market.\54\
Other commentators maintained that comity concerns must be considered
when the Section 13(q) disclosure requirements conflict with foreign
law.\55\ One commentator suggested that an exemption would be
consistent with Executive Order 13609, which directs federal agencies
to take certain steps to ``reduce, eliminate, or prevent unnecessary
differences in [international] regulatory requirements.'' \56\
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\50\ See letters from API 1, API 2, API 5, AngloGold Ashanti
(January 31, 2011) (``AngloGold''), Spencer Bachus, Chairman of the
U.S. House of Representatives Committee on Financial Services, and
Gary Miller, Chairman of the U.S. House of Representatives
Subcommittee on International Monetary Policy, Committee on
Financial Services (March 4, 2011) (``Chairman Bachus and Chairman
Miller''), Barrick Gold Corporation (February 28, 2011) (``Barrick
Gold''), BP 1, Chamber of Commerce Institute for 21st Century Energy
(March 2, 2011) (``Chamber Energy Institute''), Chevron, Cleary,
ExxonMobil 1, ExxonMobil (March 15, 2011) (``ExxonMobil 2''),
International Association of Oil and Gas Producers (January 27,
2011) (``IAOGP''), NMA 2, NYSBA Committee, Nexen Inc. (March 2,
2011) (``Nexen''), PetroChina, Petrobras, PWC, Rio Tinto, RDS 1,
Royal Dutch Shell (May 17, 2011) (``RDS 2''), Royal Dutch Shell
(August 1, 2011) (``RDS 4''), Senator Lisa Murkowski and Senator
John Cornyn (February 28, 2012) (``Sen. Murkowski and Sen.
Cornyn''), Split Rock International, Inc. (March 1, 2011) (``Split
Rock''), Statoil, Talisman Energy Inc. (``Talisman'') (June 23,
2011), and Vale. See also letter from Cravath, Swaine & Moore LLP,
Cleary Gottlieb Steen & Hamilton LLP, Davis Polk & Wardwell LLP,
Shearman & Sterling LLP, Simpson Thacher & Bartlett LLP, Skadden,
Arps, Slate, Meagher & Flom LLP, Sullivan & Cromwell LLP, and Wilmer
Cutler Pickering Hale and Dorr LLP (November 5, 2010) (pre-proposal
letter) (``Cravath et al. pre-proposal'').
\51\ See letters from API 1 and ExxonMobil 1. See also letter
from RDS 1 (mentioning China, Cameroon, and Qatar).
\52\ See letters from Barrick Gold, Cleary, NYSBA Committee, Rio
Tinto, and Statoil; see also letter from API 5.
\53\ See, e.g., letters from API 1, ExxonMobil 1, and RDS 1; see
also letter from API 5. Several commentators noted that the
Commission has a statutory duty to consider efficiency, competition,
and capital formation when adopting rules. See letter from American
Petroleum Institute (January 19, 2012) (``API 3''), Cravath et al.
pre-proposal, Senator Mary L. Landrieu (March 6, 2012), and Sen.
Murkowski and Sen. Cornyn.
\54\ See letters from Cleary, Royal Dutch Shell (October 25,
2010) (pre-proposal letter) (``RDS pre-proposal''), Split Rock, and
Statoil. See also letter from Branden Carl Berns (December 7, 2011)
(``Berns'') (maintaining that some foreign issuers subject to
Section 13(q) with modest capitalizations on U.S. exchanges might
choose to delist in response to competitive advantages enjoyed by
issuers not subject to Section 13(q)).
\55\ See letters from API 5 and NMA 2.
\56\ See letter from API 5. We note that the responsibilities of
federal agencies under Executive Order 13609 are to be carried out
``[t]o the extent permitted by law'' and that foreign regulatory
approaches are to be considered ``to the extent feasible,
appropriate, and consistent with law.'' See Proclamation No. 13609,
77 FR 26413 (May 4, 2012).
---------------------------------------------------------------------------
Other commentators opposed an exemption for host country laws
prohibiting disclosure of payment information because they believed it
would undermine the purpose of Section 13(q) and create an incentive
for foreign countries that want to prevent transparency to pass such
laws, thereby creating a loophole for companies to avoid
disclosure.\57\ Commentators also disputed the assertion that there are
foreign laws that specifically prohibit disclosure of payment
information.\58\ Those commentators noted that most confidentiality
laws in the extractive industry sector relate to the
[[Page 56371]]
confidentiality of geological and other technical data, and in any
event, contain specific provisions that allow for disclosures to stock
exchanges.\59\
---------------------------------------------------------------------------
\57\ See, e.g., letters from Cambodians, EG Justice (February 7,
2012) (``EG Justice 2''), Global Witness 1, Grupo Faro, Human Rights
Foundation of Monland (March 8, 2011 and July 15, 2011)
(respectively, ``HURFOM 1'' and ``HURFOM 2''), National Coalition of
Senegal, PWYP 1, Rep. Frank et al., Sen. Cardin et al. 1, Sen.
Cardin et al. 2, Sen. Levin 1, Soros 2, U.S. Agency for
International Development (July 15, 2011) (``USAID''), and WACAM.
\58\ See, e.g., letters from ERI 3, Global Witness 1, PWYP 1,
Publish What You Pay (December 20, 2011) (``PWYP 3''), and Rep.
Frank et al.
\59\ See letters from Global Witness 1, Susan Maples, J.D.,
Post-Doctoral Research Fellow, Columbia University School of Law
(March 2, 2011) (``Maples''), Network for the Fight Against Hunger
in Cameroon (March 14, 2011 and July 11, 2011) (respectively,
``RELUFA 1'' and ``RELUFA 2''), and PWYP 1.
---------------------------------------------------------------------------
Many commentators also sought an exemption from the disclosure
requirements for payments made under existing contracts that contain
confidentiality clauses prohibiting such disclosure.\60\ According to
commentators, while some contracts may permit the disclosure of
information to comply with an issuer's home country laws, regulations,
or stock exchange rules, those contractual provisions only allow the
contracting party, not its parent or affiliate companies, to make the
disclosure.\61\ Some commentators also sought an exemption from the
requirements for payments made under future contracts containing
confidentiality clauses.\62\
---------------------------------------------------------------------------
\60\ See letters from API 1, AngloGold, Barrick Gold, Chairman
Bachus and Chairman Miller, BP 1, Chamber Energy Institute, Chevron,
Cleary, ExxonMobil 1, IAOGP, NMA 2, NYSBA Committee, Nexen,
PetroChina, Petrobras, PWC, Rio Tinto, RDS 1, Split Rock, Statoil,
and Vale.
\61\ See letters from API 1 and ExxonMobil 1.
\62\ See letters from AngloGold and NMA 2. AngloGold suggested
conditioning the exemption on an issuer having made a good faith
determination that it would not have been able to enter into the
contract but for agreeing to a confidentiality provision.
---------------------------------------------------------------------------
Other commentators opposed an exemption based on confidentiality
clauses in contracts on the grounds that such an exemption was not
necessary.\63\ Commentators maintained that most contracts include an
explicit exception for information that must be disclosed by law, and,
in cases where such language is not explicit, it generally would be
read into any such contract under judicial or arbitral review.\64\
Commentators further stated that an exemption based on contract
confidentiality would undermine Section 13(q) by creating incentives
for issuers to craft such contractual provisions.\65\
---------------------------------------------------------------------------
\63\ See letters from Global Witness 1, Maples, Oxfam (March 20,
2012) (``Oxfam 3''), and PWYP 1.
\64\ See, e.g., letters from Oxfam 3 and PWYP 1. See also letter
from SIF citing the ``official Production Sharing Contract of the
government of Equatorial Guinea'' and noting that it explicitly
states that companies are permitted to share all information
relating to the Contract or Petroleum Operations in the following
instances: ``To the extent that such data and information is
required to be furnished in compliance with any applicable laws or
regulation'' (Article 20.1.1c) and ``[i]n conformity with the
requirements of any stock exchange having jurisdiction over a
Party[.]'' (Article 20.1.1d)).
\65\ See, e.g., letters from Global Witness 1 and Oxfam 1.
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Several commentators supported an exemption for situations when,
regardless of the existence of a contractual confidentiality clause,
such disclosure would jeopardize commercially or competitively
sensitive information.\66\ Other commentators expressed doubt that
disclosure of payment information would create competitive
disadvantages because much of the information is already available from
third-party service providers or through the large number of joint
ventures between competitors in the extractive industries.\67\
Commentators also expressed concern that providing an exemption for
commercially or competitively sensitive information would frustrate
Congress' intent to achieve payment transparency and
accountability.\68\
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\66\ See letters from American Exploration and Production
Council (January 31, 2011) (``AXPC''), API 1, Chamber Energy
Institute, Chevron, ExxonMobil 1, IAOGP, Local Authority Pension
Fund Forum (January 31, 2011) (``LAPFF''), NMA 2, Rio Tinto, RDS 1,
and United States Council for International Business (February 4,
2011) (``USCIB'').
\67\ See letters from PWYP 1 and RWI 1; see also letter from
Global Witness 1 (noting a study finding that the majority of
disclosures that would be required pursuant to Section 13(q) would
already be known to actors within the industry).
\68\ See, e.g., letter from Global Witness 1. Another
commentator stated that ``to the extent that Section 13(q)'s
reporting obligations result in some competitive disadvantage to
regulated issuers, Congress already accepted this risk when it
determined that pursuing the goals of promoting transparency and
good governance was of paramount importance--even at the cost of an
incidental burden on issuers * * * As with the Foreign Corrupt
Practices Act, Congress made the affirmative choice to set a higher
standard for global corporate practice. Other countries have already
started to follow Congress' lead in this area * * * Strong U.S.
leadership with respect to transparency in the extractive industries
will make it easier for foreign governments to adopt similar
reporting requirements, which in turn will serve to level the
playing field. Letter from Oxfam 1.
---------------------------------------------------------------------------
Some commentators believed that the disclosure of detailed payment
information would jeopardize the safety and security of a resource
extraction issuer's operations or employees and requested an exemption
in such circumstances.\69\ Other commentators believed that detailed
payment disclosure was critical for workers and their communities to
achieve benefits from investment transparency, including a decrease in
unrest and conflict and increased stability and safety.\70\
---------------------------------------------------------------------------
\69\ See letters from API 1, Spencer Bachus, Chairman of the
U.S. House of Representatives Committee on Financial Services
(August 21, 2012) (``Chairman Bachus''), Chevron, ExxonMobil 1, NMA
2, Nexen, PetroChina, and RDS 1.
\70\ See letters from NUPENG, PENGASSAN, PWYP 1, and USW.
---------------------------------------------------------------------------
Some commentators requested that the Commission extend the
disclosure requirements to foreign private issuers that are exempt from
Exchange Act reporting obligations but publish their annual reports and
other material home country documents electronically in English
pursuant to Exchange Act Rule 12g3-2(b).\71\ Those commentators
asserted that requiring such issuers to comply with the disclosure
requirements would help ameliorate anti-competitive concerns. Other
commentators, however, opposed extending the disclosure required under
Section 13(q) to companies that are exempt from Exchange Act
registration and reporting because it would discourage use of the Rule
12g3-2(b) mechanism \72\ and because such an extension would be
inconsistent with the premise of Rule 12g3-2(b).\73\
---------------------------------------------------------------------------
\71\ See letters from API 1, Calvert, ExxonMobil 1, Global
Witness 1, RWI 1, and RDS 1.
\72\ See letter from NYSBA Committee.
\73\ See letter from NMA 2 and NYSBA Committee.
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3. Final Rules
Consistent with the proposal, we are adopting final rules that
define the term ``resource extraction issuer'' as it is defined in
Section 13(q). The final rules will apply to all U.S. companies and
foreign companies that are engaged in the commercial development of
oil, natural gas, or minerals and that are required to file annual
reports with the Commission, regardless of the size of the company or
the extent of business operations constituting commercial development
of oil, natural gas, or minerals.\74\ Consistent with the proposal, the
final rules will apply to a company, whether government-owned or not,
that meets the definition of resource extraction issuer.\75\ Any
failure to include government-owned companies within the scope of the
[[Page 56372]]
disclosure rules could raise competitiveness concerns.\76\
---------------------------------------------------------------------------
\74\ See new Exchange Act Rule 13q-1.
\75\ As discussed below, a resource extraction issuer, including
a government-owned resource extraction issuer, will be required to
provide the payment disclosure if the other requirements of the rule
are met. Contrary to some commentators' suggestions, we are not
providing a carve-out from the rules for payments made by a
government-owned resource extraction issuer to its controlling
government because we believe it would be inconsistent with the
purpose of the statute. We note a government-owned resource
extraction issuer would only disclose payments made to the
government that controls it if those payments were made for the
purpose of commercial development of oil, natural gas, or minerals
and the payments are within the categories of payments that would be
required to be disclosed under the rules.
\76\ See note 38 and accompanying text.
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Although some commentators urged us to provide exemptions for
certain categories of issuers,\77\ in light of the statutory purpose of
Section 13(q),\78\ we have decided not to adopt exemptions from the
disclosure requirement for any category of resource extraction issuers,
including smaller issuers and foreign private issuers. We believe the
transparency objectives of Section 13(q) are best served by requiring
disclosure from all resource extraction issuers. In addition, we agree
with commentators that providing an exemption for smaller reporting
companies or foreign private issuers could contribute to an unlevel
playing field and raise competitiveness concerns for larger companies
and domestic companies.\79\ We also note that some commentators opposed
an exemption for smaller companies because of their belief that those
companies generally face greater equity risk from their operations in
host countries than larger issuers.\80\
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\77\ See note 41 and accompanying text.
\78\ See note 7 and accompanying text.
\79\ See notes 33 and 34 and accompanying text.
\80\ See letters from Global Witness 1, PWYP 1, Sen. Cardin et
al. 1, and Soros 1.
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The final rules also do not permit resource extraction issuers to
satisfy the disclosure requirements adopted under Section 13(q) by
providing disclosures required under other extractive transparency
reporting requirements, such as under home country laws, listing rules,
or an EITI program. Section 13(q) does not provide such an
accommodation and, as noted by some commentators, in some respects the
statute extends beyond the disclosure required under other transparency
initiatives.\81\ In addition, we note that transparency initiatives for
resource extraction payment disclosure are continuing to develop.\82\
Therefore, we believe it would be premature to permit issuers to
satisfy their disclosure obligation by complying with other extractive
transparency reporting regimes or by providing the disclosure required
by those regimes in lieu of the disclosure required by the rules we are
adopting under Section 13(q).\83\
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\81\ See note 49 and accompanying text.
\82\ One recent development is the European Commission's
issuance in October 2011 of proposed directives that would require
companies listed on EU stock exchanges and large private companies
based in EU member states to disclose their payments to governments
for oil, gas, minerals, and timber. See the European Commission's
press release concerning the proposal, which is available at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1238&format=HTML&aged=0&language=EN&guiLanguage=en. The EU proposal
differs from the final rules we are adopting in several respects.
For example, the EU proposal would apply to large, private EU-based
companies as well as EU-listed companies engaged in oil, natural
gas, minerals, and timber, whereas the final rules apply only to
Exchange Act reporting companies engaged in oil, natural gas, and
mining. The EU proposal would require disclosure of payments that
are material to the recipient government, whereas the final rules
require disclosure of payments that are not de minimis. Further, the
EU proposal would apply to exploration, discovery, development, and
extraction activities, whereas the final rules apply to exploration,
extraction, processing, and export activities. In addition, while
both the EU proposal and final rules require payment disclosure per
project and government, the EU proposal would base project reporting
on a company's current reporting structure whereas, as discussed
below, the final rules leave the term ``project'' undefined. See
also letter from PWYP 2. Other jurisdictions have introduced, but
have not adopted, transparency initiatives. See letter from ERI 4
and note 14 and accompanying text.
\83\ In this regard, we are not persuaded by comments suggesting
that we should align our rules with any reporting requirements that
may be adopted by the DOI as part of U.S. EITI. DOI is continuing
its efforts to develop a U.S. EITI program and is currently working
to form the stakeholder group. In addition, the scope of EITI
programs generally differs from the scope of the requirements of
Section 13(q). An EITI program adopted by a particular country
generally requires disclosure of payments to that country's
governments by companies operating in that country, but does not
require disclosure of payments made by those companies to foreign
governments. The disclosure requirements are developed country by
country. In contrast, Section 13(q) requires disclosure of payments
to the federal and foreign governments by resource extraction
issuers. As noted elsewhere in this release, the requirements of the
statute differ from the EITI in a number of respects.
---------------------------------------------------------------------------
Consistent with Section 13(q) and the proposed rules, we also are
not providing an exemption for any situations in which foreign law may
prohibit the required disclosure. Although some commentators asserted
that certain foreign laws currently in place would prohibit the
disclosure required under Section 13(q), other commentators disagreed
and asserted that currently no foreign law prohibits the
disclosure.\84\ Further, as noted above, some commentators believed
that we should adopt final rules providing an exemption from the
disclosure requirements where foreign laws prohibit the required
disclosure, including laws that may be adopted in the future,\85\ while
others believed that providing such an exemption would be inconsistent
with the statute and would encourage countries to adopt laws
specifically prohibiting the required disclosure.\86\ While we
understand commentators' concerns regarding the situation an issuer may
face if a country in which it does business or would like to do
business prohibits the disclosure required under Section 13(q),\87\ the
final rules we are adopting do not include an exemption for situations
in which foreign law prohibits the disclosure. We believe that adopting
such an exemption would be inconsistent with the structure and language
of Section 13(q) \88\ and, as some commentators have noted,\89\ could
undermine the statute by encouraging
[[Page 56373]]
countries to adopt laws, or interpret existing laws, specifically
prohibiting the disclosure required under the final rules.
---------------------------------------------------------------------------
\84\ Compare letters from API 1, Barrick Gold, Cleary,
ExxonMobil 1, NMA 2, NYSBA Committee, Rio Tinto, RDS 1, and Statoil
with letters from EarthRights International (February 3, 2012)
(``ERI 3''), Global Witness, PWYP, Publish What You Pay (December
20, 2011) (``PWYP 2''), Maples, and Rep. Frank et al. Several of the
comment letters from issuers and industry associations assert that
existing laws in Angola, Cameroon, China, and Qatar prohibit, or in
some situations may prohibit, disclosure of the type required by
Section 13(q). One commentator submitted translations of Despacho
385/06, issued by the Minister of the Angola Ministry of Petroleum,
as amended by Despacho 409/06 (the ``Angola Order'') and a letter
dated December 23, 2009, from the Deputy Premier, Minister of Energy
& Industry, of the State of Qatar (the ``Qatar Directive''). See
letter from ExxonMobil 2. Another commentator submitted a
translation of certain sections of Decree No. 2000/465 relating to
the Cameroon Petroleum Code, a copy of a legal opinion from Cameroon
counsel, and a copy of a legal opinion from Chinese counsel. See
letter from RDS 1. We are not aware of any other examples submitted
on the public record of foreign laws purported to prohibit
disclosure of payments by resource extraction issuers. Other
commentators have submitted contrary data, arguing that the laws of
Angola, Cameroon, China, and Qatar do not prohibit a resource
extraction issuer from complying with Section 13(q) and the final
rules, and providing examples of companies that have disclosed
payment information relating to resource development activities in
Angola, Cameroon, and China. See letter from ERI 3. One commentator
submitted a legal opinion stating that ``[n]othing in Cameroonian
law prevents oil companies from publishing data on revenues they pay
to the state derived from oil contracts signed with the
government.''
\85\ See, e.g., API 1, ExxonMobil 1, and RDS 1.
\86\ See, e.g., letters from Cambodians, EG Justice (February 7,
2012) (``EG Justice 2''), Global Witness 1, Grupo Faro, HURFOM 1 and
HURFOM 2, National Coalition of Senegal, PWYP, Rep. Frank et al.,
Sen. Cardin et al., Sen. Cardin et al. 2, Sen. Levin 1, Soros 2, US
Agency for International Development (July 15, 2011) (``USAID''),
and WACAM.
\87\ See, e.g., API 1, ExxonMobil 1, and RDS 1.
\88\ As noted by some commentators, Section 23(a)(2) requires
us, when adopting rules, to consider the impact any new rule would
have on competition. See, e.g., letters from API 1, API 3, Chairman
Bachus, Cravath et al pre-proposal, and ExxonMobil 1. Specifically,
Section 23(a)(2) requires us ``to consider * * * the impact any such
rule or regulation would have on competition'' in making rules
pursuant to the Exchange Act. Further, the section states that the
Commission ``shall not adopt any such rule * * * which would impose
a burden on competition not necessary or appropriate in furtherance
of [the Exchange Act].'' As discussed further below, we recognize
the final rules may impose a burden on competition; however, in
light of the language and purpose of Section 13(q), which is now
part of the Exchange Act, we believe the rules we are adopting
pursuant to the provision and any burden on competition that may
result are necessary in furtherance of the purpose of the Exchange
Act, including Section 13(q) of the Exchange Act.
\89\ See, e.g., letters from Cambodians, EG Justice (February 7,
2012) (``EG Justice 2''), Global Witness 1, Grupo Faro, HURFOM 1 and
HURFOM 2, National Coalition of Senegal, PWYP, Rep. Frank et al.,
Sen. Cardin et al., Sen. Cardin et al. 2, Sen. Levin 1, Soros 2,
USAID, and WACAM.
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Consistent with Section 13(q) and the proposed rules, the final
rules do not provide an exemption for instances when an issuer has a
confidentiality provision in a relevant contract, as requested by some
commentators.\90\ We understand that contracts typically allow for
disclosure to be made when required by law for reporting purposes.\91\
Although some commentators maintained that those types of contractual
provisions only allow the contracting party, not its parent or
affiliate companies, to make the disclosure,\92\ the final rules we are
adopting do not include an exemption for confidentiality provisions in
contracts because we believe this issue can be more appropriately
addressed through the contract negotiation process.\93\ As noted by
some commentators, a different approach might encourage a change in
practice or an increase in the use of confidentiality provisions to
circumvent the disclosure required by the final rules.\94\ In addition,
including an exemption from the disclosure requirements for payments
made under existing contracts that contain confidentiality clauses
prohibiting such disclosure, as suggested by some commentators,\95\
would frustrate the purpose of Section 13(q).
---------------------------------------------------------------------------
\90\ See, e.g., letters from API 1, Chevron, Cleary, ExxonMobil
1, NMA 2, and RDS 1.
\91\ See letters from Global Witness 1, Maples, and PWYP 1.
\92\ See letters from API 1 and ExxonMobil 1.
\93\ See letter from Maples.
\94\ See letters from Global Witness and Oxfam.
\95\ See note 60 and accompanying text.
---------------------------------------------------------------------------
Although some commentators sought an exemption for commercially or
competitively sensitive information, regardless of the existence of a
confidentiality provision in a contract,\96\ the final rules do not
provide such an exemption. We note that commentators disagreed on the
need for an exemption for commercially or competitively sensitive
information.\97\ While we understand commentators' concerns about
potentially being required to provide commercially or competitively
sensitive information,\98\ we also are cognizant of other commentators'
concerns that such an exemption would frustrate the purpose of Section
13(q) to promote international transparency efforts.\99\ We note that
in situations involving more than one payment, the information will be
aggregated by payment type, government, and/or project, and therefore
may limit the ability of competitors to use the information to their
advantage.
---------------------------------------------------------------------------
\96\ See note 66 and accompanying text.
\97\ See notes 66 and 67 and accompanying text.
\98\ See note 66 and accompanying text.
\99\ See note 68 and accompanying text.
---------------------------------------------------------------------------
We note that some commentators sought an exemption for
circumstances in which a company believes that disclosure might
jeopardize the safety and security of its employees and
operations,\100\ while other commentators opposed such an exemption and
noted their belief that increased transparency would instead increase
safety for employees.\101\ We understand issuers' concerns about the
safety of their employees and operations; however, in light of
commentators' disagreement on this issue, including the belief by some
commentators that disclosure will improve employee safety, and the fact
that the statute seeks to promote international transparency efforts,
we are not persuaded that such an exemption is warranted and we are not
including it in the final rules. We also note that neither the statute
nor the final rules require disclosure regarding the names or location
of employees.
---------------------------------------------------------------------------
\100\ See note 69 and accompanying text.
\101\ See note 70 and accompanying text.
---------------------------------------------------------------------------
The final rules do not extend the disclosure requirements to
foreign private issuers that are exempt from Exchange Act registration
pursuant to Rule 12g3-2(b). Foreign private issuers relying on Rule
12g3-2(b) are not required to file annual reports with the Commission
and thus, they do not fall within the plain definition of resource
extraction issuer provided in the statute. In addition, we believe that
such an extension would be inconsistent with the premise of Rule 12g3-
2(b).\102\ Issuers that are exempt from Exchange Act registration
pursuant to Rule 12g3-2(b) are not subject to reporting requirements
under the Exchange Act, including any requirement to file an annual
report.
---------------------------------------------------------------------------
\102\ See note 73 and accompanying text.
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C. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
1. Proposed Rules
Consistent with Section 13(q), the proposed rules defined
``commercial development of oil, natural gas, or minerals'' to include
the activities of 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. In proposing the
definition, we intended to capture only activities that are directly
related to the commercial development of oil, natural gas, or minerals,
but not activities that are ancillary or preparatory, such as the
manufacture of a product used in the commercial development of oil,
natural gas, or minerals. In the Proposing Release, we noted that
commercial development would not include transportation activities for
a purpose other than export. In addition, we noted, as an example, that
an issuer engaged in the removal of impurities, such as sulfur, carbon
dioxide, and water, from natural gas after extraction but prior to its
transport through the pipeline would be included in the definition of
commercial development because such removal is generally considered to
be a necessary part of the processing of natural gas in order to
prevent corrosion of the pipeline.
2. Comments on the Proposed Rules
Commentators supported various aspects of the proposed definition
\103\ while suggesting clarifications or alternative approaches to the
definition of commercial development. For example, numerous
commentators suggested defining commercial development to include
upstream activities (exploration and extraction of resources)
only.\104\ Commentators noted that Section 13(q) is entitled
``Disclosure of Payments by Resource Extraction Issuers,'' and as such,
the statute ``is directed toward those issuers who are engaged in
extractive activities, or what are commonly referred to as `upstream
activities.' '' \105\ Commentators also noted that the EITI focuses on
upstream activities \106\ and that the statute directs the Commission
``to consider consistency with EITI guidelines in the rules it
develops.'' \107\ Several commentators noted they believed defining
commercial development to include only upstream activities would be
consistent with the Commission's existing definition of ``oil and gas
producing activities'' in Regulation S-X Rule 4-10.\108\ In addition,
commentators
[[Page 56374]]
noted that adopting a definition of commercial development that is
based on the definition of ``oil and gas producing activities'' in
Regulation S-X would align it with a widely understood and accepted
industry definition.\109\ According to commentators advocating this
approach, ``commercial development of oil, natural gas, or minerals''
would include ``exploration, extraction, field processing and
gathering/transportation activities to the first marketable
location.''\110\ Some commentators suggested clarifying, either in the
regulatory text or in the adopting release, that the definition would
include field processing activities prior to the refining or smelting
phase, such as upgrading of bitumen and heavy oil and crushing and
processing of raw ore, as well as transport activities related to the
export of oil, natural gas, or minerals to the first marketable
location.\111\ In focusing exclusively on mining activities, one
commentator stated that the definition of ``commercial development''
should include exploration, extraction, and production, and activities
of processing and export to the extent that they are associated with
production.\112\ Under that approach, the definition would include
steps in production prior to the smelting or refining phase, such as
crushing of raw ore, processing of the crushed ore, and export of
processed ore to the smelter, but would not include the actual smelting
or refining. Several commentators stated that the definition should
exclude transportation and other midstream or downstream activities,
including export.\113\ According to some of those commentators, ``
`export' activities are not always directly associated with oil and gas
producing activities, and can often be undertaken by issuers that are
not engaged in `resource extraction' at all.''\114\ They believed that
requiring the reporting of payments by such issuers goes beyond the
intended scope of the statute. One commentator urged us to state
explicitly that ``commercial development'' does not include
transportation activities and that transportation activities include
the underground storage of natural gas.\115\ Another commentator stated
that an issuer should be allowed to choose whether to include
transportation in the definition of ``commercial development'' as long
as it discloses the basis for its definition.\116\
---------------------------------------------------------------------------
\103\ See, e.g., letters from API 1, AngloGold, BP 1, CRS,
Global Financial Integrity 2, NMA 2, and PWYP 1.
\104\ See letters from API 1, AXPC, Barrick Gold, BP 1, Chevron,
ExxonMobil 1, NMA 2, Petrobras, PWC, RDS 1, and Statoil.
\105\ See letters from API 1 and ExxonMobil 1.
\106\ See, e.g., letters from API 1 and NMA 2.
\107\ See letters from API 1 and ExxonMobil 1.
\108\ See, e.g., letters from API 1, Chevron, ExxonMobil 1, and
RDS 1. Rule 4-10(a)(16) defines ``oil and gas producing activities''
to include:
(A) The search for crude oil, including condensate and natural
gas liquids, or natural gas (``oil and gas'') in their natural
states and original locations;
(B) The acquisition of property rights or properties for the
purpose of further exploration or for the purpose of removing the
oil or gas from such properties;
(C) The construction, drilling, and production activities
necessary to retrieve oil and gas from their natural reservoirs,
including the acquisition, construction, installation, and
maintenance of field gathering and storage systems, such as:
(1) Lifting the oil and gas to the surface; and
(2) Gathering, treating, and field processing (as in the case of
processing gas to extract liquid hydrocarbons); and
(D) Extraction of saleable hydrocarbons, in the solid, liquid,
or gaseous state, from oil sands, shale, coalbeds, or other
nonrenewable natural resources which are intended to be upgraded
into synthetic oil or gas, and activities undertaken with a view to
such extraction.
(ii) Oil and gas producing activities do not include:
(A) Transporting, refining, or marketing oil and gas;
(B) Processing of produced oil, gas or natural resources that
can be upgraded into synthetic oil or gas by a registrant that does
not have the legal right to produce or a revenue interest in such
production;
(C) Activities relating to the production of natural resources
other than oil, gas, or natural resources from which synthetic oil
and gas can be extracted; or
(D) Production of geothermal steam. (Instructions omitted.)
\109\ See letters from API 1 and ExxonMobil 1.
\110\ See, e.g., letter from API 1.
\111\ See letters from AXPC, API 1, Barrick Gold, BP 1, Chevron,
ExxonMobil 1, NMA 2, Petrobras, PWC, RDS 1, and Statoil.
\112\ See letter from NMA 2.
\113\ See letters from API 1, Barrick Gold, ExxonMobil 1,
National Fuel Gas Supply Corporation (March 1, 2011) (``National
Fuel''), and NMA 2.
\114\ See letter from API 1. See also letter from ExxonMobil 1.
\115\ See letter from National Fuel.
\116\ See letter from Rio Tinto.
---------------------------------------------------------------------------
Other commentators stated that, at a minimum, the definition of
``commercial development'' must include the activities of exploration,
extraction, processing, and export.\117\ One commentator argued that,
although the EITI does not include processing and export activities in
its minimum disclosure requirements, the definition of ``commercial
development'' must include those activities to be consistent with the
plain language of Section 13(q) and because Congress intended the
statute to go beyond the EITI's requirements.\118\ Another commentator
suggested expanding the proposed definition to include not just
upstream activities, but also midstream activities (activities involved
in trading and transport of resources), and downstream activities
(activities involved in refining, ore processing, and marketing of
resources).\119\ The commentator agreed with the proposal that the
definition should not include activities of a manufacturer of a product
used in the commercial development of oil, natural gas, or minerals.
---------------------------------------------------------------------------
\117\ See letters from CRS and PWYP 1.
\118\ See letter from PWYP 1.
\119\ See letter from Calvert.
---------------------------------------------------------------------------
Some commentators requested further clarification that covered
transport activities include not just those related to export, but
those related to the processing or marketing of resources, whether
intra-country or cross-border, and whether by pipeline, rail, road,
air, ship, or other means.\120\ Two commentators requested that the
Commission define ``transportation activities'' to include pipelines
and security arrangements associated with a pipeline within a host
country.\121\
---------------------------------------------------------------------------
\120\ See letters from Calvert, CRS, Earthworks, EIWG, HURFOM 1,
PWYP pre-proposal, PWYP 1, and WRI.
\121\ See letters from PWYP 1 and Syena; see also letter from Le
Billon (suggesting coverage of transportation in general, security
services, and trading).
---------------------------------------------------------------------------
Some commentators agreed with the proposal that ``commercial
development'' should exclude activities that are ancillary or
preparatory to commercial development.\122\ One commentator suggested
that the term focus on activities that ``directly relate to, and
provide material support for, the physical process of extracting and
processing ore and producing minerals from that ore, including the
export of ore to the smelter.'' \123\ The commentator further noted
that activities that ``do not directly and materially further this
process, such as development of infrastructure and the community, as
well as security support, generally would fall outside this definition,
unless they include payments to governments that are expressly required
by concession, contract, law, or regulation.'' \124\ Another
commentator requested that we provide further detail about the
extractive activities to which the rules would apply.\125\
---------------------------------------------------------------------------
\122\ See letters from NMA 2 and Statoil.
\123\ Letter from NMA 2.
\124\ Letter from NMA 2.
\125\ See letter from Syena.
---------------------------------------------------------------------------
3. Final Rules
Consistent with Section 13(q) and the proposal, the final rules
define ``commercial development of oil, natural gas, or minerals'' to
include the activities of exploration, extraction, processing, and
export, or the acquisition of a license for any such activity. As we
noted in the Proposing Release, the statutory language sets forth a
clear list of activities in the definition and gives us discretionary
authority to include other significant activities relating to oil,
natural gas, or minerals under the definition of ``commercial
development.'' As described above, the final rules we are adopting
generally track the language in the statute, and except for where the
language or approach of Section 13(q) clearly deviates from the EITI,
the final rules are consistent with the EITI. In
[[Page 56375]]
instances where the language or approach of Section 13(q) clearly
deviates from the EITI, the final rules track the statute rather than
the EITI. The definition of ``commercial development'' in Section 13(q)
is broader than the activities covered by the EITI and thus clearly
deviates from the EITI; therefore, we believe the definition of the
term in the final rules should be consistent with Section 13(q).
As noted above, we received significant comment on this aspect of
the proposal. Some commentators sought a more narrow definition than
proposed, while other commentators sought a broader definition. We are
not persuaded that we should narrow the scope of the definition in
Section 13(q) by re-defining ``commercial development'' to only include
upstream activities \126\ or using the definition of ``oil and gas
producing activities'' in Rule 4-10.\127\ Nor are we persuaded that we
should expand the covered activities \128\ beyond those identified in
the statute.\129\ Under the final rules, the definition of commercial
development includes all of the activities specified in the statutory
definition, even though the statute includes activities beyond what is
currently contemplated by the EITI.\130\
---------------------------------------------------------------------------
\126\ See note 104 and accompanying text.
\127\ See note 108 and accompanying text.
\128\ See note 119 and accompanying text.
\129\ We believe the phrase ``as determined by the Commission''
at the end of the definition of ``commercial development'' in
Section 13(q) requires the Commission to identify any ``other
significant actions'' that would be covered by the rules. See 15
U.S.C. 78m(q)(1)(A). As noted above, we are not expanding the list
of activities covered by the definition of ``commercial
development.'' Therefore, to avoid confusion as to the scope of the
activities covered by the rules, the final rules do not include the
phrase ``and other significant actions relating to oil, natural gas,
or minerals.''
\130\ In the Proposing Release, we noted our understanding that
the EITI criteria primarily focus on exploration and production
activities. See, e.g., Implementing the EITI, at 24. We note that
although export payments are not typically included under the EITI,
some EITI programs have reported export taxes or related duties. See
the 2005 EITI Report of Guinea, the 2008-2009 EITI Report of
Liberia, and the 2006-2007 EITI Report of Sierra Leone, available at
http://eiti.org/document/eitireports.
---------------------------------------------------------------------------
Section 13(q) grants us the discretionary authority to include
other significant activities relating to oil, natural gas, or minerals
under the definition of ``commercial development.'' \131\ In deciding
whether to expand the statutory list of covered activities, we have
considered both commentators' views and the need to promote consistency
with EITI principles. We are not persuaded that we should extend the
rules to activities beyond the statutory list of activities comprising
``commercial development'' because we are mindful of imposing
additional costs resulting from adopting rules that extend beyond
Congress' clear directive.
---------------------------------------------------------------------------
\131\ See 15 U.S.C. 78m(q)(1)(A).
---------------------------------------------------------------------------
As noted in the Proposing Release, the definition of ``commercial
development'' is intended to capture only activities that are directly
related to the commercial development of oil, natural gas, or minerals.
It is not intended to capture activities that are ancillary or
preparatory to such commercial development. Accordingly, we would not
consider a manufacturer of a product used in the commercial development
of oil, natural gas, or minerals to be engaged in the commercial
development of the resource. For example, in contrast to the process of
extraction, manufacturing drill bits or other machinery used in the
extraction of oil would not fall within the definition of commercial
development.
In response to commentators' requests for clarification of the
activities covered by the final rules, we also are providing examples
of activities covered by the terms ``extraction,'' ``processing,'' and
``export.'' We note, however, that whether an issuer is a resource
extraction issuer will depend on its specific facts and circumstances.
As we noted in the Proposing Release, ``extraction'' includes the
production of oil and natural gas as well as the extraction of
minerals. Under the final rules, ``processing'' includes field
processing activities, such as the processing of gas to extract liquid
hydrocarbons, the removal of impurities from natural gas after
extraction and prior to its transport through the pipeline, and the
upgrading of bitumen and heavy oil. Processing also includes the
crushing and processing of raw ore prior to the smelting phase. We do
not believe that ``processing'' was intended to include refining or
smelting,\132\ and we note that refining and smelting are not
specifically listed in Section 13(q). In addition, as some commentators
noted, including refining or smelting within the final rules under
Section 13(q) would go beyond what is currently contemplated by the
EITI, which does not include refining and smelting activities.\133\
---------------------------------------------------------------------------
\132\ The Commission's oil and gas disclosure rules identify
refining and processing separately in the definition of ``oil and
gas producing activities,'' which excludes refining and processing
(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 note 108. In addition, we note that in another statute adopted
by Congress, the Sudan Accountability and Divestment Act of 2007
(SADA), relating to resource extraction activities, the statute
specifically identifies ``processing'' and ``refining'' separately
in defining ``mineral extraction activities'' and ``oil-related
activities.'' 110 P.L. No. 174 (2007). Specifically, Section 2(7) of
SADA defines ``mineral extraction activities'' to mean ``exploring,
extracting, processing, transporting, or wholesale selling of
elemental minerals or associated metal alloys or oxides (ore) * *
*.'' Section 2(8) of SADA defines ``oil-related activities'' to mean
in part ``exporting, extracting, producing, refining, processing,
exploring for, transporting, selling, or trading oil * * *.'' The
inclusion of ``processing'' and ``refining'' in SADA, in contrast to
the language of Section 13(q), suggests that the terms have
different meanings. Absent designation by the Commission, we do not
believe that ``refining'' was intended to be included in the scope
of the express terms in Section 13(q).
\133\ See, e.g., letters from API and NMA 2.
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We believe that ``export'' includes the export of oil, natural gas,
or minerals from the host country. We disagree with those commentators
who maintained that ``export'' means the removal of the resource from
the place of extraction to the refinery, smelter, or first marketable
location.\134\ Adopting such a definition would be contrary to the
plain meaning of export,\135\ and nothing in Section 13(q) or the
legislative history suggests that Congress meant ``export'' to have
such a meaning; \136\ thus, we believe such a definition would be
contrary to the intent of Section 13(q). We also are not persuaded by
the argument presented by some commentators \137\ that the final rules
should be limited only to upstream activities because the reference in
the title of Section 13(q) to ``Resource Extraction Issuers''
demonstrates Congressional intent that the statute should apply only to
issuers engaged in extractive activities.\138\ Accordingly, under the
final rules, ``commercial development'' includes the export of oil,
natural gas, or minerals and, therefore, the definition of
[[Page 56376]]
``resource extraction issuer'' will capture an issuer that engages in
the export of oil, natural gas, or minerals. We note that these
definitions could require companies that may only be engaged in
exporting oil, natural gas, or minerals and that may not have engaged
in exploration, extraction, or processing of those resources to provide
payment disclosure.
---------------------------------------------------------------------------
\134\ See notes 111 and 112 and accompanying text.
\135\ For example, Merriam-Webster dictionary defines ``export''
to mean ``to carry or send (as a commodity) to some other place (as
another country).'' Merriam-Webster Dictionary, http://www.merriam-webster.com/dictionary/export (last visited August 15, 2012). See
also letters from CRS, Global Financial Integrity 2, and PWYP 1
(stating that exclusion of export activities would be inconsistent
with plain language of statute).
\136\ See note 118 and accompanying text.
\137\ See note 105 and accompanying text.
\138\ The statutory definition of ``commercial development''
includes activities, such as processing and export, that go beyond
mere extractive activities. In this regard, we note that ``the title
of a statute and the heading of a section cannot limit the plain
meaning of the text * * *. For interpretative purposes, they are of
use only when they shed light on some ambiguous word or phrase. They
are but tools available for the resolution of a doubt. But they
cannot undo or limit that which the text makes plain.'' Brotherhood
of Railroad Trainmen v. Baltimore & Ohio Railroad Co., 331 U.S. 519,
528-29 (1947); see also Intel Corporation v. Advanced Micro Devices,
Inc., 542 U.S. 241, 256 (2004) (quoting Trainmen).
---------------------------------------------------------------------------
Consistent with the proposal, the definition of ``commercial
development'' in the final rules does not include transportation in the
list of covered activities.\139\ Section 13(q) does not include
transportation in the list of activities covered by the definition of
``commercial development.'' In addition, including transportation
activities within the final rules under Section 13(q) would go beyond
what is currently contemplated by the EITI, which focuses on
exploration and production activities and does not explicitly include
transportation activities.\140\ Thus, the final rules do not require a
resource extraction issuer to disclose payments made for transporting
oil, natural gas, or minerals for a purpose other than export.\141\ As
recommended by several commentators, transportation activities
generally would not be included within the definition \142\ unless
those activities are directly related to the export of the oil, natural
gas, or minerals. For example, under the final rules, transporting a
resource to a refinery or smelter, or to underground storage prior to
exporting it, would not be considered ``commercial development,'' and
therefore, an issuer would not be required to disclose payments related
to those activities.
---------------------------------------------------------------------------
\139\ Adopting a definition of ``commercial development'' that
does not include transport activities other than in connection with
export is consistent with the EITI, which generally does not require
the disclosure of transportation-related payments. See Implementing
the EITI, at 35.
\140\ See letters from API 1, ExxonMobil 1, and NMA 2.
\141\ In addition, we note that Section 13(q) does not include
transporting in the list of covered activities, unlike another
federal statute--the SADA--that 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 was not intended to be included in the scope of Section
13(q).
\142\ See, e.g., letters from API, Barrick Gold, National Fuel,
and NMA 2.
---------------------------------------------------------------------------
In an effort to emphasize substance over form or characterization
and to reduce the risk of evasion, as discussed in more detail below,
we are adding an anti-evasion provision to the final rules.\143\ The
provision requires disclosure with respect to an activity or payment
that, although not in form or characterization of one of the categories
specified under the final rules, is part of a plan or scheme to evade
the disclosure required under Section 13(q).\144\ Under this provision,
a resource extraction issuer could not avoid disclosure, for example,
by re-characterizing an activity that would otherwise be covered under
the final rules as transportation.
---------------------------------------------------------------------------
\143\ See Section II.D.1.c.
\144\ See Instruction 9 to Item. 2.01 of Form SD.
---------------------------------------------------------------------------
Consistent with the proposal, the definition of ``commercial
development'' in the final rules would not include marketing in the
list of covered activities. 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 currently
contemplated by the EITI, which focuses on exploration and production
activities and does not include marketing activities.\145\ Thus, the
final rules do not include marketing in the list of covered activities
in the definition of ``commercial development.'' \146\
---------------------------------------------------------------------------
\145\ See letters from API 1 and ExxonMobil 1.
\146\ For similar reasons, the definition of ``commercial
development'' does not include activities relating to security
support. See Section II.D. below for a related discussion of
payments for security support.
---------------------------------------------------------------------------
D. 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 EITI's guidelines (to the extent
practicable), determines are part of the commonly recognized revenue
stream for the commercial development of oil, natural gas, or minerals.
1. Types of Payments
a. Proposed Rules
In the Proposing Release, we explained that we interpret Section
13(q) to provide that the types of payments that are included in the
statutory language should be subject to disclosure under our rules to
the extent the Commission determines that the types of payments and any
``other material benefits'' are part of the ``commonly recognized
revenue stream for the commercial development of oil, natural gas, or
minerals.'' Consistent with Section 13(q), we proposed to require
resource extraction issuers to disclose payments of the types
identified in the statute because of our preliminary belief that they
are part of the ``commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals.'' We noted that the types
of payments listed in Section 13(q) generally are consistent with the
types of payments the EITI suggests should be disclosed and expressed
our belief that this is evidence that the payment types are part of the
commonly recognized revenue stream. As noted above, Section 13(q)
provides that our determination should be consistent with the EITI's
guidelines, to the extent practicable. Therefore, we are including all
the payments listed above in the final rules because they are included
in the EITI, which indicates they are part of the commonly recognized
revenue stream. Guidance for implementing the EITI suggests that a
country's disclosure requirements might include the following benefit
streams: \147\ Production entitlements; profits taxes; royalties;
dividends; bonuses, such as signature, discovery, and production
bonuses; fees, such as license, rental, and entry fees; and other
significant benefits to host governments, including taxes on corporate
income, production, and profits but excluding taxes on
consumption.\148\
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\147\ Under the EITI, benefit streams are defined as being any
potential source of economic benefit which a host government
receives from an extractive industry. See EITI Source Book, at 26.
\148\ EITI Source Book, at 27-28.
---------------------------------------------------------------------------
We did not propose specific definitions for each payment type,
although we stated that fees and bonuses identified as examples in the
EITI would be covered by the proposed rules. In addition, we provided
an instruction to the rules to clarify the taxes a resource extraction
issuer would be required to disclose. Under the proposal, resource
extraction issuers would have been required to disclose taxes on
corporate profits, corporate income, and production, but would not have
been required to disclose taxes levied on consumption, such as value
added taxes, personal income taxes, or sales taxes, because consumption
taxes are not typically disclosed under the EITI. We did not propose
any other ``material benefits'' that should be disclosed. Thus, we did
not propose to require disclosure of dividends, payments for
infrastructure improvements, or social or community payments because
those types of payments are not included in the statutory list of
payments. We recognized that it may be appropriate to
[[Page 56377]]
provide more specific guidance about the particular payments that
should be disclosed. We requested comment intended to elicit detailed
information about what types of payments should be included in, or
excluded from, the rules; what additional guidance may be helpful or
necessary; and whether there are ``other material benefits'' that
should be specified in the list of payments subject to disclosure
because they are part of the commonly recognized revenue stream for the
commercial development of oil, natural gas, or minerals.
b. Comments on the Proposed Rules
Several commentators supported the proposal and stated that it was
not necessary to provide further guidance regarding the types of
payments covered or to define ``other material benefits'' that are part
of the commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals.\149\ Those commentators
noted that the proposed types of payments were largely consistent with
the benefit streams listed in the EITI Source Book and represented the
commonly recognized revenue stream for the commercial development of
oil, natural gas, or minerals. Another commentator agreed the payment
types should be based on the benefit streams outlined in the EITI
Source Book, and suggested that we provide some limited guidance on the
types of payments that should be disclosed to ``ensure consistency of
presentation and to facilitate the interpretation of the rules.'' \150\
---------------------------------------------------------------------------
\149\ See letters from API 1, Chevron, ExxonMobil 1, NMA 2,
PetroChina, RDS 1, and Statoil.
\150\ See letter from BP 1.
---------------------------------------------------------------------------
Several other commentators, however, urged the Commission to adopt
a broader, more detailed, and non-exhaustive list of payment
types.\151\ For example, in addition to the statutory list of payments,
some commentators suggested the rule specify as fees required to be
disclosed a wide range of fees, including concession fees, entry fees,
leasing and rental fees, which are covered under the EITI, as well as
acreage fees, pipeline and other transportation fees, fees for
environmental, water and surface use, land use, and construction
permits, customs duties, and trade levies.\152\ Other commentators
opposed the disclosure of any fees or permits that are not unique to
the resource extraction industry or that represent ordinary course
payments for goods and services to government-owned entities acting in
a commercial capacity.\153\
---------------------------------------------------------------------------
\151\ See letters from Calvert, CRS, Earthworks, Global Witness
1, Le Billon, ONE, PWYP 1, TIAA, and WRI.
\152\ See letters from Earthworks (supporting PWYP), CRS, Global
Witness 1, Le Billon, ONE, PWYP pre-proposal, and PWYP 1.
\153\ See letters from Cleary and Vale.
---------------------------------------------------------------------------
Some commentators agreed that, as proposed, resource extraction
issuers should have to disclose taxes on corporate profits, corporate
income, and production, but should not be required to disclose taxes
levied on consumption.\154\ Commentators expressed concern, however,
that because corporate income taxes are measured at the entity level,
it would be difficult to derive a disaggregated, per project amount for
those tax payments.\155\ A couple of those commentators noted that
compounding this difficulty is the fact that the total amount of income
tax paid is a net amount reflecting tax credits and other tax
deductions included under commercial arrangements with the host
government. Tax credits and deductions may result from offsetting
results from one set of projects against credits and deductions of
other projects, according to some commentators, and therefore deriving
an income tax payment by individual project would be very
difficult.\156\ Other commentators opposed requiring the disclosure of
payments for corporate income taxes because those payments are
generally applicable to any business activity and are not specifically
made to further the commercial development of oil, natural gas, or
minerals.\157\ Still other commentators believed that issuers should
have to disclose payments for consumption and other types of taxes,
including value added taxes, withholding taxes, windfall or excess
profits taxes, and environmental taxes.\158\ One commentator believed
consumption and other taxes should be disclosed to the extent they are
``discriminatory taxes targeted at specific industries, as opposed to
taxes of general applicability.'' \159\
---------------------------------------------------------------------------
\154\ See letters from API 1, ExxonMobil 1, NMA 2, and RDS 1.
\155\ See letters from API 1, BHP Billiton, BP 1, ExxonMobil 1,
IAOGP, Petrobras, Statoil, and Talisman.
\156\ See letters from API 1 and ExxonMobil 1.
\157\ See letters from Akin Gump Strauss Hauer & Feld LLP (March
2, 2011) and Cleary.
\158\ See letters from Barrick Gold, Earthworks, and PWYP 1.
\159\ Letter from AngloGold.
---------------------------------------------------------------------------
Several commentators requested expansion of the proposed list of
payment types to include specifically at least those types typically
disclosed under the EITI, such as signature, discovery, and production
bonuses, and dividends.\160\ With regard to dividends, commentators
noted that a government or government-owned company often owns shares
in a holding company formed to develop and produce resources.\161\ In
those situations, an issuer may pay dividends to the government or
government-controlled company in lieu of royalties or production
entitlements.\162\ One commentator further stated that, unlike the
equity share that a private operator would enjoy, in those situations
the government participates on a preferential basis not available to
other entities.\163\ According to commentators, dividends paid to the
government or government-owned company in those situations would be a
material benefit, reportable under the EITI, and part of the commonly
recognized revenue stream for the commercial development of oil,
natural gas, or minerals.\164\ Focusing on the mining industry, one
commentator explained that ``[o]wnership in the share capital of a
holding company that owns a mine is an alternative structure to a
production entitlement or royalty interest, and dividends paid are part
of the commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals.'' \165\
---------------------------------------------------------------------------
\160\ See letters from AngloGold, Barrick Gold, ERI 1,
Earthworks, ExxonMobil 1, Global Witness 1, ONE, and PWYP 1.
\161\ See letters from API 1, AngloGold, ERI 1, and ExxonMobil
1.
\162\ See letters from AngloGold and ERI 1.
\163\ See letter from ERI 1. This commentator noted that a
significant portion of the revenue recognized by the government in
such cases comes from its ``equity stake in the operation--often
known as the production share--or from dividends.''
\164\ See letters from API 1, AngloGold, ExxonMobil 1, and PWYP
1.
\165\ See letter from AngloGold.
---------------------------------------------------------------------------
Other commentators, however, opposed requiring disclosure of
dividend payments.\166\ According to one commentator, dividends are
indirect payments that are outside the core elements of the revenue
stream for the commercial development of oil, natural gas or minerals,
and therefore should be excluded.\167\ Another commentator opposed the
inclusion of dividends because of its belief that dividend payments are
not generally associated with a particular project.\168\ A third
commentator believed that, because ``the term `dividends' relates to
amounts received by the host country government as a shareholder in a
state enterprise[,]'' dividend payments ``essentially are inter-
governmental transfers'' and therefore are more
[[Page 56378]]
appropriately reported by the government in an EITI reporting
country.\169\
---------------------------------------------------------------------------
\166\ See letters from NMA 2, RDS 1, and Statoil.
\167\ See letter from Statoil.
\168\ See letter from RDS 1.
\169\ Letter from NMA 2.
---------------------------------------------------------------------------
Many commentators supported the inclusion of in-kind payments,
particularly in connection with production entitlements.\170\ A couple
of commentators requested that the Commission add language to the rule
text to make explicit that issuers would be permitted to report
payments in cash or in kind.\171\ Another commentator stated that the
Commission should provide instructions concerning how to disclose a
production entitlement in kind, including which unit of measure to use,
whether to provide a monetary value, and, if so, which currency to
use.\172\ A couple of commentators suggested allowing companies to
report the payments at cost or, if not determinable, at fair market
value.\173\
---------------------------------------------------------------------------
\170\ See letters from API 1, AngloGold, Barrick Gold, ERI 1, EG
Justice (March 29, 2011), ExxonMobil 1, HURFOM 1, Le Billon, NMA 2,
Petrobras, RDS 1, TIAA, and WRI. One commentator noted that payments
in kind for ``infrastructure barter deals'' have greatly increased
over the past decade. See letter from Le Billon.
\171\ See letters from ERI 1 and NMA 2.
\172\ See letter from Petrobras.
\173\ See letters from AngloGold and NMA 2. NMA also suggested
requiring companies to report in-kind payments in the currency of
the country in which it is made and not requiring conversion of all
payments to the reporting currency.
---------------------------------------------------------------------------
Some commentators did not believe that we need to further identify
``other material benefits'' that are part of the commonly recognized
revenue stream for the commercial development of oil, natural gas, or
minerals.\174\ Other commentators, however, either urged us to provide
a broad, non-exclusive definition of ``other material benefits'' or to
specify that certain types of payments should be included under that
category because they are part of the commonly recognized revenue
stream.\175\
---------------------------------------------------------------------------
\174\ See letters from API 1, ExxonMobil 1, PetroChina, and RDS
1.
\175\ See, e.g., letters from AngloGold, Barrick Gold, ERI 1,
Earthworks, Global Witness 1, ONE, PWYP 1, Sen. Levin 1, and WRI.
---------------------------------------------------------------------------
Some commentators suggested that ``other material benefits'' should
include payments for infrastructure improvements because natural
resources are frequently located in remote or undeveloped areas, which
requires resource extraction issuers, particularly mining companies, to
make payments for infrastructure improvements that are generally viewed
as part of the cost of doing business in those areas.\176\ One
commentator stated that payments for infrastructure improvements should
be considered part of the commonly recognized revenue stream to the
extent that they constitute part of the issuer's overall relationship
with the government according to which the issuer engages in the
commercial development of oil, natural gas, or minerals, while
voluntary payments for infrastructure improvements should be
excluded.\177\ Another commentator believed that payments for
infrastructure improvements should be disclosed even if not required by
contract if an issuer undertakes them to build goodwill with the local
population.\178\
---------------------------------------------------------------------------
\176\ See, e.g., letters from ERI 1, Global Witness 1, and PWYP
1.
\177\ See letter from AngloGold.
\178\ See letter from ERI 1.
---------------------------------------------------------------------------
Other commentators opposed requiring the disclosure of payments for
infrastructure improvements.\179\ One commentator maintained that
voluntary payments for infrastructure improvements should not be
covered by the rules because they do not constitute part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas, or minerals.\180\ Other commentators acknowledged
that infrastructure improvements are often funded by issuers as part of
the commercial development of oil and gas resources, but those
commentators nevertheless believed that such payments should be
excluded because they are typically not material compared to the
primary types of payments required to be disclosed under Section
13(q).\181\ Another commentator stated that payments for infrastructure
improvements are of a de minimis nature compared to the overall costs
of the commercial development of oil, natural gas, or minerals and, in
many cases, are paid to private parties and not to government
agencies.\182\
---------------------------------------------------------------------------
\179\ See letters from API 1, ExxonMobil 1, NMA 2, RDS 1, and
Statoil.
\180\ See letter from NMA 2.
\181\ See letters from API 1 and ExxonMobil 1. See also letter
from Statoil (stating that payments for infrastructure improvements
are indirect payments that are not part of the core elements of the
revenue stream for the commercial development of oil, natural gas,
or minerals).
\182\ See letter from RDS 1.
---------------------------------------------------------------------------
Several commentators recommended defining ``other material
benefits'' to include social or community payments related to, for
example, improvements of a host country's schools, hospitals, or
universities.\183\ While some commentators believed that, at a minimum,
social or community payments should be included if required under the
investment contract or the law of the host country,\184\ other
commentators suggested that voluntary social or community payments
should be included as ``other material benefits'' because they
represent an in-kind contribution to the state that, given their
frequency, constitute part of the commonly recognized revenue stream of
resource extraction.\185\ One commentator noted that the Board of the
EITI approved a revision to the EITI rules that would encourage EITI
participants to disclose social payments that are material.\186\ Some
commentators also sought to include within the scope of ``other
material benefits'' other types of payments, such as payments for
security, personnel training, technology transfer, and local content
and supply requirements, if required by the production contract.\187\
---------------------------------------------------------------------------
\183\ See letters from AngloGold, Barrick Gold, ERI 1,
Earthworks, EG Justice, ONE, PWYP 1, Sen. Levin 1, and WRI.
\184\ See letters from AngloGold, EG Justice (noting that in at
least one country, Equatorial Guinea, companies engaged in upstream
oil activities are required by that country's hydrocarbons law to
invest in the country's development), ONE, and PWYP 1.
\185\ See letters from Barrick Gold, ERI 1, Earthworks, and WRI.
\186\ See letter from PWYP 1.
\187\ See, e.g., letters from ERI 1, Global Witness 1, and PWYP
1.
---------------------------------------------------------------------------
Several other commentators, however, maintained that social or
community payments or other ancillary payments are considered indirect
benefits under EITI guidelines, are typically not material, and
therefore are not part of the commonly recognized revenue stream for
the commercial development of oil, natural gas, or minerals.\188\
Another commentator stated that payments for social and community needs
and ancillary payments should be excluded from the final rules unless
they are expressly required by the concession contract, law, or
regulation.\189\
---------------------------------------------------------------------------
\188\ See letters from API 1, ExxonMobil 1, PetroChina, RDS 1,
and Statoil.
\189\ See letter from NMA 2.
---------------------------------------------------------------------------
c. Final Rules
While we are adopting the list of payment types largely as
proposed, we are making some additions and clarifications to the list
of payment types in response to comments. Specifically, the final rules
are consistent with the definition of payment in Section 13(q) and
state that the term ``payment'' includes:
Taxes;
Royalties;
Fees;
Production Entitlements;
Bonuses;
Dividends; and
[[Page 56379]]
Payments for infrastructure improvements.\190\
---------------------------------------------------------------------------
\190\ Under Section 13(q) and the final rules, the term
``payment'' is defined as a payment that is not de minimis, that is
made to further the commercial development of oil, natural gas, or
minerals, and includes specified types of payments. Thus, in
determining whether disclosure is required, resource extraction
issuers will need to consider whether they have made payments that
fall within the specified types and otherwise meet the definition of
payment.
---------------------------------------------------------------------------
As we noted in the Proposing Release and above, we interpret
Section 13(q) to provide that the types of payments that are included
in the statutory language should be subject to disclosure under our
rules to the extent that the Commission determines that the types of
payments and any ``other material benefits'' are part of the commonly
recognized revenue stream for the commercial development of oil,
natural gas, or minerals. As noted, the statute provides that our
determination should be consistent with the EITI's guidelines, to the
extent practicable. Therefore, we are including all the payments listed
above in the final rules because they are part of the commonly
recognized revenue stream. We do not believe the final rules should
include a broad, non-exhaustive list of payment types or category of
``other material benefits,'' as was suggested by some
commentators,\191\ because we do not believe including a broad, non-
exclusive category would be consistent with our interpretation that the
Commission must determine the ``material benefits'' that are part of
the commonly recognized revenue stream. Thus, under the final rules,
resource extraction issuers will be required to disclose only those
payments that fall within the specified list of payment types in the
rules, which include payment types that we have determined to be
material benefits that are part of the commonly recognized revenue
stream, and that otherwise meet the definition of ``payment.''
---------------------------------------------------------------------------
\191\ See note 175 and accompanying text.
---------------------------------------------------------------------------
We agree generally with those commentators who stated that it would
be appropriate to add the types of payments included under the EITI but
not explicitly mentioned under Section 13(q) to the list of payment
types required to be disclosed because their inclusion under the EITI
is evidence that they are part of the commonly recognized revenue
stream for the commercial development of oil, natural gas, or
minerals.\192\ Accordingly, the final rules add dividends to the list
of payment types required to be disclosed.\193\ The final rules clarify
in an instruction that a resource extraction issuer generally need not
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. The issuer will
however be required to disclose any dividends paid to a government in
lieu of production entitlements or royalties.\194\ We agree with the
commentators that stated ordinary dividends would not comprise part of
the commonly recognized revenue stream because such dividend payments
are not made to further the commercial development of oil, natural gas,
or minerals,\195\ except in cases where the dividend is paid to a
government in lieu of production entitlements or royalties.
---------------------------------------------------------------------------
\192\ See, e.g., letter from AngloGold.
\193\ The EITI describes dividends as ``dividends paid to the
host government as shareholder of the national state-owned company
in respect of shares and any profit distributions in respect of any
form of capital other than debt or loan capital.'' EITI Source Book,
at 27-28.
\194\ See Instruction 7 to Item 2.01.
\195\ See letters from Cleary and Statoil.
---------------------------------------------------------------------------
The final rules also include, in the list of payment types subject
to disclosure, payments for infrastructure improvements, such as
building a road or railway. Several commentators stated that, because
resource extraction issuers often make payments for infrastructure
improvements either as required by contract or voluntarily, those
payments constitute other material benefits that are part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas, or minerals.\196\ We further note that some EITI
participants have included infrastructure improvements within the scope
of their EITI program, even though those payments were not required
under the EITI until recently.\197\ In February 2011 the EITI Board
issued revised EITI rules \198\ that require participants to develop a
process to disclose infrastructure payments under an EITI program.\199\
Thus, including infrastructure payments within the list of payment
types required to be disclosed under the final rules will make the
rules more consistent with the EITI, as directed by the statute.
---------------------------------------------------------------------------
\196\ See letters from AngloGold, Barrick Gold, ERI 1,
Earthworks, EG Justice, Global Witness 1, ONE, and PWYP 1.
\197\ See the 2009 EITI report for Ghana (reported under Mineral
Development Fund contributions), the 2008 EITI report for the Kyrgyz
Republic (reported under social and industrial infrastructure
payments), the 2008-2009 EITI report for Liberia (reported under
county and community contributions), and the 2008 EITI report for
Mongolia (reported under donations to government organizations).
\198\ See EITI Rules 2011, available at http://eiti.org/document/rules.
\199\ See EITI Requirement 9(f) in EITI Rules 2011, at 24
(``Where agreements based on in-kind payments, infrastructure
provision or other barter-type arrangements play a significant role
in the oil, gas or mining sectors, the multi-stakeholder group is
required to agree [to] a mechanism for incorporating benefit streams
under these agreements in to its EITI reporting process * * *.'').
The EITI Board has established a procedure to implement the new
rules. According to the procedure, any country admitted as an EITI
candidate on or after July 1, 2011 must comply with the new rules.
Compliant countries are encouraged to make the transition to the new
rules as soon as possible. The procedure also establishes a
transition schedule for countries that are implementing the EITI but
are not yet compliant. See the EITI newsletter, available at http://eiti.org/news-events/eiti-board-agrees-transition-procedures-2011-edition-eiti-rules.
---------------------------------------------------------------------------
Under the final rules, consistent with the recommendation of some
commentators,\200\ a resource extraction issuer must disclose payments
that are not de minimis that it has made to a foreign government or the
U.S. Federal Government for infrastructure improvements if it has
incurred those payments, whether by contract or otherwise, to further
the commercial development of oil, natural gas, or minerals. For
example, payments required to build roads to gain access to resources
for extraction would be covered by the final rules. If an issuer is
obligated to build a road rather than paying the host country
government to build the road, the issuer would be required to disclose
the cost of building the road as a payment to the government to the
extent that the payment was not de minimis.\201\
---------------------------------------------------------------------------
\200\ See note 176 and accompanying text.
\201\ For a discussion of the treatment of in-kind payments
under the final rules, see the text accompanying note 212. We note
some commentators suggested infrastructure payments are usually not
material compared to the other types of payments required to be
disclosed under Section 13(q) and that infrastructure payments are
of a de minimis nature compared to the overall costs of commercial
development. See API 1, ExxonMobil 1, RDS 1, and Statoil. As
discussed further below, the not de minimis requirement applies to
all payment types, not just infrastructure payments.
---------------------------------------------------------------------------
The final rules do not require a resource extraction issuer to
disclose social or community payments, such as payments to build a
hospital or school, because it is not clear that these types of
payments are part of the commonly recognized revenue stream. We note
commentators' views on whether social or community payments should be
included varied more than their views on whether payments for
infrastructure improvements should be included. Further, this treatment
of social or community payments is consistent with the EITI, which
encourages, but does not require, EITI participants to include social
payments and transfers in EITI
[[Page 56380]]
programs if the participants deem the payments to be material.\202\
---------------------------------------------------------------------------
\202\ See EITI Requirement 9(g) in EITI Rules 2011, at 24.
Resource extraction issuers could, of course, voluntarily include
information about these types of payments in their disclosure on
Form SD.
---------------------------------------------------------------------------
Consistent with the proposal and Section 13(q), the final rules
will require a resource extraction issuer to disclose fees, including
license fees, and bonuses paid to further the commercial development of
oil, natural gas, or minerals. In response to requests by some
commentators,\203\ we are adding an instruction to clarify that fees
include rental fees, entry fees, and concession fees, and bonuses
include signature, discovery, and production bonuses.\204\ As
commentators noted,\205\ the EITI Source Book specifically mentions
these types of fees and bonuses as payments that are typically
disclosed by EITI participants.\206\ We believe this demonstrates that
these types of fees and bonuses are part of the commonly recognized
revenue stream, and therefore the final rules include an instruction
clarifying that disclosure of these payments is required. The fees and
bonuses identified are not an exclusive list, and there may be other
fees and bonuses a resource extraction issuer would be required to
disclose. A resource extraction issuer will need to consider whether
payments it makes fall within the payment types covered by the rules.
---------------------------------------------------------------------------
\203\ See note 160 and accompanying text.
\204\ See Instruction 6 to Item 2.01 of Form SD.
\205\ See, e.g., letters from API 1 and ExxonMobil 1.
\206\ See the EITI Source Book, at 28.
---------------------------------------------------------------------------
Consistent with the proposal and Section 13(q), the final rules
will require a resource extraction issuer to disclose taxes. In
addition, the final rules include an instruction, as proposed, to
clarify that a resource extraction issuer will be required to disclose
payments for taxes levied on corporate profits, corporate income, and
production, but will not be required to disclose payments for taxes
levied on consumption, such as value added taxes, personal income
taxes, or sales taxes.\207\ This approach is consistent with the
statute, which includes taxes in the list of payment types required to
be disclosed, and with the EITI.\208\ In response to concerns expressed
about the difficulty of allocating certain payments that are made for
obligations levied at the entity level, such as corporate taxes, to the
project level,\209\ the final rules provide that issuers may disclose
those payments at the entity level rather than the project level.\210\
---------------------------------------------------------------------------
\207\ See Instruction 5 to Item 2.01 of Form SD.
\208\ The EITI Source Book specifically mentions the inclusion
of taxes levied on income, production or profits and the exclusion
of taxes levied on consumption, such as value-added taxes, personal
income taxes or sales taxes. See the EITI Source Book, at 28.
\209\ See note 155 and accompanying text.
\210\ See discussion in Section II.F.2.c below.
---------------------------------------------------------------------------
We are not persuaded that there are other types of payments that
currently constitute material benefits that are part of the commonly
recognized revenue stream. Therefore, the final rules do not include
any additional payment types in the list of payment types resource
extraction issuers must disclose.
As previously noted, many commentators supported the inclusion of
in-kind payments, particularly in connection with production
entitlements.\211\ Under the final rules, resource extraction issuers
must disclose payments of the types identified in the rules that are
made in kind.\212\ Because Section 13(q) specifies that the final rules
require the disclosure of the type and total amount of payments made
for each project and to each government, issuers will need to determine
the monetary value of in-kind payments.\213\ Consistent with
suggestions we received on disclosing these types of payments,\214\ the
final rules specify that issuers may report in-kind payments at cost,
or if cost is not determinable, fair market value, and provide a brief
description of how the monetary value was calculated.\215\
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\211\ See note 170 and accompanying text. In-kind payments
include, for example, making a payment to a government in oil rather
than a monetary payment.
\212\ We note that this is consistent with the reporting of
production entitlements under the EITI. See the EITI Source Book, at
27.
\213\ Although a couple of commentators suggested that issuers
be permitted to report payments in cash or in kind, we note that
Section 13(q) requires the type and total amount of payments made
for each project and to each government, and total amount of
payments by category. In order for issuers to provide a these total
amounts, we believe it is necessary to provide a monetary value for
any in-kind payments. Thus, the final rules require that issuers
provide a monetary value for payments made in kind. 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 final
rules instruct issuers providing a monetary value for in-kind
payments to tag the information as ``in kind'' for purposes of the
currency tag.
\214\ See note 173 and accompanying text.
\215\ See Instruction 1 to Item 2.01 of Form SD.
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Finally, a resource extraction issuer may not conceal the true
nature of payments or activities that otherwise would fall within the
scope of the final rules, or create a false impression of the manner in
which it makes payments, in order to circumvent the disclosure
requirements. As suggested by one commentator,\216\ to address the
potential for circumvention of the disclosure requirements, the final
rules include an anti-evasion provision. This provision is intended to
emphasize the substance over the form or characterization of an
activity or payment. For example, a resource extraction issuer that
typically engages in a particular activity that otherwise would be
covered under the definition of commercial development of oil, natural
gas, or minerals, and that changes the way it categorizes the same
activity after the issuance of final rules to avoid disclosing payments
related to the activity may be viewed as seeking to evade the
disclosure requirements. Similarly, a resource extraction issuer that
typically makes payments of the type that would otherwise be covered
under the final rules and that changes the way it categorizes or makes
payments after issuance of the final rules so that the payments are not
technically required to be disclosed may be viewed as seeking to evade
the disclosure requirements. The final rules will require disclosure
with respect to activities or payments that, although not in form or
characterization of one of the categories specified under the final
rules, are part of a plan or scheme to evade the disclosure
requirements under Section 13(q).\217\
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\216\ See letter from Sen. Levin (February 17, 2012) (``Sen.
Levin 2'').
\217\ See Instruction 9 to Item 2.01 of Form SD.
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2. The ``Not De Minimis'' Requirement
a. Proposed Rules
Section 13(q) and the proposal define payment, in part, to be a
payment that is ``not de minimis.'' Neither the statute nor the
proposed rules define ``not de minimis.'' Under Section 13(q) and the
proposal, if the other standards for disclosure are met, resource
extraction issuers would be required to disclose payments made that are
``not de minimis.''
Under the EITI, countries are free to establish a materiality level
for disclosure.\218\ Section 13(q) established
[[Page 56381]]
the threshold for payment disclosure as ``not de minimis'' rather than
requiring disclosure of ``material'' payments. Given the use of the
phrase ``not de minimis,'' we stated in the Proposing Release our
preliminary belief that ``not de minimis'' does not equate with a
materiality standard. In doing so, we noted that that the term ``de
minimis'' is generally defined as something that is ``lacking
significance or importance'' or ``so minor as to merit disregard.''
\219\ We also noted that we preliminarily believed that the term is
sufficiently clear and that further explication was unnecessary.
---------------------------------------------------------------------------
\218\ For example, countries may establish a materiality level
based on the size of payments or the size of companies subject to
disclosure. See Implementing the EITI, at 30. The EITI Source Book
notes that a benefit stream is material ``if its omission or
misstatement could distort the final EITI report'' for the country.
EITI Source Book, at 26. Because there is no pre-determined
materiality level prescribed for all countries implementing the
EITI, the multi-stakeholder group in each EITI-implementing country
determines the threshold for disclosure that is appropriate for that
country. See Implementing the EITI, at 31. The EITI recommends the
following alternatives for considering a benefit stream to be
material:
``Alternative 1: [if it is] more than A% of the host
government's estimated total production value for the reporting
period;
Alternative 2: [if it is] more than B% of the company's
estimated total production value in the host country for the
reporting period; or
Alternative 3: [if it is] more than USD C million [or local
currency D million].''
EITI Source Book, at 27.
\219\ See the definition of ``de minimis'' in Merriam-Webster
Dictionary, available at http://www.merriam-webster.com/dictionary/deminimis. We note, in contrast, that Rule 12b-2 under the Exchange
Act [17 CFR 240.12b-2] defines ``material'' when used to qualify a
requirement for the furnishing of information as to any subject, as
limited to information required to those matters to which there is a
substantial likelihood that a reasonable investor would attach
importance in determining whether to buy or sell the securities
registered. See also Rule 405 under the Securities Act [17 CFR
230.405]. In addition, the U.S. Supreme Court has held that, in a
securities fraud suit, an omitted fact is material if there is a
substantial likelihood that its disclosure would have been
considered significant by a reasonable investor. See Basic Inc. v.
Levinson, 485 U.S. 224 (1988) and TSC Industries. Inc., et al. v.
Northway, Inc., 426 U.S. 438 (1976).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
We received significant comment on this aspect of the proposal.
Some commentators agreed that it is not necessary to define ``not de
minimis.'' \220\ Two of those commentators suggested that an issuer
should be required to disclose the methodology used to determine what
is ``not de minimis.'' \221\ One commentator noted that ``not de
minimis'' is a commonly-understood term.\222\
---------------------------------------------------------------------------
\220\ See letters from Cleary, Global Witness 1, NMA 2,
PetroChina, and Rio Tinto.
\221\ See letters from NMA 2 and Rio Tinto.
\222\ See letter from Global Witness 1. This commentator
suggested that, in the alternative, we should define the term as an
amount that meets or exceeds the lesser of (1) $1,000 for an
individual payment or $15,000 in the aggregate over a period, or (2)
a particular percentage of the issuer's per project expenditures. It
also noted that it believes ``not de minimis'' should be assessed
relative to the total expenditures on a project and not relative to
the size or valuation of the entity making the payments.
---------------------------------------------------------------------------
Most commentators that addressed the issue urged the Commission to
define ``not de minimis.'' \223\ Several commentators stated that the
Commission should avoid adopting a definition that uses one or more
quantitative measures and, instead, should define ``not de minimis'' to
mean material.\224\ According to those commentators, a definition based
on materiality would be consistent with the EITI and the Commission's
longstanding disclosure regime.\225\ One commentator stated that
adopting a definition of ``not de minimis'' based on materiality would
encourage ``reasonable consistency of disclosure across all issuers''
and result ``in the disclosure of all material facts necessary for
investors'' without the Commission having to provide further guidance
on how to determine materiality.\226\
---------------------------------------------------------------------------
\223\ See, e.g., letters from AngloGold, Barrick Gold, BP 1,
CalSTRS, Calvert, CRS, Earthworks, Harrington Investments, Inc.
(January 19, 2011) (``HII), RDS 1, Sen. Levin 1, and SIF.
\224\ See letters from API 1, BP 1, Chevron, ExxonMobil 1, RDS
1, and Statoil.
\225\ See, e.g., letters from API 1 and Chevron. According to
one commentator, adopting a definition based on specific
quantitative measures rather than existing materiality guidance
would ``substantially increase the likelihood of overburdening
issuers and users with large volumes of unnecessary and immaterial
detail * * * and significantly increase the regulatory burden and
cost of compliance.'' See letter from Chevron. See also letters from
API 1 and ExxonMobil 1. Other commentators believed that an issuer
should be able to rely on materiality principles for guidance when
determining whether a payment is ``not de minimis,'' but did not
think that a definition of ``not de minimis'' was necessary. See
letters from Cleary, NMA 2, PetroChina, and Rio Tinto.
\226\ See letter from API 1.
---------------------------------------------------------------------------
Other commentators, however, agreed with our belief that ``not de
minimis'' does not equate with material.\227\ Several commentators
noted that a provision of the U.S. federal tax code includes the
following definition of ``de minimis'': ``[a] property or service the
value of which is * * * so small as to make accounting for it
unreasonable or administratively impracticable.'' \228\ One commentator
stated that if we were to adopt a qualitative, principle-based standard
when defining de minimis, it should be based on ``the relevance of a
payment in relation to a country's size'' rather than with regard to a
company's overall payments, assets or similar metric.\229\ A few
commentators requested ``that a reasonable minimum threshold for
payments to be reported should be set'' without suggesting a particular
minimum threshold.\230\
---------------------------------------------------------------------------
\227\ See, e.g., letters from Barrick Gold, Calvert, ERI 1,
Global Witness 1, HURFOM 1, PWYP 1, and TIAA.
\228\ Letter from Calvert (quoting 26 U.S.C. Sec. 132(e)(1));
see also letters from Global Witness 1, PWYP 1, and TIAA.
\229\ See letter from PWYP 1.
\230\ See letters from Derecho, Greenpeace, and Guatemalan
Forest Communities.
---------------------------------------------------------------------------
Several commentators urged us to adopt a definition of ``not de
minimis'' based on one or more quantitative measures.\231\ Commentators
stated that such a definition was necessary to provide clarity
regarding the disclosure requirements.\232\ Two commentators suggested
using an absolute dollar amount in the definition because they believed
that such a standard would be easier to apply than a percentage, would
reduce compliance costs, and would help ensure consistent disclosure
and comparability.\233\ Another commentator similarly believed that the
use of an absolute dollar amount would help level the playing field
among issuers.\234\
---------------------------------------------------------------------------
\231\ See letters from AngloGold, Barrick Gold, CalSTRS, CRS,
Earthworks, HII, PWYP 1 (suggesting both qualitative and
quantitative standards), RWI 1, Sen. Levin 1, and SIF. Another
commentator noted that we have adopted objective standards in other
contexts and requested that we do so for the definition of ``not de
minimis.'' That commentator further suggested that we may need to
adopt different quantitative standards for large-cap and small-cap
companies, but it did not recommend particular standards. See letter
from AXPC.
\232\ See letters from Barrick Gold and Talisman.
\233\ See letters from AngloGold (recommending defining ``de
minimis'' to mean ``any payment or series of related payments made
at the tax-paying entity level which in the aggregate is less than
U.S.$1,000,000'') and CRS (recommending an amount ``significantly
less than $100,000'' and as an aggregate of payments of the same
type during the reporting period covered).
\234\ See letter from Talisman (noting that it currently reports
payments in excess of one million dollars and supporting a minimum
level of reporting of one million dollars).
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Commentators offered various suggestions for a quantitative
threshold. Some commentators suggested requiring the reporting of
payments above $10,000.\235\ In addition, numerous commentators signed
a petition supporting a de minimis threshold ``in the low thousands
(U.S. dollars) to prevent millions of dollars from going unreported.''
\236\ Several commentators suggested that we should define ``not de
minimis'' using a standard similar to a listing standard of the London
Stock Exchange's Alternative Investment Market (``AIM''), which
requires disclosure of any payment made to any government or regulatory
authority by an oil, gas, or mining company registrant that, alone or
as a whole, is over [pound]10,000, or approximately $15,000.\237\ One
commentator suggested a reporting threshold ``in the tens of
[[Page 56382]]
thousands.'' \238\ Another commentator believed that we should provide
a specific threshold and that it should be significantly less than
$100,000.\239\ The commentator further stated that the threshold should
be defined as an aggregate of payments of the same type during the
reporting period covered. Another commentator suggested using an
absolute dollar amount that would vary depending on the size of an
issuer's market capitalization.\240\
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\235\ See letters designated ``Type B'' (suggesting $10,000
threshold without elaboration) and letter from Le Billon (stating
that a ``minimal value of $10,000 would be consistent with many
legislations seeking to track financial flows, e.g. for the purpose
of money laundering'').
\236\ ONE Petition.
\237\ See letters from CalSTRS, HII, RWI 1, Sen. Levin 1, SIF,
and WACAM. Several commentators suggested defining the term further
to require disclosure of any individual payment that exceeded $1,000
as well as payments of the same type that in the aggregate exceeded
$15,000. See letters from Earthworks, Global Witness 1, Global
Witness 3, and PWYP 1.
\238\ See letter from Global Movement for Budget Transparency,
Accountability and Participation (March 30, 2012) (``BTAP'').
\239\ See letter from CRS. See also letter from PWYP 1 (stating
that $100,000 would not be an appropriate de minimis threshold
because $100,000 could exceed the annual payments, such as lease
rents or license fees, in some projects).
\240\ See letter from AXPC. That commentator, however, did not
specify any particular dollar amount or corresponding size of market
capitalization.
---------------------------------------------------------------------------
One commentator suggested defining ``de minimis'' to mean ``any
payment or series of related payments made at the tax-paying entity
level which in the aggregate is less than U.S.$1,000,000.'' \241\
Another commentator similarly suggested using an absolute dollar amount
threshold of $1,000,000 while noting that it currently reports payments
in excess of that amount. According to that commentator, its
``experience supports [$1,000,000] as the minimum level of reporting to
ensure that the objectives of revenue transparency are met while not
clouding the data with largely irrelevant information.'' \242\ One
commentator, however, opposed a ``not de minimis'' threshold of
$1,000,000 because it believed such a threshold would exclude many
payments made in the extractive industry.\243\ Another commentator
similarly cautioned against setting the ``not de minimis'' threshold
too high because it would leave important payment streams undisclosed
and could encourage companies and governments to structure payments in
future contracts in a way that would avoid the disclosure
requirement.\244\
---------------------------------------------------------------------------
\241\ See letter from AngloGold.
\242\ Letter from Talisman.
\243\ See letter from ERI 3 (referring to disclosure in Sierra
Leone's 2010 EITI Report and noting that a $1,000,000 threshold
would exclude payments for half of the companies reporting in Sierra
Leone). See also ONE Petition (urging the Commission to adopt a
final rule that ``sets the de minimis threshold in the low thousands
(U.S. dollars) to prevent millions of dollars from going
unreported'').
\244\ See letter from Rep. Frank et al.
---------------------------------------------------------------------------
Other commentators suggested adopting a quantitative definition of
``not de minimis'' that uses a relative measure, either alone or with
an absolute dollar amount.\245\ One commentator suggested defining
``not de minimis'' to mean five percent or more of an issuer's upstream
expenses or revenues.\246\ Another commentator suggested defining ``not
de minimis'' as the lesser of two percent of the issuer's consolidated
expenditures and $1,000,000.\247\ According to that commentator, using
a standard based on the lesser of a dollar amount or a percentage of
expenses would reflect the size of a company but still ensure the
disclosure of significant payments by a larger company.\248\
---------------------------------------------------------------------------
\245\ See letters from Barrick Gold and RDS 1 (RDS suggested a
quantitative definition if the Commission determines not to define
the term as ``material'').
\246\ See letter from RDS 1.
\247\ See letter from Barrick Gold (suggested ``consolidated
expenditures'' but did not provide an explanation of the term).
\248\ See letter of Barrick Gold.
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c. Final Rules
We have determined to adopt a definition of ``not de minimis'' to
provide clear guidance regarding when a resource extraction issuer must
disclose a payment.\249\ We have considered whether to define the term
using a materiality standard, as some commentators have
recommended.\250\ We continue to believe that given the use of the
phrase ``not de minimis'' in Section 13(q) rather than use of a
materiality standard, which is used elsewhere in the federal securities
laws and in the EITI,\251\ ``not de minimis'' was not intended to
equate to a materiality standard.
---------------------------------------------------------------------------
\249\ See, e.g., letters from Barrick Gold and Talisman.
\250\ See note 224 and accompanying text.
\251\ See note 218 and accompanying text.
---------------------------------------------------------------------------
More fundamentally, for purposes of Section 13(q), we do not
believe the relevant point of reference for assessing whether a payment
is ``not de minimis'' is the particular issuer. Rather, because the
disclosure is designed to further international transparency
initiatives regarding payments to governments for the commercial
development of oil, natural gas, or minerals, we think the better way
to consider whether a payment is ``not de minimis'' is in relation to
host countries. We recognize that issuers may have difficulty assessing
the significance of particular payments for particular countries or
recipient governments and, as explained below, are adopting a $100,000
threshold that, we believe, will facilitate compliance with the statute
by providing clear guidance regarding the payments that resource
extraction issuers will need to track and report and will promote the
transparency goals of the statute. In addition, we believe the
threshold we are adopting will result in a lesser compliance burden
than would otherwise be associated with the final rules if a lower
threshold were used because issuers may track and report fewer payments
than they would be required to report if a lower threshold was adopted.
Of the suggested approaches for defining ``not de minimis,'' we
believe that a standard based on an absolute dollar amount is the most
appropriate because it will be easier to apply than a qualitative
standard or a relative quantitative standard based on a percentage of
expenses or revenues of the issuer,\252\ or some other fluctuating
measure, such as a percentage of the host government's or issuer's
estimated total production value in the host country for the reporting
period. Using an absolute dollar amount threshold for disclosure
purposes should help reduce compliance costs and may also promote
consistency and comparability.\253\
---------------------------------------------------------------------------
\252\ See notes 231-233 and accompanying text.
\253\ See note 233 and accompanying text. Furthermore, some
commentators who suggested a relative standard did not provide
definitions, or suggested a standard based on upstream payments only
even though the required disclosure includes additional payments.
---------------------------------------------------------------------------
The final rules define ``not de minimis'' \254\ to mean any
payment, whether made as a single payment or series of related
payments, that equals or exceeds $100,000 during the most recent fiscal
year.\255\ The final rules provide that in the case of any arrangement
providing for periodic payments or installments (e.g., rental fees), a
resource extraction issuer must consider 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.\256\ As
discussed further below, we considered a variety of alternatives when
considering what, if any, definition would be appropriate for ``not de
minimis.''
---------------------------------------------------------------------------
\254\ See Item 2.01(c)(7) of Form SD.
\255\ For example, a resource extraction issuer that paid a
$150,000 signature bonus would be required to disclose that payment.
As another example, a resource extraction issuer obligated to pay
royalties to a government annually and that paid $10,000 in
royalties on a monthly basis to satisfy its obligation would be
required to disclose $120,000 in royalties.
\256\ See Item 2.01(c)(7) of Form SD. This is similar to other
instructions in our rules requiring disclosure of a series of
payments. See, e.g., Instructions 2 and 3 to Item 404(a) of
Regulation S-K (17 CFR 229.404(a)).
---------------------------------------------------------------------------
We believe that a $100,000 threshold is more appropriate than, and
an acceptable compromise to, the amounts
[[Page 56383]]
suggested by commentators.\257\ Commentators supporting an absolute
dollar amount differed widely on the amount best suited for the
threshold, with commentators suggesting an amount in the ``low
thousands'' of U.S. dollars,\258\ $10,000,\259\ $15,000,\260\ an amount
less than $100,000,\261\ and $1,000,000.\262\ We are not adopting a
threshold in the low thousands of U.S. dollars, $10,000, or $15,000
threshold. In light of the comments received, we are concerned that
those amounts could result in undue compliance burdens and raise
competitive concerns for many issuers. While supporters of a $15,000
threshold noted its similarity to the AIM listing requirement, we do
not believe that applying the threshold used in that listing
requirement is appropriate for purposes of Section 13(q) because that
threshold was designed to apply to the smaller companies that comprise
the AIM market.\263\
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\257\ The Proposing Release solicited comment on a wide range of
absolute dollar amounts for the ``de minimis'' threshold, and
requested data to support the definitions suggested by commentators.
See Part II.D.2. of the Proposing Release. We received little data
that was helpful. Although one commentator submitted data regarding
payments made by some oil companies for tuition, rent, and living
expenses for the students and relatives of officials in Equatorial
Guinea, those payments are not within the list of payments types
specified by Section 13(q). See letter from Sen. Levin 2. Another
commentator noted that, based on Sierra Leone's 2007 EITI
Reconciliation Report (published in 2010), a $1 million threshold
would result in non-disclosure of over 40% of payments made by
mining companies and all payments made by half of EITI reporting
companies in that country. See letter from ERI 3. Although the
letter provides information about payments made to Sierra Leone, it
appears that the companies for which data is provided would not be
subject to the reporting requirements under Section 13(q) and the
related rules.
\258\ See ONE Petition.
\259\ See letters designated Type B and letter from Le Billon.
\260\ See letters from CalSTRS, ERI 3, HII, RWI 1, Sen. Levin 1,
SIF, and WACAM.
\261\ See letters from CRS and PWYP 1.
\262\ See letters from AngloGold and Talisman; see also letter
from Barrick Gold.
\263\ We also note that the AIM requirement differs from the
disclosure required by Section 13(q) and the final rules in that the
AIM only requires disclosure of payments by extractive issuers as an
initial listing requirement and does not impose an ongoing reporting
requirement related to those payments.
---------------------------------------------------------------------------
Although a few commentators suggested we use $1,000,000 as the
threshold,\264\ including one commentator that stated it reports
payments to governments in excess of $1,000,000,\265\ we do not believe
that $1,000,000 would be an appropriate threshold. While many EITI-
reporting companies have reported payments in excess of
$1,000,000,\266\ we note that the EITI provides that countries may
establish a ``materiality'' level for disclosure, which, as noted, is
different from the ``not de minimis'' standard in Section 13(q). We
agree with those commentators that cautioned against setting the
threshold too high so as to leave important payment streams
undisclosed.\267\ Adopting $100,000 as the ``not de minimis'' threshold
furthers the purpose of Section 13(q) and will result in a lesser
compliance burden than would otherwise be associated with the final
rules if a lower threshold were used.
---------------------------------------------------------------------------
\264\ See letters from AngloGold, Barrick Gold, and Talisman.
\265\ See letter from Talisman.
\266\ See, e.g., the 2009 EITI Report for Ghana (regarding
payment of royalties, corporate taxes, and dividends); the 2006-2008
EITI Report for Nigeria (regarding payment of petroleum taxes,
royalties and signature bonuses); the 2004-2007 EITI Report for Peru
(regarding payment of corporate income taxes and royalties); and the
2009 EITI Report for Timor Leste (regarding payment of petroleum
taxes).
\267\ See letters from ERI 3 and Rep. Frank et al.
---------------------------------------------------------------------------
Although adoption of a $100,000 threshold may be viewed as somewhat
high by some commentators \268\ and may result in some smaller payments
not being reported, we believe this threshold strikes an appropriate
balance between concerns about the potential compliance burdens of a
lower threshold and the need to fulfill the statutory directive that
payments greater than a ``de minimis'' amount be covered. We
acknowledge that a ``not de minimis'' definition based on a materiality
standard, or a much higher amount, such as $1,000,000, would lessen
commentators' concerns about the compliance burden and potential for
competitive harm.\269\ We believe, however, that use of the term ``not
de minimis'' in Section 13(q) indicates that a threshold quite
different from a materiality standard, and significantly less than
$1,000,000, is necessary to further the transparency goals of the
statute.
---------------------------------------------------------------------------
\268\ See, e.g., letters from CRS (supporting a ``not de
minimis'' threshold that is significantly less than $100,000) and
PWYP 1 (supporting a ``not de minimis'' threshold of $1,000 for
individual payments and $15,000 for payments in the aggregate); see
also letter from ERI 3.
\269\ See notes 224, 241, and 242 and accompanying text.
---------------------------------------------------------------------------
In adopting the final rules, we believe an absolute, rather than
relative, threshold may make the requirement easier for issuers to
comply with and allow for increased comparability of payment
disclosures. We considered adopting a threshold that would have
required disclosure of the lesser of a specific dollar amount or a
percentage of expenses, as suggested by commentators.\270\ We
determined not to adopt such an approach because we agree with other
commentators that noted such an approach would be more difficult for
issuers to comply with, could raise the compliance costs associated
with tracking and reporting the information, and would make
comparability of disclosure more difficult.\271\ For similar reasons,
we decided not to adopt a threshold that exclusively used a percentage
threshold based on an issuer's expenses or revenues, or some other
fluctuating measure. We note that exclusively using a percentage
threshold based on an issuer's expenses or revenues could result in
larger companies having a higher payment threshold for disclosure than
contemplated by the ``de minimis'' language in the statute.
---------------------------------------------------------------------------
\270\ See note 247 and accompanying text.
\271\ See note 233 and accompanying text.
---------------------------------------------------------------------------
3. The Requirement To Provide Disclosure for ``Each Project''
a. Proposed Rules
As noted in the proposal, Section 13(q) requires a resource
extraction issuer to disclose information regarding 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.'' \272\ Consistent with Section 13(q), the proposed rules
would have required a resource extraction issuer to disclose payments
made to governments by type and total amount per project. The proposed
rules did not define ``project'' in light of the fact that neither
Section 13(q) nor our current disclosure rules include a definition of
the term. In addition, the EITI does not define the term or provide
guidance on how it should be defined.
---------------------------------------------------------------------------
\272\ The legislative history does not provide an indication as
to how we should define the term.
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Two commentators supported the proposed approach of leaving the
term ``project'' undefined to allow flexibility for different types and
sizes of businesses.\273\ Most commentators that addressed the issue
supported defining the term ``project,'' \274\ but they disagreed as to
the appropriate definition, with recommendations ranging from defining
a ``project'' as each individual lease or license to defining it as a
country. One commentator stated that leaving the term undefined ``would
create significant uncertainty for issuers and
[[Page 56384]]
result in disclosures that are not comparable from issuer to issuer.''
\275\ Several commentators urged us to adopt a definition of project
that would not impede the ability of companies to compete for
extractive industry contracts, but did not provide a particular
definition.\276\ One of those commentators recommended broadly defining
``project'' so that issuers would not have to disclose disaggregated
price and cost information that could have anti-competitive
effects.\277\ Another of those commentators stated that we must adopt a
definition of ``project,'' among other definitions, that is ``narrowly
tailored to prevent a competitive imbalance for those SEC-registered
companies which make payments to governments for the privilege of
extracting natural resources.'' \278\
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\273\ See letters from Cleary and NMA 2.
\274\ See, e.g., letters from API 1, Calvert, Chevron, PWYP 1,
RDS 1, and Sen. Levin 1.
\275\ Letter from API 1.
\276\ See letters from Chairman Bachus and Chairman Miller,
Timothy J. Muris and Bilal Sayyed (March 2, 2011) (``Muris and
Sayyed''), and Split Rock.
\277\ See letter from Muris and Sayyed.
\278\ Letter from Chairman Bachus and Chairman Miller.
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Some commentators suggested that we permit a resource extraction
issuer to treat all of its operations in a single country as a
project.\279\ Commentators asserted that doing so would be consistent
with the EITI and would prevent issuers from incurring tens of millions
of dollars in compliance costs.\280\ One commentator stated that
defining ``project'' to require country-level disclosure would be
consistent with Item 1200 of Regulation S-K, which treats an individual
country as the lowest geographic level at which comprehensive oil and
gas disclosures must be provided.\281\ Commentators that opposed
defining ``project'' as a country stated that such a definition would
be inconsistent with the statute and Congressional intent.\282\
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\279\ See letters from AXPC, AngloGold, Barrick Gold, bcIMC, BHP
Billiton, BP 1, Hispanic Leadership Fund (February 27, 2012),
Petrobras, PWC, RDS 1, Sen. Murkowski and Sen. Cornyn, and Statoil.
See also letters from API 1 and ExxonMobil 1 (stating that under
certain circumstances, an issuer should be permitted to treat
operations in a country as a project, for example, when all of an
issuer's operations in a country relate to a single geologic basin
or province).
\280\ See letters from API 1, ExxonMobil 1, Petrobras, and RDS
1.
\281\ See letter from PWC.
\282\ See, e.g., letters from Calvert, Earthworks, Global
Financial 2, Global Witness 1, HURFOM 2, ONE, Oxfam 1, PWYP 1, Rep.
Frank et al., and Sen. Cardin et al 1. See also letter from Gates
Foundation and Le Billon.
---------------------------------------------------------------------------
Other commentators supported defining ``project'' consistent with
the definition of ``reporting unit.'' \283\ According to one of those
commentators, using a definition consistent with reporting unit ``would
allow issuers to collect information on a basis with which they already
are familiar, and draw upon established internal controls over
financial reporting (``ICFR''), instead of having to reallocate and
assign payments arbitrarily at a lower or different level than which
they manage their operations, and incurring cost and burden beyond
their existing ICFR systems.'' \284\
---------------------------------------------------------------------------
\283\ See letters from API 1, Chevron, ExxonMobil 1, NMA 2, Rio
Tinto, and Talisman. Generally, the commentators did not specify
what they meant by reporting unit, but we assume that they were
referring to a reporting unit as used for financial reporting
purposes. See also note 305.
\284\ Letter from NMA 2. In this regard, we note that the
European Commission proposed disclosure requirements that would
require companies that are registered or listed in the European
Union to report payments to governments on a country and project
basis where those payments had been attributed to a specific
project. The reporting on a project basis would be made on the basis
of companies' current reporting structures. See Proposal for
Directive on transparency requirements for listed companies and
proposals on country by country reporting--frequently asked
questions, COM (2011) MEMO/11/734 (October 25, 2011), available at
http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/734&format=HTML&aged=0. As noted above, the proposals are currently
pending.
---------------------------------------------------------------------------
Other commentators stated that there are relatively limited
instances in which resource extraction issuers make payments to
governments at the entity level (for example, the payment of corporate
income taxes), and that fact should have no bearing on the definition
of ``project.'' \285\ Those commentators noted that issuers could be
permitted to report at the entity level those payments that are levied
at the entity level that are not associated with a specific project.
---------------------------------------------------------------------------
\285\ See letters from Global Witness 1 and PWYP 1 (stating that
a limited disclosure accommodation could be given in the relatively
few instances that payments are made at the entity level). See also
letter from Calvert (define ``project'' at the lease or license
level except where payments originate at the entity level).
---------------------------------------------------------------------------
Several commentators suggested defining the term in relation to a
particular geologic resource. For example, ``project'' could be defined
to mean technical and commercial activities carried out within a
particular geologic basin or province to explore for, develop, and
produce oil, natural gas, or minerals.\286\ Two commentators further
suggested that the definition could specify the covered activities to
include acreage acquisition, exploration studies, seismic data
acquisition, exploration drilling, reservoir engineering studies,
facilities engineering design studies, commercial evaluation studies,
development drilling, facilities construction, production operations,
and abandonment.\287\ The definition could further state that a project
may consist of multiple phases or stages.\288\
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\286\ See letters from API 1, API 3, Chairman Bachus, BP 1,
Chamber Energy Institute, Chevron, ExxonMobil 1, IAOGP, Sen.
Murkowski and Sen. Cornyn, Statoil, and USCIB.
\287\ See letters from API 1 and ExxonMobil 1.
\288\ See letters from API 1 and ExxonMobil 1.
---------------------------------------------------------------------------
Other commentators, however, opposed a definition of ``project''
based on a particular geologic basin or province.\289\ Those
commentators maintained that, because multiple companies often conduct
activities in a single geologic basin, and because a basin may span
more than one country, such a definition would be counter to the
``company-by-company'' and ``country-by-country'' reporting
requirements of Section 13(q) and would be of limited use to citizens
and investors. Commentators further stated that a definition of
``project'' based on a particular geologic basin would have no relation
to the level at which royalty rates, tax payments, and other rights and
fiscal obligations are assigned.\290\
---------------------------------------------------------------------------
\289\ See, e.g., letters from ERI 3, Gates Foundation, Oxfam
(February 6, 2012) (``Oxfam 2''), Petition from Angolan citizens and
Angolan civil society organizations (March 13, 2012) (``Angolan
citizens''), Rep. Frank et al., and Soros 2.
\290\ See, e.g., letters from Gates Foundation, Oxfam 2, and
Rep. Frank et al.
---------------------------------------------------------------------------
Some commentators supported defining ``project'' to mean a material
project,\291\ while others opposed such a definition.\292\ The
commentators that supported defining the term to be a material project
asserted that doing so would enable issuers to rely on traditional
principles of materiality when determining what constitutes a
project.\293\ One commentator stated that materiality ``should be
determined with reference to the issuer's total worldwide government
payments and other qualitative factors.'' \294\ Commentators that
opposed defining ``project'' as a material project stated that such a
definition is not supported by the plain
[[Page 56385]]
language of Section 13(q) and would result in inconsistent
disclosures.\295\
---------------------------------------------------------------------------
\291\ See letters from API 1, API 2, API 3, Chamber Energy
Institute, Chevron, Cravath et al. pre-proposal, ExxonMobil 1,
IAOGP, PetroChina, RDS 1, Sen. Murkowski and Sen. Cornyn, and
Statoil.
\292\ See letters from Global Witness 1, Oxfam 1, PWYP 1, and
ERI 2. Oxfam and PWYP stated that should the Commission define
``project'' as a material project, it should clarify that, when
determining the materiality of a project, consideration should be
given to the significance of a project to a country and its citizens
in addition to its significance to an issuer. According to PWYP,
``[t]he disclosure of projects that are material to the country
would allow comparability across projects and meet the intent of the
statute to provide information of use to hold governments
accountable.''
\293\ See letters from API 1, Chamber Energy Institute, Chevron,
ExxonMobil 1, IAOGP, PetroChina, RDS 1, and Statoil.
\294\ Letter from API 1.
\295\ See letters from Global Witness 1, Oxfam 1, and PWYP 1.
---------------------------------------------------------------------------
Several commentators urged the Commission to adopt a definition of
``project'' in relation to each lease, license, or other concession-
level arrangement entered into by a resource extraction issuer.\296\ In
particular, one commentator urged us to adopt a definition of
``project'' as ``any oil, natural gas or mineral exploration,
development, production, transport, refining or marketing activity from
which payments above the de minimis threshold originate at the lease or
license level, except where these payments originate from the entity
level.'' \297\ The commentators supporting a definition of ``project''
in relation to a lease or license asserted that such an approach would
be appropriate because they believed the intent of Section 13(q) was to
go beyond the EITI standards, and it would enable investors and others
to evaluate the risks faced by issuers operating in resource-rich
countries.\298\
---------------------------------------------------------------------------
\296\ See letters from Angolan citizens, BTAP, California Public
Employees Retirement System (February 28, 2011) (``CalPERS''),
Calvert, Cambodians, Derecho, Earthworks, ERI 2, Gates Foundation,
Global Financial 2, Global Witness 1, Global Witness 2, Global
Witness 3, Greenpeace, Grupo Faro, Guatemalan Forest Communities,
Libyan Transparency, Arlene McCarthy, Member of the European
Parliament (March 13, 2012) (``McCarthy''), NUPENG, Office of
Natural Resources Revenue, US Department of the Interior (August 4,
2011) (``ONRR''), ONE, ONE Petition, Oxfam 1, Oxfam 2, PENGASSAN,
PWYP pre-proposal, PWYP 1, PWYP (December 20, 2011) (nine page
letter plus appendix) (``PWYP 4''), PWYP (February 23, 2012) (``PWYP
5''), Rep. Frank et al., RWI 1, Revenue Watch Institute (February
27, 2012) (``RWI 2''), Sen. Cardin et al. 1, Soros 2, Syena, TIAA,
and WACAM. See also letters designated as Type B (stating that a
project should be ``defined as our Interior Department does it'').
But see the letter from King & Spalding LLP (September 8, 2011)
(``King & Spalding'') (objecting to ONRR's request for lease by
lease payment disclosure because such a disclosure requirement would
conflict with ONRR's duty under the Outer Continental Shelf Lands
Act to protect the confidentiality of lease-level oil and gas
exploration and production information submitted to the agency by a
company operating under a federal lease or permit).
\297\ Letter from Calvert.
\298\ See, e.g., letters from CRS, Global Witness 1, Oxfam 1,
PWYP 1, and RWI 1.
---------------------------------------------------------------------------
According to some commentators, concerns expressed about compliance
costs associated with project-level reporting ``inflate their likely
impact'' because most issuers already have internal systems in place
for recording payments that would be required to be disclosed under
Section 13(q) and many issuers already report payments at the project
level or are moving towards project-level disclosure.\299\ Another
commentator stated that project-level disclosure ``would have an
extremely beneficial impact on improving investment risk assessment and
would provide further levels of corporate and sovereign
accountability.'' \300\ That commentator further suggested that
consistently applying the rules to all resource extraction issuers
would diminish anti-competitive concerns.\301\
---------------------------------------------------------------------------
\299\ Letter from RWI 1; see also letters from PWYP 1 and ERI 2.
\300\ Letter from Syena.
\301\ See id.
---------------------------------------------------------------------------
c. Final Rules
After carefully considering the comments, we have determined,
consistent with the proposal, to leave the term ``project'' undefined
in the final rules. We continue to believe that not adopting a
definition of ``project'' has the benefit of giving issuers flexibility
in applying the term to different business contexts depending on
factors such as the particular industry or business in which the issuer
operates, or the issuer's size. As noted above, neither Section 13(q)
nor our rules include a definition of ``project,'' and the EITI does
not define the term. In view of concerns expressed by some commentators
with regard to leaving the term undefined,\302\ we are providing some
guidance about the meaning of the term.
---------------------------------------------------------------------------
\302\ See note 275 and accompanying text.
---------------------------------------------------------------------------
We understand that the term ``project'' is used within the
extractive industry in a variety of contexts. While there does not
appear to be a single agreed-upon application in the industry, we note
that individual issuers routinely provide disclosure about their own
projects in their Exchange Act reports and other public statements, and
as such, we believe ``project'' is a commonly used term whose meaning
is generally understood by resource extraction issuers and investors.
In this regard, we note that resource extraction issuers routinely
enter into contractual arrangements with governments for the purpose of
commercial development of oil, natural gas, or minerals. The contract
defines the relationship and payment flows between the resource
extraction issuer and the government,\303\ and therefore, we believe it
generally provides a basis for determining the payments, and required
payment disclosure, that would be associated with a particular
``project.''
---------------------------------------------------------------------------
\303\ See letter from TIAA (stating that ``disclosure
requirements should shed light on the financial relationship between
companies and host governments by linking the definition of
``project'' to the individual contracts between the issuer and host
country'').
---------------------------------------------------------------------------
We considered defining ``project'' by reference to a materiality
standard as it is used under the federal securities laws, as suggested
by some commentators.\304\ We recognize that such an approach may
reduce compliance burdens for issuers; however, we believe that
approach would be inconsistent with Congress' intent to provide more
detailed disclosure than would be provided using such a materiality
standard and would not result in the transparency benefits that the
statute seeks to achieve. In addition, based on Congress' use of the
terms ``de minimis'' and ``material'' in other provisions of Section
13(q), we believe that if it intended to limit the disclosure
requirement to ``material projects'' it would have drafted the
statutory language accordingly.
---------------------------------------------------------------------------
\304\ See note 291 and accompanying text.
---------------------------------------------------------------------------
While we considered defining the term as a reporting unit \305\ as
suggested by some commentators,\306\ we have decided against that
approach. We appreciate the potential benefits to issuers from defining
the term consistent with reporting unit and thereby allowing issuers to
collect information on a basis with which they already are familiar and
according to established financial reporting systems.\307\ We also
appreciate the concerns some commentators expressed regarding the need
to disaggregate and allocate payments in a potentially arbitrary
manner, which could increase costs and not provide meaningful
information to investors.\308\ Nonetheless, for the same reasons we
declined to provide a definition of ``project'' based on materiality,
we do not believe that requiring disclosure at the reporting unit level
would be consistent with the use of the term ``project'' in Section
13(q). We also do not believe that a plain reading of the statutory
language and the common use of the term ``project'' would lead one to
think that a reporting unit would be a project. Based on Congress'
intention to promote international transparency efforts, we believe
that Congress intended a greater level of transparency than would be
achieved if we defined ``project'' as a reporting unit.
---------------------------------------------------------------------------
\305\ Accounting Standards Code (``ASC'') 350-20-20 defines a
reporting unit as an operating segment, or a segment that is one
level below an operating segment.
\306\ See note 283 and accompanying text.
\307\ See note 284 and accompanying text.
\308\ See, e.g., letters from API 1 and NMA 2.
---------------------------------------------------------------------------
We also appreciate the concerns some commentators expressed
regarding potential definitions of ``project'' and
[[Page 56386]]
the need to disaggregate and allocate payments made at the entity level
in a potentially arbitrary manner, which could increase costs and would
not provide meaningful information to investors.\309\ We do not believe
that resource extraction issuers should be required to disaggregate and
allocate payments to projects for payments that are made for
obligations levied on the issuer at the entity level rather than the
project level. Consistent with the suggestion of some
commentators,\310\ the final rules we are adopting will permit a
resource extraction issuer to disclose payments at the entity level if
the payment is made for obligations levied on the issuer at the entity
level rather than the project level.\311\ Thus, if an issuer has more
than one project in a host country, and that country's government
levies corporate income taxes on the issuer with respect to the
issuer's income in the country as a whole, and not with respect to a
particular project or operation within the country, the issuer would be
permitted to disclose the resulting income tax payment or payments
without specifying a particular project associated with the
payment.\312\
---------------------------------------------------------------------------
\309\ See, e.g., letters from API 1, Muris and Sayyed, and NMA
2.
\310\ See note 285 and accompanying text.
\311\ See Instruction 2 to Item 2.01 of Form SD.
\312\ One commentator provided, as an example, a situation where
the payment of corporate income taxes is calculated on the basis of
all projects in a given jurisdiction. See letter from Global Witness
1.
---------------------------------------------------------------------------
We believe the term ``project'' requires more granular disclosure
than country-level reporting. Section 13(q) clearly requires project-
level reporting, and we believe the statutory requirement to provide
interactive data tags identifying the government that received the
payment and the country in which that government is located is further
evidence that reference to ``project'' was intended to elicit
disclosure at a more granular level than country-level reporting.\313\
---------------------------------------------------------------------------
\313\ See 15 U.S.C. 78m(q)(2)(D)(ii)(V).
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4. Payments by ``a Subsidiary * * * or an Entity Under the Control of *
* *''
a. Proposed Rules
Consistent with Section 13(q),\314\ the proposed rules would have
required a resource extraction issuer to disclose payments made by the
issuer, a subsidiary, or an entity under the control of the resource
extraction issuer, to a foreign government or the U.S. Federal
Government for the purpose of commercial development of oil, natural
gas, or minerals. Under the proposal, and consistent with Section
13(q), a resource extraction issuer would have been required to provide
disclosure if control is present. Consistent with the definition of
control under the federal securities laws,\315\ a resource extraction
issuer would have been required to make a factual determination as to
whether it has control of an entity based on a consideration of all
relevant facts and circumstances. At a minimum, a resource extraction
issuer would have been required to disclose payments made by a
subsidiary or entity under the issuer's control if the issuer must
provide consolidated financial information for the subsidiary or other
entity in the issuer's financial statements included in its Exchange
Act reports.
---------------------------------------------------------------------------
\314\ See 15 U.S.C. 78m(q)(2)(A).
\315\ Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2] and Rule
1.02 of Regulation S-X [17 CFR 210.1.02], ``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.'' The rules also define
``subsidiary'' (``A `subsidiary' of a specified person is an
affiliate controlled by such person directly, or indirectly through
one or more intermediaries. (See also `majority-owned subsidiary,'
`significant subsidiary,' and `totally-held subsidiary.')'').
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b. Comments on the Proposed Rules
Several commentators stated that we should rely on the current
definitions of ``control'' and ``subsidiary'' under Exchange Act Rule
12b-2,\316\ or as those terms are used under U.S. GAAP or IFRS, and we
need not adopt new definitions of those terms for purposes of this
rulemaking because the current definitions are well-understood by both
extractive issuers and investors.\317\ When applying those definitions,
however, commentators held a variety of views regarding the entities
for which resource extraction issuers should be required to provide the
required payment information.
---------------------------------------------------------------------------
\316\ See id.
\317\ See letters from API 1, AngloGold, BP 1, ERI 1, ExxonMobil
1, PWC, and RDS 1.
---------------------------------------------------------------------------
Some commentators believed that whether an issuer has control over
an entity is consistent with whether it must consolidate that entity
for purposes of the issuer's financial reporting. Those commentators
suggested the rules should only require an issuer to report payments
for an entity that it must either fully or proportionately consolidate
for U.S. financial reporting purposes and not require disclosure of
payments of equity investees for which no consolidation is
required.\318\ Some commentators further stated that an issuer should
not have to report payments corresponding to its proportional interest
in a joint venture unless it makes such payments directly to the host
government.\319\ The commentators noted that, under such an approach,
proportional payments made to the joint venture operator would not be
reported.\320\
---------------------------------------------------------------------------
\318\ See letters from API 1, BP 1, ExxonMobil 1, and RDS 1.
Other commentators agreed that the final rules should define control
to mean consolidated entities only but opposed using the definition
of control under Exchange Act Rule 12b-2 on the grounds that the
existing definition could include companies that are not
consolidated and regarding which an issuer would lack access to the
underlying accounting data for the controlled entities' payments.
See letters from Barrick Gold, Cleary, GE, NMA 2, NYSBA Committee,
Petrobras, Rio Tinto, and Statoil. One commentator further observed
that restricting the definition of control to consolidated entities
would avoid the possible overstating of resource extraction payments
that might occur if payments by equity investees are required to be
disclosed. See letter from Rio Tinto.
\319\ See letters from API 1, ExxonMobil 1, and RDS 1.
\320\ See id.
---------------------------------------------------------------------------
One commentator supported requiring an issuer to disclose payments
only for entities that it must consolidate because that approach would
provide a bright-line test that is easy to administer and because it
would be consistent with the EITI.\321\ The commentator further stated
that an issuer should be required to disclose payments made on behalf
of a joint venture, regardless of control, when the payments are
disproportionate to the issuer's interest in the joint venture.\322\
---------------------------------------------------------------------------
\321\ See letter from AngloGold.
\322\ See letter from AngloGold. This commentator provided an
example in which an issuer that is a 50% partner in a joint venture
would have to disclose payments made on behalf of that joint venture
if the payments include the share attributable to the other joint
venture partner in circumstances where the other partner is
unwilling or unable to make its share of the payments.
---------------------------------------------------------------------------
Other commentators believed that, in addition to requiring
disclosure of payments made by consolidated entities, the rules also
should require disclosure of payments:
Made by or on behalf of unconsolidated equity investees
and joint venture partners on a proportionate share basis where a facts
and circumstances test determines that the issuer possesses control;
\323\
---------------------------------------------------------------------------
\323\ See letters from Earthworks and PWYP 1.
---------------------------------------------------------------------------
Made by the issuer's non-reporting parent or other related
entity on behalf or for the benefit of the issuer when the issuer is
the alter ego or instrumentality of the parent or related entity \324\
or when the issuer ``controls, is controlled by, or is under common
control with'' the non-reporting parent or related entity, and the
subsidiary would
[[Page 56387]]
otherwise be required to disclose those payments under Section 13(q);
\325\
---------------------------------------------------------------------------
\324\ See letter from Conflict Risk Network (February 28, 2011)
(``Conflict Risk'').
\325\ See letters from HURFOM 1, PWYP 1, and WRI.
---------------------------------------------------------------------------
Made by an entity that is contractually obligated to
collect funds and make payments to various parties, including the host
government, on behalf of an issuer; \326\ and
---------------------------------------------------------------------------
\326\ See letters from ERI pre-proposal and Le Billon.
---------------------------------------------------------------------------
Made by one party to a joint venture that has guaranteed
the debt of another joint venture party in an off-balance sheet
transaction.\327\
---------------------------------------------------------------------------
\327\ See id.
---------------------------------------------------------------------------
Some commentators believed that a foreign government-owned or
controlled entity should not have to report certain payments made to
its parent government\328\ or to a subsidiary or other entity
controlled by it.\329\ Another commentator stated that a wholly-owned
subsidiary of an Exchange Act reporting parent should not have to
disclose payments as long as the subsidiary's parent has included the
subsidiary's payments in the parent's Exchange Act report.\330\
---------------------------------------------------------------------------
\328\ See letter from Cleary.
\329\ See letter from Statoil.
\330\ See letter from API 1.
---------------------------------------------------------------------------
c. Final Rules
We are adopting this requirement as proposed, consistent with the
statutory language of Section 13(q). The final rules require a resource
extraction issuer to provide disclosure of payments made by the issuer,
a subsidiary of the issuer, or an entity under the control of the
issuer to a foreign government or the U.S. Federal Government for the
purpose of the commercial development of oil, natural gas, or
minerals.\331\ ``Control'' and ``subsidiary'' are terms defined as in
Exchange Act Rule 12b-2.\332\ Therefore, a resource extraction issuer
must disclose payments made by a subsidiary or entity under the control
of the resource extraction issuer where the subsidiary or entity is
consolidated in the resource extraction issuer's financial statements
included in its Exchange Act reports,\333\ as well as payments by other
entities it controls as determined in accordance with Rule 12b-2. A
resource extraction issuer may be required to provide the disclosure
for entities in which it provides proportionately consolidated
information.\334\
---------------------------------------------------------------------------
\331\ With respect to payments by an Exchange Act reporting
company meeting the definition of resource extraction issuer that
also is a wholly-owned subsidiary of an Exchange Act reporting
parent that is a resource extraction issuer, consistent with some
commentators' suggestions, the subsidiary will not be required to
separately disclose payments to governments provided that the
subsidiary's parent has included the subsidiary's payments in the
parent's Form SD. The subsidiary must file its own Form SD
indicating that the required disclosure was provided in the parent's
Form SD. See Instruction 8 to Item 2.01 of Form SD.
\332\ See note 315 above.
\333\ This would be the case whether the resource extraction
issuer provides consolidated financial information under U.S.
Generally Accepted Accounting Principles (``GAAP''), International
Financial Reporting Standards as issued by the International
Accounting Standards Board (``IFRS''), or another comprehensive
basis of accounting other than U.S. GAAP or IFRS.
\334\ Proportionate consolidation may be used in a variety of
circumstances in which an issuer may or may not have control, and
therefore resource extraction issuers will need to make a facts-and-
circumstances determination, as discussed below.
---------------------------------------------------------------------------
We understand that resource extraction issuers commonly engage in
commercial development of oil, natural gas, or minerals through joint
ventures, as an operator of a joint venture, or through an equity
investment.\335\ In these situations a resource extraction issuer will
be required to determine whether it has control of an entity based on a
consideration of all relevant facts and circumstances.\336\ Following
the definition of control under the federal securities laws, such as in
Rule 12b-2, a resource extraction issuer will be required to determine
whether it has control of an entity for purposes of Rule 13q-1 based on
a consideration of all relevant facts and circumstances.\337\ We
continue to believe that a facts-and-circumstances determination of
control consistent with the federal securities laws is preferable to a
bright-line rule limiting disclosure to payments made only by
consolidated entities because it is consistent with the statutory
language. Limiting the scope of the requirement to situations in which
an issuer provides consolidated financial information for an entity may
limit the rules more narrowly than the intended scope of the statute
because a resource extraction issuer may have control over an
unconsolidated entity that makes payments that would be covered by
Section 13(q) and the final rules. Thus, an issuer that engages in
joint ventures or contractual arrangements will need to consider
whether it has control to determine whether it must disclose payments.
---------------------------------------------------------------------------
\335\ See, e.g., letters from API 1, ERI pre-proposal, NMA 2,
and PWYP 1. See also Ernst & Young, Navigating Joint Ventures in the
Oil and Gas Industry (2011), available at http://www.ey.com/
Publication/vwLUAssets/Navigating_joint_ventures_in_oil_and_
gas_industry/$FILE/Navigating_joint_ventures_in_oil_and_gas_
industry.pdf.
\336\ As we noted in the Proposing Release, if a resource
extraction issuer makes a payment to a third party to be paid to the
government on its behalf, the rules will require disclosure of that
payment. Similarly, where an entity makes payments (that are
otherwise covered by the definition of payment) to a foreign
government as a paying agent for a resource extraction issuer,
pursuant to a contractual obligation with the resource extraction
issuer, the final rules require the resource extraction issuer to
disclose these payments.
\337\ We expect that a determination in accordance with
consolidation guidance generally would be the same as under Rule
12b-2.
---------------------------------------------------------------------------
We disagree with commentators who suggested that the definition of
``control'' not track Rule 12b-2 and instead be entirely consistent
with the use of the term for purposes of financial reporting. While
determinations made pursuant to the relevant accounting standards
applicable for financial reporting may be indicative of whether control
exists, we do not believe it is determinative in all cases. We note the
suggestion by some commentators to adopt a definition of control that
does not track Rule 12b-2 and specifically addresses unconsolidated
equity investees.\338\ We are not adopting such a definition because we
believe it is appropriate and consistent with the statute to use the
same definition of control used for other purposes under the Exchange
Act, and because issuers should already be familiar with applying that
definition. A resource extraction issuer is required to make a facts-
and-circumstances determination as to whether the equity investee is an
entity under the control of the resource extraction issuer under the
final rules.
---------------------------------------------------------------------------
\338\ See letters from Earthworks and PWYP 1.
---------------------------------------------------------------------------
E. Definition of ``Foreign Government''
1. Proposed Rules
Consistent with Section 13(q), the proposed rules would have
required a resource extraction issuer to disclose payments made to a
foreign government or the Federal Government. Under Section 13(q),
Congress defined ``foreign government'' to mean a foreign government, a
department, agency, or instrumentality of a foreign government, or a
company owned by a foreign government, while granting the Commission
authority to determine the scope of the definition.\339\ The proposed
rules would have defined the term consistent with the statute. In
addition, the proposed definition of ``foreign government'' explicitly
included both a foreign national government as well as a foreign
subnational government, such as the government of a state, province,
county, district, municipality, or territory under a foreign national
government. The proposed rules would have clarified that the term
``Federal Government'' means the United States Federal Government. The
proposed rules would have further clarified that a company owned by a
foreign government is a company that is at least
[[Page 56388]]
majority-owned by a foreign government.
---------------------------------------------------------------------------
\339\ See 15 U.S.C. 78m(q)(1)(B).
---------------------------------------------------------------------------
2. Comments on the Proposed Rules
Commentators generally supported the proposed definition of foreign
government.\340\ Some of those commentators noted that inclusion of
foreign subnational governments is appropriate because issuers
frequently make payments to subnational governments and that including
them would be consistent with the EITI.\341\ Some commentators also
supported the proposed clarification regarding the meaning of ``Federal
Government'' \342\ and agreed that the term did not include state
governments.\343\ Those commentators believed that extending the
disclosure requirement to states and other subnational governments in
the United States would go beyond the scope of the statute. A few
commentators explicitly supported the proposed clarification regarding
the meaning of ``a company owned by a foreign government.'' \344\
---------------------------------------------------------------------------
\340\ See letters from API 1, AngloGold, Barrick Gold, BP 1,
Calvert, CRS, Earthworks, EIWG, ExxonMobil 1, PWYP 1, RDS 1, and
WRI.
\341\ See letters from API 1, AngloGold, Barrick Gold, BP 1,
Calvert, CRS, Earthworks, EIWG, ExxonMobil 1, PWYP 1, RDS 1, and
WRI.
\342\ See letters from API 1, BP 1, Calvert, ExxonMobil 1, NYSBA
Committee, and RDS 1.
\343\ See letters from API 1, BP 1, Calvert, ExxonMobil 1, NYSBA
Committee, and RDS 1.
\344\ See letters from API 1, ExxonMobil 1, and PetroChina.
---------------------------------------------------------------------------
Some commentators, however, suggested alternative approaches to the
definition of foreign government.\345\ A few commentators supported
adopting the statutory definition of ``foreign government'' and
suggested limiting the rule to require resource extraction issuers to
disclose only those payments made to foreign national governments.
According to those commentators, it would be unfair to require
disclosure of payments to foreign subnational governments because
Section 13(q) does not require disclosure of payments to subnational
governments in the United States. Thus, limiting the requirement to
disclose payments only to foreign national governments would promote
consistency and fairness.\346\ One commentator stated that defining
``foreign government'' to mean only a foreign national government would
be consistent with the plain meaning of Section 13(q). \347\ According
to that commentator, the fact that the statute requires an issuer to
include electronic tags identifying both the recipient government for
each payment and the country in which that government is located does
not mean that Congress intended to include foreign subnational
governments within the definition of foreign government. Rather,
according to that commentator, because the statutory definition of
foreign government includes departments, agencies and instrumentalities
of a foreign government, Congress intended only that an issuer would
use the recipient government tag to identify the specific department,
agency or instrumentality receiving the payment. In addition, one
commentator noted that it has a substantial number of provincial
government leases and that it would be overburdened by reporting
payments on a subnational level.\348\ A few commentators supported
adoption of the proposed definition of ``foreign government'' and also
suggested requiring the disclosure of payments made to U.S. subnational
governments because extractive companies may make substantial payments
to U.S. subnational governments.\349\
---------------------------------------------------------------------------
\345\ See, e.g., letters from NMA 2, Statoil, and Talisman.
\346\ See letters from NMA 2, Statoil, and Talisman.
\347\ See letter from Statoil.
\348\ See letter from Talisman.
\349\ See letters from AngloGold, Barrick Gold, and Earthworks.
---------------------------------------------------------------------------
Some commentators requested the Commission clarify that whether an
issuer will be required to disclose payments made to a foreign
government-owned company would depend on whether the foreign government
controls that company.\350\ One of those commentators suggested that
whether control exists should be determined by a facts-and-
circumstances analysis, which could result in the conclusion that a
non-majority owned company is controlled by a foreign government.\351\
The commentator believed the analysis should consider whether the
government has provided working capital to the company, and whether the
government has the ability to direct economic or policy decisions of
the company, appoint or remove directors or management, restrict the
composition of the board, or veto the decisions of the company.\352\
The other commentator suggested we also ``[should] look at the extent
to which the government has control over the company and also the
extent of advances and payments by the company to the government.''
\353\
---------------------------------------------------------------------------
\350\ See letters from PetroChina and PWYP 1.
\351\ See letter from PWYP 1.
\352\ See letter from PWYP 1.
\353\ See letter from PetroChina.
---------------------------------------------------------------------------
Other commentators suggested that the Commission clarify whether an
issuer will be required to disclose payments made to a foreign
government-owned company would depend on the capacity in which the
company is acting.\354\ According to the commentators, if the
government-owned company is acting as the agent of the government, the
issuer should have to disclose payments made to the government-owned
company.\355\ If the government-owned company is acting in the capacity
of a commercial partner with the issuer, and the government-owned
company is the operator of the joint venture, the issuer should not
have to disclose payments ``for capital or operating cash calls'' made
to the government-owned company.\356\ Two commentators asserted that an
issuer also should not have to disclose payments to a government-owned
company acting in the capacity of a commercial vendor of goods and
services.\357\ Other commentators believed that Section 13(q) requires
the disclosure of all payments to a government or government-owned
company whether for ``rent, security, food and water, use of roads and
airports'' or for capital contributions.\358\
---------------------------------------------------------------------------
\354\ See letters from API 1, Cleary, ExxonMobil 1, and Vale.
\355\ See letters from API 1 and ExxonMobil 1.
\356\ See letters from API 1 and ExxonMobil 1.
\357\ See letters from Cleary and Vale.
\358\ See letters from PWYP 1 and Sen. Levin 1.
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3. Final Rules
After considering the comments, we are adopting the definition of
``foreign government'' consistent with the definition in Section 13(q),
as proposed. A ``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.\359\ Although we
acknowledge the concerns of commentators that sought to limit the
definition of foreign government to foreign national governments,\360\
we continue to believe that the definition also should include foreign
subnational governments. The adopted definition is not only consistent
with Section 13(q), which requires an issuer to identify, for each
disclosed payment, the government that received the payment, and the
country in which the government is located,\361\ but it also is
consistent with the EITI, which recognizes that payments to subnational
governments may have to be included within the scope of an EITI
program.\362\ As noted in the proposal, if a resource
[[Page 56389]]
extraction issuer makes a payment that meets the definition of payment
to a third party to be paid to the government on its behalf, disclosure
of that payment is covered under the rules.
---------------------------------------------------------------------------
\359\ See Item 2.01(c)(2) of Form SD.
\360\ See, e.g., letter from Statoil.
\361\ See 15 U.S.C. 78m(q)(2)(D)(ii)(V).
\362\ See Implementing the EITI, at 34.
---------------------------------------------------------------------------
In addition, as proposed, the final rules clarify that a company
owned by a foreign government is a company that is at least majority-
owned by a foreign government.\363\ As noted above, some commentators
requested that we clarify the circumstances in which an issuer will be
required to disclose payments made to a foreign government-owned
company. The final rules specify the types of payments that will be
required to be disclosed, and resource extraction issuers will need to
consider whether the payments being made to a foreign government-owned
company fall within the categories of payments for which the final
rules require disclosure.
---------------------------------------------------------------------------
\363\ See Instruction 4 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
As proposed, the final rules clarify that ``Federal Government''
means the United States Federal Government.\364\ Although we
acknowledge that there is a difference in the final rules between
requiring disclosure of payments to foreign subnational governments and
not requiring payments to state or local governments in the United
States, 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. As we noted in the
proposal, 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.
---------------------------------------------------------------------------
\364\ See Item 2.01(a) of Form SD.
---------------------------------------------------------------------------
F. Disclosure Required and Form of Disclosure
1. Annual Report Requirement
a. Proposed Rules
As noted in the proposal, 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 specific form. The proposed rules would have
required a resource extraction issuer to provide the payment disclosure
in exhibits to its Exchange Act annual report filed on Form 10-K, Form
20-F, or Form 40-F. In addition, the proposed rules would have required
a resource extraction issuer to include a brief statement in the body
of the annual report directing investors to detailed information about
payments provided in the exhibits.
b. Comments on Proposed Rules
Some commentators supported the proposed approach,\365\ while other
commentators opposed requiring the disclosure in Exchange Act annual
reports on Form 10-K, Form 20-F, and Form 40-F and suggested
alternative approaches.\366\
---------------------------------------------------------------------------
\365\ See letters from Calvert, Earthworks, HURFOM 1, ONE, PGGM,
PWYP 1, RWI 1, and Soros 1.
\366\ See, e.g., letters from API 1, AngloGold, Barrick Gold, BP
1, Chevron, Cleary, ExxonMobil 1, NMA 2, NYSBA Committee, Nexen,
PetroChina, Petrobras, RDS 1, and Statoil.
---------------------------------------------------------------------------
Commentators asserted that it would be difficult to provide the
payment disclosure, which could be voluminous, within the same time
period for Exchange Act annual reports. Those commentators maintained
that additional time is necessary to provide the required
information.\367\ Otherwise, according to commentators, due to resource
constraints, issuers may be unable to file their Exchange Act annual
reports on a timely basis if they are required to provide the new
payment disclosure at the same time that they must meet their existing
obligations with respect to Exchange Act annual reports.\368\
Commentators further maintained that the payment disclosures are
largely cash-based, unaudited, of little relevance to most financial
statement users, and should not be subject to certification
requirements, whereas the financial statement information in an
existing Exchange Act annual report is accrual-based, audited, of
primary importance to most financial statement users, and subject to
certification requirements.\369\ Those commentators believed that
keeping the payment disclosure separate from the financial statements
and corresponding disclosure would avoid confusion.
---------------------------------------------------------------------------
\367\ See letters from API 1, AngloGold, Barrick Gold, BP 1,
Cleary, ExxonMobil 1, NMA 2, NYSBA Committee, Nexen, Petrobras, and
RDS 1.
\368\ See letter from Cleary; see also letters from Barrick Gold
and Petrobras.
\369\ See letters from API 1, AngloGold, Barrick Gold, Cleary,
ExxonMobil 1, NMA 2, and NYSBA Committee.
---------------------------------------------------------------------------
Many commentators supported requiring a resource extraction issuer
to make the payment disclosure in a new annual report form or under
cover of a Form 8-K or Form 6-K, rather than in an existing Exchange
Act annual report.\370\ Some commentators supported using only Forms 8-
K or 6-K,\371\ while other commentators favored using only a new annual
report.\372\ One commentator opposed using Form 8-K for the Section
13(q) disclosure because Form 8-K is the ``venue for time-sensitive
disclosures of unique changes to a company'' whereas, according to that
commentator, the Section 13(q) disclosure consists of ``standard,
material financial disclosures that should be included in the primary
documents filed in the Exchange Act annual report.'' -\373\
---------------------------------------------------------------------------
\370\ See letters from API 1, Barrick Gold, Chevron, Cleary,
ExxonMobil 1, NYSBA Committee, and RDS 1.
\371\ See letters from AngloGold, Nexen, PetroChina, and
Petrobras.
\372\ See letters from NMA 2 and Statoil.
\373\ Letter from Calvert.
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Some commentators supporting a new annual report form believed the
potential benefits of providing the disclosure on a new form rather
than in an Exchange Act annual report outweighed the potential costs
associated with the new form.\374\ Commentators suggested that the
required disclosure could be due 150 or 180 days or some other lengthy
period following the end of the issuer's fiscal year.\375\ Two
commentators believed that the reporting period for the resource
extraction issuer disclosure should be the calendar year as opposed to
the fiscal year as is the case for existing Exchange Act annual reports
because the calendar year approach would facilitate review and
compilation by the Commission and analysis by users.\376\ Other
commentators, however, suggested that disclosure should be required for
the issuer's fiscal year.\377\
---------------------------------------------------------------------------
\374\ See letters from API 1 and Cleary.
\375\ See letters from API 1, AngloGold, Barrick Gold, BP 1,
Chevron, Cleary, ExxonMobil 1, NMA 2, NYSBA Committee, Nexen
(supporting 180 days), PetroChina, Petrobras, RDS 1 (supporting 150
days), and Statoil.
\376\ See letters from API 1 and ExxonMobil 1.
\377\ See letters from AngloGold and RDS 1.
---------------------------------------------------------------------------
Several commentators that supported a deadline for the disclosure
separate from the due date for the Exchange Act annual report opposed
allowing the disclosure to be provided in an amendment to the Form 10-
K, Form 20-F, and Form 40-F.\378\ According to those commentators, such
an amendment could be misconstrued as a correction of an error or
omission or as a restatement.\379\ Other commentators stated that if
the Commission decides to require inclusion of the disclosure in an
Exchange Act annual report, it would be reasonable to permit an issuer
to
[[Page 56390]]
disclose the information in an amendment to the annual report.\380\
---------------------------------------------------------------------------
\378\ See letters from API 1, AngloGold, ExxonMobil 1, NMA 2,
and RDS 1.
\379\ See id.
\380\ See letters from Cleary, NMA 2, and NYSBA Committee.
Cleary and NYSBA Committee supported this approach if the Commission
decided not to require the disclosure in a new annual report form or
under cover of Form 8-K or 6-K.
---------------------------------------------------------------------------
Some commentators suggested permitting issuers to submit the
payment disclosure on a confidential basis.\381\ These commentators
stated that the Commission could then use the confidentially submitted
information to prepare a public compilation, which would consist of
information only at the country or other highly aggregated level. The
commentators asserted that Section 13(q)(3), which is entitled ``Public
Availability of Information,'' requires the Commission to make public a
compilation of the information required to be submitted under Section
13(q)(2). According to the commentators, the statute does not require
the submitted information itself to be publicly available.\382\
Commentators argued that the payment information should be submitted
confidentially at a disaggregated level and that the public compilation
by the Commission could be presented on ``an aggregated, per-country or
similarly high-level basis.'' \383\ According to those commentators,
this approach would satisfy the specific text of the statute and
fulfill the underlying goal of promoting the international transparency
regime of the EITI.\384\
---------------------------------------------------------------------------
\381\ See letters from API 1, Chevron, ExxonMobil 1, Nexen, and
RDS 1.
\382\ See letters from API 1, Chevron, ExxonMobil 1, Nexen, and
RDS 1.
\383\ See letters from API 1 and ExxonMobil 1. See also letters
from Chevron, Nexen, and RDS 1.
\384\ See letters from API 1 and ExxonMobil 1. See also letters
from Chevron and RDS 1.
---------------------------------------------------------------------------
In contrast, other commentators strongly disagreed with the
interpretation that Section 13(q) should be read as to not require the
public disclosure of the payment information submitted in annual
reports and that the Commission may choose to make public only a
compilation of the information.\385\ One commentator stated that the
``compilation would be in addition to the public availability of the
original company data and in no way is expected to replace the
availability of that data.'' \386\ Two commentators supporting the
proposed approach requested that the Commission clarify that the
statutorily-required compilation would function both as an online
database and summary report, which would allow users to download data
in bulk, in addition to allowing users to search by country and
company, as well as by year or multiple years of reporting.\387\
---------------------------------------------------------------------------
\385\ See letters from Calvert, PWYP 1, RWI 1, Sen. Cardin et
al. 1, Sen. Cardin et al. 2, and Sen. Levin 1.
\386\ Letter from Sen. Cardin et al. 1.
\387\ See letters from PWYP 1 and USW.
---------------------------------------------------------------------------
Two commentators stated that, to the extent the new rules require
the payment disclosure to be in an existing Exchange Act annual report,
the rules should provide that the officer certifications required by
Exchange Act Rules 13a-14(a) and (b) and 15d-14(a) and (b) do not
extend to exhibits or disclosures required pursuant to Section
13(q).\388\
---------------------------------------------------------------------------
\388\ See letters from Cleary and NYSBA Committee.
---------------------------------------------------------------------------
c. Final Rules
After considering the comments, we have determined that resource
extraction issuers should provide the required disclosure about
payments in a new annual report, separate from the issuer's existing
Exchange Act annual report. We are requiring the disclosure on new Form
SD.\389\ As noted above, Section 13(q) does not specify a location for
the disclosure. We believe requiring resource extraction issuers to
provide the payment disclosure in new Form SD will facilitate
interested parties' ability to locate the disclosure and address
issuers' concerns about providing the disclosure in their Exchange Act
annual reports on Forms 10-K, 20-F, or 40-F.\390\ Similar to the
proposal, Form SD requires issuers to include a brief statement in the
body of the form in an item entitled, ``Disclosure of Payments By
Resource Extraction Issuers,'' directing investors to the detailed
payment information provided in the exhibits to the form.
---------------------------------------------------------------------------
\389\ Form SD is a new disclosure form to be used for
specialized disclosure not included within an issuer's periodic or
current reports. In addition to resource extraction issuer payment
disclosure, Form SD also will be used to provide the disclosure
required by the rules implementing Section 1502 of the Dodd-Frank
Act. The Commission adopted Form SD at the same time as the final
rules implementing that provision. See Conflict Minerals Adopting
Release.
\390\ See notes 366-370 and accompanying text. As noted, under
the proposed rules, 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. As such, investment companies
that are registered under the Investment Company Act of 1940
(``registered investment companies'') would not have been subject to
the disclosure requirement because those companies are not required
to file Form 10-K, Form 20-F, or Form 40-F. Our decision to require
this disclosure in a new form is not intended to change the scope of
companies subject to the disclosure requirement. Therefore,
consistent with the proposal, registered investment companies that
are required to file reports on Form N-CSR or Form N-SAR pursuant to
Rule 30d-1 under the Investment Company Act (17 CFR 270.30d-1) will
not be subject to the final rules.
---------------------------------------------------------------------------
We considered commentators' suggestions about requiring the
disclosure in a Form 8-K or Form 6-K,\391\ and we determined not to
require the disclosure in those forms because we continue to believe,
and agree with commentators that noted, the resource extraction payment
disclosure differs from the disclosure required by those forms.\392\ In
this regard, we note that Section 13(q) requires us to issue final
rules requiring the disclosure in an annual report rather than
requiring the disclosure to be provided on a more rapid basis, such as
disclosure of material corporate events that are required to be filed
on a current basis on Form 8-K.\393\ In addition, we are persuaded by
the comments asserting that it would be preferable to use a different
form rather than to extend the deadline for the disclosure to be filed
and require an amendment to Form 10-K, Form 20-F, or Form 40-F, which
might suggest a change or correction had been made to a previous
filing,\394\ and therefore we are not adopting that approach. We also
believe that requiring the disclosure in a new form, rather than in
issuers' Exchange Act annual reports, should alleviate some
commentators' concerns about the disclosure being subject to the
officer certifications required by Rules 13a-14 and 15d-14 under the
Exchange Act \395\ and will allow us to adjust the timing of the
submission.
---------------------------------------------------------------------------
\391\ See note 371 and accompanying text.
\392\ See, e.g., letter from Calvert.
\393\ A Form 8-K report is required to be filed or furnished
within four business days after the occurrence of one or more of the
events required to be disclosed on the Form, unless the Form
specifies a different deadline, e.g., for disclosures submitted to
satisfy obligations under Regulation FD (17 CFR 243.100 et seq. See
General Instruction B.1 of Form 8-K (17 CFR 249.308).
\394\ See note 379 and accompanying text.
\395\ See note 369.
---------------------------------------------------------------------------
While Section 13(q) mandates that a resource extraction issuer
include the payment disclosure required by that section in an annual
report, it does not specifically mandate the time period in which a
resource extraction issuer must provide the disclosure. Although two
commentators believed that the reporting period for the resource
extraction disclosure should be the calendar year, other commentators
suggested that the fiscal year should be the reporting period for Form
SD.\396\ We believe that the fiscal year is the more appropriate
reporting period for the payment disclosure because, to the extent that
resource extraction issuers are able to use part of the tracking and
reporting systems that issuers already have established for their
public reports
[[Page 56391]]
to track and report payments under Section 13(q), their compliance
costs should be reduced.
---------------------------------------------------------------------------
\396\ Compare note 376 with note 377.
---------------------------------------------------------------------------
After considering the comments expressing concern about the
difficulty of providing the payment disclosure within the current
annual reporting cycle,\397\ we believe it is reasonable to provide a
filing deadline for Form SD that is later than the deadline for an
issuer's Exchange Act annual report. Therefore, consistent with some
commentators' suggestions regarding timing,\398\ the final rules
require resource extraction issuers to file Form SD on EDGAR no later
than 150 days after the end of the issuer's most recent fiscal year.
---------------------------------------------------------------------------
\397\ See note 367 and accompanying text.
\398\ See notes 375-377 and accompanying text.
---------------------------------------------------------------------------
We are not persuaded by commentators that the statute allows
resource extraction issuers to submit, or that it mandates resource
extraction issuers submit, the payment information confidentially to us
and have the Commission make public only a compilation of the
information.\399\ We believe that Section 13(q) contemplates that
resource extraction issuers will provide the disclosure publicly.
Section 13(q) refers to ``disclosure'' and specifies that the final
rules require an issuer to include the information ``in an annual
report.'' Our existing disclosure requirements under the Exchange Act
require companies to publicly file annual, quarterly, and current
reports; the requirements generally do not provide for non-public
reports.\400\ We do not believe that Congress intended for a different
approach with respect to the information required under Section 13(q).
In this regard, we note that the disclosure required under Section
13(q)(2) must be submitted in an interactive data format, which
suggests that Congress intended for the information to be available for
public analysis. Requiring resource extraction issuers to provide the
payment information in interactive data format will enable users of the
information to extract the information that is of the most interest to
them and to compile and compare it in any manner they find useful. We
also note that the provision regarding the public compilation does not
require the Commission to publish a compilation; rather, it states that
the Commission shall make a public compilation of the information
available online ``to the extent practicable.'' \401\ Further, Section
13(q)(3)(B) states that ``[n]othing in [Section 13(q)(3)] shall require
the Commission to make available online information other than the
information required to be submitted [under the provision requiring the
Commission to issue rules to require resource extraction issuers to
provide payment disclosure].'' We believe these provisions, when read
together and with the statute's transparency goal, mean that the
statutory intent is for the disclosure made by resource extraction
issuers to be publicly available, and under the final rules, the
disclosure will be available on Form SD on EDGAR. We note that, in this
regard, the EITI approach is fundamentally 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 provided by the companies and the government, and then the
administrator produces a report.\402\ In addition, it is not clear that
having the information submitted confidentially to the Commission would
necessarily address commentators' concerns about confidentiality
because the information may well be subject to disclosure under the
Freedom of Information Act.\403\
---------------------------------------------------------------------------
\399\ See note 381 and accompanying text.
\400\ We note that in certain limited instances, an issuer may
request confidential treatment regarding information that otherwise
would be required to be disclosed, such as commercial information
obtained from a person and that is privileged or confidential. See,
e.g., Exchange Act Rule 24b-2 (17 CFR 240.24b-2). For example, an
issuer may be permitted to omit certain information from an exhibit
filed with an Exchange Act report if that information is commercial
and disclosure would likely result in substantial competitive harm.
The Commission's staff is of the view that issuers generally are not
permitted to omit information that is required by an applicable
disclosure requirement. See Division of Corporation Finance Staff
Legal Bulletins Nos. 1 (February 28, 1997) and 1A (July 11, 2001, as
amended), available at http://www.sec.gov/interps/legal/slbcf1r.htm.
\401\ Specifically, Section 13(q)(3)(A) provides that ``[t]o the
extent practicable, the Commission shall make available online, to
the public, a compilation of the information required to be
submitted under the rules issued under paragraph (2)(A).''
\402\ See EITI Source Book, at 23 (``It will be necessary to
appoint an administrator to collect and evaluate the revenue data
provided by companies and government. It is essential that there is
stakeholder trust in the administrator's impartiality and
competency. The administrator may be a private audit firm, an
individual or an existing or specially created official body that is
universally regarded as independent of, and immune to influence by,
the government.'')
\403\ 5 U.S.C. 552.
---------------------------------------------------------------------------
2. Exhibits and Interactive Data Format Requirements
a. Proposed Rules
The proposed rules would have required a resource extraction issuer
to submit the payment disclosure on an unaudited, cash basis. The
disclosure would have been required to be presented in two exhibits to
a Form 10-K, Form 20-F, or Form 40-F, as appropriate. One exhibit would
be in HTML or ASCII format, which would have enabled investors to
easily read the disclosure about payments without additional computer
programs or software. The other exhibit would be in XBRL format, which
would have satisfied the requirement in Section 13(q) that the payment
information be submitted in an interactive data format. Consistent with
the statute, the proposed rules would have required an issuer to submit
the payment information using electronic tags that identify, for any
payments made by a resource extraction issuer to a foreign government
or the U.S. Federal Government:
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.
In addition, a resource extraction issuer would have been required to
provide the type and total amount of payments made for each project and
the type and total amount of payments made to each government in the
XBRL format.
As noted above, Section 13(q) requires the Commission, to the
extent practicable, to make available online, to the public, a
compilation of the information required under paragraph (2)(A) of that
section.\404\ The statute does not specify the content, form or
frequency of the compilation. We solicited comment on the compilation
without proposing any specific requirements for it.
---------------------------------------------------------------------------
\404\ See Section 13(q)(3)(A). The information required under
Section 13(q)(2)(A) includes the type and total amount of payments
made by resource extraction issuers to foreign governments or the
U.S. Federal Government for the purpose of the commercial
development of oil, natural gas, or minerals on a per project and
per government basis.
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Numerous commentators supported the proposed submission of the
payment information on an unaudited, cash
[[Page 56392]]
basis.\405\ After noting that Section 13(q) neither requires the
payment information to be audited nor provided on an accrual basis,
those commentators stated that such a requirement would significantly
increase issuers' implementation and ongoing reporting costs without
providing a benefit to investors. One commentator further noted that
``auditors would have to develop specific additional procedures to be
able to provide assurance regarding the completeness and accuracy of
the information provided.'' \406\
---------------------------------------------------------------------------
\405\ See letters from API 1, Anadarko Petroleum Corporation
(March 2, 2011) (``Anadarko''), AngloGold, BP 1, Chevron, Ernst &
Young (January 31, 2011) (``E&Y''), ExxonMobil 1, NMA 2, NYSBA
Committee, Petrobras, PWC, and RDS 1.
\406\ Letter from E&Y.
---------------------------------------------------------------------------
Other commentators, however, suggested requiring the payment
information to be audited, presented on both a cash and accrual basis,
and filed as part of the issuer's audited financial statements.\407\
One of the commentators stated that an audit requirement would enhance
investor protection and be consistent with the EITI because one of the
basic criteria of EITI implementation is that the reported payment data
be audited.\408\ Another commentator similarly believed that requiring
the payment information to be audited and submitted on a cash basis
would improve comparability with EITI-related data, which it noted is
subject to audit and reported on a cash basis. That commentator further
suggested that the payment information also be reported on an accrual
basis to accommodate the needs of all potential users of the data.\409\
---------------------------------------------------------------------------
\407\ See letters from PWYP 1 and RWI 1. Another commentator
supported a requirement to submit the payment information solely on
an accrual basis because that would be consistent with financial
reporting requirements. See letter from Talisman.
\408\ See letter from RWI 1.
\409\ See letter from PWYP 1.
---------------------------------------------------------------------------
Several commentators supported the proposed requirement to use XBRL
to tag the payment disclosure because XBRL is currently used by many
registrants when filing their financial statements in their Exchange
Act annual reports.\410\ Some commentators further supported a
requirement to prepare the payment disclosure in either ASCII or HTML
in addition to XBRL.\411\ Those commentators noted that the requirement
would provide the Commission with the ability to extract, analyze, and
accumulate XBRL information while also providing investors and others
the ability to view directly the information. Several commentators
requested that the Commission delay implementation of the tagging
requirement until an appropriate XBRL taxonomy for the payment
information is available.\412\
---------------------------------------------------------------------------
\410\ See letters from API 1, Anadarko, AngloGold, BP 1,
CalPERS, ExxonMobil 1, PWYP 1, and RDS 1.
\411\ See letters from API 1, ExxonMobil 1, and PWYP 1.
\412\ See letters from API 1, AngloGold, and ExxonMobil 1.
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Other commentators suggested permitting an issuer to choose between
XBRL, XML, or some other format that would enable the electronic
tagging of all of the information specified in Section 13(q).\413\
According to those commentators, such a flexible approach would
recognize that some issuers may prefer to use XBRL because that
standard is already being implemented, while others may prefer to use
XML or some other format because it is less expensive than XBRL and
more consistent with a cash-based report.\414\ One of the commentators
noted that ``XBRL conversion of data can be time consuming and result
in delay'' and requested that the rules permit an issuer to ``use any
format that would allow users to click through the information in a
standard file type to reach data sorted by each of the electronic tags
specified in the Act.'' \415\ One commentator opposed a requirement to
provide the payment information in XBRL format.\416\ The commentator
stated that the Commission has limited the implementation of XBRL to
only financial statements and stated there was not ``any justifiable
reason for a departure from this stated scope.'' \417\
---------------------------------------------------------------------------
\413\ See letters from Barrick Gold and NMA 2.
\414\ See letters from Barrick Gold and NMA 2.
\415\ Letter from Barrick Gold.
\416\ See letter from PetroChina.
\417\ Letter from PetroChina.
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Some commentators expressed views about specific electronic tags.
For example, commentators suggested various approaches regarding the
requirement to electronically tag information about the currency used
to make the payments. Some commentators opposed having to present
payment information in dual currencies--in the local currency in which
the payments were made and, if different, in the issuer's reporting
currency--and further opposed having to electronically tag the dual
currency presentations.\418\ Those commentators stated that an issuer
should only have to present and electronically tag payment information
in its reporting currency, which is typically the U.S. dollar.\419\
Other commentators opposed a requirement to reconcile payments made in
the host country's currency to an issuer's reporting currency or U.S.
dollars.\420\ Those commentators either supported a requirement to
present payments in the currency in which they were made \421\ or to
permit issuers to choose between presenting payments in either the
local currency or its reporting currency as long as the issuer
discloses the methodology for translation and exchange rates used.\422\
Commentators noted that the EITI does not require currency conversion
and urged the Commission to maintain flexibility in the final rules so
that issuers can produce the required information in as efficient a
manner as possible, in light of their reporting systems and any local
requirements.\423\ One commentator asserted that requiring disclosure
of the host country currency and the reporting currency could unduly
complicate the disclosure.\424\
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\418\ See letters from API 1, BP 1, ExxonMobil 1, and RDS 1.
\419\ See letters from API 1, BP 1, ExxonMobil 1, and RDS 1. One
commentator supported requiring only the use of U.S. dollars,
regardless of the issuer's reporting currency. See letter from RDS
1.
\420\ See letters from Cleary, NMA 2, and Rio Tinto; see also
letter from PWYP 1.
\421\ See, e.g., letters from NMA 2 and PWYP 1.
\422\ See letter from Rio Tinto.
\423\ See letters from Cleary and NMA 2.
\424\ See letter from NMA 2.
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Commentators also provided views on the proposed requirement to
identify the business segment that made the payments. Some commentators
suggested defining ``business segment'':
According to how an issuer operates its business; \425\
---------------------------------------------------------------------------
\425\ See letter from NMA 2.
---------------------------------------------------------------------------
In a manner that is consistent with the definition used
for financial reporting purposes; \426\ or
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\426\ See letters from Cleary and NYSBA Committee.
---------------------------------------------------------------------------
As a subsidiary if the parent company is making payments
on behalf of the subsidiary.\427\
---------------------------------------------------------------------------
\427\ See letter from PWYP 1.
---------------------------------------------------------------------------
Some commentators opposed requiring an issuer to electronically tag
the information to identify the business segment that made the payments
on a basis other than as defined under GAAP. According to those
commentators, a ``definition that differs from GAAP would require
companies to gather information in a manner that is not consistent with
how the business is structured or how its accounting systems are
designed.'' \428\ One commentator stated that the business segment
disclosure should be consistent with the Commission's reserve
disclosures, which are associated with upstream operations.\429\
---------------------------------------------------------------------------
\428\ Letters from API 1 and ExxonMobil 1.
\429\ See letter from RDS 1.
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Several commentators opposed requiring an issuer to electronically
tag
[[Page 56393]]
each payment according to the project in which it relates because there
are some types of payments that are made at the entity level or relate
to numerous projects.\430\ Those commentators urged us to permit an
issuer to identify the government receiving the payments rather than
requiring allocation of payments to a particular project in a
potentially arbitrary manner.\431\ Another commentator stated that an
issuer should be allowed to omit the project tag for payments, such as
taxes and dividends, which are levied at the entity level, as long as
it provides all other required tags.\432\
---------------------------------------------------------------------------
\430\ See letters from API 1, AngloGold, ExxonMobil 1, NMA 2,
and RDS 1.
\431\ See letters from API 1, AngloGold, ExxonMobil 1, NMA 2,
and RDS 1.
\432\ See letter from PWYP 1.
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As noted in Section II.F.1 above, some commentators were of the
view that Section 13(q) only requires a compilation of resource
extraction issuers' payment information, and not the annual reports
containing the issuers' payment disclosures, to be made public, and
suggested the compilation could present the payment disclosure only on
an aggregated per country or similarly high-level basis.\433\ Other
commentators, however, strongly disagreed with that view and stated
that the plain language of Section 13(q) clearly reveals Congress'
intent to require the disclosure to investors of disaggregated payment
information through the inclusion of that information in an issuer's
annual report.\434\ Towards that end, one commentator recommended that
the compilation take the form of an online database and that a summary
report be provided annually.\435\
---------------------------------------------------------------------------
\433\ See letters from API 1, Anadarko, Chamber Energy
Institute, Chevron, ExxonMobil 1, Nexen, and RDS 1.
\434\ See letters from Calvert, PWYP 1, RWI 1, and Sen. Cardin
et al. 1.
\435\ See letter from PWYP 1.
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c. Final Rules
We are adopting the requirement regarding the presentation of the
mandated payment information substantially as proposed, except that a
resource extraction issuer will be required to present the mandated
payment information in only one exhibit to new Form SD instead of two
exhibits, as proposed. Under the rule as proposed, an issuer would have
been required to file one exhibit in HTML or ASCII and another exhibit
in the XBRL interactive data format. In proposing the requirement, we
noted our belief that requiring two exhibits would provide the
information in an easily-readable format in addition to the
electronically tagged data that would be readable through a viewer.
After further consideration, we have decided to require only one
exhibit formatted in XBRL because we believe that we can achieve the
goal of the dual presentation with only one exhibit. Issuers will
submit the information on EDGAR in XBRL format, thus enabling users of
the information to extract the XBRL data, and at the same time the
information will be presented in an easily-readable format by rendering
the information received by the issuers.\436\ We believe that requiring
the information to be provided in this way may reduce the compliance
burden for issuers.
---------------------------------------------------------------------------
\436\ Users of this information should be able to render the
information by using software available free of charge on our Web
site.
---------------------------------------------------------------------------
Similar to the proposal, a resource extraction issuer also must
include a brief statement in Item 2.01 of Form SD directing investors
to the detailed information about payments provided in the exhibit. By
requiring resource extraction issuers to provide the payment
information in an exhibit, rather than in the form itself, anyone
accessing EDGAR will be able to determine quickly whether an issuer
filed a Form SD to satisfy the requirements of Section 13(q) and the
related rules.
As noted above, Section 13(q) requires the submission of certain
information in interactive data format.\437\ Under the final rules,
consistent with the proposal and tracking the statutory language, a
resource extraction issuer must submit the payment information in XBRL
using electronic tags that identify, for any payment required to be
disclosed:
---------------------------------------------------------------------------
\437\ 15 U.S.C. 78m(q)(2)(C) and 15 U.S.C. 78m(q)(2)(D)(ii).
---------------------------------------------------------------------------
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.\438\
---------------------------------------------------------------------------
\438\ See Item 2.01(a) of Form SD.
In addition, a resource extraction issuer must provide the type and
total amount of payments made for each project and the type and total
amount of payments made to each government in interactive data format.
In determining to require the use of XBRL as the interactive data
format, we note that a majority of the commentators that addressed the
issue supported the use of XBRL.\439\ While some commentators suggested
allowing a flexible approach to use an interactive data format of their
preference,\440\ we believe doing so may reduce the comparability of
the information and may make it more difficult for interested parties
to track payments made to a particular government or project; thus, we
are not adopting such an approach.
---------------------------------------------------------------------------
\439\ See note 410 and accompanying text.
\440\ See note 413 and accompanying text.
---------------------------------------------------------------------------
As mentioned above, several commentators requested that we delay
implementation of the tagging requirement until an appropriate XBRL
taxonomy for the payment information is available.\441\ We note that
the staff is currently working to develop the taxonomy for the payment
information, and we anticipate that the taxonomy will soon be published
for comment. As such, and in light of the implementation period for the
payment disclosure,\442\ we do not believe it is necessary to provide a
delay for the interactive data tagging requirement.
---------------------------------------------------------------------------
\441\ See letters from API 1, AngloGold, and ExxonMobil 1.
\442\ See Section II.G.3. below.
---------------------------------------------------------------------------
Consistent with the statute, the final rules require a resource
extraction issuer to include an electronic tag that identifies the
currency used to make the payments. As previously noted, the statute
requires a resource extraction issuer to present the type and total
amount of payments made for each project and to each government,
without specifying how the issuer should report the total amounts.
Although some commentators suggested requiring the reporting of
payments only in the currency in which they were made,\443\ we believe
that the statutory requirements to provide a tag identifying the
currency used to make the payment and the requirement to provide the
total amount of payments by payment type for each project and to each
government constrain us to require that issuers perform some currency
conversion to the extent necessary.
---------------------------------------------------------------------------
\443\ See note 421 and accompanying text.
---------------------------------------------------------------------------
As noted in an instruction to Form SD, issuers will be required 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
either U.S. dollars or the issuer's reporting currency.\444\
[[Page 56394]]
Thus, in order to provide total amounts, issuers that make payments in
other currencies will have to convert those payments into either U.S.
dollars or the issuer's reporting currency. We understand issuers'
concerns regarding the compliance costs relating to making payments in
multiple currencies and being required to report the information in
another currency.\445\ To address these concerns, the final rules
permit an issuer to choose between disclosing payments in either U.S.
dollars or its reporting currency. In addition, an issuer may 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: (1) By translating the expenses at
the exchange rate existing at the time the payment is made; (2) using a
weighted average of the exchange rates during the period; or (3) based
on the exchange rate as of the issuer's fiscal year end.\446\ A
resource extraction issuer must disclose the method used to calculate
the currency conversion.\447\
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\444\ See Instruction 3 to Item 2.01 of Form SD. Currently,
foreign private issuers may present their financial statements in a
currency other than U.S. dollars for purposes of Securities Act
registration and Exchange Act registration and reporting. See Rule
3-20 of Regulation S-X (17 CFR 210.3-20).
\445\ See, e.g., letters from API 1, BP 1, ExxonMobil 1, NMA 2,
and RDS 1. We note that the EITI recommends that oil and natural gas
participants report in U.S. dollars, as the quoted market price is
in U.S. dollars. It also recommends that mining companies be
permitted to use the local currency because most benefit streams for
those companies are paid in the local currency. The EITI also
suggests that companies may decide to report in both U.S. dollars
and the local currency. See the EITI Source Book, at 30.
\446\ See Instruction 3 to Item 2.01 of Form SD.
\447\ See id.
---------------------------------------------------------------------------
Consistent with Section 13(q) and the proposal, the final rules do
not require the resource extraction payment information to be audited
or provided on an accrual basis. We note that, in this regard, the EITI
approach is fundamentally 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 provided by the
companies and the government, and then the administrator produces a
report.\448\ In contrast, Section 13(q) requires us to issue final
rules for disclosure of payments by resource extraction issuers; it
does not contemplate that an administrator will audit and reconcile the
information, or produce a report as a result of the audit and
reconciliation. In addition, we recognize the concerns raised by some
commentators that an auditing requirement for the payment information
would significantly increase implementation and ongoing reporting
costs. We believe that not requiring the payment information to be
audited or provided on an accrual basis is consistent with Section
13(q) because the statute refers to ``payments'' and does not require
the information to be included in the financial statements.\449\ In
addition, not requiring the information to be audited or provided on an
accrual basis may result in lower compliance costs than otherwise would
be the case if resource extraction issuers were required to provide
audited information.
---------------------------------------------------------------------------
\448\ See EITI Source Book, at 23 (``It will be necessary to
appoint an administrator to collect and evaluate the revenue data
provided by companies and government. It is essential that there is
stakeholder trust in the administrator's impartiality and
competency. The administrator may be a private audit firm, an
individual or an existing or specially created official body that is
universally regarded as independent of, and immune to influence by,
the government.'').
\449\ See note 405 and accompanying text.
---------------------------------------------------------------------------
Consistent with the statute, the final rules require a resource
extraction issuer to include an electronic tag that identifies the
business segment of the resource extraction issuer that made the
payments. As suggested by commentators,\450\ we are defining ``business
segment'' to mean a business segment consistent with the reportable
segments used by the resource extraction issuer for purposes of
financial reporting.\451\ We believe that defining ``business segment''
in this way will enable issuers to report the information according to
how they currently report their business operations, which should help
to reduce compliance costs.
---------------------------------------------------------------------------
\450\ See note 426 and accompanying text.
\451\ See Item 2.01(c)(4) of Form SD. The term ``reportable
segment'' is defined in FASB ASC Topic 280, Segment Reporting, and
IFRS 8, Operating Segments.
---------------------------------------------------------------------------
We note that some of the electronic tags, such as those pertaining
to category, currency, country, and financial period will have fixed
definitions and will enable interested persons to evaluate and compare
the payment information across companies and governments. Other tags,
such as those pertaining to business segment, government, and project,
will be customizable to allow issuers to enter information specific to
their business. To the extent that payments, such as corporate income
taxes and dividends, are made for obligations levied at the entity
level, issuers may omit certain tags that may be inapplicable (e.g.,
project tag, business segment tag) for those payment types as long as
they provide all other electronic tags, including the tag identifying
the recipient government.\452\
---------------------------------------------------------------------------
\452\ See note 432 and accompanying text.
---------------------------------------------------------------------------
As discussed in greater detail above, we agree with those
commentators who stated that the public compilation was not intended to
be a substitute for the payment disclosure required of resource
extraction issuers under Section 13(q),\453\ and we have not yet
determined the content, form, or frequency of any such
compilation.\454\ We note that users of the information will be able to
compile the information in a manner that is most useful to them by
using the electronically-tagged data filed by resource extraction
issuers.
---------------------------------------------------------------------------
\453\ See note 434 and accompanying text.
\454\ In this regard, we note that members of Congress,
including one of the sponsors of the provision, submitted a comment
letter stating ``Section 1504 requires companies to report the
information in an interactive format so that the information is
readily usable by investors and the public--the basic intent of the
section. Section 1504 also suggests that if practicable, the SEC can
make a compilation of all the data available to investors and the
public for ease of use. This compilation would be in addition to the
public availability of the original company data and in no way is
expected to replace the public availability of that data.'' See
letter from Sen. Cardin et al. 1.
---------------------------------------------------------------------------
3. Treatment for Purposes of Securities Act and Exchange Act
a. Proposed Rules
As noted in the proposal, the statutory language of Section 13(q)
does not specify that the information about resource extraction
payments must be ``filed,'' rather, it states that the information
should be ``include[d] in an annual report[.]'' \455\ As proposed, the
rules would have required the disclosure of payment information to be
``furnished'' rather than ``filed'' and not subject to liability under
Section 18 of the Exchange Act, unless the issuer explicitly states
that the resource extraction disclosure is filed under the Exchange
Act.
---------------------------------------------------------------------------
\455\ 15 U.S.C. 78m(q)(2)(A).
---------------------------------------------------------------------------
b. Comments on the Proposed Rules
Numerous commentators stated their belief that the payment
disclosure should be furnished rather than filed and, therefore, not
subject to Exchange Act Section 18 liability.\456\ Such commentators
expressed the view that the nature and purpose of the Section 13(q)
disclosure requirements is 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, thus,
to support the commitment of the Federal Government
[[Page 56395]]
to international transparency promotion efforts relating to the
commercial development of oil, natural gas, or minerals.\457\ One
commentator stated that ``requiring [the disclosure to be filed] could
indirectly increase the costs of Securities Act disclosures that
incorporate the filing by reference (raising underwriting, auditing,
and perhaps even credit rating costs).'' \458\ Two commentators
requested that if the final rules require an issuer to include the
disclosure in an existing Exchange Act annual report, the rules should
not extend the officer certifications required by Exchange Act Rules
13a-14, 13a-15, 15d-14, and 15d-15 to that disclosure.\459\
---------------------------------------------------------------------------
\456\ See letters from API 1, AngloGold, Barrick Gold, BP 1,
Cleary, ExxonMobil 1, NMA 2, NYSBA Committee, PetroChina, PWC, and
RDS 1.
\457\ See, e.g., letters from API 1 and AngloGold.
\458\ See letter from NMA 2.
\459\ See letters from Cleary and NYSBA Committee.
---------------------------------------------------------------------------
Numerous other commentators disagreed with the proposal and urged
the Commission to require the payment disclosures to be filed rather
than furnished and subject to Section 18 liability.\460\ Several
commentators believed that the plain language of the statute requires
filing of the disclosure.\461\ Commentators also asserted that one of
the goals of Section 13(q) is to enhance investor protection from risks
inherent in the extractive industries, and therefore the nature and
purpose of Section 13(q) is not qualitatively different than other
disclosure that has historically been required under Section 13.\462\
According to those commentators, the best way to enhance investor
protection would be to require that resource extraction payment
disclosures be filed rather than furnished; otherwise, investor
confidence in the accuracy of the disclosures would be undermined.\463\
Some commentators stated that requiring the disclosure to be furnished
rather than filed would deprive investors of causes of action in the
event that the disclosure is false or misleading.\464\
---------------------------------------------------------------------------
\460\ See letters from Bon Secours, Calvert, CRS, Earthworks,
EIWG, ERI, ERI 2, Global Financial 2, Global Witness 1, Greenpeace,
HII, HURFOM 1, HURFOM 2, Newground, ONE, Oxfam 1, PGGM, PWYP 1, RWI
1, Sanborn, Sen. Cardin et al. 1, Sen. Cardin et al. 2, Sen. Levin
1, Soros 1, TIAA, USAID, USW, and WRI.
\461\ See letters from Calvert, Global Witness 1, PWYP 1, and
Sen. Cardin et al. 1.
\462\ See, e.g., letters from Global Witness 1, PWYP 1, Sen.
Cardin et al. 1, and Sen. Levin 1; see also letter from Sen. Cardin
et al. 2.
\463\ See, e.g., letters from Global Witness 1, PWYP 1, and Sen.
Levin 1.
\464\ See letters from Global Witness 1, Oxfam 1, PWYP 1, Sen.
Cardin et al. 1, and Sen. Levin 1; see also letter from Sen. Cardin
et al. 2.
---------------------------------------------------------------------------
In addition, several commentators opposed extending the disclosure
requirements to registration statements under the Securities Act.\465\
In opposing such an extension of the requirements, one commentator
stated that ``the purpose of these disclosures is not to inform
investors * * * so there is no logical reason for such inclusion. Also,
inclusion would raise nettlesome concerns relating to liability, and
directors' and underwriters' due diligence obligations, for no good
reason.'' \466\ Other commentators, however, believed that the
Commission should require the inclusion of the payment information in
Securities Act registration statements.\467\
---------------------------------------------------------------------------
\465\ See letters from API 1, AngloGold, Cleary, ExxonMobil 1,
NMA 2, NYBSA Committee, RDS 1 and Statoil.
\466\ Letter from NYSBA Committee.
\467\ See letters from Calvert, Earthworks, and PWYP 1.
---------------------------------------------------------------------------
c. Final Rules
Although the proposed rules would have required the payment
information to be furnished, after considering the comments, the final
rules we are adopting require resource extraction issuers to file the
payment information on new Form SD. As discussed above, commentators
disagreed as to whether the required information should be furnished or
filed,\468\ and Section 13(q) does not state how the information should
be submitted. In reaching our conclusion that the information should be
``filed'' instead of ``furnished'' we note that the statute defines
``resource extraction issuer'' in part to mean an issuer that is
required to file an annual report with the Commission,\469\ which, as
commentators have noted, suggests that the annual report that includes
the required payment information should be filed.\470\ Additionally,
many commentators believed that investors would benefit from the
payment information being ``filed'' and subject to Exchange Act Section
18 liability.\471\ Some commentators asserted that allowing the
information to be furnished would diminish the importance of the
information.\472\ Some commentators believed that requiring the
information to be filed would enhance the quality of the
disclosure.\473\ In addition, some commentators argued that the
information required by Section 13(q) differs from the information that
the Commission permits issuers to furnish and that the information is
qualitatively similar to disclosures that are required to be filed
under Exchange Act Section 13.\474\
---------------------------------------------------------------------------
\468\ Compare letters from API 1, AngloGold, Barrick Gold, BP 1,
Cleary, ExxonMobil 1, NMA 2, NYSBA Committee, PetroChina, PWC, and
RDS 1 (supporting a requirement to furnish the disclosure) with
letters from Bon Secours, Calvert, Earthworks, EIWG, ERI, ERI 2,
Global Financial 2, Global Witness 1, HII, HURFOM 1, HURFOM 2,
Newground, ONE, Oxfam 1, PGGM, PWYP 1, RWI 1, Sanborn, Sen. Cardin
et al. 1, Sen. Cardin et al. 2, Sen. Levin 1, Soros 1, TIAA, USAID,
USW, and WRI (supporting a requirement to file the disclosure).
\469\ 15 U.S.C. 78m(q)(1)(D)(i).
\470\ See letters from Global Witness 1, PWYP 1, and Sen. Cardin
et al.
\472\ See letters from Calvert and Global Witness 1.
\473\ See letters from HURFOM, Global Witness 1, and PWYP 1.
\474\ See letters from ERI 1, HII, Oxfam 1, PGGM, PWYP 1, Sen.
Cardin et al. 1, and Soros 1.
---------------------------------------------------------------------------
Other commentators supporting the proposal that the disclosure be
furnished argued that the information is not material to
investors.\475\ We note, however, other commentators, including
investors, argued that the information is material.\476\ Given the
disagreement, and that materiality is a fact specific inquiry, we are
not persuaded that this is a reason to provide that the information
should be furnished. Additionally, while we appreciate the comments
that the payment information should be furnished and not subject to
Section 18 liability, we note that Section 18 does not create strict
liability for filed information. Rather, it states that a person shall
not be liable for misleading statements in a filed document if it can
establish that it acted in good faith and had no knowledge that the
statement was false or misleading.\477\ As noted
[[Page 56396]]
above, because the disclosure is in a new form, rather than in issuers'
Exchange Act annual reports, the filed disclosure is not subject to the
officer certifications required by Rules 13a-14 and 15d-14 under the
Exchange Act.
---------------------------------------------------------------------------
\475\ See letters from API 1, ExxonMobil 1, and RDS 1; see also
letter from AngloGold.
\476\ See letters from Calvert, ERI 1, Soros 1, Global Financial
Integrity (January 28, 2011) (``Global Financial Integrity 1''),
Global Witness 1, HII, Oxfam, Sanborn, PGGM, PWYP 1, Sen. Cardin et
al. 1, and TIAA.
\477\ Exchange Act Section 18(a) provides: ``Any person who
shall make or cause to be made any statement in any application,
report, or document filed pursuant to this title or any rule or
regulation thereunder or any undertaking contained in a registration
statement as provided in subsection (d) of section 15 of this title,
which statement was at the time and in the light of the
circumstances under which it was made false or misleading with
respect to any material fact, shall be liable to any person (not
knowing that such statement was false or misleading) who, in
reliance upon such statement shall have purchased or sold a security
at a price which was affected by such statement, for damages caused
by such reliance, unless the person sued shall prove that he acted
in good faith and had no knowledge that such statement was false or
misleading. A person seeking to enforce such liability may sue at
law or in equity in any court of competent jurisdiction. In any such
suit the court may, in its discretion, require an undertaking for
the payment of the costs of such suit, and assess reasonable costs,
including reasonable attorneys' fees, against either party
litigant.'' A plaintiff asserting a claim under Section 18 would
need to meet the elements of the statute to establish a claim,
including reliance and damages. In addition, we note that issuers
that fail to comply with the final rules could also be violating
Exchange Act Sections 13(a) and (q) and 15(d), as applicable.
Issuers also would be subject to potential liability under Exchange
Act Section 10(b) [15 U.S.C. 78j] and Rule 10b-5 [17 CFR 240.10b-5],
promulgated thereunder, for any false or misleading material
statements in the information disclosed pursuant to the rule.
---------------------------------------------------------------------------
We also note a commentator stated that filing the disclosure would
require auditors to consider whether the resource extraction payment
disclosures are materially inconsistent with the financial statements
thereby increasing the cost.\478\ We note however, that unlike the
proposal, the disclosure will not be required in the Form 10-K but
instead will be required in new Form SD, which does not include audited
financial statements, and therefore will not be subject to this
potential increased cost.
---------------------------------------------------------------------------
\478\ See letter from PWC.
---------------------------------------------------------------------------
G. Effective Date
1. Proposed Rules
In the Proposing Release, we requested comment on whether we should
provide a delayed effective date for the final rules and whether doing
so would be consistent with the statute.
2. Comments on the Proposed Rules
Some commentators believed that the final rules should be effective
for fiscal years ending on or after April 15, 2012, without
exception.\479\ One of those commentators believed that providing
exceptions would go against the principle of equal treatment of
issuers.\480\ Another commentator stated that implementation of the
final rules should not be delayed because ``companies have known of the
possibility of disclosure regulations for many years.'' \481\
---------------------------------------------------------------------------
\479\ See letters from Earthworks and PWYP 1. A third
commentator urged the Commission to follow the statutory effective
date because of the current consideration by the EC of extractive
industry disclosure rules in the EU, which could follow the U.S.
standard. See letter from PWYP U.K.
\480\ See letter from PWYP 1.
\481\ See letter from Earthworks.
---------------------------------------------------------------------------
Other commentators suggested delaying the effective date of the
final rules because compliance with the final rules would necessitate
significant changes to resource planning systems.\482\ Commentators
maintained that we have the flexibility to delay the effective date
because Section 13(q) states that the disclosure must be provided not
earlier than for the fiscal year ending one year after issuance of the
final rules.\483\ Some commentators stated that an effective date for
2012 is feasible only if the scope of the required disclosure is
limited.\484\ These commentators suggested further delaying the
effective date if the final rules include, among other things, an audit
requirement, downstream activities, a granular definition of project
(e.g., a definition that precludes disclosure at the country or entity
level), preparation of disclosures on a cash basis, or required
reporting in multiple currencies.\485\ Some commentators urged the
delay of the effective date due to the need to implement new accounting
standards.\486\ Commentators suggested that we require compliance with
the rule for 2013, 2014, or 2015.\487\
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\482\ See letters from API 1, ExxonMobil 1, Chevron, and RDS 1.
\483\ See letters from Cleary and NMA 2.
\484\ See letters from API 1, Chevron, ExxonMobil 1, and NMA 2.
\485\ See letters from API 1, Chevron, ExxonMobil 1, and NMA 2.
\486\ See letters from Nexen, PetroChina, PWC, and RDS 1.
\487\ See letters from Barrick Gold (fiscal year 2013),
PetroChina (fiscal years ending on or after December 31, 2015); PwC
(annual periods beginning after December 31, 2012).
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Some commentators believed that all resource extraction issuers
should be subject to the same effective date.\488\ One commentator
suggested a phase-in approach requiring large accelerated filers to
provide the disclosure for fiscal years ending on or after July 1, 2012
and for all others to provide the disclosure for fiscal years ending on
or after July 1, 2013.\489\ The commentator believed that a phase-in
approach would reduce costs for smaller issuers because it would enable
those issuers to observe how larger issuers comply with the new
rules.\490\ Another commentator stated that a phase-in would be
appropriate for smaller reporting companies.\491\
---------------------------------------------------------------------------
\488\ See letters from API 1, Chevron, ExxonMobil 1, and RDS 1.
\489\ See letter from AngloGold.
\490\ See id.
\491\ See letter from Cleary.
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3. Final Rules
Under the final rules, a resource extraction issuer will be
required to comply with new Rule 13q-1 and Form SD for fiscal years
ending after September 30, 2013. The final rules will require a
resource extraction issuer to file with the Commission for the first
time an annual report that discloses the payments it made to
governments for the purpose of the commercial development of oil,
natural gas, or minerals. Based on the comments we received, we
understand that resource extraction issuers will need time to undertake
significant changes to their reporting systems and processes to gather
and report the payment information. Even for those issuers that provide
some payment disclosure voluntarily or as part of an EITI program,
compliance with the final rules will likely require changes in their
reporting systems.\492\ In light of this, we believe it is appropriate
to provide all issuers with a reasonable amount of time to make such
changes and to allow a transition period for reporting. Therefore, the
final rules provide that for the first report filed for fiscal years
ending after September 30, 2013, a resource extraction issuer may
provide a partial year report if the issuer's fiscal year began before
September 30, 2013. The issuer will be required to provide a report for
the period beginning October 1, 2013 through the end of its fiscal
year. For example, a resource extraction issuer with a December 31,
2013 fiscal year end will be required to file a report disclosing
payments made from October 1, 2013-December 31, 2013. For any fiscal
year beginning on or after September 30, 2013, a resource extraction
issuer will be required to file a report disclosing payments for the
full fiscal year.
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\492\ For example, issuers reporting under EITI programs that
require material information to be reported at the country level
will likely need to further develop their systems to gather and
report information at the project level and meeting the ``not de
minimis'' threshold.
---------------------------------------------------------------------------
We believe that requiring compliance with the final rules for
fiscal years ending after September 30, 2013 and providing a transition
period in which partial year reports are permitted will provide time
for issuers to effect the changes in their reporting systems necessary
to gather and report the payment information required by the final
rules.\493\ We recognize that adoption of this compliance date and
transition period means that most companies will provide partial year
reports for the first report required under the rules. We believe this
result is required, however, to enable issuers to make the changes to
their reporting systems necessary to achieve full compliance with the
final rules.
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\493\ In this regard, we note changes required to internal
tracking and reporting systems will likely be specific to the
particular company and therefore we believe it is unlikely that
smaller issuers would benefit from a phase-in that would allow them
to observe how larger issuers comply with the new rules.
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If any provision of these rules, or the application thereof to any
person or circumstance, is held to be invalid, such invalidity shall
not affect other provisions or application of such provisions to other
persons or circumstances that can be given effect without the invalid
provision or
[[Page 56397]]
application. Moreover, if any portion of Form SD not related to
resource extraction disclosure is held invalid, such invalidity shall
not affect the use of the form for purposes of disclosure pursuant to
Section 13(q).
III. Economic Analysis
A. Introduction
As discussed in detail above, we are adopting the new rules and
amendment to Form SD discussed in this release to implement Section
13(q), which was added to the Exchange Act by Section 1504 of the Act.
The new rules and revised form will require a resource extraction
issuer to disclose in an annual report filed with the Commission on
Form SD certain information relating to payments made by the issuer, a
subsidiary of the issuer, or an entity under the control of the issuer
to a foreign government or the U.S. Federal Government for the purpose
of the commercial development of oil, natural gas, or minerals. The
information will include the type and total amount of payments made for
each project of the issuer relating to the commercial development of
oil, natural gas, or minerals as well as the type and total amount of
payments made to each government. We expect that the final rules will
affect in substantially the same way both U.S. companies and foreign
companies that meet the definition of ``resource extraction issuer,''
which is an issuer that is required to file an annual report with the
Commission and engages in the commercial development of oil, natural
gas, or minerals.
Since Congress adopted Section 13(q) in July 2010, we have sought
comment on our implementation of the provision and provided
opportunities for commentators to provide input. Members of the public
interested in making their views known were invited to submit comment
letters in advance of when the official comment period for the proposed
rules opened, and the public had the opportunity to submit comment on
the proposal during the comment period. In addition, in response to the
suggestion by some commentators that we extend the comment period to
allow the public additional time to thoroughly consider the matters
addressed in the Proposing Release and to submit comprehensive
responses, we extended the comment period for an additional 30 days
\494\ and have continued to receive comment letters after the extended
deadline, all of which we have considered. We believe interested
parties have had ample opportunity to review the proposed rules, as
well as the comment letters, and to provide views on the proposal,
other comment letters, and data to inform our consideration of the
final rules. Accordingly, we do not believe that a re-proposal is
necessary.
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\494\ See Exchange Act Release No. 34-67395 (January 28, 2011),
76 FR 6111 (February 3, 2011), available at http://www.sec.gov/rules/proposed/2011/34-63795.pdf. This robust, public input has
allowed us to more fully consider how to develop the final rules.
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The Proposing Release cited some pre-proposal letters we received
from commentators indicating the potential impact of the proposed rules
on competition and capital formation. In addition to requesting comment
throughout the Proposing Release on the proposals and on potential
alternatives to the proposals, the Commission also solicited comment in
the Proposing Release on whether the proposals, if adopted, would
promote efficiency, competition, or capital formation, or have an
impact or burden on competition. We also requested comment on the
potential effect on efficiency, competition, or capital formation
should the Commission not adopt certain exceptions or accommodations.
As discussed throughout this release, we received many comments
addressing the potential economic and competitive impact of the
proposed rules. Indeed, many commentators provided multiple comment
letters to support, expand upon, or contest views expressed by other
commentators.\495\
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\495\ See, e.g., letters from API 1, API 2, API 3, American
Petroleum Institute (February 13, 2012), ExxonMobil 1, ExxonMobil 2,
ExxonMobil 3, Global Witness 1, Global Witness 2, Global Witness 3,
PWYP 1, PWYP 2, PWYP 3, PWYP 4, PWYP 5, ERI 1, ERI 2, ERI 3, ERI 4,
Oxfam 1, Oxfam 2, RELUFA 1, RELUFA 2, RELUFA 3, RWI 1, RWI 2, RDS 1,
RDS 2, RDS 3, RDS 4, Sen. Cardin et al. 1, Sen. Cardin et al. 2,
Sen. Levin 1, Sen. Levin 2, Soros 1, and Soros 2. One commentator
urged us to re-propose the rules in order to give the public an
additional opportunity to comment on and inform the Commission's
assessment of the economic impact of the proposed rules. See letter
from API 3. As described above, we believe interested parties have
had ample opportunity to review the proposed rules, as well as the
comment letters, and to provide views and data to inform our
consideration of the economic effects of the final rules.
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Section 13(q) of the Exchange Act requires us to issue rules to
implement the disclosure requirement for certain payments made by
resource extraction issuers to the Federal Government and foreign
governments. Congress intended that the rules issued pursuant to
Section 13(q) would increase the accountability of governments to their
citizens in resource-rich countries for the wealth generated by those
resources.\496\ This type of social benefit differs from the investor
protection benefits that our rules typically strive to achieve. We
understand that the statute is seeking to achieve this benefit by
mandating a new disclosure requirement under the Exchange Act that
requires resource extraction issuers to identify and report payments
they make to governments and that supports international transparency
promotion efforts relating to the commercial development of oil,
natural gas, or minerals.\497\ In addition, some commentators stated
that the information disclosed pursuant to Section 13(q) would benefit
investors, by among other things, helping investors model project cash
flows and assess political risk, acquisition costs, and management
effectiveness.\498\ Moreover, investors and other market participants,
as well as civil society in countries that are resource-rich, may
benefit from any increased economic and political stability and
improved investment climate that transparency promotes. Commentators
and the sponsors of Section 13(q) also have noted that the United
States has an interest in promoting accountability, stability, and good
governance.\499\
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\496\ See note 7 and accompanying text.
\497\ See note 8 and accompanying text.
\498\ See, e.g., letters from Calvert, CALPERS, and Soros 1.
\499\ See, e.g., letter from Sen. Cardin (February 28, 2012)
(includes a transcript of testimony from Secretary of State Hilary
Rodham Clinton before the Senate Foreign Relations Committee). See
also statement from Senator Cardin regarding the provision (``* * *
Transparency helps create more stable governments, which in turn
allows U.S. companies to operate more freely--and on a level playing
field--in markets that are otherwise too risky or unstable.''), 156
Cong. Rec. S5870 (daily ed. Jul. 15, 2010) (statement of Sen.
Cardin); and Senator Lugar regarding the provision (``* * *
Transparency empowers citizens, investors, regulators, and other
watchdogs and is a necessary ingredient of good governance for
countries and companies alike * * *. Transparency also will benefit
Americans at home. Improved governance of extractive industries will
improve investment climates for our companies abroad, it will
increase the reliability of commodity supplies upon which businesses
and people in the United States rely, and it will promote greater
energy security.'' 156 Cong. Rec. S3816 (daily ed. May 17, 2010)
(statement of Sen. Lugar)).
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We are sensitive to the costs and benefits of the final rules, and
Exchange Act Section 23(a)(2) requires us, when adopting rules, to
consider the impact that any new rule would have on competition. In
addition, Section 3(f) of the Exchange Act requires 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
[[Page 56398]]
imposed by the rule and form amendments we are adopting, as well as
their effects on efficiency, competition, and capital formation. Many
of the economic effects of the rules stem from the statutory mandate,
while others are affected by the discretion we exercise in implementing
the Congressional mandates. The discussion below addresses the costs
and benefits resulting from both the statute and our exercise of
discretion, and the comments we received about these matters. In
addition, as discussed elsewhere in this release, we recognize that the
rules will impose a burden on competition, but we believe that any such
burden that may result is necessary in furtherance of the purposes of
Exchange Act Section 13(q).
After analyzing the comments and taking into account additional
data and information, we believe it is likely that the total initial
cost of compliance for all issuers is approximately $1 billion and the
ongoing cost of compliance is between $200 million and $400 million. We
reach these estimates by considering carefully all comments we received
on potential costs. We relied particularly on those comment letters
that provided quantification and were transparent about their
methodologies. As discussed in more detail below, after thoroughly
considering each comment letter, we determined that it was appropriate
to modify and/or expand upon some of the submitted estimates and
methodologies to reflect data and information submitted by other
commentators, as well as our own judgment, experience, and expertise.
Our considered estimate of the total costs thus reflects these
synthesized data and analyses. We consider the full range of these
costs in the following sections, although where it is possible to
discuss separately the costs and benefits related to our discretionary
choices in the rules, we attempt to do so.\500\
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\500\ As discussed above, our discretionary choices are informed
by the statutory mandate and thus, discussion of the benefits and
costs of those choices will necessarily involve the benefits and
costs of the underlying statute.
---------------------------------------------------------------------------
Given the specific language of the statute and our understanding of
Congress' objectives, we believe it is appropriate for the final rules
generally to track the statutory provision. Our discretionary authority
to implement Section 13(q) is limited, and we are committed to
executing the Congressional mandate. Throughout this release, and in
the following economic analysis, we discuss the benefits and costs
arising from both the new reporting requirement mandated by Congress
and from those choices in which we have exercised our discretion.
Sections III.B. and III.C. below provide a narrative discussion of the
costs and benefits of resulting from the mandatory reporting
requirement and our exercise of discretion, respectively. In Section
III.D. below, based on commentators' estimates and our estimates, we
provide a quantitative discussion of the costs associated with the
final rules as adopted.\501\
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\501\ As noted below, Congress' goal of enhanced accountability
through Section 13(q) is an intended social benefit that cannot be
readily quantified with any precision, and therefore, our
quantitative analysis focuses on the costs.
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B. Benefits and Costs Resulting From the Mandatory Reporting
Requirement
1. Benefits
As noted above, Congress intended that the rules issued pursuant to
Section 13(q) would increase the accountability of governments to their
citizens in resource-rich countries for the wealth generated by those
resources.\502\ In addition, commentators and the sponsors of Section
13(q) also have noted that the United States has an interest in
promoting accountability, stability, and good governance.\503\
Congress' goal of enhanced government accountability through Section
13(q) may result in social benefits that cannot be readily quantified
with any precision.\504\ We also note that while the objectives of
Section 13(q) do not appear to be ones that will necessarily generate
measurable, direct economic benefits to investors or issuers, investors
have stated that the disclosures required by Section 13(q) have value
to investors and can ``materially and substantially improve investment
decision making.'' \505\
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\502\ See note 7 and accompanying text.
\503\ See note 499 and accompanying text.
\504\ These benefits could ultimately be quite significant given
the per capita income of the potentially affected countries.
\505\ Calvert (March 1, 2011). See note 498 and accompanying
text.
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Many commentators stated that they support the concept of
increasing transparency of resource extraction payments.\506\ While
commentators stated that a benefit of increasing transparency is
increased government accountability, some commentators also noted that
the new disclosure requirements would help investors assess the risks
faced by resource extraction issuers operating in resource-rich
countries.\507\ To the extent that investors want information about
payments to assess these risks, the rules may result in increased
investment by those investors and thus may increase capital formation.
---------------------------------------------------------------------------
\506\ See, e.g., letters from API 1, Calvert, Chamber Energy
Institute, ExxonMobil 1, Global Witness 1, Oxfam 1, Petrobras, PWYP
1, RDS 1, and Statoil.
\507\ See, e.g., letters from Calvert, ERI 2, Global Witness 1,
and Oxfam 1.
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Several commentators noted that the statutory requirement to
provide project-level disclosure significantly enhances the benefits of
the mandatory reporting required under Section 13(q).\508\ One
commentator stated that the benefits to civil society of project-level
reporting are significantly greater than those of country-level
reporting.\509\ This commentator stated that project-level data will
enable civil society groups, representing local communities, to know
how much their governments earn from the resources that are removed
from their respective territories and empower them to advocate for a
fairer share of revenues, double-check government-published budget
data, and better calibrate their expectations from the extractive
companies.\510\ This commentator further stated that project-level
reporting will enable both local government officials and civil society
groups to monitor the revenue that flows back to the regions from the
central government and ensure that they receive what is promised--a
benefit that would be unavailable if revenue streams were not
differentiated below the country level.\511\ Another commentator noted
that project-level reporting would shine greater light on dealings
between resource extraction issuers and governments, thereby providing
companies with ``political cover to sidestep government requests to
engage in potentially unethical activities.'' \512\
---------------------------------------------------------------------------
\508\ See, e.g., letters from Global Witness 1, Oxfam 1, PWYP 1,
RWI 1, and Syena.
\509\ See letter from ERI 1; see also letter from Gates
Foundation.
\510\ See letter from ERI 1; see also letter from Gates
Foundation (stating that it is important to seek disclosure below
the country level, that project-level disclosure will give both
citizens and investors valuable information, and that defining
``project'' as a geologic basin or province would be of limited use
to both citizens and investors).
\511\ See letter from ERI 1.
\512\ See letter from EG Justice.
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One commentator noted the benefits to investors of project-level
reporting.\513\ One benefit cited by this commentator is that project-
level reporting will enable investors to better understand the risk
profiles of individual projects within a given country, which may vary
greatly depending on a number of factors such as regional unrest,
personal interest by powerful government figures, degree of community
oppression, and environmental sensitivity.\514\ This commentator
indicated that project-level disclosures will enable investors to
[[Page 56399]]
better understand these risks, whereas country-level reporting would
allow companies to mask particularly salient projects by aggregating
payments with those from less risky projects.\515\ The commentator
noted that unusually high signing bonus payments for a particular
project may be a proxy for political influence, whereas unusually low
tax or royalty payments may signal that a project is located in a zone
vulnerable to attacks or community unrest.\516\ A further benefit of
project-level disclosures is that it would assist investors in
calculations of cost curves that determine whether and for how long a
project may remain economical, using a model that takes into account
political, social, and regulatory risks.\517\
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\513\ See letter from ERI 2.
\514\ See id.
\515\ See id.
\516\ See id.
\517\ See letter from Calvert Asset Management Company and SIF
(November 15, 2010) (pre-proposal letter).
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There also may be a benefit to investors given the view expressed
by some commentators that new disclosure requirements would help
investors assess the risks faced by resource extraction issuers
operating in resource-rich countries. To the extent that the required
disclosure will help investors in pricing the securities of the issuers
subject to the requirement mandated by Section 13(q), the rules could
improve informational efficiency. One commentator indicated that
project-level disclosures will promote capital formation by reducing
information asymmetry and providing more security and certainty to
investors as to extractive companies' levels of risk exposure.\518\ One
commentator was of the view that improved transparency regarding
company payments of royalties, taxes, and production entitlements on a
country level would provide institutional investors, such as the
commentator, with the necessary information to assess a company's
relative exposure to country-specific risks including political and
regulatory risks, and would contribute to good governance by host
governments.\519\ Similarly, another commentator was of the view that
in countries where governance is weak, the resulting corruption,
bribery, and conflict could negatively affect the sustainability of a
company's operations, so Section 13(q) would benefit companies'
operations and investors' ability to more effectively make investment
decisions.\520\ One commentator anticipated benefits of lower capital
costs and risk premiums as a result of improved stability stemming from
the statutory requirements and lessened degree of uncertainty promoted
by greater transparency.\521\ This same commentator believed that the
disclosure standardization imposed through Section 13(q) would be of
particular benefit to long-term investors by providing a model for data
disclosure as well as help to address some of the key challenges faced
by EITI implementation.\522\ Another commentator maintained that
transparency of payments is a better indicator of risk for extractive
companies than the bond markets and is also a better indicator of
financial performance.\523\
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\518\ See letter from ERI 2.
\519\ See letter from PGGM. This commentator also noted that the
disclosure required by Section 13(q) would provide in-country
activists with information to hold their governments accountable.
\520\ See letter from CalPERS.
\521\ See letter from Hermes.
\522\ See letter from Hermes.
\523\ See letter from Vale Columbia Center (December 16, 2011).
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2. Costs
Many commentators stated that the reporting regime mandated by
Section 13(q) would impose significant compliance costs on issuers.
Several commentators addressed Paperwork Reduction Act (``PRA'')-
related costs specifically,\524\ while others discussed the costs and
burdens to issuers generally as well as costs that could have an effect
on the PRA analysis.\525\ As discussed further in Section III.D. below,
in response to comments we received, we have provided our estimate of
both initial and ongoing compliance costs. In addition, also in
response to comments, we have made several changes to our PRA estimates
that are designed to better reflect the burdens associated with the new
collections of information.
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\524\ See letters from API 1, API 2, Barrick Gold, ERI 2,
ExxonMobil 1, ExxonMobil (October 25, 2011) (``ExxonMobil 3''), NMA
2, Rio Tinto, RDS 1, and RDS 4.
\525\ See, e.g., letters from BP 1, Chamber Energy Institute,
Chevron, Cleary, Hermes, and PWYP 1.
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Some commentators disagreed with our industry-wide estimate of the
total annual increase in the collection of information burden and
argued that it underestimated the actual costs that would be associated
with the rules.\526\ Some commentators stated that, depending upon the
final rules adopted, the compliance burdens and costs caused by
implementation and ongoing compliance with the rules would be
significantly greater than those estimated by the Commission.\527\
Significantly, however, in general these commentators did not provide
any quantitative analysis to support their estimates.\528\
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\526\ See letters from API 1 and ExxonMobil 1.
\527\ See letters from API 1, API 2, API 3, Barrick Gold,
ExxonMobil 1, NMA 2, Rio Tinto, and RDS 1.
\528\ See letters from API 1 and ExxonMobil 1. ExxonMobil 1 does
provide estimated implementation costs of $50 million if the
definition of ``project'' is narrow and the level of disaggregation
is high across other reporting parameters. This estimate is used in
our analysis of the expected implementation costs.
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Some commentators noted that modifications to issuers' core
enterprise resource planning systems and financial reporting systems
will be necessary to capture and report payment data at the project
level, for each type of payment, government payee, and currency of
payment.\529\ Commentators provided examples of such modifications
including establishing additional granularity to existing coding
structures (e.g., splitting accounts that contain both government and
non-government payment amounts), developing a mechanism to
appropriately capture data by ``project,'' building new collection
tools within financial reporting systems, establishing a trading
partner structure to identify and provide granularity around government
entities, establishing transaction types to accommodate types of
payment (e.g., royalties, taxes, bonuses, etc.), and developing a
systematic approach to handle ``in-kind'' payments.\530\ These
commentators estimated that the resulting initial implementation costs
would be in the tens of millions of dollars for large issuers and
millions of dollars for many small issuers.\531\ Two commentators also
estimated that total industry costs for initial implementation of the
final rules could amount to hundreds of millions of dollars.\532\
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\529\ See letters from API 1 and ExxonMobil 1. See also letter
from RDS 1.
\530\ See letters from API 1 and ExxonMobil 1.
\531\ See letters from API 1, ExxonMobil 1, and RDS 1. These
commentators did not describe how they defined small and large
issuers.
\532\ See letters from API 1 and ExxonMobil 1.
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These commentators also noted, however, that these costs could be
increased significantly depending on the scope of the final rules.\533\
For example, commentators suggested that these cost estimates could be
greater depending on the how the final rules define ``project,'' and
whether the final rules require reporting of non-consolidated entities,
require ``net'' and accrual reporting, or include an audit
requirement.\534\ Another commentator
[[Page 56400]]
estimated that the initial set up time and costs associated with the
rules implementing Section 13(q) would require 500 hours to effect
changes to its internal books and records, and $100,000 in IT
consulting, training, and travel costs.\535\ One commentator
representing the mining industry estimated that start-up costs,
including the burden of establishing new reporting and accounting
systems, training local personnel on tracking and reporting, and
developing guidance to ensure consistency across reporting units, would
be at least 500 hours for a mid-to-large sized multinational
company.\536\
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\533\ See letters from API 1, ExxonMobil 1, and RDS 1.
\534\ See letters from API 1, ExxonMobil 1, and RDS 1. As
previously discussed, the final rules do not require the payment
information to be audited or reported on an accrual basis, so
commentators' concerns about possible costs associated with these
items should be alleviated. See Section II.F.2.c. above.
\535\ See letter from Barrick Gold.
\536\ See letter from NMA 2.
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Two commentators stated that arriving at a reliable estimate for
the ongoing annual costs of complying with the rules would be difficult
because the rules were not yet fully defined, but suggested that a
``more realistic'' estimate than the estimate included in the Proposing
Release is hundreds of hours per year for each large issuer with many
foreign locations.\537\ Commentators also indicated that costs related
to external professional services would be significantly higher than
the Commission's estimate, resulting primarily from XBRL tagging and
higher printing costs, although these commentators noted that it is not
possible to estimate these costs until the final rules are fully
defined.\538\
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\537\ See letters from API 1 and ExxonMobil 1 (each noting that
estimates would increase if the final rules contain an audit
requirement, or if the final rules are such that issuers are not
able to automate material parts of the collection and reporting
process).
\538\ See letters from API 1 and ExxonMobil 1.
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One commentator estimated that ongoing compliance with the rules
implementing Section 13(q) would require 100-200 hours of work at the
head office, an additional 100-200 hours of work providing support to
its business units, and 40-80 hours of work each year by each of its
120 business units, resulting in a total of approximately 4,800-9,600
hours and costs approximating between $2,000,000 to $4,000,000.\539\
One commentator, a large multinational issuer, estimated an additional
500 hours each year, including time spent to review each payment to
determine if it is covered by the reporting requirements and ensure it
is coded to the appropriate ledger accounts.\540\ Another commentator
representing the mining industry estimated that the annual burden for a
company with a hundred projects or reporting units, the burden could
``easily reach nearly'' 10 times the estimate set out in the Proposing
Release.\541\ This commentator noted that its estimate takes into
account the task of collecting, cross-checking, and analyzing extensive
and detailed data from multiple jurisdictions around the world, as well
as the potential for protracted time investments (a) seeking
information from certain non-consolidated entities that would be
considered ``controlled'' by the issuer, (b) attempting to secure
exceptions from foreign confidentiality restrictions, (c) obtaining
compliance advice on the application of undefined terms such as ``not
de minimis'' and ``project'' and implementing new systems based upon
those definitions, (d) responding to auditor comments or queries
concerning the disclosure, which, although not in the financial
statements would, under the proposed rules, be a furnished exhibit to
Form 10-K or equivalent report for foreign issuers, and (e) any
necessary review of Section 13(q) disclosures in connection with
periodic certifications under the Sarbanes-Oxley Act.\542\ This
commentator also noted that the estimate in the Proposing Release did
not adequately capture the burden to an international company with
multiple operations where a wide range of personnel will need to be
involved in capturing and reviewing the data for the required
disclosures as well as for electronically tagging the information in
XBRL format.\543\ A number of commentators submitted subsequent letters
reiterating and emphasizing the potential of the proposed rules to
impose substantial costs.\544\
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\539\ See letter from Rio Tinto. These estimates exclude initial
set-up time required to design and implement the reporting process
and develop policies to ensure consistency among business units.
They also assume that an audit is not required.
\540\ See letter from Barrick Gold.
\541\ See letter from NMA 2. The estimate provided in the
Proposing Release was for the PRA analysis.
\542\ See letter from NMA 2.
\543\ See letter from NMA 2.
\544\ See letters from API 2, ExxonMobil 3, and RDS 4.
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Other commentators believed that concerns over compliance costs
have been overstated.\545\ One commentator stated that most issuers
already have internal systems in place for recording payments that
would be required to be disclosed under Section 13(q) and that many
issuers currently are subject to reporting requirements at a project
level.\546\ Another commentator anticipated that while the rules will
likely result in additional costs to resource extraction issuers, such
costs would be marginal in scale because in the commentator's
experience many issuers already have extensive systems in place to
handle their current reporting requirements, and any adjustments needed
as a result of Section 13(q) could be done in a timely and cost-
effective manner.\547\ Another commentator believed that issuers could
adapt their current systems in a cost-effective manner because issuers
should be able to adapt a practice undertaken in one operating
environment to those in other countries without substantial changes to
the existing systems and processes of an efficiently-run
enterprise.\548\
---------------------------------------------------------------------------
\545\ See letters from ERI 2, Oxfam 1, PWYP 1, and RWI 1.
\546\ See letter from RWI 1. This commentator stated that
issuers already have internal systems in place for reporting
requirements at the project level ``as [RWI] believe[s] that term
should be defined'' and provides examples (e.g., Indonesia requires
reporting at the production sharing agreement level; companies in
the U.S. report royalties by lease).
\547\ See letter from Hermes.
\548\ See letter from RWI 1.
---------------------------------------------------------------------------
Another commentator stated that, in addition to issuers already
collecting the majority of information required to be made public under
Section 13(q) for internal record-keeping and audits, U.S. issuers
already report such information to tax authorities at the lease and
license level.\549\ This commentator added that efficiently-run
companies should not have to make extensive changes to their existing
systems and processes to export practices undertaken in one operating
environment to another.\550\
---------------------------------------------------------------------------
\549\ See letter from PWYP 1.
\550\ See letter from PWYP 1 (citing statement made by Calvert
Investments at a June 2010 IASB-sponsored roundtable).
---------------------------------------------------------------------------
One commentator, while not providing competing estimates,
questioned the accuracy of the assertions relating to costs from
industry participants.\551\ This commentator cited the following
factors which led it to question the cost assertions from industry
participants: (i) Some issuers already report project-level payments in
certain countries in one form or another and under a variety of
regimes; (ii) some EITI countries are already moving toward project-
level disclosure; and (iii) it is unclear whether issuers can save much
time or money by reporting government payments at the material project
or country level.\552\ This commentator also explained that issuers
must keep records of their subsidiaries' payments to governments as
part of the books and records provisions of the
[[Page 56401]]
Foreign Corrupt Practices Act, so the primary costs of reporting these
payments will be in the presentation of the data rather than any need
to institute new tracking systems.\553\ This commentator indicated that
to the extent that issuers may need to implement new accounting and
reporting systems to keep track of government payments, then issuers
presumably will need to develop mechanisms for receiving and
attributing information on individual payments regardless of the form
the final rules take.\554\ The commentator also observed that the
proposed rules simply would require companies to provide the payment
information in its raw form, rather than requiring them to process it
and disclose only those payments from projects they deem to be
``material,'' which could result in savings to issuers of time and
money by allowing them to submit data without having to go through a
sifting process.\555\ This commentator observed that none of the
commentators who submitted cost estimates attempted to quantify the
savings that would ``supposedly accrue'' if disclosure were limited to
``material'' projects, as compared to disclosure of all projects, and
noted that the Commission was not required to accept commentators' bare
assertions that their ``marginal costs would be reduced very
significantly.'' \556\
---------------------------------------------------------------------------
\551\ See letter from ERI 2.
\552\ See id.
\553\ See id.
\554\ See id.
\555\ See id.
\556\ See id.
---------------------------------------------------------------------------
One commentator disagreed that issuers already report the payment
information required by Section 13(q) for tax purposes.\557\ According
to that commentator, ``[t]his is a simplistic view, and the problem is
that tax payments for a specific year are not necessarily based on the
actual accounting results for that year.'' \558\ This commentator also
noted that tax reporting and payment periods may differ.\559\
---------------------------------------------------------------------------
\557\ See letter from Rio Tinto.
\558\ See id.
\559\ See id.
---------------------------------------------------------------------------
Some commentators suggested that the statutory language of Section
13(q) gives the Commission discretion to hold individual company data
in confidence and to use that data to prepare a public report
consisting of aggregated payment information by country.\560\ Other
commentators strongly disagreed with the interpretation that Section
13(q) could be read not to require the public disclosure of the payment
information submitted in annual reports and that the Commission may
choose to make public only a compilation of the information.\561\ The
commentators suggesting the Commission make public only a compilation
of information submitted confidentially by resource extraction issuers
argued such an approach would address many of their concerns regarding
disclosure of commercially sensitive or legally prohibited information
and would significantly mitigate the costs of the mandatory disclosure
under Section 13(q). As noted above, we have not taken this approach in
the final rules because we believe Section 13(q) requires resource
extraction issuers to provide the payment disclosure publicly and does
not contemplate confidential submissions of the required information.
As a result, the final rules require public disclosure of the
information. We note that in situations involving more than one
payment, the information will be aggregated by payment type,
government, and/or project, and therefore may limit the ability of
competitors to use the information to their advantage.
---------------------------------------------------------------------------
\560\ See note 381 and accompanying text.
\561\ See letters from Calvert, PWYP 1, RWI 1, Sen. Cardin et
al. 1, Sen. Cardin et al. 2, and Sen. Levin 1.
---------------------------------------------------------------------------
To the extent public disclosure of this information could result in
costs related to competitive concerns, we note that even if we
permitted issuers to provide the information confidentially to us and
we were to publish a compilation of the information, interested parties
might still be able to obtain the information pursuant to the Freedom
of Information Act (FOIA).\562\ Section 13(q) does not state that it
provides any special protection from FOIA disclosure for information
required to be submitted. Thus, the same competitive concerns could
still exist.
---------------------------------------------------------------------------
\562\ FOIA requires all federal agencies to make specified
information available to the public, including the information
required to be filed publicly under our rules. To the extent that
the information required to be filed does not fall within one of the
exemptions in FOIA (e.g., FOIA provides an exemption for ``trade
secrets and commercial or financial information obtained from a
person and privileged or confidential''; 5 U.S.C. 552(b)(4)) the
information required to be filed would not be protected from FOIA
disclosure.
---------------------------------------------------------------------------
One commentator expressed concerns with the proposed requirement to
prepare the payment disclosures on the cash-basis of accounting, and
noted that because registrants' existing reporting processes and
accounting systems are based on the accrual method of accounting (and
require certain payments to be capitalized), the proposal would impose
a burden on resource extraction issuers' accounting groups to develop
new information system, processes, and controls.\563\
---------------------------------------------------------------------------
\563\ See letter from PWC.
---------------------------------------------------------------------------
Several commentators stated that the Commission should define ``not
de minimis'' to mean material.\564\ According to those commentators, a
definition based on materiality would be consistent with the EITI and
the Commission's longstanding disclosure regime, and would encourage
consistency of disclosure across issuers.\565\ Although a materiality-
based definition might result in reduced compliance costs for issuers,
we continue to believe that given the use of the phrase ``not de
minimis'' in Section 13(q) rather than use of a materiality standard,
which is used elsewhere in the federal securities laws and in the
EITI,\566\ ``not de minimis'' does not equate to a materiality
standard.
---------------------------------------------------------------------------
\564\ See note 224 and accompanying text.
\565\ See notes 225 and 226 and accompanying text.
\566\ See note 251 and accompanying text.
---------------------------------------------------------------------------
Consistent with Section 13(q), the final rules require resource
extraction issuers to disclose payments made by a subsidiary or entity
under the control of the issuer. Some commentators suggested that we
limit the requirement to disclose only those payments made by an issuer
and its subsidiaries for which consolidated financial information is
provided. Although limiting the requirement might result in reduced
compliance costs for issuers, we do not believe it would be appropriate
to do so because the statute specifically states that resource
extraction issuers must disclose payments made by subsidiaries and
entities under the control of the issuer.
The final rules clarify that the term ``foreign government''
includes foreign subnational governments and define the term to
explicitly include both 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. Thus, resource extraction issuers will be required
to provide information about payments made to foreign subnational
governments. This broad definition may increase disclosure costs
compared to a less detailed definition, but we believe Section 13(q)
requires this broader definition, because Section 13(q) defines the
term ``foreign government'' and requires issuers to include an
electronic tag identifying the government that received the payments,
and the country in which the government is located. The statutory
requirement to provide electronic tags for both the government that
received the payments and the
[[Page 56402]]
country in which the government is located indicates that the intent of
the statute is to include foreign subnational governments in the
definition of ``foreign governments.'' This clarification should
further the statutory goal of increasing transparency with regard to
the payments made to foreign governments.
In addition to direct compliance costs, we expect that the statute
could result in significant economic effects. Issuers that have a
reporting obligation under Section 13(q) could be put at a competitive
disadvantage with respect to private companies and foreign companies
that are not subject to the reporting requirements of the United States
federal securities laws and therefore do not have such an obligation.
For example, such competitive disadvantage could result from, among
other things, any preference by the government of the host country to
avoid disclosure of covered payment information, or any ability of
market participants to use the information disclosed by reporting
issuers to derive contract terms, reserve data, or other confidential
information. With respect to the latter concern, the potential anti-
competitive effect of the required disclosures may be tempered because,
under the statute, only the amount of covered payments needs to be
disclosed, not the manner in which such payments are determined or
other contract terms. Some commentators have stated that confidential
production and reserve data can be derived by competitors or other
interested persons with industry knowledge by extrapolating from the
payment information required to be disclosed.\567\ Other commentators
have argued, however, that such extrapolation is not possible, and that
information of the type required to be disclosed by Section 13(q) would
not confer a competitive advantage on industry participants not subject
to such disclosure requirements.\568\ Any competitive impact of Section
13(q) should be minimal in those jurisdictions in which payment
information of the types covered by Section 13(q) is already publicly
available.\569\ In addition, the competitive impact may be reduced to
the extent that other jurisdictions, such as the EU, adopt laws to
require disclosure similar to the disclosure required by Section 13(q)
and the related rules.\570\ If the requirement to disclose payment
information does impose a competitive disadvantage on an issuer, such
issuer possibly may be incented 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.\571\
Additionally, resource extraction issuers operating in countries which
prohibit, or may in the future prohibit, the disclosure required under
the final rules could bear substantial costs.\572\ Such costs could
arise because issuers may have to choose between ceasing operations in
certain countries or breaching local law, or the country's laws may
have the effect of preventing them from participating in future
projects. Some commentators asserted that four countries currently have
such laws,\573\ although other commentators disputed the assertion that
there are foreign laws that specifically prohibit disclosure of payment
information.\574\ A foreign private issuer with operations in a country
that prohibits disclosure of covered payments, or foreign issuer that
is domiciled in such country, might face different types of costs--it
might decide it is necessary to delist from an exchange in the United
States, deregister, and cease reporting with the Commission,\575\ thus
incurring a higher cost of capital and potentially limited access to
capital in the future. In addition, it is possible that more countries
will adopt laws prohibiting the disclosure required by the final rules.
Shareholders, including U.S. shareholders, might suffer an economic and
informational loss if an issuer decides it is necessary to deregister
and cease reporting under the Exchange Act in the United States.
---------------------------------------------------------------------------
\567\ See letters from API 1, ExxonMobil 1, and RDS 1.
\568\ See letters from PWYP 1 and Oxfam 1.
\569\ PWYP provides examples of countries in which payments are
publicly disclosed on a lease or concession level. See letter from
PYWP 3.
\570\ One commentator suggested that if both the US and EU
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 (August 10, 2012)
(Arlene McCarthy is a member of the European Parliament and the
parliamentary draftsperson on the EU transparency rules for the
extractive sector).
\571\ For example, a study on divestitures of assets finds that
companies that undertake voluntary divestitures have positive stock
price reactions but finds that companies forced to divest assets due
to action undertaken by the antitrust authorities suffer a decrease
in shareholder value. See Kenneth J. Boudreaux, ``Divestiture and
Share Price.'' Journal of Financial and Quantitative Analysis 10
(September 1975), 619-26. G. Hite and J. Owers. ``Security Price
Reactions around Corporate Spin-Off Announcements.'' Journal of
Financial Economics 12 (December 1983), 409-36 (finding that firms
spinning off assets because of legal/regulatory difficulties
experience negative stock returns).
\572\ See notes 52 and 53 and accompanying text.
\573\ See letters from API 1 and ExxonMobil 1. See also letter
from RDS 1 (mentioning China, Cameroon, and Qatar).
\574\ See, e.g., letters from ERI 3, Global Witness 1, PWYP 1,
PWYP 3, and Rep. Frank et al.
\575\ See letter from Berns.
---------------------------------------------------------------------------
Addressing other potential costs, one commentator referred to a
potential economic loss borne by shareholders, without quantifying such
loss, which the commentator believed could result from highly
disaggregated disclosures of competitively sensitive information
causing competitive harm.\576\ The commentator also noted resource
extraction issuers could suffer competitive harm because they could be
excluded from many future projects altogether.\577\ Another commentator
noted that tens of billions of dollars of capital investments would
potentially be put at risk if issuers were required to disclose,
pursuant to our rules, information prohibited by the host country's
laws or regulations.\578\ One commentator also noted that because
energy underlies every aspect of the economy, these negative impacts
have repercussions well beyond resource extraction issuers.\579\
---------------------------------------------------------------------------
\576\ See letter from API 1.
\577\ See id.
\578\ See letter from RDS 4.
\579\ See letter from API 1.
---------------------------------------------------------------------------
As discussed above, several commentators suggested that we adopt
exemptions or modify the disclosure requirements to mitigate the
adverse impact of the Section 13(q) reporting requirement.\580\ One
commentator indicated that the final rules should be ``aligned and
coordinated'' with the process being developed by the DOI to fulfill
the United States' commitment to implementing the EITI.\581\ We
considered alternatives to the approach we are adopting in the final
rules, including providing certain exemptions from the disclosure
requirements mandated by Section 13(q), but we believe that adopting
any of the alternatives would be inconsistent with Section 13(q) and
would undermine Congress' intent to promote international transparency
efforts. In
[[Page 56403]]
Section 13(q) Congress mandated that we adopt rules with a specific
scope and features (e.g., ``not de minimis'' threshold, project level
reporting, and electronic tagging). To faithfully effectuate
Congressional intent, we do not believe it would be appropriate to
adopt provisions that would frustrate, or otherwise be inconsistent
with, such intent. Consequently, we believe the competitive burdens
arising from the need to make the required disclosures under the final
rules are necessary by the terms of, and in furtherance of the purposes
of, Section 13(q).
---------------------------------------------------------------------------
\580\ See, e.g., notes 50, 60, and 66 and accompanying text.
\581\ See letter from NMA 3. See also note 14. Referring to
Executive Orders 13563 and 13610, the commentator suggested that we
align the final rules with the process being developed by DOI so
that ``extractive industries are not subject to contradictory or
overlapping reporting processes.'' As we have described above, the
final rules are generally consistent with the EITI, except where the
language of Section 13(q) clearly deviates from the EITI. In these
instances, the final rules generally track the statute because, on
these specific points, we believe the statutory language
demonstrates that Congress intended the final rules to go beyond
what is required by the EITI. In this regard, we view the reporting
regime mandated by Section 13(q) as being complementary to, rather
than duplicative of, host country transparency initiatives
implemented under the EITI.
---------------------------------------------------------------------------
A number of factors may serve to mitigate the competitive burdens
arising from the required disclosure. We note there were differences in
opinion among commentators as to the applicability of host country
laws.\582\ Moreover, the widening global influence of the EITI and the
recent trend of other jurisdictions to promote transparency, including
listing requirements adopted by the Hong Kong Stock Exchange and
proposed directive of the European Commission, may discourage
governments in resource-rich countries from adopting new prohibitions
on payment disclosure.\583\ Reporting companies concerned that
disclosure required by Section 13(q) may be prohibited in a given host
country may also be able to seek authorization from the host country in
order to disclose such information, reducing the cost to such reporting
companies resulting from the failure of Section 13(q) to include an
exemption for conflicts with host country laws.\584\ Commentators did
not provide estimates of the cost that might be incurred to seek such
an authorization.
---------------------------------------------------------------------------
\582\ See note 84.
\583\ See notes 15 and 48.
\584\ The Angola Order indicates that the Minister of Petroleum
may provide formal authorization for the disclosure of information
regarding a reporting company's activities in Angola. See letter
from ExxonMobil 2. See also letter from PWYP 2 (``Current corporate
practice suggests that the Angolan government regularly provides
this authorization. For instance, Statoil regularly reports payments
made to the Angolan government.'' (internal citations omitted)). The
legal opinions submitted by Royal Dutch Shell with its comment
letter also indicate that disclosure of otherwise restricted
information may be authorized by government authorities in Cameroon
and China, respectively. See letter from RDS 2.
---------------------------------------------------------------------------
Not providing any exemptions should improve the transparency of the
payment information because users of the Section 13(q) disclosure can
obtain more information about payments than would otherwise be the case
if the final rules provided an exemption. To the extent that other
jurisdictions are developing and planning to adopt similar initiatives
(e.g., EU), the advantage to foreign companies not listed in the U.S.
might diminish over time. Further, not providing any exemptions also
improves the comparability of payment information among resource
extraction issuers and across countries. As such, it may increase the
benefit to users of the Section 13(q) disclosure. In addition, in light
of the absence of an exemption from the disclosure requirement for
foreign laws that prohibit the payment disclosure, countries may be
less incentivized to enact laws prohibiting the disclosure.
Unlike many of the Commission's rulemakings, the compliance costs
imposed by disclosure requirement mandated by Section 13(q) are
intended to achieve social benefits. As noted above, the cost of
compliance for this provision will be borne by the shareholders of the
company thus potentially diverting capital away from other productive
opportunities which may result in a loss of allocative efficiency.\585\
Such effects may be partially offset if increased transparency of
resource extraction payments reduces rent-seeking behavior by
governments of resource-rich countries and leads to improved economic
development and higher economic growth. A number of economic studies
have shown that reducing corruption results in higher economic growth
through more private investments, better deployment of human capital,
and political stability.\586\
---------------------------------------------------------------------------
\585\ See letter from Chevron; see also letter from Chairman
Bachus and Chairman Miller.
\586\ See Paolo Mauro, ``Corruption and Growth.'' Quarterly
Journal of Economics. 110, 681-712 (1995); 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); 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); Pierre-Guillaume
M[eacute]on and Khalid Sekkat, ``Does corruption grease or sand the
wheels of growth?'', Public Choice 122, 69-97 (2005).
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C. Benefits and Costs Resulting From Commission's Exercise of
Discretion
As discussed in detail in Section II, we have revised the rules
from the Proposing Release to address comments we received while
remaining faithful to the language and intent of the statute as adopted
by Congress. In addition to the statutory benefits and costs noted
above, we believe that the use of our discretion in implementing the
statutory requirements will result in a number of benefits and costs to
issuers and users of the payment information. We discuss below the
choices we made in implementing the statute and the associated benefits
and costs. We are unable to quantify the impact of each of the
decisions we discuss below with any precision because reliable,
empirical evidence regarding the effects is not readily available to
the Commission. Thus, in this section, our discussion on the costs and
benefits of our individual discretionary choices is qualitative. In
Section III.D. below, we present a quantified analysis on the overall
costs of the final rules that include all aspects of the implementation
of the statute.
1. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
Consistent with the proposal, the final rules define ``commercial
development of oil, natural gas, or minerals'' to include exploration,
extraction, processing, and export, or the acquisition of license for
any such activity. As described above, the final rules we are adopting
generally track the language in the statute, and except for where the
language or approach of Section 13(q) clearly deviates from the EITI,
the final rules are consistent with the EITI. In instances where the
language or approach of Section 13(q) clearly deviates from the EITI,
the final rules track the statute rather than the EITI. The definition
of ``commercial development'' in Section 13(q) sets forth a clear list
of activities that appears to include activities beyond what is
currently contemplated by the EITI, and thus, clearly deviates from the
EITI. Therefore, we believe the definition of the term in the final
rules should be consistent with Section 13(q). The final rules we are
adopting do not include additional activities, such as transportation
or marketing, because those activities are not included in Section
13(q) and because the EITI does not explicitly include those
activities. We believe defining the term in this way is consistent with
Congress' goal of promoting international transparency efforts. To the
extent that the definition of ``commercial development'' is consistent
with the activities typically included in EITI programs, the final
rules may promote consistency and comparability of disclosure made
pursuant to Section 13(q) and the related rules and EITI programs,
which may further Congress' goal of supporting international
transparency promotion efforts. We recognize that limiting the
definition to this list of specified activities could result in costs
to users of the payment information to the extent that disclosure about
additional activities, such as refining, smelting, marketing, or stand-
alone transportation
[[Page 56404]]
services (that is, transportation that is not otherwise related to
export), would be useful to users of the information.
As noted above, to promote the goals of the provision, the final
rules include an anti-evasion provision that requires disclosure with
respect to an activity or payment that, although not in form or
characterization one of the categories specified under the final rules,
is part of a plan or scheme to evade the disclosure required under
Section 13(q).\587\ Under this provision, a resource extraction issuer
could not avoid disclosure, for example, by re-characterizing an
activity that would otherwise be covered under the final rules as
transportation. We recognize that adding this requirement may increase
the compliance costs for some issuers; however, we believe this
provision is appropriate in order to minimize evasion and improve the
effectiveness of the disclosure, thereby furthering Congress' goal.
---------------------------------------------------------------------------
\587\ See Instruction 9 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
We considered requiring disclosure about additional activities such
as refining, smelting, marketing, or stand-alone transportation
services, but determined not to include those activities in the
definition of ``commercial development'' for the reasons described
above and because it would unnecessarily increase compliance costs for
issuers. We also considered adopting a definition of ``commercial
development'' that omitted one or more of the statutorily-listed
activities, such as ``export,'' as some commentators had
suggested.\588\ We decided against that alternative because, although
it might result in less costs for issuers, the plain language of
Section 13(q) does not support that approach.
---------------------------------------------------------------------------
\588\ See, e.g., letters from API 1 and ExxonMobil 1.
---------------------------------------------------------------------------
In response to commentators' request for clarification of the
activities covered by the final rules, we also are providing guidance
about the activities covered by the terms ``extraction,''
``processing,'' and ``export.'' The guidance should reduce uncertainty
about the scope of the activities that give rise to disclosure
obligations under Section 13(q) and the related rules, and therefore
should facilitate compliance and help to lessen the costs associated
with the disclosure requirements.
2. Types of Payments
In the final rules we added two additional categories of payments
to the list of payment types that must be disclosed--dividends and
payments for infrastructure improvements. We included these payment
types in the final rules because, based on the EITI and the comments we
received on the proposal, we believe they are part of the commonly
recognized revenue stream.\589\ Defining the term ``payment'' to
include dividends \590\ and payments for infrastructure improvements
(e.g., building a road) in the list of payment types required to be
disclosed under the final rules should promote consistency with EITI
reporting and improve the effectiveness of the disclosure, thereby
furthering Congress' goal of supporting international transparency
promotion efforts. Defining ``payment'' to include dividends and
payments for infrastructure improvements also could help alleviate
competitiveness concerns by imposing similar disclosure requirements on
issuers that make such payments and issuers that make other types of
payments, such as royalties, production entitlements, or fees, required
to be disclosed under the final rules.
---------------------------------------------------------------------------
\589\ See notes 164, 176, and 177 and accompanying text.
\590\ The final rules generally do not require the disclosure of
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. The issuer will be
required to disclose dividends paid to a government in lieu of
production entitlements or royalties. See Instruction 7 to Item 2.01
of Form SD.
---------------------------------------------------------------------------
As discussed earlier, resource extraction issuers will incur costs
to provide the payment disclosure for the payment types identified in
the statute, such as the costs associated with modifications to the
issuers' core enterprise resource planning systems and financial
reporting systems to capture and report the payment data at the project
level, for each type of payment, government payee, and currency of
payment.\591\ The addition of dividends and payments for infrastructure
improvements to the list of payment types for which disclosure is
required may increase some issuers' costs of complying with the final
rules. For example, issuers may need to add these types of payments to
their tracking and reporting systems. We understand that these types of
payments are more typical for mineral extraction issuers than for oil
firms,\592\ and therefore only a subset of the issuers subject to the
final rules might be affected.
---------------------------------------------------------------------------
\591\ See note 529 and accompanying text.
\592\ See, e.g., letters from PWYP 1 and Global Witness 1; see
also Chapter 19 ``Advancing the EITI in the Mining Sector:
Implementation Issues'' by Sefton Darby and Kristian Lempa, in
Advancing the EITI in the Mining Sector: A Consultation with
Stakeholders (EITI 2009).
---------------------------------------------------------------------------
The final rules do not require disclosure of certain other types of
payments, such as social or community payments. We recognize that
excluding those payments reduces the overall level of disclosure;
however, we have not included those payments as required payment types
under the final rules because commentators disagreed as to whether they
are part of the commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals and the EITI does not
require the disclosure of social or community payments.\593\ In
addition, by not including these types of payments, the final rules
should benefit issuers by avoiding additional compliance costs for
disclosure that does not clearly enhance the effectiveness of the
disclosure required under Section 13(q).
---------------------------------------------------------------------------
\593\ See note 185 and accompanying discussion, above (citing
commentators suggesting that social or community payments constitute
part of the commonly recognized revenue stream of resource
extraction) and note 188 and accompanying discussion, above (citing
commentators maintaining that social or community payments are not
part of the commonly recognized revenue stream for the commercial
development of oil, natural gas, or minerals).
---------------------------------------------------------------------------
Resource extraction issuers that predominantly make payments that
must be disclosed pursuant to the final rules may be at a competitive
disadvantage as compared to resource extraction issuers that
predominately make payments that are not identified in the final rules.
To the extent that other types of payments could be used to substitute
for explicitly defined payments, resource extraction issuers may try to
circumvent the required disclosures by shifting to other, not
explicitly defined payments, and away from the types of payments listed
in the final rules. This could have the effect of reducing the
transparency contemplated by the statute. For example, the exclusion of
social or community payments might encourage issuers to mask other
payments, such as infrastructure improvement payments, as social or
community payments to avoid reporting under the rules, limiting the
effectiveness of the disclosure. As noted above, to promote the goals
of Section 13(q), the final rules include an anti-evasion provision
that requires disclosure with respect to an activity or payment that,
although not in form or characterization of one of the categories
specified under the final rules, is part of a plan or scheme to evade
the disclosure required under Section 13(q).\594\ Under this provision,
a resource extraction issuer could not avoid disclosure, for example,
by re-characterizing or re-configuring a payment as one that is not
required to be disclosed. We considered, as an alternative to an anti-
evasion provision, defining terms broadly to cover a wider range of
activities, but
[[Page 56405]]
determined that more expansive definitions could increase compliance
costs for resource extraction issuers and that an anti-evasion
provision should result in lower compliance costs and would accomplish
the statute's transparency goals.
---------------------------------------------------------------------------
\594\ See Instruction 9 to Item 2.01 of Form SD.
---------------------------------------------------------------------------
As discussed above, the final rules clarify that the term ``fees''
includes license fees, rental fees, entry fees, and other
considerations for licenses or concessions, and the term ``bonuses''
includes signature, discovery, and production bonuses. In addition, the
final rules clarify that a resource extraction issuer will be required
to disclose payments for taxes levied on corporate profits, corporate
income, and production, but will not be required to disclose payments
for taxes levied on consumption, such as value added taxes, personal
income taxes, or sales taxes. These clarifications are consistent with
the EITI and, therefore, should help promote comparability and support
international transparency promotion efforts. Moreover, these
clarifications should benefit issuers by reducing uncertainty about the
types of payments required to be disclosed under Section 13(q) and the
related rules, and therefore should facilitate compliance and help
mitigate costs. On the other hand, inclusion of these specific types of
fees, taxes, and bonuses could increase compliance costs for issuers,
particularly for issuers that have not participated in an EITI program
and would not track or report these items except for our clarification.
Under the final rules, issuers may disclose payments that are made
for obligations levied at the entity level, such as corporate income
taxes, at that level rather than the project level. This accommodation
should help reduce compliance costs for issuers without interfering
with the goal of achieving increased payment transparency.
Under the final rules, issuers must disclose payments made in-kind.
This requirement is consistent with the EITI and should help further
the goal of supporting international transparency promotion efforts and
enhance the effectiveness of the disclosure. We have provided issuers
with some flexibility in reporting in-kind payments. Resource
extraction issuers may report in-kind payments at cost, or if cost is
not determinable, at fair market value, which we believe should
facilitate compliance with Section 13(q) and potentially lower
compliance costs. This requirement could impose costs to the extent
that issuers have not previously had to value their in-kind payments,
or they use a different method to value those payments.
3. Definition of ``Not De Minimis''
Section 13(q) requires the disclosure of payments that are ``not de
minimis,'' but leaves the term ``not de minimis'' undefined. In the
final rules we define ``not de minimis'' to mean any payment, whether
made as a single payment or a series of related payments, that equals
or exceeds $100,000. Although we considered leaving ``not de minimis''
undefined, as we had proposed, we were convinced by commentators that
defining this term should help to promote consistency in payment
disclosures and reduce uncertainty about what payments must be
disclosed under Section 13(q) and the related rules, and therefore
should facilitate compliance.\595\ As noted above, because the primary
purpose of Section 13(q) is to further international transparency
efforts regarding payments to governments for the commercial
development of oil, natural gas, or minerals, we believe that whether a
payment is ``not de minimis'' should be considered in relation to a
host country. We recognize that issuers may have difficulty assessing
the significance of particular payments for particular countries or
recipient governments; therefore, we are adopting a $100,000 threshold
that we believe will provide clear guidance about payments that are
``not de minimis'' and promote the transparency goals of the statute.
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\595\ See notes 223 and 231-233 and accompanying text.
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We considered adopting a definition of ``not de minimis'' that was
based on a qualitative principle or a relative quantitative measure
rather than an absolute quantitative standard.\596\ We chose the
absolute quantitative approach for several reasons. An absolute
quantitative approach will promote consistency of disclosure and, in
addition, will be easier for issuers to apply than a definition based
on either a qualitative principle or relative quantitative
measure.\597\ Moreover, using an absolute dollar amount threshold for
disclosure purposes should also reduce compliance costs by reducing the
work necessary to determine what payments must be disclosed.
---------------------------------------------------------------------------
\596\ As previously noted, we declined to adopt a ``not de
minimis'' definition based on a materiality principle because that
alternative is not supported by the language of Section 13(q). See
note 566 and accompanying text.
\597\ See note 252 and accompanying text.
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Therefore, in choosing the ``de minimis'' amount, we selected an
amount that we believe strikes an appropriate balance in light of
varied commentators' concerns and the purpose of the statute. Although
some commentators suggested various thresholds,\598\ no commentator
provided data to assist us in determining an appropriate threshold
amount.
---------------------------------------------------------------------------
\598\ See notes 235-243 and accompanying text.
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We considered other absolute amounts but chose $100,000 as the
quantitative threshold in the definition of ``not de minimis.'' We
decided not to adopt a lower threshold because we are concerned that
such an amount could result in undue compliance burdens and raise
competitive concerns for many issuers. As previously noted, we believe
a $100,000 threshold is more appropriate than, and an acceptable
compromise to, the amounts suggested by commentators because it
furthers the purpose of Section 13(q) and may result in a lesser
compliance burden than otherwise would be the case if a lower threshold
was used.\599\ In addition, to prevent issuers from breaking down their
payments into amounts smaller than $100,000 and thus avoiding
disclosure, we provide an instruction in the final rules noting that in
the case of any arrangement providing for periodic payments or
installments of the same type, a resource extraction issuer must
consider 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.
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\599\ See notes 257-267 and accompanying text.
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We also considered defining ``not de minimis'' in terms of a
materiality standard, which would generally suggest, consistent with
commentators views, a threshold larger than $100,000. Such an
alternative would likely have resulted in lower compliance costs for
issuers. We also could have chosen to use a larger number, such as
$1,000,000, to define ``not de minimis,'' which again would have
resulted in lower compliance costs. Although a ``not de minimis''
definition based on a materiality standard, or a much higher amount,
such as $1,000,000, could lessen competitive concerns, setting the
threshold too high could leave important payment streams undisclosed,
reducing the potential benefits to be derived from Section 13(q). In
addition, we believe that use of the term ``not de minimis'' in Section
13(q) indicates that a threshold quite different from a materiality
standard and significantly less than $1,000,000 is necessary to further
the transparency goals of the statute. While the $100,000 threshold may
result in some smaller payments not being reported, we believe this
threshold strikes an appropriate
[[Page 56406]]
balance between concerns about the potential compliance burdens of a
lower threshold and the need to fulfill the statutory directive for
resource extraction issuers to disclose payments that are ``not de
minimis.''
4. Definition of ``Project''
Section 13(q) requires a resource extraction issuer to disclose
information regarding 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.'' As noted above, the final rules
leave the term undefined, but we have provided some guidance about the
term. Leaving the term ``project'' undefined should provide issuers
some flexibility in applying the term to different business contexts
depending on factors such as the particular industry or business in
which the issuer operates, or the issuer's size.
As noted above, resource extraction issuers routinely enter into
contractual arrangements with governments for the purpose of commercial
development of oil, natural gas, or minerals. The contract defines the
relationship and payment flows between the resource extraction issuer
and the government, and therefore, it would serve as the basis for
determining a ``project.'' We understand that the term ``project'' is
used within the extractive industry in a variety of contexts, and that
individual issuers routinely provide disclosure about their own
projects in their Exchange Act reports and other public statements. To
the extent that the meaning of ``project'' is generally understood by
resource extraction issuers and investors, leaving the term undefined
should not impose undue costs.
Resource extraction issuers may incur costs in determining their
``projects.'' Leaving the term undefined in the final rules may result
in higher costs for some resource extraction issuers than others if an
issuer's determination of what constitutes a ``project'' would result
in more granular information being disclosed than another issuer's
determination of what constitutes a ``project.'' We anticipate that
these costs may diminish over time as resource extraction issuers
become familiar with how other resource extraction issuers determine
their ``projects.'' In addition, we recognize that leaving the term
``project'' undefined may not result in the transparency benefits that
the statute seeks to achieve as effectively as would be the case if we
adopted a definition because resource extraction issuers' determination
of what constitutes a ``project'' may differ, which could reduce the
comparability of disclosure across issuers. Inconsistent disclosure may
be mitigated to some extent by the guidance we are providing about the
term.
We considered defining ``project'' at the country level. A number
of commentators asserted that this approach would further lower their
compliance burdens.\600\ While we recognize that approach would reduce
compliance burdens for issuers, we did not adopt it because we believe
it would be inconsistent with Congress' intent to provide more detailed
disclosure than at the country level and would not effectively result
in the transparency benefits that the statute seeks to achieve.\601\ We
believe the statutory requirement to provide interactive data tags
identifying the government that received the payment and the country in
which that government is located is further evidence that statutory
reference to ``project'' was intended to elicit disclosure at a more
granular level than country-level reporting.
---------------------------------------------------------------------------
\600\ See letters from API 1, ExxonMobil 1, Petrobras, and RDS
1.
\601\ See note 313 and accompanying text.
---------------------------------------------------------------------------
We also considered defining ``project'' as a reporting unit, as
suggested by some commentators.\602\ We decided against that approach
because we believe that requiring disclosure at the reporting unit
level would be inconsistent with the use of the term ``project'' in
Section 13(q). In this regard we note that it is not uncommon for an
issuer to define a reporting unit as a geographic region (for example,
as a country or continent), which would result in aggregated payment
disclosure that is inconsistent with the transparency goal of the
statute.
---------------------------------------------------------------------------
\602\ See note 283 and accompanying text.
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As suggested by some commentators, we considered defining
``project'' in relation to a particular geologic resource, such as a
``geologic basin'' or ``mineral district.'' \603\ We decided not to
adopt this approach because, as noted by some commentators,\604\ a
geologic basin or mineral district may span more than one country,
which would be counter to the country-by-country reporting required by
Section 13(q). In addition, we understand that defining the term in
this manner may not reflect how resource extraction issuers enter into
contractual arrangements for the extraction of resources, which define
the relationship and payment flows between the resource extraction
issuer and the government. For these reasons, we believe that defining
``project'' as a ``geologic basin'' may be inconsistent with the use of
the term ``project'' in Section 13(q) and may not result in the
transparency benefits that the statute seeks to achieve.
---------------------------------------------------------------------------
\603\ See note 286 and accompanying text.
\604\ See note 290 and accompanying text.
---------------------------------------------------------------------------
In addition, we considered defining ``project'' by reference to a
materiality standard as it is used under the federal securities laws,
as suggested by some commentators.\605\ While such an approach could
reduce compliance burdens for issuers, we did not adopt it because we
believe it would be inconsistent with Congress' intent to provide more
detailed disclosure than would be provided using such a materiality
standard and would not result in the transparency benefits that the
statute seeks to achieve.
---------------------------------------------------------------------------
\605\ See note 291 and accompanying text.
---------------------------------------------------------------------------
To comply with the final rules, a resource extraction issuer could
be required to implement systems to track payments at a different level
of granularity than what it currently tracks, which could result in
added compliance and implementation costs. We expect, however, that to
the extent resource extraction issuers' systems currently track
``projects'' or information by reference to its contractual
arrangements, such costs should be reduced. Not defining the term
``project'' under the final rules could result in added compliance
costs when compared to the alternative of adopting a definition
suggested by some commentators. By not defining ``project'' as
``country,'' ``reporting unit,'' ``geologic basin,'' or ``material
project,'' as some commentators suggested,\606\ issuers could incur
costs relating to implementation of systems to track payment
information at a more granular level than what their current systems
track. In addition, by leaving the term undefined rather than adopting
one of the definitions suggested by commentators, the final rules may
effectively require disclosure that may result in voluminous
information and increase the costs to issuers to track and report.
---------------------------------------------------------------------------
\606\ See notes 279, 283, 286, and 291 and accompanying text.
---------------------------------------------------------------------------
5. Annual Report Requirement
Section 13(q) provides that the resource extraction payment
disclosure must be ``include[d] in an annual report.'' The final rules
require an issuer to file the payment disclosure in an annual report on
new Form SD, rather than furnish it in one of the existing Exchange Act
annual report forms as proposed. Form SD will be due no later
[[Page 56407]]
than 150 days after the end of the issuer's most recent fiscal year.
This should lessen the burden of compliance with Section 13(q) and the
related rules because issuers generally will not have to incur the
burden and cost of providing the payment disclosure at the same time
that it must fulfill its disclosure obligations with respect to an
Exchange Act annual report.\607\ An additional benefit is that this
requirement also would provide information to users in a standardized
manner for all issuers rather than in different annual report forms
depending on whether a resource extraction issuer is a domestic or
foreign filer. In addition, requiring the disclosure in new Form SD,
rather than in issuers' Exchange Act annual reports, should alleviate
concerns about the disclosure being subject to the officer
certifications required by Exchange Act Rules 13a-14 and 15d-14, thus
potentially lowering compliance costs.
---------------------------------------------------------------------------
\607\ 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 will incur costs associated with
preparing and filing new Form SD; however, we do not believe the costs
associated with filing a new form to provide the disclosure instead of
furnishing the disclosure in an existing form will be significant.
Requiring covered issuers to file, instead of furnish, the payment
information in Form SD may increase the ability of investors to bring
suit, for instance under Section 18 of the Exchange Act. This may
improve the avenues of redress available to investors if issuers fail
to comply with the new disclosure requirements. Because this could
improve investors' ability to seek redress, it is possible that
resource extraction issuers may be more accountable for and more likely
to make the required disclosure. This, in turn, may provide benefits to
investors to the extent they use the information to make investment
decisions. On the other hand, our decision to require issuers to file,
rather than furnish, the payment information will potentially subject
issuers to litigation under Section 18 and may cause issuers to take
greater care in preparing the disclosures, thereby increasing issuers'
costs of complying with the rules.\608\
---------------------------------------------------------------------------
\608\ While the potential for litigation may increase costs, we
note that Section 18 claims have not been prevalent in recent years
and a plaintiff asserting a claim under Section 18 would need to
meet the elements of the statute, including materiality, reliance,
and damages. See Louis Loss and Joel Seligman, Ch. 11 ``Civil
Liability,'' Subsect. c ``False Filings [Sec. 18],'' Fundamentals
of Securities Regulation (3rd Ed. 2005).
---------------------------------------------------------------------------
Finally, some commentators noted the potential for their cost
estimates to increase if the final rules required the payment
information to be audited. Consistent with Section 13(q) and the
proposal, the final rules do not require the resource extraction
payment information to be audited or provided on an accrual basis. Not
requiring the payment information to be audited or provided on an
accrual basis is consistent with Section 13(q) because the statute
requires the Commission to issue final rules for disclosure of payments
by resource extraction issuers and, unlike the EITI, does not
contemplate that an administrator will audit and reconcile the
information, or produce a report as a result of the audit and
reconciliation. In addition, not requiring the payment information to
be audited or provided on an accrual basis may result in lower
compliance costs than otherwise would be the case if resource
extraction issuers were required to provide the information on an
accrual basis or audited information.\609\ A potential cost associated
with not requiring an audit is that users of the information may
perceive non-audited information as less reliable than audited
information.
---------------------------------------------------------------------------
\609\ See note 405 and accompanying text.
---------------------------------------------------------------------------
6. Exhibit and Interactive Data Requirement
Section 13(q) requires the payment disclosure to be electronically
formatted using an interactive data standard. Under the proposed rules,
a resource extraction issuer would have been required to provide the
disclosure in two exhibits--one in HTML and one in XBRL. The final
rules require a resource extraction issuer to provide the required
payment disclosure in one exhibit to Form SD. The exhibit must be
formatted in XBRL and provide all of the electronic tags required by
Section 13(q) and the final rules. We have decided to require only one
exhibit formatted in XBRL because we believe that we can achieve the
goal of the dual presentation with only one exhibit. Issuers will
submit the information on EDGAR in XBRL format, thus enabling users of
the information to extract the XBRL data, and at the same time the
information will be presented in an easily-readable format by rendering
the information received by the issuers.\610\ We believe that requiring
the information to be provided in this way may reduce the compliance
burden for issuers as compared to requiring a second exhibit formatted
in HTML. In addition, we believe that, to the extent requiring the
specified information to be presented in XBRL format promotes
consistency and standardization of the information, increases the
usability of the payment disclosure, and reduces compliance costs, a
benefit results to both issuers and users of the information.
---------------------------------------------------------------------------
\610\ Users of this information should be able to render the
information by using software available on our Web site at no cost.
---------------------------------------------------------------------------
Our choice of XBRL as the required interactive data standard may
increase compliance costs for some issuers; however, Congress expressly
required interactive data tagging. The electronic formatting costs will
vary depending upon a variety of factors, including the amount of
payment data disclosed and an issuer's prior experience with XBRL.
While most issuers are already familiar with XBRL because they
currently use XBRL for their annual and quarterly reports filed with
the Commission, issuers not already filing reports using XBRL (i.e.
foreign private issuers that report pursuant to International Financial
Reporting Standards (IFRS)) will incur some start-up costs associated
with XBRL. We do not believe that the ongoing costs associated with
this data tagging would be greater than filing the data in XML.
Consistent with the statute, the final rules require a resource
extraction issuer to include an electronic tag that identifies the
currency used to make the payments. The statute does not otherwise
specify how the resource extraction issuer should present the type and
total amount of payments for each project or to each government. We
understand that resource extraction issuers may make payments in any
number of currencies, and as a result, providing total amounts may be
difficult. 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 total amount per project or per government in
U.S. dollars or the issuer's reporting currency. A resource extraction
issuer could incur costs associated with converting payments made in
multiple currencies to U.S. dollars or its reporting currency. Given
the statute's tagging requirements and requirements for disclosure of
total amounts, we believe reporting in one currency is required. The
final rules provide flexibility to issuers in how to perform the
currency conversion, which may result in lower compliance costs because
it enables issuers to choose the option that works best for them. To
the extent issuers choose different options to perform the conversion,
it may result in less comparability of the payment
[[Page 56408]]
information and, in turn, could result in costs to users of the
information.
D. Quantified Assessment of Overall Economic Effects
As noted above, Congress intended that the rules issued pursuant to
Section 13(q) would increase the accountability of governments to their
citizens in resource-rich countries for the wealth generated by those
resources.\611\ In addition, commentators and the sponsors of Section
13(q) also have noted that the United States has an interest in
promoting accountability, stability, and good governance.\612\
Congress' goal of enhanced government accountability through Section
13(q) is intended to result in social benefits that cannot be readily
quantified with any precision. We also note that while the objectives
of Section 13(q) do not appear to be ones that will necessarily
generate measurable, direct economic benefits to investors or issuers,
investors have stated that the disclosures required by Section 13(q)
have value to investors and can ``materially and substantially improve
investment decision making.'' \613\ As noted previously, the benefits
are inherently difficult to quantify and thus our quantitative
assessment of the overall economic effects focuses on the costs of
complying with the rules.
---------------------------------------------------------------------------
\611\ See note 7 and accompanying text.
\612\ See note 499 and accompanying text.
\613\ See letter from Calvert. See note 498 and accompanying
text.
---------------------------------------------------------------------------
To assess the economic impact of the final rules, we estimated the
initial and ongoing costs of compliance using the quantitative
information supplied by commentators using two different methods. In
the first method, we estimate the cost of compliance for the average
company and then multiply this number by the total number of affected
issuers (1,101). In the second method, we separately estimate the costs
of compliance for small issuers (issuers with less than $75 million in
market capitalization) and for large issuers (issuers with $75 million
or more in market capitalization). For initial compliance costs, we
received estimates from Barrick Gold and ExxonMobil.\614\ We use these
numbers to estimate a lower and an upper bound, respectively, on
initial compliance costs.
---------------------------------------------------------------------------
\614\ See letter from Barrick Gold and ExxonMobil 1. NMA also
provided initial compliance hours that are similar to Barrick Gold.
See letter from NMA 2.
---------------------------------------------------------------------------
Our methodology to estimate both initial and ongoing compliance
costs takes the specific company estimates from Barrick Gold and
ExxonMobil and applies these costs, as a percentage of total assets, to
the average issuer and small and large issuers. Both Barrick Gold and
ExxonMobil are very large issuers and their compliance costs may not be
representative of other types of issuers. Thus, we believe it is
appropriate to scale these costs to the size of the issuer. While a
portion of the compliance costs will most likely be fixed (i.e., they
will not vary with the size of the issuer), we expect that a portion of
those costs will be variable. For example, we expect larger,
multinational issuers to have more complex payment tracking systems
compared to smaller, single country based issuers. Thus, in our
analysis we assume that compliance costs will tend to increase with
firm size. Commentators did not provide any information regarding what
fraction of compliance costs would be fixed versus variable.
Barrick Gold estimated that it would require 500 hours for initial
changes to internal books and records and processes, and 500 hours for
ongoing compliance costs. At an hourly rate of $400,\615\ this amounts
to $400,000 (1,000 hours x $400) for hourly compliance costs. Barrick
Gold also estimated that it would cost $100,000 for initial IT/
consulting and travel costs for a total initial compliance cost of
$500,000. As a measure of size, Barrick Gold's total assets as of the
end of fiscal year 2009 were approximately $25 billion.\616\ As a
percentage of Barrick Gold's total assets, initial compliance costs are
estimated to be 0.002% ($500,000/$25,075,000,000).
---------------------------------------------------------------------------
\615\ This is the rate we use to estimate outside professional
costs for purposes of the PRA. Although we believe actual internal
costs may be less in many instances, we are using this rate to
arrive at a conservative estimate of hourly compliance costs.
\616\ All data on total assets is obtained from Compustat, which
is a product of Standard and Poor's. In addition to considering
total assets as a measure of firm size, we also considered using
market capitalization. Although both measures will fluctuate, we
believe that market capitalization will fluctuate more and the
resulting percentage would then be sensitive to the measurement date
chosen. As a result, we believe that using total assets as a measure
of size is more appropriate.
---------------------------------------------------------------------------
A similar analysis for ExxonMobil estimated initial compliance
costs using its estimate of $50 million. ExxonMobil's total assets as
of the end of 2009 were approximately $233 billion and the percentage
of initial compliance costs to total assets is 0.021% ($50,000,000/
$233,323,000,000). Therefore, the lower bound of initial compliance
costs to total assets is 0.002% based upon estimates from Barrick Gold
and the upper bound is 0.021% based upon estimates from ExxonMobil.
Below is a summary of how we calculated the initial compliance
costs as a percentage of total assets:
----------------------------------------------------------------------------------------------------------------
Initial compliance cost estimates Calculation
----------------------------------------------------------------------------------------------------------------
Total number of affected issuers........................ 1,101 ............................
Barrick Gold compliance costs (lower bound):
Number of hours for initial changes to internal 500 ............................
books and records and processes....................
Number of hours for annual compliance costs......... 500 ............................
Initial number of compliance hours.................. 1,000 500 + 500
Hourly cost......................................... $400 ............................
Initial hourly compliance costs..................... $400,000 1,000 * $400
Initial IT/consulting/travel costs.................. $100,000 ............................
Total initial total compliance costs................ $500,000 $400,000 + $100,000
Barrack Gold's 2009 total assets (Compustat)............ $25,075,000,000 ............................
Initial compliance costs as a percentage of total assets 0.002% $500,000/$25,075,000,000
using Barrick Gold (lower bound).......................
ExxonMobil compliance costs (upper bound):
Initial compliance costs............................ $50,000,000 ............................
ExxonMobil's 2009 total assets (Compustat).......... $233,323,000,000 ............................
Initial compliance costs as a percentage of total assets 0.021% $50,000,000/$233,323,000,000
using ExxonMobil (upper bound).........................
----------------------------------------------------------------------------------------------------------------
[[Page 56409]]
We apply these two ratios to the average issuer (Method 1) and to
small and large issuers (Method 2). In Method 1, we calculate the
average total assets of all affected issuers to be approximately $4.4
billion.\617\ Applying the ratio of initial compliance costs to total
assets (0.002%) from Barrick Gold, we estimate the lower bound of total
initial compliance costs for all issuers to be $97 million (0.002% x
$4,422,000,000 x 1,101). Applying the ratio of initial compliance costs
to total assets (0.021%) from ExxonMobil, we estimate the upper bound
of total initial compliance costs for all issuers to be $1 billion
(0.021% x $4,422,000,000 x 1,101). The table below summarizes the upper
and lower bound of total initial compliance costs using Method 1:
---------------------------------------------------------------------------
\617\ We determined this average by identifying the SIC codes
that will be affected by the rulemaking and then obtaining from
Compustat the total assets for fiscal year 2009 of all affected
issuers. We then calculated the average of those total assets.
----------------------------------------------------------------------------------------------------------------
Method 1: Average company compliance costs Calculation
----------------------------------------------------------------------------------------------------------------
Average total assets of all affected issuers (Compustat) $4,422,000,000 ............................
Average initial compliance costs per issuer using 88,440 $4,422,000,000*0.002%
Barrick Gold percentage of total assets (lower bound)..
Total initial compliance costs using Barrick Gold (lower 97,372,440 $88,440*1,101
bound).................................................
Average initial compliance costs per issuer using Exxon 928,620 4,422,000,000*0.021%
Mobil's percentage of total assets (upper bound).......
Total initial compliance costs using ExxonMobil (upper 1,022,410,620 928,620 * 1,101
bound).................................................
----------------------------------------------------------------------------------------------------------------
In Method 2, we conduct a similar analysis for small and large
issuers. We estimate the proportion of issuers that are small issuers
(63%) and the proportion of issuers that are large issuers (37%).\618\
Next, we calculate the average total assets of small issuers in 2009
($509 million) and large issuers ($4.5 billion) and apply the ratios of
initial compliance costs to total assets estimated using the estimates
from Barrick Gold (lower bound) and ExxonMobil (upper bound) for each
type of issuer. In this analysis, we assume that the ratio of initial
compliance costs to total assets does not vary by size. Therefore,
small issuers have a lower bound estimate of initial compliance costs
of $7 million (0.002% x $509,000,000 x 63% x 1,101) and an upper bound
of $74 million (0.021% x $509,000,000 x 63% x 1,101). Large issuers
have a lower bound estimate of initial compliance costs of $37 million
(0.002% x $4,504,000,000 x 37% x 1,101) and an upper bound of $385
million (0.021% x $4,504,000,000 x 37% x 1,101). The sum of these two
numbers provides an estimate of $44 million ($7,061,153 + $36,704,037)
for the lower bound and $460 million ($74,142,111 + $385,306,841) for
the upper bound of initial compliance costs.
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\618\ For purposes of this analysis, we classify as small
issuers those whose market capitalization is less than $75 million
and we classify the rest of the affected issuers as large issuers.
----------------------------------------------------------------------------------------------------------------
Method 2: By small and large issuers
----------------------------------------------------------------------------------------------------------------
Percentage of small issuers (market capitalization 63% ............................
<$75m).................................................
Percentage of large issuers (market capitalization = 37% ............................
>$75m).................................................
Average total assets of small issuers in 2009 $509,000,000 ............................
(Compustat)............................................
Average total assets of large issuers in 2009 $4,504,000,000 ............................
(Compustat)............................................
Initial compliance costs for average small issuer:
Initial compliance costs for a small issuer using $10,180 0.002%*$509,000,000
Barrick Gold (lower bound).........................
Total initial compliance costs for small issuers $7,061,153 $10,180*1,101*63%
using Barrick Gold (lower bound)...................
Initial compliance costs for a small issuer using $106,890 0.021%*$509,000,000
ExxonMobil (upper bound)...........................
Total initial compliance costs for small issuers $74,142,111 $106,890*1,101*63%
using ExxonMobil (upper bound).....................
Initial compliance costs for average large issuer:
Initial compliance costs for a large issuer using $90,080 0.0020%*4,504,000,000
Barrick Gold (lower bound).........................
Total initial compliance costs for large issuers $36,695,890 $90,080*1,101*37%
using Barrick Gold (lower bound)...................
Initial compliance costs for a large issuer using $945,840 0.021%*4,504,000,000
ExxonMobil (upper bound)...........................
Total initial compliance costs for large issuers $385,306,841 $945,840*1,101*37%
using ExxonMobil (upper bound).....................
Total initial compliance costs for small and large $43,757,043 $7,061,153 + $36,695,890
issuers using Barrick Gold (lower bound)...............
Total initial compliance costs for small and large $459,448,952 $74,142,111 + $385,306,841
issuers using ExxonMobil (upper bound).................
----------------------------------------------------------------------------------------------------------------
In summary, using the two methods, the range of initial compliance
costs is as follows: \619\
---------------------------------------------------------------------------
\619\ The total estimated compliance cost for PRA purposes is
$234,829,000 ([332,164 hrs * $400/hr] + $101,963,400). The
compliance costs for PRA purposes would be encompassed in the total
estimated compliance costs for issuers. As discussed in detail
below, our PRA estimate includes costs related to tracking and
collecting information about different types of payments across
projects, governments, countries, subsidiaries, and other controlled
entities. The estimated costs for PRA purposes are calculated by
treating compliance costs as fixed costs, so despite using similar
inputs for calculating compliance costs under Methods 1 and 2 above,
the PRA estimate differs from the lower and upper bounds calculated
above. The PRA estimate is, however, within the range of total
compliance costs estimated using commentators' data.
[[Page 56410]]
----------------------------------------------------------------------------------------------------------------
Method 1: Average issuer Method 2: Small and large
Initial compliance costs analysis issuer analysis
----------------------------------------------------------------------------------------------------------------
Using Barrick Gold (lower bound)........................ $97,372,440 $43,757,043
Using ExxonMobil (upper bound).......................... 1,022,410,620 459,448,952
----------------------------------------------------------------------------------------------------------------
We acknowledge limitations on our analysis. First, the analysis is
limited to two large issuers' estimates from two different industries,
mining and oil and gas, and the estimates may not accurately reflect
the initial compliance costs of all affected issuers. Second, we assume
that compliance costs are a constant fraction of total assets, but
there may be substantial fixed costs to compliance that are
underestimated by using a variable cost analysis. Third, commentators
mentioned other potential compliance costs not necessarily captured in
this discussion of compliance costs.\620\ Because of these limitations,
we believe that total initial compliance costs for all issuers are
likely to be near the upper bound of approximately $1 billion. This
estimate is consistent with two commentators' qualitative estimates of
initial implementation costs.\621\
---------------------------------------------------------------------------
\620\ Those could include, for example, costs associated with
the termination of existing agreements in countries with laws that
prohibit the type of disclosure mandated by the rules, or costs of
decreased ability to bid for projects in such countries in the
future, or costs of decreased competitiveness with respect to non-
reporting entities. Commentators generally did not provide estimates
of such costs. As discussed further below, we have attempted to
estimate the costs associated with potential foreign law
prohibitions on providing the required disclosure. See Section
III.D.
\621\ See letters from API 1 and ExxonMobil 1. ``Total industry
costs just for the initial implementation could amount to hundreds
of millions of dollars even assuming a favorable final decision on
audit requirements and reasonable application of accepted
materiality concepts.''
---------------------------------------------------------------------------
We also estimated ongoing compliance costs using the same two
methods. We received quantitative information from three commentators,
Rio Tinto, National Mining Association, and Barrick Gold, that we used
in the analysis. Rio Tinto estimated that it would take between 5,000
and 10,000 hours per year to comply with the requirements, for a total
ongoing compliance cost of between $2 million (5,000*$400) and $4
million (10,000*$400). We use the midpoint of their estimate, $3
million, as their expected ongoing compliance cost. The National Mining
Association (NMA), which represents the mining industry, estimated that
ongoing compliance costs would be 10 times our initial estimate,
although it did not state specifically the number to which it referred.
We believe NMA was referring to our proposed estimate of $30,000.\622\
Although this is the dollar figure for total costs, NMA referred to it
when providing an estimate of ongoing costs, so we do the same here,
which would result in $300,000 (10*$30,000). Finally, Barrick Gold
estimated that it would take 500 hours per year to comply with the
requirements, or $200,000 (500*$400) per year. As with the initial
compliance costs, we calculate the ongoing compliance cost as a
percentage of total assets. Rio Tinto's total assets as of the end of
fiscal year 2009 were approximately $97 billion and their estimated
ongoing compliance costs as a percentage of assets is 0.003%
($3,000,000/$97,236,000,000). We calculated the average total assets of
the mining industry to be $1.5 billion,\623\ and using NMA's estimated
ongoing compliance costs, we estimate ongoing compliance costs as a
percentage of assets of 0.02% ($300,000/$1,515,000,000). Barrick Gold's
total assets as of the end of fiscal year 2009 were approximately $25
billion and their estimated ongoing compliance costs as a percentage of
assets is 0.0008% ($200,000/$25,075,000,000). We then average the
percentage of ongoing compliance costs to get an estimate of 0.0079% of
total assets.
---------------------------------------------------------------------------
\622\ The $30,000 estimate was calculated as follows:
[(52,931*$400) + $11,857,600]/1,101 = $30,000.
\623\ We estimated this number by selecting only mining issuers,
based on their SIC codes, obtaining their total assets as of the end
of fiscal year 2009 from Compustat, and averaging the total assets
of those issuers.
----------------------------------------------------------------------------------------------------------------
Ongoing compliance costs Calculation
----------------------------------------------------------------------------------------------------------------
Rio Tinto estimate of yearly compliance costs........... $2,000,000-$4,000,000 (5,000-10,000)*$400
Average Rio Tinto estimate.............................. $3,000,000 ............................
Rio Tinto's 2009 total assets (Compustat)............... $97,236,000,000 ............................
Ongoing compliance costs as a percentage of Rio Tinto's 0.003% $3,000,000/$97,236,000,000
total assets...........................................
NMA estimate of 10 times SEC estimate in proposing $300,000 10*$30,000
release................................................
Average total assets for all mining issuers (Compustat). $1,515,000,000 ............................
Ongoing compliance costs as a percentage of all mining 0.02% $300,000/$1,515,000,000
issuers total assets (NMA).............................
Barrick Gold estimate of 500 hours per year............. $200,000 500*$400
Barrick Gold's 2009 total assets (Compustat)............ $25,075,000,000 ............................
Ongoing compliance costs as a percentage of Barrick 0.0008% $200,000/$25,075,000,000
Gold's total assets....................................
Average ongoing compliance costs as a percentage of 0.0079% ............................
total assets for all three estimates: Rio Tinto, NMA
and Barrick Gold.......................................
----------------------------------------------------------------------------------------------------------------
We use the same two methods used to estimate initial compliance
costs to estimate ongoing compliance costs: Method 1 for the average
affected issuer and Method 2 for small and large issuers separately. In
Method 1, we take the average total assets for all affected issuers,
$4,422,000,000, and multiply it by the average ongoing compliance costs
as a percentage of total assets (0.0079%) to get total ongoing
compliance costs of approximately $385 million.
----------------------------------------------------------------------------------------------------------------
Method 1: Average company ongoing compliance costs Calculation
----------------------------------------------------------------------------------------------------------------
Average 2009 total assets of all affected issuers $4,422,000,000 ............................
(Compustat)............................................
Average ongoing compliance costs per issuer using $349,338 0.0079%*$4,422,000,000
average percentage of total assets (lower bound).......
Total ongoing compliance costs.......................... $384,621,138 $349,338*1,101
----------------------------------------------------------------------------------------------------------------
[[Page 56411]]
In Method 2, we estimate ongoing compliance costs separately for
small and large issuers using the same proportion of issuers as in the
analysis on initial compliance costs: small issuers (63%) and large
issuers (37%). For small issuers, we take the average total assets in
2009 ($509,000,000) \624\ and multiply it by the average ongoing
compliance costs as a percentage of total assets (0.0079%) to get total
ongoing compliance costs of approximately $28 million. For large
issuers, we take the average total assets in 2009 ($4,504,000,000)
\625\ and multiply it by the average ongoing compliance costs as a
percentage of total assets (0.0079%) to get total ongoing compliance
costs of approximately $145 million. The sum of these two numbers
provides an estimate of $173 million ($27,891,556 + $144,948,764) for
total ongoing compliance costs for affected issuers. Comparing these
two methods suggests that the ongoing compliance costs are likely to be
between $200 million and $400 million.
---------------------------------------------------------------------------
\624\ We calculate this number by selecting all small issuers
according to our classification scheme (market capitalization less
than or equal to $75 million) and then averaging their total assets
as of the end of fiscal year 2009.
\625\ We calculate this number by selecting all large issuers
according to our classification scheme (market capitalization $75
million or more) and then averaging their total assets as of the end
of fiscal year 2009.
----------------------------------------------------------------------------------------------------------------
Method 2: By small and large issuers
----------------------------------------------------------------------------------------------------------------
Percentage of small issuers (market capitalization < 63% ............................
$75m)..................................................
Percentage of large issuers (market capitalization = > 37% ............................
$75m)..................................................
Average total assets of small issuers in 2009 $509,000,000 ............................
(Compustat)............................................
Average total assets of large issuers in 2009 $4,504,000,000 ............................
(Compustat)............................................
Yearly ongoing compliance costs for a small issuer...... $40,211 0.0079%*$509,000,000
Total yearly ongoing compliance costs for small issuer.. $27,891,556 $40,211*1,101*63%
Yearly ongoing compliance costs for a large issuer...... $355,816 0.0079%*$4,504,000,000
Total yearly ongoing compliance costs for large $144,948,764 $355,816*1,101*37%
companies..............................................
Total yearly ongoing compliance costs for small and $172,840,320 $27,891,556+$144,948,764
large issuers..........................................
----------------------------------------------------------------------------------------------------------------
As discussed above in Section III.B., host country laws that
prohibit the type of disclosure required under the final rules could
lead to significant additional economic costs that are not captured by
the compliance cost estimates above. We have attempted to assess the
magnitude of these costs to the extent possible. We base our analysis
on the four countries that, according to commentators, currently have
some versions of such laws (although we do not know if such countries
would, in fact, prohibit the required disclosure or whether there might
be other countries).\626\ We searched (through a text search in the
EDGAR system) the Forms 10-K and 20-F of affected issuers for years
2009 and 2010 for any mention of Angola, Cameroon, China, or Qatar. An
examination of many of the filings that mentioned one or more of these
countries indicate that most filings did not provide detailed
information on the extent of their operations in these countries.\627\
Thus, we are unable to determine the total amount of capital that may
be lost in these countries if the information required to be disclosed
under the final rules is, in fact, prohibited by laws or regulations.
---------------------------------------------------------------------------
\626\ See letters from API 1 and ExxonMobil 1 (mentioning
Angola, Cameroon, China, and Qatar); see also letter from RDS 1
(mentioning Cameroon, China, and Qatar). Other commentators disputed
the assertion that there are foreign laws that specifically prohibit
disclosure of payment information. See, e.g., letters from ERI 3,
Global Witness 1, PWYP 1, Publish What You Pay (December 20, 2011)
(``PWYP 3''), and Rep. Frank et al.
\627\ We note that some issuers do not operate in those four
countries, and thus, would not have any such information to
disclose. Other issuers may have determined that they were not
required to provide detailed information in their filings regarding
their operations in those countries.
---------------------------------------------------------------------------
We can, however, assess if the costs of withdrawing from these four
countries are in line with one commentator's estimate of tens of
billions of dollars. We estimate the potential loss from terminating
activities in a country with such laws by the present value of the cash
flows that a firm would forgo. We assume that a firm would not suffer
any substantial losses when redeploying or disposing of its assets in
the host country under consideration. We then discuss how the presence
of various opportunities for the use of those assets by the firm itself
or another firm would affect the size of the firm's potential losses.
We also discuss how these losses would be affected if a firm cannot
redeploy the assets in question easily, or it has to sell them with a
steep discount (a fire sale). In order to estimate the lost cash flows,
we assume that the cash flows from the projects in one of these
countries are a fraction of the firm's total cash flows, and this
fraction is equal to the ratio of total project assets in the given
country to the firm's total assets. Also, we assume that the estimated
cash flows grow annually at the rate of inflation over the life of the
project.
We were able to identify a total of 51 issuers that mentioned that
they have operations in these countries (some operate in more than one
country). The table below provides information from 19 of the 51
issuers with regard to projects disclosed in their Forms 10-K and 20-
F.\628\
---------------------------------------------------------------------------
\628\ As we noted, we identified 51 issuers that disclosed
operations in at least one of the four countries, but only 19 of the
issuers provided information with regard to projects in those
countries that was specific enough to use in our analysis.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Project assets Project term Investments ($ Revenues ($ Expenses ($
Issuer ($ mil) (yrs) mil) mil) mil) Country
--------------------------------------------------------------------------------------------------------------------------------------------------------
Issuer 1................................. 7,320 25 .............. .............. .............. Angola.
Issuer 2................................. .............. 20 18.8 .............. .............. Angola.
Issuer 3................................. .............. 21 1853 .............. .............. Angola.
Issuer 4................................. 724 4 .............. 322.3 .............. Angola.
Issuer 5................................. 51.1 .............. .............. 22 .............. Cameroon.
Issuer 6................................. .............. 16 .............. .............. .............. Cameroon.
Issuer 7................................. .............. .............. 11.4 .............. .............. Angola.
Issuer 8................................. .............. .............. .............. 66.2 14 Angola.
Issuer 9................................. 91.7 .............. .............. 78.8 .............. Qatar.
[[Page 56412]]
Issuer 10................................ 364.7 .............. .............. 158.1 .............. Qatar.
Issuer 11................................ 2.8 .............. .............. 2.7 .............. Qatar.
Issuer 12................................ 86.1 .............. .............. 27.1 .............. Angola.
Issuer 13................................ 722 25 .............. .............. .............. Qatar.
Issuer 14................................ .............. .............. 0.33 .............. .............. China.
Issuer 15................................ .............. 23 .............. .............. .............. China.
Issuer 16................................ 155 .............. 59 45 .............. China.
Issuer 17................................ 261.5 .............. .............. .............. .............. China.
Issuer 18................................ .............. .............. .............. 2.1 11.7 China.
Issuer 19................................ 605.2 .............. .............. 177.6 .............. China.
--------------------------------------------------------------------------------------------------------------------------------------------------------
From the issuers with information on projects in Angola, Cameroon,
China, or Qatar, we select Issuer 1's and Issuer 4's Angola projects
and Issuer 13's Qatar project because they reported data on both the
firm assets involved in the projects in these countries and the terms
of these projects. Other issuers reported some relevant information,
but not enough, in our opinion, to meaningfully evaluate the cash flows
of their projects. We supplemented the Angola data for the two issuers
with firm financial information for the 2008 and 2009 fiscal years from
Compustat. In addition, we obtained Issuer 1's and Issuer 13's
weighted-average cost of capital (WACC) from Bloomberg, although data
was not available on Issuer 4's WACC.\629\ Instead, we assumed for
these purposes it has a similar WACC as another issuer of a similar
size for which WACC was available from Bloomberg. We assume that the
purchasing power parity holds and thus use the U.S. inflation rate for
2009 as a constant growth rate for the projects' cash flows.\630\
---------------------------------------------------------------------------
\629\ In 2011, Issuer 4 was acquired by another issuer.
\630\ Data on the U.S. inflation rate is obtained from the
Bureau of Labor Statistics.
---------------------------------------------------------------------------
In the table below we estimate the cash flows of Issuer 1's and
Issuer 4's Angola projects and Issuer 13's Qatar project using a
standard valuation methodology--the present value of discounted cash
flows--and assuming a corporate tax rate of 30% for all three issuers.
For Issuer 1, we estimate that a termination of its projects in Angola
would result in lost cash flows of approximately $12 billion. For
Issuer 4, the loss would be approximately $119 million. For Issuer 13,
the loss would be approximately $392 million.
----------------------------------------------------------------------------------------------------------------
Financial information FY2009 ($
mil) Issuer 1 Issuer 4 Issuer 13 Calculation
----------------------------------------------------------------------------------------------------------------
Earnings before interest and taxes 26,239 469 3,689 ...........................
(EBIT).
Depreciation/Amortization.......... 11,917 159 830 ...........................
Change in deferred taxes........... -1,472 -59 0 ...........................
Capital expenditures............... 17,770 301 1,914 NetPP&E2009-Net PP&E2008
Change in working capital.......... -19,992 -188 277 Working capital = Current
assets - Current
liabilities.
Tax rate (%)....................... 30% 30% 30% ...........................
Company free cash flow (FCF)....... 31,034 314 1,221 EBIT*(1 - tax rate) +
Depreciation/Amortization
+ Change in Deferred taxes
- Capital Expenditures -
Change in Working Capital.
Firm total assets.................. 233,323 6,143 19,393 ...........................
Angola/Qatar total assets.......... 7,320 724 722 ...........................
Angola/Qatar FCF................... 974 37 45 Company FCF*(Angola or
Qatar TA/Firm TA).
Term of Angola/Qatar project 25 4 25 ...........................
(years).
Company cost of capital (WACC)..... 0.09 0.1098 0.1329 ...........................
U.S. 2009 inflation rate (i)....... 0.027 0.027 0.027 ...........................
Present value of Angola/Qatar FCFs. 11,966 119 392 Angola or Qatar FCF * [1/
(WACC - i) - (1+ i)
[supcaret] term of project/
(WACC - i)*(WACC + 1)
[supcaret] term of
project].
----------------------------------------------------------------------------------------------------------------
Even though our analysis was limited to just three issuers, these
estimates suggest commentators' concerns that the impact of such host
country laws could add billions of dollars of costs to affected
issuers, and hence have a significant impact on their profitability and
competitive position, appear warranted. The assumption underlying these
estimates is that each firm either sells its assets in that particular
country at their accounting value or holds on to them but does not use
them in other projects. The losses could be larger than the estimates
in the table above if these firms are forced to sell their assets in
the above-mentioned host countries at fire sale prices. In that case,
the price discount will add to the loss of cash flows. While we do not
have data on fire sale prices for the industries of the affected
issuers, financial studies on other industries could provide some
estimates. For example, a study on the airline industry \631\ finds
that planes sold by financially distressed airlines bring 10 to 20
percent lower prices than those sold by undistressed airlines. If we
apply those percentages to the accounting value of the three issuers'
assets in these host countries, this would add hundreds of millions of
dollars to their potential losses. These costs also could be
significantly higher than our estimates if we allow the cash
[[Page 56413]]
flows of the project to grow annually at a rate higher than the rate of
inflation.
---------------------------------------------------------------------------
\631\ See Todd Pulvino 1998. ``Do Fire-Sales Exist? An Empirical
Study of Commercial Aircraft Transactions.'' Journal of Finance,
53(3): 939-78.
---------------------------------------------------------------------------
Alternatively, a firm could redeploy these assets to other projects
that would generate cash flows. If a firm could redeploy these assets
relatively quickly and without a significant cost to projects that
generate similar rates of returns as those in the above-mentioned
countries, then the firm's loss from the presence of such host country
laws would be minimal. The more difficult and costly it is for a firm
to do so, and the more difficult it is to find other projects with
similar rates of return, the larger the losses of the firm would be.
Unfortunately, we do not have enough data to quantify more precisely
the potential losses of firms under those various circumstances.
Likewise, if the firm could sell those assets to a buyer (e.g., a non-
reporting issuer) that would use them for similar projects in the host
country or elsewhere, then the buyer would likely pay the fair market
value for those assets, resulting in minimal to no loss for the firm.
Overall, the results of our analysis concur with commentators that
the presence of host country laws that prohibit the type of disclosure
required under the final rules could be very costly. The size of the
potential loss to issuers will depend on the presence of other similar
opportunities, third parties willing to buy the assets at fair-market
values in the above-mentioned host countries, and the ability of
issuers to avoid fire sale of these assets.
As noted above, we considered alternatives to the approach we are
adopting in the final rules, including providing certain exemptions
from the disclosure requirements mandated by Section 13(q), but we
believe that adopting any of the alternatives would be inconsistent
with Section 13(q) and would undermine Congress' intent to promote
international transparency efforts. To faithfully effectuate
Congressional intent, we do not believe it would be appropriate to
adopt provisions that would frustrate, or otherwise be inconsistent
with, such intent. Consequently, we believe the competitive burdens
arising from the need to make the required disclosures under the final
rules are necessary by the terms of, and in furtherance of the purposes
of, Section 13(q).
A number of factors may serve to mitigate the competitive burdens
arising from the required disclosure. We note there were differences in
opinion among commentators as to the applicability of host country
laws.\632\ Moreover, the widening global influence of the EITI and the
recent trend of other jurisdictions to promote transparency, including
listing requirements adopted by the Hong Kong Stock Exchange and
proposed directives of the European Commission, may discourage
governments in resource-rich countries from adopting new prohibitions
on payment disclosure.\633\ Reporting companies concerned that
disclosure required by Section 13(q) may be prohibited in a given host
country may also be able to seek authorization from the host country in
order to disclose such information, reducing the cost to such reporting
companies resulting from the failure of Section 13(q) to include an
exemption for conflicts with host country laws.\634\
---------------------------------------------------------------------------
\632\ See note 84 and accompanying text.
\633\ See notes 15 and 48 and accompanying text.
\634\ See note 584.
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
A. Background
Certain provisions of the final rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\635\ We published a notice requesting
comment on the collection of information requirements in the Proposing
Release for the rule amendments. An agency may not conduct or sponsor,
and a person is not required to comply with, a collection of
information unless it displays a currently valid control number. The
title for the collection of information is:
---------------------------------------------------------------------------
\635\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
``Form SD'' (a new collection of information).\636\
---------------------------------------------------------------------------
\636\ As previously noted, in another release we are issuing
today, we are adopting rules to implement the requirements of
Section 1502 of the Dodd-Frank Act and requiring issuers subject to
those requirements to file the disclosure on Form SD. See note 30
and accompanying text (referencing the Conflict Minerals Adopting
Release, Release 34-67716 (August 22, 2012).
---------------------------------------------------------------------------
We are amending Form SD to contain disclosures required by Rule
13q-1, which will 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 will
be filed on EDGAR with the Commission.\637\
---------------------------------------------------------------------------
\637\ The information required by Rule 13q-1 and Form SD is
similar to the information that would have been required under the
proposal in Forms 10-K, 20-F, or 40-F and Item 105 of Regulation S-
K. We do not believe that requiring the information to be filed in a
Form SD, rather than furnishing it in an issuer's Exchange Act
annual reports, will affect the burden estimate.
---------------------------------------------------------------------------
The new rules and amendment to the form implement Section 13(q) of
the Exchange Act, which was added by Section 1504 of the Act. Section
13(q) requires the Commission to ``issue final rules that require each
resource extraction issuer to include in an annual report of the
resource extraction issuer information relating to any payment made by
the resource extraction issuer, a subsidiary of the resource extraction
issuer, or an entity under the control of the resource extraction
issuer to a foreign government or the Federal Government for the
purpose of the commercial development of oil, natural gas, or minerals,
including--(i) the type and total amount of such payments made for each
project of the resource extraction issuer relating to the commercial
development of oil, natural gas, or minerals, and (ii) the type and
total amount of such payments made to each government.'' \638\ Section
13(q) also mandates the submission of the payment information in an
interactive data format, and provides the Commission with the
discretion to determine the applicable interactive data standard.\639\
We are adopting the requirement regarding the presentation of the
mandated payment information substantially as proposed, except that a
resource extraction issuer will be required to present the mandated
payment information in only one exhibit to new Form SD instead of two
exhibits, as proposed. We have decided to require only one exhibit
formatted in XBRL because we believe that we can achieve the goal of
the dual presentation with only one exhibit. The disclosure
requirements apply equally to U.S. issuers and foreign issuers meeting
the definition of a resource extraction issuer. As discussed in detail
above, in adopting the final rules, we have made significant changes to
the rules that were proposed.
---------------------------------------------------------------------------
\638\ 15 U.S.C. 78m(q)(2)(A).
\639\ 15 U.S.C. 78m(q)(2)(C) and (D).
---------------------------------------------------------------------------
Compliance with the rules by affected issuers is mandatory.
Responses to the information collections will not be kept confidential
and there is no mandatory retention period for the collection of
information.
B. Summary of the Comment Letters
As proposed, the required disclosure would have been included in a
resource extraction issuer's Form 10-K, Form 20-F, or Form 40-F, as
appropriate. We estimated in the Proposing Release the number of
issuers filing each of the forms that would likely be resource
extraction issuers totaled 1,101
[[Page 56414]]
issuers.\640\ We estimated the total annual increase in the paperwork
burden for all affected companies to comply with our proposed
collection of information requirements to be approximately 52,932 hours
of company personnel time and approximately $11,857,200 for the
services of outside professionals. We also estimated in the Proposing
Release that the annual incremental paperwork burden for each of Form
10-K, Form 20-F, and Form 40-F would be 75 burden hours per affected
form.\641\
---------------------------------------------------------------------------
\640\ For purposes of the PRA, we estimated that the number of
resource extraction issuers that would annually file Form 10-K would
be approximately 861, the number of such issuers that would annually
file Form 20-F would be approximately 166, and the number of such
issuers that would annually file Form 40-F would be approximately
74. We derived these estimates by determining the number of issuers
that fall under SIC codes that pertain to oil, natural gas, and
mining companies and, thus, are most likely to be resource
extraction issuers. The estimate for Form 10-K was derived by
subtracting from the total number of resource extraction issuers the
number of issuers that file annual reports on Form 20-F and Form 40-
F.
\641\ In estimating 75 burden hours, we looked to the burden
hours associated with the disclosure required by the oil and gas
rules adopted in 2008, which estimated an increase of 100 hours for
domestic issuers and 150 hours for foreign private issuers.
---------------------------------------------------------------------------
In the Proposing Release we requested comment on the PRA analysis.
We received ten comment letters that addressed PRA-related costs
specifically; \642\ we also received a number of comment letters that
discussed the costs and burdens to issuers generally that we considered
in connection with our PRA analysis.\643\ Section III.B.2 contains a
detailed summary of these comments. As described above, some
commentators disagreed with our industry-wide estimate of the total
annual increase in the paperwork burden and argued that it
underestimated the actual costs that would be associated with the
rules.\644\ Some commentators also stated that, depending upon the
final rules adopted, the compliance burdens and costs caused by
implementation and ongoing compliance with the rules would be
significantly greater than those estimated by the Commission.\645\
---------------------------------------------------------------------------
\642\ See letters from API 1, API 2, Barrick Gold, ERI 2,
ExxonMobil 1, ExxonMobil 3, NMA 2, Rio Tinto, RDS 1, and RDS 4.
\643\ See letters from BP 1, Chamber Energy Institute, Chevron,
Cleary, Hermes, and PWYP 1.
\644\ See letters from API 1 and ExxonMobil 1.
\645\ See letters from API 1, Barrick Gold, ExxonMobil 1, NMA 2,
Rio Tinto, and RDS 1.
---------------------------------------------------------------------------
We note that commentators did not object, or suggest alternatives,
to our estimate of the number of issuers who would be subject to the
proposed rules. As discussed below, we have made several changes to our
estimates in response to comments on the estimates contained in the
Proposing Release that are designed to better reflect the burdens
associated with the new collection of information.
C. Revisions to PRA Reporting and Cost Burden Estimates
After considering the comments, and the changes we are making from
the proposal, we have revised our PRA estimates for the final rules. As
discussed above, we are adopting new Rule 13q-1 and an amendment to new
Form SD to require resource extraction issuers to disclose the required
payment information in a new form rather than including the disclosure
requirements in existing Exchange Act annual reports. As described
above, Rule 13q-1 requires resource extraction issuers to file the
payment information required in Form SD. The collection of information
requirements are reflected in the burden hours estimated for Form SD.
Therefore, Rule 13q-1 does not impose any separate burden.
For purposes of the PRA, we continue to estimate that 1,101 issuers
will be subject to Rule 13q-1. We have derived our burden estimates by
estimating the average number of hours it would take an issuer to
prepare and file the required disclosure. In deriving our estimates, we
recognize that the burdens will likely vary among individual issuers
based on a number of factors, including the size and complexity of
their operations. We believe that some issuers will experience costs in
excess of this average in the first year of compliance with the rules,
and some issuers may experience less than these average costs. When
determining these estimates, we have assumed that 75% of the burden of
preparation is carried by the issuer internally and 25% of the burden
of preparation is carried by outside professionals retained by the
issuer at an average cost of $400 per hour.\646\ 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. As discussed above, we received estimates from some
commentators expressed in burden hours and estimates from other
commentators expressed in dollar costs. For purposes of this analysis
and consistent with our approach with respect to the estimates provided
in burden hours, we assume 25% of the dollar costs provided by
commentators relate to costs for outside professionals.\647\ We expect
that the rules' effect will be greatest during the first year of their
effectiveness and diminish in subsequent years. To account for this
expected diminishing burden, we believe a three-year average of the
expected burden during the first year with the expected ongoing burden
during the next two years is a reasonable estimate. After considering
the comments we received, we are revising our estimate of the PRA
compliance burden hours and costs associated with the disclosure
requirements.\648\
---------------------------------------------------------------------------
\646\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis we estimate that
such costs would be an average of $400 per hour. This is the rate we
typically estimate for outside legal services used in connection
with public company reporting. We note that no commentators provided
us with an alternative rate estimate for these purposes.
\647\ The comment letters providing dollar estimates did not
explain how they arrived at such estimates, or provide any
calculations as to the cost per hour. As such, we have included 25%
of the dollar cost estimate in our calculation of costs of outside
professionals, but we were not provided with sufficient data to
convert commentators' dollar cost estimates into burden hour
estimates.
\648\ Although the comments we received with respect to our PRA
estimates related to the proposal to include the disclosure
requirements in Forms 10-K, 20-F, and 40-F, we have considered these
estimates in arriving at our estimate for Form SD because, although
the disclosures will be provided pursuant to a new rule and in a new
form, the disclosure requirements themselves are generally not
impacted by moving the disclosure to a different form. In the
Proposing Release we requested comment on whether the required
disclosure should be provided in a new form. We believe that any
additional burden created by the use of a new form, rather than
existing annual reports, will be minimal. See also letters from API
1 and Cleary.
---------------------------------------------------------------------------
In arriving at our initial estimate in the Proposing Release we
looked to the burden hours associated with the disclosure required by
the oil and gas rules adopted in 2008, and estimated that the burden
would be less based on our belief that the disclosure required by the
proposed rules was less extensive than the oil and gas rules adopted in
2008. As discussed above, some commentators believed that our initial
estimates did not adequately reflect the actual burden associated with
complying with the proposed disclosure requirements.\649\ Based on the
comments we received, we have increased our estimate of the total
annual compliance burden for all affected issuers to comply with the
collection of information in our final rules to be approximately
332,123 hours of company personnel time and approximately $144,967,250
for the services of outside professionals, as discussed in detail
below.
---------------------------------------------------------------------------
\649\ See notes 526 and 527 and accompanying text.
---------------------------------------------------------------------------
Some commentators estimated implementation costs of tens of
millions
[[Page 56415]]
of dollars for large filers, and millions of dollars for smaller
filers.\650\ These commentators did not describe how they defined
``small'' and ``large'' filers. One commentator provided an estimate of
$50 million in implementation costs if the definition of ``project'' is
narrow and the level of disaggregation is high across other reporting
parameters, though it did not provide alternate estimates for different
definitions of ``project,'' leaving project undefined, or different
levels of disaggregation.\651\ We note that the commentator that
provided this estimate is among the largest 20 oil and gas companies in
the world,\652\ and we believe that the estimate it provided may be
representative of the costs to companies of similar large size, though
it is likely not a representative estimate of the burden for resource
extraction issuers that are smaller than this commentator. While we
received estimates for smaller filers and an estimate for one of the
largest filers, we did not receive data on companies of varying sizes
in between the two extremes.
---------------------------------------------------------------------------
\650\ See letters from API 1 and ExxonMobil 1.
\651\ See letter from ExxonMobil 1. Although the rules we are
adopting differ from the assumptions made by the commentator, we do
not believe we have a basis for deriving a different estimate.
\652\ See letter from API (October 12, 2010) (pre-proposal
letter) (ranking the 75 largest oil and gas companies by reserves
and production).
---------------------------------------------------------------------------
Similar to our economic analysis above, to account for the range of
issuers who will be subject to the final rules, for purposes of this
analysis, we have used the cost estimates provided by these issuers to
calculate different cost estimates for issuers of different sizes based
on either assets or market capitalization. We have estimated costs for
small issuers (issuers with less than $75 million in market
capitalization) and larger issuers (issuers with $75 million or more in
market capitalization). We believe that initial implementation costs
will be lowest for the smallest issuers and incrementally greater for
larger issuers. Based on a review of market capitalization data of
Exchange Act registrants filing under certain Standard Industry
Classification codes, we estimate that there are approximately 699
small issuers and 402 large issuers.
We use Method 2 from our Economic Analysis above \653\ for our
estimate of total compliance burden. Barrick Gold's estimate \654\ of
1,000 hours for compliance (500 hours for initial changes to internal
books and records and 500 hours for initial compliance) is the starting
point of the analysis.\655\ Barrick Gold is a large accelerated filer,
so we use 1,000 hours as the burden estimate for large issuers. In
order to determine the number of hours for a small issuer, we scale
Barrick Gold's estimate of the number of hours by the relative size of
a small issuer. In the Economic Analysis above, the ratio of all small
issuer total assets, $353 billion ($509,000,000 x 63% x 1,101), to all
large issuer total assets, $1,835 billion ($4,504,000,000 x 37% x
1,101), is 19%. In order to be conservative, rather than using 19%, we
estimate that the number of burden hours for small issuers will be 25%
of the burden hours of large issuers, resulting in 250 hours.
---------------------------------------------------------------------------
\653\ Method 2 estimates compliance costs separately for small
and large issuers. See Section III.D. above. Because 63% of the
issuers estimated to be subject to the final rules are small
issuers, we believe that, for PRA purposes, Method 2 provides for a
more accurate assessment of Form SD's compliance costs than Method
1, which is based on deriving an average of costs.
\654\ We use Barrick Gold's estimate because it is the only
commentator that provided a number of hours and dollar value
estimates for initial and ongoing compliance costs. Although in the
Economic Analysis section we used ExxonMobil's dollar value estimate
to calculate an upper bound of compliance costs, we are unable to
calculate the number of burden hours for purposes of the PRA
analysis using ExxonMobil's inputs.
\655\ As noted above, the costs for PRA purposes are only a
portion of the costs associated with complying with the final rules.
---------------------------------------------------------------------------
We received comments and estimates on the PRA analysis both in
hours necessary to comply with the rules and dollar costs of
compliance, as discussed above. In the Economic Analysis above, we
assume that the commentators' estimates represent total implementation
costs, including both internal costs and outside professional costs.
For purposes of this PRA analysis, we assume, as we have throughout the
analysis, that 25% of this burden of preparation represents the cost of
outside professionals.
We believe that the burden associated with this collection of
information will be greatest during the implementation period to
account for initial set up costs, but that ongoing compliance costs
will be less than during the initial implementation period once
companies have made any necessary modifications to their systems to
capture and report the information required by the rules. Two
commentators provided estimates of ongoing compliance costs: Rio Tinto
provided an estimate of 5,000-10,000 burden hours for ongoing
compliance,\656\ while Barrick Gold provided an estimate of 500 burden
hours for ongoing compliance. Based on market capitalization data, Rio
Tinto is among the top five percent of resource extraction issuers that
are Exchange Act reporting companies. We believe that, because of the
size of this commentator, the estimate it provided may be
representative of the burden for resource extraction issuers of a
similar size, but may not be a representative estimate for resource
extraction issuers that are smaller than this commentator. We believe
that Barrick Gold is more similar to the average large issuer than Rio
Tinto, and as such, we believe that Barrick Gold's estimate is a
conservative estimate of the ongoing compliance burden hours because a
comparison of the average total assets of a large issuer to Barrick
Gold's total assets is 18% ($4,504,000,000/$25,075,000,000).\657\ As
discussed above, commentators' estimates on the burdens associated with
initial implementation and ongoing compliance varied widely, with
commentators noting that the estimates varied based on the size of
issuer.\658\ We note that some estimates may reflect the burden to a
particular commentator, and, as such, may not be a representative
estimate of the burden for resource extraction issuers that are smaller
or larger than the particular commentator.\659\ Accordingly, we have
revised our estimate using an average of the figures provided to
produce a reasonable estimate of the potential burden associated with
the rules, recognizing they would apply to resource extraction issuers
of different sizes. We are using 500 burden hours (Barrick Gold's
estimate) for our estimate of ongoing compliance costs for large
issuers and 125 (25% x 500) for small issuers. Thus, we estimate that
the incremental collection of information burden associated with the
final rules and form amendment will be 667 burden hours per large
respondent [(1,000 + 500 + 500)/3 years] and 250 per small respondent
[(500 + 125 +125)/3 years]. We estimate the final rules and form
amendment will result in an internal burden to small resource
extraction issuers of 131,063 hours (699 forms x 250 hours/form x .75)
and to large resource extraction issuers of
[[Page 56416]]
201,101 hours (402 forms x 667 hours/form x .75) for a total
incremental company burden of 332,164 hours. Outside professional costs
will be $17,475,000 (699 forms x 250 hours/form x .25 x $400) for small
resource extraction issuers and $26,813,400 (402 forms x 667 hours/form
x .25 x $400). As discussed above, one commentator, Barrick Gold,
indicated that its initial compliance costs also would include $100,000
for IT consulting, training, and travel costs. To account for these
costs, we have used Barrick Gold's estimate and applied the same 25%
factor to derive estimated IT costs of $100,000 for large issuers and
$25,000 for small issuers. Thus, we estimate total IT compliance costs
for small issuers to be $17,475,000 (699 issuers x $25,000) and for
large issuers to be $40,200,000 (402 issuers x $100,000). We have added
the estimated IT compliance costs to the cost estimates for other
professional costs discussed above to derive total professional costs
of $34,950,000 for small issuers and $67,013,400 for large issuers. The
estimated overall professional cost for PRA purposes is $101,963,400.
---------------------------------------------------------------------------
\656\ See letter from Rio Tinto. This commentator estimated 100-
200 hours of work at the head office, an additional 100-200 hours of
work providing support to its business units, and a total of 4,800-
9,600 hours by its business units. We arrived at the estimated range
of 5,000-10,000 hours by adding the estimates provided by this
commentator (100 + 100 + 4,800 = 5,000, and 200 + 200 + 9,600 =
10,000).
\657\ The average large issuer's total assets compared to Rio
Tinto's total assets ($97 billion) is 4.5%. See note 625 for an
explanation of the average large issuer's total assets.
\658\ See letter from API 1 (estimating implementation costs in
the tens of millions of dollars for large filers and millions of
dollars for many smaller filers). This commentator did not explain
how it defined small and large filers.
\659\ We note, for example, one commentator's letter indicating
that it had approximately 120 operating entities. See letter from
Rio Tinto.
---------------------------------------------------------------------------
D. Revised PRA Estimate
The table below illustrates the annual compliance burden of the
Form SD collection of information.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase in Total increase
Issuer size Annual responses Incremental Increase in professional Increase in IT professional and
burden hours/form burden hours costs costs/issuer IT costs
(A) (B) (C) = (A*B)*0.75 (D) (E) (F) = (D) + (E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Small................................. 699 250 131,063 $17,475,000 $17,475,000 $34,950,000
Large................................. 402 667 201,101 26,813,400 40,200,000 67,013,400
-----------------------------------------------------------------------------------------------------------------
Total............................. 1,101 ................. 332,164 ................. ................. 101,963,400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Our PRA estimate is within the range of our estimates in the
Economic Analysis section above.\660\
---------------------------------------------------------------------------
\660\ Despite using Barrick Gold's estimate, our revised
estimate of PRA professional costs of $101,963,400 is higher than
the lower bound of compliance costs ($43,757,043) estimated under
Method 2 in the Economic Analysis section, which is also based on
Barrick Gold's estimate. This is mainly because we estimate the PRA
costs as fixed costs for smaller and larger issuers, whereas in the
Economic Analysis section, because of the nature of the data
provided by commentators, we estimate the total compliance costs as
variable costs.
---------------------------------------------------------------------------
V. Final Regulatory Flexibility Act Analysis
This Final Regulatory Flexibility Act Analysis (``FRFA'') has been
prepared in accordance with the Regulatory Flexibility Act.\661\ This
FRFA relates to the final rules we are adopting to implement Section
13(q) of the Exchange Act, which concerns certain disclosure
obligations of resource extraction issuers. As defined by Section
13(q), a resource extraction issuer is an issuer that is required to
file an annual report with the Commission, and engages in the
commercial development of oil, natural gas, or minerals.
---------------------------------------------------------------------------
\661\ 5 U.S.C. 601.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Final Rules
The final rules are designed to implement the requirements of
Section 13(q) of the Exchange Act, which was added by Section 1504 of
the Dodd-Frank Act. Specifically, the new rule and form amendment will
require a resource extraction issuer to disclose in an annual report
certain information relating to payments made by the issuer, a
subsidiary of the issuer, or an entity under the control of the issuer
to a foreign government or the United States Federal Government for the
purpose of the commercial development of oil, natural gas, or minerals.
A resource extraction issuer will have to disclose the required payment
information annually in new Form SD and include an exhibit with the
required payment information formatted in XBRL.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on any aspect of the
Initial Regulatory Flexibility Act Analysis (``IRFA''), including the
number of small entities that would be affected by the proposed rules,
the nature of the impact, how to quantify the number of small entities
that would be affected, and how to quantify the impact of the proposed
rules. We did not receive comments specifically addressing the IRFA;
however, several commentators addressed aspects of the proposed rules
that could potentially affect small entities. Some commentators
supported an exemption for a ``small entity'' or ``small business''
having $5 million or less in assets on the last day of its most
recently completed fiscal year.\662\ Other commentators opposed an
exemption for small entities and other smaller companies. Those
commentators noted that, while smaller companies have more limited
operations and projects, and therefore fewer payments to disclose as
compared to larger companies, they generally take on greater risks due
to the nature of their operations.\663\
---------------------------------------------------------------------------
\662\ See letters from API 1, Chevron, ExxonMobil 1, and RDS 1.
\663\ See letters from Calvert, Global Witness 1, Oxfam 1, PWYP
1, Sen. Cardin et al. 1, and Soros 1.
---------------------------------------------------------------------------
C. Small Entities Subject to the Final Rules
The final rules will affect small entities that are required to
file an annual report with the Commission under Section 13(a) or
Section 15(d) of the Exchange Act, and are engaged in the commercial
development of oil, natural gas, or minerals. Exchange Act Rule 0-10(a)
\664\ defines an issuer to be a ``small business'' or ``small
organization'' for purposes of the Regulatory Flexibility Act if it had
total assets of $5 million or less on the last day of its most recent
fiscal year. We believe that the final rules will affect some small
entities that meet the definition of resource extraction issuer under
Section 13(q). Based on a review of total assets for Exchange Act
registrants filing under certain Standard Industry Classification
codes, we estimate that approximately 196 oil, natural gas, and mining
companies are resource extraction issuers and that may be considered
small entities.
---------------------------------------------------------------------------
\664\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
The final rules will add to the annual disclosure requirements of
companies meeting the definition of resource extraction issuer,
including small entities, by requiring them to file the payment
disclosure mandated by Section 13(q) and the rules issued thereunder in
new Form SD. The disclosure must include:
[[Page 56417]]
the type and total amount of payments made for each
project of the issuer relating to the commercial development of oil,
natural gas, or minerals; and
The type and total amount of those payments made to each
government.
A resource extraction issuer must provide the required disclosure
in Form SD and in an exhibit formatted in XBRL. Consistent with the
statute, the rules require an issuer to submit the payment information
using electronic tags that identify, for any payments made by a
resource extraction issuer to a foreign government or the U.S. Federal
Government:
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.
In addition, a resource extraction issuer will be required to provide
the type and total amount of payments made for each project and the
type and total amount of payments made to each government in XBRL
format. The disclosure requirements will apply equally to U.S. and
foreign resource extraction issuers.
E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives, while
minimizing any significant adverse impact on small entities. In
connection with adopting the final rules, we considered, as
alternatives, establishing different compliance or reporting
requirements that take into account the resources available to smaller
entities, exempting smaller entities from coverage of the disclosure
requirements, and clarifying, consolidating, or simplifying disclosure
for small entities.
The final rules are designed to implement the payment disclosure
requirements of Section 13(q), which applies to resource extraction
issuers regardless of size. While a few commentators supported an
exemption from the disclosure requirements for small entities,\665\
numerous other commentators opposed exempting small entities because
that would be inconsistent with the statute and would contravene
Congress' intent of creating a level playing field for all affected
issuers.\666\ We do not believe that exempting resource extraction
issuers that are small entities, many of which are mining companies
engaged in exploration activities that require payments to
governments,\667\ or adopting different disclosure requirements or
additional delayed compliance for small entities, would be consistent
with the statutory purpose of Section 13(q). For example, we do not
believe that adopting rules permitting small entities to disclose
payments at the country level would be consistent with the statutory
purpose of Section 13(q). The statute is designed to enhance the
transparency of payments by resource extraction issuers to governments.
Adoption of different disclosure requirements for small entities would
impede the transparency and comparability of the disclosure mandated by
Section 13(q). In addition, it is not clear that adopting different
standards or a delayed compliance date would provide small entities
with a significant benefit. For example, small entities may have a
limited number of projects in a limited number of countries and in some
cases small entities may have only one project in a country.
---------------------------------------------------------------------------
\665\ See note 42 and accompanying text.
\666\ See note 34 and accompanying text.
\667\ See letters from Calvert and PWYP 1.
---------------------------------------------------------------------------
We also have considered the alternative of using performance
standards rather than design standards. We generally have used design
rather than performance standards in connection with the final rules
because we believe the statutory language, which requires the
electronic tagging of specific items, contemplates the adoption of
specific disclosure requirements. We further believe the final rules
will be more useful to users of the information if there are specific
disclosure requirements. Such requirements will help to promote
transparent and comparable disclosure among all resource extraction
issuers, which should help further the statutory goal of promoting
international transparency of payments to governments. At the same
time, we have determined to leave the term ``project'' undefined to
give issuers flexibility in applying the term to different business
contexts depending on factors such as the particular industry or
business in which the issuer operates, or the issuer's size.
VI. Statutory Authority and Text of Final Rule and Form Amendments
We are adopting the rule and form amendments contained in this
document under the authority set forth in Sections 3(b), 12, 13, 15,
23(a), and 36 the Exchange Act.
List of Subjects in 17 CFR Parts 240 and 249b
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, we are amending Title 17, Chapter
II of the Code of Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 is amended by adding an
authority for Sec. 240.13q-1 in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q,
78s, 78u-5, 78w, 78x, 78dd(b), 78dd(c), 78ll, 78mm, 80a-20, 80a-23,
80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq. and 8302; 18
U.S.C. 1350; 12 U.S.C. 5221(e)(3); and Pub. L. 111-203, Sec. 712,
124 Stat. 1376, (2010) unless otherwise noted.
* * * * *
Section 240.13q-1 is also issued under sec. 1504, Pub. L. 111-
203, 124 Stat. 2220.
* * * * *
0
2. Add Sec. 240.13q-1 to read as follows:
Sec. 240.13q-1 Disclosure of payments made by resource extraction
issuers.
(a) A resource extraction issuer, as defined by paragraph (b) of
this section, shall file a report on Form SD (17 CFR 249b.400) within
the period specified in that Form disclosing the information required
by the applicable items of Form SD as specified in that Form.
(b) Definitions. For the purpose of this section:
(1) Resource extraction issuer means an issuer that:
(i) Is required to file an annual report with the Commission; and
(ii) Engages in the commercial development of oil, natural gas, or
minerals.
(2) Commercial development of oil, natural gas, or minerals
includes exploration, extraction, processing, and export of oil,
natural gas, or minerals, or the acquisition of a license for any such
activity.
[[Page 56418]]
PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934
0
3. The authority citation for part 249b is amended by adding an
authority for Sec. 249b.400 to read 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. No. 111-203, 124 Stat. 2213 and 2220.
* * * * *
0
4. Amend Sec. 249b.400 by:
0
a. Designating the existing text as paragraph (a); and
0
b. Adding paragraph (b).
The addition reads as follows:
Sec. 249b.400 Form SD, Specialized Disclosure Report
(a) * * *
(b) This Form shall be filed pursuant to Rule 13q-1 (Sec. 240.13q-
1) of this chapter by resource extraction issuers that are required to
disclose the information required by Section 13(q) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(q)) and Rule 13q-1 of this chapter.
0
5. Amend Form SD (as referenced in Sec. 249b.400) by:
0
a. Adding a check box for Rule 13q-1;
0
c. Revising instruction A. under ``General Instructions'';
0
d. Redesignating instruction B.2. as B.3 and adding new instructions
B.2. and B.4. under the ``General Instructions''; and
0
e. 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 incorporation)
-----------------------------------------------------------------------
(Commission file number)
-----------------------------------------------------------------------
(Address of principle executive offices)
-----------------------------------------------------------------------
(Zip code)
-----------------------------------------------------------------------
(Name and telephone number, including area code, of the person to
contact in connection with this report.)
Check the appropriate box to indicate the rule pursuant to which
this form is being filed:
---- 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 Exchange Act.
B. Information to be Reported and Time for Filing of Reports.
1. * * *
2. Form filed under Rule 13q-1. File the information required by
Section 2 of this Form on EDGAR no later than 150 days after the end of
the issuer's most recent fiscal year.
3. If the deadline for filing this form occurs on a Saturday,
Sunday or holiday on which the Commission is not open for business,
then the deadline shall be the next business day.
4. The information and documents filed in this report shall not be
deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, unless the registrant specifically
incorporates it by reference into a filing under the Securities Act or
the Exchange Act.
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
* * * * *
Section 2--Resource Extraction Issuer Disclosure
Item 2.01 Disclosure requirements regarding payments to governments
(a) A resource extraction issuer shall file an annual report on
Form SD with the Commission, and include as an exhibit to this Form SD,
information relating to any payment made during the fiscal year covered
by the annual report by the resource extraction issuer, a subsidiary of
the resource extraction issuer, or an entity under the control of the
resource extraction issuer, to a foreign government or the United
States Federal Government, for the purpose of the commercial
development of oil, natural gas, or minerals. Specifically, a resource
extraction issuer must file the following information in an exhibit to
this Form SD electronically formatted using the eXtensible Business
Reporting Language (XBRL) interactive data standard:
(1) 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;
(2) The type and total amount of such payments made to each
government;
(3) The total amounts of the payments, by category listed in
(c)(6)(iii);
(4) The currency used to make the payments;
(5) The financial period in which the payments were made;
(6) The business segment of the resource extraction issuer that
made the payments;
(7) The government that received the payments, and the country in
which the government is located; and
(8) The project of the resource extraction issuer to which the
payments relate.
(b) Provide a statement in the body of the Form SD that the
specified payment disclosure required by this form is included in an
exhibit to this form.
(c) For purposes of this item:
(1) The term commercial development of oil, natural gas, or
minerals includes exploration, extraction, processing, and export of
oil, natural gas, or minerals, or the acquisition of a license for any
such activity.
(2) The term foreign government means a foreign government, a
department, agency, or instrumentality of a foreign government, or a
company owned by a foreign government. As used in 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.
(3) The term financial period means the fiscal year in which the
payment was made.
(4) The term business segment means a business segment consistent
with the reportable segments used by the resource extraction issuer for
purposes of financial reporting.
(5) The terms ``subsidiary'' and ``control'' are defined as
provided under Sec. 240.12b-2 of this chapter.
(6) The term payment means an amount paid that:
(i) Is made to further the commercial development of oil, natural
gas, or minerals;
[[Page 56419]]
(ii) Is not de minimis; and
(iii) Includes:
(A) Taxes;
(B) Royalties;
(C) Fees;
(D) Production entitlements;
(E) Bonuses;
(F) Dividends; and
(G) Payments for infrastructure improvements.
(7) The term not de minimis means any payment, whether made as a
single payment or a series of related payments, that equals or exceeds
$100,000. In the case of any arrangement providing for periodic
payments or installments, a resource extraction issuer must consider
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.
Instructions
1. If a resource extraction issuer makes an in-kind payment of the
types of payments required to be disclosed, the issuer must disclose
the payment. When reporting an in-kind payment, an 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, an issuer may report the payment at cost, or if cost
is not determinable, fair market value and should provide a brief
description of how the monetary value was calculated.
2. If a government levies a payment, such as a tax or 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, an 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.
3. An 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 issuer's reporting currency. If an 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
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 issuer's
fiscal year end. A resource extraction issuer must disclose the method
used to calculate the currency conversion.
4. A company owned by a foreign government is a company that is at
least majority-owned by a foreign government.
5. 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.
6. As used in Item 2.01(c)(6), fees include license fees, rental
fees, entry fees, and other considerations for licenses or concessions.
Bonuses include signature, discovery, and production bonuses.
7. A resource extraction issuer generally need not 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; however, the issuer will be required
to disclose any dividends paid in lieu of production entitlements or
royalties.
8. If an issuer meeting the definition of ``resource extraction
issuer'' in Rule 13q-1(b)(1) is a wholly-owned subsidiary of a resource
extraction issuer that has filed a Form SD disclosing the information
required by Item 2.01 for the wholly-owned subsidiary, then such
subsidiary shall not be required to separately file the disclosure
required by Item 2.01. In such circumstances, the wholly-owned
subsidiary would be required to file a notice on Form SD providing an
explanatory note that the required disclosure was filed on Form SD by
the parent and the date the parent filed the disclosure. The reporting
parent company must note that it is filing the required disclosure for
a wholly-owned subsidiary and must identify the subsidiary on Form SD.
For purposes of this instruction, all of the subsidiary's equity
securities must be owned, either directly or indirectly, by a single
person that is a reporting company under the Act that meets the
definition of ``resource extraction issuer.''
9. Disclosure is required under this paragraph 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 U.S. Federal
Government for the purpose of commercial development of oil, natural
gas, or minerals are not, in form or characterization, one of the
categories of activities or payments specified in this section but are
part of a plan or scheme to evade the disclosure required under Section
13(q).
Section 3--Exhibits
Item 3.01 Exhibits
List below the following exhibits filed as part of this report.
Exhibit 1.01--Conflict Minerals Report as required by Items 1.01
and 1.02 of this Form.
Exhibit 2.01--Resource Extraction Issuer Disclosure Report as
required by Item 2.01 of this Form.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the duly authorized undersigned.
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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: August 22, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-21155 Filed 9-11-12; 8:45 am]
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